Edgar Filing: ASHFORD HOSPITALITY TRUST INC

AHT 2015 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, 2015



¨	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		101,068,813
(Class)		Outstanding at May 7, 2015

ASHFORD HOSPITALITY TRUST, INC

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets as March 31, 2015 and December 31, 2014	2
Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014	3
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014	4
Consolidated Statement of Equity for the Three Months Ended March 31, 2015	5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	6
Notes to Consolidated Financial Statements	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4. CONTROLS AND PROCEDURES	45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	46
ITEM 1A. RISK FACTORS	46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	48
ITEM 4. MINE SAFETY DISCLOSURES	48
ITEM 5. OTHER INFORMATION	48
ITEM 6. EXHIBITS	49
SIGNATURES	51

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share amounts)



	March 31, 2015			December 31, 2014
Assets
Cash and cash equivalents	$	355,727		$	215,063
Marketable securities	72,427			63,217
Total cash, cash equivalents and marketable securities	428,154			278,280
Investments in hotel properties, net	3,953,983			2,128,611
Restricted cash	143,043			85,830
Accounts receivable, net of allowance of $417 and $241, respectively	52,512			22,399
Inventories	4,188			2,104
Note receivable, net of allowance of $7,416 and $7,522, respectively	3,599			3,553
Investment in unconsolidated entities	58,971			206,790
Deferred costs, net	36,514			12,588
Prepaid expenses	22,757			7,017
Derivative assets, net	917			182
Other assets	7,969			17,116
Intangible assets, net	15,045			—
Due from Ashford Prime OP, net	335			896
Due from affiliates	—			3,473
Due from related party, net	1,922			—
Due from third-party hotel managers	39,047			12,241
Total assets	$	4,768,956		$	2,781,080
Liabilities and Equity
Liabilities:
Indebtedness	$	3,387,623		$	1,954,103
Accounts payable and accrued expenses	131,890			71,118
Dividends payable	23,346			21,889
Unfavorable management contract liabilities	4,836			5,330
Due to Ashford Inc., net	9,120			8,202
Due to related party, net	—			1,867
Due to third-party hotel managers	1,529			1,640
Intangible liabilities, net	27,262			—
Liabilities associated with marketable securities and other	12,771			6,201
Other liabilities	6,923			1,233
Total liabilities	3,605,300			2,071,583

Redeemable noncontrolling interests in operating partnership	165,590			177,064

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, 2015 and December 31, 2014	17			17
Series D Cumulative Preferred Stock, 9,468,706 shares issued and outstanding at March 31, 2015 and December 31, 2014	95			95
Series E Cumulative Preferred Stock, 4,630,000 shares issued and outstanding at March 31, 2015 and December 31, 2014	46			46
Common stock, $0.01 par value, 200,000,000 shares authorized, 124,896,765 shares issued, 101,078,531 and 89,439,624 shares outstanding at March 31, 2015 and December 31, 2014, respectively	1,249			1,249
Additional paid-in capital	1,801,656			1,706,274
Accumulated deficit	(696,787		)	(1,050,323		)
Treasury stock, at cost, 23,818,234 and 35,457,141 shares at March 31, 2015 and December 31, 2014, respectively	(108,985		)	(125,725		)
Total stockholders’ equity of the Company	997,291			531,633
Noncontrolling interests in consolidated entities	775			800
Total equity	998,066			532,433
Total liabilities and equity	$	4,768,956		$	2,781,080

See Notes to Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)



	Three Months Ended March 31,
	2015			2014
Revenue
Rooms	$	200,990		$	156,997
Food and beverage	39,553			28,239
Other hotel revenue	8,832			6,366
Total hotel revenue	249,375			191,602
Advisory services revenue	—			2,194
Other	860			1,065
Total revenue	250,235			194,861
Expenses
Hotel operating expenses:
Rooms	43,153			34,754
Food and beverage	26,280			19,323
Other expenses	74,782			58,274
Management fees	9,657			7,742
Total hotel expenses	153,872			120,093
Property taxes, insurance, and other	11,594			9,589
Depreciation and amortization	37,864			26,152
Impairment charges	(106		)	(101		)
Transaction costs	499			—
Advisory services fee	9,567			—
Corporate, general, and administrative	4,840			12,735
Total expenses	218,130			168,468
Operating income	32,105			26,393
Equity in loss of unconsolidated entities	(6,622		)	(3,498		)
Interest income	16			6
Gain on acquisition of PIM Highland JV	381,835			—
Other income	4,330			1,277
Interest expense and amortization of premiums and loan costs	(34,635		)	(28,375		)
Write-off of loan costs and exit fees	(4,767		)	(2,028		)
Unrealized gain (loss) on marketable securities	(1,802		)	1
Unrealized loss on derivatives	(1,698		)	(347		)
Income (loss) from continuing operations before income taxes	368,762			(6,571		)
Income tax expense	(825		)	(216		)
Income (loss) from continuing operations	367,937			(6,787		)
Income from discontinued operations	—			4
Gain (loss) on sale of hotel properties, net of tax	(1,130		)	3,491
Net income (loss)	366,807			(3,292		)
Loss from consolidated entities attributable to noncontrolling interest	25			27
Net (income) loss attributable to redeemable noncontrolling interests in operating partnership	(45,336		)	877
Net income (loss) attributable to the Company	321,496			(2,388		)
Preferred dividends	(8,490		)	(8,490		)
Net income (loss) attributable to common stockholders	$	313,006		$	(10,878	)

Income (loss) per share - basic and diluted:
Basic:
Income (loss) from continuing operations attributable to common stockholders	$	3.25		$	(0.13	)
Income from discontinued operations attributable to common stockholders	—			—
Net income (loss) attributable to common stockholders	$	3.25		$	(0.13	)
Weighted average common shares outstanding – basic	95,539			81,690
Diluted:
Income (loss) from continuing operations attributable to common stockholders	$	3.13		$	(0.13	)
Income from discontinued operations attributable to common stockholders	—			—
Net income (loss) attributable to common stockholders	$	3.13		$	(0.13	)
Weighted average common shares outstanding – diluted	113,912			81,690

