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

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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

BRAEMAR HOTELS & RESORTS 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 every Interactive Data File required to be submitted 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 such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
BHR
 
New York Stock Exchange
Preferred Stock, Series B
 
BHR-PB
 
New York Stock Exchange
Preferred Stock, Series D
 
BHR-PD
 
New York Stock Exchange
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
 
32,883,068
(Class)
 
Outstanding at May 6, 2019




BRAEMAR HOTELS & RESORTS INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS

 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS (unaudited)

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Investments in hotel properties, gross
$
1,719,275

 
$
1,562,806

Accumulated depreciation
(276,799
)
 
(262,905
)
Investments in hotel properties, net
1,442,476

 
1,299,901

Cash and cash equivalents
73,802

 
182,578

Restricted cash
86,309

 
75,910

Accounts receivable, net of allowance of $108 and $101, respectively
23,314

 
12,739

Inventories
2,358

 
1,862

Prepaid expenses
7,275

 
4,409

Investment in Ashford Inc., at fair value
10,821

 
10,114

Investment in unconsolidated entity
1,872

 
1,766

Derivative assets
815

 
772

Operating lease right-of-use assets
82,308

 

Other assets
10,314

 
13,831

Intangible assets, net
5,303

 
27,678

Due from related party, net
350

 

Due from third-party hotel managers
14,402

 
4,927

Total assets
$
1,761,719

 
$
1,636,487

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Indebtedness, net
$
1,046,749

 
$
985,873

Accounts payable and accrued expenses
76,777

 
64,116

Dividends and distributions payable
9,174

 
8,514

Due to Ashford Inc.
5,114

 
4,001

Due to related party, net

 
224

Due to third-party hotel managers
2,415

 
1,633

Operating lease liabilities
60,617

 

Other liabilities
26,524

 
29,033

Total liabilities
1,227,370

 
1,093,394

Commitments and contingencies (note 16)

 

5.50% Series B cumulative convertible preferred stock, $0.01 par value, 4,965,850 shares issued and outstanding at March 31, 2019 and December 31, 2018
106,123

 
106,123

Redeemable noncontrolling interests in operating partnership
51,010

 
44,885

Equity:
 
 
 
Preferred stock, $0.01 value, 50,000,000 shares authorized:
 
 
 
Series D cumulative preferred stock, 1,600,000 shares issued and outstanding at March 31, 2019 and December 31, 2018
16

 
16

Common stock, $0.01 par value, 200,000,000 shares authorized, 32,841,263 and 32,511,660 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
328

 
325

Additional paid-in capital
514,739

 
512,545

Accumulated deficit
(132,575
)
 
(115,410
)
Total stockholders’ equity of the Company
382,508

 
397,476

Noncontrolling interest in consolidated entities
(5,292
)
 
(5,391
)
Total equity
377,216

 
392,085

Total liabilities and equity
$
1,761,719

 
$
1,636,487

See Notes to Condensed Consolidated Financial Statements.

2

Table of Contents

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
REVENUE
 
 
 
Rooms
$
76,731

 
$
65,507

Food and beverage
32,114

 
23,500

Other
19,663

 
13,482

Total hotel revenue
128,508

 
102,489

Other
5

 

Total revenue
128,513

 
102,489

EXPENSES
 
 
 
Hotel operating expenses:
 
 
 
Rooms
16,982

 
14,918

Food and beverage
22,210

 
15,620

Other expenses
38,895

 
29,664

Management fees
4,416

 
3,617

Total hotel expenses
82,503

 
63,819

Property taxes, insurance and other
7,460

 
5,604

Depreciation and amortization
16,686

 
13,006

Impairment charges

 
12

Advisory services fee
6,024

 
5,244

Transaction costs
634

 
488

Corporate general and administrative
1,126

 
28

Total expenses
114,433

 
88,201

OPERATING INCOME (LOSS)
14,080

 
14,288

Equity in earnings (loss) of unconsolidated entity
(50
)
 
(3
)
Interest income
362

 
200

Other income (expense)
(117
)
 
(63
)
Interest expense and amortization of loan costs
(14,193
)
 
(10,179
)
Write-off of loan costs and exit fees
(312
)
 
(2
)
Unrealized gain (loss) on investment in Ashford Inc.
707

 
528

Unrealized gain (loss) on derivatives
(872
)
 
73

INCOME (LOSS) BEFORE INCOME TAXES
(395
)
 
4,842

Income tax (expense) benefit
(927
)
 
(572
)
NET INCOME (LOSS)
(1,322
)
 
4,270

(Income) loss attributable to noncontrolling interests in consolidated entities
(99
)
 
42

Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
440

 
(292
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(981
)
 
4,020

Preferred dividends
(2,532
)
 
(1,707
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
(3,513
)
 
$
2,313

INCOME (LOSS) PER SHARE - BASIC:
 
 
 
Net income (loss) attributable to common stockholders
$
(0.11
)
 
$
0.07

Weighted average common shares outstanding – basic
32,115

 
31,680

INCOME (LOSS) PER SHARE - DILUTED:
 
 
 
Net income (loss) attributable to common stockholders
$
(0.11
)
 
$
0.07

Weighted average common shares outstanding – diluted
32,115

 
31,683

See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
NET INCOME (LOSS)
$
(1,322
)
 
$
4,270

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
 
 
 
Total other comprehensive income (loss)

 

TOTAL COMPREHENSIVE INCOME (LOSS)
(1,322
)
 
4,270

Comprehensive (income) loss attributable to noncontrolling interests in consolidated entities
(99
)
 
42

Comprehensive (income) loss attributable to redeemable noncontrolling interests in operating partnership
440

 
(292
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
(981
)
 
$
4,020

See Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands except per share amounts)
 
8.25% Series D Cumulative Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
5.50% Series B Cumulative Convertible
Preferred Stock
 
Redeemable Noncontrolling Interests in Operating Partnership
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2018
1,600

 
$
16

 
32,512


$
325

 
$
512,545

 
$
(115,410
)
 
(5,391
)
 
$
392,085

 
4,966

 
$
106,123

 
$
44,885

Impact of adoption of new accounting standard  (1)

 

 

 

 

 
(103
)
 

