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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________

FORM 10-Q

______________________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-32223

STRATEGIC HOTELS & RESORTS, INC.

(Exact name of registrant as specified in its charter)

______________________________________________



Maryland		33-1082757
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
200 West Madison Street, Suite 1700, Chicago, Illinois		60606-3415
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (312) 658-5000

______________________________________________

Former name, former address and former fiscal year, if changed since last report:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of common stock (par value $0.01 per share) of the registrant outstanding as of May 1, 2015 was 275,313,504.

Table of Contents

STRATEGIC HOTELS & RESORTS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

INDEX



		PAGE
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS		3

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		50

ITEM 4. CONTROLS AND PROCEDURES		51

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		52

ITEM 1A. RISK FACTORS		52

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		52

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		52

ITEM 4. MINE SAFETY DISCLOSURES		52

ITEM 5. OTHER INFORMATION		52

ITEM 6. EXHIBITS		52

SIGNATURES		53

WHERE TO FIND MORE INFORMATION:

We maintain a website at www.strategichotels.com. Through our website, we make available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). The SEC maintains a website that contains these reports at www.sec.gov.

This report (and Exhibit 99.1 hereto) contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Fairmont^®, Four Seasons^®, Hyatt^®, InterContinental^®, JW Marriott^®,Loews^®, Marriott^®, Montage^®,Renaissance^®, Ritz-Carlton^® and Westin^®. None of the owners of these trademarks, their affiliates or any of their respective officers, directors, agents or employees has or will have any liability or responsibility for any financial statements, projections or other financial information or other information contained in this report.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES (SHR)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)



	March 31, 2015			December 31, 2014
Assets
Investment in hotel properties, net*	$	3,175,420		$	2,828,400
Goodwill	38,128			38,128
Intangible assets, net of accumulated amortization of $9,404 and $7,288	93,874			94,324
Investment in unconsolidated affiliates	22,850			22,850
Cash and cash equivalents*	240,156			442,613
Restricted cash and cash equivalents*	89,985			81,510
Accounts receivable, net of allowance for doubtful accounts of $832 and $492*	68,141			51,382
Deferred financing costs, net of accumulated amortization of $8,709 and $7,814*	10,559			11,440
Deferred tax assets	1,954			1,729
Prepaid expenses and other assets*	49,944			46,781
Total assets	$	3,791,011		$	3,619,157
Liabilities, Noncontrolling Interests and Equity
Liabilities:
Mortgages payable, net of discount*	$	1,855,014		$	1,705,778
Accounts payable and accrued expenses*	251,412			224,505
Preferred stock redemption liability	—			90,384
Distributions payable	—			104
Deferred tax liabilities	46,137			46,137
Total liabilities	2,152,563			2,066,908
Commitments and contingencies (see note 13)
Noncontrolling interests in SHR’s operating partnership	9,865			10,500
Equity:
SHR’s shareholders’ equity:
Common stock ($0.01 par value per share; 350,000,000 shares of common stock authorized; 275,313,504 and 267,435,799 shares of common stock issued and outstanding)	2,753			2,674
Additional paid-in capital	2,449,084			2,348,284
Accumulated deficit	(874,658		)	(890,469		)
Accumulated other comprehensive loss	(10,054		)	(13,032		)
Total SHR’s shareholders’ equity	1,567,125			1,447,457
Noncontrolling interests in consolidated affiliates	61,458			94,292
Total equity	1,628,583			1,541,749
Total liabilities, noncontrolling interests and equity	$	3,791,011		$	3,619,157

See accompanying notes to unaudited condensed consolidated financial statements.

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STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES (SHR)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - Continued

(In Thousands)



	March 31, 2015		December 31, 2014
*Consolidated Variable Interest Entity's Assets and Liabilities included in the above balances (see note 5):
Investment in hotel properties, net	$	334,302	$	336,243
Cash and cash equivalents	5,165		62,064
Restricted cash and cash equivalents	4,778		3,746
Accounts receivable, net of allowance for doubtful accounts of $50 and $49	4,564		4,920
Deferred financing costs, net of accumulated amortization of $326 and $0	3,587		3,899
Prepaid expenses and other assets	12,784		14,603
Mortgages payable	225,000		225,000
Accounts payable and accrued expenses	16,567		10,228

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES (SHR)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)



	Three Months Ended March 31,
	2015			2014
Revenues:
Rooms	$	162,864		$	103,100
Food and beverage	123,469			70,017
Other hotel operating revenue	37,907			20,239
Lease revenue	1,031			1,299
Total revenues	325,271			194,655
Operating Costs and Expenses:
Rooms	47,865			33,707
Food and beverage	83,074			54,603
Other departmental expenses	84,724			53,579
Management fees	11,439			5,778
Other hotel expenses	15,613			15,678
Lease expense	1,034			1,258
Depreciation and amortization	37,664			22,205
Corporate expenses	8,268			7,193
Total operating costs and expenses	289,681			194,001
Operating income	35,590			654
Interest expense	(22,785		)	(18,274		)
Interest income	101			27
Equity in earnings of unconsolidated affiliates	—			4,445
Foreign currency exchange (loss) gain	(116		)	2
Gain on consolidation of affiliates	—			78,117
Other (expenses) income, net	(157		)	423
Income before income taxes and discontinued operations	12,633			65,394
Income tax expense	(219		)	(39		)
Income from continuing operations	12,414			65,355
Income from discontinued operations, net of tax	—			158,435
Net Income	12,414			223,790
Net income attributable to the noncontrolling interests in SHR’s operating partnership	(37		)	(849		)
Net loss attributable to the noncontrolling interests in consolidated affiliates	3,434			4,041
Net Income Attributable to SHR	15,811			226,982
Preferred shareholder dividends	—			(9,824		)
Net Income Attributable to SHR Common Shareholders	$	15,811		$	217,158
Amounts Attributable to SHR:
Income from continuing operations	$	15,811		$	69,155
Income from discontinued operations	—			157,827
Net income	$	15,811		$	226,982
Basic Income Per Common Share:
Income from continuing operations attributable to SHR common shareholders	$	0.06		$	0.29
Income from discontinued operations attributable to SHR common shareholders	—			0.76
Net income attributable to SHR common shareholders	$	0.06		$	1.05
Weighted average shares of common stock outstanding	273,831			206,983
Diluted Income Per Common Share:
Income from continuing operations attributable to SHR common shareholders	$	0.04		$	0.25
Income from discontinued operations attributable to SHR common shareholders	—			0.72
Net income attributable to SHR common shareholders	$	0.04		$	0.97
Weighted average shares of common stock outstanding	282,792			219,368

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES (SHR)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(In Thousands)



	Three Months Ended March 31,
	2015			2014
Net Income	$	12,414		$	223,790
Other comprehensive income:
Foreign currency exchange translation adjustments	(135		)	18,784
Reclassification of amounts from accumulated other comprehensive loss to net income and effective portion of mark to market adjustments related to cash flow hedges	3,113			333
Other comprehensive income	2,978			19,117
Comprehensive Income	15,392			242,907
Comprehensive income attributable to the noncontrolling interests in SHR’s operating partnership	(45		)	(922		)
Comprehensive loss attributable to the noncontrolling interests in consolidated affiliates	3,434			4,041
Comprehensive Income Attributable to SHR	$	18,781		$	246,026

See accompanying notes to unaudited condensed consolidated financial statements.

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STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES (SHR)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Three Months Ended March 31,
	2015			2014
Operating Activities:
Net income	$	12,414		$	223,790
Adjustments to reconcile net income to net cash provided by (used in) operating activities (including discontinued operations):
Deferred income tax (benefit) expense	(225		)	545
Depreciation and amortization	37,664			23,480
Amortization of deferred financing and other costs	5,165			1,966
Loss on early extinguishment of debt	—			272
Equity in earnings of unconsolidated affiliates	—			(4,445		)
Share-based compensation	1,884			1,458
Gain on consolidation of affiliate	—			(78,117		)
Gain on disposal of assets, net of tax	—			(155,825		)
Income tax on sale of assets	—			(20,451		)
Foreign currency exchange loss (gain)	116			(34		)
Recognition of deferred gains	(44		)	(53		)
Mark to market of derivative financial instruments	116			(2,270		)
Increase in accounts receivable	(17,168		)	(4,656		)
Increase in prepaid expenses and other assets	(238		)	(465		)
Increase (decrease) in accounts payable and accrued expenses	11,623			(1,143		)
Net cash provided by (used in) operating activities	51,307			(15,948		)
Investing Activities:
Acquisition of hotel and other investments	(110,319		)	(90,616		)
Proceeds from sales of assets	—			411,503
Cash received from unconsolidated affiliates	—			2,221
Unrestricted cash sold	—			(15,634		)
Unrestricted cash acquired	7,550			8,746
Capital expenditures	(20,507		)	(20,926		)
(Increase) decrease in restricted cash and cash equivalents	(6,952		)	5,000
Net cash (used in) provided by investing activities	(130,228		)	300,294
Financing Activities:
Equity issuance costs	(457		)	—
Preferred stock redemption	(90,391		)	(57		)
Borrowings under bank credit facility	—			30,000
Payments on bank credit facility	—			(110,000		)
Payments on mortgages	(365		)	(117,697		)
Debt financing costs	(14		)	—
Contributions from holders of noncontrolling interests in consolidated affiliates	—			2,450
Distributions to preferred shareholders	(104		)	(3,838		)
Distributions to holders of noncontrolling interests in consolidated affiliates	(29,400		)	—
Other financing activities	(2,609		)	(989		)
Net cash used in financing activities	(123,340		)	(200,131		)
Effect of exchange rate changes on cash	(196		)	119
Net change in cash and cash equivalents	(202,457		)	84,334
Change in cash of assets held for sale	—			8,903
Cash and cash equivalents, beginning of period	442,613			73,655
Cash and cash equivalents, end of period	$	240,156		$	166,892

See accompanying notes to unaudited condensed consolidated financial statements.

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STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES (SHR)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – Continued

(In Thousands)



	Three Months Ended March 31,
	2015		2014
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Fair value of shares of SHR common stock issued for acquisition of hotel property (see note 3)	$	101,396	$	—
Assumption of mortgage loans - hotel investment acquisition (see note 3)	$	148,951	$	114,507
Gain on mark to market of derivative instruments (see note 10)	$	—	$	(2,328	)
Preferred stock redemption accrual	$	—	$	103,704
Distributions declared and payable to preferred shareholders	$	—	$	2,277
Increase (decrease) in capital expenditures recorded as liabilities	$	4,415	$	(392	)
Cash Paid For:
Interest, net of interest capitalized	$	16,377	$	20,119
Income taxes, net of refunds	$	362	$	20,956

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Strategic Hotels & Resorts, Inc. (SHR and, together with its subsidiaries, the Company) was incorporated in January 2004 to acquire and asset-manage upper upscale and luxury hotels that are subject to long-term management contracts. As of March 31, 2015, the Company’s portfolio included 18 full-service hotel interests located in urban and resort markets in the United States and Hamburg, Germany. The Company considers each hotel to be a separate operating segment because the Company allocates resources and assesses performance on an individual hotel basis. The Company aggregates the individual hotels into one reportable business segment, hotel ownership.

SHR operates as a self-administered and self-managed real estate investment trust (REIT), which means that it is managed by its board of directors and executive officers. A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid federal income taxes at the corporate level. For SHR to continue to qualify as a REIT, it cannot operate hotels; instead it employs internationally known hotel management companies to operate its hotels under management contracts. SHR conducts its operations through its direct and indirect subsidiaries, including its operating partnership, Strategic Hotel Funding, L.L.C. (SH Funding), which currently holds substantially all of the Company’s assets. SHR is the sole managing member of SH Funding and holds approximately 99.7% of its membership units as of March 31, 2015. SHR manages all business aspects of SH Funding, including the sale and purchase of hotels, the investment in these hotels and the financing of SH Funding and its assets.

As of March 31, 2015, SH Funding owned interests in or leased the following 18 hotels:



1. Fairmont Chicago		10. InterContinental Miami
2. Fairmont Scottsdale Princess (a)		11. JW Marriott Essex House Hotel (d)
3. Four Seasons Jackson Hole		12. Loews Santa Monica Beach Hotel
4. Four Seasons Resort Scottsdale at Troon North		13. Marriott Hamburg (e)
5. Four Seasons Silicon Valley		14. Marriott Lincolnshire Resort (f)
6. Four Seasons Washington, D.C.		15. Montage Laguna Beach
7. Hotel del Coronado (b)		16. Ritz-Carlton Half Moon Bay
8. Hyatt Regency La Jolla (c)		17. Ritz-Carlton Laguna Niguel
9. InterContinental Chicago		18. Westin St. Francis

(a)

This property is owned by an affiliate that was partially-owned by the Company and accounted for as an unconsolidated affiliate prior to March 31, 2014 (see note 6). On March 31, 2014, the Company acquired the remaining ownership interests in the affiliate and began accounting for it as a consolidated affiliate (see note 3). One land parcel at this property is subject to a ground lease arrangement.


(b)	This property is owned by an affiliate that was partially-owned by the Company and accounted for as an unconsolidated affiliate prior to June 11, 2014 (see note 6). On June 11, 2014, the Company acquired the remaining ownership interests in the affiliate and began accounting for it as a consolidated affiliate (see note 3).


(c)	This property is owned by a consolidated affiliate in which the Company holds an interest (see notes 2 and 16).


(d)	This property is owned by a consolidated affiliate in which the Company holds an interest (see notes 2 and 5).


(e)	The Company has a leasehold interest in this property.


(f)	This property is subject to a ground lease arrangement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and in conformity with the rules and regulations of the SEC applicable to interim financial information. As such, certain information and footnote disclosures normally included in complete annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in SHR’s annual report on Form 10-K for the year ended December 31, 2014.

Basis of Consolidation:

The accompanying unaudited condensed consolidated financial statements include the accounts of SHR, its subsidiaries and other entities in which the Company has a controlling interest. If SH Funding determines that it is the holder of a variable interest in a variable interest entity (VIE), and it is the primary beneficiary, then SH Funding will consolidate the entity. At March 31, 2015, SH Funding consolidated one VIE, the entity that owns the JW Marriott Essex House Hotel (see note 5). For entities that are not considered VIEs, SH Funding consolidates those entities it controls. At March 31, 2015, SH Funding owned a 53.5% controlling interest in the entity that owns the Hyatt Regency La Jolla hotel, which is consolidated in the accompanying condensed consolidated financial statements. It accounts for those entities over which it has a significant influence but does not control using the equity method of accounting. At March 31, 2015, SH Funding owned interests in the Four Seasons Residence Club Punta Mita (Four Seasons RCPM) and the Lot H5 Venture (see note 6), which are unconsolidated affiliates in the accompanying condensed consolidated financial statements that are accounted for using the equity method of accounting.

