AHT 2014 Q1 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
¨
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: 001-31775

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland
 
86-1062192
(State or other jurisdiction of incorporation or organization)
 
(IRS employer identification number)
 
 
 
14185 Dallas Parkway, Suite 1100
 
 
Dallas, Texas
 
75254
(Address of principal executive offices)
 
(Zip code)

(972) 490-9600
(Registrant’s telephone number, including area code)

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. þ Yes ¨ No

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). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer
þ
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value per share
 
88,440,880
(Class)
 
Outstanding at May 8, 2014


ASHFORD HOSPITALITY TRUST, INC
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2014

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
 
Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2014
PART II. OTHER INFORMATION
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
March 31,
2014
 
December 31,
2013
Assets
(Unaudited)
Cash and cash equivalents
$
154,110

 
$
128,780

Marketable securities
33,096

 
29,601

     Total cash, cash equivalents and marketable securities
187,206

 
158,381

Investments in hotel properties, net
2,076,164

 
2,164,389

Restricted cash
62,853

 
61,498

Accounts receivable, net of allowance of $190 and $242, respectively
30,689

 
21,791

Inventories
1,997

 
1,946

Note receivable, net of allowance of $7,836 and $7,937, respectively
3,424

 
3,384

Investment in unconsolidated entities
191,199

 
195,545

Deferred costs, net
9,966

 
10,155

Prepaid expenses
11,558

 
7,519

Derivative assets, net
95

 
19

Other assets
5,046

 
4,303

Due from Ashford Prime, net
1,580

 
13,042

Due from affiliates
761

 
1,302

Due from related party, net
877

 
—

Due from third-party hotel managers
35,960

 
33,728

Total assets
$
2,619,375

 
$
2,677,002

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Indebtedness
$
1,780,432

 
$
1,818,929

Capital leases payable
—

 
28

Accounts payable and accrued expenses
68,946

 
70,683

Dividends payable
20,891

 
20,735

Unfavorable management contract liabilities
6,812

 
7,306

Due to related party, net
—

 
270

Due to third-party hotel managers
1,362

 
958

Liabilities associated with marketable securities and other
5,946

 
3,764

Other liabilities
1,261

 
1,286

Total liabilities
1,885,650

 
1,923,959

 
 
 
 
Redeemable noncontrolling interests in operating partnership
194,210

 
134,206

 
 
 
 
Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A Cumulative Preferred Stock, 1,657,206 shares issued and outstanding at March 31, 2014 and December 31, 2013
17

 
17

Series D Cumulative Preferred Stock, 9,468,706 shares issued and outstanding at March 31, 2014 and December 31, 2013
95

 
95

Series E Cumulative Preferred Stock, 4,630,000 shares issued and outstanding at March 31, 2014 and December 31, 2013
46

 
46

Common stock, $0.01 par value, 200,000,000 shares authorized, 124,896,765 shares issued, 80,940,880 and 80,565,563 shares outstanding at March 31, 2014 and December 31, 2013, respectively
1,249

 
1,249

Additional paid-in capital
1,645,590

 
1,652,743

Accumulated other comprehensive loss
(135
)
 
(197
)
Accumulated deficit
(969,035
)
 
(896,110
)
Treasury stock, at cost (43,955,885 shares and 44,331,202 shares at March 31, 2014 and December 31, 2013, respectively)
(139,333
)
 
(140,054
)
Total shareholders’ equity of the Company
538,494

 
617,789

Noncontrolling interests in consolidated entities
1,021

 
1,048

Total equity
539,515

 
618,837

Total liabilities and equity
$
2,619,375

 
$
2,677,002

See Notes to Consolidated Financial Statements.

1
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2014
 
2013
REVENUE
(Unaudited)
Rooms
$
157,721

 
$
183,469

Food and beverage
28,239

 
39,650

Other hotel revenue
6,377

 
8,716

Total hotel revenue
192,337

 
231,835

Advisory services
2,194

 
—

Other
1,065

 
107

Total Revenue
195,596

 
231,942

EXPENSES
 
 
 
Hotel operating expenses:
 
 
 
Rooms
34,921

 
42,156

Food and beverage
19,323

 
27,175

Other expenses
58,542

 
68,292

Management fees
7,780

 
9,893

Total hotel operating expenses
120,566

 
147,516

Property taxes, insurance, and other
9,620

 
12,248

Depreciation and amortization
26,229

 
32,480

Impairment charges
(101
)
 
(96
)
Corporate, general, and administrative
12,735

 
14,516

Total Operating Expenses
169,049

 
206,664

OPERATING INCOME
26,547

 
25,278

Equity in loss of unconsolidated entities
(3,498
)
 
(6,888
)
Interest income
6

 
36

Other income
1,277

 
5,822

Interest expense and amortization of loan costs
(28,525
)
 
(35,380
)
Write-off of loan costs and exit fees
(2,028
)
 
(1,971
)
Unrealized gain on marketable securities
1

 
2,701

Unrealized loss on derivatives
(347
)
 
(7,149
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(6,567
)
 
(17,551
)
Income tax expense
(216
)
 
(604
)
LOSS FROM CONTINUING OPERATIONS
(6,783
)
 
(18,155
)
Gain on sale of hotel property, net of tax
3,491

 
—

NET LOSS
(3,292
)
 
(18,155
)
Loss from consolidated entities attributable to noncontrolling interests
27

 
707

Net loss attributable to redeemable noncontrolling interests in operating partnership
877

 
2,762

NET LOSS ATTRIBUTABLE TO THE COMPANY
(2,388
)
 
(14,686
)
Preferred dividends
(8,490
)
 
(8,490
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(10,878
)
 
$
(23,176
)
 
 
 
 
LOSS PER SHARE - BASIC AND DILUTED:
 
 
 
Basic:
 
 
 
Loss attributable to common shareholders
$
(0.13
)
 
$
(0.34
)
Weighted average common shares outstanding – basic
81,690

 
67,682

Diluted:
 
 
 
Loss attributable to common shareholders
$
(0.13
)
 
$
(0.34
)
Weighted average common shares outstanding – diluted
81,690

 
67,682

 
 
 
 
Dividends declared per common share
$
0.12

 
$
0.12

 
 
 
 
Amounts attributable to common shareholders:
 
 
 
Net loss attributable to the Company
$
(2,388
)
 
$
(14,686
)
Preferred dividends
(8,490
)
 
(8,490
)
Net loss attributable to common shareholders
$
(10,878
)
 
$
(23,176
)

See Notes to Consolidated Financial Statements.