Dividends declared per common share	$	0.12		$	0.12

Amounts attributable to common stockholders:
Net income (loss) attributable to the Company	$	321,496		$	(2,391	)
Income from discontinued operations	—			3
Preferred dividends	(8,490		)	(8,490		)
Net income (loss) attributable to common stockholders	$	313,006		$	(10,878	)

See Notes to Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands)



	Three Months Ended March 31,
	2015			2014
Net income (loss)	$	366,807		$	(3,292	)
Other comprehensive income, net of tax:
Reclassification to interest expense	—			71
Total other comprehensive income	—			71
Comprehensive income (loss)	366,807			(3,221		)
Less: Comprehensive loss attributable to noncontrolling interest in consolidated entities	25			27
Less: Comprehensive (income) loss attributable to redeemable noncontrolling interests in operating partnership	(45,336		)	868
Comprehensive income (loss) attributable to the Company	$	321,496		$	(2,326	)

See Notes to Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(unaudited, in thousands)



	Preferred Stock												Additional Paid In Capital											Noncontrolling Interests In Consolidated Entities						Noncontrolling Interests in Operating Partnership
	Series A			Series D			Series E			Common Stock						Accumulated Deficit			Treasury Stock
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount					Accumulated Deficit			Shares		Amount						Total
Balance at January 1, 2015	1,657	$	17	9,469	$	95	4,630	$	46	124,897	$	1,249	$	1,706,274		$	(1,050,323	)	(35,457	)	$	(125,725	)	$	800		$	532,433		$	177,064
Purchases of treasury shares	—	—		—	—		—	—		—	—		—			—			(43	)	(446		)	—			(446		)	—
Equity-based compensation	—	—		—	—		—	—		—	—		107			—			—		—			—			107			64
Issuance of restricted shares/units	—	—		—	—		—	—		—	—		(2,269		)	—			1,013		2,269			—			—			33
Reissuance of treasury shares	—	—		—	—		—	—		—	—		96,228			—			10,530		14,711			—			110,939			—
Dividends declared- common shares	—	—		—	—		—	—		—	—		—			(12,129		)	—		—			—			(12,129		)	—
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		)	—
Distributions to noncontrolling interests	—	—		—	—		—	—		—	—		—			—			—		—			—			—			(2,726		)
Redemption/conversion of operating partnership units	—	—		—	—		—	—		—	—		1,316			—			139		206			—			1,522			(1,522		)
Redemption value adjustment	—	—		—	—		—	—		—	—		—			52,659			—		—			—			52,659			(52,659		)
Net income (loss)	—	—		—	—		—	—		—	—		—			321,496			—		—			(25		)	321,471			45,336
Balance at March 31, 2015	1,657	$	17	9,469	$	95	4,630	$	46	124,897	$	1,249	$	1,801,656		$	(696,787	)	(23,818	)	$	(108,985	)	$	775		$	998,066		$	165,590

See Notes to Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Three Months Ended March 31,
	2015			2014
Cash Flows from Operating Activities
Net income (loss)	$	366,807		$	(3,292	)
Adjustments to reconcile net income (loss) to net cash flow provided by operating activities:
Depreciation and amortization	37,864			26,229
Impairment charges	(106		)	(101		)
Amortization of loan costs and premiums, write-off of loan costs and exit fees	7,646			3,967
Bad debt expense	152			—
Equity in (earnings) loss of unconsolidated entities	6,622			3,498
Distribution of earnings from unconsolidated entities	249			—
Gain on hotel properties	(380,705		)	(3,503		)
Realized and unrealized gains on marketable securities	(2,275		)	(1,064		)
Purchases of marketable securities	(64,346		)	(22,553		)
Sales of marketable securities	64,036			22,319
Net settlement of trading derivatives	(1,367		)	(253		)
Unrealized loss on derivatives	1,698			347
Equity-based compensation	171			4,488
Changes in operating assets and liabilities, exclusive of effect of acquisitions and dispositions of hotel properties:
Restricted cash	3,003			(1,551		)
Accounts receivable and inventories	(10,405		)	(8,990		)
Prepaid expenses and other assets	(6,690		)	(5,413		)
Accounts payable and accrued expenses	13,780			2,513
Due from affiliates	3,473			541
Due to/from related party	(6,315		)	(1,114		)
Due to/from third-party hotel managers	(8,295		)	(1,828		)
Due to/from Ashford Prime OP, net	561			(2,655		)
Due to/from Ashford Inc., net	918			—
Other liabilities	3,851			(504		)
Net cash provided by operating activities	30,327			11,081

Cash Flows from Investing Activities
Proceeds from payments of note receivable	60			61
Net proceeds from sales of hotel properties	7,502			22,402
Dividends from Ashford Prime OP	—			249
Acquisition of hotel properties, net of cash acquired	(287,618		)	—
Change in restricted cash related to improvements and additions to hotel properties	49,703			—
Improvements and additions to hotel properties	(28,812		)	(26,956		)
Due from Ashford Prime OP	—			13,635
Payments of franchise fees	(175		)	—
Proceeds from property insurance	282			—
Net cash provided by (used in) investing activities	(259,058		)	9,391

Cash Flows from Financing Activities
Borrowings on indebtedness	1,581,032			200,000
Repayments of indebtedness and capital leases	(1,267,467		)	(169,503		)
Payments of loan costs and exit fees	(31,558		)	(3,831		)
Payments of dividends	(21,888		)	(20,734		)
Purchases of treasury shares	(446		)	(231		)
Payments for derivatives	(1,250		)	(216		)
Issuances of treasury stock	110,939			307
Distributions to noncontrolling interests in consolidated entities	—			(980		)
Other	33			46
Net cash provided by financing activities	369,395			4,858

Net increase in cash and cash equivalents	140,664			25,330
Cash and cash equivalents at beginning of period	215,063			128,780
Cash and cash equivalents at end of period	$	355,727		$	154,110
Supplemental Cash Flow Information
Interest paid	$	26,543		$	24,588
Income taxes paid	197			19
Supplemental Disclosure of Non-Cash Investing and Financing Activity
Accrued but unpaid capital expenditures	$	6,522		$	2,927
Deferred compensation to be settled in shares	—			183
Dividend receivable from Ashford Prime OP	249			249
Transfer of debt to Ashford Prime OP	—			69,000
Dividends declared but not paid	23,346			20,890

See Notes to Consolidated Financial Statements.

