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 September 30, 2015
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: 001-35972

ASHFORD HOSPITALITY PRIME, INC.

(Exact name of registrant as specified in its charter)

Maryland
 
46-2488594
(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
¨
 
Accelerated filer
þ
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
 
28,471,004
(Class)
 
Outstanding at November 5, 2015




ASHFORD HOSPITALITY PRIME, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS

 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS (unaudited)

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share amounts)
 
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
 
Cash and cash equivalents
 
$
85,708

 
$
171,439

Investments in hotel properties, net
 
1,034,073

 
990,303

Restricted cash
 
32,007

 
29,646

Accounts receivable, net of allowance of $71 and $47, respectively
 
13,714

 
12,382

Inventories
 
809

 
696

Note receivable
 
8,098

 
8,098

Deferred costs, net
 
3,867

 
4,707

Prepaid expenses
 
3,684

 
2,422

Investment in unconsolidated entity
 
47,073

 

Investment in Ashford Inc., at fair value
 
12,365

 

Derivative assets
 
1,795

 
35

Other assets
 
2,415

 
1,193

Intangible assets, net
 
23,240

 
2,542

Due from Ashford Trust OP, net
 
110

 

Due from related party, net
 
535

 
541

Due from third-party hotel managers
 
8,599

 
5,504

Total assets
 
$
1,278,092

 
$
1,229,508

Liabilities and Equity
 
 
 
 
Liabilities:
 
 
 
 
Indebtedness
 
$
760,344

 
$
765,230

Accounts payable and accrued expenses
 
37,482

 
29,273

Dividends payable
 
3,320

 
1,425

Unfavorable management contract liabilities
 
198

 
316

Due to Ashford Trust OP, net
 

 
896

Due to Ashford Inc.
 
2,441

 
2,546

Due to third-party hotel managers
 
1,146

 
954

Intangible liability, net
 
3,696

 
3,739

Other liabilities
 
1,146

 
1,131

Total liabilities
 
809,773

 
805,510

Commitments and contingencies (Note 14)
 

 

5.50% Series A cumulative convertible preferred stock, $0.01 par value, 2,600,000 shares issued and outstanding at September 30, 2015
 
62,339

 

Redeemable noncontrolling interests in operating partnership
 
59,484

 
149,555

Equity:
 
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,736,757 and 25,393,433 shares issued and 28,471,004 and 24,464,163 shares outstanding at September 30, 2015 and December 31, 2014, respectively
 
297

 
254

Additional paid-in capital
 
456,172

 
391,184

Accumulated deficit
 
(83,564
)
 
(96,404
)
Treasury stock, at cost, 1,265,753 and 929,270 shares at September 30, 2015 and December 31, 2014, respectively
 
(21,826
)
 
(16,130
)
Total stockholders’ equity of the Company
 
351,079

 
278,904

Noncontrolling interest in consolidated entities
 
(4,583
)
 
(4,461
)
Total equity
 
346,496

 
274,443

Total liabilities and equity
 
$
1,278,092

 
$
1,229,508

See Notes to Condensed Consolidated Financial Statements.

2

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
 
 
 
 
 
 
 
Rooms
$
70,584

 
$
65,253

 
$
192,868

 
$
171,484

Food and beverage
16,346

 
15,886

 
58,368

 
49,488

Other
3,795

 
3,615

 
10,038

 
9,494

Total hotel revenue
90,725

 
84,754

 
261,274

 
230,466

Other
34

 
30

 
111

 
91

Total revenue
90,759

 
84,784

 
261,385

 
230,557

Expenses
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Rooms
14,804

 
14,039

 
41,895

 
38,564

Food and beverage
12,318

 
11,118

 
38,926

 
32,377

Other expenses
25,508

 
23,079

 
69,405

 
60,078

Management fees
3,709

 
3,497

 
10,564

 
9,408

Total hotel expenses
56,339

 
51,733

 
160,790

 
140,427

Property taxes, insurance and other
4,585

 
4,076

 
13,781

 
12,127

Depreciation and amortization
11,308

 
10,657

 
32,384

 
30,136

Advisory services fee
3,514

 
3,117

 
9,776

 
9,256

Transaction costs
255

 
45

 
255

 
1,871

Corporate general and administrative
1,502

 
458

 
3,810

 
2,453

Total expenses
77,503

 
70,086

 
220,796

 
196,270

Operating income
13,256

 
14,698

 
40,589

 
34,287

Equity in loss of unconsolidated entity
(3,399
)
 

 
(4,219
)
 

Interest income
12

 
10

 
21

 
20

Other income (expense)
(59
)
 

 
1,233

 

Interest expense and amortization of loan costs
(9,348
)
 
(10,137
)
 
(28,060
)
 
(29,159
)
Write-off of loan costs and exit fees

 

 
(54
)
 

Unrealized loss on investment in Ashford Inc.
(5,621
)
 

 
(5,621
)
 

Unrealized gain (loss) on derivatives
(2,061
)
 
3

 
(2,101
)
 
(63
)
Income (loss) before income taxes
(7,220
)
 
4,574

 
1,788

 
5,085

Income tax expense
(62
)
 
(185
)
 
(371
)
 
(622
)
Net income (loss)
(7,282
)
 
4,389

 
1,417

 
4,463

(Income) loss from consolidated entities attributable to noncontrolling interest
(1,090
)
 
154

 
(1,068
)
 
741

Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
1,532

 
(1,171
)
 
(671
)
 
(1,213
)
Net income (loss) attributable to the Company
(6,840
)
 
3,372

 
(322
)
 
3,991

Preferred dividends
(895
)
 

 
(1,093
)
 

Net income (loss) attributable to common stockholders
$
(7,735
)
 
$
3,372

 
$
(1,415
)
 
$
3,991

Income (loss) per share – basic:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
(0.29
)
 
$
0.13

 
$
(0.06
)
 
$
0.16

Weighted average common shares outstanding – basic
27,162

 
25,298

 
25,109

 
24,310

Income (loss) per share – diluted:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
(0.29
)
 
$
0.13

 
$
(0.06
)
 
$
0.16

Weighted average common shares outstanding – diluted
27,162

 
34,429

 
25,109

 
33,315

Dividends declared per common share
$
0.10

 
$
0.05

 
$
0.25

 
$
0.15

Amounts attributable to common stockholders:
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
$
(6,840
)
 
$
3,372

 
$
(322
)
 
$
3,991

Preferred dividends
(895
)
 

 
(1,093
)
 

Net income (loss) attributable to common stockholders
$
(7,735
)
 
$
3,372

 
$
(1,415
)
 
$
3,991


See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(7,282
)
 
$
4,389

 
$
1,417

 
$
4,463

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Total other comprehensive income

 

 

 

Total comprehensive income (loss)
(7,282
)
 
4,389

 
1,417

 
4,463

Comprehensive (income) loss attributable to noncontrolling interest in consolidated entities
(1,090
)
 
154

 
(1,068
)
 
741

Comprehensive (income) loss attributable to redeemable noncontrolling interests in operating partnership
1,532

 
(1,171
)
 
(671
)
 
(1,213
)
Comprehensive income (loss) attributable to the Company
$
(6,840
)
 
$
3,372

 
$
(322
)
 
$
3,991

See Notes to Condensed Consolidated Financial Statements.


4

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(unaudited, in thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Treasury Stock
 
Noncontrolling
Interest in
Consolidated
Entities
 
Total
 
Redeemable Noncontrolling Interests in Operating Partnership
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance at January 1, 2015
25,393


$
254

 
$
391,184

 
$
(96,404
)
 
(929
)
 
$
(16,130
)
 
$
(4,461
)
 
$
274,443

 
$
149,555

Purchase of treasury stock

 

 

 

 
(480
)
 
(8,215
)
 

 
(8,215
)
 

Equity-based compensation



 
1,126

 

 

 

 

 
1,126

 
974

Issuance of common stock
200


2

 
3,102

 

 

 

 

 
3,104

 

Issuance of restricted shares/units

 

 
(789
)
 

 
45

 
789

 

 

 

Forfeiture of restricted common shares

 

 
10

 

 
(2
)
 
(17
)
 

 
(7
)
 

Dividends declared – common stock



 

 
(6,546
)
 

 

 

 
(6,546
)
 

Dividends declared – preferred stock

 

 

 
(1,093
)
 

 

 

 
(1,093
)
 

Distributions to noncontrolling interests

 

 

 

 

 

 
(1,190
)
 
(1,190
)
 
(1,732
)
Redemption/conversion of operating partnership units
4,144

 
41

 
61,539

 

 
100

 
1,747

 

 
63,327

 
(69,183
)
Net income

 

 

 
(322
)
 

 

 
1,068

 
746

 
671

Redemption value adjustment

 

 

 
20,801

 

 

 

 
20,801

 
(20,801
)
Balance at September 30, 2015
29,737

 
$
297

 
$
456,172

 
$
(83,564
)
 
(1,266
)
 
$
(21,826
)
 
$
(4,583
)
 
$
346,496

 
$
59,484

See Notes to Condensed Consolidated Financial Statements.


5

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows from Operating Activities
 
 
 
Net income
$
1,417

 
$
4,463

Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization
32,384

 
30,136

Equity-based compensation
2,100

 
1,787

Bad debt expense
113

 

Amortization of loan costs
1,835

 
1,328

Write-off of loan costs and exit fees
54

 

Amortization of intangibles
(110
)
 
(160
)
Realized gain on marketable securities
(1,068
)
 

Unrealized loss on investment in Ashford Inc.
5,621

 

Purchases of marketable securities
(105,878
)
 

Sales of marketable securities
55,654

 

Unrealized loss on derivatives
2,101

 
63

Equity in loss of unconsolidated entity
4,219

 

Deferred tax benefit
(918
)
 

Payments for derivatives
(3,853
)
 

Changes in operating assets and liabilities, exclusive of the effect of hotel acquisitions:
 
 
 
Restricted cash
(1,433
)
 
(2,028
)
Accounts receivable and inventories
(687
)
 
(7,566
)
Prepaid expenses and other assets
(1,036
)
 
(762
)
Accounts payable and accrued expenses
6,079

 
6,849

Due to/from related party, net
6

 
(605
)
Due to/from third-party hotel managers
(2,903
)
 
12,452

Due to/from Ashford Trust OP, net
(757
)
 
(5,875
)
Due to/from Ashford Inc.
(105
)
 

Other liabilities
(1
)
 
197

Net cash provided by (used in) operating activities
(7,166
)
 
40,279

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Proceeds from property insurance
24

 
54

Acquisition of hotel properties, net of cash acquired
(81,780
)
 
(169,609
)
Investment in Ashford Inc.
(16,623
)
 

Proceeds from disposal of property, plant and equipment
206

 

Change in restricted cash related to improvements and additions to hotel properties
(654
)
 
(20,845
)
Improvements and additions to hotel properties
(13,945
)
 
(17,755
)
Net cash used in investing activities
(112,772
)
 
(208,155
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Borrowings on indebtedness
70,000

 
80,000

Repayments of indebtedness
(74,886
)
 
(5,941
)
Payments of loan costs and exit fees
(1,199
)
 
(3,277
)
Payments for derivatives
(8
)
 
(93
)
Purchase of treasury shares
(8,875
)
 

Payments for spin-off costs

 
(1,091
)
Payments for dividends
(7,725
)
 
(4,677
)
Issuance of preferred stock
62,597

 

Issuance of common stock
3,104

 
143,933

Issuance of restricted shares/units

 
19

Forfeiture of restricted shares/units
(7
)
 
(10
)
Redemption of operating partnership units
(5,856
)
 

Distributions to a noncontrolling interest in a consolidated entity
(2,938
)
 
(1,981
)
Net cash provided by financing activities
34,207

 
206,882

 
 
 
 
Net change in cash and cash equivalents
(85,731
)
 
39,006

Cash and cash equivalents at beginning of period
171,439

 
143,776

Cash and cash equivalents at end of period
$
85,708

 
$
182,782

 
 
 
 

6

Table of Contents

 
Nine Months Ended September 30,
 
2015
 
2014
Supplemental Cash Flow Information
 
 
 
Interest paid
$
25,830

 
$
27,054

Income taxes paid
1,788

 
719

Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Investment in unconsolidated entity
$
51,292

 
$

Net other assets and liabilities acquired
(3,208
)
 
(3,615
)
Assumption of debt

 
69,000

Dividends declared but not paid
3,320

 
1,726

Capital expenditures accrued but not paid
613

 
378

Proceeds from disposal of property, plant and equipment
1,363

 

Investment in Ashford Inc.
1,363

 

Distributions declared but not paid to a noncontrolling interest in a consolidated entity

 
296

Accrued preferred stock offering expenses
258

 

See Notes to Condensed Consolidated Financial Statements.

7

Table of Contents
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1. Organization and Description of Business
Ashford Hospitality Prime, Inc., together with its subsidiaries (“Ashford Prime”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”), luxury, upper-upscale and upscale hotels in gateway and resort locations. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then-current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Ashford Prime has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code. Ashford Prime conducts its business and owns substantially all of its assets through its operating partnership, Ashford Hospitality Prime Limited Partnership (“Ashford Prime OP”). In this report, the terms “the Company,” “we,” “us” or “our” refers to Ashford Hospitality Prime, Inc. and, as the context may require, all entities included in its financial statements.
We became a public company on November 19, 2013, when Ashford Hospitality Trust, Inc. (“Ashford Trust”) completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. On July 13, 2015, Ashford Trust announced that its board of directors had declared the distribution (1) to its stockholders of approximately 4.1 million shares of common stock of Ashford Prime to be received by Ashford Trust upon redemption of Ashford Prime OP common units and (2) to the common unit holders of Ashford Hospitality Trust Limited Partnership of its remaining common units of Ashford Prime OP. The distribution occurred on July 27, 2015, to stockholders and common unit holders of record as of the close of business of the New York Stock Exchange on July 20, 2015. As a result of the distribution, Ashford Trust has no ownership interest in Ashford Prime. As a result of Ashford Trust's distribution of its remaining common units of Ashford Prime OP and shares of common stock of Ashford Prime, the Prime TRSs revoked their elections to be taxable REIT subsidiaries of Ashford Trust. The Prime TRSs remain taxable REIT subsidiaries of Ashford Prime.
We are advised by Ashford LLC, our affiliate, through an advisory agreement. Ashford LLC is a subsidiary of Ashford Inc., which was spun-off from, and remains an affiliate of, Ashford Trust. 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 September 30, 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., chairman emeritus of Ashford Trust, managed two of our eleven hotel properties. Third-party management companies managed the remaining hotel properties. On September 17, 2015, Remington Lodging and Ashford Inc. entered into an agreement pursuant to which Ashford Inc. will acquire all of the general partner interest and eighty percent of the limited partner interests in Remington Lodging. The acquisition is subject to the satisfaction of various conditions, including the approval of Ashford Inc.’s stockholders. The acquisition, if completed, will not impact our management agreements with Remington Lodging.
As of September 30, 2015 , we own and operate eleven hotels in six states and the District of Columbia. The portfolio includes nine wholly-owned hotel properties and two hotel properties that are owned through a partnership in which Ashford Prime OP has a controlling interest. These hotels represent 3,772 total rooms, or 3,537 net rooms, excluding those attributable to our partner. As a REIT, Ashford Prime needs to comply with limitations imposed by the Internal Revenue Code related to operating hotels. As of September 30, 2015 , all of our eleven hotel properties were leased by wholly-owned or majority-owned subsidiaries that are treated as taxable REIT subsidiaries (“TRS”) for federal income tax purposes (collectively the TRS entities are referred to as “Prime TRS”). Prime TRS then engages hotel management companies to operate the hotels under management contracts. As of September 30, 2015 , nine of the eleven hotel properties were leased by Ashford Prime’s wholly-owned TRS and two hotel properties majority-owned through a consolidated partnership were leased to a TRS wholly-owned by such consolidated partnership. Each hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from Prime TRS is eliminated in consolidation. The hotels are operated under management contracts with Marriott International, Inc. (“Marriott”), Hilton Worldwide (“Hilton”), Accor Business and Leisure Management, LLC (“Accor”) and Remington Lodging, which are eligible independent contractors under the Internal Revenue Code.

