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EX-32 - EXHIBIT 32 - Carey Watermark Investors Inccwi2015q410-kexh32.htm
EX-23.1 - EXHIBIT 23.1 - Carey Watermark Investors Inccwi2015q410-kexh231.htm
EX-31.1 - EXHIBIT 31.1 - Carey Watermark Investors Inccwi2015q410-kexh311.htm
EX-31.2 - EXHIBIT 31.2 - Carey Watermark Investors Inccwi2015q410-kexh312.htm
EX-21.1 - EXHIBIT 21.1 - Carey Watermark Investors Inccwi2015q410-kexh211.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the fiscal year ended December 31, 2015
 
 
 
or
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                     to                       
Commission File Number: 000-54263
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
 
(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 Act). Yes o No þ
Registrant has no active market for its common stock. Non-affiliates held 129,243,155 shares of common stock at June 30, 2015.
As of February 29, 2016, there were 133,804,030 shares of common stock of registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant incorporates by reference its definitive Proxy Statement with respect to its 2016 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
 




INDEX
 
 
 
Page
PART I
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
PART II
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
PART III
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
PART IV
 
 
 
Item 15.
 

Forward-Looking Statements

This Annual Report on Form 10-K, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. These statements are based on the current expectations of our management. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors of this Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part II, Item 8. Financial Statements and Supplementary Data.


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PART I

Item 1. Business.

General Development of Business

Overview

Carey Watermark Investors Incorporated, or CWI or CWI 1, and, together with its consolidated subsidiaries, we, us or our, is a publicly-owned, non-listed real estate investment trust, or REIT, formed as a Maryland corporation in March 2008 for the purpose of acquiring, owning, disposing of and, through Carey Lodging Advisors, LLC, a Delaware limited liability company, or our advisor, managing and seeking to enhance the value of interests in lodging and lodging-related properties, primarily in the United States. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. We conduct substantially all of our investment activities and own all of our assets through CWI OP, LP, a Delaware limited partnership, or the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, LLC, or Carey Watermark Holdings, which is owned indirectly by both W. P. Carey Inc., or WPC, and Watermark Capital Partners, LLC, or Watermark Capital Partners, (the parent of the subadvisor described below), holds a special general partner interest of 0.015% in the Operating Partnership. In order to qualify as a REIT, we cannot operate hotels directly; therefore, we lease our hotels to our wholly-owned taxable REIT subsidiaries, which we refer to as TRSs, and collectively as the TRS lessees. At December 31, 2015, we held ownership interests in 34 hotels, with a total of 8,646 rooms.

We are managed by our advisor, an indirect subsidiary of WPC, pursuant to an advisory agreement among us, the Operating Partnership and our advisor, which we refer to herein as the advisory agreement. Under the advisory agreement, our advisor is responsible for managing our overall hotel portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. On September 15, 2010, CWA, LLC, or the subadvisor, entered into a subadvisory agreement with our advisor, which we refer to herein as the subadvisory agreement. The subadvisor provides services to our advisor primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent hotel operators that manage the day-to-day operations of our hotels. In addition, the subadvisor provides us with the services of Michael G. Medzigian, our chief executive officer, subject to the approval of our independent directors.

WPC is a publicly-traded REIT listed on the New York Stock Exchange under the symbol “WPC.” During its more than 40-year history, WPC has sponsored and advised nine partnerships and eight REITs under the Corporate Property Associates and Carey Institutional Properties brand names, which we refer to as the CPA® REITs, and two REITs under the Carey Watermark Investors brand names. Like us, Carey Watermark Investors 2 Incorporated, or CWI 2, is focused on investing in lodging and lodging-related properties. None of the currently active CPA® REITs are focused on investing in lodging and lodging-related properties. WPC also serves as an advisor for Carey Credit Income Fund, the master fund in a master/feeder fund structure, where the master and each feeder have elected to be treated as a business development company, or CCIF.

Watermark Capital Partners, LLC is a private investment firm formed in May 2002 that focuses on assets that benefit from specialized marketing strategies and demographic shifts, including hotels and resorts, resort residential products, recreational projects (including golf and club ownership programs), and new-urbanism and mixed-use projects. The principal of Watermark Capital Partners, Michael G. Medzigian, has managed lodging properties valued in excess of $5.2 billion during his over 35 years of experience in the lodging and real estate industries, including as the chief executive officer of Lazard Freres Real Estate Investors, a real estate private equity management organization, and as a senior partner of Olympus Real Estate Corporation, the real estate fund management affiliate of Hicks, Muse, Tate and Furst Incorporated.

Through our initial public offering, which ran from September 15, 2010 through September 15, 2013, we raised $575.8 million, exclusive of reinvested distributions through our distribution reinvestment plan, or DRIP. We commenced a follow-on public offering on December 20, 2013, which closed on December 31, 2014 and raised $577.4 million, exclusive of reinvested distributions through our DRIP. We have fully invested the proceeds of our initial public offering and follow-on offering in lodging properties. The gross offering proceeds raised exclude reinvested distributions through the DRIP totaling $78.3 million as of December 31, 2015.

The advisor determined our estimated net asset value per share, or NAV, as of December 31, 2015 to be $10.66.


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We have no employees. At December 31, 2015, WPC employed 314 individuals who were available to perform services for us under our advisory agreement (Note 3) and Watermark Capital Partners employed 12 individuals who were available to perform services for us through the subadvisory agreement.

Financial Information About Segments

We operate in one reportable segment – Hospitality. See Our Portfolio below.

Narrative Description of Business

Business Objectives and Strategy

We are a non-traded REIT that strives to create value in the lodging industry.

Our primary investment objectives are:

to provide stockholders with current income in the form of quarterly distributions; and 
to increase the value of our portfolio in order to generate long-term capital appreciation.

We plan to meet our objectives by maintaining a diverse portfolio of lodging and lodging-related investments, including those that offer high current income, properties to which we can add value and provide the opportunity for capital appreciation, and to the extent available, distressed situations where we may be able to make opportunistic investments.

We seek to maintain a diversified portfolio that has the potential to generate attractive risk adjusted returns across economic cycles, while mitigating the risk associated with any one geography or lodging category. We believe that a lodging portfolio that is diversified both geographically and across multiple lodging categories provides the opportunity to benefit from growth, while mitigating risk from lagging performance that is geographically specific or focused on specific lodging categories.

Our core strategy for achieving these objectives is to acquire, own, dispose of, manage, and seek to enhance the value of, interests in lodging and lodging related investments that are expected to generate current income and have the potential for growth through value add strategies. While our core strategy is focused on the lodging industry, we may also invest in other real estate property sectors, although we have not made any such investments to date. We will adjust our investment focus from time to time based upon market conditions and our advisor's views on relative value as market conditions change. Material changes in our investment focus will be described in our periodic reports filed with the SEC; however, these reports would typically be filed after changes in our investment focus have been made, and in some cases, several months after such changes.

As a REIT, we are allowed to own lodging properties, but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we will enter into leases with certain of our subsidiaries organized as TRSs. The TRS lessees will in turn contract with independent property operators that will manage the day-to-day operations of our properties.

We believe that the following market factors and attributes of our investment model are particularly important to our ability to meet our investment objective:

An investment model that incorporates a diversified lodging portfolio provides the potential to generate attractive risk adjusted returns across economic cycles while mitigating the risks associated with any one geographic or lodging segment.
Our investment model should benefit from the continuing improvement in lodging industry fundamentals.
A lodging-centric investment strategy provides an opportunity for attractive returns and long-term growth in value as well as a potentially effective inflation hedge.
As compared with certain other types of real estate assets, the lodging sector provides a broad range of value creation opportunities that can enhance returns.
We will deploy a differentiated investment approach.
Our investment strategy, resources and investment structure differentiate us from other sources of capital for the real estate industry.

The lodging properties we acquire may include full-service branded hotels located in urban settings, resort properties, high-end independent urban and boutique hotels, select-service hotels and mixed-use projects with non-lodging components. Full-service hotels generally provide a full complement of guest amenities, including food and beverage services, meeting and conference

CWI 2015 10-K 3




facilities, concierge and room service, valet parking, among others. Select-service hotels typically have limited food and beverage outlets and do not offer comprehensive business or banquet facilities. Resort properties may include smaller boutique hotels and large-scale integrated resorts. Through the date of this Report, we have invested in full-service hotels, select-service hotels and resorts.

We may engage in securitization transactions with respect to any loans we purchase. We do not plan to make investments in sub-prime mortgages. We expect to make investments primarily in the United States. However, we may consider, and are not prohibited under our organizational documents from making, investments outside the United States.

Our advisor will evaluate potential acquisitions on a case-by-case basis. We are not required to meet any diversification standards and have no specific policies or restrictions regarding the geographic areas where we make investments or on the percentage of our capital that we may invest in a particular asset. However, without the prior approval of a majority of our independent directors, we may not invest more than 25% of our equity capital in non-lodging-related investments. We may also invest in permitted temporary investments, which include bank accounts and certificates of deposit, short-term U.S. government securities and other short-term liquid investments.

Our Portfolio

At December 31, 2015, our portfolio was comprised of our full or partial ownership in 34 hotels with 8,646 guest rooms, all located in the U.S. market. See Item 2. Properties.

Holding Period

We generally intend to hold our investments in real property for an extended period depending on the type of investment. We may dispose of other types of investments, such as investments in securities, more frequently. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation for our stockholders while avoiding increases in risk. No assurance can be given that this objective will be realized.

Financing Strategies

At December 31, 2015, our hotel portfolio, including both our Consolidated and Unconsolidated hotels, was 62% leveraged. We may fund some individual investments solely or primarily using our equity capital and others may be financed with greater than 50% leverage. Our organizational documents permit us to incur maximum leverage of up to 75% of the total costs of our investments, or 300% of our net assets, whichever is less, or a higher amount with the approval of a majority of our independent directors.

Over time, we expect to meet our long-term liquidity requirements, including funding additional hotel property acquisitions, through long-term secured and unsecured borrowings and the issuance of additional equity or securities.

Transactions With Affiliates

We may borrow funds or purchase properties from, or enter into joint ventures with, our advisor, the subadvisor, or their respective affiliates, including CWI 2, the CPA® REITs and WPC or its affiliates, if we believe that doing so is consistent with our investment objectives and we comply with our investment policies and procedures. We may also invest in other vehicles, such as real estate opportunity funds, that were formed, sponsored or managed by our advisor or the subadvisor and their respective affiliates. These transactions may take the form of jointly-owned ventures, direct purchases or sales of assets or debt, mergers or another type of transaction. A majority of our directors (including the independent directors) must approve any significant investment in which we invest jointly with an entity sponsored and/or managed by our advisor, the subadvisor or their respective affiliates, including CWI 2 and the CPA® REITs.


CWI 2015 10-K 4




Competition

We face active competition from other companies with similar investment objectives that seek to raise funds from investors through publicly registered, non-traded funds, publicly-traded funds and private funds such as hedge funds. Some of these entities may have substantially greater financial resources than we do and may be able and willing to accept more risk than we can prudently manage. Competition generally may increase the bargaining power of property owners seeking to sell and reduce the number of suitable investment opportunities offered to us or purchased by us.

The hotel industry is highly competitive. Hotels we acquire compete with other hotels for guests in our markets. Competitive factors include location, convenience, brand affiliation, room rates, range and the quality of services, facilities and guest amenities or accommodations offered. Competition in the markets in which our hotels operate include competition from existing, newly renovated and newly developed hotels in the relevant segments. Competition can adversely affect the occupancy, average daily rates, or ADR, and revenue per available hotel room, or RevPAR, of our hotels, and thus our financial results, and may require us to provide additional amenities, incur additional costs or make capital improvements that we otherwise might not choose to make, which may adversely affect our profitability.

Seasonality

Certain lodging properties are seasonal in nature. Generally, occupancy rates and revenues are greater in the second and third quarters than in the first and fourth quarters. As a result of the seasonality of certain lodging properties, there may be quarterly fluctuations in results of operations of our properties. Quarterly financial results may be adversely affected by factors outside our control, including weather conditions and poor economic factors.

Environmental Matters

The hotel properties that we acquire are subject to various federal, state and local environmental laws and regulations. Current and former owners and operators of property may have liability for the cost of investigating, cleaning up or disposing of hazardous materials released at, on, under, in or from the property. These laws typically impose responsibility and liability without regard to whether the owner or operator knew of or was responsible for the presence of hazardous materials or contamination, and liability under these laws is often joint and several. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of hazardous materials. As part of our efforts to mitigate these risks, we typically engage third parties to perform assessments of potential environmental risks when evaluating a new property acquisition, and we frequently obtain contractual protections (indemnities, cash reserves, letters of credit or other instruments) from property sellers, or another third party, to address known or potential environmental issues.

Financial Information About Geographic Areas

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 for financial information pertaining to our geographic operations.

Available Information

We will supply to any stockholder, upon written request and without charge, a copy of this Report as filed with the SEC. All filings we make with the SEC, including this Report, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, and any amendments to those reports, are available for free on our website, http://www.careywatermark.com, as soon as reasonably practicable after they are filed with or furnished to the SEC. We are providing our website address solely for the information of investors. We do not intend our website to be an active link or to otherwise incorporate the information contained on our website into this Report, or other filings with the SEC. Our SEC filings are available to be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC’s website at http://www.sec.gov. Our Code of Business Conduct and Ethics, which applies to all employees, including our Chief Executive Officer and Chief Financial Officer, is available on our website, http://www.careywatermark.com. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics within four business days after any such amendments or waivers.


CWI 2015 10-K 5




Item 1A. Risk Factors.

Our business, results of operations, financial condition and ability to pay distributions could be materially adversely affected by various risks and uncertainties, including the conditions below. These risk factors may affect our actual operating and financial results and could cause such results to differ materially from our expectations as expressed in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically and we cannot assure you that the factors described below list all risks that may become material to us at any later time.

The price of shares being offered through our DRIP has been determined by our board of directors based upon our NAV and may not be indicative of the price at which the shares would trade if they were listed on an exchange or actively traded by brokers.