All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates:

The preparation of condensed consolidated financial statements in conformity with GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Restricted Cash and Cash Equivalents:

At March 31, 2015 and December 31, 2014, restricted cash and cash equivalents included $44,868,000 and $37,486,000, respectively, that will be used for property and equipment replacement in accordance with hotel management agreements. At March 31, 2015 and December 31, 2014, restricted cash and cash equivalents also included reserves of $45,117,000 and $44,024,000, respectively, required by loan and other agreements.

Income Taxes:

SHR has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Tax Code). As a REIT, SHR generally will not be subject to U.S. federal income tax if it distributes 100% of its annual taxable income to its shareholders and complies with certain other requirements. As a REIT, SHR is subject to a number of organizational and operational requirements. If it fails to qualify as a REIT in any taxable year, SHR will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if it qualifies for taxation as a REIT, it may be subject to foreign, state and local income taxes and to U.S. federal income tax and excise tax on its undistributed income. In addition, taxable income from SHR’s taxable REIT subsidiaries is subject to federal, foreign, state and local income taxes. Also, the foreign countries where the Company has operations do not recognize REITs under their respective tax laws. Accordingly, the Company is subject to tax in those jurisdictions.

Deferred tax assets and liabilities are established for net operating loss carryforwards and temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the net operating loss carryforwards are utilized and when the temporary differences reverse. The Company evaluates uncertain tax positions in accordance with applicable accounting guidance. A valuation allowance for deferred tax assets is provided if the Company believes all or some portion of the deferred tax asset may not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances that causes a change in the estimated realizability of the related deferred tax asset is included in earnings.

For the three months ended March 31, 2015 and 2014, income tax expense is summarized as follows (in thousands):



	Three Months Ended March 31,
	2015			2014
Current tax expense	$	(444	)	$	(219	)
Deferred tax benefit	225			180
Total income tax expense	$	(219	)	$	(39	)

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Per Share Data:

The Company uses the two-class method to calculate per share data for common stock and participating securities. Under the two-class method, net earnings are allocated to common stock and participating securities as if all of the net earnings for the period had been distributed. Unvested share-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing per share data pursuant to the two-class method. The Company's restricted stock units (RSUs) are considered participating securities because they contain non-forfeitable rights to dividend equivalents. To the extent the Company has undistributed earnings, it will follow the two-class method of computing per share data.

Basic income per common share is computed by dividing the net income attributable to SHR common shareholders by the weighted average shares of common stock outstanding during each period. Diluted income per common share is computed by dividing the net income attributable to SHR common shareholders as adjusted for the impact of dilutive securities, if any, by the weighted average shares of common stock outstanding plus potentially dilutive securities. Dilutive securities may include RSUs, performance-based RSUs, and noncontrolling interests that have an option to exchange their interests to shares of SHR common stock. No effect is shown for securities that are anti-dilutive. Potentially dilutive shares are determined using the more dilutive of either the two-class method or the treasury stock method. The following table sets forth the components of the calculation of net income attributable to SHR common shareholders used for determining per share amounts for the three months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015			2014
Numerator - Basic:
Income from continuing operations attributable to SHR	$	15,811		$	69,155
Preferred shareholder dividends	—			(6,115		)
Preferred stock redemption(a)	—			(3,709		)
Undistributed earnings allocated to participating securities - basic	(37		)	(695		)
Income from continuing operations attributable to SHR common shareholders - basic	15,774			58,636
Discontinued operations attributable to SHR	—			157,827
Net income attributable to SHR common shareholders - basic	$	15,774		$	216,463

Numerator - Diluted:
Income from continuing operations attributable to SHR common shareholders - basic	$	15,774		$	58,636
Undistributed earnings allocated to participating securities - basic	37			695
Undistributed earnings allocated to participating securities - diluted	(29		)	(647		)
Adjustment for noncontrolling interests in consolidated affiliates (see note 5)	(3,281		)	(3,131		)
Income from continuing operations attributable to SHR common shareholders - diluted	12,501			55,553
Discontinued operations attributable to SHR	—			157,827
Net income attributable to SHR common shareholders - diluted	$	12,501		$	213,380

Denominator:
Weighted average shares of common stock – basic (b)	273,831			206,983
Effect of dilutive securities:
Noncontrolling interests in consolidated affiliates (see note 5)	6,958			10,087
Performance-based RSUs	2,003			2,298
Weighted average shares of common stock - diluted	282,792			219,368

(a) In March 2014, SHR publicly announced its intention to redeem all of the outstanding shares of its 8.50% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock) on April 3, 2014. For purposes of calculating per share amounts for the three months ended March 31, 2014, the difference between the fair value of the Series A Preferred Stock and the carrying amount of the Series A Preferred Stock is an adjustment to net income attributable to SHR common shareholders.

(b) Includes RSUs and performance-based RSUs of 1,115 and 1,302 at March 31, 2015 and 2014, respectively, that have vested but have not yet been issued to shares of common stock.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities that could potentially dilute basic income per share in the future that are not included in the computation of diluted income per share because they are anti-dilutive as of March 31, 2015 and 2014 are as follows (in thousands):



	Computation For Three Months Ended March 31,
	2015	2014
Noncontrolling interests in SHR's operating partnership	794	797
RSUs	—	658

Accumulated Other Comprehensive Loss:

The Company’s accumulated other comprehensive loss (OCL) results from activity related to certain derivative financial instruments and unrealized gains or losses on foreign currency translation adjustments (CTA). The following tables provide the changes in accumulated OCL for the three-month periods ended March 31, 2015 and 2014 (in thousands):



	Derivative Activity			CTA			Accumulated OCL
Balance at January 1, 2015	$	(10,898	)	$	(2,134	)	$	(13,032	)
Other comprehensive loss before reclassifications	—			(135		)	(135		)
Amounts reclassified from accumulated OCL	3,113			—			3,113
Net other comprehensive income (loss)	3,113			(135		)	2,978
Balance at March 31, 2015	$	(7,785	)	$	(2,269	)	$	(10,054	)



	Derivative Activity			CTA			Accumulated OCL
Balance at January 1, 2014	$	(20,616	)	$	(20,829	)	$	(41,445	)
Other comprehensive loss before reclassifications	(200		)	(111		)	(311		)
Amounts reclassified from accumulated OCL	533			18,895			19,428
Net other comprehensive income	333			18,784			19,117
Balance at March 31, 2014	$	(20,283	)	$	(2,045	)	$	(22,328	)

The reclassifications out of accumulated OCL for the three months ended March 31, 2015 and 2014 are as follows (in thousands):



	Amounts Reclassified from Accumulated OCL
Details about Accumulated OCL Components	2015		2014		Statement of Operations Line Item
Activity related to cash flow hedges	$	3,113	$	533	Interest expense
Activity related to CTA	$	—	$	18,895	Income from discontinued operations, net of tax

New Accounting Guidance:

In April 2015, the Financial Accounting Standards Board (FASB) issued new guidance which changes the presentation of debt issuance costs in financial statements. Under the new guidance, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the debt issuance costs is reported as interest expense. The new guidance is effective on January 1, 2016, with early adoption permitted for any annual or interim period for which an entity's financial statements have not yet been made available for issuance. The new guidance must be applied retrospectively to all prior periods presented. The Company expects to adopt the new guidance on January 1, 2016 and will apply the presentation guidance to all periods presented in its consolidated financial statements.

In August 2014, the FASB issued new accounting guidance which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. The standard provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective on January 1, 2017. The Company will apply the guidance prospectively and does not anticipate the guidance will have a material impact on its consolidated financial statements or disclosures.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In May 2014, the FASB issued new guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new guidance is effective on January 1, 2017, subject to a tentative one-year deferral proposed by the FASB. Early adoption is currently not permitted but is subject to tentative changes proposed by the FASB. The guidance permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its consolidated financial statements.

In April 2014, the FASB issued new guidance which amends the requirements for reporting discontinued operations. Under the guidance, only disposals that represent a strategic shift that has (or will have) a major effect on the entity's results of operations would qualify as discontinued operations. In addition, the guidance expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components. The provisions are effective in the first quarter of 2015, with early adoption permitted for any annual or interim period for which an entity's financial statements have not yet been made available for issuance. The Company adopted the guidance on January 1, 2015 and will apply the guidance prospectively to disposal activity occurring after January 1, 2015.

3. INVESTMENT IN HOTEL PROPERTIES, NET

The following summarizes the Company’s investment in hotel properties as of March 31, 2015 and December 31, 2014, excluding the leasehold interest in the Marriott Hamburg hotel and unconsolidated affiliates (in thousands):



	March 31, 2015			December 31, 2014
Land	$	996,667		$	858,670
Leasehold interest	11,633			11,633
Buildings	2,142,724			1,964,252
Building and leasehold improvements	109,845			106,303
Site improvements	63,204			59,038
Furniture, fixtures and equipment	664,838			611,450
Improvements in progress	12,605			21,552
Total investment in hotel properties	4,001,516			3,632,898
Less accumulated depreciation	(826,096		)	(804,498		)
Total investment in hotel properties, net	$	3,175,420		$	2,828,400
Consolidated hotel properties	17			16

Hotel Acquisitions:

The Company's hotel acquisitions, as more fully described below, are consistent with the Company's strategy of focusing on the acquisition of upper upscale and luxury hotels in select urban and resort markets with strong growth characteristics and high barriers to entry where it believes there are opportunities to add value. All of the acquisitions were accounted for under the provisions of business combination guidance. The assets and liabilities of the hotels were consolidated in the Company's condensed consolidated balance sheets at the acquisition-date fair values and the results of operations were consolidated in the Company's condensed consolidated statements of operations from the date of acquisition.

Montage Laguna Beach

On January 29, 2015, the Company acquired the Montage Laguna Beach resort. The acquisition was funded through the issuance of 7,347,539 shares of SHR's common stock to an affiliate of the seller, the assumption of a $150,000,000 existing mortgage loan encumbering the property, and a cash payment of approximately $110,319,000, which includes prorations and closing costs. For the three months ended March 31, 2015 and 2014, the Company incurred acquisition costs related to the Montage Laguna Beach resort of $667,000 and $0, respectively, that are included in corporate expenses on the condensed consolidated statements of operations.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Four Seasons Resort Scottsdale at Troon North

On December 9, 2014, the Company acquired the Four Seasons Resort Scottsdale at Troon North for a cash payment of approximately $140,920,000, which includes net working capital. For the three months ended March 31, 2015 and 2014, the Company incurred acquisition costs related to the Four Seasons Resort Scottsdale at Troon North of $53,000 and $0, respectively, that are included in corporate expenses on the condensed consolidated statements of operations.

Hotel del Coronado

On June 11, 2014, the Company closed on the acquisition of the 63.6% equity interests in the entity that owns the Hotel del Coronado, BSK Del Partner, L.P. (the Hotel del Coronado Venture), that were previously owned by certain affiliates of Blackstone Real Estate Partners VI L.P. (Blackstone) (see note 6) for a cash payment of $210,000,000. Additionally, the Company became fully obligated under the entire $475,000,000 mortgage and mezzanine loans outstanding. Effective as of the closing of the transaction, the Company consolidated the Hotel del Coronado Venture.

As part of the consolidation of the Hotel del Coronado Venture, the Company recorded $65,547,000 as a gain on the consolidation of affiliates during the second quarter 2014 in the condensed consolidated statement of operations, which represented the difference between the $120,000,000 fair value of the Company's preexisting equity interest in the Hotel del Coronado Venture and its carrying value. The fair value of the preexisting equity interest in the Hotel del Coronado Venture was determined based on an agreed upon value between the Company and a third party, both of which are market participants, which the Company considered to be a value determined in an orderly transaction in the principal market. For the three months ended March 31, 2015 and 2014, the Company incurred no acquisition costs related to the Hotel del Coronado Venture.

Fairmont Scottsdale Princess Hotel

On March 31, 2014, the Company closed on the acquisition of the 50.0% equity interests in the entities that own the Fairmont Scottsdale Princess hotel, Walton/SHR FPH Holdings, L.L.C. and FMT Scottsdale Holdings, L.L.C. (the Fairmont Scottsdale Princess Venture), that were previously owned by an affiliate of Walton Street Capital, L.L.C. (Walton Street) (see note 6) for a cash payment of $90,616,000. Additionally, the Company became fully obligated under the entire $117,000,000 mortgage loan previously outstanding (see note 16). Effective as of the closing of the transaction, the Company consolidated the Fairmont Scottsdale Princess Venture.

As part of the consolidation of the Fairmont Scottsdale Princess Venture, the Company recorded $78,191,000 as a gain on the consolidation of affiliates in the condensed consolidated statement of operations for the three months ended March 31, 2014, which represented the difference between the $107,853,000 fair value of the Company's preexisting equity interest in the Fairmont Scottsdale Princess Venture, which included a preferred return to the Company, and its carrying value. The fair value of the preexisting equity interest in the Fairmont Scottsdale Princess Venture was determined based on an agreed upon value between the Company and a third party, both of which are market participants, which the Company considered to be a value determined in an orderly transaction in the principal market. For the three months ended March 31, 2015 and 2014, the Company incurred acquisition costs related to the the Fairmont Scottsdale Princess Venture of $0 and $74,000, respectively, which were recorded as an offset to gain on consolidation of affiliates on the condensed consolidated statements of operations.

Purchase Price Allocations of Hotel Acquisitions

The amounts recognized as assets acquired and liabilities assumed for each hotel acquisition are based on the acquisition-date fair values. The allocation of the fair value of recent acquisitions are preliminary and are subject to a measurement period that will allow the Company to obtain the information necessary to properly identify and measure the assets acquired and liabilities assumed. The final allocation of the fair values may result in adjustments to the recognized amounts of assets and liabilities, which could be significant. The Company expects to finalize the preliminary allocations as soon as possible, but no later than one year from the respective acquisition dates.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a summary of the allocation of the fair values for the Company's acquisitions (in thousands):



	Preliminary					Final
	Montage Laguna Beach			Four Seasons Resort Scottsdale at Troon North		Hotel del Coronado Venture		Fairmont Scottsdale Princess Venture
Land	$	138,396		$	37,402	$	236,497	$	26,732
Buildings	175,723			75,957		404,851		213,289
Site improvements	4,166			7,175		6,677		16,037
Furniture, fixtures and equipment	40,830			18,920		53,943		40,341
Improvements in progress	—			—		1,749		151
Intangible assets	1,666			554		87,710		9,859
Below market debt discount	1,049			—		—		2,493
Net working capital	(115		)	912		13,573		6,568
Total fair value allocated	$	361,715		$	140,920	$	805,000	$	315,470

The allocation of fair value attributable to intangible assets acquired as part of these acquisitions include (in thousands):



	Amounts		Weighted-Average Amortization Period
Intangible assets subject to amortization:
Advanced bookings	$	9,045	1 year, 5 months
Memberships value	5,973		30 years
Below market ground lease	7,656		95 years, 9 months
Below market hotel management agreement	18,822		9 years, 2 months
	41,496
Intangible assets not subject to amortization:
Trade name	58,293
Total intangible assets acquired	$	99,789

Pro Forma and Other Financial Information Related to Acquisition of Hotel

The following pro forma and other financial information is provided for the acquisition of the Fairmont Scottsdale Princess Venture that was completed during the three months ended March 31, 2014, which had a material effect on the Company's results of operations.