 
(103
)
 

 

 

Purchase of common stock

 

 
(17
)
 

 
(202
)
 

 

 
(202
)
 

 

 

Equity-based compensation

 

 



 
978

 

 

 
978

 

 

 
550

Preferred stock offering costs
 
 
 
 



 
(13
)
 

 
 
 
(13
)
 

 

 

Issuance of restricted shares/units

 

 
237

 
2

 
(2
)
 

 

 

 

 

 
7

Forfeiture of restricted common shares

 

 
(1
)
 

 

 

 

 

 

 

 

Dividends declared – common stock ($0.16/share)

 

 



 

 
(5,329
)
 

 
(5,329
)
 

 

 

Dividends declared – preferred stock-Series B ($0.34/share)

 

 

 

 

 
(1,707
)
 

 
(1,707
)
 

 

 

Dividends declared – preferred stock-Series D ($0.52/share)

 

 

 

 

 
(825
)
 

 
(825
)
 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 
(778
)
Redemption/conversion of operating partnership units

 

 
110

 
1

 
1,433

 
(285
)
 

 
1,149

 

 

 
(1,149
)
Net income (loss)

 

 

 

 

 
(981
)
 
99

 
(882
)
 

 

 
(440
)
Redemption value adjustment

 

 

 

 

 
(7,935
)
 

 
(7,935
)
 

 

 
7,935

Balance at March 31, 2019
1,600

 
$
16

 
32,841

 
$
328

 
$
514,739

 
$
(132,575
)
 
$
(5,292
)
 
$
377,216

 
4,966

 
$
106,123

 
$
51,010

_______________
(1) see notes 2 and 5 .

5

Table of Contents

 
8.25% Series D Cumulative Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Noncontrolling Interests in Consolidated Entities
 
Total
 
5.50% Series B Cumulative Convertible
 Preferred Stock
 
Redeemable Noncontrolling Interests in Operating Partnership
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at January 1, 2018

 
$

 
32,120

 
$
321

 
$
469,791

 
$
(88,807
)
 
$
(4,753
)
 
$
376,552

 
4,966

 
$
106,123

 
$
46,627

Purchase of common stock

 

 
(7
)
 

 
(74
)
 

 

 
(74
)
 

 

 

Equity-based compensation

 

 

 

 
2,449

 

 

 
2,449

 

 

 
144

Issuance of restricted shares/units

 

 
406

 
4

 
54

 

 

 
58

 

 

 
18

Forfeiture of restricted common shares

 

 
(2
)
 

 

 

 

 

 

 

 

Dividends declared – common stock ($0.16/share)

 

 

 

 

 
(5,275
)
 

 
(5,275
)
 

 

 

Dividends declared – preferred stock-Series B ($0.34/share)

 

 

 

 

 
(1,707
)
 

 
(1,707
)
 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 
(822
)
Net income (loss)

 

 

 

 

 
4,020

 
(42
)
 
3,978

 

 

 
292

Balance at March 31, 2018

 
$

 
32,517

 
$
325

 
$
472,220

 
$
(91,769
)
 
$
(4,795
)
 
$
375,981

 
4,966

 
$
106,123

 
$
46,259

See Notes to Condensed Consolidated Financial Statements.

6

Table of Contents

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2019

2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(1,322
)
 
$
4,270

Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization
16,686

 
13,006

Equity-based compensation
1,528

 
2,593

Bad debt expense
87

 
57

Amortization of loan costs
1,180

 
988

Write-off of loan costs and exit fees
312

 
2

Amortization of intangibles
119

 
43

Amortization of non-refundable membership initiation fees
(27
)
 

Interest expense accretion on refundable membership club deposits
225

 

Impairment charges

 
12

Unrealized (gain) loss on investment in Ashford Inc.
(707
)
 
(528
)
Realized and unrealized (gain) loss on derivatives
937

 
(73
)
Net settlement of trading derivatives
(925
)
 
(270
)
Equity in (earnings) loss of unconsolidated entity
50

 
3

Deferred income tax expense (benefit)
179

 
136

Changes in operating assets and liabilities, exclusive of the effect of hotel acquisitions and dispositions:
 
 
 
Accounts receivable and inventories
(9,354
)
 
(5,419
)
Insurance receivable

 
(5,387
)
Prepaid expenses and other assets
(1,536
)
 
(3,747
)
Accounts payable and accrued expenses
(49
)
 
781

Operating lease right-of-use assets
115

 

Due to/from related party, net
(493
)
 
(498
)
Due to/from third-party hotel managers
(2,518
)
 
(637
)
Due to/from Ashford Inc.
1,113

 
(1,436
)
Operating lease liabilities
(30
)
 

Other liabilities
(6,186
)
 
53

Net cash provided by (used in) operating activities
(616
)
 
3,949

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisition of hotel properties, net of cash and restricted cash acquired
(112,095
)
 
(4,500
)
Investment in unconsolidated entity
(156
)
 
(2,000
)
Improvements and additions to hotel properties
(36,644
)
 
(15,736
)
Net cash provided by (used in) investing activities
(148,895
)
 
(22,236
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Borrowings on indebtedness
249,000

 

Repayments of indebtedness
(187,086
)
 
(714
)
Payments of loan costs and exit fees
(2,441
)
 
(92
)
Payments for derivatives
(55
)
 
(67
)
Purchase of common stock
(202
)
 
(74
)
Payments for dividends and distributions
(7,979
)
 
(7,518
)
Preferred stock offering costs
(110
)
 

Other
7

 
18

Net cash provided by (used in) financing activities
51,134

 
(8,447
)
Net change in cash, cash equivalents and restricted cash
(98,377
)
 
(26,734
)
Cash, cash equivalents and restricted cash at beginning of period
258,488

 
185,342

Cash, cash equivalents and restricted cash at end of period
$
160,111

 
$
158,608

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Interest paid
$
12,363

 
$
9,031

Income taxes paid (refund)
(1,224
)
 
(743
)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Dividends and distributions declared but not paid
9,174

 
8,374

Capital expenditures accrued but not paid
14,891

 
4,138

Non-cash dividends paid

 
58


7

Table of Contents

 
Three Months Ended March 31,
 
2019

2018
SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
 
 
Cash and cash equivalents at beginning of period
$
182,578

 
$
137,522

Restricted cash at beginning of period
75,910

 
47,820

Cash, cash equivalents and restricted cash at beginning of period
$
258,488

 
$
185,342

 
 
 
 
Cash and cash equivalents at end of period
$
73,802

 
$
95,223

Restricted cash at end of period
86,309

 
63,385

Cash, cash equivalents and restricted cash at end of period
$
160,111

 
$
158,608

See Notes to Condensed Consolidated Financial Statements.