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 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. Other than Ashford Hospitality Trust, Inc.’s investment in Ashford Inc. common stock, we own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership (“Ashford Trust OP”), our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of Ashford Trust, 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.

On December 14, 2014, we executed a Letter Agreement (the “Agreement”) with PRISA III Investments ("PRISA III"). The Agreement was approved by the investment committee of Prudential Real Estate Investors ("PREI"), the investment manager of PRISA III, and fully executed and delivered to us on December 15, 2014. Pursuant to the Agreement, we agreed to purchase and PRISA III agreed to sell (the “Transaction”) all of PRISA III’s right, title and interest in and to its approximately 28.26% interest in the PIM Highland Holding LLC (“PIM Highland JV”). As of March 6, 2015, we own 100% of the PIM Highland JV. See Notes 3, 6 and 7.

We are advised by Ashford Hospitality Advisors LLC (“Ashford LLC”), a subsidiary of Ashford Inc., through an advisory agreement. All of the hotels in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.

As of March 31, 2015, we owned interests in the following assets:


•	116 consolidated hotel properties, including 114 directly owned and two owned through a majority-owned investment in a consolidated entity, which represent 25,579 total rooms (or 25,552 net rooms excluding those attributable to our partners);


•	10 hotel properties owned through a 15.2% interest in Ashford Hospitality Prime Limited Partnership (“Ashford Prime OP”) with a carrying value of $54.6 million;


•	86 hotel condominium units at WorldQuest Resort in Orlando, Florida;


•	a 30.1% ownership in Ashford Inc. common stock with a carrying value of $4.4 million; and


•	a mezzanine loan with a carrying value of $3.6 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, 2015, our 116 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, 2015, 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 76 of our 116 hotel properties, one of the 10 Ashford Prime OP 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 2014 Annual Report to Stockholders on Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission (“SEC”) on March 2, 2015, and March 31, 2015, respectively.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.


•	On March 1, 2014, we completed the sale of the Pier House Resort to Ashford Prime (“Ashford Prime”). 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 period from January 1, 2014, through February 28, 2014.


•	On February 6, 2015, we acquired the Lakeway Resort & Spa, and on February 25, 2015, we acquired the Memphis Marriott East hotel. The results of these hotels are included in our results of operations as of their respective acquisition dates.


•	On March 6, 2015, we acquired the remaining approximate 28.26% interest in the 28 hotels of the PIM Highland JV. For the period January 1, 2014, through March 5, 2015, we have recorded equity in earnings for our ownership percentage. Beginning March 6, 2015, we consolidated the results of operations of these hotels.

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.

Restricted Cash—Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of approximately 3% to 6% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. For purposes of the consolidated statements of cash flows, changes in restricted cash caused by using such funds for debt service, real estate taxes, and insurance are shown as operating activities. Changes in restricted cash caused by using such funds for furniture, fixtures, and equipment replacements are included in cash flows from investing activities.

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, 2015 and 2014.

Hotel Dispositions—Effective January 1, 2015, discontinued operations are defined as the disposal of components of an entity that represents strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. We anticipate that dispositions of hotel properties will not represent a strategic shift that has (or will have) a major effect on our operations and financial results as most will not fit the definition. This new guidance is to be implemented prospectively only. As such, hotel property dispositions that occurred prior to December 31, 2014, will continue to be reported as discontinued operations in the statements of operations for all applicable periods presented. See Note 4.

Assets Held for Sale and Discontinued Operations—We classify assets as held for sale when we have obtained a firm commitment from a buyer, and consummation of the sale is considered probable and expected within one year. The related operations of assets held for sale are reported as discontinued if the disposal is a component of an entity or group of components that represents a strategic shift that has (or will have) a major effect on our operations and cash flows.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Intangible Assets and Liabilities—Intangible assets and liabilities represent the assets and liabilities recorded on certain hotel properties’ ground lease contracts that were below or above market rates at the date of acquisition. These assets and liabilities are amortized using the straight-line method over the remaining terms of the respective lease contracts.

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, 2015 and 2014.

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, 2015, 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 assumptions. No impairment charges were recorded during the three months ended March 31, 2015 and 2014. Valuation adjustments of $(106,000) and $(101,000) on previously impaired notes were credited to impairment charges during the three months ended March 31, 2015 and 2014, respectively.

Investments in Unconsolidated Entities—Investments in entities in which we have ownership interests ranging from 14.4% to 30.1% 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, 2015 and 2014.

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.

Marketable Securities—Marketable securities, including U.S. treasury bills, publicly traded equity securities and stocks, and put and call options on certain publicly traded securities. All of these investments are recorded at fair value. Put and call options are considered derivatives. The fair value of these investments has been determined 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. The cost of securities sold is determined by using the high cost method. Net investment income, including interest income (expense), dividends, realized gains or losses and costs of investment, is reported as a component of “other income.” Unrealized gains and losses on these investments are reported as “unrealized gain (loss) on marketable securities” in the consolidated statements of operations.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Due to/from Affiliates—Due to/from affiliates represents current receivables and payables resulting primarily from advances of shared costs incurred. Both due to/from affiliates are generally settled within a period not exceeding one year.