8

Table of Contents
ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation —The accompanying unaudited condensed consolidated financial statements include the accounts of Ashford Hospitality Prime, Inc., its majority-owned subsidiaries and a majority-owned consolidated entity in which it has a controlling interest. The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to 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.
Ashford Prime OP is considered to be a variable interest entity (“VIE”), as defined by authoritative accounting guidance. A VIE 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. All major decisions related to Ashford Prime OP that most significantly impact its 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 our wholly-owned subsidiary, Ashford Prime OP General Partner LLC, its general partner. As such, we consolidate Ashford Prime OP.
The following items affect reporting comparability of our historical condensed consolidated financial statements:
Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the three and nine months ended September 30, 2015 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 .
On February 24, 2014, we acquired the Sofitel Chicago Water Tower, and on March 1, 2014, we acquired the Pier House Resort. The results of these hotels are included in our results of operations as of their respective acquisition dates.
On July 9, 2015, we acquired the Bardessono Hotel and Spa (“Bardessono Hotel”). The results of this hotel are included in our results of operations as of its acquisition date.
Use of Estimates —The preparation of these condensed 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 4% to 5% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. For purposes of the condensed 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 —Hotel properties are generally stated at cost. For hotel properties owned through our majority-owned entities, the carrying basis attributable to the partners’ minority ownership is recorded at 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 the 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 the 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. During the three and nine months ended September 30, 2015 and 2014 , there were no impairment charges.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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.
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.
Investment in Unconsolidated Entity —We hold an investment in an unconsolidated entity in which we have an ownership interest of  45.3% that is accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the entity’s net income/loss. We review the investment in unconsolidated entity for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. If our analysis indicates that the investment’s estimated fair value is less than the carrying amount, we record an impairment in equity in earnings (loss) in unconsolidated entity.  No  such impairment was recorded in the  three and nine months ended September 30, 2015 . We also hold approximately 195,000 shares of Ashford Inc. common stock, which represented an approximately  9.7%  ownership interest in Ashford Inc. and had a fair value of $12.4 million at September 30, 2015. This investment would typically be accounted for under the equity method of accounting, under ASC 323-10 - Investments - Equity Method and Joint Ventures . However, we have elected to record our investment in Ashford Inc. using the fair value option under ASC 825-10 - Fair Value Option - Financial Assets and Financial Liabilities .
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 —Prior to our investment in the AIM Real Estate Hedged Equity (U.S.) Fund, L.P. (the “REHE Fund”) we held marketable securities. Marketable securities included U.S. treasury bills, publicly traded equity securities and put and call options on certain publicly traded equity securities. All of our investments in marketable securities were recorded at fair value. Put and call options were considered derivatives. The fair value of these investments was determined based on the closing price as of the balance sheet date. The cost of securities sold was determined by using the high cost method. Net investment income, including interest income (expense), dividends, realized gains and losses, and costs of investment, is reported as a component of “other income.”
Due to/from Related Party, net —Due to/from related party, net, represents current receivables related to advances for project management services and payables resulting from transactions related to hotel management, project management and market services with a related party. These receivables and payables are generally settled within a period not exceeding one year.
Due to/from Ashford Trust OP, net —Due to/from Ashford Trust OP, net, represents payables and receivables related to reimbursable expenses as of September 30, 2015 . As of December 31, 2014 , these payables also included the advisory services fee for the period when Ashford LLC was a subsidiary of Ashford Trust. These receivables and payables are generally settled within a period not exceeding one year.
Due to Ashford Inc. —Due to Ashford Inc. represents payables related to the advisory services fee, including reimbursable expenses, for the periods following Ashford Inc.’s spin-off from Ashford Trust. These payables are generally settled within a period not exceeding one year.
Due to/from Third-Party Hotel Managers —Due from third-party hotel managers primarily consists of amounts due from Marriott related to cash reserves held at the Marriott corporate level related to operating, capital improvements, insurance, real estate taxes and other items. Due to third-party hotel managers primarily consists of amounts due to Marriott, Hilton and Accor related to rebilled expenses.
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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Derivative 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. Interest rate derivatives include interest rate caps and floors. 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. These derivatives are subject to master netting settlement arrangements. As the derivatives are subject to master netting settlement arrangements, we report derivatives with the same counterparty net on the condensed consolidated balance sheets. We also purchase options on Eurodollar futures to hedge against our cash flows. Eurodollar futures prices reflect market expectations for interest rates on three month Eurodollar deposits for specific dates in the future, and the final settlement price is determined by three-month LIBOR on the last trading day. Options on Eurodollar futures provide the ability to limit losses while maintaining the possibility of profiting from favorable changes in the futures prices. As the purchaser, our maximum potential loss is limited to the initial premium paid for the Eurodollar option contracts, while our potential gain has no limit. These exchange-traded options are centrally cleared, and a clearinghouse stands in-between all trades to ensure that the obligations involved in the trades are satisfied.
All derivatives are recorded at fair value in accordance with the applicable authoritative accounting guidance. Interest rate derivatives and futures contracts are reported as “derivative assets” in the condensed consolidated balance sheet. The changes in fair value are recognized in earnings as “unrealized gain (loss) on derivatives” in the condensed consolidated statements of operations.
Noncontrolling Interests —The redeemable noncontrolling interests in the operating partnership represent the limited partners’ proportionate share of equity in earnings/losses of Ashford Prime OP, which is an allocation of net income attributable to the common unit holders based on the weighted average ownership percentage of these limited partners’ common unit holdings throughout the period. The redeemable noncontrolling interests in Ashford Prime OP are classified in the mezzanine section of the condensed consolidated balance sheets as these redeemable operating units do not meet the requirements for equity classification prescribed by the authoritative accounting guidance because the redemption feature requires the delivery of cash or registered shares at our option. The carrying value of the noncontrolling interests in Ashford Prime OP is based on the greater of the accumulated historical cost or the redemption value.
The noncontrolling interest in consolidated entities represents an ownership interest of 25% in two hotel properties at September 30, 2015 and December 31, 2014 , and is reported in equity in the condensed consolidated balance sheets.
Net income/loss attributable to redeemable noncontrolling interests in operating partnership and income/loss from consolidated entities attributable to noncontrolling interest are reported as deductions/additions from/to net income/loss. Comprehensive income/loss attributable to these noncontrolling interests is reported as reductions/additions from/to comprehensive income/loss.
Equity-Based Compensation —Stock/unit-based compensation for non-employees is accounted for at fair value based on the market price of the shares at period end in accordance with applicable authoritative accounting guidance that results in the recordation of expense, included in “advisory services fee,” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. Performance stock units (“PSUs”) granted to certain executive officers are accounted for at fair value at period end based on a Monte Carlo simulation valuation model that results in the recordation expense, included in “advisory services fee,” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. Stock/unit grants to independent directors are recorded at fair value based on the market price of the shares at grant date, which amount is fully expensed as the grants of stock/units are fully vested on the date of grant.
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, Prime 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 Prime 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 bases.
The entities that own the eleven hotels are considered partnerships for federal income tax purposes. Partnerships are not subject to U.S. federal income taxes. The partnerships’ revenues and expenses pass through to and are taxed on the owners. The states and cities where the partnerships operate follow the U.S. federal income tax treatment, with the exception of the District of Columbia, Texas, and the city of Philadelphia. Accordingly, we provide for income taxes in these jurisdictions for the partnerships. The entities that operate the eleven hotels are considered taxable corporations for U.S. federal, state, and city income tax purposes and have elected to be taxable REIT subsidiaries of Ashford Prime. The entities that operate the two hotels owned by a consolidated partnership elected to be treated as taxable REIT subsidiaries (“TRS”) of Ashford Trust in April 2007, when the partnership was acquired by

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Ashford Trust. As a result of Ashford Trust’s distribution of its remaining common units of Ashford Prime OP and shares of common stock of Ashford Prime on July 27, 2015, the Prime TRSs revoked their elections to be taxable REIT subsidiaries of Ashford Trust effective July 29, 2015. The Prime TRSs remain taxable REIT subsidiaries of Ashford Prime.
As of September 30, 2015, Ashford Prime’s wholly-owned TRS had recorded deferred tax assets of $1.2 million . After evaluating positive and negative evidence, including the generation of taxable income during the nine months ended September 30, 2015, and a carry back potential of certain deferred tax assets, we determined that it is more likely than not that we will utilize a portion of our deferred tax assets. As a result, in the three and nine month periods ending September 30, 2015, we released $43,000 and $918,000 , respectively, of our valuation allowance and correspondingly recorded non-cash income tax benefits of $43,000 and $918,000 , which reduced our income tax expense for the three and nine months ended September 30, 2015.
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 2012 through 2014 remain subject to potential examination by certain federal and state taxing authorities.
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 affects the presentation of our results of operations to the extent that the operations of disposed hotel properties are 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. In August 2015, the FASB issued ASU 2015-14,  Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which defers the effective date to fiscal periods beginning after December 15, 2017. Early adoption is permitted for fiscal periods beginning after December 15, 2016. 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. ASU 2014-15 also requires certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. 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 (“ASU 2015-02”). 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 evaluating the effect that ASU 2015-02 will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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 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 sheets and related disclosures.
In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30) : Presentation and Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements  (“ASU 2015-15”) to amend SEC paragraphs of the FASB Accounting Standards Codification pursuant to an SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting. The guidance in ASU 2015-03, described above, does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We do not expect that the adoption of this standard will have an impact on our financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16,  Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments  (“ASU 2015-16”), as part of its Simplification Initiative to provide guidance on management’s responsibility to adjust provisional amounts recognized in a business combination and to provide related disclosure requirements. The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and has an adjustment to provisional amounts recognized during the measurement period. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. We do not expect that the adoption of this standard will have an impact on our financial position, results of operations or cash flows.
3. Investments in Hotel Properties, net
Investments in hotel properties, net consisted of the following (in thousands):
 
 
September 30, 2015
 
December 31, 2014
Land
 
$
202,356

 
$
202,356

Buildings and improvements
 
980,615

 
918,809

Furniture, fixtures and equipment
 
65,463

 
56,623

Construction in progress
 
1,617

 
1,557

Total cost
 
1,250,051

 
1,179,345

Accumulated depreciation
 
(215,978
)
 
(189,042
)
Investments in hotel properties, net
 
$
1,034,073

 
$
990,303


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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Acquisitions
Bardessono Hotel
On July 9, 2015 , we acquired a 100% leasehold interest in the Bardessono Hotel in Yountville, California for total consideration of $85.0 million . The acquisition was funded with proceeds from our recently completed preferred stock offering and cash on hand. See Note 13. Ashford Inc. agreed to provide $2.0 million of key money consideration in connection with its engagement to provide hotel advisory services. The key money consideration included 19,897 shares of Ashford Inc. common stock, which represented approximately 1% of the outstanding shares of Ashford Inc. The initial value assigned to the shares was based on the previous 10-day closing prices as of July 1, 2015, which was approximately $1.8 million . The remaining key money consideration was paid in cash in the amount of $206,000 . The key money consideration was paid on September 14, 2015. In return for the key money consideration, Ashford Prime transferred furniture, fixtures and equipment with a carrying value of $1.9 million to Ashford Inc., which was subsequently leased back at no cost for a term of five years. The fair value of the key money consideration received on September 14, 2015, was approximately $1.6 million , which decreased in value from July 1, 2015 solely due to the change in the price of Ashford Inc. common stock. Prepaid rent on the sale-leaseback was recorded in the amount of $302,000 , which will be amortized over the five-year lease term. Lease expense related to the prepaid rent of $3,000 was recognized for the three and nine months ended September 30, 2015 .
The hotel advisory services and the lease are considered a multiple element arrangement, in accordance with the applicable accounting guidance. As such, a portion of the base advisory fee will be allocated to lease expense equal to the estimated fair value of the lease payments that would have been made. As a result, $15,000 of advisory expense was allocated to lease expense for the three and nine months ended September 30, 2015 . Lease expense is included in “other” expense in the condensed consolidated statements of operations.
We have allocated the purchase price to the assets acquired and liabilities assumed on a preliminary basis using estimated fair value information currently available. We are in the process of evaluating the values assigned to investment in hotel property, property level working capital balances and intangibles. This valuation is considered a Level 3 valuation technique. Thus, the balances reflected below are subject to change, and any such changes could result in adjustments to the allocation. Any change to the amounts recorded within the investments in hotel properties or intangibles 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):
 
Preliminary Allocations as of September 30, 2015
Land
$

Buildings and improvements
58,786

Furniture, fixtures, and equipment
5,385

 
64,171

Intangible asset
20,816

Net other assets and liabilities
(3,208
)
The results of operations of the Bardessono Hotel have been included in our results of operations since July 9, 2015 . For both the three and nine months ended September 30, 2015 , we have included total revenue of $4.9 million and net income of $897,000 , in our condensed consolidated statements of operations. The unaudited pro forma results of operations as if the acquisition had occurred on January 1, 2014 are included in the pro forma table below under “Pro Forma Financial Results.”
Intangible Assets
The intangible asset associated with the Bardessono Hotel noted above represents a below-market rate ground lease, the value of which was determined based on the comparison of rent due under the lease contract assumed in the acquisition for the remaining duration of the lease contract with the market rate, and is amortized over the respective lease term with an expiration date of 2105 . We had one other intangible asset, related to a below market rate lease, prior to the acquisition of the Bardessono Hotel. The

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


expiration date of that lease is 2043 . Including both intangible assets, amortization related to intangible assets was an expense of $74,000 and $119,000 for the three and nine months ended September 30, 2015 , respectively.
Estimated future amortization expense for intangible assets for each of the next five years is as follows (in thousands):
 
Intangible Assets
2015
$
80

2016
320

2017
320

2018
320

2019
320

Thereafter
21,880

Total
$
23,240

Pro Forma Financial Results
The following table reflects the unaudited pro forma results of operations as if the Bardessono Hotel acquisition had occurred on January 1, 2014 and the removal of $255,000 of non-recurring transaction costs. These adjustments are directly attributable to the transaction for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Total revenue
$
91,191

 
$
90,087

 
$
270,210

 
$
243,427

Net income (loss)
(6,961
)
 
5,406

 
1,198

 
5,226

4. Note Receivable
As of September 30, 2015 and December 31, 2014 , we owned a note receivable of $8.1 million from the city of Philadelphia, Pennsylvania. The note bears interest at a rate of 12.85% and matures in 2018. The interest income recorded on the note receivable is offset against the interest expense recorded on the TIF loan of the same amount. See Note 6.
5. Investment in Unconsolidated Entity
In June 2015, in exchange for consideration of certain marketable securities, we obtained a 45.3% ownership interest in the REHE Fund. The REHE Fund is managed by Ashford Investment Management, LLC (“AIM”), an indirect subsidiary of Ashford Inc. The REHE Fund invests substantially all of its assets in the AIM Real Estate Hedged Equity Master Fund, LP (the “Master Fund”), and as a consequence of our investment in the REHE Fund, we obtained an indirect interest in the Master Fund. Our maximum loss exposure is limited to our investment in the REHE Fund.
The following tables summarize the condensed balance sheet as of  September 30, 2015 , and the condensed statements of operations for the three and nine months ended September 30, 2015 , of the REHE Fund (in thousands):
AIM Real Estate Hedged Equity (U.S.) Fund, LP
Condensed Balance Sheet
 
 
September 30, 2015
Total assets
 
$
103,954

Total liabilities
 
11

Partners’ capital
 
103,943

Total liabilities and partners’ capital
 
$
103,954

Our ownership interest in the REHE Fund
 
$
47,073


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


AIM Real Estate Hedged Equity (U.S.) Fund, LP
Condensed Statements of Operations
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2015
Total investment income
 
$
508

 
$
732

Net expenses
 
(205
)
 
(235
)
Net investment income
 
303


497

Unrealized loss on investments
 
(7,839
)
 
(10,829
)
Realized gain on investments
 
29

 
1,064

Net loss attributable to the REHE Fund
 
$
(7,507
)
 
$
(9,268
)
Our equity in loss of the REHE Fund
 
$
(3,399
)
 
$
(4,219
)
The Master Fund generally invests in publicly traded equity securities and put and call options on publicly traded equity securities. The REHE Fund records its investment in the Master Fund at its proportionate share of net assets of the Master Fund. Income (loss) and distributions are allocated to the REHE Fund’s partners based on their respective ownership percentage of the REHE Fund. Our equity in loss in the REHE Fund represents our share of the REHE Fund’s loss from June 1, 2015 through September 30, 2015 . We generally may redeem our investment in the REHE Fund on the last business day of a month after providing a 45-day written notice. As of September 30, 2015 , we have no unfunded commitments to the REHE Fund. We are not obligated to pay any portion of the management fee or the performance allocation in favor of the REHE Fund’s investment manager and general partner, respectively, but we do share pro rata in all other applicable expenses of the REHE Fund.
On July 31, 2015, we entered into a block trade with an unaffiliated third party pursuant to a sale arrangement between the Company, Ashford Inc. and Ashford Trust. The block trade included the purchase from a third party of approximately 175,000 shares of Ashford Inc. common stock at $95.00 per share, which approximated the 120-day volume weighted average share price, for a total cost of approximately $16.6 million . The sale arrangement and block trade were evaluated and approved by the independent members of our board of directors. The block trade purchase price and other terms of the sale arrangement were the result of negotiations with the third party, and the board of directors received a fairness opinion from an independent financial advisor that the price paid for the Ashford Inc. shares by the Company was fair to the Company. We did not receive any concessions or economic benefits from Ashford Inc. pertaining to our current contractual arrangements with Ashford Inc. in connection with this block trade. The block trade settled on August 4, 2015, and the loss resulting from the block trade is recorded within “unrealized loss on investment in Ashford Inc.” in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2015.
Separately, on September 14, 2015, we received 19,897 shares of Ashford Inc. common stock from Ashford Inc. as part of our acquisition of the Bardessono Hotel. See Note 3 for discussion of that transaction. As of September 30, 2015 , we held approximately 195,000 shares of Ashford Inc. common stock, which represented an approximate  9.7%  ownership interest in Ashford Inc. and had a fair value of $12.4 million . See Notes 9 and 10.
As we exercise significant influence over Ashford Inc., this investment would typically be accounted for under the equity method of accounting, under ASC 323-10 - Investments - Equity Method and Joint Ventures . However, we have elected to record our investment in Ashford Inc. using the fair value option under ASC 825-10 - Fair Value Option - Financial Assets and Financial Liabilities . We have elected to use the fair value option to account for our investment in Ashford Inc. as the fair value is readily available since Ashford Inc. common stock is traded on a national exchange. The fair value of our investment in Ashford Inc. is included in “investment in Ashford Inc., at fair value” on our condensed consolidated balance sheet, and changes in market value are included in “unrealized loss on investment in Ashford Inc.” on our condensed consolidated statements of operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The following tables summarize the condensed balance sheet as of  September 30, 2015 , and the condensed statements of operations for the  three and nine months ended September 30, 2015 , of Ashford Inc. (in thousands):
Ashford Inc.
Condensed Balance Sheet
 
 
September 30, 2015
Total assets
 
$
173,821

Total liabilities
 
45,444

Redeemable noncontrolling interests in Ashford LLC
 
286

Total stockholders’ equity of Ashford Inc.
 
26,091

Noncontrolling interests in consolidated entities
 
102,000

Total equity
 
128,091

Total liabilities and equity
 
$
173,821

Our investment in Ashford Inc., at fair value
 
$
12,365

Ashford Inc.
Condensed Statements of Operations
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2015
Total revenue
 
$
14,496

 
$
42,103

Total operating expenses
 
(13,219
)
 
(45,600
)
Operating income (loss)
 
1,277

 
(3,497
)
Unrealized loss on investment in unconsolidated entity
 
(1,954
)
 
(3,020
)
Unrealized loss on investments
 
(7,861
)
 
(10,851
)
Realized gain on investments
 
35

 
1,070

Other
 
385

 
599

Income tax expense
 
(1,036
)
 
(1,500
)
Net income (loss)
 
(9,154
)
 
(17,199
)
Loss from consolidated entities attributable to noncontrolling interests
 
9,208

 
13,323

Net (income) loss attributable to redeemable noncontrolling interests in Ashford LLC
 

 
10

Net income (loss) attributable to Ashford Inc.
 
$
54

 
$
(3,866
)
Our unrealized loss on investment in Ashford Inc.
 
