Hospitality Investors Trust, Inc. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Hospitality Investors Trust, Inc.	Financial_Report.xls
EX-10.35 - EXHIBIT 10.35 - Hospitality Investors Trust, Inc.	archospexhibit10-35q32014.htm
EX-10.36 - EXHIBIT 10.36 - Hospitality Investors Trust, Inc.	v394105_ex10-36.htm
EX-32 - EXHIBIT 32 - Hospitality Investors Trust, Inc.	archospexhibit32q32014.htm
EX-31.1 - EXHIBIT 31.1 - Hospitality Investors Trust, Inc.	archospexhibit311q32014.htm
EX-31.2 - EXHIBIT 31.2 - Hospitality Investors Trust, Inc.	archospexhibit312q32014.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-190698

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)



Maryland		80-0943668
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

405 Park Avenue, 14th Floor New York, New York		10022
(Address of Principal Executive Office)		(Zip Code)

(212) 415-6500

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):



Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant's common stock, $0.01 par value, outstanding as of October 31, 2014 was 7,531,908.

TABLE OF CONTENTS



	Page
PART I
Item 1. Financial Statements	1
Condensed Consolidated/Combined Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013	1
Condensed Consolidated/Combined Statements of Operations and Comprehensive Income (Loss) (Unaudited) of the Successor for the Three Months Ended September 30, 2014 and for the Period from March 21 to September 30, 2014 and of the Predecessor for the Three Months Ended September 30, 2013, the Period from January 1 to March 20, 2014 and for the Nine Months Ended September 30, 2013	2
Condensed Consolidated/Combined Statement of Changes in Equity (Unaudited) for the Nine Months Ended September 30, 2014	3
Condensed Consolidated/Combined Statements of Cash Flows (Unaudited) of the Successor for the Period from March 21 to September 30, 2014 and of the Predecessor for the Period from January 1 to March 20, 2014 and for the Nine Months Ended September 30, 2013	4
Notes to Condensed Consolidated/Combined Financial Statements (Unaudited)	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	44
PART II
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3. Defaults Upon Senior Securities	48
Item 4. Mine Safety Disclosures	48
Item 5. Other Information	48
Item 6. Exhibits	49
Signatures	50

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

CONDENSED CONSOLIDATED/COMBINED BALANCE SHEETS

(In thousands, except for share and per share data)



	Successor			Predecessor
	September 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Real estate investments:
Land	$	12,308		$	15,878
Buildings and improvements	80,487			118,356
Furniture, fixtures and equipment	5,324			13,297
Total real estate investments	98,119			147,531
Less: accumulated depreciation and amortization	(1,919		)	(31,390		)
Total real estate investments, net	96,200			116,141
Cash and cash equivalents	34,838			10,520
Acquisition deposit	75,000			—
Restricted cash	3,427			1,522
Investments in unconsolidated entities	7,730			4,381
Below-market lease asset, net	8,166			—
Prepaid expenses and other assets	7,032			1,830
Deferred financing fees, net	1,271			848
Total Assets	$	233,664		$	135,242

LIABILITIES AND EQUITY
Mortgage note payable	$	45,500		$	41,449
Promissory notes payable	64,849			—
Accounts payable and accrued expenses	16,296			5,297
Due to affiliates	7,706			—
Total liabilities	134,351			46,746
Equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.01 par value, 300,000,000 shares authorized, 5,053,290 and 8,888 shares issued and outstanding, respectively	51			—
Additional paid-in capital	109,594			—
Deficit	(10,332		)	—
Members' equity	—			88,496
Total equity	99,313			88,496
Total Liabilities and Equity	$	233,664		$	135,242

The accompanying notes are an integral part of these statements.

Table of Contents

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except for share and per share data)

(Unaudited)



	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30, 2014			Three Months Ended September 30, 2013			For the Period from March 21 to September 30, 2014			For the Period from January 1 to March 20, 2014			Nine Months Ended September 30, 2013
Revenues
Rooms	$	8,954		$	8,362		$	18,462		$	6,026		$	23,326
Food and beverage	1,545			1,358			3,566			1,543			4,540
Other	888			693			2,139			676			2,311
Total revenue	11,387			10,413			24,167			8,245			30,177
Operating expenses
Rooms	1,840			1,662			3,753			1,405			4,782
Food and beverage	1,159			1,077			2,497			1,042			3,349
Management fees - related party	456			380			967			289			1,085
Other property-level operating expenses	4,246			4,046			9,077			3,490			11,810
Depreciation and amortization	907			1,224			1,919			994			3,846
Rent	1,311			1,098			2,664			933			3,234
Total operating expenses	9,919			9,487			20,877			8,153			28,106
Income from operations	1,468			926			3,290			92			2,071
Interest expense	(2,070		)	(593		)	(4,313		)	(531		)	(1,698		)
Acquisition and transaction related costs	(2,965		)	—			(7,610		)	—			—
Equity in earnings (losses) of unconsolidated entities	261			135			2,607			(166		)	102
General and administrative	(50		)	—			(1,519		)	—			—
Total expenses	(4,824		)	(458		)	(10,835		)	(697		)	(1,596		)
Net income (loss) before taxes	(3,356		)	468			(7,545		)	(605		)	475
Provision for income taxes	193			—			1,368			—			—
Net income (loss) and comprehensive income (loss)	$	(3,549	)	$	468		$	(8,913	)	$	(605	)	$	475

Basic and diluted net loss per share	$	(1.27	)	NA			$	(8.13	)	NA			NA
Basic and diluted weighted average shares outstanding	2,792,350			NA			1,096,566			NA			NA

___________________________________________________

NA - not applicable

The accompanying notes are an integral part of these statements.

Table of Contents

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

CONDENSED CONSOLIDATED/COMBINED STATEMENT OF CHANGES IN EQUITY

(In thousands, except for share data)

(Unaudited)



	Common Stock
	Number of Shares	Par Value		Additional Paid-in Capital			Deficit			Total Stockholders' Equity			Members' Equity			Total
Balance, December 31, 2013	8,888	$	—	$	200		$	(6	)	$	194		$	88,496		$	88,690
Issuance of common stock	105,609	1		2,417			—			2,418			—			2,418
Net loss	—	—		—			—			—			(605		)	(605		)
Distributions	—	—		—			—			—			(800		)	(800		)
Common stock offering costs, commissions and dealer manager fees	—	—		(1,529		)	—			(1,529		)	—			(1,529		)
Balance, March 20, 2014	114,497	1		1,088			(6		)	1,083			87,091			88,174
Proceeds received from Successor for the assets of Predecessor	—	—		—			—			—			(87,091		)	(87,091		)
Issuance of common stock	4,926,140	50		122,509			—			122,559			—			122,559
Net loss	—	—		—			(8,913		)	(8,913		)	—			(8,913		)
Dividends paid or declared	—	—		—			(1,413		)	(1,413		)	—			(1,413		)
Common stock issued through Distribution Reinvestment Plan	12,653	—		301			—			301			—			301
Share-based payments	—	—		14			—			14			—			14
Common stock offering costs, commissions and dealer manager fees	—	—		(14,318		)	—			(14,318		)	—			(14,318		)
Balance, September 30, 2014	5,053,290	$	51	$	109,594		$	(10,332	)	$	99,313		$	—		$	99,313

The accompanying notes are an integral part of these statements.

Table of Contents

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Successor			Predecessor
	For the Period from March 21 to September 30, 2014			For the Period from January 1 to March 20, 2014			Nine Months Ended September 30, 2013
Cash flows from operating activities:
Net income (loss)	$	(8,913	)	$	(605	)	$	475
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	1,919			994			3,846
Amortization of deferred financing costs	400			75			161
Amortization of below-market lease obligation	234			—			—
Accretion of deferred consideration	70			—			—
Accretion of contingent consideration	283			—			—
Equity in (gains) losses of unconsolidated entities	(2,607		)	166			(102		)
Distribution from unconsolidated affiliates	257			—			—
Share-based payments	14			—			—
Changes in assets and liabilities:
Prepaid expenses and other assets	(2,917		)	(581		)	(841		)
Restricted cash	(604		)	—			—
Due to affiliates	2,752			—			—
Accounts payable and accrued expenses	6,079			(605		)	676
Net cash (used in) provided by operating activities	(3,033		)	(556		)	4,215

Cash flows from investing activities:
Acquisition of hotel assets of the Predecessor	(41,390		)	—			—
Real estate investment improvements	(1,399		)	(83		)	(3,373		)
Acquisition deposit	(75,000		)	—			—
Increase in restricted cash	(2,204		)	(468		)	(383		)
Net cash used in investing activities	(119,993		)	(551		)	(3,756		)

Cash flows from financing activities:
Proceeds from issuance of common stock, net	123,177			—			—
Payments of offering costs	(12,987		)	—			—
Dividends paid	(500		)	—			—
Contributions from members	—			—			226
Distribution to members	—			(800		)	(2,336		)
Affiliate financing advancement	2,570			—			—
Proceeds from affiliate note payable used to fund acquisition deposit	40,500			—			—
Repayment of affiliate note payable used to fund acquisition deposit	(40,500		)	—			—
Payments of mortgage note payable	—			(137		)	(254		)
Proceeds from mortgage note payable	45,500			—			3,440
Proceeds from promissory note payable	1,775			—			—
Deferred financing fees	(1,671		)	—			—
Net cash provided by (used in) financing activities	157,864			(937		)	1,076
Net change in cash	34,838			(2,044		)	1,535
Cash and cash equivalents, beginning of period	—			10,520			7,652
Cash and cash equivalents, end of period	$	34,838		$	8,476		$	9,187