Due to/from Related Party—Due to/from related party represents current receivables and payables resulting from transactions related to hotel management, project management and market services with a related party. Due to/from related party is generally settled within a period not exceeding one year.

Due to/from Ashford Prime OP, net—Due to/from Ashford Prime OP represents receivables and payables resulting primarily from miscellaneous operating and capital improvement true-ups between the two entities. In 2014, we had receivables related to advisory fees. Both due to/from Ashford Prime OP is generally settled within a period not exceeding one year.

Due to Ashford Inc., net—Due to Ashford Inc., net, represents current payables resulting primarily from advisory services fee, including reimbursable expenses. In 2014, due to Ashford Inc., net, included payables resulting primarily from costs associated with the spin-off of Ashford Inc. Due to Ashford Inc., net, is generally settled within a period not exceeding one year.

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. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. 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. 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. Beginning with 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. As of March 6, 2015, we acquired the remaining approximate 28.26% of the PIM Highland JV which discontinued the aforementioned reimbursements.

Prior to the spin-off of Ashford Inc. in November 2014, we recognized advisory services revenue when services had been rendered. The quarterly base fee was equal to 0.7% per annum of the total market capitalization, as defined in the advisory agreement, of Ashford Prime, subject to certain minimums. Reimbursements for overhead and internal audit services was recognized when services had been rendered. We also recorded advisory services revenue for equity grants of Ashford Prime common stock and LTIP units awarded to our officers and employees in connection with providing advisory services equal to the fair value of the award in proportion to the requisite service period satisfied during the period, as well as an offsetting expense in an equal amount included in “corporate, general and administrative” expense.

Derivatives Instruments and Hedging—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 gain (loss) on derivatives” in the consolidated statements of operations. For the three months ended March 31, 2015 and 2014, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Income Taxes—As a REIT, we generally are not 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.

The “Income Taxes” Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance requires us to determine whether tax positions we have taken or expect to take in a tax return are more likely than not to be sustained upon examination by the appropriate taxing authority based on the technical merits of the positions. Tax positions that do not meet the more likely than not threshold would be recorded as additional tax expense in the current period. We analyze all open tax years, as defined by the statute of limitations for each jurisdiction, which includes the federal jurisdiction and various states. We classify interest and penalties related to underpayment of income taxes as income tax expense. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and cities. Tax years 2011 through 2014 remain subject to potential examination by certain federal and state taxing authorities.

Reclassification—Certain amounts in the consolidated financial statements for the three months ended March 31, 2014, have been reclassified for discontinued operations.

Recently Adopted Accounting Standards—In April 2014, the FASB issued accounting guidance that 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. The new accounting guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. We adopted this accounting guidance on January 1, 2015. The adoption of this accounting guidance impacted the presentation of our results of operations as it required the operations of our disposed hotel property to be included in continuing operations.

Recently Issued Accounting Standards—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 is effective in fiscal periods beginning after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management's responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure requirements. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect the adoption of this standard will have an impact on our financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The ASU amends the consolidation guidance for VIEs and general partners' investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We are currently evaluating the effect of the ASU on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Upon adoption of the standard we will reclassify deferred financing

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

costs, net from total assets to be shown net of debt in the liabilities section of our consolidated balance sheet. Adoption of this standard will only affect the presentation of our consolidated balance sheet.

3. Investments in Hotel Properties, net

Investments in hotel properties, net consisted of the following (in thousands):



	March 31, 2015			December 31, 2014
Land	$	661,499		$	358,514
Buildings and improvements	3,535,862			2,125,656
Furniture, fixtures, and equipment	346,744			211,777
Construction in progress	16,563			11,704
Condominium properties	12,153			12,065
Total cost	4,572,821			2,719,716
Accumulated depreciation	(618,838		)	(591,105		)
Investments in hotel properties, net	$	3,953,983		$	2,128,611

Acquisitions

On February 6, 2015, we acquired a 100% interest in the Lakeway Resort & Spa (“Lakeway Resort”) in Austin, Texas, for total consideration of $33.5 million. The acquisition was funded with cash. We have allocated the assets acquired and liabilities assumed on a preliminary basis using the estimated fair value information currently available. This valuation is considered a Level 3 valuation technique. We are in the process of obtaining necessary information and evaluating the values assigned to investment in hotel properties and property level working capital balances. Thus, the balances reflected below are subject to change and could result in adjustments. Any change to the amounts recorded within the investments in hotel properties will also impact depreciation and amortization expense.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):



Land	$	4,541
Buildings and improvements	24,703
Furniture, fixtures, and equipment	4,237
	33,481
Net other assets and liabilities	(382		)

The results of operations of the hotel property have been included in our results of operations since February 6, 2015. For the three months ended March 31, 2015, we have included total revenue of $1.8 million and net loss of $58,000 in our consolidated statements of operations.

On February 25, 2015, we acquired a 100% interest in the Memphis Marriott East (“Memphis Marriott”) hotel in Memphis, Tennessee for total consideration of $43.5 million. The acquisition was funded with cash. We have allocated the assets acquired and liabilities assumed on a preliminary basis using the estimated fair value information currently available. This valuation is considered a Level 3 valuation technique. We are in the process of obtaining necessary information and evaluating the values assigned to investment in hotel properties and property level working capital balances. Thus, the balances reflected below are subject to change and could result in adjustments. Any change to the amounts recorded within the investments in hotel properties will also impact depreciation and amortization expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):



Land	$	6,210
Buildings and improvements	32,934
Furniture, fixtures, and equipment	4,350
	43,494
Net other assets and liabilities	34

The results of operations of the hotel property have been included in our results of operations since February 25, 2015. For the three months ended March 31, 2015, we have included total revenue of $1.2 million and net income of $152,000 in our consolidated statements of operations.

On March 25, 2015, we completed the financing of a $33.3 million mortgage loan, secured by the Memphis Marriott. See Note 7.