The impact to revenues and net income attributable to SHR common shareholders from this acquisition for the three months ended March 31, 2015 is as follows (in thousands):



	Three Months Ended March 31, 2015
Increase in revenues	$	42,220
Increase in net income attributable to SHR common shareholders	$	11,147

There was no impact to revenues and net income attributable to SHR common shareholders from the acquisition date of the Fairmont Scottsdale Princess Venture during the three months ended March 31, 2014 because the transaction closed on the last day of the reporting period.

The following unaudited pro forma information is provided for informational purposes only and does not purport to represent what the Company's results of operations would have been had it completed the acquisition on January 1, 2013, nor is it necessarily indicative of the results that may be expected in future periods. For purposes of the pro forma financial information, the $78,117,000 gain on the consolidation of affiliate recognized as a result of the acquisition of the Fairmont Scottsdale Princess Venture is assumed to have been recognized on January 1, 2013.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On an unaudited pro forma basis, revenues, net income attributable to SHR common shareholders and basic and diluted income attributable to SHR common shareholders per share for the three months ended March 31, 2014 are as follows as if this acquisition had occurred on January 1, 2013 (in thousands):



	Three Months Ended March 31,
	2014
Total revenue	$	229,661
Net income	$	149,779
Preferred shareholder dividends	$	(9,824	)
Net income attributable to SHR common shareholders	$	143,428
Net income attributable to SHR common shareholders per share:
Basic	$	0.69
Diluted	$	0.65

4. DISCONTINUED OPERATIONS

During the three months ended March 31, 2014, the Company sold the following hotels:



Hotel	Location	Date Sold	Sales Proceeds			Gain on sale
Four Seasons Punta Mita Resort and La Solana land parcel	Punta Mita, Mexico	February 28, 2014	$	206,867,000		$	63,879,000
Marriott London Grosvenor Square	London, England	March 31, 2014	$	209,407,000	(a)	$	92,889,000

(a) There was an outstanding balance of £67,301,000 ($112,150,000) on the mortgage loan secured by the Marriott London Grosvenor Square hotel, which was repaid at the time of closing. The net proceeds received by the Company were $97,257,000.

The results of operations of hotels sold prior to January 1, 2015 are classified as discontinued operations and segregated in the condensed consolidated statements of operations for all periods presented. Subsequent to January 1, 2015, only disposals that represent a strategic shift that has a major effect on the Company's results of operations would qualify as discontinued operations. The following is a summary of income from discontinued operations for the three months ended March 31, 2014 (in thousands):



	Three Months Ended March 31, 2014
Hotel operating revenues	$	17,767
Operating costs and expenses	11,485
Depreciation and amortization	1,275
Total operating costs and expenses	12,760
Operating income	5,007
Interest expense	(1,326		)
Interest income	2
Loss on early extinguishment of debt	(272		)
Foreign currency exchange gain	32
Income tax expense	(833		)
Gain on sale, net of tax	155,825
Income from discontinued operations	$	158,435

5. VARIABLE INTEREST ENTITY

On September 14, 2012, the Company formed a joint venture (the Essex House Hotel Venture) with affiliates of KSL Capital Partners, LLC (KSL) to acquire, own, manage, and operate the JW Marriott Essex House Hotel. The Company contributed cash of $89,147,000 to acquire a 51% equity interest in the Essex House Hotel Venture, and KSL contributed cash of $85,651,000 to acquire a 49% equity interest. Pursuant to the terms of the joint venture agreements establishing the Essex House Hotel Venture, at any time prior to the third anniversary of the formation of the Essex House Hotel Venture, KSL shall have the right to sell its equity interest in the Essex House Hotel Venture to the Company in exchange for shares of SHR's common stock, as set forth in the joint venture agreements, at a purchase price equal to KSL's net investment plus 8.0% compounded annually (the Put Option). For purposes of paying the purchase price, SHR's common stock shall be valued at the greater of (i) $7.50 per share and (ii) the 20-day volume-weighted average price per share of SHR's common stock as of the date KSL exercises the Put Option. The Essex House Hotel Venture is jointly controlled by the Company and KSL; however, it is considered a variable interest entity because the Company determined that it is the only holder of equity at risk due to the Put Option. The Company also determined that it is the primary beneficiary of the Essex House Hotel Venture due to the Put Option, which impacts the Company's power to direct the activities that most significantly impact the economic performance of the entity, as well as its obligation to absorb the losses and its right to receive benefits from the entity that could potentially be significant to the entity. As such, the transactions and accounts of the Essex House Hotel Venture are included in the accompanying condensed consolidated financial statements.

Other than in connection with a customary environmental indemnity and non-recourse carve-out guaranty in favor of the lender, the liabilities of the Essex House Hotel Venture are solely the obligations of the Essex House Hotel Venture and are not guaranteed by the Company. The debt is secured by the JW Marriott Essex House Hotel, and the creditors of the Essex House Hotel Venture do not have general recourse to the Company. The use of certain assets of the Essex House Hotel Venture is restricted because they are collateral for the Essex House Hotel Venture's debt (see note 8), and the Company does not have the ability to leverage the assets.

The Company and KSL are subject to the terms of the joint venture agreements, which include provisions for additional contributions. For the three months ended March 31, 2015, the Company and KSL provided no additional contributions to the Essex House Hotel Venture. For the three months ended March 31, 2014, the Company and KSL provided additional contributions of $2,550,000 and $2,450,000, respectively, to the Essex House Hotel Venture for property improvements.

For the three months ended March 31, 2015, the Company and KSL received distributions of $30,600,000 and $29,400,000, respectively, from the Essex House Hotel Venture from excess cash received from the refinancing of the mortgage loan secured by the JW Marriott Essex House Hotel in December 2014.

6. INVESTMENT IN UNCONSOLIDATED AFFILIATES

Investment in unconsolidated affiliates as of March 31, 2015 and 2014 includes the following (in thousands):



	2015		2014
Four Seasons RCPM	3,427		3,427
Lot H5 Venture	19,423		19,423
Total investment in unconsolidated affiliates	$	22,850	$	22,850

Four Seasons RCPM

The Company owns a 31% interest in, and acts as asset manager for, an unconsolidated affiliate, formed with two unaffiliated parties, that developed the Four Seasons RCPM, a luxury vacation home product sold in fractional and whole ownership interests on the property adjacent to the Four Seasons Punta Mita Resort in Mexico. The Company earns asset management fees and recognizes income on the percentage not owned by the Company. These fees amounted to $0 and $18,000 for the three months ended March 31, 2015 and 2014, respectively, and are included in other (expenses) income, net in the condensed consolidated statements of operations.

Lot H5 Venture

The Company has an interest in an unconsolidated affiliate, formed with an unaffiliated party, that owns an undeveloped, oceanfront land parcel in Punta Mita, Nayarit, Mexico, known as the Lot H5 land parcel (the Lot H5 Venture). The Company has a preferred position in the Lot H5 Venture that entitles it to receive the first $12,000,000 of distributions generated from the

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Lot H5 land parcel with any excess distributions split equally between the Company and its partner. The Company jointly controls the Lot H5 Venture with its partner and accounts for its interest in the Lot H5 Venture as an equity method investment.

Acquisitions of Unconsolidated Affiliates:

Fairmont Scottsdale Princess Venture

Prior to March 31, 2014, the Company had a 50% ownership interest in the Fairmont Scottsdale Princess Venture. The Company jointly controlled the venture with an unaffiliated third party, Walton Street, and served as the managing member. The Company acted as asset manager and was entitled to earn a quarterly base management fee, as well as certain project management fees. The Company recognized fees of $0 and $228,000 for the three months ended March 31, 2015 and 2014, respectively, which are included in other (expenses) income, net on the condensed consolidated statements of operations.

On March 31, 2014, the Company acquired Walton Street's 50.0% interest in the Fairmont Scottsdale Princess Venture. The Company now wholly owns the Fairmont Scottsdale Princess Venture. The Company has consolidated the Fairmont Scottsdale Princess Venture and no longer accounts for the investment using the equity method of accounting (see note 3).

Hotel del Coronado Venture

Prior to June 11, 2014, the Company had a 36.4% ownership interest in the Hotel del Coronado Venture. Blackstone, an unaffiliated third party, had the remaining ownership interest in the Hotel del Coronado Venture and was the general partner. The Company acted as asset manager and was entitled to earn a quarterly asset management fee, certain development fees, and if applicable, certain incentive fees. The Company recognized fees of $0 and $209,000 for the three months ended March 31, 2015 and 2014, respectively, which are included in other (expenses) income, net on the condensed consolidated statements of operations.

On June 11, 2014, the Company acquired Blackstone's 63.6% interest in the Hotel del Coronado Venture. The Company now wholly owns the Hotel del Coronado Venture. The Company has consolidated the Hotel del Coronado Venture and no longer accounts for the investment using the equity method of accounting (see note 3).

7. OPERATING LEASE AGREEMENTS

Building Lease

In June 2004, the Company recorded a sale of the Marriott Hamburg hotel, and the Company’s leaseback of the hotel was reflected as an operating lease. A deferred gain was recorded in conjunction with the sale and is being recognized as a reduction of lease expense over the life of the lease. The Company recognized $44,000 and $53,000 of the deferred gain for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 and December 31, 2014, the deferred gain on the sale of the Marriott Hamburg hotel recorded in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets amounted to $2,684,000 and $2,933,000, respectively. On a monthly basis, the Company makes minimum rent payments aggregating to an annual total of €3,833,000 (adjusting by an index formula) ($4,114,000 based on the foreign exchange rate as of March 31, 2015) and pays additional rent based upon the performance of the hotel, which are recorded as lease expense in the Company’s condensed consolidated statements of operations. A euro-denominated security deposit at March 31, 2015 and December 31, 2014 was $2,039,000 and $2,299,000, respectively, and is included in prepaid expenses and other assets on the Company’s condensed consolidated balance sheets. The Company subleases its interest in the Marriott Hamburg hotel to a third party. The Company has reflected the sublease arrangement as an operating lease and records lease revenue.

Ground Leases

The Company is subject to a ground lease agreement with a third party landlord whereby it leases one parcel of land at the Fairmont Scottsdale Princess hotel, which became a consolidated property in March 2014 (see note 3). The ground lease expires in December 2109. Annual rent payments through December 2020 are equal to $1,500,000 plus a percentage of gross revenue, as defined by the terms of the ground lease agreement. Subsequent to December 2020, annual rent payments are a percentage of gross revenue.

The Company is subject to a ground lease agreement with a third party landlord whereby it leases the land for the Marriott Lincolnshire Resort. The term of the ground lease goes through December 31, 2112 and annual rent payments are a fixed amount, subject to indexation.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Lease payments related to hotel ground leases are included in other hotel expenses on the condensed consolidated statements of operations.

Office Space Lease

The Company is subject to a lease agreement with a third party landlord for its office space. The office lease expires in September 2017. Lease payments related to office space are included in corporate expenses on the condensed consolidated statements of operations.

8. INDEBTEDNESS

Mortgages Payable, Net of Discount:

Certain subsidiaries of SHR are the borrowers under various financing arrangements. These subsidiaries are separate legal entities and their respective assets and credit are not available to satisfy the debt of SHR or any of its other subsidiaries.

Mortgages payable, net of discount, at March 31, 2015 and December 31, 2014 consisted of the following (in thousands):



				Balance Outstanding at
Debt	Spread (a)	Initial Maturity	Maturity Including Extension Options	March 31, 2015			December 31, 2014
Fairmont Scottsdale Princess(b)	0.36%	April 2015	April 2015	$	117,000		$	117,000
Hotel del Coronado(c)	3.65%	March 2016	March 2018	475,000			475,000
Loews Santa Monica Beach Hotel(d)	2.55%	May 2017	May 2021	120,000			120,000
Fairmont Chicago	Fixed	June 2017	June 2017	93,124			93,124
Westin St. Francis	Fixed	June 2017	June 2017	209,588			209,588
Four Seasons Washington, D.C.(d)	2.25%	June 2017	June 2019	120,000			120,000
Hyatt Regency La Jolla(e)	4.00%/Fixed	December 2017	December 2017	89,239			89,247
JW Marriott Essex House Hotel(d)	2.95%	January 2018	January 2020	225,000			225,000
InterContinental Chicago	Fixed	August 2021	August 2021	142,085			142,442
Montage Laguna Beach(f)	Fixed	August 2021	August 2021	150,000			—
InterContinental Miami	Fixed	September 2024	September 2024	115,000			115,000
Total mortgages payable(g)				1,856,036			1,706,401
Unamortized discount(b) (f)				(1,022		)	(623		)
Total mortgages payable, net of discount				$	1,855,014		$	1,705,778

(a)

Interest on mortgage loans is paid monthly at the applicable spread over London Interbank Offered Rate (LIBOR) (0.18% at March 31, 2015) for all variable-rate mortgage loans except for the Hyatt Regency La Jolla hotel (see (e) below). Interest on the Fairmont Chicago and Westin St. Francis mortgage loans is paid monthly at an annual fixed rate of 6.09%, interest on the InterContinental Chicago mortgage loan is paid monthly at an annual fixed rate of 5.61%, interest on the Montage Laguna Beach mortgage loan is paid monthly at an annual fixed rate of 3.90%, and interest on the InterContinental Miami mortgage loan is paid monthly at an annual fixed rate of 3.99%.

(b)

On March 31, 2014, the Company acquired the remaining 50.0% equity interest in the Fairmont Scottsdale Princess Venture, resulting in the Fairmont Scottsdale Princess Venture becoming wholly-owned by the Company. In connection with the acquisition, the Company consolidated the Fairmont Scottsdale Princess Venture and became fully obligated under the entire outstanding balance of the mortgage loan secured by the Fairmont Scottsdale Princess hotel (see note 3). The Company recorded the mortgage loan at its fair value, which included a debt discount, which was being amortized as additional interest expense over the maturity period of the loan. On April 9, 2015, the Company repaid the entire balance outstanding on the mortgage loan (see note 16).

(c)

On June 11, 2014, the Company acquired the remaining 63.6% equity interest in the Hotel del Coronado Venture, resulting in the Hotel del Coronado Venture becoming wholly-owned by the Company. In connection with the acquisition, the Company consolidated the Hotel del Coronado Venture and became fully obligated under the entire outstanding balance of the mortgage and mezzanine loans secured by the Hotel del Coronado (see note 3). The first of

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

three extension options related to the mortgage and mezzanine loans was exercised in March 2015 leaving two, one-year extension options available, subject to certain conditions.