The price of the shares being offered through our DRIP has been determined by our board of directors in the exercise of its business judgment based upon our NAV as of December 31, 2015. The valuation methodologies underlying our estimated NAV involved subjective judgments. Valuations of real properties do not necessarily represent the price at which a willing buyer would purchase our properties; therefore, there can be no assurance that we would realize the values underlying our NAV if we were to sell our assets and distribute the net proceeds to our stockholders. In addition, the values of our assets and debt are likely to fluctuate over time. This price may not be indicative of (i) the price at which shares would trade if they were listed on an exchange or actively traded by brokers, (ii) the proceeds that a stockholder would receive if we were liquidated or dissolved or (iii) the value of our portfolio at the time you were able to dispose of your shares.

Our distributions have exceeded, and may in the future exceed, our funds (used in) from operations, or FFO.

Over the life of our company, the regular quarterly cash distributions we pay are expected to be principally sourced from our FFO. However, we have funded a portion of our cash distributions to date using net proceeds from our public offerings and there can be no assurance that our FFO will be sufficient to cover our future distributions. Our distribution coverage using FFO was approximately 63% and 42% of total distributions for the year ended December 31, 2015 and on a cumulative basis through that date, respectively, with the balance funded with proceeds from our offering.  Our distribution coverage using cash flow from operations was approximately 83% and 64% of total distributions for the year ended December 31, 2015 and on a cumulative basis through that date, respectively, with the balance funded with proceeds from our offering. If our properties are not generating sufficient cash flow or our other expenses require it, we may need to use other sources of funds, such as proceeds from asset sales, borrowings, or our offerings to fund distributions in order to satisfy REIT requirements. If we fund distributions from borrowings, such financing will incur interest costs and need to be repaid. And when we fund distributions from offering proceeds, we have fewer funds available for the acquisition of properties, which may affect our ability to generate future cash flows from operations and reduce stockholders’ overall return. These risks will be greater for persons who acquire our shares relatively early in this offering, before a significant portion of the offering proceeds have been invested. Distributions in excess of our earnings and profits could constitute a return of capital for U.S. federal income tax purposes.

Stockholders’ equity interests may be diluted.

Our stockholders do not have preemptive rights to any shares of common stock issued by us in the future. Therefore, if we (i) sell shares of common stock in the future, including those issued pursuant to our DRIP, (ii) sell securities that are convertible into our common stock, (iii) issue common stock in a private placement to institutional investors, (iv) issue shares of common stock to our independent directors or to our advisor and its affiliates for payment of fees in lieu of cash, (v) issue shares of common stock under our 2010 Equity Incentive Plan or (vi) redeemed shares of common stock pursuant to our redemption program prior to obtaining an NAV, then existing stockholders and investors that purchased their shares in our initial public offering will experience dilution of their percentage ownership in us. Depending on the terms of such transactions, most notably the offer price per share and the value of our properties and our other investments, existing stockholders might also experience a dilution in the book value per share of their investment in us.

Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investment.

Our charter requires that our independent directors review our investment policies at least annually to determine that the policies are in the best interest of our stockholders. These policies may change over time. The methods of implementing our investment policies may also vary as new investment techniques are developed. Except as otherwise provided in our charter, our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by a majority of our directors (including a majority of the independent directors), without the approval of our stockholders. As a

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result, the nature of your investment could change without your consent. Material changes in our investment focus will be described in our periodic reports filed with the SEC; however, these reports would typically be filed after changes in our investment focus have been made, and in some cases, several months after such changes. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and hotel property market fluctuations, all of which could materially adversely affect our ability to achieve our investment objectives.

We are not required to meet any diversification standards; therefore, our investments may become subject to concentration risks.

Subject to our intention to maintain our qualification as a REIT, there are no limitations on the number or value of particular types of investments that we may make. We are not required to meet any diversification standards, including geographic diversification standards. Therefore, our investments may become concentrated in type or geographic location, which could subject us to significant concentration risks with potentially adverse effects on our ability to achieve our investment objectives.

Our success is dependent on the performance of our advisor and the subadvisor.

Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our advisor in the acquisition of investments, the determination of any financing arrangements and the management of our assets. The current advisory agreement with our advisor is scheduled to expire on December 31, 2016, unless renewed pursuant to its terms. Our advisor has retained the services of the subadvisor because the subadvisor is experienced in investing in and managing hotel properties and other lodging-related assets. If either our advisor or the subadvisor fails to perform according to our expectations, we could be materially adversely affected.

The past performance of WPC or Watermark Capital Partners, or partnerships and programs sponsored or managed by WPC, including the CPA® REITs, may not be indicative of our advisor’s performance with respect to us. Prior to us, our advisor had not previously sponsored a program focused on lodging investments. We cannot guarantee that our advisor will be able to successfully manage and achieve liquidity for us to the extent it has done so in the past.

We are dependent upon our advisor and our advisor’s access to the lodging experience of the subadvisor.

We are subject to the risk that our advisor will terminate the advisory agreement or that the subadvisor will terminate the subadvisory agreement and that no suitable replacement(s) will be found to manage us. We have no employees or separate facilities and are substantially reliant on our advisor, which has significant discretion as to the implementation and execution of our business strategies. Our advisor in turn is relying in part on the lodging experience of the subadvisor. We can offer no assurance that our advisor will remain our external manager, that the subadvisor will continue to be retained or that we will continue to have access to our advisor’s, WPC’s and/or Watermark Capital Partners’ professionals, information or deal flow. If our advisor terminates the advisory agreement or if our advisor or the subadvisor terminates the subadvisory agreement, we will not have such access and will be required to expend time and money to seek replacements, all of which may impact our ability to execute our business plan and meet our investment objectives.

Moreover, lenders for certain of our assets may request change of control provisions in the loan documentation that would make the termination, replacement or dissolution of our advisor, events of default or events requiring the immediate repayment of the full outstanding balance of the loan. If such a default or accelerated repayment event occurs with respect to any of our assets, our revenues and distributions to our stockholders may be adversely affected.

WPC and our dealer manager are parties to a settlement agreement with the SEC and are subject to a federal court injunction as well as a consent order with the Maryland Division of Securities.

In 2008, WPC and Carey Financial, a subsidiary of WPC and the dealer manager for our public offerings, settled all matters relating to an investigation by the SEC, including matters relating to payments by certain CPA® REITs during 2000-2003 to broker-dealers that distributed their shares, which were alleged by the SEC to be undisclosed underwriting compensation, but which WPC and Carey Financial neither admitted nor denied. In connection with implementing the settlement, a federal court injunction was entered against WPC and Carey Financial enjoining them from violating a number of provisions of the federal securities laws. Any further violation of these laws by WPC or Carey Financial could result in civil remedies, including sanctions, fines and penalties, which may be more severe than if the violation had occurred without the injunction being in place. Additionally, if WPC or Carey Financial breaches the terms of the injunction, the SEC may petition the court to vacate the settlement and restore the SEC’s original action to the active docket for all purposes.


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In 2012, Corporate Property Associates 15 Incorporated, WPC and Carey Financial settled all matters relating to an investigation by the state of Maryland regarding the sale of unregistered securities of Corporate Property Associates 15 Incorporated in 2002 and 2003. Under the Consent Order, Corporate Property Associates 15 Incorporated, WPC and Carey Financial agreed, without admitting or denying liability, to cease and desist from any further violations of selling unregistered securities in Maryland. Contemporaneous with the issuance of the Consent Order, Corporate Property Associates 15 Incorporated, WPC and Carey Financial paid the Maryland Division of Securities a civil penalty of $10,000.

Additional regulatory action, litigation or governmental proceedings could adversely affect us by, among other things, distracting WPC and Carey Financial from their duties to us, resulting in significant monetary damages to WPC and Carey Financial, which could adversely affect their ability to perform services for us, or resulting in injunctions or other restrictions on WPC’s or Carey Financial’s ability to act as our advisor and dealer manager, respectively, in the United States or in one or more states.

Exercising our right to repurchase all or a portion of Carey Watermark Holdings’ interests in our Operating Partnership upon certain termination events could be prohibitively expensive and could deter us from terminating the advisory agreement.

The termination or resignation of Carey Lodging Advisors, LLC as our advisor, including by non-renewal of the advisory agreement and replacement with an entity that is not an affiliate of our advisor, would give our Operating Partnership the right, but not the obligation, to repurchase all or a portion of Carey Watermark Holdings’ interests in our Operating Partnership at the fair market value of those interests on the date of termination, as determined by an independent appraiser. This repurchase could be prohibitively expensive and require the Operating Partnership to sell assets in order to complete the repurchase. If our Operating Partnership does not exercise its repurchase right, we might be unable to find another entity that would be willing to act as our advisor while Carey Watermark Holdings owns a significant interest in the Operating Partnership. Even if we do find another entity to act as our advisor, we may be subject to higher fees than the fees charged by Carey Lodging Advisors, LLC. These considerations could deter us from terminating the advisory agreement.

The repurchase of Carey Watermark Holdings’ special general partner interest in our Operating Partnership upon the termination of our advisor in connection with a merger or other extraordinary corporate transaction may discourage certain business combination transactions.

In the event of a merger or other extraordinary corporate transaction in which our advisory agreement is terminated and an affiliate of WPC does not replace Carey Lodging Advisors, LLC as our advisor, the Operating Partnership must either repurchase all or a portion of Carey Watermark Holdings’ special general partner interest in our Operating Partnership or obtain Carey Watermark Holdings’ consent to the merger. This obligation may deter a transaction in which we are not the surviving entity. This deterrence may limit the opportunity for stockholders to receive a premium for their shares that might otherwise exist if a third party attempted to acquire us through a merger or other extraordinary corporate transaction.

Payment of fees to our advisor and distributions to our special general partner will reduce cash available for investment and distribution.

Our advisor will perform services for us in connection with the selection and acquisition of our investments, the management of our properties and the administration of our other investments. Unless our advisor elects to receive shares of our common stock in lieu of cash compensation, we will pay our advisor substantial cash fees for these services. In addition, Carey Watermark Holdings, as the special general partner of our Operating Partnership, is entitled to certain distributions from our Operating Partnership. The payment of these fees and distributions will reduce the amount of cash available for investments or distribution to our stockholders.


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We have limited independence from our advisor, subadvisor and their respective affiliates, who may be subject to conflicts of interest.

Substantially all of our management functions are performed by officers of our advisor pursuant to the advisory agreement and by the subadvisor pursuant to the subadvisory agreement. Additionally, some of the directors of WPC and Watermark Capital Partners, or entities managed by them, are also members of our board of directors. This limited independence, combined with our advisor’s and Carey Watermark Holdings’ interests in us, may result in potential conflicts of interest because of the substantial control that our advisor has over us and because some of its economic incentives may differ from those of our stockholders. Circumstances under which a conflict could arise between us, our advisor, the subadvisor and their affiliates include:

our advisor and subadvisor are compensated for certain transactions on our behalf (e.g., for acquisitions of investments, sales and financing), which may cause our advisor to engage in transactions that generate higher fees, rather than transactions that are more appropriate or beneficial for our business;
agreements between us and our advisor, and between our advisor and subadvisor, including agreements regarding compensation, will not be negotiated on an arm’s-length basis, as would occur if the agreements were with unaffiliated third parties;
acquisitions of single assets or portfolios of assets from affiliates (including WPC or the other Managed REITs), subject to our investment policies and procedures, in the form of a direct purchase of assets, a merger or another type of transaction;
competition with WPC, the other entities managed by it and the subadvisor for investment acquisitions, which are resolved by our advisor (although our advisor is required to use its best efforts to present a continuing and suitable investment program to us, allocation decisions present conflicts of interest, which may not be resolved in the manner most favorable to our interests);
decisions regarding asset sales, which could impact the timing and amount of fees payable to our advisor and subadvisor as well as allocations and distributions payable to Carey Watermark Holdings pursuant to its special general partner interests (e.g., our advisor receives asset management fees and may decide not to sell an asset; however, our advisor receives disposition fees and Carey Watermark Holdings will be entitled to certain profit allocations and cash distributions based upon sales of assets as a result of its Operating Partnership profits interest, and the subadvisor will share in apportion of those fees and distributions);
business combination transactions, including mergers with WPC or another Managed REIT;
decisions regarding liquidity events, which may entitle our advisor, subadvisor and their affiliates to receive additional fees and distributions relation to the liquidations;
a recommendation by our advisor that we declare distributions at a particular rate because the advisor and Carey Watermark Holdings may begin collecting subordinated fees once the applicable preferred return rate has been met;
disposition fees based on the sale price of assets, as well as interests in disposition proceeds based on net cash proceeds from the sale, exchange or other disposition of assets may cause a conflict between our advisor’s desire to sell an asset and our plans to hold or sell the asset;
the termination and negotiation of the advisory agreement and other agreements with our advisor, subadvisor and their affiliates; and
as of December 31, 2015, the advisor and its affiliates own approximately 1.1% of our outstanding common stock, which gives the advisor influence over our affairs even if we were to terminate the advisory agreement (there can be no assurance that such affiliates will act in accordance with our interests when exercising the voting power of their shares).

There are conflicts of interest with certain of our directors and officers who have duties to WPC and/or to Watermark Capital Partners and entities sponsored or managed by either of them.

Several of the officers and certain of the directors of our advisor or the subadvisor are also our officers and directors, including Mr. Medzigian, Thomas E. Zacharias and Hisham A. Kader. Our advisor has entered into contracts with us to provide us with asset management, property acquisition and disposition services and the subadvisor supports our advisor in the provision of these services. Our officers may benefit from the fees and distributions paid to our advisor, the subadvisor and Carey Watermark Holdings.

In addition, Mr. Medzigian, our chief executive officer and one of our directors, is and will be a principal in other real estate investment transactions or programs that may compete with us. Currently, Mr. Medzigian is the chairman and managing partner of Watermark Capital Partners, a private investment and management firm that specializes in real estate private equity transactions involving hotels and resorts, resort residential products, recreational projects (including golf and club ownership

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programs), and new-urbanism and mixed-use projects. Watermark Capital Partners, through its affiliates, currently owns interests in and/or manages three lodging properties within the United States, including one which is part of a joint venture with WPC and one in which Watermark Capital Partners serves as asset manager pursuant to an asset management agreement with an affiliate of WPC. WPC and the CPA® REITs own five investments in 21 lodging properties located within the United States, including one which is part of a joint venture with Watermark Capital Partners. WPC, the CPA® REITs and Watermark Capital Partners have an economic interest in other transactions, including in such pre-existing lodging investments, and Mr. Medzigian, by virtue of his position in Watermark Capital Partners, may be subject to conflicts of interests. As a result of the interests described in this section, our advisor, the subadvisor and the directors and officers who are common to us and the other Managed REITs, WPC and Watermark Capital Partners will experience conflicts of interest.