8

Table of Contents
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1. Organization and Description of Business
Braemar Hotels & Resorts Inc., together with its subsidiaries (“Braemar”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”) luxury hotels and resorts. 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. Braemar has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code. Braemar conducts its business and owns substantially all of its assets through its operating partnership, Braemar Hospitality Limited Partnership (“Braemar OP”). In this report, the terms the “Company,” “we,” “us” or “our,” refers to Braemar Hotels & Resorts Inc. and, as the context may require, all entities included in its condensed consolidated financial statements.
We are advised by Ashford Hospitality Advisors LLC (“Ashford LLC” or the “Advisor”) through an advisory agreement. Ashford LLC is a subsidiary of Ashford Inc. All of the hotel properties 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.
We do not operate any of our hotel properties directly; instead we employ hotel management companies to operate them for us under management contracts. As of March 31, 2019 , Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington Lodging”), which is beneficially wholly-owned by Mr. Monty J. Bennett, Chairman of our board of directors, and Mr. Archie Bennett, Jr., Chairman Emeritus of Ashford Hospitality Trust, Inc. (“Ashford Trust”), managed three of our thirteen hotel properties. Third-party management companies managed the remaining hotel properties.
Ashford Inc. also provides other products and services to us or our hotel properties through certain entities in which Ashford Inc. has an ownership interest. These products and services include project management services, mortgage placement services, real estate advisory services, watersports activities, travel/transportation services and mobile key technology.
The accompanying condensed consolidated financial statements include the accounts of such wholly-owned and majority owned subsidiaries of Braemar OP that as of March 31, 2019 , own thirteen hotel properties in six states, the District of Columbia and the U.S. Virgin Islands (“USVI”). The portfolio includes eleven wholly-owned hotel properties and two hotel properties that are owned through a partnership in which Braemar OP has a controlling interest. These hotel properties represent 3,719 total rooms, or 3,484 net rooms, excluding those attributable to our partner. As a REIT, Braemar is required to comply with limitations imposed by the Internal Revenue Code related to operating hotels. As of March 31, 2019 , twelve of our thirteen 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 “Braemar TRS”). One hotel property, located in the USVI, is owned by our USVI TRS. Braemar TRS then engages third-party or affiliated hotel management companies to operate the hotel properties under management contracts. Hotel operating results related to the hotel properties are included in the condensed consolidated statements of operations.
As of March 31, 2019 , ten of the thirteen hotel properties were leased by Braemar’s wholly-owned TRS and the two hotel properties majority-owned through a consolidated partnership were leased to a TRS wholly-owned by such consolidated partnership. Each leased 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 Braemar TRS is eliminated in consolidation. The hotel properties are operated under management contracts with Marriott International, Inc. (“Marriott”), Hilton Worldwide (“Hilton”), Accor Business and Leisure Management, LLC (“Accor”), Hyatt Hotels Corporation (“Hyatt”), Ritz-Carlton, Inc., a subsidiary of Marriott (“Ritz-Carlton”) and Remington Lodging, which are eligible independent contractors under the Internal Revenue Code.
2 . Significant Accounting Policies
Basis of Presentation and Principles of Consolidation —The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements include the accounts of Braemar Hotels & Resorts Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these condensed consolidated financial statements. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP in the

9

Table of Contents
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


accompanying unaudited condensed consolidated financial statements. We believe the disclosures made herein are adequate to prevent the information presented from being misleading. However, the financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2018 Annual Report on Form 10-K, as originally filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019, as subsequently amended.
Braemar 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 and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. All major decisions related to Braemar 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, Braemar OP General Partner LLC, its general partner. As such, we consolidate Braemar OP.
The following items affect reporting comparability of our historical condensed consolidated financial statements:
historical seasonality patterns at some of our hotel properties cause fluctuations in our overall operating results. Consequently, operating results for the three months ended March 31, 2019 , are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 ;
on April 4, 2018, we acquired the Ritz-Carlton, Sarasota. The operating results of the hotel property have been included in the results of operations as of its acquisition date;
on June 1, 2018, we sold the Tampa Renaissance; and
on January 15, 2019, we acquired the Ritz-Carlton, Lake Tahoe. The operating results of the hotel property have been included in the 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 (“FF&E”) replacements of approximately 4% to 5% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions.
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. Asset write-downs resulting from property damage are recorded up to the amount of the allocable property insurance deductible in the period that the property damage occurs. See note 4 .
Investment in Ashford Inc. —We hold approximately 195,000 shares of Ashford Inc. common stock, which represented approximately 7.9% of the outstanding common stock in Ashford Inc., with a fair value of $10.8 million at March 31, 2019 . This investment would typically be accounted for under the equity method of accounting, under Accounting Standard Codification (“ASC”) 323-10 - Investments - Equity Method and Joint Ventures since we exercise significant influence. 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 .
Investment in Unconsolidated Entity —Investment in unconsolidated entity, in which we have ownership interest of 8.4% at March 31, 2019 , is accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the entities’ net income/loss. We review our investment in unconsolidated entity for impairment in each reporting