(d)	The mortgage loan secured by the Loews Santa Monica Beach Hotel has four, one-year extension options, subject to certain conditions. The mortgage loans secured by the Four Seasons Washington, D.C. hotel and the JW Marriott Essex House Hotel each have two, one-year extension options, subject to certain conditions.

(e)

Interest on $72,000,000 of the total principal amount is paid monthly at an annual rate of LIBOR plus 4.00%, subject to a 0.50% LIBOR floor, and interest on $17,239,000 of the total principal amount is paid monthly at an annual fixed rate of 10.00%. On April 21, 2015, the Company and its joint venture partner entered into an agreement to sell the property that secures this mortgage loan. The mortgage loan will be repaid when the transaction closes (see note 16).

(f)

On January 29, 2015, the Company closed on the acquisition of the Montage Laguna Beach resort. In connection with the acquisition, the Company assumed the existing mortgage loan secured by the Montage Laguna Beach resort (see note 3). The Company recorded the mortgage loan at its fair value, which included a debt discount, which is being amortized as additional interest expense over the maturity period of the loan.


(g)	All of these loan agreements require maintenance of financial covenants, all of which the Company was in compliance with at March 31, 2015.

Bank Credit Facility:

The Company has a $300,000,000 secured bank credit facility agreement. The agreement contains an accordion feature, which provides the option to increase the borrowing capacity up to $400,000,000, subject to the satisfaction of customary conditions set forth in the agreement. The following summarizes key financial terms and conditions of the bank credit facility:


•	interest on the facility is payable monthly based upon a leverage-based pricing grid ranging from LIBOR plus 1.75% to LIBOR plus 2.50% in the case of a LIBOR loan or base rate plus 0.75% to base rate plus 1.50% in the case of a base rate loan. The applicable margins were increased, in each case, by 0.25% for the period from April 25, 2014 through March 31, 2015.


•	an unused commitment fee is payable monthly based on the unused revolver balance at a rate of 0.30% per annum in the event that the bank credit facility usage is less than 50% and a rate of 0.20% per annum in the event that the bank credit facility usage is equal to or greater than 50%;


•	maturity date of April 25, 2018, with the right to extend the maturity date for an additional one-year period with an extension fee equal to 0.25%, subject to certain conditions;

•

lenders received collateral in the form of pledges by SH Funding and certain of its subsidiaries of their interests in subsidiaries that directly or indirectly own, lease or operate the borrowing base properties, which currently include the Four Seasons Jackson Hole hotel, the Four Seasons Silicon Valley hotel, the Marriott Lincolnshire Resort, the Ritz-Carlton Half Moon Bay hotel, and the Ritz-Carlton Laguna Niguel hotel, and guarantees of the loan from the Company and such subsidiaries;

•

maximum availability is determined by the lesser of 55% advance rate against the gross asset value of the borrowing base properties as determined under the loan (provided at any time the total fixed charge coverage ratio is greater than 1.75 times, the percentage shall be increased to 60%) or a 1.40 times debt service coverage on the borrowing base properties (based on the trailing 12 months net operating income for these assets divided by the greater of the in-place interest rate or 7.0% debt constant on the balance outstanding under the bank credit facility);


•	minimum corporate fixed charge coverage of 1.40 times during 2015 and 1.50 times thereafter;


•	maximum corporate leverage of 60%;


•	minimum tangible net worth of approximately $1,416,189,000, excluding goodwill and currency translation adjustments, plus an amount equal to 75% of the net proceeds of any new issuances of our common stock, which is not used to reduce indebtedness or used in a transaction or series of transactions to redeem outstanding capital stock;

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


•	restrictions on SHR and SH Funding’s ability to pay dividends. Such restrictions include:


•	prohibitions on SHR and SH Funding's ability to pay any dividends unless certain conditions are met; and


•	prohibitions on SHR and SH Funding’s ability to issue dividends in cash or in kind at any time an event of default shall have occurred.

Notwithstanding the dividend restrictions described above, for so long as the Company qualifies, or has taken all other actions necessary to qualify as a REIT, SH Funding may authorize, declare, and pay quarterly cash dividends to the Company when and to the extent necessary for the Company to distribute cash dividends to its stockholders generally in an aggregate amount not to exceed the minimum amount necessary for the Company to maintain its tax status as a REIT, unless certain events of default exist.

Other terms and conditions exist including a prohibition on mortgaging the borrowing base properties, provisions to release assets from the borrowing base and limitations on the Company's ability to incur costs for discretionary capital programs and to redeem, retire or repurchase common stock. Under the agreement, SH Funding has a letter of credit sub-facility of $75,000,000, which is secured by the $300,000,000 bank credit facility. Letters of credit reduce the borrowing capacity under the bank credit facility.

The interest rate at March 31, 2015 was 2.18%. There were no borrowings under the bank credit facility during the three months ended March 31, 2015. At March 31, 2015, the maximum availability under the bank credit facility was $300,000,000. Additionally, at March 31, 2015, there were no borrowings outstanding under the bank credit facility and no outstanding letters of credit. The agreement also requires maintenance of financial covenants, all of which SH Funding and SHR were in compliance with at March 31, 2015.

Debt Maturity:

The following table summarizes the aggregate maturities (assuming all extension options exercised) as of March 31, 2015 for all mortgages and the Company’s bank credit facility (in thousands):



Years ending December 31,	Amounts
2015 (remainder)	$	118,439
2016	2,031
2017	394,123
2018	477,299
2019	122,433
Thereafter	741,711
	1,856,036
Unamortized discount	(1,022		)
Total	$	1,855,014

Interest Expense:

Total interest expense in continuing and discontinued operations includes a reduction related to capitalized interest of $113,000 and $228,000 for the three months ended March 31, 2015 and 2014, respectively. Total interest expense in continuing and discontinued operations includes amortization of deferred financing costs of $895,000 and $1,407,000 for the three months ended March 31, 2015 and 2014, respectively.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. EQUITY AND DISTRIBUTION ACTIVITY

Common Stock:

The following table presents the changes in the issued and outstanding shares of SHR common stock since December 31, 2014 (excluding 793,618 units of SH Funding (OP Units) outstanding at both March 31, 2015 and December 31, 2014, respectively, which are redeemable for shares of SHR common stock on a one-for-one basis, or the cash equivalent thereof, subject to certain restrictions and at the option of SHR) (in thousands):



Outstanding at December 31, 2014	267,436
RSUs and performance-based RSUs redeemed for shares of SHR common stock	530
Common stock issued	7,348
Outstanding at March 31, 2015	275,314

On January 29, 2015, the Company issued 7,347,539 shares of SHR's common stock to partially fund the acquisition of the Montage Laguna Beach resort (see note 3).

In February 2015, the Company entered into a stock distribution agreement whereby the Company may sell, from time to time, through certain agents, shares of SHR's common stock, having an aggregate offering price of up to $250,000,000 by means of ordinary brokers' transactions at market prices or as otherwise agreed between the Company and the agents. The net proceeds from any sale of shares of SHR's common stock are expected to be used for working capital and general corporate purposes, which may include the repayment of indebtedness. No shares were sold under the stock distribution agreement during the three months ended March 31, 2015.

Distributions to Shareholders and Unitholders

On November 4, 2008, SHR’s board of directors elected to suspend the quarterly dividend to holders of shares of SHR common stock.

Preferred Stock:

On January 5, 2015, the Company redeemed all of the outstanding 3,615,375 shares of it 8.25% Series B Cumulative Redeemable Preferred Stock (Series B Preferred Stock). The shares of Series B Preferred Stock were redeemed at a redemption price of $25.00 per share, or approximately $90,384,000 in total, plus accrued and unpaid dividends up to and including the redemption date in the amount of $0.028646 per share, or approximately $104,000 in total. Following the redemption, dividends on the Series B Preferred Stock ceased to accrue.

After the redemption of the Series B Preferred Stock in January 2015, there are no remaining shares of preferred stock outstanding.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noncontrolling Interests:

The following tables reflect the reconciliation of the beginning and ending balances of the equity attributable to SHR and the noncontrolling owners (in thousands):



	SHR Shareholders’ Equity			Nonredeemable Noncontrolling Interests			Total Permanent Shareholders’ Equity			Total Redeemable Noncontrolling Interests (Temporary Equity)(a)
Balance at December 31, 2014	$	1,447,457		$	94,292		$	1,541,749		$	10,500
Common shares issued	100,646			—			100,646			293
Net income (loss)	15,811			(3,434		)	12,377			37
CTA	(135		)	—			(135		)	—
Derivative activity	3,105			—			3,105			8
Share-based compensation	(723		)	—			(723		)	(2		)
Preferred stock redemption	(7		)	—			(7		)	—
Redemption value adjustment	984			—			984			(984		)
Distributions to holders of noncontrolling interests in consolidated affiliates	—			(29,400		)	(29,400		)	—
Other	(13		)	—			(13		)	13
Balance at March 31, 2015	$	1,567,125		$	61,458		$	1,628,583		$	9,865



	SHR Shareholders’ Equity			Nonredeemable Noncontrolling Interests			Total Permanent Shareholders’ Equity			Total Redeemable Noncontrolling Interests (Temporary Equity)(a)
Balance at December 31, 2013	$	710,513		$	92,355		$	802,868		$	7,534
Net income (loss)	226,982			(4,041		)	222,941			849
CTA	18,713			—			18,713			71
Derivatives and other activity	331			—			331			2
Share-based compensation	463			—			463			2
Preferred stock redemption	(103,760		)	—			(103,760		)	—
Declared distributions to preferred shareholders	(6,115		)	—			(6,115		)	—
Redemption value adjustment	308			—			308			(308		)
Contributions from holders of noncontrolling interests in consolidated affiliates	—			2,450			2,450			—
Other	26			—			26			(26		)
Balance at March 31, 2014	$	847,461		$	90,764		$	938,225		$	8,124

(a)

The historical cost of the redeemable noncontrolling interests is based on the proportional relationship between the carrying value of equity associated with SHR’s common shareholders relative to that of the unitholders of SH Funding, as OP Units may be exchanged into shares of SHR common stock on a one-for-one basis. The interests held by the noncontrolling partners are stated at the greater of carrying value or their redemption value.

As of March 31, 2015 and December 31, 2014, the redeemable noncontrolling interests had a redemption value of approximately $9,865,000 (based on the March 31, 2015 SHR common stock closing price of $12.43) and $10,500,000 (based on the December 31, 2014 SHR common stock closing price of $13.23), respectively. As of March 31, 2014 and December 31, 2013, the redeemable noncontrolling interests had a redemption value of approximately $8,124,000 (based on the March 31, 2014 SHR common stock closing price of $10.19) and $7,534,000 (based on the December 31, 2013 SHR common stock closing price of $9.45), respectively.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. DERIVATIVES

The Company manages its interest rate risk by varying its exposure to fixed and variable rates while attempting to minimize its interest costs. The Company manages its variable interest rate risk through the use of interest rate derivative instruments. The Company enters into interest rate derivative instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company uses interest rate caps to limit exposure on its variable-rate debt that would result from an increase in interest rates. The Company’s lenders, as stipulated in the respective loan agreements, generally require such caps. The Company records all derivatives at fair value in either prepaid expenses and other assets or accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

The valuation of the interest rate derivative instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments (CVA) to appropriately reflect its own nonperformance risk and the respective counterparty’s nonperformance risk. When assessing nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Except for the CVA, all inputs used to measure fair value of the derivative financial instruments are Level 2 inputs. The Company has concluded that the inputs used to measure its CVA are Level 3 inputs. If the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers into and out of Level 3, or between other levels, at the fair value at the beginning of the reporting period in which the changes occur. The Company assessed the impact of the CVA on the overall fair value of its derivative instruments and concluded that the CVA does not have a significant impact to the fair values as of March 31, 2015. As of March 31, 2015 and December 31, 2014, all derivative liabilities are categorized as Level 2.

Derivatives in Cash Flow Hedging Relationships:

Historically, the Company has used interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involved the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualified as cash flow hedges were recorded in accumulated OCL and was subsequently reclassified into earnings in the period that the hedged forecasted transaction affected earnings. During the three months ended March 31, 2014, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives was recognized directly in earnings.

In April 2014, the Company paid $17,428,000, which included accrued and unpaid interest, to terminate its two interest rate swaps that were in cash flow hedging relationships. There was no immediate charge to earnings based on the Company's forecasted levels of LIBOR-based debt at the date of the termination. Amounts previously recorded in accumulated OCL related to these interest rate swaps will be reclassified into earnings as additional interest expense on a straight-line basis over the original maturity period of the interest rate swaps. During the next twelve months, an additional $7,785,000 will be reclassified as an increase to interest expense.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives Not Designated as Hedging Instruments:

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

In April 2014, the Company paid $5,281,000, which included accrued and unpaid interest, to terminate its two interest rate swaps that were not designated as hedging instruments. These interest rate swaps were marked to market through earnings through the date of termination, with no additional gain or loss recognized in earnings at the date of termination.

As of March 31, 2015, the Company had the following outstanding interest rate derivatives that were not designated as hedging instruments:



Interest Rate Derivatives	Number of Instruments	Notional Amount (in thousands)
Interest rate caps	10	$	1,429,000

At March 31, 2015 and December 31, 2014, the aggregate notional amount of the Company’s interest rate cap agreements was $1,429,000,000. The Company’s interest rate caps have LIBOR strike rates ranging from 2.05% to 4.55% and maturity dates ranging from April 2015 to July 2017.

Fair Values of Derivative Instruments:

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 (in thousands):



		Fair Value as of
	Balance Sheet Location	March 31, 2015		December 31, 2014
Derivatives not designated as hedging instruments:
Interest rate caps	Prepaid expenses and other assets	$	42	$	113

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company does not have any fair value measurements using inputs based on quoted prices in active markets (Level 1) or significant unobservable inputs (Level 3) as of March 31, 2015 or December 31, 2014. The following tables reflect changes in interest rate swap liabilities categorized as Level 2 for the three months ended March 31, 2014 (in thousands):



Balance as of January 1, 2014	$	(27,921	)
Mark to market adjustments	4,622
Balance as of March 31, 2014	$	(23,299	)

Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations:

The tables below present the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015			2014
Derivatives in Cash Flow Hedging Relationships
Interest rate swaps:
Effective portion of loss recognized in accumulated OCL	$	—		$	(217	)
Effective portion of loss reclassified into interest expense	$	(3,113	)	$	(3,199	)

Derivatives Not Designated as Hedging Instruments
Interest rate swaps:
Ineffective losses recognized in interest expense	$	—		$	(92	)
Interest rate caps:
Loss recognized in other (expenses) income, net	$	(116	)	$	(23	)

11. SHARE-BASED EMPLOYEE COMPENSATION PLANS

Second Amended and Restated 2004 Incentive Plan:

On June 21, 2004, SHR adopted the 2004 Incentive Plan (the Plan). The Plan provided for the grant of equity-based awards in the form of, among others, options to purchase shares of SHR common stock (Options), RSUs, and stock appreciation rights (SARs), which are collectively referred to as the Awards. On May 22, 2008, SHR’s shareholders approved SHR’s Amended and Restated 2004 Incentive Plan (the Amended Plan). The Amended Plan: (a) added OP Units as an additional type of award; (b) adjusted the number of authorized shares from 3,000,000 shares of SHR common stock to 4,200,000 shares of SHR common stock or OP Units; (c) limited the maximum term of Options and SARs to no more than 10 years and prohibited the repricing of Options and SARs; and (d) established minimum vesting periods for certain awards. On May 19, 2011, SHR’s shareholders approved SHR’s Second Amended and Restated 2004 Incentive Plan (the Amended and Restated Plan) pursuant to which the number of securities authorized and reserved for issuance increased from 4,200,000 shares of SHR common stock or OP Units to 9,700,000 shares of SHR common stock or OP Units. The termination date of the Amended and Restated Plan was also extended from June 21, 2014 to December 31, 2016.