As previously discussed in Note 1, we acquired the remaining approximate 28.26% interest in the PIM Highland JV. The transaction closed on March 6, 2015, for consideration of $250.1 million in cash. We recognized a gain of $381.8 million. Subsequent to the close of the transaction, $907.6 million of existing debt of the PIM Highland JV was refinanced. See Note 7. We have allocated the assets acquired and liabilities assumed on a preliminary basis using the estimated fair value information currently available. This valuation is considered a Level 3 valuation technique. We are in the process of obtaining necessary information and evaluating the values assigned to investment in hotel properties and property level working capital balances. We are also in the process of evaluating the fair value of intangibles associated with above and below market leases which could impact rent expense. Thus, the balances reflected below are subject to change and could result in adjustments. Any change to the amounts recorded within the investments in hotel properties will also impact depreciation and amortization expense.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):



Land	$	292,934
Buildings and improvements	1,351,293
Furniture, fixtures, and equipment	118,878
	1,763,105
Indebtedness	(1,120,082		)
Net other assets and liabilities	105,814

The results of operations of the hotel properties have been included in our results of operations since March 6, 2015. For the three months ended March 31, 2015, we have included total revenue of $37.6 million and net income of $434,000 in our consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Subsequent to March 31, 2015, on April 29, 2015, we completed the acquisition of the Hampton Inn & Suites in Gainesville, Florida for total consideration of $25.3 million in cash.

The following table reflects the unaudited pro forma results of operations as if all acquisitions had occurred and the applicable indebtedness was incurred on January 1, 2014 and the removal of $495,000 of non-recurring transaction costs and gain on acquisition of the PIM Highland JV of $381.8 million. The table also reflects the removal of equity in loss in unconsolidated entity of $3.8 million and $2.8 million for the three month ended March 31, 2015 and 2014, respectively. These adjustments are directly attributable to the transactions for the three months ended March 31, 2015 (in thousands):



	Three Months Ended March 31,
	2015			2014
Total revenue	$	330,830		$	310,103
Net loss	(23,129		)	(11,466		)

4. Hotel Dispositions

Effective January 1, 2015, discontinued operations according to ASU 2014-08 are defined as the disposal 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. As a result, operations of hotels sold subsequent to December 31, 2014 will continue to be reported in continuing operations, while gains/losses on disposition will be included in gain/loss on sale of property, after continuing operations. For transactions that have been classified as discontinued operations for periods prior to ASU 2014-08, we will continue to present the operating results as discontinued operations in the statements of operations for all applicable periods presented.

In March 2015, we completed the sale of the Hampton Inn hotel in Terre Haute, Indiana. We included operations for this hotel through the date of disposition in income (loss) from continuing operations as shown in the consolidated statements of operations for the three months ended March 31, 2015 and 2014, as disposition of this hotel does not represent a strategic shift in our business.

The following table includes condensed financial information from this hotel (in thousands):



	Three Months Ended March 31,
	2015			2014
Total hotel revenue	$	361		$	472
Total hotel operating expenses	(308		)	(430		)
Operating income	53			42
Property taxes, insurance and other	(40		)	(41		)
Depreciation and amortization	(164		)	(150		)
Interest expense and amortization of loan costs	—			(128		)
Loss from continuing operations	(151		)	(277		)
Loss on sale of hotel property	(1,130		)	—
Net loss	(1,281		)	(277		)
Net loss from continuing operations attributable to redeemable noncontrolling interests in operating partnership	147			36
Loss from continuing operations attributable to the Company	$	(1,134	)	$	(241	)

In November 2014, we completed the sale of the Homewood Suites hotel in Mobile, Alabama. Since this hotel sold prior to ASU 2014-08, we will continue to present the operating results as discontinued operations in the statements of operations for all applicable periods presented. The following table includes condensed financial information from this hotel for the three months ended March 31, 2014 (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)



	Three Months Ended March 31,
	2014
Hotel revenues	$	735
Hotel operating expenses	(473		)
Operating income	262
Property taxes, insurance and other	(31		)
Depreciation and amortization	(77		)
Interest expense and amortization of loan costs	(150		)
Net income	4
Income from discontinued operations attributable to redeemable noncontrolling interests in operating partnership	(1		)
Income from discontinued operations attributable to the Company	$	3

5. Note Receivable

At March 31, 2015 and December 31, 2014, we had one mezzanine loan receivable with a net carrying value of $3.6 million, net of a valuation allowance of $7.4 million and $7.5 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 held 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 had 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, were subject to the approval of an executive committee, which was comprised of four persons with us and our partner each designating two of those persons. As a result, we utilized the equity accounting method with respect to the PIM Highland JV.

As previously discussed, pursuant to the Agreement, we agreed to purchase and PRISA III agreed to sell all of PRISA III’s right, title and interest in and to its approximately 28.26% interest in the PIM Highland JV. As of March 6, 2015, we own 100% of the PIM Highland JV. Prior to the acquisition of the remaining approximate 28.26% interest in the PIM Highland JV, we had a carrying value of $144.8 million at December 31, 2014. The acquisition-date fair value of the previous equity interest was $522.8 million and is included in the measurement of the consideration transferred. We recognized a gain of $381.8 million as a result of remeasuring our equity interest in PIM Highland JV before the business combination. See Note 3 for unaudited pro forma results of operations and Note 7 for indebtedness related to the PIM Highland JV.