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


period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment.
Our investment in unconsolidated entity is considered to be a variable interest in the underlying entity. VIEs, 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 and (ii) 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 entity’s activities and operations, we are not considered to be the primary beneficiary of this entity on an ongoing basis and therefore such entity should not be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.
We review our investment in unconsolidated entity for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. Any impairment is recorded in equity in earnings (loss) in unconsolidated entity. No such impairment was recorded for the three months ended March 31, 2019 and 2018 .
Leases —We determine if an arrangement is a lease at commencement date. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on our consolidated balance sheets. We currently do not have any finance leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. The lease terms used to calculate our right-of-use assets may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Equity-Based Compensation —Prior to the adoption of Accounting Standards Update (“ASU”) 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) in the third quarter of 2018, stock/unit-based compensation for non-employees was accounted for at fair value based on the market price of the shares at period end that resulted in recording expense, included in “advisory services fee” and “management fees,” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. Performance stock units (“PSUs”) and Performance Long-Term Incentive Plan (“Performance LTIP”) units granted to certain executive officers were accounted for at fair value at period end based on a Monte Carlo simulation valuation model that resulted in recording 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 certain independent directors are recorded at fair value based on the market price of the shares/units at grant date, which amount is fully expensed as the grants of stock/units are fully vested on the date of grant and included in “corporate general and administrative” expense in the condensed consolidated statements of operations.
After the adoption of ASU 2018-07 in the third quarter of 2018, stock/unit-based compensation for non-employees is measured at the grant date and expensed ratably over the vesting period based on the original measurement as of the grant date. This results in the recording of expense, included in “advisory services fee,” “management fees” and “corporate general and administrative” expense, equal to the ratable amount of the grant date fair value based on the requisite service period satisfied during the period. PSUs and Performance LTIP units granted to certain executive officers vest based on time and market conditions and are measured at the grant date fair value based on a Monte Carlo simulation valuation model. The subsequent expense is then ratably recognized over the service period as the service is rendered regardless of when, if ever, the market conditions are satisfied. This results in recording expense, included in “advisory services fee,” equal to the ratable amount of the grant date fair value based on the requisite service period satisfied during the period. Stock/unit grants to certain independent directors are measured at the grant date based on the market price of the shares/units at grant date, which amount is fully expensed as the grants of stock/units are fully vested on the date of grant.
Recently Adopted Accounting Standards — In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases ("ASU 2018-10") and ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”). The amendments in ASU 2018-10 affect only narrow aspects of the guidance issued in

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


the amendments in ASU 2016-02, including but not limited to lease residual value guarantee, rate implicit in the lease, lease term and purchase option. The amendments in ASU 2018-11 provide an optional transition method for adoption of the new standard, which will allow entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors (“ASU 2018-20”). The amendments create a lessor practical expedient applicable to sales and other similar taxes incurred in connection with a lease, and simplify lessor accounting for lessor costs paid by the lessee.
We adopted the standard effective January 1, 2019 on a modified retrospective basis and implemented internal controls to enable the preparation of financial information on adoption. We elected the practical expedients which provide us the option to apply the new guidance at its effective date on January 1, 2019 without having to adjust the comparative prior period financial statements. The package of practical expedients also allowed us to carry forward the historical lease classification. Additionally, we elected the practical expedients allowing us not to separate lease and non-lease components and not record leases with an initial term of twelve months or less (“short-term leases”) on the balance sheet across all existing asset classes.
The adoption of this standard has resulted in the recognition of ROU assets and lease liabilities primarily related to our ground lease arrangements for which we are the lessee. As of January 1, 2019, we recorded operating lease liabilities of  $60.6 million as well as a corresponding ROU asset of $82.5 million , which includes, among other things, the reclassified intangible assets of  $22.3 million . The standard did not have a material impact on our condensed consolidated statements of operations and statements of cash flows. See related disclosures in note 5 .
Recently Issued Accounting Standards —In June 2016, the FASB issued ASU 2016-13,  Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments  ("ASU 2016-13"). The ASU sets forth an “expected credit loss” impairment model to replace the current “incurred loss” method of recognizing credit losses. The standard requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses ( ASU 2018-19”) . ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases . We are currently evaluating the impact that ASU 2016-13 will have on our condensed consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies certain disclosure requirements related to fair value measurements including requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements and a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that ASU 2018-13 will have on the condensed consolidated financial statements and related disclosures.
3 . Revenue
Rooms revenue represents revenues from the occupancy of our hotel rooms and is driven by the occupancy and average daily rate charged. Rooms revenue includes revenue for guest no-shows, day use, and early/late departure fees. The contracts for room stays with customers are generally short in duration and revenues are recognized as services are provided over the course of the hotel stay.
Food & Beverage (“F&B”) revenue consists of revenue from the restaurants and lounges at our hotel properties, in-room dining and mini-bars revenue, and banquet/catering revenue from group and social functions. Other F&B revenue may include revenue from audio visual equipment/services, rental of function rooms, and other F&B related revenues. Revenue is recognized as the services or products are provided. Our hotel properties may employ third parties to provide certain services at the property, for example, audio visual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenues as appropriate (i.e. gross vs. net).
Other revenue consists of ancillary revenue at the property, including attrition and cancellation fees, condo management fees, resort and destination fees, health center fees, spas, golf, telecommunications, parking, entertainment and other guest services, as well as rental revenue primarily from leased retail outlets at our hotel properties, and membership initiation fees and dues, primarily from club memberships. Cancellation fees are recognized from non-cancellable deposits when the customer provides notification

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


of cancellation in accordance with established management policy time frames. Non-refundable membership initiation fees are recognized over the expected life of an active membership.
Taxes specifically collected from customers and submitted to taxing authorities are not recorded in revenue. Interest income is recognized when earned.
The following tables present our revenue disaggregated by geographical areas (in thousands):
 
 
Three Months Ended March 31, 2019
Primary Geographical Market
 
Number of Hotels
 
Rooms
 
Food and Beverage
 
Other Hotel
 
Other
 
Total
California
 
5
 
$
29,914

 
$
10,165

 
$
3,926

 
$

 
$
44,005

Colorado
 
1
 
9,597

 
4,836

 
3,666

 

 
18,099

Florida
 
2
 
14,996

 
8,096

 
4,822

 

 
27,914

Illinois
 
1
 
3,323

 
1,138

 
296

 

 
4,757

Pennsylvania
 
1
 
4,237

 
808

 
229

 

 
5,274

Washington
 
1
 
5,116

 
1,814

 
383

 

 
7,313

Washington, D.C.
 