RSUs and Performance-Based RSUs:

During the three months ended March 31, 2015, SHR granted 234,113 RSUs to certain employees, officers and directors under the Amended and Restated Plan. These RSUs represent awards of shares of SHR’s common stock that will generally vest over three years.

In February 2015, SHR granted certain employees a target grant of 322,285 performance-based RSUs under a performance share plan that provides the recipient the opportunity to earn between 0.0% and 200.0% of the target (up to a maximum of 644,570 performance shares), based on the relative total shareholder return of the shares of SHR common stock, as defined in the agreement, over the period from January 2, 2015 through December 31, 2017.

The Company measures compensation expense for RSUs based on the per share fair market value of SHR's common stock at the date of grant, adjusted for estimated forfeitures. The Company measures compensation expense for performance-based

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

RSUs based on a Monte Carlo simulation to estimate the fair value on the date of grant. Compensation expense for RSUs and performance-based RSUs is recognized on a straight-line basis over the service period and is included in corporate expenses in the accompanying condensed consolidated statements of operations. The Company recorded compensation expense of $1,884,000 and $1,458,000 related to RSUs and performance-based RSUs for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there was unrecognized compensation expense of $4,975,000 related to unvested RSUs and $7,256,000 related to performance-based RSUs granted under the Amended and Restated Plan. The unrecognized compensation expense is expected to be recognized over a weighted average period of 2.15 years for unvested RSUs and 2.24 years for performance-based RSUs.

12. RELATED PARTY TRANSACTIONS

On February 28, 2014, certain direct and indirect wholly-owned subsidiaries of SH Funding sold the Four Seasons Punta Mita Resort and adjacent La Solana land parcel to affiliates of Cascade Investment, L.L.C. (Cascade) for proceeds of $206,867,000 (see note 4). Cascade beneficially owned approximately 6.4% of SHR's common stock as of the closing date.

Additionally, the Company has entered into month-to-month agreements with an affiliate of Cascade pursuant to which the Company provides advisory services for certain hotels not owned by the Company. The Company currently receives fees of $46,000 per month under these agreements (see note 15).

13. COMMITMENTS AND CONTINGENCIES

Environmental Matters:

Generally, the properties acquired by the Company have been subjected to environmental site assessments. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed, nor is the Company aware of any environmental liability that it believes would have a material effect on its business or financial statements.

Litigation:

The Company is party to various claims and routine litigation arising in the ordinary course of business. Based on discussions with legal counsel, the Company does not believe that the results of these claims and litigation, individually or in the aggregate, will have a material effect on its business or financial statements.

Letters of Credit:

As of March 31, 2015, the Company provided a $75,000 letter of credit related to its office space lease. In January 2015, the Company terminated the letter of credit that was previously provided in connection with an obligation to complete property improvements at the JW Marriott Essex House Hotel.

Purchase Commitments:

Construction Contracts

The Company has executed various contracts related to construction activities. As of March 31, 2015, the Company’s obligations under these contracts amounted to approximately $9,504,000. The construction activities are expected to be completed in the next twelve months.

JW Marriott Essex House Hotel Property Improvement Plan

As required by the JW Marriott Essex House Hotel management agreement, the Essex House Hotel Venture has an obligation to renovate and improve the property. As of March 31, 2015, the Essex House Hotel Venture's obligation under this agreement is approximately $638,000. The improvements are to be completed by July 2015.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

As of March 31, 2015 and December 31, 2014, the carrying amounts of certain financial instruments employed by the Company, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses were representative of their fair values because of the short-term maturity of these instruments.

At March 31, 2015 and December 31, 2014, the Company estimated the fair value of mortgages and other debt payable and the bank credit facility to be approximately $1,883,000,000 and $1,726,000,000, respectively.

STRATEGIC HOTELS & RESORTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company estimated the fair value of the debt using a future discounted cash flow analysis based on the use and weighting of multiple market inputs being considered. Based on the frequency and availability of market data, all inputs used to measure the estimated fair value of the debt are Level 2 inputs. The primary sensitivity in these calculations is based on the selection of appropriate discount rates.

Derivative financial instruments have been recorded at their estimated fair values.

15. MANAGEMENT AND ADVISORY AGREEMENTS

JW Marriott Essex House Hotel Performance Guarantee

In connection with the acquisition of the JW Marriott Essex House Hotel in September 2012, the Essex House Hotel Venture entered into a management agreement with an affiliate of Marriott International, Inc. (Marriott). In connection with the management agreement, Marriott provided the Essex House Hotel Venture with a limited performance guarantee that will ensure, subject to certain limitations, a target level of net operating profit. Guarantee payments are calculated and paid to the Essex House Hotel Venture on a monthly basis based on the cumulative year-to-date results with a final true-up at the end of each year. Monthly interim payments are recorded as deferred revenue and are recognized as other hotel operating revenue at the end of the year when the final guarantee payment for the year is determined. Since the commencement of the performance guarantee, the Essex House Hotel Venture has received payments of $20,000,000 which have been recognized in earnings, and has received payments of an additional $8,970,000, which have been recorded as deferred revenues in accounts payable and accrued expenses on the condensed consolidated balance sheet. The maximum guarantee that could be paid to the Essex House Hotel Venture during the guarantee period is $40,000,000. Any guarantee payments that exceed $20,000,000 may be recoverable by Marriott in accordance with the terms of the limited performance guarantee. Any amounts that are recoverable will be deferred and will not be recognized in earnings. The guarantee period began on September 17, 2012 and will continue through the earlier of a) December 31, 2020, b) the date at which the maximum guarantee has been funded, or c) the termination of the management agreement.

Asset Management and Advisory Agreements

The Company has entered into asset management and advisory agreements with third parties to provide such services to hotels not owned by the Company. The Company earns base fees and may have the potential to earn additional incentive fees. The Company earned fees of $263,000 and $100,000 for the three months ended March 31, 2015 and 2014, respectively, under these agreements, which are included in other (expenses) income, net in the condensed consolidated statements of operations.

16. SUBSEQUENT EVENTS

On May 1, 2015, the Company signed a purchase and sale agreement pursuant to which the Company agreed to acquire the Four Seasons Hotel Austin for $197,000,000. The acquisition, subject to certain closing conditions, is expected to close in the second quarter of 2015.

On April 21, 2015, the Company, along with its joint venture partner, entered into an agreement to sell the Hyatt Regency La Jolla hotel for $118,000,000. The transaction, which is subject to certain closing conditions, is expected to close in the second quarter of 2015. The mortgage loan secured by the Hyatt Regency La Jolla hotel will be repaid when the transaction closes.

On April 9, 2015, the Company repaid the $117,000,000 mortgage loan secured by the Fairmont Scottsdale Princess hotel (see note 8).

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Note on Forward-Looking Statements

On one or more occasions, we may make statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements other than statements of historical facts included or incorporated by reference in this Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Words or phrases such as “anticipates,” “believes,” "could," “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “targets,” “will,” “will continue,” “will likely result” or other comparable expressions or the negative of these terms identify forward-looking statements. Forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management’s examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved.

Some important factors that could cause actual results or outcomes for us to differ materially from these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q.

Overview

Our core business is to acquire and asset-manage upper upscale and luxury hotels (as defined by Smith Travel Research, an independent provider of lodging industry statistical data). We own a unique portfolio of hotels that includes complex assets with multiple revenue streams located in select urban and resort markets that have strong growth characteristics and high barriers to entry. See “Item 1. Financial Statements -1. General” for the hotel interests owned or leased by us as of March 31, 2015. We are committed to enhancing shareholder value through a disciplined strategy that includes internal growth through exceptional asset management; conservative balance sheet management; disciplined capital allocation; and opportunistic dispositions of hotels upon completion of our value enhancement and cash flow generating strategies.

We were incorporated in Maryland in January 2004 and completed our initial public offering of our common stock in June 2004. We made an election to be taxed as a real estate investment trust (REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Tax Code). A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid federal income taxes at the corporate level. To continue to qualify as a REIT, we cannot operate hotels; instead we employ internationally known hotel management companies to operate our hotels under management contracts. We operate as a self-administered and self-managed REIT, which means that we are managed by our board of directors and executive officers. We conduct our operations through our direct and indirect subsidiaries including our operating partnership, Strategic Hotel Funding, L.L.C. (SH Funding), which currently holds substantially all of our assets. We are the managing member of SH Funding and hold approximately 99.7% of its membership units as of March 31, 2015. We manage all business aspects of SH Funding, including the sale and purchase of hotels, the investment in such hotels and the financing of SH Funding and its assets.

Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, references to “we”, “our”, “us”, and “the Company” are references to SHR together, except as the context otherwise requires, with its consolidated subsidiaries, including SH Funding.

When presenting the U.S. dollar equivalent amount for any amounts expressed in a foreign currency, the U.S. dollar equivalent amount has been computed based on the exchange rate on the date of the transaction or the exchange rate prevailing on March 31, 2015, as applicable, unless otherwise noted.

Key Indicators of Operating Performance

We evaluate the operating performance of our business using a variety of operating and other information that includes financial information prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) such as total revenues, operating income (loss), net income (loss), and earnings per share, as well as non-GAAP financial information. 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 performance of individual hotels, groups of hotels, and/or our

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business as a whole. Key performance indicators that we evaluate include average daily occupancy, average daily rate (ADR), revenue per available room (RevPAR), and Total RevPAR, which are more fully discussed under “—Factors Affecting Our Results of Operations—Revenues.” We also evaluate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), Comparable EBITDA, Funds from Operations (FFO), FFO-Fully Diluted, and Comparable FFO as supplemental non-GAAP measures to GAAP performance measures. We provide a more detailed discussion of the non-GAAP financial measures under “—Non-GAAP Financial Measures.”

Outlook

The lodging industry began its recovery in the first quarter of 2010, after one of the worst downturns in its history. Luxury demand, in which our portfolio has the highest concentration of assets, has experienced positive RevPAR growth since that time. RevPAR gains continued into the first quarter of 2015, driven by improved transient and group demand and increases in average room rates.

The first quarter of 2015 represented the 20^th consecutive quarter of RevPAR growth and profit margin expansion for our same store United States portfolio of 15 hotels, which includes 100.0% of the results of operations of the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, including periods prior to our full ownership, and excludes the Four Seasons Resort Scottsdale at Troon North and the Montage Laguna Beach resort. For the quarter ended March 31, 2015, RevPAR for our same store United States portfolio increased 10.5%, driven by a 5.5% increase in ADR and a 3.3 percentage point increase in occupancy, compared to the quarter ended March 31, 2014. Group occupied room nights increased 6.3% while transient occupied room nights increased 3.5%. Transient ADR increased 5.2% compared to the quarter ended March 31, 2014 and group ADR increased 8.6%.

The key indicators of operating performance of our same store United States portfolio discussed above, including RevPAR and ADR, differ from the key indicators of operating performance of our Same Store Assets portfolio (which is defined within "—Factors Affecting Our Results of Operations - Total Portfolio and Same Store Assets Definitions"), which are discussed in the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations." In addition to the Four Seasons Resort Scottsdale at Troon North and the Montage Laguna Beach resort, our Same Store Assets portfolio excludes the results of operations of the Fairmont Scottsdale Princess hotel and the Hotel del Coronado because we did not have full ownership of these properties during all periods presented.

As we assess lodging supply and demand dynamics looking forward, we are optimistic about the long-term prospects for the current recovery continuing, particularly in the product niche and markets in which we own assets. Group bookings pace remains our best forward indicator of demand. For our same store United States portfolio of hotels, definite group room nights for 2015 as of March 31, 2015 are down 0.2% compared to the same time last year and booked at 3.6% higher rates. The decline in definite group room nights year over year is primarily driven by the Westin St. Francis hotel. For the remainder of our same store United States portfolio, excluding the Westin St. Francis hotel, definite group room nights are up 2.3% compared to the same time last year. With the exception of the New York City market and select areas of the Miami market, new supply in the luxury and upper upscale segments remains very well contained in our markets and the current significant gap between hotel trading values and replacement costs bodes favorably for very limited supply growth into the future.

During the lodging downturn we implemented hotel specific contingency plans designed to reduce costs and maximize efficiency at each hotel. These include, but are not limited to, adjusting variable labor, eliminating certain fixed labor, and reducing the hours of room service operations and other food and beverage outlets. We believe the cost structures of our hotels have been fundamentally redesigned to sustain many of the cost reductions, even during periods of rising lodging demand. Therefore, we are optimistic that improving lodging demand will lead to increases in ADR and drive significant profit margin expansion throughout our portfolio.

European Strategy

We previously announced our intention to exit our assets in Europe in an orderly process designed to maximize proceeds. Since that time, we sold the Renaissance Paris Hotel LeParc Trocadero (Renaissance Paris), the InterContinental Prague hotel, our leasehold interest in the Paris Marriott hotel and the Marriott London Grosvenor Square hotel. With the closing of the sale of the Marriott London Grosvenor Square hotel on March 31, 2014, we have effectively completed our exit from Europe as our only remaining European asset is our leasehold interest in the Marriott Hamburg hotel. We continue to opportunistically explore options to exit this investment and still intend to be North American-centric with respect to any new acquisitions.

Factors Affecting Our Results of Operations

Acquisition of Consolidated Properties. On January 29, 2015, we closed on the acquisition of the Montage Laguna Beach resort. The acquisition was funded through the issuance of 7,347,539 shares of SHR's common stock to an affiliate of the

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seller, the assumption of a $150.0 million existing mortgage loan encumbering the property, and a cash payment of approximately $110.3 million, which includes prorations and closing costs.

On December 9, 2014, we closed on the acquisition of the Four Seasons Resort Scottsdale at Troon North for a cash payment of approximately $140.9 million, which includes net working capital.