2
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
 
(Unaudited)
Net loss
$
(3,292
)
 
$
(18,155
)
Other comprehensive loss, net of tax:
 
 
 
Change in unrealized loss on derivatives
—

 
(2
)
Reclassification to interest expense
71

 
8

Total other comprehensive income
71

 
6

Comprehensive loss
(3,221
)
 
(18,149
)
Less: Comprehensive loss attributable to noncontrolling interests in consolidated entities
27

 
707

Less: Comprehensive loss attributable to redeemable noncontrolling interests in operating partnership
868

 
2,761

Comprehensive loss attributable to the Company
$
(2,326
)
 
$
(14,681
)

See Notes to Consolidated Financial Statements.

3
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
 
Preferred Stock
 
 
 
Additional
Paid In
Capital
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
Noncontrolling
Interests In
Consolidated
Entities
 
 
 

Noncontrolling
Interests in
Operating
Partnership
 
Series A
 
Series D
 
Series E
 
Common Stock
 
 
Accumulated
Deficit
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amounts
 
Shares
 
Amounts
 
Shares
 
Amounts
 
Shares
 
Amounts
 
 
 
 
Shares
 
Amounts
 
 
Total
 
Balance at January 1, 2014
1,657

 
$
17

 
9,469

 
$
95

 
4,630

 
$
46

 
124,897

 
$
1,249

 
$
1,652,743

 
$
(896,110
)
 
$
(197
)
 
(44,331
)
 
$
(140,054
)
 
$
1,048

 
$
618,837

 
$
134,206

Purchases of treasury shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(21
)
 
(231
)
 
—

 
(231
)
 
—

Equity-based compensation
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
617

 
—

 
—

 
—

 
—

 
—

 
617

 
3,871

Forfeitures of restricted shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4

 
—

 
—

 
(2
)
 
(4
)
 
—

 
—

 
—

Issuance of restricted shares/units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(956
)
 
—

 
—

 
398

 
956

 
—

 
—

 
46

Reissuance of treasury shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
307

 
—

 
—

 
—

 
—

 
—

 
307

 
—

Dividends declared- common shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(9,713
)
 
—

 
—

 
—

 
—

 
(9,713
)
 
—

Dividends declared- preferred shares- Series A
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(886
)
 
—

 
—

 
—

 
—

 
(886
)
 
—

Dividends declared- preferred shares- Series D
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,000
)
 
—

 
—

 
—

 
—

 
(5,000
)
 
—

Dividends declared – preferred shares- Series E
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,604
)
 
—

 
—

 
—

 
—

 
(2,604
)
 
—

Reclassification to interest expense
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
62

 
—

 
—

 
—

 
62

 
9

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,687
)
Redemption value adjustment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(52,334
)
 
—

 
—

 
—

 
—

 
(52,334
)
 
52,334

Unvested operating partnership units reclassified to equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,308
)
 
—

 
—

 
—

 
—

 
—

 
(7,308
)
 
7,308

Deferred compensation to be settled in shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
183

 
—

 
—

 
—

 
—

 
—

 
183

 
—

Net income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,388
)
 
—

 
—

 
—

 
(27
)
 
(2,415
)
 
(877
)
Balance at March 31, 2014
1,657

 
$
17

 
9,469

 
$
95

 
4,630

 
$
46

 
124,897

 
$
1,249

 
$
1,645,590

 
$
(969,035
)
 
$
(135
)
 
(43,956
)
 
$
(139,333
)
 
$
1,021

 
$
539,515

 
$
194,210


See Notes to Consolidated Financial Statements.

4
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended March 31,
 
2014
 
2013
Cash Flows from Operating Activities
(Unaudited)
Net loss
$
(3,292
)
 
$
(18,155
)
Adjustments to reconcile net loss to net cash flow provided by operating activities:
 
 
 
Depreciation and amortization
26,229

 
32,480

Impairment charges
(101
)
 
(96
)
Amortization of loan costs, write-off of loan costs, and exit fees
3,967

 
3,903

Equity in loss of unconsolidated entities
3,498

 
6,888

Income from financing derivatives
—

 
(6,215
)
Gain on sale of hotel property
(3,503
)
 
(24
)
Realized and unrealized gains on marketable securities
(1,064
)
 
(2,202
)
Purchases of marketable securities
(22,553
)
 
(10,605
)
Sales of marketable securities
22,319

 
10,528

Net settlement of trading derivatives
(253
)
 
(961
)
Unrealized loss on derivatives
347

 
7,149

Equity-based compensation
4,488

 
8,342

Changes in operating assets and liabilities, exclusive of effect of disposition of hotel property:
 
 
 
Restricted cash
(1,551
)
 
5,890

Accounts receivable and inventories
(8,990
)
 
(1,204
)
Prepaid expenses and other assets
(5,413
)
 
(4,255
)
Accounts payable and accrued expenses
2,513

 
(498
)
Due from affiliates
541

 
(716
)
Due to/from related party
(1,114
)
 
(2,352
)
Due to/from third-party hotel managers
(1,828
)
 
(8,403
)
Due to/from Ashford Prime OP
(2,655
)
 
—

Other liabilities
(504
)
 
(505
)
Net cash provided by operating activities
11,081

 
18,989

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Proceeds from payments of note receivable
61

 
60

Net proceeds from sales of hotel properties
22,402

 
148

Dividends from Ashford Prime OP
249

 
—

Improvements and additions to hotel properties
(26,956
)
 
(20,017
)
Due from Ashford Prime
13,635

 
—

Net cash provided by (used in) investing activities
9,391

 
(19,809
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Borrowings on indebtedness
200,000

 
199,875

Repayments of indebtedness and capital leases
(169,503
)
 
(148,560
)
Payments of loan costs and prepayment penalties
(3,831
)
 
(2,849
)
Payments of dividends
(20,734
)
 
(18,258
)
Purchases of treasury shares
(231
)
 
—

Payments for derivatives
(216
)
 
(36
)
Cash income from derivatives
—

 
7,878

Issuance of preferred stock
—

 
244

Issuances of treasury stock
307

 
—

Distributions to noncontrolling interests in consolidated entities
(980
)
 
(13,489
)
Other
46

 
62

Net cash provided by financing activities
4,858

 
24,867

 
 
 
 
Net increase in cash and cash equivalents
25,330

 
24,047

Cash and cash equivalents at beginning of period
128,780

 
185,935

Cash and cash equivalents at end of period
$
154,110


$
209,982

Supplemental Cash Flow Information
 
 
 
Interest paid
$
24,588

 
$
31,100

Income taxes paid
$
19

 
$
99

Supplemental Disclosure of Non-Cash Investing and Financing Activity
 
 
 
Deferred compensation to be settled in shares
$
183

 
$
—

Dividend receivable from Ashford Prime
$
249

 
$
—

Non-cash extinguishment of debt
$
69,000

 
$
—

Dividends declared but not paid
$
20,890

 
$
19,250


See Notes to Consolidated Financial Statements.