1
 
8,708

 
4,561

 
382

 

 
13,651

USVI
 
1
 
840

 
696

 
5,959

 

 
7,495

Corporate entities
 
 

 

 

 
5

 
5

Total
 
13
 
$
76,731

 
$
32,114

 
$
19,663

 
$
5

 
$
128,513

 
 
Three Months Ended March 31, 2018
Primary Geographical Market
 
Number of Hotels
 
Rooms
 
Food and Beverage
 
Other Hotel
 
Other
 
Total
California
 
4
 
$
19,104

 
$
7,306

 
$
3,474

 
$

 
$
29,884

Colorado
 
1
 
9,797

 
4,819

 
3,543

 

 
18,159

Florida
 
1
 
5,473

 
802

 
752

 

 
7,027

Illinois
 
1
 
3,419

 
1,251

 
210

 

 
4,880

Pennsylvania
 
1
 
6,153

 
1,173

 
297

 

 
7,623

Washington
 
1
 
5,502

 
1,664

 
265

 

 
7,431

Washington, D.C.
 
1
 
8,961

 
4,339

 
284

 

 
13,584

USVI
 
1
 
1,816

 
199

 
4,546

 

 
6,561

Sold hotel properties
 
1
 
5,282

 
1,947

 
111

 

 
7,340

Total
 
12
 
$
65,507

 
$
23,500

 
$
13,482

 
$

 
$
102,489

 
 
 
4 . Investments in Hotel Properties, net
Investments in hotel properties, net consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Land
$
455,298

 
$
428,567

Buildings and improvements
1,089,457

 
989,180

Furniture, fixtures and equipment
114,086

 
103,025

Construction in progress
60,434

 
42,034

Total cost
1,719,275

 
1,562,806

Accumulated depreciation
(276,799
)
 
(262,905
)
Investments in hotel properties, net
$
1,442,476

 
$
1,299,901


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


Ritz-Carlton, Lake Tahoe
On January 15, 2019, the Company acquired a 100%  interest in the  170 -room Ritz-Carlton, Lake Tahoe located in Truckee, California for  $120.0 million . The Company incurred $582,000 in acquisition costs. In connection with the acquisition the Company completed the financing of a $54.0 million mortgage loan secured by the Ritz-Carlton, Lake Tahoe. See note 8 .
We accounted for this transaction as an asset acquisition because substantially all of the fair value of the gross assets acquired were concentrated in a group of similar identifiable assets. We allocated the cost of the acquisition including transaction costs to the individual assets acquired and liabilities assumed on a relative fair value basis, which is considered a Level 3 valuation technique, as noted in the following table (in thousands):
Land (1)
$
26,731

Buildings and improvements
89,340

Furniture, fixtures and equipment
2,172

 
$
118,243

Capital reserves
6,150

Key money
(3,811
)
 
$
120,582

Net other assets (liabilities)
$
912

________
(1)  
Amount includes the value of a 3.4 -acre parking lot adjacent to the hotel which could be used for future development of luxury town homes.
The results of operations of the hotel property have been included in our results of operations as of the acquisition date. The table below summarizes the total revenue and net income (loss) in our condensed consolidated statements of operations for the three months ended  March 31, 2019 :
 
Three Months Ended March 31, 2019
Total revenue
$
13,491

Net income (loss)
$
3,028

Impairment Charges and Insurance Recoveries
In September 2017, the Ritz-Carlton, St. Thomas located in St. Thomas, USVI, the Key West Pier House located in Key West, FL and the Tampa Renaissance located in Tampa, FL (sold in 2018) were impacted by the effects of Hurricanes Irma and Maria. The Company holds insurance policies that provide coverage for property damage and business interruption after meeting certain deductibles at all of its hotel properties.
For the three months ended March 31, 2019 and 2018 , the Company recorded revenue from business interruption losses associated with lost profits from the hurricanes of $6.0 million and $4.9 million , respectively, which are included in “other” hotel revenue in our condensed consolidated statements of operations. The Company received no proceeds from our insurance carriers for property damage and business interruption from the hurricanes during both the three months ended March 31, 2019 and 2018 . Additionally, during the three months ended March 31, 2018, the Company recorded revenue of $1.8 million , net of deductibles of $500,000 , for business interruption losses associated with lost profits at the Bardessono Hotel and Hotel Yountville as a result of the Napa wildfires, which is included in “other” hotel revenue in our condensed consolidated statements of operations. During the three months ended March 31, 2019 and 2018 , we recorded impairment charges of $0 and $12,000 , respectively, as a result of a change in estimate of property damage as a result of the hurricanes. As of March 31, 2019 , the Company had a net liability of $11.4 million , included in “other liabilities” on the condensed consolidated balance sheet, as it has received insurance proceeds in excess of the sum of its impairment, remediation expenses and business interruption revenue recorded through March 31, 2019 . The Company will not record revenue for business interruption losses associated with lost profits or gains from property damage recoveries until the amount for such recoveries is known and the amount is realizable.
5 . Leases
On January 1, 2019, we adopted ASC 842 on a modified retrospective basis. We elected the practical expedients which allowed us to apply the new guidance at its effective date on January 1, 2019 without adjusting the comparative prior period financial

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


statements. The package of practical expedients also allowed us to carry forward the historical lease classification. Additionally, we elected the practical expedients allowing us not to separate lease and non-lease components and not record leases with an initial term of twelve months or less (“short-term leases”) on the balance sheet across all existing asset classes.
The adoption of this standard has resulted in the recognition of ROU assets and lease liabilities primarily related to our ground lease arrangements for which we are the lessee. As of January 1, 2019, we recorded operating lease liabilities of  $60.6 million as well as a corresponding ROU asset of $82.5 million , which includes, among other things, the reclassified intangible assets of $22.3 million . The standard did not have a material impact on our condensed consolidated statements of operations and statements of cash flows.
The majority of our leases are operating ground leases. We also have operating equipment leases, such as copier and vehicle leases, at our hotel properties. Some leases include one or more options to renew, with renewal terms that can extend the lease term from  one  to  50  years. The exercise of lease renewal options is at our sole discretion. Some leases have variable payments, however, if variable payments are contingent, they are not included in the ROU assets and liabilities. We have no finance leases as of March 31, 2019 .
As of March 31, 2019 , our leased assets and liabilities consisted of the following (in thousands):
 