The following tables summarize the consolidated balance sheet as of December 31, 2014 and the consolidated statements of operations for the period from January 1, 2015 through March 5, 2015 and the three months ended March 31, 2014 of the PIM Highland JV (in thousands):

PIM Highland JV

Condensed Consolidated Balance Sheet



	December 31, 2014
Total assets	$	1,394,806
Total liabilities	1,166,682
Members’ equity	228,124
Total liabilities and members’ equity	$	1,394,806

Our ownership interest in PIM Highland JV	$	144,784

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

PIM Highland JV

Condensed Consolidated Statements of Operations



	Period from January 1 to March 5,			Three Months Ended March 31,
	2015			2014
Total revenue	$	76,695		$	108,761
Total operating expenses	(69,949		)	(95,388		)
Operating income	6,746			13,373
Interest income and other	17			13
Interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees	(10,212		)	(15,908		)
Other expenses	—			(44		)
Income tax expense	(1,222		)	(447		)
Net loss	$	(4,671	)	$	(3,013	)
Our equity in loss of PIM Highland JV	$	(3,836	)	$	(2,754	)

At March 31, 2015 and December 31, 2014, we held a 15.2% and 14.9%, respectively, ownership interest in Ashford Prime OP, a 10-hotel portfolio, totaling 3,707 rooms (3,472 net rooms excluding those attributable to our partners).

The following tables summarize the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 and the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014, of Ashford Prime OP (in thousands):

Ashford Hospitality Prime Limited Partnership

Condensed Consolidated Balance Sheets



	March 31, 2015		December 31, 2014
Total assets	$	1,225,832	$	1,229,508
Total liabilities	815,555		805,510
Partners’ capital	410,277		423,998
Total liabilities and partners’ capital	$	1,225,832	$	1,229,508
Our ownership interest in Ashford Prime OP	$	54,613	$	54,907

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Ashford Hospitality Prime Limited Partnership

Condensed Consolidated Statements of Operations



	Three Months Ended March 31,
	2015			2014
Total revenue	$	77,789		$	61,806
Total operating expenses	(69,530		)	(57,031		)
Operating income	8,259			4,775
Interest income	4			4
Other Income	139			—
Interest expense and amortization and write-offs of loan costs	(9,637		)	(8,989		)
Unrealized gain on investments	1,323			—
Unrealized loss on derivatives	(32		)	(15		)
Income tax expense	(481		)	(226		)
Net loss	(425		)	(4,451		)
Loss from consolidated entities attributable to noncontrolling interests	147			405
Net loss attributable to Ashford Prime OP	$	(278	)	$	(4,046	)
Our equity in loss of Ashford Prime OP	$	(45	)	$	(744	)

On February 27, 2014, we announced that our Board of Directors had approved a plan to spin-off our asset management business into a separate publicly traded company in the form of a taxable special distribution. The spin-off was completed on November 12, 2014, with a pro-rata taxable distribution of Ashford Inc.’s common stock to our common stockholders of record as of November 11, 2014. The distribution was comprised of one share of Ashford Inc. common stock for every 87 shares of our common stock held by our stockholders. In addition for each common unit of our operating partnership the holder received a common unit of the operating limited liability company subsidiary of Ashford Inc. Each holder of common units of the operating limited liability company of Ashford Inc. could exchange up to 99% of those units for shares of Ashford Inc. stock at the rate of one share of Ashford Inc. common stock for every 55 common units. The exchange occurred on November 12, 2014, simultaneously with the distribution to common stockholders. Following the spin-off, we continue to hold approximately 598,000 shares of Ashford Inc. common stock for the benefit of our common stockholders, which represents an approximate 30.1% ownership interest in Ashford Inc. at the time of the spin-off. In connection with the spin-off, we entered into a 20-year advisory agreement with Ashford Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following tables summarize the condensed balance sheets as of March 31, 2015 and December 31, 2014 and the condensed statements of operations for the three months ended March 31, 2015 and 2014 of Ashford Inc. (in thousands):

Ashford Inc.

Condensed Balance Sheets



	March 31, 2015		December 31, 2014
Total assets	$	48,801	$	49,230
Total liabilities	37,807		33,912
Redeemable noncontrolling interests in Ashford LLC	535		424
Total equity	10,459		14,894
Total liabilities and equity	$	48,801	$	49,230
Our ownership interest in Ashford Inc.	$	4,358	$	7,099

Ashford Inc.

Condensed Statements of Operations



	Three Months Ended March 31,
	2015			2014
Total revenue	$	13,118		$	2,312
Total operating expenses	(21,502		)	(11,110		)
Operating loss	(8,384		)	(8,798		)
Income tax expense	(1,454		)	(15		)
Net loss	(9,838		)	(8,813		)
Loss from consolidated entities attributable to noncontrolling interests	763			—
Net loss attributable to redeemable noncontrolling interests in Ashford LLC	21			—
Net loss attributable to Ashford Inc.	$	(9,054	)	$	(8,813	)
Our equity in loss of Ashford Inc.	$	(2,741	)	$	—

Additionally, as of March 31, 2015 and December 31, 2014, 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7. Indebtedness

Indebtedness consisted of the following (in thousands):