$
(5,621
)
 
$
(5,621
)

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


6. Indebtedness
Indebtedness consisted of the following (in thousands):
Indebtedness
 
Collateral
 
Maturity
 
Interest Rate
 
September 30, 2015
 
December 31, 2014
Mortgage loan
 
1 hotel
 
September 2015
 
LIBOR (1)  + 4.90%
 
$

 
$
69,000

Mortgage loan (3)
 
1 hotel
 
March 2016
 
LIBOR (1) + 2.30%
 
80,000

 
80,000

Secured revolving credit facility (4)
 
Various
 
November 2016
 
Base Rate  (2) + 1.25% to 2.75% or LIBOR (1)  + 2.25% to 3.75%
 

 

Mortgage loan (3)
 
1 hotel
 
March 2017
 
LIBOR (1)  + 2.25% to 2.50%
 
70,000

 

Mortgage loan (5)
 
1 hotel
 
April 2017
 
5.91%
 
33,505

 
33,860

Mortgage loan
 
2 hotels
 
April 2017
 
5.95%
 
122,823

 
124,111

Mortgage loan
 
3 hotels
 
April 2017
 
5.95%
 
249,934

 
252,556

TIF loan (5) (6)
 
1 hotel
 
June 2018
 
12.85%
 
8,098

 
8,098

Mortgage loan
 
2 hotels
 
November 2019
 
LIBOR (1)  + 2.65%
 
195,984

 
197,605

Total
 
 
 
 
 
 
 
$
760,344

 
$
765,230

__________________
(1)  
LIBOR rates were 0.193% and 0.171% at September 30, 2015 and December 31, 2014 , respectively.
(2)  
Base Rate, as defined in our secured revolving credit facility agreement, is the greater of (i) the prime rate set by Bank of America, or (ii) federal funds rate + 0.5% .
(3)  
This loan has three one -year extension options, subject to satisfaction of certain conditions.
(4)  
Our borrowing capacity under our secured revolving credit facility is $150.0 million . We have an option, subject to lender approval, to further increase the borrowing capacity to an aggregate of $300.0 million . We may use up to $15.0 million for standby letters of credit. The secured revolving credit facility has two one -year extension options subject to advance notice, satisfaction of certain conditions and a 0.25% extension fee.
(5)  
These loans are collateralized by the same property.
(6)  
The interest expense from the TIF loan is offset against interest income recorded on the note receivable of the same amount. See Note 4.
On March 9, 2015, we refinanced our  $69.0 million  mortgage loan, with an outstanding balance of  $69.0 million  due September 2015, with a  $70.0 million  mortgage loan due March 2017, with three one -year extension options, subject to the satisfaction of certain conditions. The new loan is interest only and provides for a floating interest rate of LIBOR +  2.25% to 2.50% . The mortgage loan is secured by the Pier House Resort in Key West, Florida.
We are required to maintain certain financial ratios under our secured revolving credit facility. If we violate covenants in any debt 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. Violations of certain debt covenants may result in our inability to borrow unused amounts under our line of credit, even if repayment of some or all of our 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 the consolidated group. Presently, our existing financial covenants are non-recourse and primarily relate to maintaining minimum debt coverage ratios. As of September 30, 2015 , we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


7. Income (Loss) 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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss) attributable to common stockholders – Basic and diluted:
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
$
(6,840
)
 
$
3,372

 
$
(322
)
 
$
3,991

Less: Dividends on preferred stock
(895
)
 

 
(1,093
)
 

Less: Dividends on common stock
(2,833
)
 
(1,265
)
 
(6,449
)
 
(3,793
)
Less: Dividends on performance stock units
(35
)
 

 
(70
)
 

Less: Dividends on unvested restricted shares
(14
)
 
(5
)
 
(27
)
 
(13
)
Less: Net income allocated to unvested shares

 
(8
)
 

 
(1
)
Undistributed net income (loss) allocated to common stockholders
(10,617
)
 
2,094

 
(7,961
)
 
184

Add back: Dividends on common stock
2,833

 
1,265

 
6,449

 
3,793

Distributed and undistributed net income (loss) – basic
$
(7,784
)
 
$
3,359

 
$
(1,512
)
 
$
3,977

Net income attributable to redeemable noncontrolling interests in operating partnership

 
1,171

 

 
1,213

Distributed and undistributed net income – diluted
$
(7,784
)
 
$
4,530

 
$
(1,512
)
 
$
5,190

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
27,162

 
25,298

 
25,109

 
24,310

Effect of assumed conversion of operating partnership units

 
9,131

 

 
9,005

Weighted average common shares outstanding – diluted
27,162

 
34,429

 
25,109

 
33,315

 
 
 
 
 
 
 
 
Income (loss) per share – basic:
 
 
 
 
 
 
 
Net income (loss) allocated to common stockholders per share
$
(0.29
)
 
$
0.13

 
$
(0.06
)
 
$
0.16

Income (loss) per share – diluted:
 
 
 
 
 
 
 
Net income (loss) allocated to common stockholders per share
$
(0.29
)
 
$
0.13

 
$
(0.06
)
 
$
0.16

Due to their anti-dilutive effect, the computation of diluted income (loss) per share does not reflect the adjustments for the following items (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss) allocated to common stockholders is not adjusted for:
 
 
 
 
 
 
 
Net income allocated to performance stock units
$
35

 
$

 
$
70

 
$

Net income allocated to unvested restricted shares
14

 
13

 
27

 
14

Net income (loss) attributable to redeemable noncontrolling interests in operating partnership
(1,532
)
 

 
671

 

Dividends on Series A preferred stock
895

 

 
1,093

 

Total
$
(588
)
 
$
13

 
$
1,861

 
$
14

Weighted average diluted shares are not adjusted for:
 
 
 
 
 
 
 
Effect of performance stock units
181

 

 
69

 

Effect of unvested restricted shares
64

 
46

 
38

 
58

Effect of assumed conversion of operating partnership units
5,385

 

 
7,446

 

Effect of assumed conversion of Series A preferred stock
3,439

 

 
1,398

 

Total
9,069

 
46

 
8,951

 
58


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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


8. 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 and interest rate floors to hedge our debt and our cash flows. The interest rate derivatives include interest rate caps and interest rate floors, which are subject to master netting settlement arrangements. As of  September 30, 2015 , the maturities on these instruments ranged from March 2016 to July 2020. All derivatives are recorded at fair value.
In 2015 , we entered into an interest rate cap with a notional amount and strike rate of $56.0 million and 4.5% , respectively, which had an effective date of March 2015, a maturity date of March 2017 and a total cost of $8,000 . 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 $70.0 million and a maturity date of March 2017. We also entered into two interest rate floors with an aggregate notional amount and strike rate of $3.0 billion and -0.25% , respectively, which had an effective date of July 2015 and a maturity date of July 2020, for a total cost of $3.5 million .
In 2014, we entered into an interest rate cap with a notional amount and strike rate of $80.0 million and 1.50% , respectively, which had an effective date of February 2014, a maturity date of March 2016 and total cost of $93,000 . 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 $80.0 million and a maturity date of March 2016. In connection with the $69.0 million mortgage loan assumed in connection with the Pier House Resort acquisition, we acquired an interest rate cap with a notional amount and strike rate of $69.0 million and 1.80% , respectively, which had an effective date of September 2013, a maturity date of September 2015 and a total cost of  $19,000 . This interest rate cap was terminated in March 2015 when the related mortgage loan was refinanced. This instrument was not designated as a cash flow hedge.
In 2014, we entered into an interest rate cap with a notional amount and strike rate of  $148.5 million  and  4.00% , respectively, which had an effective date of November 2014, a maturity date of December 2016 and a total cost of  $33,000 . This instrument was not designated as a cash flow hedge. This instrument caps the interest rate on our mortgage loan with a principal balance of  $196.0 million  and a maturity date of November 2019.
Futures Contracts —In September 2015, we entered into Eurodollar futures for upfront costs, including commissions, of $372,000 and maturity dates ranging from September 2016 to March 2017 . The net carrying value of these futures contracts was an asset of $313,000 as of September 30, 2015 , which is included in “derivative assets” in the condensed consolidated balance sheets. No unrealized gain or loss was recognized for the three and nine months ended September 30, 2015 .
9. Fair Value Measurements
Fair Value Hierarchy —Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of 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.
The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the Level 2 inputs). We also incorporate credit valuation adjustments (the Level 3 inputs) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. The fair value of interest rate floors is determined by obtaining the last market bid prices from several counterparties for a similar investment as of the measurement date. The bids (the Level 2 inputs) used in the calculation of fair value are reviewed across each counterparty and are accessed individually to determine the relevant fair value of each

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


interest rate floor. The fair value of futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). The fair value of futures contracts reflect minimal counterparty risk because futures contracts are exchange-traded and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures contracts, guarantees the futures contracts against default.
We have determined that 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 the 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present 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)
 
Total
 
September 30, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
Interest rate derivatives
 
$

 
$
1,482

 
$
1,482

(1)  
Futures contracts
 
313

 

 
313

(1)  
 
 
313

 
1,482

 
1,795

 
Non-derivative assets:
 
 
 
 
 
 
 
Investment in Ashford Inc.
 
12,365

 

 
12,365

 
Total
 
12,991

 
2,964

 
15,955

 
 
 
Significant Other
Observable Inputs (Level 2)
 
Total
 
December 31, 2014
 
 
 
 
 
Assets
 
 
 
 
 
Derivative assets:
 
 
 
 
 
Interest rate derivatives
 
$
35

 
$
35

(1)  
__________________
(1)  
Reported as “derivative assets” in the condensed consolidated balance sheets.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Effect of Fair Value Measured Assets and Liabilities on Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on the condensed consolidated statements of operations (in thousands):
 
 
Gain (Loss) Recognized in Income
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2015
 
 
2014
 
 
2015
 
 
2014
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$
(2,061
)
 
 
$
3

 
 
$
(2,101
)
 
 
$
(63
)
 
Equity put options
 

 
 

 
 
(1,017
)
 
 

 
Equity call options
 

 
 

 
 
23

 
 

 
 
 
 
 
 
 
 
 


 
 


 
Non-derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Investment in Ashford Inc.
 
(5,621
)
 
 

 
 
(5,621
)
 
 

 
Equity - American Depositary Receipt
 

 
 

 
 
(75
)
 
 

 
Equity securities
 

 
 

 
 
560

 
 

 
U.S. treasury securities
 

 
 

 
 
53

 
 

 
Total
 
(7,682
)
 
 
3

 
 
(8,178
)
 
 
(63
)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Short equity put options
 

 
 

 
 
680

 
 

 
Short equity call options
 

 
 

 
 
844

 
 

 
Net
 
$
(7,682
)
 
 
$
3

 
 
$
(6,654
)
 
 
$
(63
)
 
Total combined
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$
(2,061
)
(1)  
 
$
3

(1)  
 
$
(2,101
)
(1)  

$
(63
)
(1)  
Unrealized loss on investment in Ashford Inc.
 
(5,621
)
(2)  
 

 
 
(5,621
)
(2)  
 

 
Realized gain on marketable securities
 

(3)  
 

 
 
1,068

(3)  
 

 
Net
 
$
(7,682
)
 
 
$
3

 
 
$
(6,654
)
 
 
$
(63
)
 
__________________
(1)  
Reported as “unrealized loss on derivatives” in the condensed consolidated statements of operations.
(2)  
Reported as “unrealized loss investment in Ashford Inc.” in the condensed consolidated statements of operations.
(3)  
Reported as “other income” in the condensed consolidated statements of operations.
10. Summary of Fair Value of Financial Instruments
Determining the estimated fair values of certain financial instruments such as notes receivable and indebtedness requires considerable judgment to interpret market data. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled.

22

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The carrying amounts and estimated fair values of financial instruments were as follows (in thousands):
 
 
September 30, 2015
 
December 31, 2014
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial assets and liabilities measured at fair value:
 
 
 
 
 
 
 
 
Investment in Ashford Inc.
 
$
12,365

 
$
12,365

 
$

 
$

Derivative assets
 
1,795

 
1,795

 
35

 
35

Financial assets not measured at fair value:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
85,708

 
$
85,708

 
$
171,439

 
$
171,439

Restricted cash
 
32,007

 
32,007

 
29,646

 
29,646

Accounts receivable, net
 
13,714

 
13,714

 
12,382

 
12,382

Note receivable
 
8,098

 
$9,728 to $10,752

 
8,098

 
$10,295 to $11,378

Due from Ashford Trust OP, net
 
110

 
110

 

 

Due from related party, net
 
535

 
535

 
541

 
541

Due from third-party hotel managers
 
8,599

 
8,599

 
5,504

 
5,504

Financial liabilities not measured at fair value:
 
 
 
 
 
 
 
 
Indebtedness
 
$
760,344

 
$734,198 to $811,479

 
$
765,230

 
$747,659 to $826,359

Accounts payable and accrued expenses
 
37,482

 
37,482

 
29,273

 
29,273

Dividends payable
 
3,320

 
3,320

 
1,425

 
1,425

Due to Ashford Trust OP, net
 

 

 
896

 
896

Due to Ashford Inc.
 
2,441

 
2,441

 
2,546

 
2,546

Due to third-party hotel managers
 
1,146

 
1,146

 
954

 
954

Cash, cash equivalents and restricted cash . These financial assets bear interest at market rates and have maturities of less than 90 days. The carrying values approximate fair value due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Accounts receivable, net, due from related party, net, accounts payable and accrued expenses, dividends payable, due to/from Ashford Trust OP, net, due to Ashford Inc. and due to/from third-party hotel managers . The carrying values of these financial instruments approximate their fair values due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Note receivable . Fair value of the note receivable was determined by using similar loans with similar collateral. Since there is very little to no trading activity, we had to rely on our internal analysis of what we believe a willing buyer would pay for this note at September 30, 2015 and December 31, 2014 . We estimated the fair value of the note receivable to be approximately 20.1% to 32.8% higher than the carrying value of $8.1 million at September 30, 2015 and approximately 27.1% to 40.5% higher than the carrying value of $8.1 million at December 31, 2014 . This is considered a Level 2 valuation technique.
Investment in Ashford Inc. Fair value of the investment in Ashford Inc. is based on the quoted closing price on the balance sheet date. This is considered a Level 1 valuation technique.
Derivative assets . Fair value of the interest rate derivatives is determined using the net present value of the expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of the Company and the counterparties. Fair value of interest rate floors is determined by obtaining the last market bid prices from several counterparties for a similar investment as of the measurement date. Futures contracts are valued at their last reported settlement price as of the measurement date. See Notes 2, 8 and 9 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. The 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 the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. We estimated the fair value of the total indebtedness to be approximately 96.6% to 106.7% of the carrying value of $760.3 million at September 30, 2015 and approximately 97.7% to 108.0% of the carrying value of $765.2 million at December 31, 2014 . This is considered a Level 2 valuation technique.

23

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


11. Redeemable Noncontrolling Interests in Operating Partnership
Redeemable noncontrolling interests in the operating partnership represents the limited partners’ proportionate share of equity and their allocable share of equity in earnings/losses of Ashford Prime OP, which is an allocation of net income/loss attributable to the common unit holders based on the weighted average ownership percentage of these limited partners’ common units of limited partnership interest in the operating partnership (“common units”) and units issued under our Long-Term Incentive Plan (the “LTIP units”) that are vested. Beginning one year after issuance, each common unit may be redeemed, by the holder, for either cash or, at our sole discretion, one share of our common stock.
LTIP units, which are issued to certain officers and employees of Ashford LLC as compensation, have vesting periods of three years. Additionally, certain independent members of the board of directors have elected to receive LTIP units as part of their compensation, which are fully vested upon grant. Upon reaching economic parity with common units, each vested LTIP unit can be converted by the holder into one common unit which can then be redeemed for cash or, at our election, settled in our common stock. An LTIP unit will achieve parity with the common units upon the sale or deemed sale of all or substantially all of the assets of the operating partnership at a time when our stock is trading at a level in excess of the price it was trading on the date of the LTIP issuance. More specifically, LTIP units will achieve full economic parity with common units in connection with (i) the actual sale of all or substantially all of the assets of the operating partnership or (ii) the hypothetical sale of such assets, which results from a capital account revaluation, as defined in the partnership agreement, for the operating partnership.
As of September 30, 2015 , we have issued a total of 365,000 LTIP units, all of which, other than approximately 3,000  units issued in March 2015 and 6,000 units issued May 2015, had reached full economic parity with, and are convertible into, common units. Expense of $244,000 and $974,000 was recognized for the three and nine months ended September 30, 2015 , of which $244,000 and $872,000 , respectively, was associated with LTIP units issued to Ashford LLC’s employees, which amounts are included in “advisory services fee” and  $102,000 was associated with LTIP units issued to our independent directors for the nine months ended September 30, 2015 , which is included in “corporate general and administrative” expense in our condensed consolidated statements of operations. Expense of $370,000 and $1.5 million was recognized for the three and nine months ended September 30, 2014 , of which $370,000 and $1.4 million , respectively, associated with LTIP units issued to Ashford LLC’s employees is included in “advisory services fee” and $49,000 associated with LTIP units issued to our independent directors is included in “corporate general and administrative” expense in our condensed consolidated statements of operations for the nine months ended September 30, 2014. The fair value of the unrecognized cost of LTIP units, which was $2.3 million at September 30, 2015 , will be expensed over a period of 2.5 years.
During the nine months ended September 30, 2015 , approximately 345,000 common units with an aggregate fair value of $5.9 million at redemption were redeemed by the holders and, at our election, we issued cash at an average price of $16.97 per unit to satisfy the redemption price. Excluding the Ashford Trust redemption of our OP common units discussed below, during the three and nine months ended September 30, 2015 , approximately 70,000 and 100,000 common units with aggregate fair values of $1.1 million and $1.6 million at redemption, respectively, were redeemed by the holders and, at our election, we issued shares of our common stock to satisfy the redemption price. During the three and nine months ended September 30, 2014 , no common units were redeemed for cash or shares of our common stock.
Redeemable noncontrolling interests in Ashford Prime OP as of September 30, 2015 and December 31, 2014 , were $59.5 million and $149.6 million , respectively, which represented ownership of our operating partnership of 16.53% and 25.88% , respectively. The carrying value of redeemable noncontrolling interests as of September 30, 2015 and December 31, 2014 , included adjustments of $9.2 million and $47.3 million , respectively, to reflect the excess of redemption value over the accumulated historical costs. For the three and nine months ended September 30, 2015 , we allocated net loss of $1.5 million and net income of $671,000 to the redeemable noncontrolling interests, respectively. For the three and nine months ended September 30, 2014 , we allocated net income of $1.2 million and $1.2 million to the redeemable noncontrolling interests, respectively. We declared aggregate cash distributions to holders of common units and holders of LTIP units of $438,000 and $1.7 million for the three and nine months ended September 30, 2015 , respectively, and $456,000 and $1.4 million for the three and nine months ended September 30, 2014 , respectively. These distributions are recorded as a reduction of redeemable noncontrolling interests in operating partnership.
Ashford Trust Distribution of Ashford Prime Common Stock and Ashford Prime OP Common Units —On July 13, 2015, Ashford Trust announced that its board of directors had declared the distribution (1) to its stockholders of approximately 4.1 million shares of common stock of Ashford Prime to be received by Ashford Trust upon redemption of Ashford Prime OP common units and (2) to the common unit holders of Ashford Hospitality Trust Limited Partnership of its remaining common units of Ashford Prime OP. The distribution occurred on July 27, 2015, to stockholders and common unit holders of record as of the close of business of the New York Stock Exchange on July 20, 2015. The distribution had an aggregate fair value of approximately $61.7 million at redemption. As a result of the distribution, Ashford Trust has no ownership interest in Ashford Prime.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