Acquisition of Interests in Consolidated Properties. On June 11, 2014, we closed on the acquisition of the 63.6% equity interests in the entity that owns the Hotel del Coronado, BSK Del Partners, L.P. (the Hotel del Coronado Venture), that were previously owned by certain affiliates of Blackstone Real Estate Partners VI L.P. for a cash payment of $210.0 million. Additionally, we became fully obligated under the entire $475.0 million mortgage and mezzanine loans outstanding. Effective as of the closing of the transaction, we consolidated the Hotel del Coronado Venture.

On March 31, 2014, we closed on the acquisition of the 50.0% equity interests in the entities that own the Fairmont Scottsdale Princess hotel, Walton/SHR FPH Holdings, L.L.C. and FMT Scottsdale Holdings, L.L.C. (the Fairmont Scottsdale Princess Venture), that were previously owned by an affiliate of Walton Street Capital, L.L.C. for a cash payment of $90.6 million. Additionally, we became fully obligated under the entire $117.0 million mortgage loan previously outstanding. Effective as of the closing of the transaction, we consolidated the Fairmont Scottsdale Princess Venture.

Sale of Interests in Consolidated Properties. On March 31, 2014, we sold our interest in the Marriott London Grosvenor Square hotel for proceeds of approximately $209.4 million. There was an outstanding balance of £67.3 million ($112.2 million) on the mortgage loan secured by the Marriott London Grosvenor Square hotel, which was repaid at the time of closing. We received net proceeds of approximately $97.3 million. The results of operations for this property have been classified as discontinued operations for all periods presented.

On February 28, 2014, we sold our interest in the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel for proceeds of $206.9 million. The results of operations for this property and the adjacent land parcel have been classified as discontinued operations for all periods presented.

Total Portfolio and Same Store Assets Definitions. We define our Total Portfolio as properties that we wholly or partially own or lease and whose operations are included in our consolidated operating results. The Total Portfolio excludes all sold properties and assets held for sale, if any, included in discontinued operations.

We present certain information about our hotel operating results and key performance indicators on a comparable hotel basis, which we refer to as our Same Store analysis. We define our Same Store Assets as those hotels (a) that are owned or leased by us, and whose operations are included in our consolidated operating results and (b) for which we reported operating results throughout the entire reporting periods presented. We present the results of Same Store Assets because we believe that doing so provides useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners. In particular, these measures assist in distinguishing whether increases or decreases in revenues and/or expenses are due to operations of the Same Store Assets or from acquisition or disposition activity.

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The following table summarizes the properties that are included in our Same Store Assets portfolio and Total Portfolio for the reporting periods presented:



	Same Store Assets Portfolio	Total Portfolio
	Three Months Ended March 31,	Three Months Ended March 31,
	2015 and 2014	2015	2014
United States:
Marriott Lincolnshire Resort	X	X	X
Loews Santa Monica Beach Hotel	X	X	X
Hyatt Regency La Jolla	X	X	X
Ritz-Carlton Half Moon Bay	X	X	X
InterContinental Chicago	X	X	X
InterContinental Miami	X	X	X
Fairmont Chicago	X	X	X
Four Seasons Washington, D.C.	X	X	X
Westin St. Francis	X	X	X
Ritz-Carlton Laguna Niguel	X	X	X
Four Seasons Jackson Hole	X	X	X
Four Seasons Silicon Valley	X	X	X
JW Marriott Essex House Hotel	X	X	X
Fairmont Scottsdale Princess (1)		X	X
Hotel del Coronado		X
Four Seasons Resort Scottsdale at Troon North		X
Montage Laguna Beach		X

European:
Marriott Hamburg (2)	X	X	X

(1) The Fairmont Scottsdale Princess hotel is included in our Total Portfolio during the three months ended March 31, 2014 because we owned the property at March 31, 2014; however, there was no impact to operating results or key performance indicators related to the Fairmont Scottsdale Princess hotel during the three months ended March 31, 2014 because the transaction closed on the last day of the reporting period.

(2) We exclude the Marriott Hamburg hotel for purposes of calculating the key performance indicators, such as occupancy, ADR, and RevPAR, which are discussed throughout the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” because we sublease the operations of the hotel and only record lease revenue.

Revenues. Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue for the three months ended March 31, 2015 and 2014 consisted of:



	Total Portfolio % of Total Revenues				Same Store Assets % of Total Revenues
	2015		2014		2015		2014
Revenues:
Rooms	50.1	%	53.0	%	52.5	%	53.0	%
Food and beverage	38.0	%	36.0	%	36.4	%	36.0	%
Other hotel operating revenue	11.6	%	10.4	%	10.6	%	10.4	%
Lease revenue	0.3	%	0.6	%	0.5	%	0.6	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%

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•	Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue.


•	Food and beverage revenue. Occupancy, local catering and banquet events are the major drivers of food and beverage revenue.


•	Other hotel operating revenue. Other hotel operating revenue consists primarily of cancellation fees, spa, telephone, parking, golf course, internet access, space rentals, retail and other guest services and is also driven by occupancy.


•	Lease revenue. We sublease our interest in the Marriott Hamburg hotel to a third party and earn annual base rent plus additional rent contingent on the hotel meeting performance thresholds.

Changes in our revenues are most easily explained by performance indicators that are used in the hotel real estate industry:


•	average daily occupancy;


•	ADR, which stands for average daily rate, is equal to rooms revenue divided by the number of occupied rooms;


•	RevPAR, which stands for revenue per available room, is equal to rooms revenue divided by the number of rooms available; and


•	Total RevPAR, which stands for total revenue per available room, is equal to the sum of rooms revenue, food and beverage revenue and other hotel operating revenue, divided by the number of rooms available.

We generate a significant portion of our revenue from two broad categories of customers, transient and group.

Our transient customers include individual or group business and leisure travelers that occupy fewer than 10 rooms per night. Transient customers for our Total Portfolio accounted for approximately 52.6% and 59.2% of the rooms sold during the three months ended March 31, 2015 and 2014, respectively. We divide our transient customers into the following subcategories:


•	Transient Leisure – This category generates the highest room rates and includes travelers that receive published rates offered to the general public that do not have access to negotiated or discounted rates.


•	Transient Negotiated – This category includes travelers, who are typically associated with companies and organizations that generate high volumes of business, that receive negotiated rates that are lower than the published rates offered to the general public.

Our group customers include groups of 10 or more individuals that occupy 10 or more rooms per night. Group customers for our Total Portfolio accounted for approximately 47.4% and 40.8% of the rooms sold during the three months ended March 31, 2015 and 2014, respectively. We divide our group customers into the following subcategories:


•	Group Association – This category includes group bookings related to national and regional association meetings and conventions.


•	Group Corporate – This category includes group bookings related to corporate business.


•	Group Other – This category generally includes group bookings related to social, military, education, religious, fraternal and youth and amateur sports teams.

Fluctuations in revenues, which, for our domestic hotels, historically have been correlated with changes in the United States gross domestic product (U.S. GDP), are driven largely by general economic and local market conditions, which in turn affect levels of business and leisure travel. Guest demographics also affect our revenues. During 2014 and through the first quarter of 2015, demand at our hotels has been strong, which we believe reflects the relative strength of our primary customer demographics, particularly U.S. based corporations and affluent transient travelers.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases unless the supply growth is offset by an equal or greater increase in demand. One reason we target upper upscale and luxury hotels in select urban and resort markets, including major business centers and leisure destinations, is because they tend to be in locations that have greater supply constraints such as lack of available land, high development costs, long development and entitlement lead times, and brand trade area restrictions that prevent the addition of a certain brand or brands in close proximity. Nevertheless, our hotels are not insulated from competitive pressures and our hotel operators will lower room rates to compete more aggressively for guests in periods when occupancy declines.

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Hotel Operating Expenses. Our hotel operating expenses for the three months ended March 31, 2015 and 2014 consisted of the costs and expenses to provide hotel services, including:



	Total Portfolio % of Total Hotel Operating Expenses				Same Store Assets % of Total Hotel Operating Expenses
	2015		2014		2015		2014
Hotel Operating Expenses:
Rooms	19.7	%	20.6	%	20.6	%	20.6	%
Food and beverage	34.2	%	33.4	%	33.8	%	33.4	%
Other departmental expenses	34.9	%	32.8	%	33.2	%	32.8	%
Management fees	4.7	%	3.6	%	4.2	%	3.6	%
Other hotel expenses	6.5	%	9.6	%	8.2	%	9.6	%
Total hotel operating expenses	100.0	%	100.0	%	100.0	%	100.0	%


•	Rooms expense. Occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.


•	Food and beverage expense. Occupancy, local catering and banquet events are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.


•	Other departmental expenses. Other departmental expenses consist of general and administrative, marketing, repairs and maintenance, utilities and expenses related to earning other operating revenue.


•	Management fees. We pay base and incentive management fees to our hotel operators. Base management fees are computed as a percentage of revenue. Incentive management fees are incurred when operating profits exceed levels prescribed in our management agreements.


•	Other hotel expenses. Other hotel expenses consist primarily of insurance costs and property taxes.

Salaries, wages and related benefits are included within the categories of hotel operating expenses described above and represented approximately 51.2% and 52.1% of the Total Portfolio total hotel operating expenses for the three months ended March 31, 2015 and 2014, respectively.

Most categories of variable operating expenses, such as utilities and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses while increases in RevPAR attributable to increases in ADR typically only result in increases in limited categories of operating costs and expenses, such as management fees charged by our operators, which are based on hotel revenues. Therefore, changes in ADR have a more significant impact on operating margins.

Lease Expense. As a result of the sale-leaseback transaction of the Marriott Hamburg hotel, we record lease expense in our condensed consolidated statements of operations. In conjunction with the sale-leaseback transaction, we also recorded a deferred gain, which is amortized as an offset to lease expense.

Corporate Expenses. Corporate expenses include payroll and related costs, professional fees, travel expenses, office rent and transaction costs.

Recent Events. In addition to the changes to the consolidated hotel properties and unconsolidated affiliates noted above, we expect that the following events will cause our future results of operations to differ from our historical performance:

Hotel Acquisition. On May 1, 2015, we signed a purchase and sale agreement pursuant to which we agreed to acquire the Four Seasons Hotel Austin for $197.0 million. The acquisition, subject to certain closing conditions, is expected to close in the second quarter of 2015.

Sale of Hotel Interest in Consolidated Property. On April 21, 2015, we, along with our joint venture partner, entered into an agreement to sell the Hyatt Regency La Jolla hotel for $118.0 million. The transaction, which is subject to certain closing conditions, is expected to close in the second quarter of 2015. The mortgage loan secured by the Hyatt Regency La Jolla hotel will be repaid when the transaction closes.

Mortgage Loan Agreements. On April 9, 2015, we repaid the entire balance outstanding of the mortgage loan secured by the Fairmont Scottsdale Princess hotel.

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On December 30, 2014, a joint venture formed between us and affiliates of KSL Capital Partners, LLC (the Essex House Hotel Venture) refinanced the mortgage loan secured by the JW Marriott Essex House Hotel and entered into a new $225.0 million limited recourse loan agreement. The initial mortgage loan maturity was extended to January 2018 with two, one-year extension options, subject to certain conditions. The interest rate decreased to an annual rate of one-month London InterBank Offered Rate (LIBOR) plus 2.95% from the previous annual rate of LIBOR plus 4.00%, subject to a 0.75% LIBOR floor.

On July 7, 2014, we paid off the outstanding balance of an $85.0 million mortgage loan secured by the InterContinental Miami hotel. On August 29, 2014, we entered into a new $115.0 million mortgage loan secured by the InterContinental Miami hotel. The interest rate changed to an annual fixed rate of 3.99% from the previous annual rate of one-month LIBOR plus 3.50%. The loan has a maturity date of September 6, 2024.

On June 30, 2014, we refinanced the loan secured by the Four Seasons Washington, D.C. hotel. The principal was reduced to $120.0 million and the interest rate was reduced to one-month LIBOR plus 2.25% from one-month LIBOR plus 3.15%. The loan has an initial maturity date of June 30, 2017 with two, one-year extension options, subject to certain conditions.

On May 29, 2014, we refinanced the loan secured by the Loews Santa Monica Beach Hotel. The principal was increased to $120.0 million and the interest rate was reduced to one-month LIBOR plus 2.55% from one-month LIBOR plus 3.85%. The loan has an initial maturity date of May 29, 2017 with four, one-year extension options, subject to certain conditions.

Bank Credit Facility. On April 25, 2014, we entered into a $300.0 million secured bank credit facility, which also includes a $100.0 million accordion feature. This new facility replaced the $300.0 million secured bank credit facility that was set to expire in June 2015 (assuming all extension options were exercised). The facility's interest rate is based upon a leverage-based pricing grid ranging from London Interbank Offered Rate (LIBOR) plus 175 basis points to LIBOR plus 250 basis points. The facility expires on April 25, 2018, with a one-year extension available, subject to certain conditions. See "—Liquidity and Capital Resources—Bank Credit Facility."

Preferred Stock Redemptions. On January 5, 2015, we redeemed all of the outstanding 3,615,375 shares of our 8.25% Series B Cumulative Redeemable Preferred Stock (Series B Preferred Stock). The shares of the Series B Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends from January 1, 2015 up to and including January 5, 2015 in the amount of $0.028646 per share, for a total redemption cost of approximately $90.5 million. Following the redemption, dividends on the Series B Preferred Stock ceased to accrue.

On July 3, 2014, we redeemed all of the outstanding 3,827,727 shares of our 8.25% Series C Cumulative Redeemable Preferred Stock (Series C Preferred Stock). The shares of the Series C Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends from July 1, 2014 up to and including July 3, 2014 in the amount of $0.01719 per share, for a total redemption cost of approximately $95.8 million. Following the redemption, dividends on the Series C Preferred Stock ceased to accrue.

On April 3, 2014, we redeemed all of the outstanding 4,148,141 shares of our 8.50% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock). The shares of the Series A Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to and including April 3, 2014 in the amount of $0.54896 per share, for a total redemption cost of approximately $106.0 million. Following the redemption, dividends on the Series A Preferred Stock ceased to accrue.

Common Stock. In December 2014, we completed an underwritten public offering of common stock by issuing 20.0 million shares at a price of $12.57 per share. After transaction expenses, we raised net proceeds of approximately $250.9 million. These proceeds were used to fund the acquisition of the Four Seasons Resort Scottsdale at Troon North, to redeem all of the issued and outstanding shares of our Series B Preferred Stock on January 5, 2015, and for general corporate purposes, including, without limitation, reducing debt and funding capital expenditures and working capital.

In June 2014, we completed an underwritten public offering of common stock by issuing 41.4 million shares at a public offering price of $10.50 per share. After underwriting discounts and commissions and transaction expenses, we raised net proceeds of approximately $416.7 million. These proceeds were used to fund the acquisition of the remaining equity interest in the Hotel del Coronado, to redeem all of the issued and outstanding shares of our Series C Preferred Stock, and for general corporate purposes, including, without limitation, reducing our borrowings under our bank credit facility, repaying other debt and funding capital expenditures and working capital.