Our NAV is computed by the advisor relying in part on information that the advisor provides to a third party.

Our NAV is computed by the advisor relying in part upon an annual third-party appraisal of the fair market value of our real estate and third-party estimates of the fair market value of our debt. Any valuation includes the use of estimates and our valuation may be influenced by the information provided to the third party by the advisor. Because NAV is an estimated value and can change as interest rate and real estate markets fluctuate, there is no assurance that a stockholder will realize such NAV in connection with any liquidity event.

We may face competition from WPC and entities managed by our advisor, the subadvisor and their respective affiliates in the purchase, sale and ownership of properties.

WPC, Watermark Capital Partners, entities managed by our advisor in the future, and entities separately managed now or in the future by WPC (such as the other Managed REITs) may compete with us with respect to properties, potential purchasers, sellers of properties and mortgage financing for properties. If some of the entities formed and managed by our advisor or the subadvisor, or their respective affiliates, in the future focus specifically on lodging investments, they may receive preference in the allocation of those types of investments.

If we internalize our management functions, stockholders’ interests could be diluted and we could incur significant self-management costs.

In the future, our board of directors may consider internalizing the functions currently performed for us by our advisor by, among other methods, acquiring our advisor or subadvisor. The method by which we could internalize these functions could take many forms. There is no assurance that internalizing our management functions will be beneficial to us and our stockholders. There is also no assurance that the key employees of the advisor or subadvisor who perform services for us would elect to work directly for us, instead of remaining with the advisor (or another affiliate of WPC) or the subadvisor. An acquisition of our advisor or subadvisor could also result in dilution of your interests as a stockholder and could reduce earnings per share and FFO per share. Additionally, we may not realize the perceived benefits, be able to properly integrate a new staff of managers and employees, or be able to effectively replicate the services provided previously by our advisor or subadvisor. Internalization transactions, including the acquisition of advisors or property managers affiliated with entity sponsors, have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims, which would reduce the amount of funds available for us to invest in properties or other investments and to pay distributions. All of these factors could have material adverse effect on our results of operations, financial condition and ability to pay distributions.

We could be adversely affected if the advisor completed an internalization with another Managed Program.

Our advisor and its affiliates act as the external advisor to the other Managed Programs and may act as the advisor to other entities in the future. If any of such entities were to acquire our advisor in an internalization transaction, we could be adversely affected because such a transaction could result in the loss of the advisor’s services to us. In addition, our advisor is a subsidiary of WPC, which is an operating REIT in its own right that is listed on the NYSE. There can be no assurance that WPC will not decide in the future to focus on business activities other than acting as an advisor to non-listed REITs, such as us. In such cases, we would have to find a new advisor. A new advisor would not be familiar with our company and may charge fees that are higher than the fees we pay to our advisor, all of which may materially adversely affect our performance.

We could have property losses that are not covered by insurance.

Our property insurance policies provide that all of the claims from each of our hotels resulting from a particular insurable event must be combined together for purposes of evaluating whether the aggregate limits and sub-limits contained in our policies

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have been exceeded. Therefore, if an insurable event occurs that affects more than one of our hotels, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached. If the total value of the loss exceeds the aggregate limits available, each affected hotel may only receive a proportional share of the amount of insurance proceeds provided for under the policy. We may incur losses in excess of insured limits, and as a result, may be even less likely to receive sufficient coverage for risks that affect multiple properties, such as earthquakes or catastrophic terrorist acts. Risks such as war, catastrophic terrorist acts, nuclear, biological, chemical or radiological attacks, and some environmental hazards may be deemed to fall completely outside the general coverage limits of our policies, may be uninsurable or may be too expensive to justify insuring against.

We may also encounter disputes concerning whether an insurance provider will pay a particular claim that we believe is covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur, or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In such event, we may nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

We obtain terrorism insurance to the extent required by lenders or franchisors as a part of our all-risk property insurance program, as well as our general liability policy. However, our all-risk policies have limitations, such as per occurrence limits and sub-limits, which may have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act for “certified” acts of terrorism - namely those that are committed on behalf of non-U.S. persons or interests. Furthermore, we do not have full replacement coverage at all of our hotels for acts of terrorism committed on behalf of U.S. persons or interests (“non-certified” events), as our coverage for such incidents is subject to sub-limits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological and chemical incidents is excluded under our policies. While the Terrorism Risk Insurance Act will reimburse insurers for losses resulting from nuclear, biological and chemical perils, it does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. Additionally, there is a possibility that Congress will not renew the Terrorism Risk Insurance Act, which would eliminate the federal subsidy for terrorism losses. As a result of the above, there remains uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.

Our operations could be restricted if we become subject to the Investment Company Act.

A person will generally be deemed to be an “investment company” for purposes of the Investment Company Act of 1940, or the Investment Company Act, if:

it is, or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; or
it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which is referred to as the “40% test.”

We believe that we and our subsidiaries are engaged primarily in the business of acquiring and owning interests in real estate. We do not hold ourselves out as being engaged primarily in the business of investing, reinvesting, or trading in securities. Accordingly, we do not believe that we are an investment company as defined under the Investment Company Act. If we were required to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things, (i) limitations on our capital structure (including our ability to use leverage), (ii) restrictions on specified investments, (iii) prohibitions on proposed transactions with “affiliated persons” (as defined in the Investment Company Act), and (iv) compliance with reporting, record keeping, voting, proxy disclosure, and other rules and regulations that would significantly increase our operating expenses.
Securities issued by majority-owned subsidiaries, such as our operating partnership, are excepted from the term “investment securities” for purposes of the 40% test described in the second bullet point above because they are not themselves investment companies and do not rely on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, hence our operating partnership generally expects to satisfy the 40% test. However, depending on the nature of its investments, our operating partnership may rely upon the exclusion from registration as an investment company pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of the operating partnership's assets must be comprised of qualifying real estate assets and at least 80% of its portfolio must be comprised of qualifying real estate assets and real estate-related assets.

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Qualifying assets for this purpose include mortgage loans and other assets, including certain mezzanine loans and B notes, that the SEC staff in various no-action letters has affirmed can be treated as qualifying assets. We treat the following as real estate-related assets: commercial mortgage-backed securities, debt and equity securities of companies primarily engaged in real estate businesses, and securities issued by pass-through entities of which substantially all the assets consist of qualifying assets and/or real estate-related assets. We rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. In August 2011, the SEC issued a concept release soliciting public comment on a wide range of issues relating to Section (3)(c)(5)(C), including the nature of the assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including the guidance of the SEC or its staff regarding this exclusion, will not change in a manner that adversely affects our operations. To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the operating partnership holding assets we might wish to sell or selling assets we might wish to hold.

Because the operating partnership is not an investment company and does not rely on the exclusion from investment company registration provided by Section 3(c)(1) or 3(c)(7), and the operating partnership is our majority-owned subsidiary, our interests in the operating partnership do not constitute investment securities for purposes of the 40% test. Our interest in the operating partnership is our only material asset; therefore, we believe that we satisfy the 40% test.

To maintain compliance with an Investment Company Act exemption or exclusion, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forego opportunities to acquire interests in companies that we would otherwise want to acquire and that would be important to our investment strategy. If we were required to register as an investment company, we would be prohibited from engaging in our business as currently contemplated because the Investment Company Act imposes significant limitations on leverage. In addition, we would have to seek to restructure the advisory agreement because the compensation that it contemplates would not comply with the Investment Company Act. If we fail to comply with the Investment Company Act, criminal and civil actions could be brought against us, our contracts could be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
 
Compliance with the Americans with Disabilities Act of 1990 and the related regulations, rules and orders may adversely affect our financial condition.

Under the Americans with Disabilities Act of 1990, all public accommodations, including hotels, are required to meet certain federal requirements for access and use by disabled persons. Various state and local jurisdictions have also adopted requirements relating to the accessibility of buildings to disabled persons. We make every reasonable effort to ensure that our hotels substantially comply with the requirements of the Americans with Disabilities Act of 1990 and other applicable laws. However, we could be liable for both governmental fines and payments to private parties if it were determined that our hotels are not in compliance with these laws. If we were required to make unanticipated major modifications to our hotels to comply with the requirements of the Americans with Disabilities Act of 1990 and similar laws, it could materially adversely affect our ability to make distributions to our stockholders and to satisfy our other obligations.

We incur debt to finance our operations, which may subject us to an increased risk of loss.

We incur debt to finance our operations. The leverage we employ varies depending on our ability to obtain credit facilities, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted leveraged return we expect from our investment portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire.

Debt service payments may reduce the net income available for distributions to our stockholders. Moreover, we may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. Our charter or bylaws do not restrict the form of indebtedness we may incur.


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Our participation in joint ventures creates additional risk.

From time to time, we participate in joint ventures to purchase assets together with unaffiliated third parties, Watermark Capital Partners, WPC, or the other entities sponsored or managed by our advisor or its affiliates, such as the other Managed REITs. There are additional risks involved in joint venture transactions. As a co-investor in a joint venture, we would not be in a position to exercise sole decision-making authority relating to the property, the joint venture or our investment partner. In addition, there is the potential that our joint venture partner may become bankrupt or that we may have diverging or inconsistent economic or business interests. These diverging interests could, among other things, expose us to liabilities in the joint venture investment in excess of our proportionate share of those liabilities. The partition rights of each owner in a jointly-owned property could reduce the value of each portion of the divided property. Further, the fiduciary obligation that our advisor or members of our board of directors may owe to our partner in an affiliated transaction may make it more difficult for us to enforce our rights.

We are subject, in part, to the risks of real estate ownership.

Our performance and asset value is, in part, subject to risks incident to the ownership and operation of real estate, including:

adverse changes in general or local economic conditions;
changes in local conditions, such as an oversupply of hotel rooms or a reduction in demand for hotel rooms;
changes in traffic patterns and neighborhood characteristics;
increases in the cost of property insurance;
uninsured property liability, property damage or casualty losses;
changes in operating expenses, interest rates or the availability of financing;
changes in laws and governmental regulations, including those governing real estate usage, zoning, environmental issues and taxes;
unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws;
exposure to environmental losses; and
force majeure and other factors beyond the control of our management.

If available financing declines or interest rates rise, our financial condition and ability to make distributions may be adversely affected.

A reduction in available financing or increased interest rates for real-estate related investments may impact our financial condition by increasing our cost of borrowing, reducing our overall leverage (which may reduce our returns on investment) and making it more difficult for us to obtain financing for ongoing acquisitions. These effects could in turn adversely affect our ability to make distributions to our stockholders.

We may have difficulty selling our properties and this lack of liquidity may limit our ability to quickly change our portfolio in response to changes in economic or other conditions.

Real estate investments are generally less liquid than many other financial assets, which may limit our ability to quickly adjust our portfolio in response to changes in economic or other conditions. The real estate market is affected by many factors that are beyond our control, including general economic conditions, availability of financing, interest rates and other factors, such as supply and demand.

We may be required to spend funds to correct defects or to make improvements before a property can be sold and such funds may not be readily available. When acquiring lodging properties, we may agree to lock-out provisions that restrict us from selling a property for a period of time or that impose other material restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors, and any others that would impede our ability to respond to adverse changes in the lodging industry or the performance of our properties, could have a material adverse effect on our results of operations and financial condition, as well as our ability to pay distributions to stockholders.


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Our inability to sell properties may result in us owning lodging facilities that no longer fit within our business strategy. Holding these properties or selling them at a loss may affect our earnings and, in turn, could adversely affect our value. Some of the other factors that could restrict our ability to sell properties include, but are not limited to:

inability to agree on a favorable price or on favorable terms;
restrictions imposed by third parties, such as an inability to transfer franchise or management agreements;
lender restrictions;
environmental issues; and
property condition.

Potential liability for environmental matters could adversely affect our financial condition.

Owners of real estate are subject to numerous federal, state and local environmental laws and regulations. Under these laws and regulations, a current or former owner of real estate may be liable for costs of remediating hazardous substances found on its property, whether or not they were responsible for its presence. Although we subject our properties to an environmental assessment prior to acquisition, we may not be made aware of all the environmental liabilities associated with a property prior to its purchase, or we or a subsequent owner may discover hidden environmental hazards after acquisition. The costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell the property or to borrow using the property as collateral.

Various federal, state and local environmental laws impose responsibilities on an owner or operator of real estate and subject those persons to potential joint and several liabilities. Typical provisions of those laws include:

responsibility and liability for the costs of investigation and removal (including at appropriate disposal facilities) or remediation of hazardous or toxic substances in, on or migrating from our real property, generally without regard to our knowledge of, or responsibility for, the presence of the contaminants;
liability for claims by third parties based on damages to natural resources or property, personal injuries, or costs of removal or remediation of hazardous or toxic substances in, on or migrating from our property; and
responsibility for managing asbestos-containing building materials, and third-party claims for exposure to those materials.

Environmental laws may also impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures.

We and our independent hotel operators rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We and our independent hotel operators rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We purchase some of our information technology from third-party vendors and we will rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information (e.g., individually identifiable information, including information relating to financial accounts). Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not be able to prevent the improper system functions, damage or the improper access or disclosure of personally identifiable information. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.

We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.

Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our or our independent property operators’ information technology systems to more sophisticated security threats. While we and our independent property operators employ a number of measures to prevent, detect and mitigate

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these threats including password protection, backup servers and annual penetration testing, there is no guarantee such efforts will be successful in preventing a cyber attack. Cybersecurity incidents could compromise the confidential information of financial transactions and records, personal identifying information, reservations, billing and operating data and disrupt and affect the efficiency of our business operations.