12. Equity and Stock-Based Compensation
Equity Offering —On June 9, 2015, we commenced a private placement of  200,000  shares of common stock at  $15.52  per share for gross proceeds of  $3.1 million . The offering closed on June 11, 2015. The net proceeds from the sale of the shares after discounts and offering expenses were approximately  $3.1 million .
Dividends —Common stock dividends declared for the three and nine months ended September 30, 2015 , were $2.9 million and $6.5 million , respectively. Common stock dividends declared for the three and nine months ended September 30, 2014 , were $1.3 million and $3.8 million , respectively. On May 13, 2015, our board of directors increased our quarterly cash dividend from $0.05 to $0.10 per share of our common stock beginning with the second quarter 2015 dividend.
Performance Stock Units —On June 8, 2015, the compensation committee of the board of directors of the Company approved grants of PSUs to certain executive officers. The award agreements provide for the grant of a target number of 350,000 PSUs that will be settled in shares of common stock of the Company or common partnership units of the operating partnership, at the executive’s election, if and when the applicable vesting criteria have been achieved following the end of the performance and service period, which began on January 1, 2015 and ends on December 31, 2017. The target number of PSUs may be adjusted from 0% to 200% based on achievement of a specified relative total stockholder return, as determined by the Company’s Compensation Committee.
Stock-Based Compensation —Stock-based compensation expense for the three and nine months ended September 30, 2015 , was $691,000 and $1.1 million , respectively. For the three and nine months ended September 30, 2015 , expense of $78,000 and $224,000 , respectively, is associated with restricted shares of our common stock issued to Ashford LLC’s employees and included in “advisory services fee.” At September 30, 2015 , the unrecognized cost of the unvested shares of restricted stock issued to Ashford LLC’s employees was $774,000 which will be expensed over a period of 2.5 years . For the three and nine months ended September 30, 2015 , expense of $613,000 and $750,000 , respectively, is associated with PSUs issued to certain executive officers and included in “advisory services fee.” At September 30, 2015 , the unrecognized cost of the unvested PSUs was $5.4 million which will be expensed over a period of 2.3 years . For the nine months ended September 30, 2015 , expense of $153,000 is associated with shares of our common stock issued to our independent directors and included in “corporate general and administrative” expense on our condensed consolidated statements of operations. Stock-based compensation expense for the three and nine months ended September 30, 2014 , was $61,000 and $327,000 , respectively, of which $61,000 and $130,000 , respectively, is associated with restricted shares of our common stock issued to Ashford LLC’s employees and included in “advisory services fee” and $197,000 is associated with shares of our common stock issued to our independent directors and included in “corporate general and administrative” expense on our condensed consolidated statements of operations for the nine months ended September 30, 2014 .
Stock Repurchases —On October 27, 2014, our board of directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time. The repurchase program does not have an expiration date. The specific timing, manner, price, amount and other terms of the repurchases are at management’s discretion and depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. Under the repurchase program, we repurchased 471,064 shares of our common stock, for approximately $8.1 million , during the nine months ended September 30, 2015 . No shares were repurchased during the three months ended September 30, 2015 . As of September 30, 2015 , we have purchased a cumulative 1.4 million shares of our common stock, for approximately $24.2 million , since the program’s inception on November 4, 2014.
Noncontrolling Interest in Consolidated Entities —A partner had a noncontrolling ownership interest of 25% in two hotel properties with a total carrying value of $(4.6) million and $(4.5) million at September 30, 2015 and December 31, 2014 , respectively. Income from consolidated entities attributable to this noncontrolling interest was $1.1 million for both the three and nine months ended September 30, 2015 , respectively. Loss from consolidated entities attributable to this noncontrolling interest was $154,000 and $741,000 for the three and nine months ended September 30, 2014 , respectively.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


13. 5.5% Series A Cumulative Convertible Preferred Stock
On June 9, 2015, we entered into a purchase agreement for the sale of 2.6 million shares of our 5.5% Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) to a financial institution, which resold the Series A Preferred Stock to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) at an initial offering price of $25.00 per share, with an aggregate underwriting discount of $1.5 million (net purchase price of $24.4125 per share). The net proceeds from the offering of the Series A Preferred Stock after the underwriting discount and other expenses were $62.3 million . At September 30, 2015 , we had  2.6 million  outstanding shares of Series A Preferred Stock. Due to certain redemption features that are not under our control, the Series A Preferred Stock is classified outside of permanent equity.
Each share of Series A Preferred Stock is convertible at any time, at the option of the holder, into a number of whole shares of common stock at an initial conversion price of $18.90 (which represents an initial conversion rate of 1.3228 shares of our common stock, subject to certain adjustments). The Series A Preferred Stock is also subject to conversion upon certain events constituting a change of control. Holders of the Series A Preferred Stock have no voting rights, subject to certain exceptions.
Commencing June 11, 2016, the Company may, at its option, cause the Series A Preferred Stock to be converted in whole or in part, on a pro rata basis, into fully paid and nonassessable shares of the Company’s common stock at the conversion price, provided that the “Closing Bid Price” (as defined in the Articles Supplementary) of the Company’s common stock shall have equaled or exceeded 110% of the conversion price for the immediately preceding 45 consecutive trading days ending three days prior to the date of notice of conversion.  In the event of such mandatory conversion, the Company shall pay holders of the Series A Preferred Stock any additional dividend payment to make the holder whole on dividends expected to be received through June 11, 2019, in an amount equal to the net present value, where the discount rate is the dividend rate on the Series A Preferred Stock, of the difference between (i) the annual dividend payments the holders of Series A Preferred Stock would have received in cash from the date of the mandatory conversion to June 11, 2019, and (ii) the common stock quarterly dividend payments the holders of Series A Preferred Stock would have received over the same time period had such holders held common stock.
The Series A Preferred Stock dividend for all issued and outstanding shares is set at $1.375 per annum per share. For the three and nine months ended September 30, 2015 , we declared dividends of  $895,000 and $1.1 million with respect to shares of Series A Preferred Stock. 
14. Commitments and Contingencies
Restricted Cash —Under certain management and debt agreements for our hotel properties existing at September 30, 2015 , escrow payments are required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt and management agreements, we escrow 4% to 5% of gross revenues for capital improvements.
Management Fees —Under management agreements for our hotel properties existing at September 30, 2015 , we pay a) monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by our independent directors, if required. These management agreements expire from May 14, 2023, through December 31, 2041, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.
Litigation —The Company is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within the contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the Company. However, the final results of these legal proceedings cannot be predicted with certainty and if the Company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the Company’s current estimates of the range of potential losses, the Company’s consolidated financial position or results of operations could be materially adversely affected in future periods.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


15. Segment Reporting
We operate in one business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refer to owning hotels through either acquisition or new development. We report operating results of direct hotel investments on an aggregate basis as substantially all of our hotel investments have similar economic characteristics and exhibit similar long-term financial performance. As of September 30, 2015 and December 31, 2014 , all of our hotel properties were domestically located.
16. Related Party Transactions
In connection with our spin-off, we entered into an advisory agreement with Ashford LLC, as amended, which was an indirect subsidiary of Ashford Trust until November 12, 2014, when its parent company, Ashford Inc. was spun off by Ashford Trust. Ashford LLC acts as our advisor, and as a result, we pay advisory fees to Ashford LLC. We are required to pay Ashford LLC a quarterly base fee that is a percentage of our total market capitalization on a declining sliding scale, subject to a minimum quarterly base fee, as payment for managing our day-to-day operations in accordance with our investment guidelines. Total market capitalization includes the aggregate principal amount of our consolidated indebtedness (including our proportionate share of debt of any entity that is not consolidated but excluding our joint venture partners’ proportionate share of consolidated debt). The range of base fees on the scale are between 0.70% and 0.50% per annum. The applicable base fee depends on where our total market capitalization falls in a range from less than $6.0 billion to greater than $10.0 billion . At September 30, 2015 , the quarterly base fee was 0.70% based on our current total market capitalization. We are also required to pay Ashford LLC an incentive fee that is based on our total shareholder return performance as compared to our peer group as well as to reimburse Ashford LLC for certain reimbursable overhead and internal audit, insurance claims advisory and asset management services, as specified in the advisory agreement. We also record equity-based compensation expense for equity grants of common stock and LTIP units awarded to the officers and employees of Ashford LLC 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.
On June 10, 2015, the independent directors of the Company approved an amended and restated advisory agreement with Ashford LLC, effective as of June 10, 2015. The amendments, among other things: permit the Company to engage an asset manager other than Ashford LLC with respect to any new properties acquired by the Company, if the Company and Ashford LLC determine that such property would be uneconomic to the Company without incentives; shorten the initial term of the advisory agreement to ten years; extend the renewal terms to five years; provide for key money investments by Ashford LLC to facilitate the Company’s acquisition of properties under certain conditions, including Ashford LLC becoming the asset manager for the acquired property and receiving related asset management and other fees, as applicable; adjust the base fee payable to Ashford LLC to a declining sliding scale percentage of total market capitalization of the Company above $6.0 billion ; clarify the calculation of the termination fee; allow Ashford LLC to terminate the Advisory Agreement upon a Company Change of Control (as defined in the advisory agreement) and require the Company to pay a termination fee to Ashford LLC upon such termination; and grant Ashford LLC repurchase rights with respect to its shares held by the Company upon any termination of the advisory agreement. In connection with the agreement between Ashford Inc. and Remington Holdings to combine, on September 17, 2015, we entered into a letter agreement with Ashford Inc. approved by the independent directors of the Company to clarify that for purposes of determining the termination fee under the advisory agreement, Ashford LLC’s earnings shall exclude earnings arising under the master management agreement under which Remington Lodging may manage any of our hotels.
On July 31, 2015, we entered into a block trade with an unaffiliated third party pursuant to a sale arrangement between the Company, Ashford Inc. and Ashford Trust. The block trade included the purchase from the third party of approximately 175,000 shares of Ashford Inc. common stock at a price of $95.00 per share, which approximated the 120-day volume weighted average price, for a total cost of approximately $16.6 million . The sale arrangement and block trade were evaluated and approved by the independent members of our board of directors. The block trade purchase price and other terms of the sale arrangement were the result of negotiations with the third party, and the board of directors received a fairness opinion from an independent financial advisor that the price paid for the Ashford Inc. shares by the Company was fair to the Company. We did not receive any concessions or economic benefits from Ashford Inc. pertaining to our current contractual arrangements with Ashford Inc. in connection with this block trade. The block trade settled on August 4, 2015, and the loss resulting from the block trade is recorded within “unrealized loss on investment in Ashford Inc.” in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2015.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


For the period from January 1, 2014 to November 11, 2014, we incurred advisory services fees to Ashford Trust. Beginning November 12, 2014, we incurred advisory services fees to Ashford Inc. The following table summarizes the advisory services fees incurred (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Advisory services fee
 
 
 
 
 
 
 
Base advisory fee
$
2,144

 
$
2,249

 
$
6,513

 
$
6,458

Reimbursable fees (1)
435

 
437

 
1,417

 
1,257

Equity-based compensation (2)  
935

 
431

 
1,846

 
1,541

Incentive management fee

 

 

 

 
$
3,514

 
$
3,117

 
$
9,776

 
$
9,256

________
(1)  
Reimbursable fees include overhead, internal audit, insurance claims advisory and asset management services.
(2)  
Equity-based compensation is associated with equity grants of Ashford Prime’s common stock and LTIP units awarded to officers and employees of Ashford LLC.
At September 30, 2015 , we had $110,000 in due from Ashford Trust OP, net, associated with reimbursable expenses. At December 31, 2014 , we had $896,000 in due to Ashford Trust OP, net, associated with the advisory services fee discussed above. At September 30, 2015 and December 31, 2014 , we had $2.4 million and $2.5 million , respectively, in due to Ashford Inc. associated with the advisory services fee.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “we,” “us,” “our”, the “Company” or “Ashford Prime” refer to Ashford Hospitality Prime, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Prime Limited Partnership, a Delaware limited partnership, which we refer to as “our operating partnership” or “Ashford Prime OP.” “Ashford Trust” or “AHT” refers to Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.” “Ashford LLC” refers to Ashford Hospitality Advisors LLC, a Delaware limited liability company and a wholly-owned subsidiary of Ashford Inc., an affiliate of Ashford Prime and Ashford Trust. “Remington Lodging” refers to Remington Lodging and Hospitality LLC, a Delaware limited liability company, a property management company owned by Mr. Monty J. Bennett, our chief executive officer and chairman, and his father, Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust. “Our TRSs” refers to our taxable REIT subsidiaries, including Ashford Prime TRS Corporation, a Delaware corporation, which we refer to as “Ashford Prime TRS,” and its subsidiaries, together with the two taxable REIT subsidiaries that lease our two hotels held in a consolidated entity and are wholly-owned by that entity.
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International®, Hilton Worldwide®, Sofitel® and Accor®.
FORWARD-LOOKING STATEMENTS
Throughout this Form 10-Q, we make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature:  
our business and investment strategy;
our projected operating results and dividend rates;
our ability to obtain future financing arrangements;
our understanding of our competition;
market trends;
projected capital expenditures;
anticipated acquisitions or dispositions; and
the impact of technology on our operations and business.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, taking into account all information currently available to us, our actual results and performance could differ materially from those set forth in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements include, but are not limited to:
factors discussed in our Form 10-K for the year ended December 31, 2014 , as filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2015 (the “ 2014 10-K”), including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties,” as updated in our subsequent Quarterly Reports on Form 10-Q;
general volatility of the capital markets, the general economy or the hospitality industry, whether the result of market events or otherwise;
our ability to deploy capital and raise additional capital at reasonable costs to repay debts, invest in our properties and fund future acquisitions;
unanticipated increases in financing and other costs, including a rise in interest rates;
the degree and nature of our competition;
actual and potential conflicts of interest with Ashford Trust, Ashford LLC, Ashford Inc., Remington Lodging, our executive officers and our non-independent directors;
changes in personnel of Ashford LLC or the lack of availability of qualified personnel;
changes in governmental regulations, accounting rules, tax rates and similar matters;

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legislative and regulatory changes, including changes to the Internal Revenue Code and related rules, regulations and interpretations governing the taxation of real estate investment trusts (“REITs”); and
limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes.
When considering forward-looking statements, you should keep in mind the matters summarized under “Item 1A. Risk Factors” of our 2014 10-K and any subsequent updates to this disclosure in our Quarterly Reports on Form 10-Q, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law.
Overview
We are an externally-advised Maryland corporation that invests primarily in high revenue per available room (“RevPAR”), luxury, upper-upscale and upscale hotels in gateway and resort locations. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then-current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Two times the U.S. national average was $149 for the year ended December 31, 2014 . We have elected to be taxed as a REIT under the Internal Revenue Code beginning in the year ended December 31, 2013. We conduct our business and own substantially all of our assets through our operating partnership, Ashford Prime OP.
We were formed as a Maryland corporation in April 2013 and became a public company on November 19, 2013, when Ashford Trust, a New York Stock Exchange-listed REIT, completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. As of June 30, 2015, Ashford Trust beneficially owned common units of Ashford Prime OP representing 15.2% of our company on a fully-diluted basis. On July 13, 2015, Ashford Trust announced that its board of directors had declared the distribution (1) to its stockholders of approximately 4.1 million shares of common stock of Ashford Prime to be received by Ashford Trust upon redemption of Ashford Prime OP common units and (2) to the common unit holders of Ashford Hospitality Trust Limited Partnership of its remaining common units of Ashford Prime OP. The distribution occurred on July 27, 2015, to stockholders and common unit holders of record as of the close of business of the New York Stock Exchange on July 20, 2015. As a result of the distribution, Ashford Trust has no ownership interest in Ashford Prime.
We operate in the direct hotel investment segment of the hotel lodging industry. As of November 5, 2015 , we owned interests in 11 hotels in six states and the District of Columbia with 3,772 total rooms, or 3,537 net rooms, excluding those attributable to our partner. The hotels in our current portfolio are predominantly located in U.S. gateway and resort locations with favorable growth characteristics resulting from multiple demand generators. We own nine of our hotel properties directly, and the remaining two hotel properties through an investment in a majority-owned consolidated entity.
We are advised by Ashford LLC, a subsidiary of Ashford Inc. and an affiliate of our Company and Ashford Trust, 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.
Recent Developments
On March 9, 2015, we refinanced our $69.0 million mortgage loan with an outstanding balance of $69.0 million due September 2015, with a $70.0 million mortgage loan with Credit Agricole. The new loan is due March 2017, and has three one-year extension options, subject to the satisfaction of certain conditions. The new loan is interest only and provides for a floating interest rate of LIBOR + 2.25% to 2.50%. The mortgage loan is secured by the Pier House Resort in Key West, Florida.
On May 13, 2015, our board of directors increased our quarterly cash dividend from $0.05 to $0.10 per share of our common stock and common units beginning with the second quarter dividend.
On June 9, 2015, we commenced a private placement of  200,000  shares of common stock at  $15.52  per share for gross proceeds of  $3.1 million . The offering closed on June 11, 2015. The net proceeds from the sale of the shares after discounts and offering expenses were approximately  $3.1 million .
On June 9, 2015, we entered into a purchase agreement for the sale of 2.6 million shares of our 5.5% Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) to a financial institution, which resold the Series A Preferred Stock to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) at an initial offering price of $25.00 per share, with an aggregate underwriting discount of $1.5 million (net purchase price of $24.4125).

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The net proceeds from the offering of the Series A Preferred Stock after the underwriting discount and other expenses were $62.3 million .
On June 10, 2015, the independent directors of the Company approved an amended and restated advisory agreement with Ashford LLC, effective as of June 10, 2015. The amendments, among other things: permit the Company to engage an asset manager other than Ashford LLC with respect to any new properties acquired by the Company, if the Company and Ashford LLC determine that such property would be uneconomic to the Company without incentives; shorten the initial term of the advisory agreement to ten years; extend the renewal terms to five years; provide for key money investments by Ashford LLC to facilitate the Company’s acquisition of properties under certain conditions, including Ashford LLC becoming the asset manager for the acquired property and receiving related asset management and other fees, as applicable; adjust the base fee payable to Ashford LLC to a declining sliding scale percentage of total market capitalization of the Company above $6 billion; clarify the calculation of the termination fee; allow Ashford LLC to terminate the Advisory Agreement upon a Company Change of Control (as defined in the advisory agreement) and require the Company to pay a termination fee to Ashford LLC upon such termination; and grant Ashford LLC repurchase rights with respect to its shares held by the Company upon any termination of the advisory agreement.
On July 9, 2015 , we acquired a 100% leasehold interest in the Bardessono Hotel and Spa (“Bardessono Hotel”) in Yountville, California for total consideration of $85.0 million . The acquisition was funded with proceeds from our recently completed preferred stock offering and cash on hand. See Note 13. Ashford Inc. provided $2.0 million of key money consideration by paying approximately $206,000 in cash and issuing 19,897 shares of Ashford Inc. common stock to Ashford Prime.
On July 31, 2015, we entered into a block trade with an unaffiliated third party pursuant to a sale arrangement between the Company, Ashford Inc. and Ashford Trust. The block trade included the purchase from a third party of approximately 175,000 shares of Ashford Inc. common stock at a price of $95.00 per share, which approximated the 120-day volume weighted average price, for a total cost of approximately $16.6 million . The sale arrangement and block trade were evaluated and approved by the independent members of our board of directors. The block trade purchase price and other terms of the sale arrangement were the result of negotiations with the third party, and the board of directors received a fairness opinion from an independent financial advisor that the price paid for the Ashford Inc. shares by the Company was fair to the Company. We did not receive any concessions or economic benefits from Ashford Inc. pertaining to our current contractual arrangements with Ashford Inc. in connection with this block trade. The block trade settled on August 4, 2015, and the loss resulting from the block trade is recorded within “unrealized loss on investment in Ashford Inc.” in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2015.
On August 28, 2015, we announced that the independent directors of the board of directors have decided to explore a full range of strategic alternatives, including a possible sale of the Company. The independent directors have retained Deutsche Bank Securities Inc. as their financial advisor to assist in this process. The independent directors are in the beginning stage of the strategic review, and there can be no assurance that the Company will enter into any transaction at this time or in the future. The Company does not intend to make any further public comment regarding the review until it has been completed.
Key Indicators of Operating Performance
We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel’s contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include:
Occupancy—Occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period.
ADR—ADR means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate.
RevPAR—RevPAR means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales or parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods

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and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period). RevPAR improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. RevPAR improvements attributable to increases in ADR are generally accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (including housekeeping services, utilities and room supplies) and could also result in increased other operating department revenue and expense. Changes in ADR typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs.
Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue included approximately 78% and 74% of our total hotel revenue for the three and nine months ended September 30, 2015 , respectively, and is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.
We also use funds from operations (“FFO”), Adjusted FFO (“AFFO”), earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA as measures of the operating performance of our business. See “Non-GAAP Financial Measures.”
LIQUIDITY AND CAPITAL RESOURCES
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our hotels, including:
advisory fees payable to Ashford LLC;
recurring maintenance necessary to maintain our hotels in accordance with brand standards;
interest expense and scheduled principal payments on outstanding indebtedness, including our secured revolving credit facility (see “Contractual Obligations and Commitments”);
distributions necessary to qualify for taxation as a REIT;
dividends on preferred stock; and
capital expenditures to improve our hotels.
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our secured revolving credit facility.
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotels and scheduled debt payments. We expect to meet our long-term liquidity requirements through various sources of capital, including our secured revolving credit facility and future equity issuances, existing working capital, net cash provided by operations, long-term hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.
Our hotels require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of hotels will require significant capital outlays. We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.