Interest Rate Swap Terminations. On April 21, 2014, we paid $22.7 million, including accrued and unpaid interest, to terminate all of our remaining interest rate swaps with a combined notional amount of $400.0 million.

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Comparison of Three Months Ended March 31, 2015 to Three Months Ended March 31, 2014

Operating Results

The following table presents the operating results for the three months ended March 31, 2015 and 2014, including the amount and percentage change in these results between the two periods of our Total Portfolio and Same Store Assets (in thousands, except operating data).



	Total Portfolio											Same Store Assets
	2015			2014			Change ($) Favorable/ (Unfavorable)			Change (%) Favorable/ (Unfavorable)		2015			2014			Change ($) Favorable/ (Unfavorable)			Change (%) Favorable/ (Unfavorable)
Revenues:
Rooms	$	162,864		$	103,100		$	59,764		58.0	%	$	112,828		$	103,100		$	9,728		9.4	%
Food and beverage	123,469			70,017			53,452			76.3	%	78,230			70,017			8,213			11.7	%
Other hotel operating revenue	37,907			20,239			17,668			87.3	%	22,710			20,238			2,472			12.2	%
Lease revenue	1,031			1,299			(268		)	(20.6	)%	1,031			1,299			(268		)	(20.6	)%
Total revenues	325,271			194,655			130,616			67.1	%	214,799			194,654			20,145			10.3	%
Operating Costs and Expenses:
Hotel operating expenses	242,715			163,345			(79,370		)	(48.6	)%	171,721			163,295			(8,426		)	(5.2	)%
Lease expense	1,034			1,258			224			17.8	%	1,034			1,258			224			17.8	%
Depreciation and amortization	37,664			22,205			(15,459		)	(69.6	)%	22,615			22,082			(533		)	(2.4	)%
Corporate expenses	8,268			7,193			(1,075		)	(14.9	)%	—			—			—			—	%
Total operating costs and expenses	289,681			194,001			(95,680		)	(49.3	)%	195,370			186,635			(8,735		)	(4.7	)%
Operating income	35,590			654			34,936			5,341.9	%	$	19,429		$	8,019		$	11,410		142.3	%
Interest expense, net	(22,684		)	(18,247		)	(4,437		)	(24.3	)%
Equity in earnings of unconsolidated affiliates	—			4,445			(4,445		)	(100.0	)%
Foreign currency exchange (loss) gain	(116		)	2			(118		)	(5,900.0	)%
Gain on consolidation of affiliates	—			78,117			(78,117		)	(100.0	)%
Other (expenses) income, net	(157		)	423			(580		)	(137.1	)%
Income before income taxes and discontinued operations	12,633			65,394			(52,761		)	(80.7	)%
Income tax expense	(219		)	(39		)	(180		)	(461.5	)%
Income from continuing operations	12,414			65,355			(52,941		)	(81.0	)%
Income from discontinued operations, net of tax	—			158,435			(158,435		)	(100.0	)%
Net income	12,414			223,790			(211,376		)	(94.5	)%
Net income attributable to the noncontrolling interests in SHR’s operating partnership	(37		)	(849		)	812			95.6	%
Net loss attributable to the noncontrolling interests in consolidated affiliates	3,434			4,041			(607		)	(15.0	)%
Net income attributable to SHR	$	15,811		$	226,982		$	(211,171	)	(93.0	)%
Reconciliation of Same Store Assets Operating Income to Total Portfolio Operating Income:
Same Store Assets operating income												$	19,429		$	8,019		$	11,410		142.3	%
Corporate expenses												(8,268		)	(7,193		)	(1,075		)	(14.9	)%
Corporate depreciation and amortization												(128		)	(123		)	(5		)	(4.1	)%
Non-Same Store Assets operating income (loss)												24,557			(49		)	24,606			50,216.3	%
Total Portfolio operating income												$	35,590		$	654		$	34,936		5,341.9	%
Portfolio Data:
Number of hotels	18			15								14			14
Number of rooms	8,325			7,105								6,459			6,456

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Rooms. Our Same Store Assets contributed to a $9.7 million, or 9.4%, increase in rooms revenue for the three months ended March 31, 2015 from the three months ended March 31, 2014. The components of RevPAR from our Same Store Assets for the three months ended March 31, 2015 and 2014 are summarized as follows:



	Three Months Ended March 31,
	2015			2014			Change (%) Favorable/ (Unfavorable)
Occupancy	70.7		%	68.2		%	3.7	%
ADR	$	286.96		$	271.92		5.5	%
RevPAR	$	202.79		$	185.40		9.4	%

The increase in RevPAR for the Same Store Assets resulted from a 5.5% increase in ADR and a 2.5 percentage-point increase in occupancy. Rooms revenue increased primarily due to growth in both transient and group occupancy, which helped drive 4.5% and 8.0% increases in transient and group ADR, respectively, for our Same Store Assets for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014. Significant contributors to growth in rooms revenue at our Same Store Assets include: the Westin St. Francis hotel, which had increased transient demand over the prior year and strong citywide and self-contained group demand that helped drive higher transient and group ADR; the Hyatt Regency La Jolla hotel, which had a significant increase in both transient and group occupancy due to the completion of a renovation that caused significant displacement in the the prior year; and the Ritz-Carlton Laguna Niguel and Four Seasons Silicon Valley hotels, which both had strong group demand that helped drive higher transient and group ADR. The increase in our Same Store Assets rooms revenue was offset by declines in rooms revenue at the InterContinental Chicago hotel and the Loews Santa Monica Beach Hotel due to renovation displacement at the hotels. The JW Marriott Essex House Hotel, which has been impacted by additional hotel supply in the New York City market that is putting downward pressure on demand and rates, also had declines in rooms revenue.

For our Total Portfolio, rooms revenue increased $59.8 million, or 58.0%, for the three months ended March 31, 2015 from the three months ended March 31, 2014. In addition to the increase in the rooms revenue at our Same Store Assets, the increase in our Total Portfolio rooms revenue includes $50.1 million of additional rooms revenue from hotel acquisitions.

The components of RevPAR from our Total Portfolio for the three months ended March 31, 2015 and 2014 are summarized as follows:



	Three Months Ended March 31,
	2015			2014			Change (%) Favorable/ (Unfavorable)
Occupancy	72.7		%	68.2		%	6.6	%
ADR	$	312.37		$	271.92		14.9	%
RevPAR	$	227.07		$	185.40		22.5	%

Food and Beverage. Our Same Store Assets had an $8.2 million, or 11.7%, increase in food and beverage revenue for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014, primarily due to an increase in banquet and catering revenues from strong group spend at many of our Same Store Assets, including significant group spend at the Westin St. Francis and Ritz-Carlton Laguna Niguel hotels. The InterContinental Miami hotel had an increase in outlet revenue due to strong volume at its Toro Toro restaurant. An increase in both transient and group occupancy after renovation displacement in the prior year at the Hyatt Regency La Jolla hotel positively impacted outlet transient spend and group banquet and catering spending. For our Total Portfolio, food and beverage revenue increased $53.5 million, or 76.3%, when comparing the three months ended March 31, 2015 to the three months ended March 31, 2014. In addition to the increase in food and beverage revenue at our Same Store Assets, the increase in our Total Portfolio food and beverage revenue includes $45.2 million of additional food and beverage revenue from hotel acquisitions.

Other Hotel Operating Revenue. Our Same Store Assets had a $2.5 million, or 12.2%, increase in other hotel operating revenue for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014, primarily due to an increase in cancellation and attrition fees, specifically at the InterContinental Miami and Ritz-Carlton Laguna Niguel hotels. For our Total Portfolio, other hotel operating revenue increased $17.7 million, or 87.3%, when comparing the three months ended March 31, 2015 to the three months ended March 31, 2014, which, in addition to the increase in other hotel operating revenue from our Same Store Assets, includes $15.2 million of additional other hotel operating revenue from hotel acquisitions.

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Hotel Operating Expenses. The following table presents the components of our hotel operating expenses for the three months ended March 31, 2015 and 2014, including the amount and percentage changes in these expenses between the two periods of our Total Portfolio and Same Store Assets (in thousands):



	Total Portfolio									Same Store Assets
	2015		2014		Change ($) Favorable/ (Unfavorable)			Change (%) Favorable/ (Unfavorable)		2015		2014		Change ($) Favorable/ (Unfavorable)			Change (%) Favorable/ (Unfavorable)
Hotel operating expenses:
Rooms	$	47,865	$	33,707	$	(14,158	)	(42.0	)%	$	35,202	$	33,707	$	(1,495	)	(4.4	)%
Food and beverage	83,074		54,603		(28,471		)	(52.1	)%	58,117		54,603		(3,514		)	(6.4	)%
Other departmental expenses	84,724		53,579		(31,145		)	(58.1	)%	57,051		53,579		(3,472		)	(6.5	)%
Management fees	11,439		5,778		(5,661		)	(98.0	)%	7,221		5,778		(1,443		)	(25.0	)%
Other hotel expenses	15,613		15,678		65			0.4	%	14,130		15,628		1,498			9.6	%
Total hotel operating expenses	$	242,715	$	163,345	$	(79,370	)	(48.6	)%	$	171,721	$	163,295	$	(8,426	)	(5.2	)%

Hotel operating expenses for our Same Store Assets increased by $8.4 million, or 5.2%, for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014. Increases in occupancy and higher food and beverage volume resulted in increases in payroll and related costs of $5.0 million, specifically in the food and beverage department, increases in food and beverage costs of $1.0 million, and increases in travel agent commissions of $0.6 million. Increases in occupancy and ADR and higher food and beverage volume also contributed to a $0.2 million increase in credit card commissions. Management fees increased by $1.4 million due to higher gross revenues and improved operating profit at many of our Same Store Assets. The increase in hotel operating expenses was offset by a $1.7 million reduction in real estate taxes, which primarily relates to a real estate tax refund received by the Westin St. Francis hotel during the three months ended March 31, 2015.

For our Total Portfolio, hotel operating expenses increased by $79.4 million, or 48.6%, for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014, due to the increase in our Same Store Assets as well as $71.0 million of additional hotel operating expenses related to hotel acquisitions.

Depreciation and Amortization. For our Total Portfolio, depreciation and amortization increased $15.5 million, or 69.6%, for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014, primarily due to $14.9 million additional depreciation and amortization expense from hotel acquisitions.

Corporate Expenses. Corporate expenses increased $1.1 million, or 14.9%, for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014. Corporate expenses consist primarily of payroll and related costs, professional fees, travel expenses, office rent, and transaction costs. The increase in corporate expenses is primarily due to acquisition costs related to the Montage Laguna Beach resort and higher payroll costs.

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Interest Expense, Net. There was a $4.4 million, or 24.3%, increase in interest expense, net for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014. The components of interest expense, net for the three months ended March 31, 2015 and 2014, are summarized as follows (in thousands):



	Three Months Ended March 31,
	2015			2014			Change ($) Favorable/ (Unfavorable)			Change (%) Favorable/ (Unfavorable)
Mortgages	$	(18,016	)	$	(17,993	)	$	(23	)	(0.1	)%
Bank credit facility	(224		)	(857		)	633			73.9	%
Amortization of deferred financing costs	(895		)	(1,291		)	396			30.7	%
Amortization of debt discount	(650		)	—			(650		)	(100.0	)%
Amortization of interest rate swap costs	(3,113		)	(655		)	(2,458		)	(375.3	)%
Mark to market of certain interest rate swaps	—			2,294			(2,294		)	(100.0	)%
Interest income	101			27			74			274.1	%
Capitalized interest	113			228			(115		)	(50.4	)%
Total interest expense, net	$	(22,684	)	$	(18,247	)	$	(4,437	)	(24.3	)%

The change in interest expense, net, is primarily due to the following:

•

an increase in mortgage interest due to the consolidation of the mortgage loans secured by the Fairmont Scottsdale Princess hotel and the Hotel del Coronado and the assumption of the mortgage loan secured by the Montage Laguna Beach resort, offset by lower annual interest rates resulting from refinancing activity in 2014 and the elimination of cash swap settlement payments due to the termination of all of our remaining interest rate swaps in April 2014;


•	a decrease in bank credit facility interest due to no borrowings under the bank credit facility during the three months ended March 31, 2015 and only incurring an unused commitment fee;


•	an increase in amortization of debt discount related to the Montage Laguna Beach resort and the Fairmont Scottsdale Princess hotel; and


•	an increase in interest expense related to the amortization and mark to market of interest rate swaps, which was impacted by the swap terminations that increased amortization of amounts previously recorded in accumulated other comprehensive loss but eliminated mark to market gains and losses.

The weighted average debt outstanding for the three months ended March 31, 2015 and 2014 amounted to $1.8 billion and $1.1 billion, respectively. At March 31, 2015, approximately 39.1% of our total debt had fixed interest rates.

Equity in Earnings of Unconsolidated Affiliates. There was no activity related to unconsolidated affiliates for the three months ended March 31, 2015. The change in equity in earnings of unconsolidated affiliates is due to the acquisitions of the remaining equity interests in the Fairmont Scottsdale Princess Venture and the Hotel del Coronado Venture in 2014. Subsequent to each acquisition, the operating results of the Fairmont Scottsdale Princess Venture and the Hotel del Coronado were consolidated and no longer accounted for using the equity method of accounting.

The following table presents certain components included in the calculation of equity in earnings resulting from our unconsolidated affiliates for the three months ended March 31, 2014 (in thousands):



	Fairmont Scottsdale Princess Venture (1)		Hotel del Coronado Venture (2)			Unconsolidated Affiliates in Mexico (3)			Total
Equity in earnings (losses)	$	4,846	$	(280	)	$	(121	)	$	4,445
Depreciation and amortization	1,551		1,955			—			3,506
Interest expense	168		1,900			1			2,069
Income tax benefit	—		(230		)	(55		)	(285		)

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(1)	The Fairmont Scottsdale Princess Venture is FMT Scottsdale Holdings, L.L.C. and Walton/SHR FPH Holdings, L.L.C., the owner of the Fairmont Scottsdale Princess hotel. The Fairmont Scottsdale Princess Venture became wholly owned by us in March 2014.


(2)	The Hotel del Coronado Venture is BSK Del Partners, L.P., the owner of the Hotel del Coronado. The Hotel del Coronado Venture became wholly owned by us in June 2014.


(3)	These affiliates include the Four Seasons Residence Club Punta Mita (Four Seasons RCPM) and the Lot H5 Venture.

Gain on Consolidation of Affiliates. On March 31, 2014, we acquired the 50.0% interest in the Fairmont Scottsdale Princess Venture that was not previously owned by us and recorded a gain on consolidation of affiliate of $78.1 million for the three months ended March 31, 2014.

Other (Expenses) Income, Net. Other (expenses) income, net includes asset management fee income, non-income related state, local and franchise taxes, as well as miscellaneous income and expenses. The $0.6 million, or 137.1%, change in other (expenses) income, net for the three months ended March 31, 2015, when compared to the three months ended March 31, 2014, was primarily due to a reduction in asset management fees we used to receive related to the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which were eliminated when we consolidated the properties in 2014.