The occurrence of cyber incidents to our advisor, or a deficiency in our advisor’s cyber security, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber incident is an intentional attack that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information, or an unintentional accident or error. As our advisor’s reliance on technology has increased, so have the risks posed to our advisor’s systems, both internal and those our advisor has outsourced. Our advisor may also store or come into contact with sensitive information and data. If, in handling this information, our advisor or their respective partners fail to comply with applicable privacy or data security laws, we could face significant legal and financial exposure to claims of governmental agencies and parties whose privacy is compromised. The three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our business relationships in the hotel industry and private data exposure. We and our advisor maintain insurance intended to cover some of these risks, but it may not be sufficient to cover the losses from any future breaches of our advisor systems. Our advisor has implemented processes, procedures, and controls to help mitigate these risks, but these measures, as well as our and our advisor’s increased awareness of a risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.

Economic conditions may adversely affect the lodging industry.

The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. GDP. It is also sensitive to business and personal discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenues and profitability of our hotel properties, and therefore our net operating profits. The global economic downturn in 2008 and 2009 led to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels and significantly reduced room rates.

Our business is dependent on the speed and strength of the recovery of the U.S. economy, which cannot be predicted. Depending on the strength and sustainability of the recovery, we could experience an adverse impact on our revenue and a negative effect on our profitability.

We are subject to various operating risks common to the lodging industry, which may adversely affect our ability to make distributions to our stockholders.

Our hotel properties and lodging facilities are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:

competition from other hotel properties or lodging facilities in our markets;
over-building of hotels in our markets, which would adversely affect occupancy and revenues at the hotels we acquire;
dependence on business and commercial travelers and tourism;
increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
changes in governmental laws and regulations, fiscal policies and zoning ordinances, and the related compliance costs of such changes;
adverse effects of international, national, regional and local economic and market conditions;
unforeseen events beyond our control, such as terrorist attacks, travel related health concerns (including pandemics and epidemics), political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents and unusual weather patterns (including natural disasters such as hurricanes, tsunamis or earthquakes);

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adverse effects of a downturn in the lodging industry; and
risks generally associated with the ownership of hotel properties and real estate, as discussed in other risk factors.

These risks could reduce our net operating profits, which in turn could adversely affect our ability to make distributions to our stockholders.

Seasonality of certain lodging properties may cause quarterly fluctuations in results of operations of our properties.

Certain lodging properties are seasonal in nature. Generally, occupancy rates and revenues are greater in the second and third quarters than in the first and fourth quarters of each year. As a result of the seasonality of certain lodging properties, there may be quarterly fluctuations in the results of operations of our properties. Quarterly financial results may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may need to enter into short-term borrowings during certain periods in order to offset these fluctuations in revenues, to fund operations or to make distributions to our stockholders.

The cyclical nature of the lodging industry may cause fluctuations in our operating performance.
 
The lodging industry is highly cyclical in nature. Fluctuations in operating performance are caused largely by general economic and local market conditions, which affect business and leisure travel levels. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry’s performance, and over-building has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A decline in lodging demand, a substantial growth in lodging supply or a deterioration in the improvement of lodging fundamentals as forecast by industry analysts could result in returns that are substantially below expectations, or result in losses, which could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Future terrorist attacks or increased concern about terrorist activities, or the threat or outbreak of a pandemic disease, could adversely affect the travel and lodging industries and may affect the operations of our hotels.

As in the past, terrorist attacks or alerts in the United States and abroad, or the threat of, or actual outbreak of, pandemic disease could reduce both business and leisure travel, resulting in a decline in the lodging sector. Any kind of terrorist activity within the United States or elsewhere could negatively impact both domestic and international markets, as well as our business. Such attacks or threats of attacks could have a material adverse effect on our business, our ability to insure our properties and our operations. The threat of or actual outbreak of a pandemic disease could reduce business and leisure travel, which could have a material adverse effect on our business.

We may not have control over properties under construction.

We have acquired, and may continue to acquire, hotels under development, as well as hotels that require extensive renovation. When we acquire a hotel for development or renovation, we may not be able to control construction costs and the timing of construction or a developer’s ability to build in conformity with plans, specifications and timetables.

We are subject to the risk of increased lodging operating expenses.

We are subject to the risk of increased lodging operating expenses, including, but not limited to, the following cost elements: wage and benefit costs; repair and maintenance expenses; employee liabilities; energy costs; property taxes; insurance costs; and other operating expenses. Any increases in one or more of these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.

If our leases with the TRS lessees do not qualify as arm’s length for tax purposes, we could be subject to potentially significant tax penalties.

Our TRS lessees will incur taxes or accrue tax benefits consistent with a “C” corporation. If the leases between us and our TRS lessees are deemed by the Internal Revenue Service to not reflect arm’s length transactions for tax purposes, we may be subject to severe tax penalties as the lessor, which will increase our lodging operating expenses and adversely impact our profitability and cash flows.


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Our results of operations, financial position, cash flows and ability to service debt and to make distributions to stockholders depend on the ability of the independent property operators to operate and manage the hotels.

As a REIT, we are allowed to own lodging properties, but are prohibited from operating them. Therefore, in order for us to satisfy certain REIT qualification rules, we enter into leases with the TRS lessees for each of our lodging properties. The TRS lessees in turn contract with independent property operators that manage the day-to-day operations of our properties. Although we consult with the property operators with respect to strategic business plans, we may be limited, depending on the terms of the applicable operating agreement and REIT qualification rules, in our ability to direct the actions of the independent property operators, particularly with respect to daily operations. Thus, even if we believe that our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR, ADR or operating profits, we may not have sufficient rights under a particular property operating agreement to force the property operator to change its method of operation. We can only seek redress if a property operator violates the terms of the applicable property operating agreement with the TRS lessee, and then only to the extent of the remedies provided in the property operating agreement. Our results of operations, financial position, cash flows and ability to service debt and to make distributions to stockholders are, therefore, substantially dependent on the ability of the property operators to successfully operate our hotel. Some of our operating agreements may have lengthy terms, may not be terminable by us before the agreement’s expiration and may require the payment of substantial termination fees. In the event that we are able to and do replace any of our property operators, we may experience significant disruptions at the affected hotels, which may adversely affect our ability to make distributions to our stockholders.

There may be operational limitations associated with management and franchise agreements affecting our properties and these limitations may prevent us from using these properties to their best advantage for our stockholders.

The TRS lessees hold some of our properties and may enter into franchise or license agreements with nationally recognized lodging brands. These franchise agreements may contain specific standards for, and restrictions and limitations on, the operation and maintenance of our properties in order to maintain uniformity within the franchise system. We expect that franchisors will periodically inspect our properties to ensure that we maintain their standards. We do not know whether those limitations will restrict the business plans we have tailored for each property and/or market.

The standards are subject to change over time, in some cases at the direction of the franchisor, and may restrict the ability of our TRS lessees, as franchisee, to make improvements or modifications to a property. Conversely, as a condition to the maintenance of a franchise license, a franchisor could also require us to make capital expenditures, even if we do not believe the improvements are necessary, desirable or likely to result in an acceptable return on our investment. Action or inaction by us or our TRS lessees could result in a breach of those standards or other terms and conditions of the franchise agreements and could result in the loss or termination of a franchise license.

In addition, when terminating or changing the franchise affiliation of a property, we may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the property covered by the franchise due to the associated loss of name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a franchise license for one or more lodging properties could materially and adversely affect our results of operations, financial condition and cash flows, including our ability to service debt and make distributions to our stockholders.

We are subject to the risks of brand concentration.

We are subject to the potential risks associated with the concentration of our hotels under a particular brand. A negative public image or other adverse event that becomes associated with a brand could adversely affect hotels operated under that brand. If any of the brands under which our hotels operate suffer a significant decline in appeal to the traveling public, the revenues and profitability of such hotels could be adversely affected.

We face competition in the lodging industry, which may limit our profitability and returns to our stockholders.

The lodging industry is highly competitive. This competition could reduce occupancy levels and rental revenues at our properties, which would adversely affect our operations. We face competition from many sources, including from (i) other lodging facilities, both in the immediate vicinity and the geographic market where our lodging properties are located and (ii) nationally recognized lodging brands that we are not associated with. In addition, increases in operating costs due to inflation may not be offset by increased room rates.


CWI 2015 10-K 17




We also face competition for investment opportunities. In addition to WPC, Watermark Capital Partners and their respective affiliates, including the other Managed REITs, we face competition from other REITs, national lodging chains and other entities that may have substantially greater financial resources than us. If our advisor is unable to compete successfully in the acquisition and management of our lodging properties, our results of operation and financial condition may be adversely affected and may reduce the cash available for distribution to our stockholders.

As for our properties that are operated by independent property operators, our revenues depend on the ability of such independent property operators to compete successfully with other hotels and resorts in their respective markets. Some of our competitors may have substantially greater marketing and financial resources than us. If the independent property operators are unable to compete successfully or if our competitors’ marketing strategies are effective, our results of operations, financial condition and ability to service debt may be adversely affected and may reduce the cash available for distribution to our stockholders.

The lack of an active public trading market for our shares could make it difficult for stockholders to sell shares quickly or at all.

There is no active public trading market for our shares and we do not expect one to develop. Moreover, we are not required to ever complete a liquidity event. Our stockholders should not rely on our redemption plan as a method to sell shares promptly because it includes numerous restrictions that limit stockholders’ ability to sell their shares to us and our board of directors may amend, suspend or terminate the plan without advance notice. In particular, the redemption plan provides that we may redeem shares only if we have sufficient funds available for redemption and to the extent the total number of shares for which redemption is requested in any quarter, together with the aggregate number of shares redeemed in the preceding three fiscal quarters, does not exceed 5% of the total number of our shares outstanding as of the last day of the immediately preceding fiscal quarter. Given these limitations, it may be difficult for stockholders to sell their shares promptly or at all. In addition, the price received for any shares sold prior to a liquidity event is likely to be less than the applicable NAV per share at that time. Investor suitability standards imposed by certain states may also make it more difficult for stockholders to sell their shares to someone in those states.

The limit in our charter on the number of our shares a person may own may discourage a takeover, which might provide our stockholders with liquidity or other advantages.

To assist us in meeting the REIT qualification rules, among other things, our charter prohibits the ownership by one person or affiliated group of more than 9.8% in value of our stock or more than 9.8% in value or number, whichever is more restrictive, of our outstanding shares of common stock, unless exempted (prospectively or retroactively) by our board of directors. This ownership limitation may discourage third parties from making a potentially attractive tender offer for our stockholders’ shares, thereby inhibiting a change of control in us.

We disclose FFO and modified funds from (used in) operations, or MFFO, which are financial measures that are not derived in accordance with U.S. generally accepted accounting principles, or GAAP, in documents we file with the SEC; however, FFO and MFFO are not equivalent to our net income or loss as determined under GAAP, and stockholders should consider GAAP measures to be more relevant to our operating performance.

We use and disclose to investors FFO and MFFO, which are metrics not derived in accordance with GAAP, or non-GAAP financial measures. FFO and MFFO are not equivalent to our net income or loss as determined in accordance with GAAP and investors should consider GAAP measures to be more relevant to evaluating our operating performance. FFO and GAAP net income differ because FFO excludes gains or losses from sales of property and asset impairment write-downs, depreciation and amortization, and is after adjustments for such items related to noncontrolling interests. MFFO and GAAP net income differ because MFFO represents FFO with further adjustments to exclude acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, realized gains and losses from early extinguishment of debt, deferred rent receivables and the further adjustments of these items related to noncontrolling interests.


CWI 2015 10-K 18




Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance.

Neither the SEC, the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly.

Conflicts of interest may arise between holders of our common stock and holders of partnership interests in our Operating Partnership.

Our directors and officers have duties to us and our stockholders under Maryland law in connection with their management of us. At the same time, our Operating Partnership was formed in Delaware and we, as general partner, have duties under Delaware law to our Operating Partnership and the limited partners in connection with our management of our Operating Partnership. Our duties as general partner of our Operating Partnership may come into conflict with the duties of our directors and officers to us and our stockholders.

Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our Operating Partnership provides that, for so long as we own a controlling interest in our Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders. The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.

In addition, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees will not be liable or accountable to our Operating Partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. Furthermore, our Operating Partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from, and against, any and all claims arising from operations of our Operating Partnership, unless it is established that: (i) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (ii) the indemnified party actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. These limitations on liability do not supersede the indemnification provisions of our charter.

Maryland law could restrict a change in control, which could have the effect of inhibiting a change in control of us even if a change in control were in our stockholders’ interest.

Provisions of Maryland law applicable to us prohibit business combinations with:

any person who beneficially owns 10% or more of the voting power of our outstanding voting stock, referred to as an interested stockholder;
an affiliate or associate who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock, also referred to as an interested stockholder; or
an affiliate of an interested stockholder.

These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding voting shares and two-thirds of the votes entitled to be cast by holders of our outstanding voting stock (other than voting stock held by the interested stockholder or

CWI 2015 10-K 19




by an affiliate or associate of the interested stockholder). These requirements could have the effect of inhibiting a change in control of us even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder. In addition, a person is not an interested stockholder if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

Our board of directors may determine that it is in our best interest to classify or reclassify any unissued stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock. However, the issuance of preferred stock must also be approved by a majority of independent directors not otherwise interested in the transaction, who will have access at our expense to our legal counsel or to independent legal counsel. In addition, the board of directors, with the approval of a majority of the entire board and without any action by the stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue. If our board of directors determines to take any such action, it will do so in accordance with the duties it owes to holders of our common stock.

Risks Related to REIT Structure

While we believe that we are properly organized as a REIT in accordance with applicable law, we cannot guarantee that the Internal Revenue Service will find that we have qualified as a REIT.

We believe that we are organized in conformity with the requirements for qualification as a REIT under the Internal Revenue Code beginning with our 2008 taxable year and that our current and anticipated investments and plan of operation will enable us to meet and continue to meet the requirements for qualification and taxation as a REIT. Investors should be aware, however, that the Internal Revenue Service or any court could take a position different from our own. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will qualify as a REIT for any particular year.

Furthermore, our qualification and taxation as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership, and other requirements on a continuing basis. Our ability to satisfy the quarterly asset tests under applicable Internal Revenue Code provisions and Treasury Regulations will depend in part upon our board of directors’ good faith analysis of the fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. While we believe that we will satisfy these tests, we cannot guarantee that this will be the case on a continuing basis.