5
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Description of Business
Ashford Hospitality Trust, Inc., together with its subsidiaries (“Ashford Trust”), is a self-advised real estate investment trust (“REIT”) focused on investing in the hospitality industry across all segments and in all methods including direct real estate, securities, equity, and debt. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership ("AHLP"), our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of Ashford Hospitality Trust, Inc., serves as the sole general partner of our operating partnership. In this report, terms such as the "Company,” “we,” “us,” or “our” refer to Ashford Hospitality Trust, Inc. and all entities included in its consolidated financial statements.
As of March 31, 2014, we owned interests in the following hotel properties (all located in the United States) and a note receivable:
•
86 consolidated hotel properties ("legacy hotel properties"), including 84 directly owned and two owned through majority-owned investments in consolidated entities, which represent 16,895 total rooms (or 16,868 net rooms excluding those attributable to our partners),
•
28 hotel properties owned through a 71.74% common equity interest and a 50.0% preferred equity interest in an unconsolidated entity (“PIM Highland JV”), which represent 8,083 total rooms (or 5,799 net rooms excluding those attributable to our partner),
•
10 hotel properties owned through a 14.6% interest in Ashford Hospitality Prime Limited Partnership ("Ashford Prime OP"),
•
90 hotel condominium units at WorldQuest Resort in Orlando, Florida, and
•
a mezzanine loan with a carrying value of $3.4 million.
For federal income tax purposes, we have elected to be treated as a REIT, which imposes limitations related to operating hotels. As of March 31, 2014, our 86 legacy hotel properties were leased or owned by our wholly owned subsidiaries that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated statements of operations. As of March 31, 2014, the 28 hotel properties owned by our unconsolidated joint venture, PIM Highland JV, are leased to its wholly owned subsidiary that is treated as a taxable REIT subsidiary for federal income tax purposes.
As of March 31, 2014, Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington Lodging”), which is beneficially wholly owned by Mr. Monty J. Bennett, our Chairman and Chief Executive Officer and Mr. Archie Bennett, Jr., our Chairman Emeritus, managed 53 of our 86 legacy hotel properties, 21 of the 28 PIM Highland JV hotel properties, and WorldQuest Resort. Third-party management companies managed the remaining hotel properties.
2. Significant Accounting Policies
Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of Ashford Hospitality Trust, Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our 2013 Annual Report to Shareholders on Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission (“SEC”) on March 3, 2014 and March 31, 2014, respectively.
The following items affect reporting comparability related to our consolidated financial statements:
•
Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

6
Table of Contents
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

•
On November 19, 2013, we completed the spin-off of Ashford Hospitality Prime, Inc. ("Ashford Prime") and on March 1, 2014 we completed the sale of the Pier House Resort to Ashford Prime. The results of the eight initial hotel properties, that were spun-off on November 19, 2013 and are now owned by Ashford Prime, are included in our consolidated statements of operations for the three months ended March 31, 2013, in accordance with the applicable accounting guidance. The results of the Pier House Resort, which we acquired on May 14, 2013 and sold on March 1, 2014, are included in our results of operations for the three months ended March 31, 2014, until its date of sale. Because we acquired the Pier House Resort on May 14, 2013, its operating results are not included in our results of operations for the three months ended March 31, 2013.
Use of Estimates – The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Investments in Hotel Properties, net – Hotel properties are generally stated at cost. However, four hotel properties contributed upon Ashford Trust's formation in 2003 are stated at the predecessor's historical cost, net of impairment charges, if any, plus a partial step-up related to the acquisition of noncontrolling interests from third parties associated with certain of these properties. For hotel properties owned through our majority-owned entities, the carrying basis attributable to the partners' minority ownership is recorded at the predecessor's historical cost, net of any impairment charges, while the carrying basis attributable to our majority ownership is recorded based on the allocated purchase price of our ownership interests in the entities. All improvements and additions which extend the useful life of hotel properties are capitalized.
Impairment of Investments in Hotel Properties – Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property's net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period, and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. No impairment charges were recorded for investments in hotel properties for the three months ended March 31, 2014 and 2013.
Note Receivable – Mezzanine loan financing, classified as note receivable, represents a loan held for investment and intended to be held to maturity. Note receivable is recorded at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and allowance for losses when a loan is deemed to be impaired. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method over the life of the loan. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received when contractually due. Payments received on impaired nonaccrual loans are recorded as adjustments to impairment charges. No interest income was recorded for the three months ended March 31, 2014 and 2013.
Variable interest entities (“VIEs”), as defined by authoritative accounting guidance, must be consolidated by their controlling interest beneficiaries if the VIEs do not effectively disperse risks among the parties involved. Our remaining mezzanine note receivable at March 31, 2014 is secured by a hotel property and is subordinate to the controlling interest in the secured hotel property. Although the note receivable is considered to be a variable interest in the entity that owns the related hotel, we are not considered to be the primary beneficiary of the hotel property as a result of holding the loan. Therefore, we do not consolidate the hotel property for which we have provided financing. We will evaluate interests in entities acquired or created in the future to determine whether such entities should be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.
Impairment of Note Receivable – We review notes receivable for impairment each reporting period. A loan is impaired when, based on current information and events, collection of all amounts recorded as assets on the balance sheet is no longer considered probable. We apply normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.
When a loan is impaired, we measure impairment based on the present value of expected cash flows discounted at the loan’s effective interest rate against the value of the asset recorded on the balance sheet. We may also measure impairment based on a loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Loan impairments are recorded as a valuation allowance and a charge to earnings. Our assessment of impairment is based on considerable management judgment and