Table of Contents

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Successor		Predecessor
	For the Period from March 21 to September 30, 2014		For the Period from January 1 to March 20, 2014		Nine Months Ended September 30, 2013
Supplemental disclosure of cash flow information:
Interest paid	$	3,424	$	458	$	1,442
Taxes paid	$	586	—		—
Non-cash investing and financing activities:
Reclassification of deferred offering costs to additional paid-in capital	$	1,505	$	—	$	—
Offering costs in due to affiliates	$	1,740	$	—	$	—
Offering costs in accounts payable and accrued expenses	$	279	$	—	$	—
Purchases of property and equipment in accounts payable and accrued expenses	$	753	$	—	$	—
Proceeds receivable from share sales ⁽¹⁾	$	1,801	$	—	$	—
Seller financing of real estate investments	$	58,074	$	—	$	—
Seller financing of investment in unconsolidated entities	$	5,000	$	—	$	—
Contingent consideration on acquisition	$	4,100	$	—	$	—
Deferred consideration on acquisition	$	3,400	$	—	$	—
Dividends declared but not paid	$	612	$	—	$	—
Common stock issued through distribution reinvestment plan	$	301	$	—	$	—

___________________________________________________


⁽¹⁾	The proceeds receivable from the sale of shares of common equity was received by the Company prior to the filing date of this Quarterly Report on Form 10-Q.

The accompanying notes are an integral part of these statements.

Table of Contents

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

Note 1 - Organization

American Realty Capital Hospitality Trust, Inc. (the "Company") was incorporated on July 25, 2013 as a Maryland corporation and intends to qualify as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ending December 31, 2014. The Company was formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. The Company has no limitation as to the brand of franchise or license with which the Company's hotels will be associated. All such properties may be acquired by the Company alone or jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate and invest in other real estate-related debt. As of September 30, 2014, the Company has acquired interests in six hotels through fee simple, leasehold and joint venture interests (the "Barceló Portfolio").

On January 7, 2014, the Company commenced its initial public offering ("IPO" or the "Offering") on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-190698), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covered up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which the Company's common stockholders may elect to have their distributions reinvested in additional shares of the Company's common stock.

Until the filing of the Company's second quarterly financial filing with the SEC, pursuant to the Securities Exchange Act of 1934, as amended, following the earlier to occur of (i) the Company's acquisition of at least $2.0 billion in total investment portfolio assets or (ii) January 7, 2016, the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will initially be equal to $23.75 per share, which is 95% of the initial per share offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to the Company's net asset value ("NAV") per share plus applicable commissions and fees in the case of the primary offering, and the per share purchase price in the DRIP will be equal to the NAV per share. On February 3, 2014, the Company received and accepted subscriptions in excess of the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issued shares of common stock to the initial investors who were admitted as stockholders. As of September 30, 2014, the Company had 5.1 million shares of stock outstanding and had received total gross proceeds from the IPO of approximately $125.4 million, including shares issued under the DRIP. As of September 30, 2014, the aggregate value of all the common stock outstanding was $126.3 million based on a per share value of $25.00 (or $23.75 for shares issued under the DRIP).

Substantially all of the Company's business is conducted through American Realty Capital Hospitality Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP Units"). Additionally, American Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner") contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. The holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of common stock or, at the option of the OP, a corresponding number of shares of common stock of the Company in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.

The Company has no direct employees. The Company has retained American Realty Capital Hospitality Advisor, LLC (the "Advisor") to manage certain aspects of its affairs on a day-to-day basis. American Realty Capital Hospitality Properties, LLC (the "Property Manager") serves as the Company's property manager and the Property Manager has retained Crestline Hotels & Resorts, LLC (the "Sub Property Manager"), an entity under common control with the parent of American Realty Capital IX, LLC, (the "Sponsor") to provide services, including locating investments, negotiating financing and operating certain hotel assets in the Company's portfolio. Realty Capital Securities, LLC (the "Dealer Manager"), an entity under common control with the parent of the Sponsor serves as the dealer manager of the offering. The Advisor, Special Limited Partner, Property Manager, Sub Property Manager and Dealer Manager are related parties and receive fees, distributions and other compensation for services related to the Offering and the investment and management of the Company's assets.

Table of Contents

AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

Pending Acquisition

On May 23, 2014, the Company entered into a Real Estate Sale Agreement to acquire (the "Grace Acquisition") the fee simple or leasehold interests in 126 hotels (the "Portfolio") from W2007 Equity Inns Realty, LLC, W2007 Equity Inns Realty, L.P., W2007 EQI Urbana Partnership, L.P., W2007 EQI Seattle Partnership, L.P., W2007 EQI Savannah 2 Partnership, L.P., W2007 EQI Rio Rancho Partnership, L.P., W2007 EQI Orlando Partnership, L.P., W2007 EQI Orlando 2 Partnership, L.P., W2007 EQI Naperville Partnership, L.P., W2007 EQI Milford Corporation, W2007 EQI Louisville Partnership, L.P., W2007 EQI Knoxville Partnership, L.P., W2007 EQI Jacksonville Partnership I, L.P., W2007 EQI Indianapolis Partnership, L.P., W2007 EQI Houston Partnership, L.P., W2007 EQI HI Austin Partnership, L.P., W2007 EQI East Lansing Partnership, L.P., W2007 EQI Dalton Partnership, L.P., W2007 EQI College Station Partnership, L.P., W2007 EQI Carlsbad Partnership, L.P., W2007 EQI Augusta Partnership, L.P. and W2007 EQI Asheville Partnership, L.P. (collectively, the "Sellers") which are indirectly owned by one or more Whitehall Real Estate Funds, an investment arm controlled by The Goldman Sachs Group, Inc.

The aggregate contract purchase price for the Portfolio is approximately $1.925 billion, exclusive of closing costs and subject to certain adjustments at closing. The Company anticipates funding approximately $271.0 million of the purchase price with cash generated through equity raises, funding approximately $976.0 million through the assumption of existing mortgage and mezzanine indebtedness and funding approximately $227.0 million through additional mortgage and mezzanine financing. The mortgage indebtedness that the Company expects to assume is for $865.0 million at an interest rate of London Interbank Offered Rate ("LIBOR") plus 3.11% and the mezzanine indebtedness is for $111.0 million at an interest rate of LIBOR plus 4.77%. Both the mortgage and mezzanine indebtedness that the Company expects to assume are secured by 106 of the 126 hotels in the Portfolio and mature on May 1, 2016, subject to three (one-year) extension rights which, if all three are exercised, result in an outside maturity date of May 1, 2019.

Consistent with the terms of the Grace Acquisition, the Company anticipates that the remaining $451.0 million of the contract purchase price will be satisfied by the issuance of preferred equity interests in two newly-formed Delaware limited liability companies, ARC Hospitality Portfolio I Holdco, LLC and ARC Hospitality Portfolio II Holdco, LLC, each of which will be an indirect subsidiary of the Company and an indirect owner of the Portfolio. The holders of the preferred equity interests will be entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing and 8.00% per annum thereafter. On liquidation, the preferred equity interests will be entitled to receive their original value (as reduced by redemptions) prior to any distributions being made to the Company or its shareholders. After the earlier to occur of either (i) the date of repayment in full of currently outstanding unsecured obligations of the Company in the original principal amount of approximately $63.1 million, which represents the Barceló Promissory Note (See Note 7 - Promissory Notes Payable), or (ii) the date the gross amount of IPO proceeds received by the Company after the closing of the Grace Acquisition exceeds $100.0 million (reduced from $150.0 million through a side letter related to the Real Estate Sale Agreement dated August 22, 2014), the Company will be required to use 35.0% of any IPO proceeds to redeem the peferred equity interests at par, up to a maximum of $350.0 million for any 12-month period. The Company will also be required, in certain circumstances, to apply debt proceeds to redeem the preferred equity interests at par. As of the end of the third year following the closing of the Grace Acquisition, the Company will be required to have redeemed 50.0% of the preferred equity interests, and as of the end of the fourth year following the closing of the Grace Acquisition, the Company will be required to redeem 100.0% of the preferred equity interests remaining outstanding at such time. In addition, the Company will have the right, at its option, to redeem the preferred equity interests, in whole or in part, at any time at par. The holders of the preferred equity interests will have certain customary consent rights over actions by the Company relating to the Portfolio. If the Company is unable to satisfy the redemptions requirements, the holders of the preferred equity interests will have certain rights, including the ability to assume control of the operations of the Portfolio. Due to the fact that the preferred equity interests will be mandatorily redeemable and certain of their other characteristics, the preferred equity interests will be classified as debt in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Pursuant to the terms of the Grace Acquisition, the Company’s obligation to consummate the acquisition of the Portfolio is subject to certain customary closing conditions. Among these customary conditions, the Company must enter into replacement franchise agreements for each hotel and the Company must obtain the consent of certain ground lessors for certain hotels. The Company was required to make a $50.0 million earnest money deposit, with an additional $25.0 million due if the Company exercised its right to extend closing of the acquisition to December 15, 2014. This right was exercised on July 21, 2014 through an amendment to the Real Estate Sale Agreement and the additional $25.0 million earnest money deposit was funded on September 19, 2014.

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AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

On November 11, 2014, the Real Estate Sale Agreement was amended and restated to incorporate all amendments made to that date (the "Amended Purchase Agreement"). The Amended Purchase Agreement reduces the size of the acquisition of the fee simple or leasehold interests to 116 hotels for an aggregate purchase price of $1.808 billion and changes the scheduled close date to February 27, 2015.