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Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of our hotels decline. When these provisions are triggered, substantially all of the profit generated by our hotels is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. Cash is not distributed to us at any time after the cash trap provisions have been triggered until we have cured the performance issues. Currently, none of the cash trap provisions of our loans are triggered.
In connection with our spin-off from Ashford Trust, we indemnified Ashford Trust for certain carve-out guarantees and environmental indemnities associated with three of our loans, for which Ashford Trust is still jointly and severally liable. Certain of these guarantees represent a guaranty of material amounts, and if we are required to make indemnification payments under those guarantees, our liquidity could be adversely affected.
On October 27, 2014, our board of directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time. The repurchase program does not have an expiration date. The specific timing, manner, price, amount and other terms of the repurchases are at management’s discretion and depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. Under the repurchase program, we repurchased  471,064  shares of our common stock, for approximately  $8.1 million , during the nine months ended September 30, 2015 . No shares were repurchased during the three months ended September 30, 2015. As of September 30, 2015 , we have purchased a cumulative 1.4 million shares of our common stock, for approximately $24.2 million , since the program’s inception on November 4, 2014.
On March 9, 2015, we refinanced our  $69.0 million  mortgage loan, with an outstanding balance of  $69.0 million  due September 2015, with a  $70.0 million  mortgage loan due March 2017, with three one -year extension options, subject to the satisfaction of certain conditions. The new loan is interest only and provides for a floating interest rate of LIBOR +  2.25% to 2.50% . The mortgage loan is secured by the Pier House Resort in Key West, Florida.
On June 9, 2015, we commenced a private placement of  200,000  shares of common stock at  $15.52  per share for gross proceeds of  $3.1 million . The offering closed on June 11, 2015. The net proceeds from the sale of the shares after discounts and offering expenses were approximately  $3.1 million .
On June 9, 2015, we entered into a purchase agreement for the sale of 2.6 million shares of our 5.5% Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) to a financial institution, which resold the Series A Preferred Stock to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) at an initial offering price of $25.00 per share, with an aggregate underwriting discount of $1.5 million (net purchase price of $24.4125). The net proceeds from the offering of the Series A Preferred Stock after the underwriting discount and other expenses were $62.3 million .
In connection with the acquisition of the Bardessono Hotel, which closed on July 9, 2015 , Ashford Inc. provided $2.0 million of key money consideration by paying approximately $206,000 in cash and issuing 19,897 shares of Ashford Inc. common stock to Ashford Prime.
On July 31, 2015, we entered into a block trade with an unaffiliated third party pursuant to a sale arrangement between the Company, Ashford Inc. and Ashford Trust. The block trade included the purchase of approximately 175,000 shares of Ashford Inc. common stock at a price of $95.00 per share, which approximated the 120-day volume weighted average price, for a total cost of approximately $16.6 million . The sale arrangement and block trade were evaluated and approved by the independent members of our board of directors. The block trade purchase price and other terms of the sale arrangement were the result of negotiations with the third party, and the board of directors received a fairness opinion from an independent financial advisor that the price paid for the Ashford Inc. shares by the Company was fair to the Company. We did not receive any concessions or economic benefits from Ashford Inc. pertaining to our current contractual arrangements with Ashford Inc. in connection with this block trade. The block trade settled on August 4, 2015, and the loss resulting from the block trade is recorded within “unrealized loss on investment in Ashford Inc.” in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2015.
Secured Revolving Credit Facility
We have a three-year, $150 million secured revolving credit facility, which we believe provides us with significant financial flexibility to fund future acquisitions and hotel redevelopments. The secured revolving credit facility is provided by a syndicate of financial institutions with Bank of America, N.A. serving as the administrative agent to Ashford Prime OP, as the borrower. We and certain of our subsidiaries guarantee the secured revolving credit facility, which is secured by a pledge of 100% of the equity interests we hold in Ashford Prime OP and 100% of the equity interest issued by any guarantor (other than Ashford Prime) or any other subsidiary of ours that is not restricted under its loan documents or organizational documents from having its equity pledged

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(subject to certain exclusions), all mortgage receivables held by the borrower or any guarantor, and certain deposit accounts and securities accounts held by the borrower and any guarantor. The proceeds of the secured revolving credit facility may be used for working capital, capital expenditures, property acquisitions, and any other lawful purposes.
The secured revolving credit facility also contains customary terms, covenants, negative covenants, events of default, limitations and other conditions for credit facilities of this type. Subject to certain exceptions, we are subject to restrictions on incurring additional indebtedness, mergers and fundamental changes, sales or other dispositions of property, changes in the nature of our business, investments, and capital expenditures.
We also are subject to certain financial covenants, as set forth below, which are tested by the borrower on a consolidated basis (net of the amounts attributable to the non-controlling interest held by our partner in a majority-owned consolidated entity) and include, but are not limited to, the following:
Consolidated indebtedness (less cash and cash equivalents and amounts represented by marketable securities) to EBITDA not to exceed 6.5x and beginning December 1, 2015, this ratio will be reduced to 5.75x; provided, however, that a one-time allowance will be made if we are out of compliance with such covenant by an amount of 0.50x for the first three fiscal quarters following a significant acquisition occurring after November 30, 2014. This ratio was 5.65x at September 30, 2015 .
Consolidated recourse indebtedness other than the secured revolving credit facility not to exceed $50,000,000.
Consolidated fixed charge coverage ratio not less than 1.25x and beginning December 1, 2015, this ratio will be increased to 1.35x. This ratio was 1.84x at September 30, 2015 .
Indebtedness of the consolidated parties that accrues interest at a variable rate (other than the secured revolving credit facility) that is not subject to a “cap,” “collar,” or other similar arrangement not to exceed 25% of consolidated indebtedness.
Consolidated tangible net worth not less than 75% of the consolidated tangible net worth on the closing date of the secured revolving credit facility plus 75% of the net proceeds of any future equity issuances.
Secured debt that is secured by real property (excluding the eight hotels we acquired in connection with the spin-off) not to exceed 70% of the as-is appraised value of such real property.
All financial covenants are tested and certified by the borrower on a quarterly basis. The amounts and effects of the Pier House Resort acquisition were excluded from the calculation of the financial covenants for the first four quarters following such acquisition, but were included in such calculation beginning with the second quarter of 2015. We were in compliance with all covenants at September 30, 2015 .
The secured revolving credit facility includes customary events of default, and the occurrence of an event of default will permit the lenders to terminate commitments to lend under the secured revolving credit facility and accelerate payment of all amounts outstanding thereunder. If a default occurs and is continuing, we will be precluded from making distributions on our shares of common stock (other than those required to allow us to qualify and maintain our status as a REIT, so long as such default does not arise from a payment default or event of insolvency).
Borrowings under the secured revolving credit facility bear interest, at our option, at either LIBOR for a designated interest period plus an applicable margin, or the base rate (as defined in the credit agreement) plus an applicable margin. The applicable margin for borrowings under the secured revolving credit facility for base rate loans range from 1.25% to 2.75% per annum and the applicable margin for borrowings under the secured revolving credit facility for LIBOR loans range from 2.25% to 3.75% per annum, depending on the ratio of consolidated indebtedness to EBITDA described above, with the lowest rate applying if such ratio is less than 4x, and the highest rate applying if such ratio is greater than 6.5x.
The secured revolving credit facility is a three-year interest-only facility with all outstanding principal being due at maturity on November 21, 2016, subject to two one-year extension options if certain terms and conditions are satisfied. The secured revolving credit facility has an accordion feature whereby the aggregate commitments may be increased up to $300 million, subject to certain terms and conditions and a 0.25% extension fee. No amounts were drawn under the secured revolving credit facility as of September 30, 2015 .
We intend to repay indebtedness incurred under our secured revolving credit facility from time to time out of net cash provided by operations and from the net proceeds of issuances of additional equity and debt securities, as market conditions permit.
Sources and Uses of Cash
As of September 30, 2015 , we had $85.7 million of cash and cash equivalents, compared to $171.4 million at December 31, 2014 . We anticipate that our principal sources of funds to meet our cash requirements will include cash on hand, positive cash flow from operations and capital market activities.

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Net Cash Flows Provided by (Used in) Operating Activities . Net cash flows used in operating activities were $7.2 million for the nine months ended September 30, 2015 . Net cash flows provided by operating activities were $40.3 million for the nine months ended September 30, 2014 . Cash flows from operations are impacted by changes in hotel operations, the operating results of the Sofitel Chicago Water Tower, which was acquired on February 24, 2014, the operating results of the Pier House Resort, which was acquired on March 1, 2014, and the operating results of the Bardessono Hotel, which was acquired on July 9, 2015, as well as changes in restricted cash due to the timing of cash deposits for certain loans as well as the timing of collecting receivables from hotel guests, paying vendors, settling with related parties and settling with hotel managers. Cash flows from operations for the nine months ended September 30, 2015 were negatively impacted by $50 million as a result of the net purchases of marketable securities.
Net Cash Flows Used in Investing Activities . For the nine months ended September 30, 2015 , investing activities used net cash flows of $112.8 million . These cash outlays were primarily attributable to cash outflows of $13.9 million of capital improvements made to various hotel properties, $16.6 million attributable to our investment in Ashford Inc., $81.8 million attributable to the acquisition of the Bardessono Hotel and $654,000 of net deposits to restricted cash for capital expenditures. These outflows were partially offset by inflows of $206,000 of proceeds from the disposal of property, plant and equipment and $24,000 of proceeds from property insurance claims. For the nine months ended September 30, 2014 , investing activities used net cash flows of $208.2 million . These cash outlays were primarily attributable to cash outflows of $169.6 million attributable to the acquisitions of the Sofitel Chicago Water Tower and the Pier House Resort, $20.8 million  of net deposits to restricted cash for capital expenditures and $17.8 million of capital improvements made to various hotel properties. These outlays were partially offset by inflows of $54,000 of proceeds from property insurance claims.
Net Cash Flows Provided by Financing Activities. For the nine months ended September 30, 2015 , net cash flows provided by financing activities were $34.2 million . Cash inflows primarily consisted of borrowings on indebtedness of $70.0 million , proceeds from the issuance of preferred stock of $62.6 million and proceeds from a private placement of common stock of $3.1 million . These inflows were partially offset by cash outlays of $74.9 million for repayments of indebtedness, $8.9 million for the purchase of our common stock, primarily under our share repurchase program, $5.9 million for the redemption of operating partnership units, $7.7 million for payments of dividends, $2.9 million for distributions to the holder of a noncontrolling interest in consolidated entities, $1.2 million for payments of loan costs and exit fees and payments for derivatives of $8,000 . For the nine months ended September 30, 2014 , net cash flows provided by financing activities were $206.9 million . Cash inflows primarily consisted of net proceeds of $143.9 million from our underwritten public offering and borrowings on indebtedness of $80.0 million . These inflows were partially offset by cash outlays of $5.9 million for repayments of indebtedness,  $4.7 million for payments of dividends, $3.3 million for payments of loan costs and exit fees, $2.0 million for distributions to the holder of a noncontrolling interest in our consolidated entities,  $1.1 million for payments of spin-off costs and payments for derivatives of $93,000 .


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RESULTS OF OPERATIONS
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
The following table summarizes the changes in key line items from our statements of operations for the three months ended September 30, 2015 and 2014 (in thousands except percentages):
 
Three Months Ended September 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Revenue
 
 
 
 
 
 
 
Rooms
$
70,584

 
$
65,253

 
$
5,331

 
8.2
 %
Food and beverage
16,346

 
15,886

 
460

 
2.9

Other
3,795

 
3,615

 
180

 
5.0

Total hotel revenue
90,725

 
84,754

 
5,971

 
7.0

Other
34

 
30

 
4

 
13.3

Total revenue
90,759

 
84,784

 
5,975

 
7.0

Expenses
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Rooms
14,804

 
14,039

 
765

 
5.4

Food and beverage
12,318

 
11,118

 
1,200

 
10.8

Other expenses
25,508

 
23,079

 
2,429

 
10.5

Management fees
3,709

 
3,497

 
212

 
6.1

Total hotel expenses
56,339

 
51,733

 
4,606

 
8.9

Property taxes, insurance and other
4,585

 
4,076

 
509

 
12.5

Depreciation and amortization
11,308

 
10,657

 
651

 
6.1

Advisory services fee
3,514

 
3,117

 
397

 
12.7

Transaction costs
255

 
45

 
210

 
466.7

Corporate general and administrative
1,502

 
458

 
1,044

 
227.9

Total expenses
77,503

 
70,086

 
7,417

 
10.6

Operating income
13,256

 
14,698

 
(1,442
)
 
(9.8
)
Equity in loss of unconsolidated entity
(3,399
)
 

 
3,399

 
 
Interest income
12

 
10

 
2

 
20.0

Other expense
(59
)
 

 
59

 
 
Interest expense and amortization of loan costs
(9,348
)
 
(10,137
)
 
(789
)
 
(7.8
)
Unrealized loss on investment in Ashford Inc.
(5,621
)
 

 
5,621

 
 
Unrealized gain (loss) on derivatives
(2,061
)
 
3

 
2,064

 
68,600.0

Income (loss) before income taxes
(7,220
)
 
4,574

 
(11,794
)
 
(257.8
)
Income tax expense
(62
)
 
(185
)
 
(123
)
 
(66.5
)
Net income (loss)
(7,282
)
 
4,389

 
11,671

 
65.9

(Income) loss from consolidated entities attributable to noncontrolling interest
(1,090
)
 
154

 
1,244

 
807.8

Net (income) loss income attributable to redeemable noncontrolling interests in operating partnership
1,532

 
(1,171
)
 
(2,703
)
 
(230.8
)
Net income (loss) attributable to the Company
$
(6,840
)
 
$
3,372

 
$
10,212

 
102.8
 %

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Net income (loss) represents the operating results of our hotel properties for the three months ended September 30, 2015 and 2014 . The results of the Chicago Sofitel are included since its acquisition on February 24, 2014 and the results of the Pier House Resort are included since its acquisition on March 1, 2014. The operating results of the Bardessono Hotel are included since its acquisition on July 9, 2015. The following table illustrates the key performance indicators of our hotels for the periods indicated:
 
Three Months Ended September 30,
 
2015
 
2014
Occupancy
85.75
%
 
86.61
%
ADR (average daily rate)
$
237.53

 
$
220.93

RevPAR (revenue per available room)
$
203.69

 
$
191.33

Rooms revenue (in thousands)
$
70,584

 
$
65,253

Total hotel revenue (in thousands)
$
90,725

 
$
84,754

The following table illustrates the key performance indicators of the 10 hotels that were included for the full third quarter of 2015 and 2014:
 
Three Months Ended September 30,
 
2015
 
2014
Occupancy
85.82
%
 
86.61
%
ADR (average daily rate)
$
228.80

 
$
220.93

RevPAR (revenue per available room)
$
196.35

 
$
191.33

Rooms revenue (in thousands)
$
67,019

 
$
65,253

Total hotel revenue (in thousands)
$
85,781

 
$
84,754

Net income (loss) attributable to the Company. Net income (loss) attributable to the Company changed $10.2 million , or 102.8% from net income attributable to the Company of $3.4 million for the three months ended September 30, 2014 (the “2014 quarter”) to net loss attributable to the Company of $6.8 million for the three months ended September 30, 2015 (the “2015 quarter”) as a result of the factors discussed below.
Rooms Revenue . Rooms revenue from our hotels in creased $5.3 million , or 8.2% , to $70.6 million during the 2015 quarter compared to the 2014 quarter . During the 2015 quarter , we experienced an 86 basis point de crease in occupancy and a 7.5% in crease in room rates. Rooms revenue increased (i) $3.6 million as a result of the acquisition of the Bardessono Hotel in July 2015; (ii) $659,000 at the Plano Marriott Legacy Town Center primarily as a result of 7.4% higher room rates and a 461 basis point increase in occupancy at the hotel; (iii) $452,000 at the San Francisco Courtyard Downtown primarily as a result of 6.0% higher room rates, slightly offset by a 123 basis point decrease in occupancy at the hotel; (iv) $291,000 at the Pier House Resort as a result of 1.6% higher room rates and a 565 basis point increase in occupancy at the hotel; (v) $184,000 at the Seattle Marriott Waterfront as a result of 3.0% higher room rates at the hotel, partially offset by a 95 basis point decrease in occupancy at the hotel; (vi) $160,000 at the Seattle Courtyard Downtown as a result of 7.2% higher room rates, partially offset by a 326 basis point decrease in occupancy at the hotel; (vii) $160,000 at the Philadelphia Courtyard as a result of 4.1% higher room rates, partially offset by a 134 basis point decrease in occupancy at the hotel; (viii) $138,000 at the Hilton La Jolla Torrey Pines as a result of 4.1% higher room rates at the hotel, partially offset by a 169 basis point decrease in occupancy at the hotel; and (ix) $97,000 at the Capital Hilton as a result of a 227 basis point increase in occupancy, partially offset by a 2% decrease in room rates at the hotel. These in creases were slightly offset by decreases of (i) $274,000 at the Sofitel Chicago Water Tower as a result of 1.1% lower rooms rates and a 194 basis point decrease in occupancy at the hotel and (ii) $101,000 at the Tampa Renaissance as a result of a 1,042 basis point decrease in occupancy, partially offset by 11.1% higher room rates at the hotel.
Food and Beverage Revenue . Food and beverage revenues from our hotels in creased $460,000 , or 2.9% , to $16.3 million during the 2015 quarter . This in crease is primarily attributable to increases in food and beverage revenue of $975,000 as a result of the acquisition of the Bardessono Hotel in July 2015 and higher food and beverage revenue of $314,000 and $73,000 at the Seattle Marriott Waterfront and the Capital Hilton , respectively. Additional increases resulted from aggregate increases in food and beverage revenue of $131,000 at the Pier House Resort , the San Francisco Courtyard Downtown and the Plano Marriott Legacy Town Center . These increases were partially offset by decreases in food and beverage revenue of $526,000 and $419,000 at the Sofitel Chicago Water Tower and the Hilton La Jolla Torrey Pines , respectively. Additional decreases resulted from aggregate decreases in food and beverage revenue of $89,000 at the Seattle Courtyard Downtown , the Philadelphia Courtyard and the Tampa Renaissance .