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

assumptions. No impairment charges were recorded during the three months ended March 31, 2014 and 2013. Valuation adjustments of $101,000 and $96,000 on previously impaired notes were credited to impairment charges during the three months ended March 31, 2014 and 2013, respectively.
Investments in Unconsolidated Entities – Investments in entities in which we have ownership interests ranging from 14.4% to 71.74% are accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the entities' net income (loss). We review the investments in our unconsolidated entities for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. Any impairment is recorded in equity earnings (loss) in unconsolidated entities. No such impairment was recorded in the three months ended March 31, 2014 and 2013.
Our investments in certain unconsolidated entities are considered to be variable interests in the underlying entities. Variable Interest Entities (“VIE”), as defined by authoritative accounting guidance, must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, (ii) an implicit financial responsibility to ensure that a VIE operates as designed, and (iii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Because we do not have the power and financial responsibility to direct the unconsolidated entities’ activities and operations, we are not considered to be the primary beneficiary of these entities on an ongoing basis and therefore such entities should not be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.
We have a 71.74% ownership interest in PIM Highland JV. We adopted the equity accounting method for our investment in the PIM Highland JV because we exercise significant influence but do not control the joint venture. Although we have the majority ownership of 71.74% in the joint venture, all the major decisions related to the joint venture, including establishment of policies and operating procedures with respect to business affairs, incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four persons with us and our partner each designating two of those persons. Our investment in PIM Highland JV had a carrying value of $136.5 million and $139.3 million at March 31, 2014 and December 31, 2013, respectively.
In connection with the spin-off of Ashford Prime on November 19, 2013, we maintained an initial 20% ownership interest in Ashford Prime OP (subsequently reduced to a 14.6% ownership interest as the result of an additional equity raise by Ashford Prime). We adopted the equity accounting method for our investment in Ashford Prime OP because we exercise significant influence but do not control the entity. All major decisions related to Ashford Prime OP that most significantly impact Ashford Prime OP's economic performance, including but not limited to operating procedures with respect to business affairs and any acquisitions, dispositions, financings, restructurings or other transactions with sellers, purchasers, lenders, brokers, agents and other applicable representatives, are subject to the approval of Ashford Prime OP General Partner LLC, its general partner. Our investment in Ashford Prime had a carrying value of $54.7 million and $56.2 million at March 31, 2014 and December 31, 2013, respectively.
Assets Held for Sale and Discontinued Operations – We classify assets as held for sale when management has obtained a firm commitment from a buyer and consummation of the sale is considered probable and expected within one year. In addition, we deconsolidate a property upon transfer of title. When deconsolidating a property/subsidiary, we recognize a gain or loss in net income measured as the difference between the fair value of any consideration received, the fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated, and the carrying amount of the former property/subsidiary. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from our ongoing operations, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) we will not have any significant continuing involvement subsequent to the disposal.
Marketable Securities – Marketable securities, including U.S. treasury bills, public equity securities and equity put and call options of certain publicly traded companies, are recorded at fair value. Equity put and call options are considered derivatives. The fair value of these investments is based on the closing price as of the balance sheet date and is reported as “Marketable securities” or “Liabilities associated with marketable securities and other” in the consolidated balance sheets. On the consolidated statements of operations, net investment income, including interest income (expense), dividends, realized gains or losses and related costs incurred, is reported as a component of “Other income” while unrealized gains and losses on these investments are reported as “Unrealized gain (loss) on marketable securities."
Revenue Recognition – Hotel revenues, including room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, parking and space rentals, are recognized when services have been rendered. Advisory services are recognized when services have been rendered. The quarterly base fee is equal to 0.70% per annum of the total enterprise value of

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Ashford Prime, as defined in the advisory agreement, subject to certain minimums. The incentive fee is earned annually in each year that Ashford Prime's total shareholder return exceeds the total shareholder return for Ashford Prime's peer group, as defined in the advisory agreement. Reimbursements for overhead and internal audit services are recognized when services have been rendered. Interest income (including accretion of discounts on the mezzanine loan using the effective interest method), is recognized when earned. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received when contractually due. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. We are reimbursed by PIM Highland JV for costs associated with managing its day-to-day operations and providing corporate administrative services such as accounting, insurance, marketing support, asset management and other services. For the three months ended March 31, 2014, we changed the presentation to report such reimbursements as "Other" revenue as opposed to credits within "Corporate, general and administrative" expense. This change had no impact on our financial condition or results of operations.
Derivatives and Hedges – We use interest rate derivatives to hedge our risks and to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room). Interest rate derivatives could include swaps, caps, floors and flooridors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. We also use credit default swaps to hedge financial and capital market risk. All of our derivatives are subject to master-netting settlement arrangements and the credit default swaps are subject to credit support annexes. For credit default swaps, cash collateral is posted by us as well as our counterparty. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral.
All derivatives are recorded at fair value in accordance with the applicable authoritative accounting guidance. Interest rate derivatives and credit default swaps are reported as “Derivative assets, net” or “Liabilities associated with marketable securities and other” in the consolidated balance sheets. Accrued interest on non-hedge designated interest rate derivatives is included in “Accounts receivable, net” in the consolidated balance sheets. For interest rate derivatives designated as cash flow hedges:
a)
the effective portion of changes in fair value is initially reported as a component of “Accumulated other comprehensive income (loss)” (“OCI”) in the equity section of the consolidated balance sheets and reclassified to interest expense in the consolidated statements of operations in the period during which the hedged transaction affects earnings, and
b)
the ineffective portion of changes in fair value is recognized directly in earnings as “Unrealized loss on derivatives” in the consolidated statements of operations. For the three months ended March 31, 2014 and 2013 there was no ineffectiveness.
For non-hedge designated interest rate derivatives and credit default swaps, changes in fair value are recognized in earnings as “Unrealized loss on derivatives” in the consolidated statements of operations.
Income Taxes - As a REIT, we generally will not be subject to federal corporate income tax on the portion of our net income (loss) that does not relate to taxable REIT subsidiaries. However, Ashford TRS is treated as a taxable REIT subsidiary for federal income tax purposes. In accordance with authoritative accounting guidance, we account for income taxes related to Ashford TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, the analysis utilized by us in determining our deferred tax asset valuation allowance involves considerable management judgment and assumptions.
Recently Issued Accounting Standards - In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. Upon adoption of this standard, we will be required to evaluate whether a disposal meets the discontinued operations requirements under ASU 2014-08. We will make the additional disclosures upon adoption. We do not expect the adoption of this standard to have an impact on our financial position, results of operations or cash flows.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

3. Summary of Significant Transactions
On January 24, 2014, we refinanced our $164.4 million loan due March 2014 with a $200.0 million loan due February 2016, with three one-year extension options, subject to the satisfaction of certain conditions. The new loan provides for an interest rate of LIBOR + 4.75%, with a LIBOR floor of 0.20%. The new loan continues to be secured by the same five hotels that secured the original loan including: the Embassy Suites Philadelphia Airport, Embassy Suites Walnut Creek, Sheraton Mission Valley San Diego, Sheraton Anchorage and the Hilton Minneapolis/St Paul Airport Mall of America. The refinance resulted in excess proceeds above closing costs and reserves of approximately $37.8 million.
On February 27, 2014, we announced that our Board of Directors unanimously approved a plan to spin-off our asset management business into a separate publicly traded company in the form of a taxable distribution. The distribution is expected to be completed in the third quarter of 2014, and we anticipate that (i) the distribution will be comprised of common stock in Ashford Inc., a newly formed company, (ii) Ashford Hospitality Advisors LLC ("Ashford LLC") will become a subsidiary of Ashford Inc. and (iii) Ashford Inc. will conduct its business and own substantially all of its assets through Ashford LLC. Ashford LLC will continue to externally advise Ashford Prime and we expect that Ashford LLC will enter into a 20-year advisory agreement to externally advise the Company. We also expect that Ashford Inc. will file an application to list its shares on the NYSE or NYSE MKT Exchange. This distribution is anticipated to be declared effective during the third quarter of 2014; however, it remains subject to effectiveness of the registration statement filed with the SEC, the approval of the listing of shares by the applicable exchange, and other legal requirements. We cannot be certain this distribution will proceed or proceed in the manner as currently anticipated.
On March 1, 2014, we closed on the sale of the Pier House Resort to Ashford Prime. The sales price was $92.7 million. Ashford Prime assumed the $69.0 million mortgage and paid the balance of the purchase price in cash, in accordance with the option agreement. We recognized a gain of $3.5 million. We deferred a gain of $599,000 as a result of our retained interest in Ashford Prime.
4. Investments in Hotel Properties, net
Investments in hotel properties, net consisted of the following (in thousands):
 