Note 2 - Summary of Significant Accounting Policies

The accompanying condensed consolidated/combined financial statements of the Company included herein were prepared in accordance with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the period from January 1 to March 20, 2014 for the Barceló Portfolio (the "Predecessor") and for the period from March 21 to September 30, 2014 for the Company (the "Successor") are not necessarily indicative of the results for the entire year or any subsequent interim period because of the impact of seasonal or short-term variations related to the hotel industry. Certain prior period amounts have been reclassified to conform to current period presentation.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2013, which are included in the Company's Annual Report on Form 10-K filed with the SEC on April 7, 2014.

Development Stage Company

On February 3, 2014, the Company raised proceeds sufficient to break escrow in connection with its IPO. The Company received and accepted aggregate subscriptions in excess of the minimum $2.0 million and issued shares of common stock to its initial investors who were admitted as stockholders. The Company acquired the Barceló Portfolio through fee simple, leasehold and joint venture interests and commenced operations on March 21, 2014, and as of such date was no longer considered to be a development stage company.

Principles of Consolidation/Combination and Basis of Presentation

The accompanying condensed consolidated/combined financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

The Predecessor represents hospitality assets and operations owned by Barceló Crestline Corporation and its consolidated subsidiaries ("BCC"), which historically have been maintained in various legal entities. Historically, financial statements have not been prepared for the Predecessor as a discrete stand-alone entity. The accompanying condensed consolidated/combined financial statements for the Predecessor as of December 31, 2013, for the period from January 1 to March 20, 2014 and for the three and nine months ended September 30, 2013 have been derived from the historical accounting records of BCC and reflect the assets, liabilities, equity, revenue and expenses directly attributable to the Predecessor, as well as allocations deemed reasonable by management, to present the combined financial position, results of operations, changes in equity, and cash flows of the Predecessor on a stand-alone basis. Included in the accompanying condensed consolidated/combined statement of operations for the period from March 21 to September 30, 2014 is $0.2 million of costs related to the Company for the period from January 1 to March 20, 2014. No costs related to the Company for the period from January 1 to March 20, 2014 were included in the condensed consolidated statement of operations for the three months ended September 30, 2014.

Use of Estimates

The preparation of the accompanying condensed consolidated/combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding

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revenue recognition, purchase price allocations to record investments in real estate, the useful lives of real estate and real estate taxes, as applicable.

Real Estate Investments

The Company allocates the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and fixtures. The Company utilizes various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on purchase price allocation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value.

In making estimates of fair values for purposes of allocating the purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

Investments in real estate that are not considered to be business combinations are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of the Company's assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for leasehold interests.

The Company is required to make subjective assessments as to the useful lives of the Company’s assets for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company’s investments in real estate. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations at fair value for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on the Company’s operations and financial results.

Below-Market Lease

The below-market lease intangible is based on the difference between the market rent and the contractual rent and is discounted to a present value using an interest rate reflecting the Company's current assessment of the risk associated with the lease acquired. Acquired lease intangible assets are amortized over the remaining lease term. The amortization of a below-market lease is recorded as an increase to rent expense on the condensed consolidated/combined statements of operations.

Impairment of Long Lived Assets and Investments in Unconsolidated Entities

When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less the estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. No such impairment losses were recorded in the periods presented.

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Cash and Cash Equivalents

Cash and cash equivalents includes cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less.

Restricted Cash

Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and excess cash flow deposits due to mortgage agreement restrictions. For purposes of the statement of cash flows, changes in restricted cash caused by changes to the amount needed for future capital improvements are treated as investing activities and changes related to future interest and real estate tax payments and excess cash flow deposits are treated as operating activities.

Deferred Financing Fees

Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful.

Variable Interest Entities

Accounting Standards Codification ("ASC") 810, Consolidation contains the guidance surrounding the definition of variable interest entities ("VIE"), the definition of variable interests and the consolidation rules surrounding VIEs. In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company has variable interests in VIEs through its investments in entities which own the Westin Virginia Beach Town Center (the "Westin Virginia Beach") and the Hilton Garden Inn Blacksburg.

Once it is determined that the Company holds a variable interest in an entity, GAAP requires that the Company perform a qualitative analysis to determine (i) which entity has the power to direct the matters that most significantly impact the VIE’s financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The entity that has both of these characteristics is deemed to be the primary beneficiary and is required to consolidate the VIE (See Note 4 - Variable Interest Entities and Investments in Unconsolidated Entities).

Revenue Recognition

Hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.

Share-Based Payments

The Company has a share-based incentive award plan, which is accounted for under the guidance for share-based payments. The expense for such awards will be included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met (See Note 14 - Share-Based Payments).

Income Taxes

The Company intends to elect and qualify to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with its tax year ending December 31, 2014. In order to qualify as a REIT, the Company must annually distribute to its stockholders 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its

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income, property tax and federal income and excise taxes on its undistributed income. The Company's hotels are leased to a taxable REIT subsidiary ("TRS") which is a wholly owned subsidiary of the OP. The TRS is subject to federal, state and local income taxes.

Earnings/Loss per Share

The Company calculates basic income or loss per share by dividing net income or loss for the period by the weighted-average shares of its common stock outstanding for a respective period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and unvested stock awards, except when doing so would be anti-dilutive.

Advertising Costs

The Company expenses advertising costs as incurred. These costs were $0.1 million for the three months ended September 30, 2014 and $0.3 million combined between the Predecessor and the Company for the nine months ended September 30, 2014. These costs were $0.1 million and $0.3 million for the Predecessor for the three and nine months ended September 30, 2013, respectively.

Allowance for Doubtful Accounts

Receivables consist principally of trade receivables from customers and are generally unsecured and are due within 30 to 90 days. The Company records a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical patterns of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced. Trade receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying condensed consolidated/combined balance sheets, and are as follows (in thousands):



	Successor			Predecessor
	September 30, 2014			December 31, 2013
Trade receivables	$	1,188		$	788
Allowance for doubtful accounts	(40		)	(26		)
Trade receivables, net of allowance	$	1,148		$	762

Reportable Segments

The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated/combined revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level, none of which represent a reportable segment.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosure of Disposal of Components of an Entity. Under this standard, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. In addition, it requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. As a result, the operations of sold properties through the date of their disposal will be included in continuing operations, unless the sale represents a strategic shift. However, the gain or loss on the sale of a property will be reported separately below income from continuing operations. The Company adopted this ASU as of January 1, 2014. No prior year restatements are permitted for this change in policy. For purposes of earnings per share calculation, beginning in 2014 gains and losses on property sales will be included in continuing operations.

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On May 28, 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used along with existing auditing standards. The adoption of ASU 2014-15 becomes effective for the Company on its fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Company's consolidated financial statements.

Note 3 - Real Estate Investments

On March 21, 2014, the Company acquired the Barceló Portfolio through fee simple, leasehold and joint venture interests. The aggregate purchase price of the Barceló Portfolio was approximately $112.0 million, exclusive of closing costs. The Barceló Portfolio consists of (i) three wholly owned hotel assets (the "Portfolio Owned Assets"), the Baltimore Courtyard Inner Harbor Hotel (the "Baltimore Courtyard"), the Courtyard Providence Downtown Hotel (the "Providence Courtyard") and the Homewood Suites by Hilton Stratford (the "Stratford Homewood Suites"); (ii) one leased asset, the Georgia Tech Hotel & Conference Center (the "Georgia Tech Hotel"); and (iii) equity interests in two joint ventures (the "Joint Venture Assets") that each own one hotel, the Westin Virginia Beach and the Hilton Garden Inn Blacksburg.

The following table presents the allocation of the assets acquired and liabilities assumed by the Company as of March 21, 2014 (in thousands):



	Successor
Assets acquired and liabilities assumed	As of March 21, 2014
Land	$	12,308
Buildings and improvements	79,192
Below-market lease obligation	8,400
Furniture, fixtures and equipment	5,220
Restricted cash	619
Investment in unconsolidated entities	5,380
Prepaid expenses and other assets	2,314
Accounts payable and accrued expenses	(1,469		)
Total operating assets acquired, net	111,964
Contingent consideration on acquisition	(4,100		)
Seller financing of real estate investments	(58,074		)
Seller financing of investment in unconsolidated entities	(5,000		)
Deferred consideration	(3,400		)
Total assets acquired, net	$	41,390

The Company is finalizing the fair value of certain tangible and intangible assets acquired and adjustments may be made to the preliminary purchase price allocation shown above. Pro forma information as if the above acquisitions during the nine months ended September 30, 2014 had been consummated on January 1, 2013 have not been presented as the results for the Predecessor for the nine months ended September 30, 2014 and 2013 are included in the condensed consolidated/combined statements of operations.

Contingent consideration included as part of the acquisition is payable to BCC in 2016 based on the operating results of the Baltimore Courtyard, Providence Courtyard and Stratford Homewood Suites. Additionally, deferred consideration payable to

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BCC of $3.0 million and $0.5 million is payable within ten business days after the date the Company raises $70.0 million in common equity from the Offering excluding any common equity raised on or prior to the closing of the Grace Acquisition (See Note 11 - Commitments and Contingencies for further information on the preceding). The fair value of the contingent consideration on acquisition of $4.1 million and the deferred consideration of $3.4 million are included in accounts payable and accrued expenses and the seller financing of real estate investments and seller financing of investment in unconsolidated entities are included in promissory notes payable on the accompanying condensed consolidated/combined balance sheets.