Indebtedness	Collateral	Maturity	Interest Rate	March 31, 2015		December 31, 2014
Mortgage loan ⁽⁴⁾	5 hotels	November 2015	Greater of 6.40% or LIBOR ⁽¹⁾ + 6.15%	$	—	$	211,000
Mortgage loan	10 hotels	July 2015	5.22%	—		145,278
Mortgage loan	8 hotels	December 2015	5.70%	92,203		92,772
Mortgage loan	5 hotels	February 2016	5.53%	104,692		105,164
Mortgage loan	5 hotels	February 2016	5.53%	75,207		75,546
Mortgage loan ⁽²⁾⁽⁶⁾	5 hotels	February 2016	LIBOR⁽¹⁾ + 4.75%	200,000		200,000
Mortgage loan ⁽²⁾	7 hotels	August 2016	LIBOR⁽¹⁾ + 4.35%	301,000		301,000
Mortgage loan ⁽²⁾	5 hotels	August 2016	LIBOR⁽¹⁾ + 4.38%	62,900		62,900
Mortgage loan ⁽²⁾	1 hotel	August 2016	LIBOR⁽¹⁾ + 4.20%	37,500		37,500
Mortgage loan ⁽²⁾	8 hotels	January 2017	LIBOR ⁽¹⁾ + 4.95%	376,800		—
Mortgage loan ⁽⁵⁾	24 hotels	April 2017	LIBOR ⁽¹⁾ + 4.39%	1,070,560		—
Mortgage loan ⁽²⁾	1 hotel	April 2017	LIBOR ⁽¹⁾ + 4.95%	33,300		—
Mortgage loan	5 hotels	April 2017	5.95%	111,463		111,869
Mortgage loan	5 hotels	April 2017	5.95%	100,188		100,552
Mortgage loan	5 hotels	April 2017	5.95%	152,447		153,002
Mortgage loan	7 hotels	April 2017	5.95%	121,940		122,384
Mortgage loan	1 hotel	January 2018	4.38%	99,343		—
Mortgage loan	2 hotels	January 2018	4.44%	108,646		—
Mortgage loan ⁽³⁾	1 hotel	July 2019	LIBOR⁽¹⁾ + 3.75%	5,524		5,525
Mortgage loan	1 hotel	November 2020	6.26%	99,509		99,780
Mortgage loan	1 hotel	January 2024	5.49%	10,636		10,673
Mortgage loan	1 hotel	January 2024	5.49%	7,288		7,313
Mortgage loan	1 hotel	May 2024	4.99%	6,819		6,845
Mortgage loan	3 hotels	August 2024	5.20%	67,520		67,520
Mortgage loan	2 hotels	August 2024	4.85%	12,500		12,500
Mortgage loan	3 hotels	August 2024	4.90%	24,980		24,980
Mortgage loan	3 hotels	February 2025	4.45%	54,813		—
Mortgage loan	2 hotels	February 2025	4.45%	24,461		—
Mortgage loan	2 hotels	February 2025	4.45%	21,192		—
				3,383,431		1,954,103
Premiums				4,192		—
Total				$	3,387,623	$	1,954,103

____________________________________

⁽¹⁾ LIBOR rates were 0.176% and 0.171% at March 31, 2015 and December 31, 2014, respectively.

⁽²⁾ This mortgage loan has three one-year extension options subject to satisfaction of certain conditions.

⁽³⁾ This mortgage loan provides for an interest rate of LIBOR + 3.75% with a 0.25% LIBOR floor for the first 18 months and is fixed at 4.0% thereafter.

⁽⁴⁾ This mortgage loan had three one-year extension options subject to satisfaction of certain conditions. The first one-year extension period began in November 2014.

⁽⁵⁾ This mortgage loan has four one-year extension options subject to satisfaction of certain conditions.

⁽⁶⁾This mortgage loan has a LIBOR floor of 0.20%.

On January 2, 2015, we refinanced two mortgage loans totaling $356.3 million. The refinance included our $211.0 million mortgage loan due November 2015 and the $145.3 million mortgage loan due July 2015. The new loans totaled $477.3 million in four loan pools as of March 31, 2015. The new loans include a $376.8 million mortgage loan due January 2017, a $54.8 million mortgage loan due February 2025, a $24.5 million mortgage loan due February 2025 and a $21.2 million mortgage loan due February 2025. The $376.8 million mortgage loan is interest only and provides for a floating interest rate of LIBOR + 4.95%. The stated maturity is January 2017, with three one-year extension options. The three mortgage loans totaling $100.5 million due February 2025 bear interest at a fixed rate of 4.45%. The stated maturity date for each of these loans is February 2025. The new loans continue to be secured by the same 15 hotel properties.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

On March 25, 2015, we completed the financing of a $33.3 million mortgage loan, secured by the Memphis Marriott. The mortgage loan is interest only and provides for a floating interest rate of LIBOR + 4.95%. The stated maturity is April 2017, with three one-year extension options.

During the three months ended March 31, 2015, we recognized premium amortization of $127,000. The amortization of the premium is computed using a method that approximates the effective interest method, which is included in interest expense and amortization of premiums and loan costs in the consolidated statements of operations.

As previously discussed in Note 1, pursuant to the Agreement, we acquired the remaining approximate 28.26% interest in the PIM Highland JV. The transaction closed on March 6, 2015. Subsequent to the close of the transaction, $907.6 million of assumed mortgage loans due March 2015 were refinanced with a $1.07 billion non-recourse mortgage loan due April 2017. The new loan provides for an interest rate of LIBOR plus 4.39%. Additionally we assumed two mortgage loans which include a $99.3 million mortgage due January 2018 with a fixed interest rate of 4.38% and a $108.6 million mortgage loan due January 2018 with a fixed interest rate of 4.44%.

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 all or 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. 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 Ashford Trust OP, our operating partnership, and the liabilities of such subsidiaries do not constitute the obligations of Ashford Trust or Ashford Trust OP. 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, 2015, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended.

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 stockholders 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.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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,
	2015			2014
Net income (loss) allocated to common stockholders:
Net income (loss) attributable to the Company	$	321,496		$	(2,391	)
Less: Dividends on preferred stocks	(8,490		)	(8,490		)
Less: Dividends on common stock	(11,964		)	(9,629		)
Less: Dividends on unvested restricted shares	(165		)	(84		)
Less: Undistributed income from continuing operations allocated to unvested shares	(2,035		)	—
Undistributed income (loss)	298,842			(20,594		)
Add back: Dividends on common stock	11,964			9,629
Distributed and undistributed income (loss) from continuing operations - basic	$	310,806		$	(10,965	)
Add back: Income from continuing operations allocated to operating partnership units	45,336			—
Distributed and undistributed net income (loss) - diluted	$	356,142		$	(10,965	)

Income from discontinued operations allocated to common stockholders:
Income from discontinued operations attributable to the Company	$	—		$	3

Weighted average shares outstanding:
Weighted average common shares outstanding - basic	95,539			81,690
Effect of assumed conversion of operating partnership units	18,373			—
Weighted average shares outstanding - diluted	113,912			81,690