March 31,
2014
 
December 31, 2013
Land
$
353,248

 
$
410,148

Buildings and improvements
2,053,943

 
2,071,811

Furniture, fixtures, and equipment
148,651

 
166,193

Construction in progress
35,097

 
11,956

Condominium properties
12,465

 
12,442

Total cost
2,603,404

 
2,672,550

Accumulated depreciation
(527,240
)
 
(508,161
)
Investments in hotel properties, net
$
2,076,164

 
$
2,164,389

5. Note Receivable
As of March 31, 2014 and December 31, 2013, we had one mezzanine loan receivable with a net carrying value of $3.4 million and $3.4 million, respectively, net of a valuation allowance of $7.8 million and $7.9 million, respectively. This note is secured by one hotel property, bears interest at a rate of 6.09%, and matures in 2017. All required payments on this loan are current. Ongoing payments are treated as reductions of carrying value with related valuation allowance adjustments recorded as credits to impairment charges.
6. Investment in Unconsolidated Entities
We hold a 71.74% common equity interest and a $25.0 million, or 50%, preferred equity interest earning an accrued but unpaid 15% annual return with priority over common equity distributions in PIM Highland JV, a 28-hotel portfolio venture. Although we have majority ownership in PIM Highland JV, all major decisions related to the joint venture, including establishment of policies and operating procedures with respect to business affairs and incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four persons with us and our partner each designating two of those

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

persons. As a result, we utilize the equity accounting method with respect to PIM Highland JV, which had a carrying value of $136.5 million and $139.3 million at March 31, 2014 and December 31, 2013, respectively.
Mortgage and mezzanine loans securing PIM Highland JV are non-recourse to the borrowers, except for customary exceptions or carve-outs that trigger recourse liability to the borrowers in certain limited instances. Recourse obligations typically include only the payment of costs and liabilities suffered by the lenders as a result of the occurrence of certain bad acts on the part of the borrower. However, in certain cases, the carve-outs could trigger recourse obligations on the part of the borrower with respect to repayment of all or a portion of the outstanding principal amount of the loans. We have entered into customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of the borrowers that result from non-recourse carve-outs (which include, but are not limited to, fraud, misrepresentation, willful conduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities). In the opinion of management, none of these guaranty agreements, either individually or in the aggregate, are likely to have a material adverse effect on our business, results of operations, or financial condition.
The following tables summarize the consolidated balance sheets as of March 31, 2014 and December 31, 2013 and the consolidated statements of operations for the three months ended March 31, 2014 and 2013 of the PIM Highland JV (in thousands):
PIM Highland JV
Condensed Consolidated Balance Sheets
 
March 31,
2014
 
December 31,
2013
Total assets
$
1,388,010

 
$
1,390,782

Total liabilities
1,174,082

 
1,173,841

Members' equity
213,928

 
216,941

Total liabilities and members' equity
$
1,388,010

 
$
1,390,782

Our ownership interest in PIM Highland JV
$
136,548

 
$
139,302

PIM Highland JV
Condensed Consolidated Statements of Operations
 
 
 
 
 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Total revenue
$
108,761

 
$
102,273

Total expenses
(95,388
)
 
(94,760
)
Operating income
13,373

 
7,513

Interest income and other
13

 
18

Interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees
(15,908
)
 
(15,702
)
Other expenses
(44
)
 
—

Income tax expense
(447
)
 
(716
)
Net loss
$
(3,013
)
 
$
(8,887
)
Our equity in loss of PIM Highland JV
$
(2,754
)
 
$
(6,888
)
On June 17, 2013, we announced that our Board of Directors had approved a plan to spin-off an 80% ownership interest in an 8-hotel portfolio, totaling 3,146 rooms (2,912 net rooms excluding those attributable to our partners), to holders of our common stock in the form of a taxable special distribution. The distribution was comprised of common stock in Ashford Prime, a newly formed company into which we contributed the portfolio interests. The distribution was made on November 19, 2013, on a pro rata basis to holders of our common stock as of November 8, 2013, with each of our common shareholders receiving one share of Ashford Prime common stock for every five shares of our common stock held by such stockholder as of the close of business on November 8, 2013. We maintained a 20% ownership interest in Ashford Prime OP at the time of the spin-off. Our ownership interest in Ashford Prime OP was 14.6% at March 31, 2014.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The following tables summarize the condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 and the condensed consolidated statement of operations for the three months ended March 31, 2014 and the condensed combined consolidated statement of operations for the three months ended March 31, 2013 of Ashford Prime OP (in thousands):
Ashford Hospitality Prime Limited Partnership
Condensed Balance Sheets
 
March 31, 2014
 
December 31, 2013
Total assets
$
1,249,099

 
$
962,407

Total liabilities
808,105

 
659,280

Partners' capital
440,994

 
303,127

Total liabilities and partners' capital
$
1,249,099

 
$
962,407

Our ownership interest in Ashford Prime OP
$
54,651

 
$
56,243

Ashford Hospitality Prime Limited Partnership
Condensed Statements of Operations
 
Three Months Ended March 31,
 
2014
 
2013
Total revenue
$
61,806

 
$
54,086

Total expenses
(57,031
)
 
(48,909
)
Operating income
4,775

 
5,177

Interest income
4

 
10

Interest expense and amortization and write-offs of loan costs
(8,989
)
 
(9,863
)
Unrealized loss on derivatives
(15
)
 
(31
)
Income tax expense
(226
)
 
(619
)
Net loss
(4,451
)
 
(5,326
)
Loss from consolidated entities attributable to noncontrolling interests
405

 
704

Net loss attributable to redeemable noncontrolling interests in operating partnership
1,168

 
—

Net loss attributable to Ashford Prime OP
$
(2,878
)
 
$
(4,622
)
Our equity in loss of Ashford Prime OP
$
(744
)
 
$
—

Additionally, as of March 31, 2014 and December 31, 2013, we had a 14.4% subordinated beneficial interest in a trust that holds the Four Seasons hotel property in Nevis, which had a zero carrying value.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