If we fail to remain qualified as a REIT, we would be subject to federal income tax at corporate income tax rates and would not be able to deduct distributions to stockholders when computing our taxable income.

If, in any taxable year, we fail to qualify for taxation as a REIT and are not entitled to relief under the Internal Revenue Code, we will:

not be allowed a deduction for distributions to stockholders in computing our taxable income;
be subject to federal and state income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; and
be barred from qualifying as a REIT for the four taxable years following the year when we were disqualified.


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Any such corporate tax liability could be substantial and would reduce the amount of cash available for distributions to our stockholders, which in turn could have an adverse impact on the value of our common stock. This adverse impact could last for five or more years because, unless we are entitled to relief under certain statutory provisions, we will be taxed as a corporation beginning the year in which the failure occurs and for the following four years.

If we fail to qualify for taxation as a REIT, we may need to borrow funds or liquidate some investments to pay the additional tax liability. Were this to occur, funds available for investment would be reduced. REIT qualification involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations, as well as various factual determinations concerning matters and circumstances not entirely within our control. There are limited judicial or administrative interpretations of these provisions. Although we plan to continue to operate in a manner consistent with the REIT qualification rules, we cannot assure you that we will qualify in a given year or remain so qualified.

If we fail to make required distributions, we may be subject to federal corporate income tax.

We intend to declare regular quarterly distributions, the amount of which will be determined, and is subject to adjustment, by our board of directors. To continue to qualify and be taxed as a REIT, we will generally be required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and excluding net capital gain) each year to our stockholders. Generally, we expect to distribute all, or substantially all, of our REIT taxable income. If our cash available for distribution falls short of our estimates, we may be unable to maintain the proposed quarterly distributions that approximate our taxable income and we may fail to qualify for taxation as a REIT. In addition, our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes or the effect of nondeductible expenditures (e.g., capital expenditures, payments of compensation for which Section 162(m) of the Internal Revenue Code denies a deduction, the creation of reserves, or required debt service or amortization payments). To the extent we satisfy the 90% distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. We will also be subject to a 4.0% nondeductible excise tax if the actual amount that we pay out to our stockholders for a calendar year is less than a minimum amount specified under the Internal Revenue Code. In addition, in order to continue to qualify as a REIT, any C-corporation earnings and profits to which we succeed must be distributed as of the close of the taxable year in which we accumulate or acquire such C-corporation’s earnings and profits.

Because certain covenants in our debt instruments may limit our ability to make required REIT distributions, we could be subject to taxation.

Our existing debt instruments include, and our future debt instruments may include, covenants that limit our ability to make required REIT distributions. If the limits set forth in these covenants prevent us from satisfying our REIT distribution requirements, we could fail to qualify for federal income tax purposes as a REIT. If the limits set forth in these covenants do not jeopardize our qualification for taxation as a REIT, but prevent us from distributing 100% of our REIT taxable income, we will be subject to federal corporate income tax, and potentially a nondeductible excise tax, on the retained amounts.

Because we will be required to satisfy numerous requirements imposed upon REITs, we may be required to borrow funds, sell assets, or raise equity on terms that are not favorable to us.

In order to meet the REIT distribution requirements and maintain our qualification and taxation as a REIT, we may need to borrow funds, sell assets, or raise equity, even if the then-prevailing market conditions are not favorable for such transactions. If our cash flows are not sufficient to cover our REIT distribution requirements, it could adversely impact our ability to raise short- and long-term debt, sell assets, or offer equity securities in order to fund the distributions required to maintain our qualification and taxation as a REIT. Furthermore, the REIT distribution requirements may increase the financing we need to fund capital expenditures, future growth, and expansion initiatives, which would increase our total leverage.

In addition, if we fail to comply with certain asset ownership tests at the end of any calendar quarter, we must generally correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate otherwise attractive investments. These actions may reduce our income and amounts available for distribution to our stockholders.


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Because the REIT rules require us to satisfy certain rules on an ongoing basis, our flexibility or ability to pursue otherwise attractive opportunities may be limited.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders, and the ownership of our common stock. Compliance with these tests will require us to refrain from certain activities and may hinder our ability to make certain attractive investments, including the purchase of non-qualifying assets, the expansion of non-real estate activities, and investments in the businesses to be conducted by our TRSs, thereby limiting our opportunities and the flexibility to change our business strategy. Furthermore, acquisition opportunities in domestic and international markets may be adversely affected if we need or require target companies to comply with certain REIT requirements prior to closing on acquisitions.

To meet our annual distribution requirements, we may be required to distribute amounts that may otherwise be used for our operations, including amounts that may be invested in future acquisitions, capital expenditures, or debt repayment; and it is possible that we might be required to borrow funds, sell assets, or raise equity to fund these distributions, even if the then-prevailing market conditions are not favorable for such transactions.

Because the REIT provisions of the Internal Revenue Code limit our ability to hedge effectively, the cost of our hedging may increase, and we may incur tax liabilities.

The REIT provisions of the Internal Revenue Code limit our ability to hedge assets and liabilities that are not incurred to acquire or carry real estate. Generally, income from hedging transactions that have been properly identified for tax purposes (which we enter into to manage interest rate risk with respect to borrowings to acquire or carry real estate assets) and income from certain currency hedging transactions related to our non-U.S. operations, do not constitute “gross income” for purposes of the REIT gross income tests (such a hedging transaction is referred to as a “qualifying hedge”). In addition, for taxable years beginning after December 31, 2015, if we enter into a qualifying hedge, but dispose of the underlying property (or a portion thereof) or the underlying debt (or a portion thereof) is extinguished, we can enter into a hedge of the original qualifying hedge, and income from the subsequent hedge will also not constitute “gross income” for purposes of the REIT gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the REIT gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs could be subject to tax on income or gains resulting from such hedges or expose us to greater interest rate risks than we would otherwise want to bear. In addition, losses in any of our TRSs generally will not provide any tax benefit, except for being carried forward for use against future taxable income in the TRSs.

Because the REIT rules limit our ability to receive distributions from TRSs, our ability to fund distribution payments using cash generated through our TRSs may be limited.

Our ability to receive distributions from our TRSs is limited by the rules we must comply with in order to maintain our REIT status. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from real estate-related sources, which principally includes gross income from the leasing of our properties. Consequently, no more than 25% of our gross income may consist of dividend income from our TRSs and other non-qualifying income types. Thus, our ability to receive distributions from our TRSs is limited and may impact our ability to fund distributions to our stockholders using cash flows from our TRSs. Specifically, if our TRSs become highly profitable, we might be limited in our ability to receive net income from our TRSs in an amount required to fund distributions to our stockholders commensurate with that profitability.

We use TRSs, which may cause us to fail to qualify as a REIT.

To qualify as a REIT for federal income tax purposes, we hold our non-qualifying REIT assets and conduct our non-qualifying REIT income activities in or through one or more TRSs. The net income of our TRSs is not required to be distributed to us and income that is not distributed to us will generally not be subject to the REIT income distribution requirement. However, there may be limitations on our ability to accumulate earnings in our TRSs and the accumulation or reinvestment of significant earnings in our TRSs could result in adverse tax treatment. In particular, if the accumulation of cash in our TRSs causes the fair market value of our TRS interests and certain other non-qualifying assets to exceed 25% (or 20% for taxable years after December 31, 2017) of the fair market value of our assets, we would lose tax efficiency and could potentially fail to qualify as a REIT.


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Our ownership of TRSs will be subject to limitations that could prevent us from growing our investment management business and our transactions with our TRSs could cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on an arm’s-length basis.

Overall, (i) for taxable years beginning prior to January 1, 2018, no more than 25% of the value of a REIT’s gross assets, and (ii) for taxable years beginning after December 31, 2017, no more than 20% of the value of a REIT’s gross assets, may consist of interests in TRSs; compliance with this limitation could limit our ability to grow our investment management business. In addition, the Internal Revenue Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Internal Revenue Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We will monitor the value of investments in our TRSs in order to ensure compliance with TRS ownership limitations and will structure our transactions with our TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS ownership limitation or be able to avoid application of the 100% excise tax.

Our board of directors, in its sole discretion, determines our dividend rate on a quarterly basis; therefore, our cash distributions are not guaranteed and may fluctuate.

Our board of directors, in its sole discretion, will determine on a quarterly basis the amount of cash to be distributed to our stockholders based on a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity, applicable provisions of the Maryland General Corporation Law, and other factors (including debt covenant restrictions that may impose limitations on cash payments and future acquisitions and divestitures). Consequently, our distribution levels are not guaranteed and may fluctuate.

Because distributions payable by REITs generally do not qualify for reduced tax rates, the value of our common stock could be adversely affected.

Certain distributions payable by domestic or qualified foreign corporations to individuals, trusts, and estates in the United States are currently eligible for federal income tax at a maximum rate of 20%. Distributions payable by REITs, in contrast, are generally not eligible for this reduced rate, unless the distributions are attributable to dividends received by the REIT from other corporations that would otherwise be eligible for the reduced rate. This more favorable tax rate for regular corporate distributions could cause qualified investors to perceive investments in REITs to be less attractive than investments in the stock of corporations that pay distributions, which could adversely affect the value of REIT stocks, including our common stock.

Even if we continue to qualify as a REIT, certain of our business activities will be subject to corporate level income tax and foreign taxes, which will continue to reduce our cash flows, and we will have potential deferred and contingent tax liabilities.

Even if we qualify for taxation as a REIT, we may be subject to certain (i) federal, state, local, and foreign taxes on our income and assets, including alternative minimum taxes, (ii) taxes on any undistributed income and state, local, or foreign income, and (iii) franchise, property, and transfer taxes. In addition, we could be required to pay an excise or penalty tax under certain circumstances in order to utilize one or more relief provisions under the Internal Revenue Code to maintain qualification for taxation as a REIT, which could be significant in amount.

Any TRS assets and operations would continue to be subject, as applicable, to federal and state corporate income taxes and to foreign taxes in the jurisdictions in which those assets and operations are located. Any of these taxes would decrease our earnings and our cash available for distributions to stockholders.

We will also be subject to a federal corporate level tax at the highest regular corporate rate (35% for year 2016) on all or a portion of the gain recognized from a sale of assets formerly held by any C corporation that we acquire on a carry-over basis transaction occurring within a five-year period after we acquire such assets, to the extent the built-in gain based on the fair market value of those assets on the effective date of the REIT election is in excess of our then tax basis. The tax on subsequently sold assets will be based on the fair market value and built-in gain of those assets as of the beginning of our holding period. Gains from the sale of an asset occurring after the specified period will not be subject to this corporate level tax. We expect to have only a de minimis amount of assets subject to these corporate tax rules and do not expect to dispose of any significant assets subject to these corporate tax rules.


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Because dividends received by foreign stockholders are generally taxable, we may be required to withhold a portion of our distributions to such persons.

Ordinary dividends received by foreign stockholders that are not effectively connected with the conduct of a U.S. trade or business are generally subject to U.S. withholding tax at a rate of 30%, unless reduced by an applicable income tax treaty. Additional rules with respect to certain capital gain distributions will apply to foreign stockholders that own more than 10% of our common stock.

The ability of our board of directors to revoke our REIT qualification, without stockholder approval, may cause adverse consequences for our stockholders.

Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and we will be subject to federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on the total return to our stockholders.

Federal and state income tax laws governing REITs and related interpretations may change at any time, and any such legislative or other actions affecting REITs could have a negative effect on us and our stockholders.

Federal and state income tax laws governing REITs or the administrative interpretations of those laws may be amended at any time. Federal, state, and foreign tax laws are under constant review by persons involved in the legislative process, at the Internal Revenue Service and the U.S. Department of the Treasury, and at various state and foreign tax authorities. Changes to tax laws, regulations, or administrative interpretations, which may be applied retroactively, could adversely affect us or our stockholders. We cannot predict whether, when, in what forms, or with what effective dates, the tax laws, regulations, and administrative interpretations applicable to us or our stockholders may be changed. Accordingly, we cannot assure you that any such change will not significantly affect our ability to qualify for taxation as a REIT and/or the attendant tax consequences to us or our stockholders.

Item 1B. Unresolved Staff Comments.

None.


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Item 2. Properties.

Our principal corporate offices are located in the offices of the advisor at 50 Rockefeller Plaza, New York, New York 10020.