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Other Hotel Revenue . Other hotel revenue, which consists mainly of telecommunications, parking and rentals, in creased $180,000 , or 5.0% , to $3.8 million during the 2015 quarter . The in crease is primarily attributable to increases in other hotel revenue of $404,000 as a result of the acquisition of the Bardessono Hotel in July 2015 and higher other hotel revenue of $213,000 in aggregate at the San Francisco Courtyard Downtown , Pier House Resort , Seattle Courtyard Downtown and Capital Hilton . These in creases were partially offset by a decrease in other hotel revenue of $439,000 at the Seattle Marriott Waterfront , Hilton La Jolla Torrey Pines , Sofitel Chicago Water Tower , Plano Marriott Legacy Town Center , Philadelphia Courtyard and the Tampa Renaissance .
Other Non-Hotel Revenue . Other non-hotel revenue in creased $4,000 , or 13.3% , to $34,000 in the 2015 quarter . The  in crease is attributable to an increase in Texas margin tax recoveries from hotel guests.
Rooms Expense . Rooms expense in creased $765,000 , or 5.4% , to $14.8 million in the 2015 quarter . The in crease is primarily attributable to an increase in rooms expense of $622,000 as a result of the acquisition of the Bardessono Hotel in July 2015. Rooms margin in creased 50 basis points from 78.5% to 79.0% .
Food and Beverage Expense . Food and beverage expense in creased $1.2 million , or 10.8% , to $12.3 million during the 2015 quarter . The increase is primarily attributable to an increase in food and beverage expense of $820,000 as a result of the acquisition of the Bardessono Hotel in July 2015 and increased food and beverage revenues.
Other Operating Expenses . Other operating expenses in creased $2.4 million , or 10.5% , to $25.5 million in the 2015 quarter . Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. The increase is primarily attributable to an increase in other operating expense of $1.6 million as a result of the acquisition of the Bardessono Hotel in July 2015. We experienced a de crease of $317,000 in direct expenses and an in crease of $2.7 million in indirect expenses and incentive management fees in the 2015 quarter . The direct expenses were 1.3% of total hotel revenue for the 2015 quarter and 1.8% for the 2014 quarter . The in crease in indirect expenses is primarily attributable to an increase in general and administrative costs of $850,000, including $387,000 as a result of the acquisition of the Bardessono Hotel in July 2015, an increase in marketing costs of $705,000, including $187,000 as a result of the acquisition of the Bardessono Hotel in July 2015, an increase in repairs and maintenance of $442,000, including $177,000 as a result of the acquisition of the Bardessono Hotel in July 2015, an increase in lease expense of $357,000, including $412,000 as a result of the acquisition of the Bardessono Hotel in July 2015, an increase in incentive management fees of $221,000 and an increase in energy costs of $171,000, including $83,000 as a result of the acquisition of the Bardessono Hotel in July 2015.
Management Fees . Base management fees in creased $212,000 , or 6.1% , to $3.7 million in the 2015 quarter . The increase is primarily attributable to an increase in management fee of $148,000 as a result of the acquisition of the Bardessono Hotel in July 2015 and as a result of higher hotel revenue in the 2015 quarter .
Property Taxes, Insurance and Other . Property taxes, insurance and other in creased $509,000 , or 12.5% , to $4.6 million in the 2015 quarter . The increase is primarily attributable to an increase in property taxes and insurance of $264,000 as a result of the acquisition of the Bardessono Hotel in July 2015, and higher accruals based on higher estimated property tax value assessments.
Depreciation and Amortization . Depreciation and amortization in creased $651,000 , or 6.1% , to $11.3 million for the 2015 quarter . The increase is primarily attributable to an increase in depreciation and amortization expense of $599,000 as a result of the acquisition of the Bardessono Hotel in July 2015.
Advisory Services Fee. Advisory services fee in creased  $397,000 , or 12.7% , to  $3.5 million  in the 2015 quarter as a result of an increase in equity-based compensation of $504,000 due to additional grants of our equity awards in 2015. This increase was slightly offset by a decrease in base fees of $105,000 and a decrease in reimbursable overhead and internal audit, insurance claims advisory and asset management services of $2,000 . We are party to an advisory agreement with our advisor, Ashford LLC, which was a subsidiary of Ashford Trust until November 12, 2014, when the spin-off of Ashford Inc. from Ashford Trust was completed. We recorded an advisory services fee of $3.5 million to Ashford Inc., the parent of Ashford LLC, in the 2015 quarter , which included a base advisory fee of $2.1 million , reimbursable overhead and internal audit, insurance claims advisory and asset management services of $435,000 and equity-based compensation of $935,000 associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. For the 2014 quarter , we incurred an advisory services fee of $3.1 million to Ashford Trust which included a base advisory fee of  $2.2 million , equity-based compensation of $431,000 associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Advisor and reimbursable overhead, internal audit, insurance claims advisory and asset management services of  $437,000 .
Transaction Costs.  In the  2015 quarter , we recorded transaction costs of $255,000 related to the acquisition of the Bardessono Hotel. In the 2014 quarter , we recorded transaction costs of $45,000 related to the acquisitions of the Sofitel Chicago Water Tower and the Pier House Resort.

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Corporate General and Administrative . Corporate general and administrative expenses in creased $1.0 million , or 227.9% , to $1.5 million in the 2015 quarter as a result an increase in professional fees of $480,000, an increase in other miscellaneous expenses of $510,000 and an increase in public company costs of $54,000.
Equity in Loss of Unconsolidated Entity . We recorded equity in loss of unconsolidated entity of  $3.4 million in the  2015 quarter which consisted of our equity in loss in the REHE Fund. We did not have any equity in loss of unconsolidated entity in the 2014 quarter .
Interest Income . Interest income in creased $2,000 , or 20.0% , to $12,000 for the 2015 quarter .
Other Expense . Other expense was an expense of $59,000 for the 2015 quarter due to commissions paid on certain derivative instruments purchased. In the 2014 quarter , we did not recognize any other expense.
Interest Expense and Amortization of Loan Costs . Interest expense and amortization of loan costs de creased $789,000 , or 7.8% , to $9.3 million for the 2015 quarter due to the refinancing of our $197.8 million mortgage loan in the fourth quarter of 2014 and our $69.0 million mortgage loan in the first quarter of 2015. The average LIBOR rates for the 2015 quarter and the 2014 quarter were 0.20% and 0.15% , respectively.
Unrealized Loss on Investment in Ashford Inc. Unrealized loss on investment in Ashford Inc. of  $5.6 million  represents the fair value adjustment for the 2015 quarter on our investment in Ashford Inc. There was no unrealized gain/loss on investment in Ashford Inc. for the 2014 quarter . The fair value is based on the closing market price at the end of the quarter.
Unrealized Loss on Derivatives . Unrealized loss on derivatives was $2.1 million for the 2015 quarter . Unrealized loss on derivatives represents unrealized gains or losses on our interest rate caps and floors. The fair value of the interest rate caps and floors are primarily based on movements in the LIBOR forward curve and the passage of time.
Income Tax Expense . Income taxes expense de creased $123,000 , or 66.5% to $62,000 for the 2015 quarter . This change was primarily due to an increase in certain indirect expenses recognized by our TRS entity that operates two hotels owned by a consolidated partnership, as well as a partial release in the 2015 quarter of the valuation allowance previously recorded against the deferred tax asset held by our wholly-owned TRS.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests . The noncontrolling interest partners in consolidated entities were allocated income of $1.1 million and a loss of $154,000 for the 2015 quarter and the 2014 quarter , respectively. At September 30, 2015 , noncontrolling interests in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.
Net (Income) Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net loss of $1.5 million and net income of $1.2 million for the 2015 quarter and the 2014 quarter , respectively. Redeemable noncontrolling interests in Ashford Prime OP represented ownership interests of 16.53% and 25.77% as of September 30, 2015 and 2014, respectively.

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Table of Contents

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
The following table summarizes the changes in key line items from our statements of operations for the nine months ended September 30, 2015 and 2014 (in thousands except percentages):
 
Nine Months Ended September 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Revenue
 
 
 
 
 
 
 
Rooms
$
192,868

 
$
171,484

 
$
21,384

 
12.5
 %
Food and beverage
58,368

 
49,488

 
8,880

 
17.9
 %
Other
10,038

 
9,494

 
544

 
5.7
 %
Total hotel revenue
261,274

 
230,466

 
30,808

 
13.4
 %
Other
111

 
91

 
20

 
22.0
 %
Total revenue
261,385

 
230,557

 
30,828

 
13.4
 %
Expenses
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Rooms
41,895

 
38,564

 
3,331

 
8.6
 %
Food and beverage
38,926

 
32,377

 
6,549

 
20.2
 %
Other expenses
69,405

 
60,078

 
9,327

 
15.5
 %
Management fees
10,564

 
9,408

 
1,156

 
12.3
 %
Total hotel expenses
160,790

 
140,427

 
20,363

 
14.5
 %
Property taxes, insurance and other
13,781

 
12,127

 
1,654

 
13.6
 %
Depreciation and amortization
32,384

 
30,136

 
2,248

 
7.5
 %
Advisory services fee
9,776

 
9,256

 
520

 
5.6
 %
Transaction costs
255

 
1,871

 
(1,616
)
 
(86.4
)%
Corporate general and administrative
3,810

 
2,453

 
1,357

 
55.3
 %
Total expenses
220,796

 
196,270

 
24,526

 
12.5
 %
Operating income
40,589

 
34,287

 
6,302

 
18.4
 %
Equity in loss of unconsolidated entity
(4,219
)
 

 
4,219

 
 
Interest income
21

 
20

 
1

 
5.0
 %
Other income (expense)
1,233

 

 
1,233

 
 
Interest expense and amortization of loan costs
(28,060
)
 
(29,159
)
 
(1,099
)
 
(3.8
)%
Write-off of loan costs and exit fees
(54
)
 

 
54

 


Unrealized loss on investment in Ashford Inc.
(5,621
)
 

 
5,621

 


Unrealized gain (loss) on derivatives
(2,101
)
 
(63
)
 
2,038

 
3,234.9
 %
Income (loss) before income taxes
1,788

 
5,085

 
(3,297
)
 
64.8
 %
Income tax expense
(371
)
 
(622
)
 
(251
)
 
(40.4
)%
Net income (loss)
1,417

 
4,463

 
(3,046
)
 
(68.3
)%
(Income) loss from consolidated entities attributable to noncontrolling interest
(1,068
)
 
741

 
1,809

 
44.1
 %
Net income attributable to redeemable noncontrolling interests in operating partnership
(671
)
 
(1,213
)
 
(542
)
 
(44.7
)%
Net income (loss) attributable to the Company
$
(322
)
 
$
3,991

 
$
4,313

 
108.1
 %

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Table of Contents

Net income (loss) represents the operating results of our hotel properties for the nine months ended September 30, 2015 and 2014 . The operating results of the Sofitel Chicago Water Tower are included since its acquisition on February 24, 2014, and the operating results of the Pier House Resort are included since its acquisition on March 1, 2014. The operating results of the Bardessono Hotel are included since its acquisition on July 9, 2015.
The following table illustrates the key performance indicators of our hotels for the periods indicated:
 
Nine Months Ended September 30,
 
2015
 
2014
Occupancy
83.61
%
 
82.53
%
ADR (average daily rate)
$
226.68

 
$
211.90

RevPAR (revenue per available room)
$
189.52

 
$
174.87

Rooms revenue (in thousands)
$
192,868

 
$
171,484

Total hotel revenue (in thousands)
$
261,274

 
$
230,466

The following table illustrates the key performance indicators of the eight hotels that were included for the full nine months of 2015 and 2014:
 
Nine Months Ended September 30,
 
2015
 
2014
Occupancy
83.68
%
 
82.03
%
ADR (average daily rate)
$
215.22

 
$
203.45

RevPAR (revenue per available room)
$
180.11

 
$
166.89

Rooms revenue (in thousands)
$
72,297

 
$
143,420

Total hotel revenue (in thousands)
$
210,857

 
$
191,830

Net income (loss) attributable to the Company. Net income (loss) attributable to the Company changed $4.3 million , or 108.1% , from net income attributable to the Company of $4.0 million for the nine months ended September 30, 2014 (the “ 2014 period ”) to net loss attributable to the Company of $322,000 for the nine months ended September 30, 2015 (the “ 2015 period ”) as a result of the factors discussed below.
Rooms Revenue . Rooms revenue from our hotels in creased $21.4 million , or 12.5% , to $192.9 million during the 2015 period compared to the 2014 period . During the 2015 period , we experienced a 108 basis point in crease in occupancy and a 7.0% in crease in room rates. Rooms revenue increased (i) $4.3 million at the Pier House Resort due to the inclusion of its operating results for the entire 2015 period as a result of its acquisition in the 2014 period , higher room rates of 5.9% and a 579 basis point increase in occupancy at the hotel; (ii) $3.6 million as a result of the acquisition of the Bardessono Hotel in July 2015; (iii) $2.1 million at the San Francisco Courtyard Downtown primarily as a result of 5.0% higher room rates and a 273 basis point increase in occupancy at the hotel; (iv) $2.1 million at the Philadelphia Courtyard as a result of 6.3% higher room rates and a 405 basis point increase in occupancy due to a renovation during the 2014 period ; (v) $2.0 million at the Sofitel Chicago Water Tower due to the inclusion of its operating results for the entire 2015 period as a result of its acquisition in the 2014 period ; (vi) $1.9 million at the Seattle Marriott Waterfront as a result of 6.8% higher room rates and a 200 basis point increase in occupancy at the hotel; (vii) $1.6 million at the Plano Marriott Legacy Town Center as a result of 8.2% higher room rates and a 232 basis point increase in occupancy at the hotel; (viii) $1.5 million at the Hilton La Jolla Torrey Pines as a result of 6.7% higher room rates and a 147 basis point increase in occupancy at the hotel; (ix) $1.0 million at the Capital Hilton as a result of 1.1% higher room rates and a 161 basis point increase in occupancy at the hotel; (x) $842,000 at the Seattle Courtyard Downtown as a result of 10.0% higher room rates, partially offset by lower occupancy of 145 basis points at the hotel and (xi) $502,000 at the Tampa Renaissance as a result of 7.8% higher room rates at the hotel, partially offset by lower occupancy of 234 basis points at the hotel.
Food and Beverage Revenue . Food and beverage revenues from our hotels in creased $8.9 million , or 17.9% , to $58.4 million during the 2015 period . This in crease is primarily attributable to an increase in food and beverage revenue of $975,000 as a result of the acquisition of the Bardessono Hotel in July 2015 and increases in food and beverage revenue of $2.2 million , $2.1 million , $1.4 million and $1.3 million at the Capital Hilton , the Hilton La Jolla Torrey Pines , the Plano Marriott Legacy Town Center and Seattle Marriott Waterfront , respectively. Additional increases resulted from aggregate increases in food and beverage revenue of $1.6 million at the Pier House Resort , the San Francisco Courtyard Downtown , the Tampa Renaissance and the Philadelphia

41

Table of Contents

Courtyard . These increases were partially offset by decreases in food and beverage revenue of $400,000 and $160,000 at the Sofitel Chicago Water Tower and Seattle Courtyard Downtown , respectively.
Other Hotel Revenue . Other hotel revenue, which consists mainly of telecommunications, parking and rentals, in creased $544,000 , or 5.7% , to $10.0 million during the 2015 period . This in crease is primarily attributable to an increase in other hotel revenue of $404,000 as a result of the acquisition of the Bardessono Hotel in July 2015 and increases of $341,000 and $56,000 at the Pier House Resort and Sofitel Chicago Water Tower , respectively, due to the inclusion of their operating results for the entire 2015 period as a result of their acquisitions in the 2014 period. Additional increases of $180,000 , $117,000 and $36,000 resulted from the San Francisco Courtyard Downtown , the Capital Hilton and the Seattle Courtyard Downtown , respectively. These in creases were partially offset by decreases in other revenue in aggregate of $590,000 at Seattle Marriott Waterfront , the Plano Marriott Legacy Town Center , the Hilton La Jolla Torrey Pines , the Tampa Renaissance and the Philadelphia Courtyard .
Other Non-Hotel Revenue . Other non-hotel revenue in creased $20,000 , or 22.0% , to $111,000 in the 2015 period . The in crease is attributable to increased Texas margin tax recoveries from hotel guests.
Rooms Expense . Rooms expense in creased $3.3 million , or 8.6% , to $41.9 million in the 2015 period . The in crease is attributable to an increase in rooms revenue, the acquisition of the Bardessono Hotel and the inclusion of the operating results the Sofitel Chicago Water Tower and the Pier House Resort for the entire 2015 period as a result of their acquisition in the 2014 period as well as an increase in rooms revenues at our remaining hotels. Rooms margin in creased 80 basis points from 77.5% to 78.3% .
Food and Beverage Expense . Food and beverage expense in creased $6.5 million , or 20.2% , to $38.9 million during the 2015 period . The increase is attributable to increased food and beverage revenue, the acquisition of the Bardessono Hotel and increases at the Sofitel Chicago Water Tower and the Pier House Resort due to the inclusion of their operating results for the entire 2015 period as a result of their acquisition in the 2014 period.
Other Operating Expenses . Other operating expenses in creased $9.3 million , or 15.5% , to $69.4 million in the 2015 period . Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced a de crease of $895,000 in direct expenses and an in crease of $10.2 million in indirect expenses and incentive management fees in the 2015 period . Direct expenses were 1.2% of total hotel revenue for the 2015 period and 1.7% for the 2014 period . The in crease in indirect expenses is primarily attributable to an increase in general and administrative costs of $3.3 million, an increase in marketing costs of $2.2 million, an increase in incentive management fees of $1.8 million, an increase in repairs and maintenance costs of $922,000, an increase in lease expense of $254,000 and an increase in energy costs of $333,000. Of the increase in indirect expenses, $3.6 million is attributable to the acquisition of the Bardessono Hotel and the inclusion of the operating results of the Pier House Resort and the Sofitel Chicago Water Tower for the entire 2015 period as a result of their acquisition in the 2014 period.
Management Fees . Base management fees in creased $1.2 million , or 12.3% , to $10.6 million in the 2015 period as a result of higher hotel revenue in the 2015 period .
Property Taxes, Insurance and Other . Property taxes, insurance and other in creased $1.7 million , or 13.6% , to $13.8 million in the 2015 period . The increase is primarily attributable to the acquisition of the Bardessono Hotel and to the inclusion of the operating results of the Sofitel Chicago Water Tower and the Pier House Resort for the entire 2015 period as a result of their acquisition in the 2014 period and higher assessed values.
Depreciation and Amortization . Depreciation and amortization in creased $2.2 million , or 7.5% , to $32.4 million for the 2015 period attributable to the acquisition of the Bardessono Hotel and to the Sofitel Chicago Water Tower and the Pier House Resort due to the inclusion of their operating results for the entire 2015 period as a result of their acquisition in the 2014 period and capital expenditures incurred since September 30, 2014 .
Advisory Services Fee. Advisory services fee in creased  $520,000 , or 5.6% , to  $9.8 million  in the 2015 period as a result of an increase in base fees of $55,000 , an increase in reimbursable overhead and internal audit, insurance claims advisory and asset management services of $160,000 , and an increase in equity-based compensation of $305,000 . We are party to an advisory agreement with our advisor, Ashford LLC, which was a subsidiary of Ashford Trust until November 12, 2014, when the spin-off of Ashford Inc. from Ashford Trust was completed. We recorded an advisory services fee of $9.8 million to Ashford Inc., the parent of Ashford LLC, in the 2015 period , which included a base advisory fee of $6.5 million , reimbursable overhead and internal audit, insurance claims advisory and asset management services of $1.4 million and equity-based compensation of $1.8 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. For the 2014 period , we incurred an advisory services fee of $9.3 million to Ashford Trust which included a base advisory fee of  $6.5 million , equity-based compensation of  $1.5 million  associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Advisor in connection with providing advisory services and reimbursable overhead, internal audit, insurance claims advisory and asset management services of  $1.3 million .