7. Indebtedness
Indebtedness consisted of the following (in thousands):
Indebtedness
Collateral
Maturity
Interest Rate
 
March 31, 2014
 
December 31, 2013
Mortgage loan (5)
5 hotels
March 2014
LIBOR (1) + 4.50%
 
$
—

 
$
164,433

Mortgage loan (2)
9 hotels
May 2014
LIBOR (1) + 6.50%
 
135,000

 
135,000

Mortgage loan
1 hotel
May 2014
8.32%
 
5,036

 
5,075

Senior credit facility (4)
Various
September 2014
LIBOR (1) + 2.75% to 3.50%
 
—

 
—

Mortgage loan (2)
5 hotels
November 2014
Greater of 6.40% or LIBOR (1) + 6.15%
 
211,000

 
211,000

Mortgage loan
8 hotels
December 2014
5.75%
 
101,724

 
102,348

Mortgage loan
10 hotels
July 2015
5.22%
 
148,346

 
148,991

Mortgage loan (3)
1 hotel
September 2015
LIBOR (1) + 4.90%
 
—

 
69,000

Mortgage loan
8 hotels
December 2015
5.70%
 
94,360

 
94,899

Mortgage loan
5 hotels
February 2016
5.53%
 
107,288

 
107,737

Mortgage loan
5 hotels
February 2016
5.53%
 
88,974

 
89,347

Mortgage loan
5 hotels
February 2016
5.53%
 
77,071

 
77,394

Mortgage loan (5)
5 hotels
February 2016
LIBOR (1) + 4.75%
 
200,000

 
—

Mortgage loan
5 hotels
April 2017
5.95%
 
112,960

 
113,343

Mortgage loan
5 hotels
April 2017
5.95%
 
101,533

 
101,878

Mortgage loan
5 hotels
April 2017
5.95%
 
154,494

 
155,019

Mortgage loan
7 hotels
April 2017
5.95%
 
123,578

 
123,997

Mortgage loan
1 hotel
November 2020
6.26%
 
100,910

 
101,268

Mortgage loan
1 hotel
January 2024
5.49%
 
10,775

 
10,800

Mortgage loan
1 hotel
January 2024
5.49%
 
7,383

 
7,400

Total
 
 
 
 
$
1,780,432

 
$
1,818,929

____________________________________
(1) LIBOR rates were 0.152% and 0.168% at March 31, 2014 and December 31, 2013, respectively.
(2) These mortgage loans have three one-year extension options subject to satisfaction of certain conditions.
(3) This mortgage loan was assumed by Ashford Prime in connection with the sale of the Pier House Resort.
(4) Our borrowing capacity under our senior credit facility is $165.0 million. We have an option, subject to lender approval, to further expand the facility to an aggregate size of $225.0 million. We may use up to $10.0 million for standby letters of credit. The credit facility has a one-year extension option subject to advance notice, certain conditions and a 0.25% extension fee.
(5) On January 24, 2014, we refinanced our $164.4 million loan due March 2014 with a $200.0 million loan due February 2016, with three one-year extension options, subject to the satisfaction of certain conditions. The new loan provides for an interest rate of LIBOR + 4.75%, with a LIBOR floor of 0.20%.
On January 24, 2014, we refinanced our $164.4 million loan due March 2014 with a $200.0 million loan due February 2016, with three one-year extension options, subject to the satisfaction of certain conditions. The new loan provides for an interest rate of LIBOR + 4.75%, with a LIBOR floor of 0.20%. The new loan continues to be secured by the same five hotels that secured the original loan, including: the Embassy Suites Philadelphia Airport, Embassy Suites Walnut Creek, Sheraton Mission Valley San Diego, Sheraton Anchorage and the Hilton Minneapolis/St Paul Airport Mall of America. The refinance resulted in excess proceeds above closing costs and reserves of approximately $37.8 million.
We are required to maintain certain financial ratios under various debt and derivative agreements. If we violate covenants in any debt or derivative agreement, we could be required to repay a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of Ashford Trust or AHLP, our operating partnership, and the liabilities of such subsidiaries do not constitute the obligations of Ashford Trust or AHLP. Presently, our existing financial covenants are non-recourse and primarily relate to maintaining minimum debt coverage ratios, maintaining an overall minimum net worth, maintaining a maximum loan-to-value ratio, and maintaining an overall minimum total assets. As of March 31, 2014, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended.
We have derivative agreements that incorporate the loan covenant provisions of our senior credit facility requiring us to maintain certain minimum financial covenant ratios with respect to our indebtedness. Failure to comply with these covenant provisions would result in us being in default on any derivative instrument obligations covered by the applicable agreement. At

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

March 31, 2014, we were in compliance with all the covenants under the senior credit facility and the fair value of derivatives that incorporate our senior credit facility covenant provisions was a liability of $46,000.
8. Income (Loss) Per Share
Basic income (loss) per common share is calculated using the two-class method by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is calculated using the two-class method, or treasury stock method if more dilutive, and reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower income per share. The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2014
 
2013
Net loss allocated to common shareholders:
 
 
 
Net loss attributable to the Company
$
(2,388
)
 
$
(14,686
)
Less: Dividends on preferred stocks
(8,490
)
 
(8,490
)
Less: Dividends on common stock
(9,629
)
 
(8,139
)
Less: Dividends on unvested restricted shares
(84
)
 
(61
)
Undistributed loss
(20,591
)
 
(31,376
)
Add back: Dividends on common stock
9,629

 
8,139

Distributed and undistributed net loss - basic and diluted
$
(10,962
)
 
$
(23,237
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Weighted average shares outstanding - basic and diluted
81,690

 
67,682

 
 
 
 
Basic loss per share:
 
 
 
Loss from continuing operations allocated to common shareholders per share
$
(0.13
)
 
$
(0.34
)
Income (loss) from discontinued operations allocated to common shareholders per share
—

 
—

Net loss allocated to common shareholders per share
$
(0.13
)
 
$
(0.34
)
 
 
 
 
Diluted loss per share:
 
 
 
Loss from continuing operations allocated to common shareholders per share
$
(0.13
)
 
$
(0.34
)
Income (loss) from discontinued operations allocated to common shareholders per share
—

 
—

Net loss allocated to common shareholders per share
$
(0.13
)
 
$
(0.34
)
Due to the anti-dilutive effect, the computation of diluted loss per share does not reflect adjustments for the following items (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Net loss allocated to common shareholders is not adjusted for:
 
 
 
Income allocated to unvested restricted shares
$
84

 
$
61

Net loss attributable to noncontrolling interest in operating partnership units
(877
)
 
(2,762
)
Total
$
(793
)
 
$
(2,701
)
 
 
 
 
Weighted average diluted shares are not adjusted for:
 
 
 