Our Hotels

The following table sets forth certain information for each of the hotels that we consolidate in our financial statements, or our Consolidated Hotels, as further discussed in Note 4, and the hotels that we record as equity investments in our financial statements, or our Unconsolidated Hotels, as further discussed in Note 5, at December 31, 2015:
Hotel
 
State
 
Number of
Rooms
 
% Owned
 
Acquisition
Date
 
Hotel Type
Consolidated Hotels
 
 
 
 
 
 
 
 
 
 
Hampton Inn Boston Braintree
 
MA
 
103
 
100%
 
May 31, 2012
 
Select-service
Hilton Garden Inn New Orleans French Quarter/CBD
 
LA
 
155
 
88%
 
June 8, 2012
 
Select-service
Lake Arrowhead Resort and Spa
 
CA
 
173
 
97%
 
July 9, 2012
 
Resort
Courtyard San Diego Mission Valley
 
CA
 
317
 
100%
 
December 6, 2012
 
Select-service
Hampton Inn Atlanta Downtown
 
GA
 
119
 
100%
 
February 14, 2013
 
Select-service
Hampton Inn Frisco Legacy Park
 
TX
 
105
 
100%
 
February 14, 2013
 
Select-service
Hampton Inn Memphis Beale Street
 
TN
 
144
 
100%
 
February 14, 2013
 
Select-service
Hampton Inn Birmingham Colonnade
 
AL
 
133
 
100%
 
February 14, 2013
 
Select-service
Hilton Garden Inn Baton Rouge Airport
 
LA
 
131
 
100%
 
February 14, 2013
 
Select-service
Courtyard Pittsburgh Shadyside
 
PA
 
132
 
100%
 
March 12, 2013
 
Select-service
Hutton Hotel Nashville
 
TN
 
247
 
100%
 
May 29, 2013
 
Full-service
Holiday Inn Manhattan 6th Avenue Chelsea
 
NY
 
226
 
100%
 
June 6, 2013
 
Full-service
Fairmont Sonoma Mission Inn & Spa
 
CA
 
226
 
75%
 
July 10, 2013
 
Resort
Marriott Raleigh City Center (a)
 
NC
 
400
 
100%
 
August 13, 2013
 
Full-service
Hawks Cay Resort (b)
 
FL
 
428
 
100%
 
October 23, 2013
 
Resort
Renaissance Chicago Downtown (a)
 
IL
 
560
 
100%
 
December 20, 2013
 
Full-service
Hyatt Place Austin Downtown
 
TX
 
296
 
100%
 
April 1, 2014
 
Select-service
Courtyard Times Square West (a)
 
NY
 
224
 
100%
 
May 27, 2014
 
Select-service
Sheraton Austin Hotel at the Capitol
 
TX
 
363
 
80%
 
May 28, 2014
 
Full-service
Marriott Boca Raton at Boca Center
 
FL
 
256
 
100%
 
June 12, 2014
 
Full-service
Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center
 
CO
 
302
 
100%
 
June 25, 2014
 
Select-service
Sanderling Resort
 
NC
 
125
 
100%
 
October 28, 2014
 
Resort
Staybridge Suites Savannah Historic District
 
GA
 
104
 
100%
 
October 30, 2014
 
Select-service
Marriott Kansas City Country Club Plaza
 
MO
 
295
 
100%
 
November 18, 2014
 
Full-service
Westin Minneapolis
 
MN
 
214
 
100%
 
February 12, 2015
 
Full-service
Westin Pasadena
 
CA
 
350
 
100%
 
March 19, 2015
 
Full-service
Hilton Garden Inn/Homewood Suites Atlanta
Midtown
 
GA
 
228
 
100%
 
April 29, 2015
 
Select-service
Ritz-Carlton Key Biscayne (c)
 
FL
 
480
 
47%
 
May 29, 2015
 
Resort
Ritz-Carlton Fort Lauderdale (d)
 
FL
 
198
 
70%
 
June 30, 2015
 
Resort
Le Méridien Dallas, The Stoneleigh
 
TX
 
176
 
100%
 
November 20, 2015
 
Full-service
 
 
 
 
7,210
 
 
 
 
 
 
Unconsolidated Hotels
 
 
 
 
 
 
 
 
 
 
Hyatt New Orleans French Quarter
 
LA
 
254
 
80%
 
September 6, 2011
 
Full-service
Westin Atlanta Perimeter North
 
GA
 
372
 
57%
 
October 3, 2012
 
Full-service
Marriott Sawgrass Golf Resort & Spa (e)
 
FL
 
511
 
50%
 
October 3, 2014
 
Resort
Ritz-Carlton Philadelphia
 
PA
 
299
 
60%
 
May 15, 2015
 
Full-service
 
 
 
 
1,436
 
 
 
 
 
 
___________
(a)
These hotels are subject to long-term ground leases (Note 10).

CWI 2015 10-K 25




(b)
Includes 251 two-, three- and four-bedroom privately-owned villas that participate in the resort residential management program at this hotel, or the Villa Rental Program (Note 6).
(c)
CWI 2 owns an interest of approximately 19% in this venture. Also, the number of rooms presented includes 178 condo-hotel units that participate in the villa/condo rental program.
(d)
Includes 32 condo-hotel units that participate in the villa/condo rental program.
(e)
Represents our remaining 50% interest in the Marriott Sawgrass Golf Resort & Spa venture after selling our 50% controlling interest to CWI 2 (Note 4).

Our Hotel Management and Franchise Agreements

Hotel Management Agreements

All of our hotels are managed by independent hotel operators pursuant to management or operating agreements, with some also subject to separate license agreements addressing matters pertaining to operation under the designated brand. Under these agreements, the managers generally have sole responsibility and exclusive authority for all activities necessary for the day-to-day operation of the hotels, including establishing room rates; securing and processing reservations; procuring inventories, supplies and services; providing periodic inspection and consultation visits to the hotels by the managers’ technical and operational experts; and promoting and publicizing the hotels. The managers provide all managerial and other employees for the hotels, review the operation and maintenance of the hotels; prepare reports, budgets and projections; and provide other administrative and accounting support services to the hotels. These support services include planning and policy services, divisional financial services, product planning and development, employee staffing and training, corporate executive management and certain in-house legal services. We have certain approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.

The initial terms of our management and operating agreements typically range from three to 25 years, with one or more renewal terms at the option of the manager. The management agreements condition the manager’s right to exercise options for specified renewal terms upon the satisfaction of specified economic performance criteria, or allow us to terminate at will with 30 to 60 days’ notice. The manager typically receives compensation in the form of a base management fee, which is calculated as a percentage (generally ranging from 1-3%) of annual gross revenues, and an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap, or (ii) after the owner has received a priority return on its investment in the hotel.

The management agreements relating to four of our Consolidated Hotels contain the right and license to operate the hotels under specified brands. No separate franchise agreements exist and no separate franchise fee is required for these hotels. These hotels are managed by subsidiaries of Marriott, under the Ritz-Carlton and Renaissance brands, and Fairmont, under the Fairmont brand.

Franchise Agreements

23 of our Consolidated Hotels operate under franchise or license agreements with national brands that are separate from our management agreements.

Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3% to 6% of room revenues. In addition, we generally pay 2% to 4% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels.

Our typical franchise agreement provides for a term of 10 to 25 years. The agreements provide no renewal or extension rights and are not assignable. If we breach one of these agreements, in addition to losing the right to use the brand name for the applicable hotel, we may be liable, under certain circumstances, for liquidated damages equal to the fees paid to the franchisor with respect to that hotel during the three immediately preceding years.


CWI 2015 10-K 26




Item 3. Legal Proceedings.

At December 31, 2015, we were not involved in any material litigation.

Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations.

Item 4. Mine Safety Disclosures.

Not applicable.


CWI 2015 10-K 27




PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Unlisted Shares and Distributions

There is no active public trading market for our shares. At February 29, 2016, there were 33,363 holders of record of our shares of common stock.

We are required to distribute annually at least 90% of our distributable REIT net taxable income to maintain our status as a REIT. Quarterly distributions paid by us for the past two years are as follows:
 
Years Ended December 31,
 
2015
 
2014
First quarter
$
0.1375

 
$
0.1375

Second quarter
0.1375

 
0.1375

Third quarter 
0.1425

 
0.1375

Fourth quarter
0.1425

 
0.1375

 
$
0.5600

 
$
0.5500


Issuer Purchases of Equity Securities

The following table provides information with respect to repurchases of our common stock during the three months ended December 31, 2015:
2015 Period
 
Total number of shares purchased (a)
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Maximum number (or approximate dollar value)
of shares that may yet be purchased under the plans or programs
October
 

 

 
N/A
 
N/A
November
 

 

 
N/A
 
N/A
December
 
180,365

 
$
9.81

 
N/A
 
N/A
Total
 
180,365

 
 
 
 
 
 
___________
(a)
Represents shares of our common stock repurchased under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders who have held their shares for at least one year from the date of their issuance, subject to certain exceptions, conditions and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. We generally receive fees in connection with share redemptions.

Securities Authorized for Issuance Under Equity Compensation Plans

This information will be contained in our definitive proxy statement for the 2016 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated by reference.


CWI 2015 10-K 28




Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the consolidated financial statements and related notes in Item 8 (in thousands, except per share amounts and statistical data):
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Operating Data (a)
 
 
 
 
 
 
 
 
 
Total revenues
$
542,103

 
$
348,079

 
$
122,223

 
$
13,036

 
$

Acquisition-related expenses
19,868

 
25,899

 
26,941

 
5,549

 
498

Net loss
(30,640
)
 
(33,720
)
 
(30,399
)
 
(3,842
)
 
(712
)
Loss (income) attributable to noncontrolling interests
4,915

 
988

 
(1,507
)
 
1,119

 

Net loss attributable to CWI stockholders
(25,725
)
 
(32,732
)
 
(31,906
)
 
(2,723
)
 
(712
)
 
 
 
 
 
 
 
 
 
 
Basic and diluted loss per share:
 
 
 
 
 
 
 
 
 
Net loss attributable to CWI stockholders
(0.20
)
 
(0.38
)
 
(0.66
)
 
(0.15
)
 
(0.06
)
 
 
 
 
 
 
 
 
 
 
Distributions declared per share (b)
0.5600

 
0.5500

 
0.5875

 
0.5500

 
0.4000

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
$
2,460,346

 
$
2,002,255

 
$
1,083,368

 
$
229,758

 
$
41,775

Net investments in real estate (c)
2,173,203

 
1,522,474

 
868,200

 
186,521

 
33,466

Non-recourse debt
1,359,422

 
969,594

 
563,058

 
88,762

 

Senior Credit Facility
20,000

 

 

 

 

Due to related parties and affiliates
3,104

 
2,059

 
5,225

 
847

 
456

Other Information
 
 
 

 
 

 
 

 
 
Net cash provided by (used in) operating activities
$
61,269

 
$
33,536

 
$
(1,174
)
 
$
(2,558
)
 
$
(1,091
)
Cash distributions paid
69,481

 
40,973

 
14,193

 
3,110

 
606

Scheduled payments of mortgage principal (d)
29,689

 
2,400

 
811

 
2,000

 

Supplemental Financial Measures
 
 
 
 
 
 
 
 
 
FFO attributable to CWI stockholders
$
47,624

 
$
10,498

 
$
(13,410
)
 
$
(1,254
)
 
$
(712
)
MFFO attributable to CWI stockholders
67,082

 
39,335

 
14,170

 
(286
)
 
277

Consolidated Hotel Operating Statistics (e)
 
 
 
 
 
 
 
 
 
Occupancy
76.3
%
 
75.6
%
 
72.2
%
 
66.1
%
 
N/A

ADR
$
204.79

 
$
193.91

 
$
166.72

 
$
144.95

 
N/A

RevPAR
$
156.24

 
$
146.53

 
$
120.44

 
$
95.78

 
N/A

___________
(a)
We acquired our first Consolidated Hotel in May 2012.
(b)
For the first, second and third quarters of 2013 and the second, third and fourth quarters of 2012, $0.025 of each distribution was payable in shares of our common stock.
(c)
Net investments in real estate consist of Net investments in hotels and Equity investments in real estate.
(d)
Represents scheduled payments of mortgage principal and prepayments of mortgage principal. Prepayments of mortgage principal in connection with refinancings were $25.5 million for the year ended December 31, 2015.
(e)
Represents statistical data for our Consolidated Hotels during our ownership period.


CWI 2015 10-K 29




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results.

The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Report and the matters described under Item 1A. Risk Factors.

Business Overview

We are a publicly-owned, non-listed REIT formed for the purpose of acquiring, owning, disposing of and, through our advisor, managing and seeking to enhance the value of interests in lodging and lodging-related properties. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. We conduct substantially all of our investment activities and own all of our assets through the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, which is owned indirectly by WPC and Watermark Capital Partners, holds a special general partner interest of 0.015% in the Operating Partnership.
We raised a total of $1.2 billion through our initial public offering and follow-on offering, exclusive of DRIP. We have invested our offering proceeds in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality, acquisition-related expenses and by hotel renovations. We often invest in hotels that then undergo significant renovations. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations.

Significant Developments

Net Asset Value

Our advisor determined our NAV as of December 31, 2015 to be $10.66. Our NAV was calculated by our advisor relying in part on appraisals of the fair market value of our real estate portfolio at December 31, 2015 provided by PKF Consulting USA, LLC and estimates of the fair market value of our mortgage debt at the same date provided by Robert A. Stanger & Co., Inc., each of which is an independent consultant and service provider to the real estate industry. The net amount was then adjusted for estimated disposition fees payable to our advisor and our other net assets and liabilities at the same date. For additional information on our calculation of our NAV at December 31, 2015, please see our Current Report on Form 8-K dated March 15, 2016.

2015 Acquisitions

During the year ended December 31, 2015, we acquired (i) ownership interests in six Consolidated Hotels, with real estate and other hotel assets, net of assumed liabilities and contributions from noncontrolling interests, totaling $493.7 million (Note 4) and (ii) an ownership interest in an Unconsolidated Hotel for $38.3 million (Note 5).

Financings

In connection with our 2015 Acquisitions (Note 4), we obtained new non-recourse mortgage financing totaling $284.8 million, with a weighted-average annual interest rate of 3.9% and term of 5.8 years (Note 9).

In connection with our acquisition of Ritz-Carlton Key Biscayne in May 2015, we assumed a $164.0 million non-recourse mortgage loan with an annual interest rate of 6.09% and a maturity date of June 2017. At the time of acquisition, we recorded a fair market value adjustment that resulted in a premium of $7.5 million, which will be amortized over the remaining term of the loan.


CWI 2015 10-K 30




During 2015, we also refinanced two non-recourse mortgage loans on our consolidated hotels totaling $25.5 million with new non-recourse mortgage loans totaling $27.0 million, with a weighted-average interest rate of 2.8% and term of three years, and recognized a net gain on extinguishment of debt of $1.8 million. We also drew down $7.0 million on an existing mortgage loan for renovations at the Marriott Boca Raton at Boca Center.

Senior Credit Facility

On December 4, 2015, we, as guarantor, entered into a Credit Agreement with our Operating Partnership as borrower and Wells Fargo Bank, National Association, as administrative agent. The Credit Agreement provides for a $50.0 million senior unsecured revolving credit facility, or the Senior Credit Facility, inclusive of a $5.0 million letter of credit subfacility. The Senior Credit Facility is scheduled to mature on December 4, 2017 and bears interest at London Interbank Offered Rate plus 2.75%. The maturity date may be extended by us for one 12-month period, subject to the satisfaction of certain conditions, and an extension fee of 0.25%. At December 31, 2015, the outstanding balance under the Senior Credit Facility was $20.0 million (Note 9).

Disposition

On April 1, 2015, we sold a 50% controlling interest in the Marriott Sawgrass Golf Resort & Spa, which we acquired in October 2014, to CWI 2 for a contractual sales price of $37.2 million. Our remaining 50% interest in the hotel is accounted for as an equity method investment (Note 5). We recognized other income of $2.4 million in our consolidated financial statements resulting primarily from the reimbursement we received from CWI 2 of 50% of the acquisition costs we incurred on our acquisition of the hotel in October 2014, which were expensed in prior periods.