Note 4 - Variable Interest Entities and Investments in Unconsolidated Entities

The Company's accompanying condensed consolidated/combined financial statements and the Predecessor's combined financial statements include investments in (i) an entity that owns the Westin Virginia Beach and (ii) an entity that owns the Hilton Garden Inn Blacksburg.

The Company as of September 30, 2014 and the Predecessor as of December 31, 2013 have a 24.00% non-controlling interest (but with certain veto and approval rights) in BSE/AH Blacksburg Hotel, LLC (the "HGI Blacksburg JV"), an entity that owns the assets of the Hilton Garden Inn Blacksburg. The HGI Blacksburg JV has a loan with an original principal balance of $13.0 million (the "Blacksburg Loan"). In addition, BCC is a party to the First Amended and Restated Guaranty of Payment dated April 17, 2008 (the "Blacksburg Payment Guaranty") in connection with the Blacksburg Loan, which is partially supported by a Construction Loan Indemnity from the other partners in the HGI Blacksburg JV dated March 10, 2008 (the "Blacksburg Cross Indemnity"). In connection with the acquisition of its non-controlling interest in the HGI Blacksburg JV, on March 21, 2014, the Company entered into an Indemnity Agreement (the "BCC Indemnity") pursuant to which the Company agreed to indemnify BCC against liabilities arising under the Blacksburg Payment Guaranty and/or the Blacksburg Cross Indemnity. The outstanding balance of the Blacksburg Loan was $10.2 million and $10.7 million as of September 30, 2014 and December 31, 2013, respectively.

Under the Blacksburg Payment Guaranty, BCC is jointly liable to the lender, along with four other parties, for payment of any Blacksburg Loan deficiencies. The Blacksburg Payment Guaranty remains in effect until the Blacksburg Loan is repaid. Under the Blacksburg Cross Indemnity, each of the joint venture owners of the hotel agrees to be responsible for its pro rata share of any liabilities under the Blacksburg Payment Guaranty, and to be 100% responsible for any liabilities caused by it. Thus, so long as each of the other parties to the Blacksburg Cross Indemnity remains solvent, the Company, through the BCC Indemnity, should never be liable for anything more than the Company’s pro rata share of losses, or 100% of the losses the Company caused.

The Company as of September 30, 2014 and the Predecessor as of December 31, 2013 have a 30.53% non-controlling interest (but with certain veto and approval rights) in TCA Block 7 Hotel, LLC (the "Westin Virginia Beach JV"), an entity that owns the assets of the Westin Virginia Beach. On April 8, 2014, a loan in connection with the hotel was refinanced and Notes A and B of that loan were paid off. Upon payment in full of Notes A and B, Note C for $7.0 million and related accrued interest of $0.5 million were forgiven. On April 8, 2014, Westin Virginia Beach JV entered into a $20.7 million loan (the "Westin Virginia Beach Loan") with an unaffiliated lender. In addition, the Company is a party to a Guaranty of Recourse Obligations dated April 8, 2014 (the "Westin Virginia Beach Non-Recourse Carve-out Guaranty") in connection with the Westin Virginia Beach Loan, which is partially supported by a permanent loan cross indemnity from the other partners in the Westin Virginia Beach JV dated April 1, 2014 (the "Westin Virginia Beach Cross Indemnity"). The outstanding balance of the prior loans was $26.6 million as of December 31, 2013, and the outstanding balance of the Westin Virginia Beach Loan was $20.6 million as of September 30, 2014.

Under the Westin Virginia Beach Non-Recourse Carve-out Guaranty, the Company, along with two other parties, would be liable to the lender for repayment for part or all of the loan upon occurrence of events triggering non-recourse carve-out liability. Pursuant to the Westin Virginia Beach Cross Indemnity, each of the joint venture partners is obligated to pay its pro rata share of any losses incurred by the parties to the Westin Virginia Beach Non-Recourse Carve-out Guaranty, except to the extent that any such loss is caused by one of those parties, in which case that party is responsible for 100% of the losses. Therefore, so long as each of the other parties remains solvent, the Company should never be liable for anything more than its pro rata share of losses, or 100% of the losses it caused. The Westin Virginia Beach Non-Recourse Carve-out Guaranty remains in place until the Westin Virginia Beach Loan is repaid.

The Company considers these entities to be VIEs. The Company has concluded it is not the primary beneficiary with the power to direct activities that most significantly impact economic performance of the entities, and accordingly, has not

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consolidated the entities. The Company has accounted for the entities under the equity method of accounting and included them in investments in unconsolidated entities in the accompanying condensed consolidated/combined balance sheets.

The Company’s and Predecessor's investments in unconsolidated entities as of September 30, 2014 and December 31, 2013, respectively, consist of the following (in thousands):



			Investment in Partnership				Income (Loss)
			Successor		Predecessor		Successor		Predecessor		Successor		Predecessor
Partnership	Ownership Interest		September 30, 2014		December 31, 2013		Three Months Ended September 30, 2014		Three Months Ended September 30, 2013		For the Period from March 21 to September 30, 2014		For the Period from January 1 to March 20, 2014			Nine Months Ended September 30, 2013
HGI Blacksburg JV	24.00	%	$	1,614	$	893	$	77	$	58	$	94	$	(35	)	$	43
Westin Virginia Beach JV	30.53	%	6,116		3,488		184		77		2,513		(131		)	59
Total			$	7,730	$	4,381	$	261	$	135	$	2,607	$	(166	)	$	102

The Company received a capital distribution of $0.24 million from the Westin Virginia Beach JV for the nine months ended September 30, 2014. No distributions were recorded during the three months ended September 30, 2014 and 2013 and the nine months ended September 30, 2013.

During the three and nine months ended September 30, 2014, the Company received a capital distribution of $0.01 million from the HGI Blacksburg JV. No distributions were recorded during the three and nine months ended September 30, 2013.

The maximum exposure to loss as a result of the Company’s and Predecessor's investments in unconsolidated entities as of September 30, 2014 and December 31, 2013, respectively, is as follows (in thousands)⁽¹⁾:



	Partnership Loan Balance				Investment in Partnership				Partnership Maximum Exposure to Loss
	Successor		Predecessor		Successor		Predecessor		Successor		Predecessor
Partnership	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
HGI Blacksburg JV	$	10,213	$	10,663	$	1,614	$	893	$	11,827	$	11,556
Westin Virginia Beach JV	20,611		26,576		6,116		3,488		26,727		30,064
Total	$	30,824	$	37,239	$	7,730	$	4,381	$	38,554	$	41,620

______________________________________________________________________________________________

⁽¹⁾ Represents the Company's maximum exposure to loss at each unconsolidated entity should the loss be caused by the Company. As a result of the Blacksburg Payment Guaranty, the Blacksburg Cross Indemnity, the Westin Virginia Beach Non-Recourse Carve-out Guaranty and the Westin Virginia Beach Cross Indemnity, the Company and Predecessor have a maximum exposure to loss of the outstanding loan balance at the entity as well as their investment in the entity.

Below are the condensed statements of operations for the HGI Blacksburg JV for the three months ended September 30, 2014 and 2013 and for the period from January 1 to March 20, 2014, for the period from March 21 to September 30, 2014 and for the nine months ended September 30, 2013 (in thousands):

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	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30, 2014			Three Months Ended September 30, 2013			For the Period from March 21 to September 30, 2014			For the period from January 1 to March 20, 2014			Nine Months Ended September 30, 2013
Hotel revenue	$	1,511		$	1,348		$	2,853		$	687		$	3,424
Operating income (loss)	460			359			686			(47		)	587
Interest expense	(109		)	(116		)	(232		)	(97		)	(409		)
Net income (loss)	$	351		$	243		$	454		$	(144	)	$	178
Company's share of net income (loss)	84			58			109			(35		)	43
Additional amortization expense ⁽¹⁾	(7		)	—			(15		)	—			—
Company's share of net income (loss)	$	77		$	58		$	94		$	(35	)	$	43

____________________________________________________________________________

⁽¹⁾ Amortization of the purchase price of the Company’s original interest in the HGI Blacksburg JV, less the Company's share of the partnership’s deficit, which resulted in a basis difference of $0.7 million.

Below are the condensed statements of operations for the Westin Virginia Beach JV for the three months ended September 30, 2014 and 2013 and for the period from January 1 to March 20, 2014, for the period from March 21 to September 30, 2014 and for the nine months ended September 30, 2013 (in thousands):



	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30, 2014			Three Months Ended September 30, 2013			For the Period from March 21 to September 30, 2014			For the Period from January 1 to March 20, 2014			Nine Months Ended September 30, 2013
Hotel revenue	$	3,737		$	3,167		$	7,246		$	2,070		$	8,616
Operating income (loss)	993			830			1,655			(67		)	1,470
Interest income	—			1			—			—			2
Interest expense	(280		)	(372		)	(714		)	(304		)	(1,074		)
Forgiveness of debt	—			—			7,522			—			—
Net income (loss)	$	713		$	459		$	8,463		$	(371	)	$	398
Company's share of net income (loss)	217			139			2,583			(113		)	121
Additional amortization expense ⁽¹⁾	(33		)	(62		)	(70		)	(18		)	(62		)
Company's share of net income (loss)	$	184		$	77		$	2,513		$	(131	)	$	59

_________________________________________________________________________

⁽¹⁾ Amortization of the purchase price of the Predecessor’s original interest in the Westin Virginia Beach JV, less the Predecessor’s share of the partnership’s deficit, which resulted in a basis difference of $3.4 million and the Company’s original interest in the Westin Virginia Beach JV, less the Company's share of the partnership’s deficit, which resulted in a basis difference of $3.4 million.