March 31, 2019
Assets
 
Operating lease right-of-use assets
$
82,308

Liabilities
 
Operating lease liabilities
$
60,617

We incurred the following lease costs related to our operating leases (in thousands):
 
 
Classification
 
Three Months Ended March 31, 2019
Operating lease cost (1) (2)
 
Hotel operating expenses - other
 
$
1,383

_______________________________________
(1) Includes variable lease costs associated with the ground leases and short-term leases, which are immaterial.
(2) Includes approximately $323,000 of variable lease cost and $119,000 of amortization costs related to the intangible assets that was reclassified upon adoption of ASC 842.
Other information related to leases is as follows:
 
Three Months Ended March 31, 2019
Supplemental Cash Flows Information
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases (in thousands)
$
782

Weighted Average Remaining Lease Term
 
Operating leases (1)
48 years

Weighted Average Discount Rate
 
Operating leases (1)
4.96
%
_______________________________________
(1) Calculated using the lease term, excluding extension options, and discount rates of the ground leases.

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


Future minimum lease payments due under non-cancellable leases as of March 31, 2019 were as follows (in thousands):
 
 
Operating Leases
2019
 
$
2,346

2020
 
3,140

2021
 
3,152

2022
 
3,164

2023
 
3,176

Thereafter
 
150,980

Total future minimum lease payments
 
165,958

Less: interest
 
(105,341
)
Present value of lease liabilities
 
$
60,617

Future minimum lease payments due under non-cancellable leases under ASC 840 as of December 31, 2018 were as follows (in thousands):
2019
 
$
3,161

2020
 
3,156

2021
 
3,152

2022
 
3,164

2023
 
3,177

Thereafter
 
151,244

Total
 
$
167,054

6 . Hotel Dispositions
On June 1, 2018, the Company sold the Tampa Renaissance hotel for $68.0 million in cash. The sale resulted in a gain of  $15.7 million  for the year ended December 31, 2018 and was included in “gain (loss) on sale of hotel properties” in our condensed consolidated statements of operations.
Since the sale of the hotel property did not represent a strategic shift that has (or will have) a major effect on our operations or financial results, its results of operations were not reported as discontinued operations in our condensed consolidated financial statements.
We included the results of operations of this hotel property through the date of disposition in net income (loss) as shown in our condensed consolidated statements of operations for the three months ended March 31, 2018 . The following table includes the condensed financial information from this hotel property (in thousands):
 
Three Months Ended March 31,
 
2018
Total hotel revenue
$
7,340

Total hotel operating expenses
(4,978
)
Operating income (loss)
2,362

Property taxes, insurance and other
(269
)
Depreciation and amortization
(937
)
Impairment charges
(12
)
Interest expense and amortization of loan costs
(488
)
Income (loss) before income taxes
656

(Income) loss before income taxes attributable to redeemable noncontrolling interests in operating partnership
(74
)
Income (loss) before income taxes attributable to the Company
$
582


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


7. Investment in Unconsolidated Entity
Ashford Inc.
As of March 31, 2019 and December 31, 2018 , we held approximately 195,000 shares of Ashford Inc. common stock. The closing price per share of Ashford Inc. common stock on the NYSE American LLC was $55.53 and $51.90 as of March 31, 2019 and December 31, 2018 , respectively. This represented an approximate  7.9%  and 8.1% ownership interest in the outstanding common stock of Ashford Inc. for March 31, 2019 and December 31, 2018 , respectively. See notes 11 and 12 .
We have elected to use the fair value option, under the applicable accounting guidance, 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 sheets, and changes in market value are included in “unrealized gain (loss) on investment in Ashford Inc.” on our condensed consolidated statements of operations.
The following tables summarize the condensed consolidated balance sheets as of  March 31, 2019 and December 31, 2018 , and the condensed consolidated statements of operations for the  three months ended March 31, 2019 and 2018 , of Ashford Inc. (in thousands):
Ashford Inc.
Condensed Consolidated Balance Sheets
(unaudited)
 
March 31, 2019
 
December 31, 2018
Total assets
$
420,106

 
$
379,005

Total liabilities
144,363

 
108,726

Series B cumulative convertible preferred stock
201,338

 
200,847

Redeemable noncontrolling interests
3,810

 
3,531

Total stockholders’ equity of Ashford Inc.
69,968

 
65,443

Noncontrolling interests in consolidated entities
627

 
458

Total equity
70,595

 
65,901

Total liabilities and equity
$
420,106

 
$
379,005

Our investment in Ashford Inc., at fair value
$
10,821

 
$
10,114


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


Ashford Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Total revenue
$
63,320

 
$
48,168

Total operating expenses
(60,778
)
 
(53,204
)
Operating income (loss)
2,542

 
(5,036
)
Equity in earnings (loss) of unconsolidated entities
(275
)
 

Interest expense and loan amortization cost
(366
)
 
(166
)
Other income (expense)
(33
)
 
73

Income tax (expense) benefit
(1,300
)
 
(706
)
Net income (loss)
568

 
(5,835
)
(Income) loss from consolidated entities attributable to noncontrolling interests
163

 
173

Net (income) loss attributable to redeemable noncontrolling interests
(21
)
 
(61
)
Net income (loss) attributable to Ashford Inc.
$
710

 
$
(5,723
)
Preferred dividends
(2,791
)
 

Amortization of preferred stock discount
(491
)
 

Net income attributable to common stockholders
$
(2,572
)
 
$
(5,723
)
Our unrealized gain (loss) on investment in Ashford Inc.
$
707

 
$
528

OpenKey
On March 28, 2018, the Company made a $2.0 million investment in OpenKey, which is controlled and consolidated by Ashford Inc., for an 8.2% ownership interest, which investment was recommended by our Related Party Transactions Committee and unanimously approved by the independent members of our board of directors. On February 6, 2019, the Company made an additional investment of  $156,000 , which was recommended by our Related Party Transactions Committee and unanimously approved by the independent members of our board of directors.
OpenKey is a hospitality-focused mobile key platform that provides a universal smart phone app for keyless entry into hotel guest rooms. Our investment is recorded as “investment in unconsolidated entity” in our condensed consolidated balance sheet and is accounted for under the equity method of accounting as we have been deemed to have significant influence over the entity under the applicable accounting guidance.
The following table summarizes our carrying value and ownership interest in OpenKey:
 