Effect of unvested restricted shares
144

 
146

Effect of assumed conversion of operating partnership units
19,316

 
17,967

Total
19,460

 
18,113


14
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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Derivative Instruments and Hedging
Interest Rate Derivatives – We are exposed to risks arising from our business operations, economic conditions, and financial markets. To manage these risks, we use interest rate derivatives to hedge our debt and potentially improve cash flows. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR and RevPAR. Interest rate derivatives may include interest rate swaps, caps, floors and flooridors. Our derivatives are subject to master-netting settlement arrangements. The maturities on these instruments range from May 2014 to February 2016. To mitigate nonperformance risk, we routinely rely on a third party’s analysis of the creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.
Credit Default Swap Derivatives – In August 2011, we entered into credit default swap transactions for a notional amount of $100.0 million to hedge financial and capital market risk for an upfront cost of $8.2 million that was subsequently returned to us as collateral by our counterparty. A credit default swap is a derivative contract that functions like an insurance policy against the credit risk of an entity or obligation. The seller of protection assumes the credit risk of the reference obligation from the buyer (us) of protection in exchange for annual premium payments. If a default or a loss, as defined in the credit default swap agreements, occurs on the underlying bonds, then the buyer of protection is protected against those losses. The only liability for us, the buyer, is the annual premium and any change in value of the underlying CMBX index (if the trade is terminated prior to maturity). For all CMBX trades completed to date, we were the buyer of protection. Credit default swaps are subject to master-netting settlement arrangements and credit support annexes. Assuming the underlying bonds pay off at par over their remaining average life, our total exposure for these trades is approximately $8.5 million. Cash collateral is posted by us as well as our counterparty. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral. The change in market value of credit default swaps is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty when the change in market value is over $250,000. The net carrying value of our credit default swaps were liabilities of $46,000 and $73,000 as of March 31, 2014 and December 31, 2013, respectively, which are included in “Liabilities associated with marketable securities and other” in the consolidated balance sheets. We recognized unrealized losses of $226,000 and $904,000 for the three months ended March 31, 2014 and 2013, respectively, that are included in “Unrealized loss on derivatives” in the consolidated statements of operations.
Marketable Securities and Liabilities Associated with Marketable Securities and other– We invest in public securities, including stocks and put and call options, which are considered derivatives. At March 31, 2014, we had investments in these derivatives totaling $458,000 and liabilities of $376,000. At December 31, 2013, we had investments in these derivatives totaling $560,000 and liabilities of $561,000.
10. Fair Value Measurements
Fair Value Hierarchy – For disclosure purposes, financial instruments, whether measured at fair value on a recurring or nonrecurring basis or not measured at fair value, are classified in a hierarchy consisting of three levels based on the observability of valuation inputs in the market place as discussed below:
•
Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
Fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Fair values of interest rate caps, floors, flooridors, and corridors are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rates of the floors or rise above the strike rates of the caps. Variable interest rates used in the calculation of projected receipts and payments on the swaps, caps, and floors are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (Level 2 inputs). We also incorporate credit valuation adjustments (Level 3 inputs) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.

15
Table of Contents
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Fair values of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs). The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.
Fair values of marketable securities and liabilities associated with marketable securities, including public equity securities, equity put and call options, and other investments, are based on their quoted market closing prices (Level 1 inputs).
When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at March 31, 2014, the LIBOR interest rate forward curve (Level 2 inputs) assumed an uptrend from 0.16% to 1.04% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of hedge and non-hedge designated derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.

16
Table of Contents
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
 
 
Quoted Market Prices (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Counterparty and Cash Collateral Netting (4)
 
Total
 
 
 
 
March 31, 2014:
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Interest rate derivatives - non-hedge
$
—

 
$
95

 
$
—

 
$
95

(1) 
 
Equity put and call options
458

 
—

 
—

 
458

(2) 
 
Non-derivative assets:
 
 
 
 
 
 
 
 
 
Equity and US treasury securities
32,638

 
—

 
—

 
32,638

(2) 
 
Total
33,096

 
95

 
—

 
33,191

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 Credit default swaps
—

 
769

 
(815
)
 
(46
)
(3) 
 
 Short-equity put options
(97
)
 
—

 
—

 
(97
)
(3) 
 
 Short-equity call options
(279
)
 
—

 
—

 
(279
)
(3) 
 
Non-derivative liabilities:
 
 
 
 
 
 
 
 
 
 Margin account balance
(5,524
)
 
—

 
—

 
(5,524
)
(3) 
 
Total
(5,900
)
 
769

 
(815
)
 
(5,946
)
 
 
Net
$
27,196

 
$
864

 
$
(815
)
 
$
27,245

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Interest rate derivatives - non-hedge
$
—

 
$
19

 
$
—

 
$
19

(1) 
 
Equity put and call options
560

 
—

 
—

 
560

(2) 
 
Non-derivative assets:
 
 
 
 
 
 
 
 
 
Equity and US treasury securities
29,041

 
—

 
—

 
29,041

(2) 
 
Total
29,601

 
19

 
—

 
29,620

 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
Credit default swaps
—

 
995

 
(1,068
)
 
(73
)
(3) 
 
Short-equity put options
(82
)
 
—

 
—

 
(82
)
(3) 
 
Short-equity call options
(479
)
 
—

 
—

 
(479
)
(3) 
 
Non-derivative Liabilities:
 
 
 
 
 
 
 
 
 
Margin account balance
(3,130
)
 
—

 
—

 
(3,130
)
(3) 
 
Total
(3,691
)
 
995

 
(1,068
)
 
(3,764
)
 
 
Net
$
25,910

 
$
1,014

 
$
(1,068
)
 
$
25,856

 
____________________________________
(1) Reported net as “Derivative assets, net” in the consolidated balance sheets.
(2) Reported as “Marketable securities” in the consolidated balance sheets.
(3) Reported as “Liabilities associated with marketable securities and other” in the consolidated balance sheets.
(4) Represents cash collateral posted by our counterparty.

17
Table of Contents
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Effect of Fair-Value-Measured Assets and Liabilities on Consolidated Statements of Operations
The following tables summarizes the effect of fair-value-measured assets and liabilities on the consolidated statements of operations for the three months ended March 31, 2014 and 2013 (in thousands):
 
Gain (Loss) Recognized In Income
 
Interest Savings (Cost) Recognized In Income
 
Reclassified from Accumulated OCI
 into Interest Expense
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
(121
)
 
$
(10,645
)
 
$
—

 
$
10,639

 
$
71

 
$
8

Equity put and call options
(512
)
 
204

 
—

 
—

 
—

 
—

Credit default swaps
(247
)
 
(925
)
 
—

 
—

 
—

 
—

Non-derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Equity and US treasury securities
1,242

 
2,576

 
—

 
—

 
—

 
—

Total
362

 
(8,790
)
 
—

 
10,639

 
71

 
8

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
—

 
4,400

 
—

 
(4,424
)
 
—

 
—

Short-equity put options
391

 
7

 
—

 
—

 
—

 
—

Short-equity call options
4

 
(585
)
 