Note 5 - Leases

In October 2001, the Predecessor, through a wholly owned subsidiary, entered into an operating lease agreement to lease the Georgia Tech Hotel, which opened in August 2003. On March 21, 2014, the Company acquired the Predecessor's interest in the lease. The lease has an initial term of 30 years from the opening date, with a 10-year extension option. The lease requires the Company to pay rent equal to (i) a fixed minimum rent plus (ii) an additional rent based upon a specified percentage of revenues to the extent they exceed a specified threshold. The Company is responsible for paying all of the hotel operating expenses including all personnel costs, impositions, utility charges, insurance premiums, and payments for funding furniture, fixtures and equipment reserves. Rent expense for the Georgia Tech Hotel attributable to the Successor for the three months ended September 30, 2014 and for the period from March 21 to September 30, 2014 was $1.3 million and $2.7 million, respectively. In connection with the acquisition of the Georgia Tech Hotel lease, the Company has allocated a value to the below-market lease intangible based on the difference between the market rent and the rental commitments. During the three

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and nine months ended September 30, 2014, $0.1 million and $0.2 million, respectively, has been amortized to rent expense. Rent expense attributable to the Predecessor for the three months ended September 30, 2013, for the period from January 1 to March 20, 2014 and the nine months ended September 30, 2013 was $1.1 million, $0.9 million and $3.2 million, respectively.

The future minimum rental commitments for the Georgia Tech Hotel are as follows (in thousands):



	Minimum Rental Commitments		Amortization of Lease Intangible to Rent Expense
October 1, 2014 - December 31, 2014	$	1,100	$	106
Year ended December 31, 2015	4,400		433
Year ended December 31, 2016	4,400		433
Year ended December 31, 2017	4,400		433
Year ended December 31, 2018	4,400		433
Thereafter	64,533		6,328
Total	$	83,233	$	8,166

Note 6 - Mortgage Note Payable

The Company’s and the Predecessor's mortgage note payable as of September 30, 2014 and December 31, 2013 consist of the following, respectively (in thousands):



Successor
	Outstanding Mortgage Note Payable
Encumbered Properties	September 30, 2014		Interest Rate	Payment	Maturity
Baltimore Courtyard & Providence Courtyard	$	45,500	4.3%	Interest Only, Principal paid at Maturity	April 2019



Predecessor
	Outstanding Mortgage Note Payable
Encumbered Properties	December 31, 2013		Interest Rate	Payment	Maturity
Baltimore Courtyard & Providence Courtyard	$	41,449	4.55% plus the greater of (i) three-month LIBOR or (ii) a LIBOR floor of 0.50%⁽¹⁾	Principal and Interest	January 2016

______________________________________________________________________________________________

⁽¹⁾ 5.05% at December 31, 2013

The Predecessor's mortgage note payable was paid off concurrently with the acquisition of the Barceló Portfolio by the Company. Interest expense related to the mortgage note payable attributable to the Successor for the three months ended September 30, 2014 and for the period from March 21 to September 30, 2014 was $0.5 million and $1.1 million, respectively. Interest expense attributable to the Predecessor for the three months ended September 30, 2013, for the period from January 1 to March 20, 2014 and the nine months ended September 30, 2013 was $0.5 million, $0.5 million and $1.5 million, respectively.

Note 7 - Promissory Notes Payable

The Company’s promissory notes payable as of September 30, 2014 are as follows (in thousands):

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	Outstanding Promissory Notes Payable
Use of Proceeds	September 30, 2014		Interest Rate		Payment	Maturity
Barceló acquisition	$	63,074	6.8	%	Interest Only	See below
Property improvement plan	1,775		4.5	%	Interest Only	March 2019
Grace Acquisition deposit	—		6.0	%	Interest Only	May 2015

______________________________________________________________________________________________

The promissory notes payable for the Barceló acquisition originally consisted of the Portfolio Owned Assets and Joint Venture Assets promissory notes which had a maturity date of within ten business days upon the Company raising equal to or greater than $150.0 million in common equity from the Offering. During the three months ended September 30, 2014, the Company entered into an amendment to the Portfolio Owned Assets and Joint Venture Assets promissory notes whereby the promissory notes were combined into one note (the "Barceló Promissory Note") with an outstanding principal amount of $63.1 million. The Barceló Promissory Note has a maturity date of within ten business days after the Company raises $70.0 million in common equity from the Offering after the closing of the Grace Acquisition. If the Grace Acquisition has not closed by March 31, 2015, the amendment shall become null and void and the Portfolio Owned Assets and Joint Venture Assets promissory notes shall be in full effect as if the amendments never occurred. There are no principal payments under the Barceló Promissory Note payable for 2014 and 2015, unless the contingent payment feature above is satisfied by raising equal to or greater than $70.0 million in common equity from the Offering after the closing of the Grace Acquisition or if the Grace Acquisition has not closed by March 31, 2015 and the Company has raised equal to or greater than $150.0 million in common equity from the Offering resulting in the contingent payment feature being satisfied under the Portfolio Owned Assets and Joint Venture Assets promissory notes.

In connection with entering into the Grace Acquisition, the Company paid a $50.0 million customary earnest money deposit on May 27, 2014 which was partially funded by a $40.5 million draw on a $45.0 million promissory note with CARP, LLC, an entity under common ownership with the Sponsor (the "Affiliate Promissory Note"), which had a maturity date of May 27, 2015. As of September 30, 2014, the Affiliate Promissory Note had been repaid in full.

The Barceló Promissory Note is payable to BCC and the property improvement plan promissory note is payable to the Sub Property Manager.

Interest expense related to promissory notes payable attributable to the Company for the three months ended September 30, 2014 and for the period from March 21 to September 30, 2014 was $1.3 million and $2.5 million, respectively. No interest expense related to promissory notes payable was incurred by the Predecessor for the three and nine months ended September 30, 2013 as the Predecessor did not have any promissory notes.

Note 8 - Accounts Payable and Accrued Expenses

The following is a summary of the components of accounts payable and accrued expenses (in thousands):



	Successor		Predecessor
	September 30, 2014		December 31, 2013
Other accounts payable and accrued expenses	$	7,244	$	2,745
Contingent consideration from acquisition	4,383		—
Deferred payment for acquisition	3,470		—
Accrued salaries and related liabilities	1,199		819
Georgia Tech Hotel lease obligation	—		1,733
Total	$	16,296	$	5,297

Note 9 - Common Stock

The Company had 5,053,290 shares and 8,888 shares of common stock outstanding and had received total proceeds of $125.4 million and $0.2 million as of September 30, 2014 and December 31, 2013, respectively.

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On February 3, 2014, the Company's board of directors declared distributions payable to stockholders of record each day during the applicable month at a rate equal to $0.00465753425 per day, or $1.70 per annum, per share of common stock. The first distribution was paid in May 2014 to holders of record in April 2014. The distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month.

Share Repurchase Program

The Company has a Share Repurchase Program (the "SRP") that enables stockholders to sell their shares of common stock originally purchased from the Company to the Company. Under the SRP, stockholders may request that the Company redeem all or any portion, subject to certain minimum conditions described below, if such repurchase does not impair the Company’s capital or operations.

Except in connection with a stockholder’s death, disability, bankruptcy or other involuntary exigent circumstance, prior to the time that the shares of common stock are listed on a national securities exchange and until the Company begins to calculate its NAV, the repurchase price per share will depend on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $23.13 or 92.5% of the amount they actually paid for each share; after two years from the purchase date — the lower of $23.75 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $24.38 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $25.00 or 100.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations).

Once the Company begins to calculate its NAV, the price per share that the Company will pay to repurchase the Company’s shares of common stock on the last day of each quarter, will be the Company’s per share NAV of common stock for the quarter, calculated after the close of business on each day the Company makes its quarterly financial filing. Subject to limited exceptions, stockholders whose shares of common stock are repurchased within the first four months from the date of purchase will be subject to a short-term trading fee of 2.0% of the aggregate per share NAV of the shares of common stock repurchased.

The board of directors may reject a request for repurchase, at any time. Purchases under the SRP by the Company will be limited in any calendar year to 5.0% of the weighted average number of shares outstanding during the prior calendar year. In addition, funds available for the Company's SRP are limited and may not be sufficient to accommodate all requests. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.

When a stockholder requests a repurchase and the repurchase is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. As of September 30, 2014 and December 31, 2013, no shares had been repurchased or requested to be repurchased.

Distribution Reinvestment Plan

Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the primary Offering. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend or suspend any aspect of the DRIP or terminate the DRIP with ten days’ notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying balance sheets in the period distributions are paid. There were 12,653 shares issued under the DRIP as of September 30, 2014. No shares were issued under the DRIP as of December 31, 2013.

Note 10 - Fair Value Measurements

In accordance with ASC 820, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on

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(Unaudited)

observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.

The Company’s financial instruments recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:


•	Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets.


•	Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.