March 31, 2019
 
December 31, 2018
Carrying value of the investment in OpenKey (in thousands)
$
1,872

 
$
1,766

Ownership interest in OpenKey
8.4
%
 
8.2
%
The following table summarizes our equity in earnings (loss) in OpenKey (in thousands):
 
 
Three Months Ended March 31,
Line Item
 
2019
 
2018
Equity in earnings (loss) of unconsolidated entity
 
$
(50
)
 
$
(3
)

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


8 . Indebtedness
Indebtedness consisted of the following (in thousands):
Indebtedness
 
Collateral
 
Maturity
 
Interest Rate
 
March 31, 2019
 
December 31, 2018
Secured revolving credit facility (3)
 
None
 
November 2019
 
Base Rate  (2) + 1.25% to 2.50% or LIBOR (1)  + 2.25% to 3.50%
 
$

 
$

Mortgage loan (4)
 
Park Hyatt Beaver Creek
 
April 2019
 
LIBOR (1) + 2.75%
 
67,500

 
67,500

Mortgage loan (5)
 
Capital Hilton
 
November 2019
 
LIBOR (1)  + 2.65%
 

 
187,086

 
 
Hilton La Jolla Torrey Pines
 
 
 
 
 
 
 
 
Mortgage loan (6)
 
Ritz-Carlton, St. Thomas
 
December 2019
 
LIBOR (1)  + 4.95%
 
42,000

 
42,000

Mortgage loan (7)
 
Pier House Resort
 
March 2020
 
LIBOR (1)  + 2.25%
 
70,000

 
70,000

Mortgage loan
 
Courtyard Philadelphia
 
June 2020
 
LIBOR (1)  + 2.16%
 
435,000

 
435,000

 
 
Courtyard San Francisco Downtown
 
 
 
 
 
 
 
 
 
 
Sofitel Chicago Magnificent Mile
 
 
 
 
 
 
 
 
 
 
Marriott Seattle Waterfront
 
 
 
 
 
 
 
 
Mortgage loan
 
Hotel Yountville
 
May 2022
 
LIBOR (1)  + 2.55%
 
51,000

 
51,000

Mortgage loan
 
Bardessono Hotel
 
August 2022
 
LIBOR (1) + 2.55%
 
40,000

 
40,000

Mortgage loan
 
Ritz-Carlton, Sarasota
 
April 2023
 
LIBOR (1) + 2.65%
 
100,000

 
100,000

Mortgage loan
 
Ritz-Carlton, Lake Tahoe
 
January 2024
 
LIBOR (1) + 2.10%
 
54,000

 

Mortgage loan (5)
 
Capital Hilton
 
February 2024
 
LIBOR (1) + 1.70%
 
195,000

 

 
 
Hilton La Jolla Torrey Pines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,054,500

 
992,586

Deferred loan costs, net
 
 
 
 
 
 
 
(7,751
)
 
(6,713
)
Indebtedness, net
 
 
 
 
 
 
 
$
1,046,749

 
$
985,873

__________________
(1)  
LIBOR rates were 2.495% and 2.503% at March 31, 2019 and December 31, 2018 , respectively.
(2)  
Base Rate, as defined in the 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% , or (iii) LIBOR + 1.0% .
(3)  
Our borrowing capacity under our secured revolving credit facility is $100.0 million . We have an option, subject to lender approval, to further increase the borrowing capacity to an aggregate of $250.0 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.
(4)  
This mortgage loan has three one -year extension options, subject to satisfaction of certain conditions, of which the first was exercised in April 2019.
(5)  
On January 22, 2019, we refinanced this mortgage loan with an outstanding balance of $186.8 million with a new $195.0 million mortgage loan with a five -year term. The new mortgage loan is interest only and bears interest at a rate of LIBOR + 1.70% .
(6)  
This mortgage loan has three one -year extension options, subject to satisfaction of certain conditions, of which the second was exercised in December 2018.
(7)  
This mortgage loan has three one -year extension options, subject to satisfaction of certain conditions, of which the third was exercised in March 2019.
On April 4, 2018, in connection with the acquisition of the 266 -room Ritz-Carlton, Sarasota in Sarasota, Florida, the Company completed the financing of a $100.0 million mortgage loan. This mortgage loan provides for an interest rate of LIBOR + 2.65% . The mortgage loan is interest only until July 1, 2021 and then amortizes 1% annually for the remaining term. The stated maturity is April 2023.
On May 23, 2018, the Company refinanced two mortgage loans with an outstanding balance of $357.6 million with a new $435.0 million mortgage loan with a two -year initial term and five one -year extension options subject to the satisfaction of certain conditions. As a result of the refinance the Tampa Renaissance became unencumbered. The new mortgage loan is interest only and bears interest at a rate of LIBOR + 2.16% . The loan is secured by four hotels: Marriott Seattle Waterfront, Courtyard San Francisco Downtown, Courtyard Philadelphia and Sofitel Chicago Magnificent Mile.
On January 15, 2019, in connection with the acquisition of the 170 -room Ritz-Carlton, Lake Tahoe located in Truckee, California, the Company completed the financing of a $54.0 million mortgage loan. This mortgage loan provides for an interest rate of LIBOR + 2.10% . The mortgage loan is interest only and has a five year term.
On January 22, 2019, the Company refinanced its existing mortgage loan with an outstanding balance of approximately  $186.8 million and a final maturity date in November 2021 with a new  $195.0 million  mortgage loan that is interest only, bears interest at a rate of LIBOR +  1.70%  and has a  five -year term. The mortgage loan is secured by the same  two  hotels: the Capital Hilton and Hilton La Jolla Torrey Pines. These  two  hotels are held in a joint venture in which we have a  75%  equity interest.