—

 
—

 
—

 
—

Non-derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-equity securities
—

 
—

 
—

 
—

 
—

 
—

Total
395

 
3,822

 
—

 
(4,424
)
 
—

 
—

Net
$
757

 
$
(4,968
)
 
$
—

 
$
6,215

 
$
71

 
$
8

Total combined
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
(121
)
 
$
(6,245
)
 
$
—

 
$
6,215

 
$
71

 
$
8

Credit default swaps
(226
)
 
(904
)
 
—

 
—

 
—

 
—

Total derivatives
(347
)
(1) 
(7,149
)
(1) 
—

 
6,215

(2) 
71

 
8

Unrealized gain on marketable securities
1

(3) 
2,701

(3) 
—

 
—

 
—

 
—

Realized gain (loss) on marketable securities
1,103

(2) (4) 
(520
)
(2) 
—

 
—

 
—

 
—

Net
$
757

 
$
(4,968
)
 
$
—

 
$
6,215

 
$
71

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
____________________________________
(1) Reported as “Unrealized loss on derivatives” in the consolidated statements of operations.
(2) Included in “Other income” in the consolidated statements of operations.
(3) Reported as “Unrealized gain on marketable securities” in the consolidated statements of operations.
(4) Includes cost of $21 and $21 for the three months ended March 31, 2014 and 2013, respectively, associated with credit default swaps.
For the three months ended March 31, 2014 and 2013 the change in fair values of our interest rate derivatives that were recognized as change in other comprehensive loss totaled $0 and $(2,000), respectively. During the next twelve months, we expect $28,000 of accumulated comprehensive loss will be reclassified to interest expense.


18
Table of Contents
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

11. Summary of Fair Value of Financial Instruments
Determining estimated fair values of our financial instruments such as notes receivable and indebtedness requires considerable judgment to interpret market data. Market assumptions and/or estimation methodologies used may have a material effect on estimated fair value amounts. Accordingly, estimates presented are not necessarily indicative of amounts at which these instruments could be purchased, sold, or settled. Carrying amounts and estimated fair values of financial instruments, for periods indicated, were as follows (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial assets and liabilities measured at fair value:
 
 
 
 
 
 
 
Marketable securities
$
33,096

 
$
33,096

 
$
29,601

 
$
29,601

Derivative assets, net
$
95

 
$
95

 
$
19

 
$
19

Liabilities associated with marketable securities and other
$
5,946

 
$
5,946

 
$
3,764

 
$
3,764

 
 
 
 
 
 
 
 
Financial assets not measured at fair value:
 
 
 
 
 
 
 
Cash and cash equivalents
$
154,110

 
$
154,110

 
$
128,780

 
$
128,780

Restricted cash
$
62,853

 
$
62,853

 
$
61,498

 
$
61,498

Accounts receivable
$
30,689

 
$
30,689

 
$
21,791

 
$
21,791

Note receivable
$
3,424

 
$ 2,858 to $3,158
 
$
3,384

 
$ 2,800 to $3,094
Due from affiliates
$
761

 
$
761

 
$
1,302

 
$
1,302

Due from Ashford Prime, net
$
1,580

 
$
1,580

 
$
13,042

 
$
13,042

Due from related party, net
$
877

 
$
877

 
$
—

 
$
—

Due from third-party hotel managers
$
35,960

 
$
35,960

 
$
33,728

 
$
33,728

 
 
 
 
 
 
 
 
Financial liabilities not measured at fair value:
 
 
 
 
 
 
 
Indebtedness
$
1,780,432

 
$ 1,746,456 to $1,930,294
 
$
1,818,929

 
$ 1,786,651 to $1,974,714

Accounts payable and accrued expenses
$
68,946

 
$
68,946

 
$
70,683

 
$
70,683

Dividends payable
$
20,891

 
$
20,891

 
$
20,735

 
$
20,735

Due to related party, net
$
—

 
$
—

 
$
270

 
$
270

Due to third-party hotel managers
$
1,362

 
$
1,362

 
$
958

 
$
958

Cash, cash equivalents, and restricted cash. These financial assets bear interest at market rates and have maturities of less than 90 days. The carrying value approximates fair value due to their short-term nature. This is considered a Level 1 valuation technique.
Accounts receivable, accounts payable, accrued expenses, dividends payable, due to/from Ashford Prime, due to/from related party, due to/from affiliates and due to/from third-party hotel managers. The carrying values of these financial instruments approximate their fair values due to their short-term nature. This is considered a Level 1 valuation technique.
Note receivable. Fair values of notes receivable may be determined using similar loans with similar collateral. We relied on our internal analysis of what we believe a willing buyer would pay for these notes. We estimated the fair value of note receivable to be approximately 16.5% to 7.8% lower than the carrying value of $3.4 million at March 31, 2014 and approximately 17.3% to 8.6% lower than the carrying value of $3.4 million at December 31, 2013. This is considered a Level 2 valuation technique.
Marketable securities. Marketable securities consist of US treasury bills, public equity securities, and equity put and call options. The fair value of these investments is based on quoted market closing prices at the balance sheet dates. See Notes 2, 9 and 10 for a complete description of the methodology and assumptions utilized in determining fair values.
Indebtedness. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. Current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied and adjusted for credit spreads. Credit spreads take into consideration general market conditions, maturity, and collateral. We estimated the fair value of total indebtedness to be approximately 98.1% to 108.4% of the carrying value of $1.8 billion at March 31, 2014 and approximately 98.2% to 108.6% of the carrying value of $1.8 billion at December 31, 2013. This is considered a Level 2 valuation technique.

19
Table of Contents
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Derivative assets, net and liabilities associated with marketable securities and other. Fair values of interest rate derivatives are determined using the net present value of expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of us and our counterparties. Fair values of credit default swap derivatives are obtained from a third party who publishes the CMBX index composition and price data. Liabilities associated with marketable securities consists of a margin account balance, short public equity securities and short equity put and call options. Fair value is determined based on quoted market closing prices at the balance sheet dates. See Notes 2, 9 and 10 for a complete description of the methodology and assumptions utilized in determining fair values.
12. Redeemable Noncontrolling Interests in Operating Partnership
Redeemable noncontrolling interests in the operating partnership represent certain limited partners' proportionate share of equity in earnings/losses of the operating partnership, which is an allocation of net income/loss attributable to common unit holders based on the weighted average ownership percentage of these limited partners' common units and units issued under our Long-Term Incentive Plan (the “LTIP units”) that are vested throughout the period plus distributions paid to the limited partners with regard to Class B common units. Class B common units have a fixed dividend rate of 7.2% and priority in payment of cash dividends over common units but otherwise have no preference over common units. Beginning one year after issuance, each common unit of limited partnership interest (including each Class B common unit) may be redeemed for either cash or, at our sole discretio