42

Table of Contents

Transaction Costs.  In the 2015 period , we recorded transaction costs of $255,000 related to the acquisition of the Bardessono Hotel. We recorded transaction costs of $1.9 million related to the acquisitions of the Sofitel Chicago Water Tower and the Pier House Resort in the 2014 period .
Corporate General and Administrative . Corporate general and administrative expenses in creased $1.4 million , or 55.3% , to $3.8 million in the 2015 period as a result of an increase in professional fees of $1.0 million, an increase in miscellaneous expense of $542,000 and an increase in equity-based compensation to non-employee directors of $8,000 partially offset by lower public company costs of $210,000.
Equity in Loss of Unconsolidated Entity . We recorded equity in loss of unconsolidated entity of $4.2 million in the 2015 period which consisted of our equity in loss in the AIM REHE Fund. We did not have any equity in loss of unconsolidated entity in the 2014 period .
Interest Income . Interest income in creased $1,000 , or 5.0% , to $21,000 for the 2015 period .
Other Income . Other income was $1.2 million for the 2015 period due to a realized gain on marketable securities of $1.1 million and $223,000 of dividends related to marketable securities. This income was partially offset by $59,000 for commissions paid on certain derivative instruments purchased during the 2015 period. In the 2014 period , we did not recognize any other income.
Interest Expense and Amortization of Loan Costs . Interest expense and amortization of loan costs de creased $1.1 million , or 3.8% , to $28.1 million for the 2015 period due to the refinancing of our $197.8 million mortgage loan in the fourth quarter of 2014 and our $69.0 million mortgage loan in the 2015 period , partially offset by an increase in interest expense and amortization of loan costs as a result of the financings associated with the acquisitions of the Sofitel Chicago Water Tower and the Pier House Resort in the 2014 period and higher average LIBOR rates. The average LIBOR rates for the 2015 period and the 2014 period were 0.18% and 0.15% , respectively.
Write-off of Loan Costs and Exit Fees . In the 2015 period , we incurred fees of $54,000 in connection with the refinancing of our $69.0 million mortgage loan due September 2015, which had an outstanding balance of $69.0 million. The mortgage loan was replaced with a $70.0 million mortgage loan due March 2017. In the 2014 period , we did not incur any write-offs of loan costs.
Unrealized Loss on Investment in Ashford Inc. Unrealized loss on investment in Ashford Inc. of  $5.6 million  represents the fair value adjustment for the 2015 period on our investment in Ashford Inc. There was no unrealized gain/loss on investment in Ashford Inc. for the 2014 period . The fair value is based on the closing market price of Ashford Inc. common stock at the end of the period.
Unrealized Loss on Derivatives . Unrealized loss on derivatives in creased $2.0 million , or 3,234.9% , to $2.1 million . Unrealized loss on derivatives represents unrealized losses on our interest rate caps and floors. The fair value of the interest rate caps and floors are primarily based on movements in the LIBOR forward curve and the passage of time.
Income Tax Expense . Income tax expense de creased $251,000 , or 40.4% , to $371,000 . The decrease in income tax expense was primarily due to an increase in certain indirect expenses recognized by our TRS entity that operates two hotels owned by a consolidated partnership, as well as a partial release in the 2015 period of the valuation allowance for our wholly-owned TRS previously recorded in the full amount of the deferred tax asset held by our TRS.
(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interest . The noncontrolling interest partner in consolidated entities was allocated income of $1.1 million and loss of $741,000 for the 2015 period and the 2014 period , respectively. At September 30, 2015 , noncontrolling interest in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.
Net Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net loss of $671,000 and $1.2 million for the 2015 period and the 2014 period , respectively. Redeemable noncontrolling interests represented ownership interests in Ashford Prime OP of 16.53% and 25.77% as of September 30, 2015 and 2014 , respectively.

43

Table of Contents

Seasonality
Our properties’ respective operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months and some during the winter months. This seasonality pattern can cause fluctuations in our quarterly lease revenue under our percentage leases. We anticipate that our cash flows from the operations of our properties will be sufficient to enable us to make quarterly distributions to maintain our future REIT status. To the extent that cash flows from operations are insufficient during any quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize other cash on hand or borrowings to fund distributions required to maintain our REIT status. However, we cannot make any assurances that we will make distributions in the future.
Contractual Obligations and Commitments
There have been no material changes since December 31, 2014 , outside of the ordinary course of business, to contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2014 10-K.
Off-Balance Sheet Arrangements
In the normal course of business, we may form or invest in partnerships or joint ventures. We evaluate each partnership and joint venture to determine whether the entity is a variable interest entity (“VIE”). If the entity is determined to be a VIE we assess whether we are the primary beneficiary and need to consolidate the entity. For further discussion see Note 2 to our Condensed Consolidated Financial Statements.
Critical Accounting Policies
Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2014 10-K. There have been no material changes in these critical accounting policies.
Non-GAAP Financial Measures
The following non-GAAP presentations of EBITDA, Adjusted EBITDA, Funds From Operations (“FFO”) and Adjusted FFO (“AFFO”) are made to help our investors evaluate our operating performance.
EBITDA is defined as net income (loss) attributable to the Company before interest expense and amortization of loan costs, interest income, income taxes, depreciation and amortization, redeemable noncontrolling interests in the operating partnership and after adjustments for unconsolidated entities. We adjust EBITDA to exclude certain additional items such as transaction costs, dead deal costs, write-off of loan costs and exit fees, and non-cash items such as amortization of unfavorable management contract liability, non-employee equity-based compensation, unrealized (gain) loss on marketable securities, unrealized (gain) loss on derivatives and other income, as well as the Company’s portion of adjustments to EBITDA of unconsolidated entities. Unless otherwise indicated, EBITDA and Adjusted EBITDA exclude amounts attributable to the portion of a partnership owned by the third party. We present EBITDA and Adjusted EBITDA because we believe they reflect more accurately the ongoing performance of our hotel assets and other investments and provide more useful information to investors as they are indicators of our ability to meet our future debt payment requirements, working capital requirements and they provide an overall evaluation of our financial condition. EBITDA and Adjusted EBITDA as calculated by us may not be comparable to EBITDA and Adjusted EBITDA reported by other companies that do not define EBITDA and Adjusted EBITDA exactly as we define the terms. EBITDA and Adjusted EBITDA do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as determined by GAAP as an indicator of liquidity.

44

Table of Contents

The following table reconciles net income to EBITDA and Adjusted EBITDA (in thousands) (unaudited):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(7,282
)
 
$
4,389

 
$
1,417

 
$
4,463

(Income) loss from consolidated entities attributable to noncontrolling interest
(1,090
)
 
154

 
(1,068
)
 
741

Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
1,532

 
(1,171
)
 
(671
)
 
(1,213
)
Net income (loss) attributable to the Company
(6,840
)
 
3,372

 
(322
)
 
3,991

Interest income (1)
(12
)
 
(9
)
 
(21
)
 
(19
)
Interest expense and amortization of loan costs (1)
8,965

 
9,656

 
26,924

 
27,736

Depreciation and amortization (1)
10,594

 
9,845

 
30,222

 
27,715

Income tax expense
62

 
185

 
371

 
622

Net income (loss) attributable to redeemable noncontrolling interests in operating partnership
(1,532
)
 
1,171

 
671

 
1,213

Company’s portion of EBITDA of Ashford Inc.
126

 

 
126

 

EBITDA available to the Company and OP unitholders
11,363

 
24,220

 
57,971

 
61,258

Amortization of unfavorable management contract liability
(40
)
 
(40
)
 
(119
)
 
(119
)
Write-off of loan costs and exit fees

 

 
54

 

Transaction costs
255

 
45

 
255

 
1,871

Unrealized loss on investment in Ashford Inc.
5,621

 

 
5,621

 

Unrealized loss on derivatives (1)
2,061

 
(3
)
 
2,097

 
63

Other (income) expense
59

 

 
(1,233
)
 

Compensation adjustment related to modified employment terms

 

 

 
573

Non-employee equity-based compensation
935

 
435

 
2,101

 
1,218

Strategic alternatives and other deal costs
600

 

 
912

 

Company’s portion of adjustments to EBITDA of Ashford Inc.
99

 

 
99

 

Company’s portion of loss in unconsolidated entity
3,399

 

 
4,219

 

Adjusted EBITDA available to the Company and OP unitholders
$
24,352

 
$
24,657

 
$
71,977

 
$
64,864

__________________
(1)  
Net of adjustment for noncontrolling interest in consolidated entities. The following table presents the amounts of the adjustments for non-controlling interest for each line item:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest expense and amortization of loan costs
$
(383
)
 
$
(481
)
 
$
(1,136
)
 
$
(1,423
)
Depreciation and amortization
(714
)
 
(812
)
 
(2,162
)
 
(2,421
)
Interest income

 
1

 

 
1

Unrealized loss on derivatives

 

 
(4
)
 

We calculate FFO and AFFO in the following table. FFO is calculated on the basis defined by NAREIT, which is net income (loss) attributable to the Company, computed in accordance with GAAP, excluding gains or losses on sales of properties and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated entities and redeemable noncontrolling interests in the operating partnership. Adjustments for unconsolidated entities are calculated to reflect FFO on the same basis. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. Our calculation of AFFO excludes write-off of loan costs and exit fees, transaction costs, dead deal costs and non-cash items such as unrealized (gain) loss on marketable securities, unrealized (gain) loss on derivatives and other income (expense). FFO and AFFO exclude amounts attributable to the portion of a partnership owned by the third party. We consider FFO and AFFO to be appropriate measures of our ongoing normalized operating performance as a REIT. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than us. FFO and AFFO do not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income or loss as an indication of our financial performance or GAAP cash flows from operating activities as a

45

Table of Contents

measure of our liquidity. FFO and AFFO are also not indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO and AFFO should be considered along with our net income or loss and cash flows reported in the financial statements.
The following table reconciles net income to FFO and Adjusted FFO (in thousands) (unaudited):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(7,282
)
 
$
4,389

 
$
1,417

 
$
4,463

(Income) loss from consolidated entities attributable to noncontrolling interest
(1,090
)
 
154

 
(1,068
)
 
741

Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
1,532

 
(1,171
)
 
(671
)
 
(1,213
)
Preferred dividends
(895
)
 

 
(1,093
)
 

Net income (loss) attributable to the Company
(7,735
)
 
3,372

 
(1,415
)
 
3,991

Depreciation and amortization on real estate (1)
10,594

 
9,845

 
30,222

 
27,715

Net income (loss) attributable to redeemable noncontrolling interests in operating partnership
(1,532
)
 
1,171

 
671

 
1,213

Company’s portion of FFO of Ashford Inc.
69

 

 
69

 

FFO available to common stockholders and OP unitholders
1,396

 
14,388

 
29,547

 
32,919

Preferred dividends
895

 

 
1,093

 

Unrealized loss on investment in Ashford Inc.
5,621

 

 
5,621

 

Unrealized loss on derivatives (1)
2,061

 
(3
)
 
2,097

 
63

Other (income) expense
59

 

 
(1,233
)
 

Transaction costs
255

 
45

 
255

 
1,871

Strategic alternatives and other deal costs
600

 

 
912

 

Compensation adjustment related to modified employment terms

 

 

 
573

Write-off of loan costs and exit fees

 

 
54

 

Company’s portion of adjustments to FFO of Ashford Inc.
(90
)
 

 
(90
)
 

Company’s portion of loss in unconsolidated entity
3,399

 

 
4,219

 

Adjusted FFO available to the Company and OP unitholders
$
14,196

 
$
14,430

 
$
42,475

 
$
35,426

____________________
(1)  
Net of adjustment for noncontrolling interest in consolidated entities. The following table presents the amounts of the adjustments for non-controlling interest for each line item:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Depreciation and amortization on real estate
$
(714
)
 
$
(812
)
 
$
(2,162
)
 
$
(2,421
)
Unrealized loss on derivatives

 

 
(4
)
 


46

Table of Contents

Hotel Properties
The following table presents certain information related to our hotel properties:
 
Hotel Property
 
Location
 
Service Type
 
Total Rooms
 
% Owned
 
Owned Rooms
 
 
Fee Simple Properties
 
 
 
 
 
 
 
 
 
 
 
Hilton
 
Washington, D.C.
 
Full
 
550

 
75
%
 
413

 
Marriott
 
Seattle, WA
 
Full
 
358

 
100
%
 
358

 
Marriott
 
Plano, TX
 
Full
 
404

 
100
%
 
404

 
Courtyard by Marriott
 
Philadelphia, PA
 
Select
 
499

 
100
%
 
499

 
Courtyard by Marriott
 
Seattle, WA
 
Select
 
250

 
100
%
 
250

 
Courtyard by Marriott
 
San Francisco, CA
 
Select
 
405

 
100
%
 
405

 
Sofitel
 
Chicago, IL
 
Full
 
415

 
100
%
 
415

 
Pier House Resort
 
Key West, FL
 
Full
 
142

 
100
%
 
142

 
Ground Lease Properties
 
 
 
 
 
 
 
 
 
 
 
Hilton (1)
 
La Jolla, CA
 
Full
 
394

 
75
%
 
296

 
Renaissance (2)
 
Tampa, FL
 
Full
 
293

 
100
%
 
293

 
Bardessono Hotel and Spa (3)
 
Yountville, CA
 
Full
 
62

 
100
%
 
62

 
Total
 
 
 
 
 
3,772

 
 
 
3,537

________
(1)  
The ground lease expires in 2043.
(2)  
The ground lease expires in 2080.
(3)  
The initial term of the ground lease expires in 2055. The ground lease contains two 25-year extension options.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring our variable-rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under GAAP guidance.
To the extent that we acquire assets or conduct operations in an international jurisdiction, we will also have currency exchange risk. We may enter into certain hedging arrangements in order to manage interest rate and currency fluctuations.
At September 30, 2015 , our total indebtedness of $760.3 million included $346.0 million of variable-rate debt. The impact on the results of operations of a 25-basis point change in interest rate on the outstanding balance of variable-rate debt at September 30, 2015 , would be approximately $865,000 per year. Interest rate changes will have no impact on the remaining $414.3 million of fixed rate debt.
The above amounts were determined based on the impact of hypothetical interest rates on our borrowings and assume no changes in our capital structure. The information presented above includes those exposures that existed at September 30, 2015 , but it does not consider exposures or positions that could arise after that date. Accordingly, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies at the time, and the related interest rates.
In July 2015, we entered into two interest rate floors with an aggregate notional amount and strike rate of $3.0 billion and -0.25% , respectively. Our total exposure is capped at our initial upfront costs of $3.5 million .
In September 2015, we entered into Eurodollar futures to hedge our cash flow risk for upfront costs, including commissions, of $372,000 . Eurodollar futures prices reflect market expectations for interest rates on three month Eurodollar deposits for specific dates in the future, and the final settlement price is determined by three-month LIBOR on the last trading day. Options on Eurodollar futures provide the ability to limit losses while maintaining the possibility of profiting from favorable changes in the futures prices. As the purchaser, our maximum potential loss is limited to the initial premium paid for the Eurodollar option contracts, while our

47

Table of Contents

potential gain has no limit. These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.
ITEM 4.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2015 (“Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms; and (ii) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss from these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial position or results of operations. However, the final results of legal proceedings cannot be predicted with certainty and if we fail to prevail in one or more of these legal matters, and the associated realized losses exceed our current estimates of the range of potential losses, our consolidated financial position or results of operations could be materially adversely affected in future periods.
ITEM 1A.
RISK FACTORS
The discussion of our business and operations and risk factors discussed in this report should be read together with the risk factors contained in Item 1A of our 2014 10-K, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The following table provides the information with respect to purchases of our common stock during each of the months in the third quarter of 2015 :
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of a Publicly Announced Plan
 
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plan
Common stock:
 
 
 
 
 
 
 
 
July 1 to July 31  (1)
 
130

 
$
16.32

 

 
$
75,835,840

August 1 to August 31  (1)
 
40

 
14.00

 

 
75,835,840

September 1 to September 30 (1)
 
40

 
14.90

 

 
75,835,840

Total
 
210

 
$
15.60

 

 
 
__________________
(1)  
Includes shares that were repurchased from Ashford Trust when former Ashford Trust employees who held restricted shares of Ashford Prime common stock they received in the spin-off, forfeited the shares to Ashford Trust upon termination of employment.
ITEM 3.
DEFAULT UPON SENIOR SECURITIES
None.

48

Table of Contents

ITEM 4.
MINE SAFETY DISCLOSURES
None.
ITEM 5.
OTHER INFORMATION
None.