•	Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company is required to disclose the fair value of financial instruments which it is practicable to estimate. The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these items. The following table shows the carrying values and the fair values of material non-current liabilities that qualify as financial instruments, determined in accordance with the authoritative guidance for disclosures about fair value of financial instruments (in thousands):



	Successor				Predecessor
	September 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Mortgage note payable	$	45,500	$	45,044	$	41,449	$	38,921
Promissory notes payable	64,849		64,849		—		—
Contingent consideration on acquisition	4,383		4,383		—		—
Deferred consideration	3,470		3,470		—		—
Total	$	118,202	$	117,746	$	41,449	$	38,921

The fair value of the mortgage note payable was determined using the discounted cash flow method and applying current market rates and is classified as level 3 under the fair value hierarchy. The fair values of the promissory notes payable was determined to equal their carrying amounts as these amounts are expected to be repaid within a year. The fair value of the contingent consideration on acquisition and deferred consideration was determined to equal their carrying amounts as these amounts are accreted using current market rates.

Note 11 - Commitments and Contingencies

Litigation

In the ordinary course of business, the Company may become subject to litigation or claims. There are no material legal proceedings pending or known to be contemplated against the Company.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has acquired the Barceló Portfolio through fee simple, leasehold and

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joint venture interests and as of September 30, 2014, has not been notified by any governmental authority of any non-compliance, liability or other claim and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.

Contingent Consideration

Included as part of the acquisition of the Barceló Portfolio is a contingent consideration payable to BCC based on the operating results of the Baltimore Courtyard, Providence Courtyard and Stratford Homewood Suites. The amount payable is calculated by applying a capitalization rate to the excess earnings before interest, taxes, depreciation and amortization ("EBITDA") earned in the second year after the acquisition over an agreed upon target. If this target EBITDA is not met, no amount will be due to BCC, but if the EBITDA earned is higher than forecasted, the amount due to BCC could be higher than the liability recorded in the condensed consolidated/combined balance sheets as of September 30, 2014.

Deferred Consideration

Included as part of the acquisition of the Barceló Portfolio is deferred consideration payable to BCC of $3.0 million and $0.5 million which was payable on March 21, 2015 and March 21, 2016, respectively. As part of the amendment to the Portfolio Owned Assets and Joint Venture Assets promissory notes, the full amount of $3.5 million is now payable within ten business days after the date the Company raises $70.0 million in common equity from the Offering after the closing of the Grace Acquisition. If the Grace Acquisition has not closed by March 31, 2015, the amendment shall become null and void and the deferred consideration of $3.0 million and $0.5 million shall be payable on the original due dates of March 21, 2015 and March 21, 2016, respectively. The deferred consideration does not bear interest unless the amounts remain unpaid as of the repayment date, at which time, interest will begin accruing at a rate of 6.8% per annum.

Note 12 - Related Party Transactions and Arrangements

As of September 30, 2014, the Special Limited Partner owned 8,888 shares of the Company’s outstanding common stock. The Advisor and its affiliates may incur and pay costs and fees on behalf of the Company. The Company had a payable due to affiliates related to operating, acquisition, financing and offering costs of $7.7 million and $0.6 million as of September 30, 2014 and December 31, 2013, respectively. In connection with the Grace Acquisition, the Company entered into the Affiliate Promissory Note with an entity under common ownership with the Sponsor (See Note 7 - Promissory Notes Payable). The Affiliate Promissory Note was repaid in full as of September 30, 2014. No amount was due under the Affiliate Promissory Note as of December 31, 2013.

Fees Paid in Connection with the Offering

The Dealer Manager is paid fees and compensation in connection with the sale of the Company's common stock in the Offering. The Dealer Manager is paid a selling commission of up to 7.0% of the per share purchase price of the Company’s offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager is paid up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer-manager fee. The Dealer Manager may reallow its dealer-manager fee to participating broker-dealers. A participating broker dealer may elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares by such participating broker dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option is elected, it’s expected that the dealer manager fee will be reduced to 2.5% of gross proceeds.

The table below shows the fees incurred from and payable to the Dealer Manager for the Offering during the three and nine months ended September 30, 2014 and 2013, respectively, and the associated payable as of September 30, 2014 and December 31, 2013, which is recorded in due to affiliates on the Company's condensed consolidated/combined balance sheets (in thousands):

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September 30, 2014

(Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,				Payable as of
	2014		2013		2014		2013		September 30, 2014		December 31, 2013
Total commissions and fees incurred from the Dealer Manager	$	9,926	$	—	$	11,763	$	—	$	179	$	—

The Advisor and its affiliates are paid compensation and/or receive reimbursement for services relating to the Offering, including transfer agency services provided by an affiliate of the Dealer Manager. All offering costs incurred by the Company or its affiliated entities on behalf of the Company have been charged to additional paid-in capital on the accompanying condensed consolidated/combined balance sheets upon commencement of operations. Offering costs were reclassified from deferred costs to stockholders’ equity when the Company commenced its Offering, and included all expenses incurred by the Company in connection with its Offering as of such date. As of December 31, 2013, such costs totaled $1.5 million. The table below shows compensation and reimbursements incurred and payable to the Advisor and its affiliates for services relating to the Offering during the three and nine months ended September 30, 2014 and 2013, respectively, and the associated amounts payable as of September 30, 2014 and December 31, 2013, which is recorded in due to affiliates on the Company's condensed consolidated/combined balance sheets (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,				Payable as of
	2014		2013		2014		2013		September 30, 2014		December 31, 2013
Total compensation and reimbursement for services provided by the Advisor and its affiliates	$	541	$	—	$	1,652	$	—	$	2,341	$	—

The Company is responsible for offering and related costs from the ongoing offering, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the Offering, measured at the end of the Offering. Offering costs in excess of the 2.0% cap as of the end of the Offering are the Advisor’s responsibility. As of September 30, 2014 and December 31, 2013, offering and related costs exceeded 2.0% of gross proceeds received from the Offering by $1.6 million and $1.5 million, respectively, due to the on-going nature of the Offering.

Fees Paid in Connection With the Operations of the Company

Fees Paid to the Advisor

The Advisor receives an acquisition fee of 1.5% of the contract purchase price of each acquired property and 1.5% of the amount advanced for a loan or other investment. The Advisor may also be reimbursed for expenses incurred in the process of acquiring properties, in addition to third-party costs the Company may pay directly to, or reimburse the Advisor for. Additionally, the Company may reimburse the Advisor for legal expenses it or its affiliates directly incur in the process of acquiring properties in an amount not to exceed 0.1% of the contract purchase price of the Company’s assets acquired. Once the proceeds from the Offering have been fully invested, the aggregate amount of acquisition fees and financing coordination fees (as described below) may not exceed 1.9% of the contract purchase price, for any new investments, including reinvested proceeds, and the amount advanced for a loan or other investment for all the assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect to a particular investment exceed 4.5% of the contract purchase price or 4.5% of the amount advanced for a loan or other investment.

If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor or its assignees a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.

The table below depicts the acquisition and financing coordination fees charged by the Advisor in connection with the operations of the Company for the three and nine months ended September 30, 2014 and 2013, respectively, and the associated

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payable as of September 30, 2014 and December 31, 2013, which is recorded in due to affiliates on the Company's condensed consolidated/combined balance sheets (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,				Payable as of
	2014		2013		2014		2013		September 30, 2014		December 31, 2013
Acquisition fees	$	—	$	—	$	1,598	$	—	$	1,598	$	—
Financing coordination fees	—		—		815		—		815		—
	$	—	$	—	$	2,413	$	—	$	2,413	$	—

For its asset management services, the Company causes the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted partnership units of the OP ("Class B Units") on a quarterly basis in an amount equal to the excess of the cost of the Company’s assets or the lower of the cost of assets and the applicable quarterly NAV, once the Company begins calculating NAV, multiplied by 0.1875% divided by the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the Offering price minus selling commissions and dealer manager fees) and, at such time as the Company calculates NAV, to per share NAV. The Advisor is entitled to receive distributions on the vested and unvested Class B Units it receives in connection with its asset management subordinated participation at the same rate as distributions received on the Company’s common stock; such distributions are in addition to the incentive fees the Advisor and its affiliates may receive from the Company, including, without limitation, the annual subordinated performance fee and the subordinated participation in net sales proceeds, the subordinated incentive listing distribution or the subordinated distribution upon termination of the advisory agreement, as applicable. The restricted Class B Units do not become unrestricted Class B Units until such time as the adjusted market value of the OP’s assets plus applicable distributions equals the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors and only at such time as the capital account associated with a restricted Class B Unit equals the capital account of an unrestricted Class B Unit. Asset management services were performed by the Advisor for the three and nine months ended September 30, 2014, and 18,547 Class B Units have been issued as of September 30, 2014.

Fees Paid to the Property Manager

The Company pays a property management fee of approximately 4.0% of the monthly gross receipts from the properties managed by the Company’s Sub-Property Manager or a third-party sub-property manager, as applicable and as negotiated with each such sub-property manager. The Company also reimburses the Sub-Property Manager or a third-party sub-property manager for property level expenses, as well as fees and expenses of such sub-property manager. However, the Company will not reimburse such sub-property managers for general overhead costs or for the wages and salaries and other employee-related expenses of employees of such sub-property managers, other than employees or subcontractors who are engaged in the on-site operation, management, maintenance or access control of the Company’s properties. The Predecessor paid the Sub-Property Manager a similar property management fee.