Basic income (loss) per share:
Income (loss) from continuing operations allocated to common stockholders per share	$	3.25		$	(0.13	)
Income from discontinued operations allocated to common stockholders per share	—			—
Net income (loss) allocated to common stockholders per share	$	3.25		$	(0.13	)

Diluted income (loss) per share:
Income (loss) from continuing operations allocated to common stockholders per share	$	3.13		$	(0.13	)
Income from discontinued operations allocated to common stockholders per share	—			—
Net income (loss) allocated to common stockholders per share	$	3.13		$	(0.13	)

Due to the anti-dilutive effect, the computation of diluted income (loss) per share does not reflect adjustments for the following items (in thousands):



	Three Months Ended March 31,
	2015		2014
Net income (loss) allocated to common stockholders is not adjusted for:
Income allocated to unvested restricted shares	$	2,200	$	84
Net income (loss) attributable to noncontrolling interest in operating partnership units	—		(877		)
Total	$	2,200	$	(793	)

Weighted average diluted shares are not adjusted for:
Effect of unvested restricted shares	432		144
Effect of assumed conversion of operating partnership units	—		19,316
Total	432		19,460

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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 primarily use interest rate derivatives to hedge our debt as a way to potentially improve cash flows. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR and RevPAR. The interest rate derivatives currently include interest rate caps. These derivatives are subject to master netting settlement arrangements. As of March 31, 2015, maturities on these instruments range from November 2015 to April 2017. To mitigate the 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.

In 2015, we entered into interest rate caps with notional amounts totaling $1.5 billion and strike rates ranging from 2.50% to 3.00%. These interest rate caps had effective dates from January 2015 to March 2015, and maturity dates from January 2017 to April 2017, for a total cost of $1.3 million. These instruments were not designated as a cash flow hedges. These instruments cap the interest rates on our mortgage loans with principal balances of $1.5 billion and a maturity dates from January 2017 to April 2017.

In 2014, we entered into an interest rate cap with a notional amount and strike rate of $200.0 million and 2.25%, respectively, which had an effective date of January 2014, a maturity date of February 2016 and total cost of $216,000. The instrument was not designated as a cash flow hedge. This instrument caps the interest rate on our mortgage loan with a principal balance of $200.0 million and a maturity date of February 2016.

Credit Default Swap Derivatives—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 was approximately $1.8 million as of March 31, 2015. 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.

In February 2015 and August 2011, we entered into credit default swap transactions for notional amounts of $45.0 million and $100.0 million, respectively, to hedge financial and capital market risk for upfront costs of $1.6 million and $8.2 million, respectively, that was subsequently returned to us as collateral by our counterparty. The net carrying value of these credit default swaps was an asset of $503,000 and liability of $184,000 as of March 31, 2015 and December 31, 2014, respectively, which are included in “derivative assets, net” and “liabilities associated with marketable securities and other”, respectively, in the consolidated balance sheets. We recognized an unrealized loss of $0.7 million and $226,000 for the three months ended March 31, 2015 and 2014, respectively, which 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 publicly traded equity securities and put and call options on certain publicly traded equity securities, which are considered derivatives. At March 31, 2015, we had investments in these derivatives totaling $1.2 million and liabilities of $1.0 million. At December 31, 2014, we had investments in these derivatives totaling $654,000 and liabilities of $997,000.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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.

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, 2015, the LIBOR interest rate forward curve (Level 2 inputs) assumed an uptrend from 0.18% to 1.31% 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.

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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)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting⁽⁴⁾			Total


March 31, 2015:
Assets
Derivative assets:
Interest rate derivatives - non-hedge	$	—		$	414	$	—	$	—		$	414		⁽¹⁾
Credit default swaps	—			1,331		—		(828		)	503			⁽¹⁾
Equity put options	935			—		—		—			935			⁽²⁾
Equity call options	267			—		—		—			267			⁽²⁾
Non-derivative assets:
Equity	53,155			—		—		—			53,155			⁽²⁾
U.S. treasury securities	18,070			—		—		—			18,070			⁽²⁾
Total	72,427			1,745		—		(828		)	73,344

Liabilities
Derivative liabilities:
Short equity put options	(353		)	—		—		—			(353		)	⁽³⁾
Short equity call options	(694		)	—		—		—			(694		)	⁽³⁾
Non-derivative liabilities:
Equity	(1,427		)	—		—		—			(1,427		)	⁽³⁾
Margin account balance	(10,297		)	—		—		—			(10,297		)	⁽³⁾
Total	(12,771		)	—		—		—			(12,771		)
Net	$	59,656		$	1,745	$	—	$	(828	)	$	60,573

December 31, 2014:
Assets
Derivative assets:
Interest rate derivatives - non-hedge	$	—		$	182	$	—	$	—		$	182		⁽¹⁾
Equity put options	653			—		—		—			653			⁽²⁾
Equity call options	1			—		—		—			1			⁽²⁾
Non-derivative assets:
Equity securities	57,941			—		—		—			57,941			⁽²⁾
U.S. treasury securities	4,622			—		—		—			4,622			⁽²⁾
Total	63,217			182		—		—			63,399
Liabilities
Derivative liabilities:
Credit default swaps	—			379		—		(563		)	(184		)	⁽³⁾
Short equity put options	(216		)	—		—		—			(216		)	⁽³⁾
Short equity call options	(781		)	—		—		—			(781		)	⁽³⁾
Non-derivative liabilities:
Short equity securities	(17		)	—		—		—			(17		)	⁽³⁾
Margin account balance	(5,003		)	—		—		—			(5,003		)	⁽³⁾
Total	(6,017		)	379		—		(563		)	(6,201		)
Net	$	57,200		$	561	$	—	$	(563	)	$	57,198

____________________________________

⁽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.

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 summarize the effect of fair-value-measured assets and liabilities on the consolidated statements of operations for the three months ended March 31, 2015 and 2014 (in thousands):