New Tax Legislation

The Protecting Americans from Tax Hikes Act of 2015, or the PATH Act, was enacted on December 18, 2015. The PATH Act makes significant changes to the Internal Revenue Code, and contains various provisions that affect us, including several pertaining to REIT qualification and taxation, as summarized below:
For taxable years beginning after December 31, 2017, the PATH Act reduces the limit for which the value of our assets may consist of stock or securities of one or more TRSs to 20% from 25%.
For distributions made in taxable years beginning after December 31, 2014, the preferential dividend rules no longer apply to publicly-offered REITs. A dividend is preferential unless it is distributed pro rata, with no preference to any share of stock compared to other shares of the same class of stock;
Effective for taxable years beginning after December 31, 2015, the PATH Act conforms tax deductibility with deductibility for computing “earnings and profits.” A REIT’s current earnings and profits are not reduced by any amount unless the REIT can deduct such amount from its current year’s taxable income.
Effective for taxable years beginning after December 31, 2015, the PATH Act expands the safe harbor that allows a REIT to sell property with an aggregate tax basis or fair market value up to 20% of its aggregate tax basis, or fair market value, as compared to 10% previously. REITs may be subject to a prohibited transaction tax if the REIT engages in frequent property sales. A safe-harbor applies if, among other requirements, the tax basis or fair market value of the property sold by the REIT in any given year does not exceed 10% of the aggregate tax basis, or aggregate fair market values of all of the REIT assets as of the beginning of the year.
The PATH Act extends the deductibility of “bonus depreciation” until December 31, 2019. The tax deduction for bonus depreciation pertains to all businesses, which are permitted to immediately deduct 50 percent of certain investment costs.
Effective for taxable years beginning after December 31, 2015, the PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements, which had previously ended on December 31, 2014. Without the qualification, the tax deductible recovery period for leasehold improvements is up to 39 years; and
For tax years beginning after December 31, 2015, the PATH Act expands the treatment of REIT hedges to include income from hedges of previously acquired hedges that a REIT entered into to manage risk associated with liabilities or properties that have been extinguished or disposed of.


CWI 2015 10-K 31




Financial and Operating Highlights

(Dollars in thousands, except ADR and RevPAR)
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Hotel revenues
 
$
542,103

 
$
348,079

 
$
122,223

Acquisition-related expenses
 
19,868

 
25,899

 
26,941

Net loss attributable to CWI stockholders
 
(25,725
)
 
(32,732
)
 
(31,906
)
 
 
 
 
 
 
 
Cash distributions paid
 
69,481

 
40,973

 
14,193

 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
61,269

 
33,536

 
(1,174
)
Net cash used in investing activities
 
(652,544
)
 
(716,561
)
 
(765,477
)
Net cash provided by financing activities
 
343,576

 
904,463

 
845,295

 
 
 
 
 
 
 
Supplemental financial measures: (a)
 
 
 
 
 
 
FFO attributable to CWI stockholders
 
47,624

 
10,498

 
(13,410
)
MFFO attributable to CWI stockholders
 
67,082

 
39,335

 
14,170

 
 
 
 
 
 
 
Consolidated Hotel Operating Statistics
 
 
 
 
 
 
Occupancy
 
76.3
%
 
75.6
%
 
72.2
%
ADR
 
$
204.79

 
$
193.91

 
$
166.72

RevPAR
 
156.24

 
146.53

 
120.44

___________
(a)
We consider the performance metrics listed above, including FFO and MFFO, which are supplemental measures that are not defined by GAAP, or non-GAAP measures, to be important measures in the evaluation of our results of operations, liquidity and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

The comparison of our results period over period is influenced by both the number and size of the hotels consolidated in each of the respective periods. At December 31, 2015, we owned 30 Consolidated Hotels, which reflects six hotels that were acquired during the year ended December 31, 2015 and the sale of our 50% controlling interest in the Marriott Sawgrass Golf Resort & Spa to CWI 2 (Note 4), compared to 25 Consolidated Hotels at December 31, 2014 and 16 Consolidated Hotels at December 31, 2013.

Increases in revenue, net cash provided by operating activities, FFO and MFFO for the year ended December 31, 2015 as compared to 2014 were primarily driven by our 2014 and 2015 Acquisitions.

The decrease in net loss attributable to CWI stockholders for the year ended December 31, 2015 as compared to 2014 was driven primarily by (i) the significant increase in revenue as a result of our 2014 and 2015 Acquisitions, described below, (ii) a decrease in acquisition-related expenses, (iii) other income of $2.4 million recognized in connection with the sale of the 50% controlling interest in the Marriott Sawgrass Golf Resort & Spa to CWI 2 (Note 4) and (iv) the net gain on extinguishment of debt of $1.8 million recognized in connection with the refinancings of two mortgages (Note 9) during 2015.

Current Trends

Lodging Fundamentals

The lodging industry continues to be in a period of expansion that we believe provides growth-oriented opportunities. According to data from Smith Travel Research, the U.S. hotel industry reported year-over-year RevPAR increases for 2014 and 2015 of 8.3% and 6.3%, respectively. There are several factors contributing to these strong operating fundamentals. One of the

CWI 2015 10-K 32




factors supporting this growth has been the lack of new hotel construction, which is bolstering the demand for existing supply. Supply growth over the last six years has been below the long-term average, and according to PwC Hospitality Directions US January 2016, is forecast to remain below the long-term average in 2016 as well. In 2015, PwC Hospitality Directions US January 2016 noted supply grew at 1.1%, whereas demand grew at 2.9%. Another factor is that the lodging industry continues to benefit from an overall increase in travel. According to the World Tourism Organization, international tourist arrivals reached 1.2 billion in 2015, an increase of 4.4% vs. prior year. The World Tourism Organization indicated 2015 marked the sixth consecutive year of above average growth since the economic crisis in 2009. We remain encouraged by the improvement in lodging fundamentals and believe that we continue to operate in an expansionary phase of the economic cycle. We believe that the combination of economic expansion and improving lodging industry fundamentals has created an environment with opportunities to invest new equity capital at attractive risk adjusted returns.



CWI 2015 10-K 33




Portfolio Overview

Summarized Acquisition Data

The following table sets forth acquisition data for our Consolidated and Unconsolidated Hotels and therefore excludes subsequent improvements and capitalized costs. Amounts for our initial investment for our Consolidated Hotels represent the fair value of net assets acquired less the fair value of noncontrolling interests, exclusive of acquisition expenses and the fair value of any debt assumed, at time of acquisition. Amounts for our initial investment for our Unconsolidated Hotels represent purchase price plus capitalized costs, inclusive of fees paid to our advisor, at the time of acquisition (dollars in thousands):
Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Our Initial
Investment
 
Acquisition Date
 
Hotel Type
 
Renovation Status at December 31, 2015
Consolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Inn Boston Braintree
 
MA
 
103

 
100
%
 
$
12,500

 
5/31/2012
 
Select-service
 
Completed
Hilton Garden Inn New Orleans French Quarter/CBD
 
LA
 
155

 
88
%
 
16,176

 
6/8/2012
 
Select-service
 
Completed
Lake Arrowhead Resort and Spa
 
CA
 
173

 
97
%
 
24,039

 
7/9/2012
 
Resort
 
Completed
Courtyard San Diego Mission Valley
 
CA
 
317

 
100
%
 
85,000

 
12/6/2012
 
Select-service
 
Completed
2013 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Inn Atlanta Downtown
 
GA
 
119

 
100
%
 
18,000

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Frisco Legacy Park
 
TX
 
105

 
100
%
 
16,100

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Memphis Beale Street
 
TN
 
144

 
100
%
 
30,000

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Birmingham Colonnade
 
AL
 
133

 
100
%
 
15,500

 
2/14/2013
 
Select-service
 
Completed
Hilton Garden Inn Baton Rouge Airport
 
LA
 
131

 
100
%
 
15,000

 
2/14/2013
 
Select-service
 
Completed
Courtyard Pittsburgh Shadyside
 
PA
 
132

 
100
%
 
29,900

 
3/12/2013
 
Select-service
 
Completed
Hutton Hotel Nashville
 
TN
 
247

 
100
%
 
73,600

 
5/29/2013
 
Full-service
 
None planned
Holiday Inn Manhattan 6th Avenue Chelsea
 
NY
 
226

 
100
%
 
113,000

 
6/6/2013
 
Full-service
 
Completed
Fairmont Sonoma Mission Inn & Spa
 
CA
 
226

 
75
%
 
76,647

 
7/10/2013
 
Resort
 
Completed
Marriott Raleigh City Center
 
NC
 
400

 
100
%
 
82,193

 
8/13/2013
 
Full-service
 
Completed
Hawks Cay Resort (a)
 
FL
 
428

 
100
%
 
131,301

 
10/23/2013
 
Resort
 
In progress
Renaissance Chicago Downtown
 
IL
 
560

 
100
%
 
134,939

 
12/20/2013
 
Full-service
 
In progress
2014 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt Place Austin Downtown
 
TX
 
296

 
100
%
 
86,673

 
4/1/2014
 
Select-service
 
None planned
Courtyard Times Square West
 
NY
 
224

 
100
%
 
87,443

 
5/27/2014
 
Select-service
 
None planned
Sheraton Austin Hotel at the Capitol
 
TX
 
363

 
80
%
 
90,220

 
5/28/2014
 
Full-service
 
In progress
Marriott Boca Raton at Boca Center
 
FL
 
256

 
100
%
 
61,794

 
6/12/2014
 
Full-service
 
Completed
Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center
 
CO
 
302

 
100
%
 
81,262

 
6/25/2014
 
Select-service
 
None planned
Sanderling Resort (b)
 
NC
 
125

 
100
%
 
37,052

 
10/28/2014
 
Resort
 
Completed/
In progress
Staybridge Suites Savannah Historic District
 
GA
 
104

 
100
%
 
22,922

 
10/30/2014
 
Select-service
 
Planned future
Marriott Kansas City Country Club Plaza
 
MO
 
295

 
100
%
 
56,644

 
11/18/2014
 
Full-service
 
Planned future
2015 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Westin Minneapolis
 
MN
 
214

 
100
%
 
66,176

 
2/12/2015
 
Full-service
 
Planned future
Westin Pasadena
 
CA
 
350

 
100
%
 
141,738

 
3/19/2015
 
Full-service
 
Planned future
Hilton Garden Inn/Homewood Suites Atlanta Midtown
 
GA
 
228

 
100
%
 
58,492

 
4/29/2015
 
Select-service
 
None planned
Ritz-Carlton Key Biscayne (c)
 
FL
 
480

 
47
%
 
68,925

 
5/29/2015
 
Resort
 
Planned future
Ritz-Carlton Fort Lauderdale (d)
 
FL
 
198

 
70
%
 
89,642

 
6/30/2015
 
Resort
 
Completed
Le Méridien Dallas, The Stoneleigh
 
TX
 
176

 
100
%
 
68,714

 
11/20/2015
 
Full-service
 
In progress
 
 
 
 
7,210

 
 
 
$
1,891,592

 
 
 
 
 
 
Unconsolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt New Orleans French Quarter
 
LA
 
254

 
80
%
 
$
13,000

 
9/6/2011
 
Full-service
 
Completed
Westin Atlanta Perimeter North
 
GA
 
372

 
57
%
 
13,170

 
10/3/2012
 
Full-service
 
Completed
Marriott Sawgrass Golf Resort & Spa (e)
 
FL
 
511

 
50
%
 
33,758

 
10/3/2014
 
Resort
 
In progress
Ritz-Carlton Philadelphia
 
PA
 
299

 
60
%
 
38,327

 
5/15/2015
 
Full-service
 
In progress
 
 
 
 
1,436

 
 
 
$
98,255

 
 
 
 
 
 
___________
(a)
Includes 251 privately-owned villas that participate in the villa/condo rental program.

CWI 2015 10-K 34




(b)
The renovations at the Sanderling Resort consist of two phases. The first phase was completed during the second quarter of 2015 and the second phase is currently expected to be completed during the first quarter of 2016 (Note 10).
(c)
CWI 2 owns an interest of approximately 19% in this venture. Also, the number of rooms presented includes 178 condo-hotel units that participate in the villa/condo rental program.
(d)
Includes 32 condo-hotel units that participate in the villa/condo rental program.
(e)
Our initial investment represents our remaining 50% interest in the Marriott Sawgrass Golf Resort & Spa venture after selling our 50% controlling interest to CWI 2 (Note 4).

Results of Operations

We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value of our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and impairment charges.

In addition, we use other information that may not be financial in nature, including statistical information to evaluate the operating performance of our business, including occupancy rate, ADR and RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors.

As illustrated by the acquisition dates listed in the table above in “Portfolio Overview,” our results are not comparable year over year because of our continued investment activity during 2015, 2014 and 2013. Additionally, the comparability of our results year over year are significantly impacted by acquisition-related costs and fees, which are material one-time costs that are expensed as incurred, as well as the timing of renovation activity.