The table below shows the management fees and reimbursable expenses incurred by the Company during the three and nine months ended September 30, 2014 and the associated payable, which is recorded in due to affiliates on the Company's condensed consolidated/combined balance sheets, as of September 30, 2014 and by the Predecessor for the three and nine months ended September 30, 2013 and the associated payable as of December 31, 2013, which is recorded in accounts payable and accrued expenses on the Predecessor's condensed consolidated/combined balance sheets (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,				Payable as of
	2014		2013		2014		2013		September 30, 2014		December 31, 2013
Total management fees and reimbursable expenses paid to Sub-Property Manager	$	673	$	608	$	2,160	$	1,953	$	228	$	168

Fees Paid to Other Affiliates

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The Company entered into an agreement with RCS Capital, the investment banking and capital markets division of the Dealer Manager ("RCS Capital") to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. The Company has recorded the payment of the costs associated with this agreement of $0.9 million in prepaid expenses and other assets on the Company's condensed consolidated/combined balance sheets and amortizes the costs associated with this agreement over the estimated remaining life of the Offering.

RCS Advisory Services, LLC ("RCS Advisory") is paid compensation for services provided to the Company on behalf of the Advisor based on time and expenses incurred. Additionally, the Company entered into a $1.0 million agreement with RCS Advisory to provide transaction management services in connection with the Grace Acquisition.

The Company entered into an agreement with RCS Capital to provide strategic financial advice and assistance in connection with the Grace Acquisition, such as performing financial advisory and analysis services, due diligence and negotiation of the financial aspects of the acquisition. The Company will be charged 0.25% of the total transaction cost for these services and has accrued $2.4 million associated with this agreement for the three and nine months ended September 30, 2014 and the associated payable, which is recorded in due to affiliates on the Company's condensed consolidated/combined balance sheets.

The table below depicts related party fees and reimbursements charged by the Dealer Manager and RCS Advisory in connection with the operations of the Company for the three and nine months ended September 30, 2014 and 2013, respectively, and the associated payable as of September 30, 2014 and December 31, 2013 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,				Payable as of
	2014		2013		2014		2013		September 30, 2014		December 31, 2013
Transaction fees and expenses	$	2,160	$	—	$	3,170	$	—	$	2,545	$	—
Advisory and investment banking fee	115		—		345		—		—		—
Total related party fees and reimbursements	$	2,275	$	—	$	3,515	$	—

In order to increase operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor. In certain instances, to improve the Company’s working capital, the Advisor may elect to absorb a portion of the Company’s general and administrative costs. No expenses were absorbed by the Advisor for the three and nine months ended September 30, 2014.

The Company reimburses the Advisor’s costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services; however, the Company will not reimburse the Advisor for personnel costs, including executive salaries, in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions.

The Advisor at its election may also contribute capital to enhance the Company’s cash position for working capital and distribution purposes. Any contributed capital amounts are not reimbursable to the Advisor. Further, any capital contributions are made without any corresponding issuance of common or preferred shares. There were no contributions to capital from the Advisor for the three and nine months ended September 30, 2014.

Fees Paid in Connection with the Liquidation or Listing of the Company’s Real Estate Assets

The Company may pay the Advisor an annual subordinated performance fee calculated on the basis of the Company’s total return to stockholders, payable annually in arrears, such that for any year in which the Company’s total return on stockholders’ capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return but not to exceed 10.0% of the

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aggregate total return for such year. This fee will be payable only upon the sale of assets, other disposition or refinancing of such assets, which results in the return on stockholders’ capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three and nine months ended September 30, 2014.

The Company may pay a brokerage commission to the Advisor on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third-party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the three and nine months ended September 30, 2014.

The Company will pay the Special Limited Partner a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of the remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company’s investors have received a 6.0% cumulative non-compounded return on their capital contributions plus the return of their capital. No such participation became due and payable during the three and nine months ended September 30, 2014.

If the common stock of the Company is listed on a national exchange, the Company will pay the Special Limited Partner a subordinated incentive listing distribution of 15.0% of the amount by which the Company’s market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors. The Special Limited Partner will not be entitled to the subordinated incentive listing fee unless investors have received a 6.0% cumulative, pre-tax non-compounded return on their capital contributions plus the return of their capital. No such distributions were incurred during the three and nine months ended September 30, 2014. Neither the Special Limited Partner nor any of its affiliates can earn both the subordination participation in the net proceeds and the subordinated incentive listing distribution.

Upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner, through its controlling interest in the Advisor, will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs. No such distributions were incurred during the three and nine months ended September 30, 2014.

Note 13 - Economic Dependency

Under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management, asset acquisition and disposition decisions, the sale of shares of common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services and investor relations.

As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.

Note 14 - Share-Based Payments

Restricted Share Plan

The Company has adopted an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further action by the Company’s board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder’s meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary of the date of grant in increments of 20.0% per annum. The RSP provides the Company with the ability to

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AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

grant awards of restricted shares to the Company’s directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares of common stock granted under the RSP shall not exceed 5.0% of outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 4.0 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).

Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares. The fair value of the shares will be expensed over the vesting period of five years. There were 6,665 and 0 restricted shares granted as of September 30, 2014 and December 31, 2013, respectively, none of which had vested. Based on a share price of $22.50, the compensation expense related to restricted stock was $6,500 and $14,500 during the three and nine months ended September 30, 2014 and is recorded in general and administrative expense in the accompanying statements of operations. There was no compensation expense related to restricted stock during the three and nine months ended September 30, 2013.

Other Share-Based Payments

The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors. There were no such shares of common stock issued in lieu of cash as of September 30, 2014 and December 31, 2013, respectively.

Note 15 - Subsequent Events

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the accompanying condensed consolidated financial statements except for the following transactions:

Sales of Common Stock

As of October 31, 2014, the Company had 7.5 million shares of common stock outstanding, including unvested restricted shares and shares issued under the DRIP. Total gross proceeds, net of repurchases, from these issuances were $187.3 million, including proceeds from shares issued under the DRIP. As of October 31, 2014, the aggregate value of all share issuances was $188.3 million based on a per share value of $25.00 (or $23.75 per share for shares issued under the DRIP).

Total capital raised to date, including shares issued under the DRIP, is as follows (in thousands):



Source of Capital	Inception to September 30, 2014		October 1, 2014 to October 31, 2014		Total
Common stock	$	125,427	$	61,834	$	187,261

Distributions Paid

On October 1, 2014, the Company paid distributions of $0.6 million to stockholders of record during the month of September 2014. Approximately $0.3 million of such distributions were paid in cash, while $0.3 million was reinvested to purchase 11,111 shares under the DRIP.

Pending Acquisition

On November 11, 2014, the Company entered into an amendment and restatement of the Real Estate Sale Agreement for the Grace Acquisition (See Note 1 - Organization).

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated/combined financial statements of American Realty Capital Hospitality Trust, Inc. and the notes thereto. As used herein, the terms "we," "our" and "us" refer to American Realty Capital Hospitality Trust, Inc., a Maryland corporation, including, as required by context, to American Realty Capital Hospitality Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and to its subsidiaries. We are externally managed by American Realty Capital Hospitality Advisors, LLC (our "Advisor"), a Delaware limited liability company.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations we and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:


•	We have a limited operating history. This inexperience makes our future performance difficult to predict.

•

All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in American Realty Capital Hospitality Advisors, LLC, the dealer manager, Realty Capital Securities, LLC (the "Dealer Manager"), and other entities affiliated with AR Capital, LLC ("American Realty Capital"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions.

•

Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital advised investment programs, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.


•	While we are investing the proceeds of our initial public offering of common stock (our "IPO" or "our Offering"), the competition for the type of properties we desire to acquire may cause our distributions and the long-term returns of our investors to be lower than they otherwise would be.


•	We focus on acquiring a diversified portfolio of hospitality assets located in the United States, Canada and Mexico and are subject to risks inherent in concentrating investments in the hospitality industry.


•	No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.


•	Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.


•	We may be unable to obtain the financing needed to complete acquisitions, including the Grace Acquisition.

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•	We will incur substantial additional indebtedness to consummate the Grace Acquisition, which may have a material adverse effect on our financial condition and results of operations.


•	We may not generate cash flows sufficient to pay our distributions to stockholders, and, as such, we may be forced to borrow at higher rates or depend on our Advisor and its affiliates to waive reimbursements of certain expenses and fees to fund our operations.


•	If we and our Advisor are unable to find sufficient suitable investments, then we may not be able to achieve our investment objectives or pay distributions.


•	If we raise substantially less than the maximum offering in our IPO, we may not be able to complete the Grace Acquisition or invest in a diversified portfolio of real estate assets and the value of an investment in us may vary more widely with the performance of specific assets.


•	We are obligated to pay fees to our Advisor and its affiliates, which may be substantial.


•	We may be unable to pay or maintain cash distributions or increase distributions over time.


•	Our organizational documents permit us to pay distributions from unlimited amounts of any source. Until substantially all the proceeds from our IPO are invested, we may use proceeds from our IPO and financings to fund distributions. There are no established limits on the amounts of net proceeds and borrowings that we may use to fund such distribution payments.


•	Any of these distributions may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact the value of our stockholders' investment.


•	We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States from time to time.


•	Our failure to qualify or to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT") which would result in higher taxes, may adversely affect operations and would reduce our NAV and cash available for distributions.


•	We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act.

All forward-looking statements should also be read in light of the risks identified in Item 1A of our Annual Report on Form 10-K.

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Overview

American Realty Capital Hospitality Trust, Inc. was incorporated on July 25, 2013 as a Maryland corporation and intends to qualify as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with the taxable year ending December 31, 2014. We were formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. We have no limitation as to the brand of franchise or license with which our hotels will be associated. All such properties may be acquired by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate and invest in other real estate-related debt. As of September 30, 2014, we have acquired interests in six hotels through fee simple, leasehold and joint venture interests (the "Barceló Portfolio").