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BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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. As of March 31, 2019 , we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.
9. 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 March 31,
 
2019
 
2018
Net income (loss) attributable to common stockholders - basic and diluted:
 
 
 
Net income (loss) attributable to the Company
$
(981
)
 
$
4,020

Less: Dividends on preferred stock
(2,532
)
 
(1,707
)
Less: Dividends on common stock
(5,158
)
 
(5,116
)
Less: Dividends on unvested performance stock units
(75
)
 
(72
)
Less: Dividends on unvested restricted shares
(96
)
 
(87
)
Undistributed net income (loss) allocated to common stockholders
(8,842
)
 
(2,962
)
Add back: Dividends on common stock
5,158

 
5,116

Distributed and undistributed net income (loss) - basic and diluted
$
(3,684
)
 
$
2,154

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Weighted average common shares outstanding – basic
32,115

 
31,680

Advisory services incentive fee shares

 
3

Weighted average common shares outstanding – diluted
32,115

 
31,683

 
 
 
 
Income (loss) per share - basic:
 
 
 
Net income (loss) allocated to common stockholders per share
$
(0.11
)
 
$
0.07

Income (loss) per share - diluted:
 
 
 
Net income (loss) allocated to common stockholders per share
$
(0.11
)
 
$
0.07

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 March 31,
 
2019
 
2018
Net income (loss) allocated to common stockholders is not adjusted for:
 
 
 
Income (loss) allocated to unvested restricted shares
$
96

 
$
87

Income (loss) allocated to unvested performance stock units
75

 
72

Income (loss) attributable to redeemable noncontrolling interests in operating partnership
(440
)
 
292

Dividends on preferred stock - Series B
1,707

 
1,707

Total
$
1,438

 
$
2,158

Weighted average diluted shares are not adjusted for:
 
 
 
Effect of unvested restricted shares
87

 
49

Effect of unvested performance stock units
288

 
16

Effect of assumed conversion of operating partnership units
4,342

 
4,124

Effect of assumed conversion of preferred stock - Series B
6,569

 
6,569

Effect of advisory services incentive fee shares
73

 

Total
11,359

 
10,758


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BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


10 . Derivative Instruments
Interest Rate Derivatives —We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage these risks, we primarily use interest rate derivatives to hedge our debt and our cash flows. The interest rate derivatives include interest rate caps and interest rate floors, which are subject to master netting settlement arrangements. All derivatives are recorded at fair value.
The following table summarizes the interest rate derivatives we entered into over the applicable periods:
 
Three Months Ended March 31,
Interest rate caps:
2019
 
2018
Notional amount (in thousands)
$
177,500

 
$
150,000

Strike rate low end of range
3.00
%
 
2.43
%
Strike rate high end of range
7.80
%
 
7.80
%
Effective date range
January 2019 - March 2019

 
February 2018

Termination date range
March 2020 - February 2021

 
March 2019

Total cost of interest rate caps (in thousands)
$
55

 
$
67

 
 
 
 
Interest rate floors:
 
 
 
Notional amount (in thousands)
$
2,000,000

 
$

Strike rate
1.63
%
 
%
Effective date
January 2019

 
n/a

Termination date
March 2020

 
n/a

Total cost of interest rate floors (in thousands)
$
75

 
$

_______________
No instruments were designated as cash flow hedges for both the three months ended March 31, 2019 and 2018 .
Interest rate derivatives consisted of the following:
Interest rate caps:  (1)
March 31, 2019
 
December 31, 2018
Notional amount (in thousands)
$
913,000

 
$
1,292,500

Strike rate low end of range
3.00
 %
 
2.43
 %
Strike rate high end of range
7.80
 %
 
11.61
 %
Effective date range
March 2017 - March 2019

 
January 2017 - December 2018

Termination date range
April 2019 - February 2021

 
January 2019 - June 2020

Aggregate principal balance on corresponding mortgage loans (in thousands)
$
845,500

 
$
805,500

 
 
 
 
Interest rate floors:   (1) (2)
 
 
 
Notional amount (in thousands)
$
11,250,000

 
$
10,850,000

Strike rate low end of range
(0.25
)%
 
(0.25
)%
Strike rate high end of range
2.00
 %
 
2.00
 %
Effective date range
July 2015 - January 2019

 
July 2015 - July 2018

Termination date range
June 2019 - July 2020

 
March 2019 - July 2020

_______________
(1)  
No instruments were designated as cash flow hedges.
(2)  
Cash collateral is posted by us as well as our counterparties. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral.
Credit Default Swap Derivatives —We use credit default swaps, tied to the CMBX index, to hedge financial and capital market risk. A credit default swap is a derivative contract that functions like an insurance policy against the credit risk of an entity or obligation. The seller of protection assumes the credit risk of the reference obligation from the buyer (us) of protection in exchange for annual premium payments. If a default or a loss, as defined in the credit default swap agreements, occurs on the underlying bonds, then the buyer of protection is protected against those losses. The only liability for us, the buyer, is the annual premium and any change in value of the underlying CMBX index (if the trade is terminated prior to maturity). For all CMBX trades completed

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BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


to date, we were the buyer of protection. Credit default swaps are subject to master-netting settlement arrangements and credit support annexes. As of March 31, 2019 , we held a credit default swap with a notional amount of $50.0 million , an effective date of August 2017 and an expected maturity date of October 2026 . Assuming the underlying bonds pay off at par over their remaining average life, our estimated total exposure for these trades was approximately  $1.7 million  as of  March 31, 2019 . Cash collateral is posted by us as well as our counterparties. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral. The change in market value of credit default swaps is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparties when such change in market value is over  $250,000 .
11 . 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.
Fair value of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs). The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.
The fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. These expected future cash flows are probability-weighted projections based on the contract terms, accounting for both the magnitude and likelihood of potential payments, which are both computed using the appropriate LIBOR forward curve and market implied volatilities as of the valuation date (Level 2 inputs).
The fair value of options on futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). 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.
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 counter-parties, which we consider significant ( 10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at  March 31, 2019 , the LIBOR interest rate forward curve (Level 2 inputs) assumed a downtrend from  2.495%  to  2.001%  for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of hedge and non-hedge designated derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.

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BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


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)
 
Significant Unobservable Inputs
(Level 3)
 
Counterparty and Cash Collateral Netting (1)
 
Total
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives - floors
$

 
$
83

 
$

 
$
96

 
$
179

 
Interest rate derivatives - caps

 
4