49

Table of Contents

ITEM 6.
EXHIBITS
Exhibit
 
Description
2.1
 
Separation and Distribution Agreement between Ashford Hospitality Prime, Inc., Ashford Hospitality Trust, Inc. and the other parties thereto (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on November 12, 2013)
2.2
 
Separation and Distribution Agreement Correction between Ashford Hospitality Prime, Inc., Ashford Hospitality Trust, Inc. and the other parties thereto (incorporated by reference to Exhibit 2.2 of the Registration Statement on Form S-11 filed on December 19, 2013)
2.3
 
Agreement for Purchase and Sale of Real Property Commonly Known as Bardessono Inn & Spa Yountville, California between Yountville Investors LLC, and Ashford Yountville LP (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on July 15, 2015)
3.1
 
Articles of Amendment and Restatement of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on November 12, 2013)
3.2
 
Articles Supplementary of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on May 18, 2015)
3.3
 
Articles Supplementary for 5.50% Series A Cumulative Convertible Preferred Stock of Ashford Hospitality Prime, Inc., as amended by a Certificate of Correction (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed on June 12, 2015)
3.4
 
Amended and Restated Bylaws of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on November 12, 2013)
4.1
 
Registration Rights Agreement, dated as of June 9, 2015, by and among Ashford Hospitality Prime, Inc., Ashford Hospitality Prime Limited Partnership, Ashford Hospitality Advisors LLC and MLV & Co. LLC (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on June 12, 2015)
10.1
 
Letter Agreement, dated September 17, 2015, by and between Ashford Hospitality Prime, Inc. and Ashford Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 18, 2015)
10.2*
 
First Amendment to the Credit Agreement, dated September 30, 2015, by and between Ashford Hospitality Prime Limited Partnership, Ashford Hospitality Prime, Inc. and Bank of America, N.A.
12*
 
Statement Regarding Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends
31.1*
 
Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
31.2*
 
Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
32.1*
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 are formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements Comprehensive Income (Loss); (iii) Consolidated Statement of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements. In accordance with Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
 
 
 
 
101.INS
 
XBRL Instance Document
Submitted electronically with this report.
101.SCH
 
XBRL Taxonomy Extension Schema Document
Submitted electronically with this report.
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
Submitted electronically with this report.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
Submitted electronically with this report.
101.LAB
 
XBRL Taxonomy Label Linkbase Document
Submitted electronically with this report.
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
Submitted electronically with this report.
___________________________________
* Filed herewith.

50

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ASHFORD HOSPITALITY PRIME, INC.
Date:
November 9, 2015
By:
/s/  MONTY J. BENNETT
 
 
 
 
Monty J. Bennett
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
Date:
November 9, 2015
By:
/s/  DERIC S. EUBANKS
 
 
 
 
Deric S. Eubanks
 
 
 
 
Chief Financial Officer
 


51


EXHIBIT 10.2

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this “ Amendment ”) is entered into as of September 30, 2015, among ASHFORD HOSPITALITY PRIME LIMITED PARTNERSHIP , a Delaware limited partnership (the “ Borrower ”), ASHFORD HOSPITALITY PRIME, INC. , a Maryland corporation (the “ Parent ”), each Lender (defined below) party hereto, and BANK OF AMERICA, N.A. , as Administrative Agent (the “ Administrative Agent ”), Swing Line Lender, and L/C Issuer (the Administrative Agent, the Swing Line Lender, the L/C Issuer, and Lenders are each a “ Credit Party ” and collectively “ Credit Parties ”).

R E C I T A L S

A.    The Borrower, the Parent, the Administrative Agent, the Swing Line Lender, the L/C Issuer, and certain lenders (each, a “ Lender ” and collectively, “ Lenders ”) are parties to that certain Credit Agreement dated as of November 19, 2013 (as modified, amended, renewed, extended, or restated from time to time, the “ Credit Agreement ”).

B.    The Borrower, the Parent, and certain Subsidiaries of the Parent party hereto (each, a “ Loan Party ” and collectively, the “ Loan Parties ”) have requested that Credit Parties modify certain provisions contained in the Credit Agreement, and each Credit Party that is a party hereto has agreed to such modifications, subject to the terms and conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.    Terms and References . Unless otherwise stated in this Amendment (a) terms defined in the Credit Agreement have the same meanings when used in this Amendment, and (b) references to “ Sections ” are to the Credit Agreement’s sections.

2.    Amendment to the Credit Agreement.

(a) Section 1.01 of the Credit Agreement is hereby amended to add the following definitions in the appropriate alphabetical order:

AH REHE Investment ” means, as of the last day of any fiscal quarter, the ownership of the Parent or its Subsidiaries of the equity interests in AIM Real Estate Hedged Equity (U.S.) Fund, LP. For purposes of covenant compliance, the amount of any AH REHE Investment shall be the value of such investment, determined in accordance with GAAP, as shown on the most recent financial statement of the Consolidated Parties and the Controlled JV Subsidiaries delivered in accordance with Section 6.01 hereof.

AINC Investment ” means, as of the last day of any fiscal quarter, the ownership of the Parent or its Subsidiaries of the publicly traded shares in Ashford, Inc. For purposes of covenant compliance, the amount of any AINC Investment shall be valued at the then current market value, calculated by taking the product of the Ashford, Inc. share price as of the last day of such fiscal quarter and the number of shares owned by Parent and its Subsidiaries as of the last day of such fiscal quarter.


First Amendment to Credit Agreement


First Amendment Effective Date ” means September 30, 2015, the effective date of the First Amendment to Credit Agreement, executed by the Borrower, the Parent, the Administrative Agent, the Swing Line Lender, the L/C Issuer, and certain Lenders.

(b) Section 1.01 of the Credit Agreement is hereby amended to delete the definition of “ Unrestricted Cash ” in its entirety and replace such definition with the following:

Unrestricted Cash ” means, as of any date of determination, without duplication, (a) all “cash and cash equivalents” (as set forth on the balance sheet of the Parent), (b) the AH REHE Investment, (c) the AINC Investment, (d) cash held by property managers, (e) amounts representing “Restricted Cash,” “Marketable Securities,” and “Due From Third Party Hotel Managers” (each as set forth on the balance sheet of the Parent) of the Parent and its Subsidiaries, including its pro rata share of such amounts of any JV Subsidiaries; provided that, “ Unrestricted Cash ” shall exclude the items set forth in clauses (b) , (c) , (d) , and (e) above to the extent such items exceed $100,000,000 in the aggregate.

(c) Section 1.01 of the Credit Agreement is hereby amended to delete the definition of “ Change of Control ” in its entirety and replace such definition with the following:

Change of Control ” means an event or series of events by which:
(a)    any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “ beneficial owner ” (as defined in Rules 13d‑3 and 13d‑5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “ option right ”)), directly or indirectly, of 35% or more of the equity securities of the Parent entitled to vote for members of the board of directors or equivalent governing body of the Parent on a fully-diluted basis (and taking into account all such securities that such “person” or “group” has the right to acquire pursuant to any option right); or

(b)    during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Parent cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body; or

(c)    The Parent shall cease, directly or indirectly, to Control the Borrower.

(d) Section 1.01 of the Credit Agreement is hereby amended to delete the definition of “ JV Subsidiary ” in its entirety and replace such definition with the following:

JV Subsidiary ” means any entity in which Borrower owns, directly and indirectly, less than 100% of the equity interests, excluding (i) any investment in the securities of any publicly

2      First Amendment to Credit Agreement


traded company constituting less than 5% of the outstanding class of such securities and (ii) with respect to the calculation of the financial covenants set forth in Section 7.11 hereof, the related definitions, and Section 7.03 , Ashford, Inc. and AIM Real Estate Hedged Equity (U.S.) Fund, LP.

(e) Section 3.01(e)(ii)(D) of the Credit Agreement is hereby amended by adding the following at the end thereof:

For purposes of determining withholding Taxes imposed under FATCA, from and after the First Amendment Effective Date, the Borrower and the Administrative Agent shall treat (and the Lenders hereby authorize the Administrative Agent to treat) the Obligations as not qualifying as a “grandfathered obligation” within the meaning of Treasury Regulation Section 1.1471-2(b)(2)(i) .
(f) Section 7.03 of the Credit Agreement is hereby amended and restated in its entirety as follows:

7.03    Investments . Make or hold any Investment, other than those which are in the lines of businesses of the Parent, the Borrower and the Guarantors as of the date hereof, or those substantially related or incidental thereto (for the sake of clarity, acquiring and owning retail and/or commercial space acquired as part of an acquisition consisting primarily of assets otherwise permitted to be acquired or held pursuant to this Section 7.03 shall be considered substantially related or incidental to the lines of businesses of the Parent, the Borrower and the Guarantors as of the date hereof), and unless immediately prior to making such Investment, and immediately thereafter and after giving effect thereto, no Default is or would be in existence, subject to the following additional restrictions:
(a)      The Borrower and the Guarantors shall not make or hold:
(i)      Investments in real properties consisting of undeveloped or speculative land (valued at cost for purposes of this clause) with an aggregate value greater than 5% of Total Asset Value;
(ii)      Investments in development properties (valued at cost for purposes of this clause) with an aggregate value greater than 5% of Total Asset Value;
(iii)      Investments in JV Subsidiaries that are not consolidated with Parent under GAAP (valued at cost for purposes of this clause) with an aggregate value greater than 25% of Total Asset Value;
(iv)      Investments in mortgage and mezzanine loans and notes receivables (valued at cost for purposes of this clause) with an aggregate value greater than 10% of Total Asset Value;
(v)      the AH REHE Investment and the AINC Investment with an aggregate value greater than 10% of Total Asset Value; and
(vi)      Investments such that the collective aggregate value of the Investments owned pursuant to items (i) through (v) of this clause (a) at any time exceeds 25% of Total Asset Value.
3.    Amendments to other Loan Documents.


3      First Amendment to Credit Agreement


(a)    All references in the Loan Documents to the Credit Agreement shall henceforth include references to the Credit Agreement, as modified and amended hereby, and as may, from time to time, be further amended, modified, extended, renewed, and/or increased.

(b)    Any and all of the terms and provisions of the Loan Documents are hereby amended and modified wherever necessary, even though not specifically addressed herein, so as to conform to the amendments and modifications set forth herein.

4.      Conditions Precedent . This Amendment shall not be effective unless and until: (a) the Administrative Agent receives fully executed counterparts of this Amendment signed by the Loan Parties, the Administrative Agent, and the Required Lenders; (b) the representations and warranties in the Credit Agreement, as amended by this Amendment, and each other Loan Document are true and correct on and as of the date of this Amendment as though made as of the date of this Amendment except to the extent that any of them speak to a different specific date, in which case they shall be true and correct in on and as such earlier date; provided , that for purposes of this Amendment, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b) , respectively, of Section 6.01 of the Credit Agreement; (c) the Administrative Agent receives payment of all reasonable fees and expenses of the Administrative Agent in connection with this Amendment; and (d) after giving effect to this Amendment, no Default exists.

5.      Ratifications . Each Loan Party (a) ratifies and confirms all provisions of the Loan Documents as amended by this Amendment, (b) ratifies and confirms that all guaranties, assurances, and liens granted, conveyed, or assigned to or for the benefit of the Credit Parties under the Loan Documents are not released, reduced, or otherwise adversely affected by this Amendment and continue to guarantee, assure, and secure full payment and performance of the present and future obligations of the Borrower under the Credit Agreement and the other Loan Documents, and (c) agrees to perform such acts and duly authorize, execute, acknowledge, deliver, file, and record such additional documents, and certificates as the Administrative Agent may request in order to create, perfect, preserve, and protect those guaranties, assurances, and liens.

6.      Representations . Each Loan Party represents and warrants to the Credit Parties that as of the date of this Amendment: (a) this Amendment has been duly authorized, executed, and delivered by each Loan Party; (b) no action of, or filing with, any governmental authority is required to authorize, or is otherwise required in connection with, the execution, delivery, and performance by any Loan Party of this Amendment except for those which have been obtained; (c) the Loan Documents, as amended by this Amendment, are valid and binding upon each Loan Party and are enforceable against each Loan Party in accordance with their respective terms, except as limited by Debtor Relief Laws; (d) the execution, delivery, and performance by each Loan Party of this Amendment does not require the consent of any other Person and do not and will not constitute a violation of any laws, agreements, or understandings to which any Loan Party is a party or by which any Loan Party is bound except for those which have been obtained; (e) all representations and warranties in the Loan Documents are true and correct except to the extent that any of them speak to a different specific date, in which case they shall be true and correct in all material respects on and as of such earlier date; provided , that for purposes of this Amendment, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b) , respectively, of Section 6.01 of the Credit Agreement; and (f) no Default exists.

7.    Continued Effect. Except to the extent amended hereby, all terms, provisions and conditions of the Credit Agreement and the other Loan Documents, and all documents executed in connection therewith,

4      First Amendment to Credit Agreement


shall continue in full force and effect and shall remain enforceable and binding in accordance with their respective terms.

8.      Miscellaneous . Unless stated otherwise (a) the singular number includes the plural and vice versa and words of any gender include each other gender, in each case, as appropriate, (b) headings and captions may not be construed in interpreting provisions, (c) this Amendment must be construed -- and its performance enforced -- under New York law, (d) if any part of this Amendment is for any reason found to be unenforceable, all other portions of it nevertheless remain enforceable, and (e) this Amendment may be executed in any number of counterparts (originals or facsimile copies followed by originals) with the same effect as if all signatories had signed the same document, and all of those counterparts must be construed together to constitute the same document.

9.    RELEASE. EACH LOAN PARTY HEREBY ACKNOWLEDGES THAT THE OBLIGATIONS UNDER THE LOAN DOCUMENTS ARE ABSOLUTE AND UNCONDITIONAL WITHOUT ANY RIGHT OF RECISSION, SETOFF, COUNTERCLAIM, DEFENSE, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY SUCH OBLIGATIONS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM ANY CREDIT PARTY. EACH LOAN PARTY HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES EACH CREDIT PARTY AND EACH CREDIT PARTY’S PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS, AND ASSIGNS (COLLECTIVELY, THE “RELEASED PARTIES”), FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER ARISING FROM OR UNDER THE LOAN DOCUMENTS (AS AMENDED HEREBY) AND THE TRANSACTION EVIDENCED THEREBY, WHETHER KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE HEREOF WHICH ANY LOAN PARTY MAY NOW OR HEREAFTER HAVE AGAINST THE RELEASED PARTIES, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING, OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE.

10.    ENTIRETIES. THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

11.      Parties. This Amendment binds and inures to each Loan Party and each Credit Party, and their respective successors and permitted assigns.

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]



5      First Amendment to Credit Agreement


EXECUTED as of the date first stated above.


ASHFORD HOSPITALITY PRIME LIMITED PARTNERSHIP

By:
Ashford Prime OP General Partner LLC, its general partner

By:
/s/ DAVID A. BROOKS
Name: David A. Brooks
Title: Vice President
ASHFORD HOSPITALITY PRIME, INC.
By:
/s/ DAVID A. BROOKS
Name: David A. Brooks
Title: Chief Operating Officer and General Counsel

ASHFORD PRIME OP LIMITED PARTNER LLC
ASHFORD PRIME OP GENERAL PARTNER LLC
ASHFORD HHC III LLC


By:
/s/ DAVID A. BROOKS
Name: David A. Brooks
Title: Vice President

ASHFORD PRIME TRS CORPORATION

By:
/s/ DERIC S. EUBANKS
Name: Deric S. Eubanks
Title: President


Signature Page to First Amendment to Credit Agreement



BANK OF AMERICA, N.A. , as the Administrative Agent

By:
/s/ SUZANNE E. PICKETT
Name: Suzanne E. Pickett
Title: Vice President

Signature Page to First Amendment to Credit Agreement



BANK OF AMERICA, N.A. , as a Lender, the L/C Issuer, and the Swing Line Lender

By:
/s/ SUZANNE E. PICKETT
Name: Suzanne E. Pickett
Title: Vice President

Signature Page to First Amendment to Credit Agreement


CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK , as a Lender

By:
/s/ JOSEPH A. ASCIOLLA
Name: Joseph A. Asciolla
Title: Managing Director

By:
/s/ DAVID BOWERS
Name: David Bowers
Title: Managing Director


Signature Page to First Amendment to Credit Agreement


CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH , as a Lender

By:
/s/ MIKHAIL FAYBUSOVICH
Name: Mikhail Faybusovich
Title: Authorized Signatory

By:
/s/ GREGORY FANTONI
Name: Gregory Fantoni
Title: Authorized Signatory

Signature Page to First Amendment to Credit Agreement




KEYBANK NATIONAL ASSOCIATION , as a Lender


By:
/s/ ANGELA KARA
Name: Angela Kara
Title: Assistant Vice President

Signature Page to First Amendment to Credit Agreement


MORGAN STANLEY BANK, N.A. , as a Lender

By:
/s/ EMANUEL MA
Name: Emanuel Ma
Title: Authorized Signatory


Signature Page to First Amendment to Credit Agreement
EXHIBIT 12


ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
(dollars in thousands)
 
Nine Months Ended
 
 Year Ended December 31,
 
September 30, 2015
 
2014
 
2013
 
2012
 
2011
 
2010
 Earnings
 
 
 
 
 
 
 
 
 
 
 
 Income (loss) from continuing operations before provision for income taxes and noncontrolling interests
$
1,788

 
$
4,635

 
$
(15,585
)
 
$
591

 
$
2,273

 
$
(18,308
)
 Amount recorded for equity in loss of unconsolidated entity
4,219

 

 

 

 

 

 Add:
 
 
 
 
 
 
 
 
 
 
 
 Interest on indebtedness
26,225

 
37,203

 
32,266

 
29,991

 
30,525

 
30,737

 Amortization of loan costs
1,835

 
1,828

 
745

 
1,253

 
1,278

 
1,251

 Interest component of operating leases
252

 
264

 
227

 
220

 
182

 
226

 
$
34,319

 
$
43,930

 
$
17,653

 
$
32,055

 
$
34,258

 
$
13,906

 
 
 
 
 
 
 
 
 
 
 
 
 Fixed charges
 
 
 
 
 
 
 
 
 
 
 
 Interest on indebtedness
$
26,225

 
$
37,203

 
$
32,266

 
$
29,991

 
$
30,525

 
$
30,737

 Amortization of loan costs
1,835

 
1,828

 
745

 
1,253

 
1,278

 
1,251

 Interest component of operating leases
252

 
264

 
227

 
220

 
182

 
226

 
$
28,312

 
$
39,295

 
$
33,238

 
$
31,464

 
$
31,985

 
$
32,214

 Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
 
Series A Preferred Stock
$
1,093

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Combined fixed charges and preferred stock dividends
$
29,405

 
$
39,295

 
$
33,238

 
$
31,464

 
$
31,985

 
$
32,214

 
 
 
 
 
 
 
 
 
 
 
 
 Ratio of earnings to fixed charges
1.21

 
1.12

 

 
1.02

 
1.07

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Ratio of earnings to combined fixed charges and preferred stock dividends
1.17

 
1.12

 
 
 
1.02

 
1.07

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Deficit (Fixed charges)


 


 
$
15,585

 


 


 
$
18,308

 
 
 
 
 
 
 
 
 
 
 
 
 Deficit (Combined fixed charges and preferred stock dividends)
 
 


 
$
15,585

 

 

 
$
18,308






EXHIBIT 31.1
CERTIFICATION
I, Monty J. Bennett, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Ashford Hospitality Prime, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2015

/s/ MONTY J. BENNETT
 
Monty J. Bennett
 
Chief Executive Officer
 




EXHIBIT 31.2
CERTIFICATION
I, Deric S. Eubanks, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Ashford Hospitality Prime, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2015

/s/ DERIC S. EUBANKS
 
Deric S. Eubanks
 
Chief Financial Officer
 




EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ashford Hospitality Prime, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2015 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Monty J. Bennett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2015

/s/  MONTY J. BENNETT
 
Monty J. Bennett
 
Chief Executive Officer
 




EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ashford Hospitality Prime, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2015 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Deric S. Eubanks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2015

/s/  DERIC S. EUBANKS
 
Deric S. Eubanks
 
Chief Financial Officer