On January 7, 2014, we commenced our initial public offering ("IPO" or the "Offering") on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-190698), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which our common stockholders may elect to have their distributions reinvested in additional shares of common stock.

Until the filing of our second quarterly financial filing with the SEC, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), following the earlier to occur of (i) our acquisition of at least $2.0 billion in total investment portfolio assets or (ii) January 7, 2016, the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will initially be equal to $23.75 per share, which is 95% of the initial per share offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to our net asset value ("NAV") per share plus applicable commissions and fees in the case of the primary offering and the per share purchase price in the DRIP will be equal to the NAV per share. On February 3, 2014, we received and accepted subscriptions in excess of the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issued shares of common stock to the initial investors who were admitted as stockholders. As of September 30, 2014, we had 5.1 million shares of stock outstanding and had received total gross proceeds from the IPO of approximately $125.4 million, including shares issued under the DRIP. As of September 30, 2014, the aggregate value of all the common stock outstanding was $126.3 million based on a per share value of $25.00 (or $23.75 for shares issued under the DRIP).

Substantially all of our business is conducted through American Realty Capital Hospitality Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. We are the sole general partner and hold substantially all of the units of limited partner interests in the OP ("OP Units"). Additionally, American Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner") contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. The holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of common stock or, at the option of the OP, a corresponding number of shares of common stock in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.

We have no direct employees. We have retained American Realty Capital Hospitality Advisor, LLC (the "Advisor") to manage certain aspects of our affairs on a day-to-day basis. American Realty Capital Hospitality Properties, LLC (the "Property Manager") serves as our property manager and the Property Manager has retained Crestline Hotels & Resorts, LLC (the "Sub Property Manager"), an entity under common control with the parent of American Realty Capital IX, LLC, (the "Sponsor") to provide services, including locating investments, negotiating financing and operating certain hotel assets in our portfolio. Realty Capital Securities, LLC (the "Dealer Manager"), an entity under common control with the parent of our Sponsor serves as the dealer manager of the offering. The Advisor, Special Limited Partner, Property Manager, Sub Property Manager and Dealer Manager are related parties and receive fees, distributions and other compensation for services related to the Offering and the investment and management our assets.

The results of operations for the period from January 1 to March 20, 2014 for the Barceló Portfolio (the "Predecessor") and for the period from March 21 to September 30, 2014 for us are not necessarily indicative of the results for the entire year or any subsequent interim period. Certain prior period amounts have been reclassified to conform to current period presentation.

Pending Acquisition

On May 23, 2014, we entered into a Real Estate Sale Agreement to acquire the Portfolio from the Sellers through the Grace Acquisition.

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The aggregate contract purchase price for the Portfolio is approximately $1.925 billion, exclusive of closing costs and subject to certain adjustments at closing. We anticipate funding approximately $271.0 million of the purchase price with cash generated through equity raises, funding approximately $976.0 million through the assumption of existing mezzanine and mortgage indebtedness and funding approximately $227.0 million through additional mezzanine and mortgage financing. The mortgage indebtedness that we expect to assume is for $865.0 million at an interest rate of London Interbank Offered Rate ("LIBOR") plus 3.11% and the mezzanine indebtedness is for $111.0 million at an interest rate of LIBOR plus 4.77%. Both the mortgage and mezzanine indebtedness we expect to assume are secured by 106 of the 126 hotels in the Portfolio and mature on May 1, 2016, subject to three (one-year) extension rights which, if all three are exercised, result in an outside maturity date of May 1, 2019.

Consistent with the terms of the Grace Acquisition, we anticipate that the remaining $451.0 million of the contract purchase price will be satisfied by the issuance of preferred equity interests in two newly-formed Delaware limited liability companies, ARC Hospitality Portfolio I Holdco, LLC and ARC Hospitality Portfolio II Holdco, LLC, each of which will be an indirect subsidiary and an indirect owner of the Portfolio. The holders of the preferred equity interests will be entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing and 8.00% per annum thereafter. On liquidation, the preferred equity interests will be entitled to receive their original value (as reduced by redemptions) prior to any distributions being made to us or our shareholders. After the earlier to occur of either (i) the date of repayment in full of our currently outstanding unsecured obligations in the original principal amount of approximately $63.1 million, which represents the Barceló Acquisition Promissory Note (See Note 7 - Promissory Notes Payable), or (ii) the date the gross amount of IPO proceeds received by us after the closing of the Grace Acquisition exceeds $100.0 million (reduced from $150.0 million through a side letter related to the Real Estate Sale Agreement dated August 22, 2014), we will be required to use 35.0% of any IPO proceeds to redeem the preferred equity interests at par, up to a maximum of $350.0 million for any 12-month period. We will also be required, in certain circumstances, to apply debt proceeds to redeem the preferred equity interests at par. As of the end of the third year following the closing of the Grace Acquisition, we will be required to have redeemed 50.0% of the preferred equity interests, and as of the end of the fourth year following the closing of the Grace Acquisition, we will be required to redeem 100.0% of the preferred equity interests remaining outstanding at such time. In addition, we will have the right, at our option, to redeem the preferred equity interests, in whole or in part, at any time at par. The holders of the preferred equity interests will have certain customary consent rights over our actions relating to the Portfolio. If we are unable to satisfy the redemptions requirements, the holders of the preferred equity interests will have certain rights, including the ability to assume control of the operations of the Portfolio. Due to the fact that the preferred equity interests will be mandatorily redeemable and certain of their other characteristics, the preferred equity interests will be treated as debt in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Pursuant to the terms of the Grace Acquisition, our obligation to consummate the acquisition of the Portfolio is subject to certain customary closing conditions. Among these customary conditions, we must enter into replacement franchise agreements for each hotel and we must obtain the consent of certain ground lessors for certain hotels. We were required to make a $50.0 million earnest money deposit, with an additional $25.0 million due if the we exercised our right to extend the closing of the acquisition to December 15, 2014. This right was exercised on July 21, 2014 through an amendment to the Real Estate Sale Agreement and the additional $25.0 million supplemental earnest money deposit was funded on September 19, 2014.

Significant Accounting Estimates and Critical Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated/combined financial statements include our accounts and our subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether we have a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which we have the primary beneficiary.

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financial statements for the Predecessor as of December 31, 2013, for the period from January 1 to March 20, 2014 and for the three and six months ended June 30, 2013 have been derived from the historical accounting records of BCC and reflect the assets, liabilities, equity, revenue and expenses directly attributable to the Predecessor, as well as allocations deemed reasonable by management, to present the combined financial position, results of operations, changes in equity, and cash flows of the Predecessor on a stand-alone basis. The accompanying condensed consolidated/combined financial statements for the Predecessor have been prepared in conformity with the audited financial statements of the Predecessor as of and for the year ended December 31, 2013. Included in the accompanying condensed consolidated/combined statement of operations for the period from March 21 to September 30, 2014 is $0.2 million of costs related to us for the period from January 1 to March 20, 2014. No costs related to us for the period from January 1 to March 20, 2014 were included in the condensed consolidated statement of operations for the three months ended September 30, 2014.

Real Estate Investments

We allocate the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and fixtures. We utilize various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on purchase price allocation studies performed by independent third parties or our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value.

In making estimates of fair values for purposes of allocating the purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

Investments in real estate that are not considered to be business combinations and are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of our assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the lease term for leasehold interests.

We are required to make subjective assessments as to the useful lives of our assets for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations at fair value for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on our operations and financial results.

Below-Market Lease

The below-market lease intangible is based on the difference between the market rent and the contractual rent and is discounted to a present value using an interest rate reflecting our current assessment of the risk associated with the lease acquired. Acquired lease intangible assets are amortized over the remaining lease term. The amortization of a below-market lease is recorded as an increase to rent expense on the condensed consolidated/combined statements of operations.

Impairment of Long Lived Assets and Investments in Unconsolidated Entities

When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.

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Revenue Recognition

Hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.

Income Taxes

We intend to elect and qualify to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with its tax year ending December 31, 2014. In order to qualify as a REIT, we must annually distribute to our stockholders 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders and complies with various other organizational and operational requirements applicable to it as a REIT. Even if we qualify for taxation as a REIT, it may be subject to certain state and local taxes on its income, property tax and federal income and excise taxes on its undistributed income. Our hotels are leased to a taxable REIT subsidiary ("TRS") which is a wholly owned subsidiary of the OP. The TRS is subject to federal, state and local income taxes.

Reportable Segments

We have determined that it has one reportable segment, with activities related to investing in real estate. Our investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total condensed consolidated/combined revenues. Management evaluates the operating performance of our investments in real estate on an individual property level, none of which represent a reportable segment.

Revenue Performance Metrics

We measure hotel revenue performance by evaluating revenue metrics such as:


•	Occupancy percentage ("Occ")


•	Average Daily Rate ("ADR")


•	Revenue Per Available Room ("RevPAR")

Occ, ADR, and RevPAR are commonly used, non-GAAP, measures within the hotel industry to evaluate hotel performance. RevPAR is defined as the product of the ADR and Occ (and also as the quotient of room revenue and available rooms). RevPAR does not include food and beverage or other revenues generated by the hotels. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget, to prior periods and to the competitive set in the market, as well as on a company-wide and regional basis.

Results of Operations

The results of operations for the accompa

Hospitality Investors Trust, Inc. - FORM 10-Q - November 14, 2014

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