CWI 2015 10-K 35




The following table presents our comparative results of operations (in thousands):
 
 
Years Ended December 31,
 
 
2015
 
2014
 
Change
 
2014
 
2013
 
Change
Hotel Revenues
 
$
542,103

 
$
348,079

 
$
194,024

 
$
348,079

 
$
122,223

 
$
225,856

 
 
 
 
 
 
 
 
 
 
 
 
 
Hotel Expenses
 
467,666

 
295,790

 
171,876

 
295,790

 
101,456

 
194,334

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related expenses
 
19,868

 
25,899

 
(6,031
)
 
25,899

 
26,941

 
(1,042
)
Asset management fees to affiliate and other
 
12,583

 
7,329

 
5,254

 
7,329

 
2,847

 
4,482

Corporate general and administrative expenses
 
11,906

 
11,845

 
61

 
11,845

 
6,147

 
5,698

Impairment charge
 
6,143

 

 
6,143

 

 

 

 
 
50,500

 
45,073

 
5,427

 
45,073

 
35,935

 
9,138

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
 
23,937

 
7,216

 
16,721

 
7,216

 
(15,168
)
 
22,384

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income and (Expenses)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(54,514
)
 
(36,405
)
 
(18,109
)
 
(36,405
)
 
(14,020
)
 
(22,385
)
Equity in earnings (losses) of equity method investments in real estate
 
2,418

 
(731
)
 
3,149

 
(731
)
 
(51
)
 
(680
)
Other income
 
2,446

 
46

 
2,400

 
46

 
6

 
40

Net gain on extinguishment of debt (Note 9)
 
1,840

 

 
1,840

 

 

 

 
 
(47,810
)
 
(37,090
)
 
(10,720
)
 
(37,090
)
 
(14,065
)
 
(23,025
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from Operations Before Income Taxes
 
(23,873
)
 
(29,874
)
 
6,001

 
(29,874
)
 
(29,233
)
 
(641
)
Provision for income taxes
 
(6,767
)
 
(3,846
)
 
(2,921
)
 
(3,846
)
 
(1,166
)
 
(2,680
)
Net Loss
 
(30,640
)
 
(33,720
)
 
3,080

 
(33,720
)
 
(30,399
)
 
(3,321
)
Loss (income) attributable to noncontrolling interests
 
4,915

 
988

 
3,927

 
988

 
(1,507
)
 
2,495

Net Loss Attributable to CWI Stockholders
 
$
(25,725
)
 
$
(32,732
)
 
$
7,007

 
$
(32,732
)
 
$
(31,906
)
 
$
(826
)
MFFO Attributable to CWI Stockholders
 
$
67,082

 
$
39,335

 
$
27,747

 
$
39,335

 
$
14,170

 
$
25,165



CWI 2015 10-K 36




Our Same Store Hotels are comprised of our 2012 Acquisitions and our Recently Acquired Hotels are comprised of our 2013 Acquisitions, 2014 Acquisitions and 2015 Acquisitions as listed above, excluding the Marriott Sawgrass Golf Resort & Spa, which represents our Property Sold.

The following table sets forth the average occupancy rate, ADR and RevPAR of our Consolidated Hotels for the years ended December 31, 2015, 2014 and 2013. In the year of acquisition, this information represents data from the hotels respective acquisition date through period end.
 
 
Years Ended December 31,
Same Store Hotels
 
2015
 
2014
 
2013
Occupancy Rate
 
75.4
%
 
75.9
%
 
70.2
%
ADR
 
$
158.09

 
$
147.87

 
$
141.72

RevPAR
 
$
119.20

 
$
112.29

 
$
99.45

 
 
Years Ended December 31,
Recently Acquired Hotels
 
2015
 
2014
 
2013
Occupancy Rate
 
76.5
%
 
76.0
%
 
73.4
%
ADR
 
$
211.46

 
$
204.23

 
$
180.47

RevPAR
 
$
161.84

 
$
155.13

 
$
132.52

 
 
Years Ended December 31,
Property Sold (a)
 
2015
 
2014
 
2013
Occupancy Rate
 
70.4
%
 
61.6
%
 
%
ADR
 
$
169.32

 
$
148.85

 
$

RevPAR
 
$
119.21

 
$
91.70

 
$

___________
(a)
We sold a 50% controlling interest in the Marriott Sawgrass Golf Resort & Spa on April 1, 2015.

Hotel Revenues

2015 vs. 2014 — For the year ended December 31, 2015 as compared to 2014, hotel revenues increased by $194.0 million. Same Store Hotel revenue increased by $1.8 million. Revenue from our Recently Acquired Hotels increased by $189.0 million for the year ended December 31, 2015 as compared to 2014. Our 2013 Acquisitions contributed additional revenue of $8.7 million. The increase in revenue from our 2013 Acquisitions was primarily contributed by Hawks Cay Resort and the Marriott Raleigh City Center as a result of the completion of planned renovation projects that were in progress during the prior year period, as well as revenue contributed by Fairmont Sonoma Resort & Spa resulting from an increase in group business occupancy and food and beverage revenue. The revenue was partially offset by a decrease in revenue at the Renaissance Chicago Downtown as a result of renovations during the year ended December 31, 2015. Our 2014 Acquisitions contributed additional revenue of $73.2 million during the year ended December 31, 2015 as compared to 2014, primarily representing the impact of a full period of revenue during 2015 as compared to a partial period in 2014. Our 2015 Acquisitions contributed revenue of $107.1 million during the year ended December 31, 2015. During the years ended December 31, 2015 and 2014, Marriott Sawgrass Golf Resort & Spa contributed revenue of $13.3 million and $10.1 million, respectively. We acquired this hotel on October 3, 2014 and subsequently sold a 50% controlling interest in this hotel to CWI 2 on April 1, 2015.

2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, hotel revenues increased by $225.9 million. Same Store Hotel revenue increased by $4.7 million. Revenue from our Recently Acquired Hotels increased by $211.1 million for the year ended December 31, 2014 as compared to 2013. Our 2013 Acquisitions contributed additional revenue of $150.0 million during the year ended December 31, 2014 as compared to 2013, primarily representing the impact of a full period of revenue during 2014 as compared to a partial period in 2013. Our 2014 Acquisitions contributed revenue of $61.1 million during the year ended December 31, 2014. The Marriott Sawgrass Golf Resort & Spa contributed revenue of $10.1 million for the year ended December 31, 2014. We acquired this hotel on October 3, 2014; therefore, there was no related prior year revenue for the year ended December 31, 2013.


CWI 2015 10-K 37




Hotel Expenses

Certain prior period amounts have been reclassified to conform to the current period presentation.  Additionally, on January 1, 2015, we adopted the Uniform System of Accounts for the Lodging Industry, Eleventh Revised Edition, which mandates a prospective reclassification of certain hotel revenue and hotel expense items within the income statement. During the year ended December 31, 2014, we included rent paid to third-party condominium unit owners related to the Hawks Cay Resort totaling $9.2 million in Room expense in our consolidated financial statements. Beginning in 2015, these expenses, which totaled $9.8 million for the year ended December 31, 2015, were included in Property taxes, insurance, rent and other. During the year ended December 31, 2015, rent paid to third-party condominium owners related to the Ritz-Carlton Key Biscayne and Ritz-Carlton Fort Lauderdale, both acquired during the second quarter of 2015, totaled $4.3 million, which was also included in Property taxes, insurance, rent and other.

2015 vs. 2014 —For the year ended December 31, 2015 as compared to 2014, hotel expenses increased by $171.9 million. Same Store Hotel operating expenses increased by $0.5 million. Aggregate hotel operating expenses for our Recently Acquired Hotels increased by $170.4 million for the year ended December 31, 2015 as compared to 2014. Expenses related to our 2013 Acquisitions increased by $14.4 million, consistent with an increase in revenue as discussed above. Expenses related to our 2014 Acquisitions increased by $58.4 million, which primarily represented the impact of a full period of expenses during 2015 as compared to a partial period in 2014. Expenses of $97.6 million were incurred by our 2015 Acquisitions during the year ended December 31, 2015. During the years ended December 31, 2015 and 2014, Marriott Sawgrass Golf Resort and Spa incurred operating expenses of $10.7 million and $9.7 million, respectively. We acquired this hotel on October 3, 2014 and subsequently sold a 50% controlling interest in this hotel to CWI 2 on April 1, 2015.

2014 vs. 2013 — For the years ended December 31, 2014 as compared to 2013, hotel expenses increased by $194.3 million. Same store operating expenses increased by $3.5 million. Aggregate hotel operating expenses for our Recently Acquired Hotels increased by $181.1 million. Expenses from our 2013 Acquisitions increased by $133.1 million in 2014 as compared to 2013, resulting primarily from the hotels incurring a full year of expenses in 2014 as compared to a partial year of expenses in 2013. Expenses of $48.0 million were incurred by our 2014 Acquisitions for the year ended December 31, 2014. The Marriott Sawgrass Golf Resort and Spa incurred expenses of $9.7 million for the year ended December 31, 2014. We acquired this hotel on October 3, 2014; therefore, there were no related prior year expenses for the year ended December 31, 2013.

Acquisition-Related Expenses

We expense acquisition-related costs and fees associated with acquisitions of our Consolidated Hotels that are accounted for as business combinations as incurred.

2015 vs. 2014 — For the year ended December 31, 2015 as compared to 2014, acquisition-related expenses decreased by $6.0 million, which reflects a reduction in investment volume for 2015 as compared to 2014.

2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, acquisition-related expenses decreased by $1.0 million, which reflects a slight reduction in investment volume for 2014 as compared to 2013.

Asset Management Fees to Affiliate and Other Expenses

Asset management fees to affiliate and other expenses primarily represent fees paid to our advisor. We pay our advisor an annual asset management fee equal to 0.50% of the aggregate Average Market Value of our Investments, as defined in our advisory agreement with our advisor (Note 3).

2015 vs. 2014 — For the year ended December 31, 2015 as compared to 2014, asset management fees to affiliate and other expenses increased by $5.3 million, reflecting the impact of our 2014 Acquisitions and 2015 Acquisitions, which increased the asset base from which our advisor earns a fee.

2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, asset management fees to affiliate and other increased by $4.5 million, reflecting the impact of our 2013 Acquisitions and 2014 Acquisitions, which increased the asset base from which our advisor earns a fee.


CWI 2015 10-K 38




Impairment Charge

Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value.

2015 — For the year ended December 31, 2015, we recognized an impairment charge of $6.1 million to reduce the carrying value of an asset to its estimated fair value as a result of an other-than-temporary decline in the estimated fair value of the properties residual value (Note 7).

Operating Income

2015 vs. 2014 — For the year ended December 31, 2015, operating income was $23.9 million, as compared to $7.2 million for the year ended December 31, 2014, representing (i) the significant increase in revenue primarily from our 2015 Acquisitions, (ii) the full year impact of our 2014 Acquisitions, (iii) an increase in contributions from hotels that were either not undergoing significant renovations during the period or hotels that completed renovations during the period and (iv) a decrease in acquisition-related expenses year over year. The improvements in operating results were partially offset by increases in asset management fees paid during the year ended December 31, 2015 as compared to the prior year.

2014 vs. 2013 — For the year ended December 31, 2014, operating income was $7.2 million, as compared to operating loss of $15.2 million for the year ended December 31, 2013, representing (i) the impact of the significant increase in revenue on our operating results, primarily from our 2014 Acquisitions, (ii) the full year impact of our 2013 Acquisitions, (iii) an increase in contributions from hotels that were either not undergoing significant renovations during the year or hotels that completed renovations during the year and (iv) a slight decrease in acquisition-related expenses in the current year.

Interest Expense

2015 vs. 2014 — For the year ended December 31, 2015 as compared to 2014, interest expense increased by $18.1 million, primarily as a result of the full year impact of mortgage financing obtained in connection with our 2014 Acquisitions, in addition to the impact of mortgage financing obtained in connection with our 2015 Acquisitions.

2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, interest expense increased by $22.4 million, primarily as a result of the full year impact of mortgage financing obtained in connection with our 2013 Acquisitions, in addition to the impact of mortgage financing obtained in connection with our 2014 Acquisitions.

Equity in Earnings (Losses) of Equity Method Investments in Real Estate

Equity in earnings (losses) of equity method investments in real estate represents earnings (losses) from our equity investments in Unconsolidated Hotels recognized in accordance with each investment agreement and based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period (Note 5). We are required to periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. No other-than-temporary impairment charges were recognized during the years ended December 31, 2015, 2014 or 2013.


CWI 2015 10-K 39




The following table sets forth our share of equity in earnings (losses) from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Years Ended December 31,
 
 
2015
 
2014
 
2013
Ritz-Carlton Philadelphia Venture (a)
 
$
1,960

 
$

 
$

Hyatt French Quarter Venture (b)
 
660

 
446

 
(1,344
)
Westin Atlanta Venture (c)
 
(372
)
 
(1,177
)
 
(1,307
)
Marriott Sawgrass Golf Resort & Spa Venture (d)
 
170

 

 

Long Beach Venture (e)
 

 

 
2,600

Total equity in earnings (losses) of equity method investments in real estate
 
$
2,418

 
$
(731
)
 
$
(51
)
___________
(a)
We purchased our 60% interest in this venture on May 15, 2015. The results above represent data from acquisition date through December 31, 2015.
(b)
Our share of equity in earnings from the venture has increased year over year primarily a result of improved operating results at the hotel.
(c)
The decrease in our share of equity in losses from the venture year over year was primarily a result of the impact of the completion of renovations at the hotel in August 2014, which negatively impacted both 2014 and 2013.
(d)
On October 3, 2014, we acquired the Marriott Sawgrass Golf Resort & Spa. On April 1, 2015, we sold a 50% controlling interest to CWI 2 and began accounting for our interest in the hotel as an equity method investment. The results above represent data from April 1, 2015 through December 31, 2015.
(e)
We sold our 49% interest in the Long Beach Venture on July 17, 2013.

Other Income

During the year ended December 31, 2015, we recognized other income of $2.4 million from the sale of 50% of our interest in the Marriott Sawgrass Golf Resort & Spa to CWI 2 for a contractual sales price of $37.2 million, resulting primarily from the reimbursement we received from CWI 2 of 50% of the acquisition costs we incurred on our acquisition of the hotel in October 2014, which were expensed in 2014 (Note 4).

Net Gain on Extinguishment of Debt

During the year ended December 31, 2015, we recognized a net gain on extinguishment of debt of $1.8 million primarily related to the refinancing of the non-recourse mortgage loan on the Lake Arrowhead Resort and Spa during the second quarter of 2015 (Note 9).


CWI 2015 10-K 40




Loss (Income) Attributable to Noncontrolling Interests

The following table sets forth our loss (income) attributable to noncontrolling interests (in thousands):
 
 
Years Ended December 31,
Venture
 
2015
 
2014
 
2013
Ritz-Carlton Key Biscayne Venture (a)
 
$
9,896

 
$

 
$

Ritz-Carlton Fort Lauderdale Venture (a)
 
2,086

 

 

Fairmont Sonoma Mission Inn & Spa Venture (b)
 
1,119

 
5,574

 
(72
)
Sheraton Austin Hotel at the Capitol Venture (c)
 
(944
)
 
(370
)
 

Hilton Garden Inn New Orleans French Quarter/
CBD Venture
 
(120
)
 
(120
)
 
398

Lake Arrowhead Resort and Spa
 

 

 
115

Operating Partnership - Available Cash Distribution
 
(7,122
)
 
(4,096
)
 
(1,948
)