Income from Discontinued Operations, Net of Tax. The income from discontinued operations, net of tax, for the three months ended March 31, 2014 is primarily due to the gains recognized on the sale of the Marriott London Grosvenor Square hotel and the Four Seasons Punta Mita Resort during the three months ended March 31, 2014.

Net Income Attributable to the Noncontrolling Interests in SHR's Operating Partnership. We record net loss or income attributable to noncontrolling interests in SHR's operating partnership based on the percentage of SH Funding we do not own. The $0.8 million decrease in net income attributable to the noncontrolling interests in SHR's partnership is due to lower net income related to gains recognized for the sales of assets and consolidation of affiliates during the three months ended March 31, 2014 that did not occur during the three months ended March 31, 2015.

Net Loss Attributable to the Noncontrolling Interests in Consolidated Affiliates. We record net loss or income attributable to noncontrolling interests in consolidated affiliates for the non-ownership interests in hotels that are partially owned by us. The decrease in net loss attributable to noncontrolling interests in consolidated affiliates is due to improved operating results at the Hyatt Regency La Jolla hotel, which was negatively impacted by renovation displacement in the prior year.

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Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures, including:


•	interest expense and scheduled principal payments on outstanding indebtedness; and


•	recurring maintenance and capital expenditures necessary to maintain our properties properly.

Capital expenditures for the three months ended March 31, 2015 and 2014 amounted to $20.5 million and $20.9 million, respectively. Included in the March 31, 2015 and 2014 amounts were $0.1 million and $0.2 million of capitalized interest, respectively. For the remainder of the year ending December 31, 2015, we expect to spend approximately $60.0 million on hotel property and equipment replacement projects in accordance with hotel management agreements and approximately $35.0 million to $45.0 million on owner-funded projects, subject to adjustments based on continued evaluation. Major expected capital expenditures include guestroom renovations at the Loews Santa Monica Beach Hotel and the Four Seasons Washington, D.C. hotel as well as a 100-room expansion at the Fairmont Scottsdale Princess hotel.

Historically, we have satisfied our short-term liquidity requirements through our existing working capital, cash provided by operations, and our bank credit facility. As of March 31, 2015, we had approximately $145.9 million of available corporate level cash, not including restricted cash and cash currently held by the hotels. The corporate liquidity will be used for potential acquisition opportunities, capital projects, continued reduction in debt, and other general corporate purposes. Moreover, we anticipate our $300.0 million bank credit facility agreement, which includes a $100.0 million accordion feature, will continue to provide sufficient borrowing capacity to meet our short-term liquidity requirements during the next twelve months (see – “Bank Credit Facility” below). As of March 31, 2015, we were in compliance with our financial and other restrictive covenants contained in the bank credit facility agreement, and we had no outstanding borrowings and no letters of credit outstanding on our $300.0 million bank credit facility.

Our available capacity under our bank credit facility and compliance with financial covenants in future periods will depend substantially on the financial results of our hotels, and in particular, the operating results and gross asset values of the borrowing base assets, which include the Four Seasons Jackson Hole hotel, the Four Seasons Silicon Valley hotel, the Marriott Lincolnshire Resort, the Ritz-Carlton Half Moon Bay hotel, and the Ritz-Carlton Laguna Niguel hotel. As of May 1, 2015, the outstanding borrowings and letters of credit under the bank credit facility in the aggregate were $0.

On April 21, 2015, we, along with our joint venture partner, entered into an agreement to sell the Hyatt Regency La Jolla hotel for $118.0 million. The mortgage loan secured by the Hyatt Regency La Jolla hotel will be repaid when the transaction closes. The transaction, which is anticipated to close in the second quarter of 2015, is expected to provide additional liquidity. On May 1, 2015, we signed a purchase and sale agreement pursuant to which we agreed to acquire the Four Seasons Hotel Austin for $197.0 million. The acquisition, subject to certain closing conditions, is expected to close in the second quarter of 2015. We intend to initially fund the acquisition with existing cash balances and borrowings under our $300.0 million bank credit facility.

We believe that the following measures we have taken should be sufficient to satisfy our liquidity needs for the next 12 months.

In February 2015, we entered into a stock distribution agreement whereby we may sell, from time to time, through certain agents, shares of SHR's common stock, having an aggregate offering price of up to $250.0 million by means of ordinary brokers' transactions at market prices or as otherwise agreed to between us and the agents.

In December 2014, we completed an underwritten public offering of common stock and raised net proceeds of approximately $250.9 million. We used a portion of the proceeds to fund the acquisition of the Four Seasons Resort Scottsdale at Troon North and to redeem all of the issued and outstanding shares of our Series B Preferred Stock in January 2015, which eliminates future preferred dividend distributions related to these shares, and for general corporate purposes, including, without limitation, repaying other debt and funding capital expenditures and working capital. In June 2014, we completed an underwritten public offering of common stock and raised net proceeds of approximately $416.6 million. We used the proceeds to fund the acquisition of the remaining 63.6% interest in the Hotel del Coronado Venture not previously owned by us, to redeem all of the issued and outstanding shares of our Series C Preferred Stock, which eliminates future preferred dividend distributions related to these shares, and for general corporate purposes, including, without limitation, reducing our borrowings under our bank credit facility, repaying other debt and funding capital expenditures and working capital.

In December 2014, the Essex House Hotel Venture entered into a new $225.0 million mortgage loan secured by the JW Marriott Essex House Hotel, whereby we reduced the interest rate spread and extended the maturity of the mortgage loan to 2020, assuming extension options are exercised. In August 2014, we entered into a new $115.0 million mortgage loan secured by the InterContinental Miami hotel, whereby we were able to obtain a favorable fixed annual rate and extend the maturity of

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the mortgage loan to 2024. In May and June 2014, we refinanced the mortgage loans secured by the Loews Santa Monica Beach Hotel and the Four Seasons Washington, D.C. hotel whereby we reduced the interest rate spreads on both loans and staggered and extended maturities to 2021 and 2019, respectively, assuming extension options are exercised (see – “Mortgages and other debt payable” below).

In March 2014, we sold the Marriott London Grosvenor Square hotel for proceeds of approximately $209.4 million, which included amounts used to repay the outstanding mortgage loan balance, and used the proceeds to acquire the remaining 50.0% equity interest in the Fairmont Scottsdale Princess Venture not previously owned by us.

In February 2014, we sold our interest in the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel for proceeds of approximately $206.9 million. We used the proceeds to redeem all of the issued and outstanding shares of our Series A Preferred Stock, which eliminates future preferred dividend distributions related to these shares, and repay indebtedness under the bank credit facility.

In November 2008, our board of directors elected to suspend the quarterly dividend to holders of shares of our common stock beginning in the fourth quarter of 2008. Our board of directors will continue to evaluate the dividend policy in light of the REIT provisions of the Tax Code, restrictions under our bank credit facility (if applicable), the overall economic climate and our improving financial results.

Bank credit facility. On April 25, 2014, we entered into a $300.0 million secured bank credit facility agreement. This facility replaced the $300.0 million secured bank credit facility that was set to expire in June 2015 (assuming all extension options were exercised). The agreement contains an accordion feature, which provides the option to increase the borrowing capacity up to $400.0 million, subject to the satisfaction of customary conditions set forth in the agreement. The following summarizes key financial terms and conditions of the bank credit facility:


•	interest on the facility is payable monthly at LIBOR plus an applicable margin in the case of each LIBOR loan and base-rate plus an applicable margin in the case of each base rate loan whereby the applicable margins are dependent on the ratio of consolidated debt to gross asset value (Leverage Ratio) as follows:



Leverage Ratio	Applicable Margin of each LIBOR Loan (% per annum) (a)		Applicable Margin of each Base Rate Loan (% per annum) (a)
Greater than or equal to 60%	2.50	%	1.50	%
Greater than or equal to 55% but less than 60%	2.25	%	1.25	%
Greater than or equal to 50% but less than 55%	2.10	%	1.10	%
Greater than or equal to 45% but less than 50%	1.95	%	0.95	%
Less than 45%	1.75	%	0.75	%

(a) The applicable margins were increased, in each case, by 25 basis points for the period from April 25, 2014 through March 31, 2015.


•	an unused commitment fee is payable monthly based on the unused revolver balance at a rate of 0.30% per annum in the event that the bank credit facility usage is less than 50% and a rate of 0.20% per annum in the event that the bank credit facility usage is equal to or greater than 50%;


•	maturity date of April 25, 2018, with the right to extend the maturity date for an additional one-year period with an extension fee equal to 25 basis points, subject to certain conditions;

•

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•	minimum corporate fixed charge coverage of 1.40 times during 2015 and 1.50 times thereafter;


•	maximum corporate leverage of 60%;


•	minimum tangible net worth of approximately $1.4 billion, excluding goodwill and currency translation adjustments, plus an amount equal to 75% of the net proceeds of any new issuances of our common stock, which is not used to reduce indebtedness or used in a transaction or series of transactions to redeem outstanding capital stock;


•	restrictions on SHR and SH Funding’s ability to pay dividends. Such restrictions include:


•	prohibitions on SHR and SH Funding's ability to pay any dividends unless certain ratios and other conditions are met; and


•	prohibitions on SHR and SH Funding’s ability to issue dividends in cash or in kind at any time an event of default shall have occurred.

Other terms and conditions exist including a prohibition on mortgaging the borrowing base properties, provisions to release assets from the borrowing base and limitations on our ability to incur costs for discretionary capital programs and to redeem, retire or repurchase common stock. Under the agreement, SH Funding has a letter of credit sub-facility of $75.0 million, which is secured by the $300.0 million bank credit facility. Letters of credit reduce the borrowing capacity under the bank credit facility.

Mortgages payable, net of discount. The following table summarizes our outstanding debt and scheduled maturities, including extension options, related to mortgages payable, net of discount as of March 31, 2015 (in thousands):



	Balance as of March 31, 2015			Remainder of 2015		2016		2017		2018		2019		Thereafter
Mortgages payable
Hyatt Regency La Jolla(1)	$	89,239		$	—	$	—	$	89,239	$	—	$	—	$	—
Fairmont Scottsdale Princess, LIBOR plus 0.36%(2)	117,000			117,000		—		—		—		—		—
Hotel del Coronado, LIBOR plus 3.65%	475,000			—		—		—		475,000		—		—
Four Seasons Washington, D.C., LIBOR plus 2.25%	120,000			—		—		—		—		120,000		—
Fairmont Chicago, 6.09%	93,124			—		—		93,124		—		—		—
Westin St. Francis, 6.09%	209,588			—		—		209,588		—		—		—
Loews Santa Monica Beach Hotel, LIBOR plus 2.55%	120,000			—		—		—		—		—		120,000
JW Marriott Essex House Hotel, LIBOR plus 2.95%	225,000			—		—		—		—		—		225,000
InterContinental Miami, 3.99%	115,000			—		—		—		—		—		115,000
Montage Laguna Beach, 3.90%	150,000			—		—		—		—		—		150,000
InterContinental Chicago, 5.61%	142,085			1,439		2,031		2,172		2,299		2,433		131,711
Total mortgages payable(3)	1,856,036			118,439		2,031		394,123		477,299		122,433		741,711
Unamortized discount	(1,022		)	—		—		—		—		—		—
Total mortgages payable, net of discount	$	1,855,014		$	118,439	$	2,031	$	394,123	$	477,299	$	122,433	$	741,711


(1)	Interest on $72.0 million of the total principal amount is paid monthly at an annual rate of LIBOR plus 4.00%, subject to a 0.50% LIBOR floor, and interest on $17.2 million of the total principal amount is paid monthly at an annual fixed rate of 10.00%. On April

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21, 2015, we entered into an agreement to sell the property that secures this mortgage loan. The mortgage loan secured by this property will be repaid when the transaction closes. See “Item 1. Financial Statements -16. Subsequent Events.”


(2)	On April 9, 2015, we repaid the mortgage loan secured by this property. See “Item 1. Financial Statements -16. Subsequent Events.”


(3)	All of these loan agreements require maintenance of financial covenants, all of which we were in compliance with at March 31, 2015.

Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, debt refinancings, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions of properties. In addition, we may use cash to buy back outstanding debt or common securities from time to time when market conditions are favorable through open market purchases, privately negotiated transactions, or a tender offer, although the terms of our bank credit facility may impose certain conditions or restrictions in connection therewith.

Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, sales of properties, long-term property mortgage indebtedness, bank credit facilities, issuance of senior unsecured debt instruments and through the issuance of additional equity securities. Credit markets have improved and access to mortgage and corporate level debt is more readily available. However, the capital markets can be volatile and there are no guarantees our maturing debt will be readily refinanced. Our ability to raise funds through the issuance of equity securities is dependent upon, among other things, general market conditions for both REITs in general and us specifically, including market perceptions regarding the Company. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but equity and debt financing may not be consistently available to us on terms that are attractive or at all.

Equity Securities

As of March 31, 2015, we had 2,902,147 RSUs and performance-based RSUs outstanding, of which 1,115,209 were vested. The following table presents the changes in our issued and outstanding shares of common stock and SH Funding operating partnership units (OP Units) from December 31, 2014 to March 31, 2015 (excluding RSUs):



	Shares of Common Stock	OP Units Represented by Noncontrolling Interests	Total
Outstanding at December 31, 2014	267,435,799	793,618	268,229,417
RSUs and performance-based RSUs redeemed for shares of our common stock	530,166	—	530,166
Common stock issued	7,347,539	—	7,347,539
Outstanding at March 31, 2015	275,313,504	793,618	276,107,122

Cash Flows

Operating Activities. Net cash provided by operating activities was $51.3 million for the three months ended March 31, 2015 compared to net cash used in operating activities of $15.9 million for the three months ended March 31, 2014. Cash flows from operations increased from 2014 to 2015 primarily due to increased operating income at many of our Same Store Assets, operating income generated by newly acquired hotels, a reduction in income taxes paid, which was significantly higher in the prior year due to income taxes paid attributable to the sale of the Four Seasons Punta Mita Resort and adjacent La Solana land parcel, and a reduction in cash interest paid.

Investing Activities. Net cash used in investing activities was $130.2 million for the three months ended March 31, 2015 and net cash provided by investing activities was $300.3 million for the three months ended March 31, 2014. The significant investing activities during these periods are summarized below:


•	We partially funded the acquisition of the Montage Laguna Beach resort with a cash payment of $110.3 million during the three months ended March 31, 2015. We acquired the 50.0% equity interest in the Fairmont Scottsdale Princess Venture not previously owned by us for a cash payment of $90.6 million during the three months ended March 31, 2014.


•	We sold the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel for sales proceeds of $206.9 million, of which $203.2 million was received during the three months ended March 31, 2014, and we sold the

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Marriott London Grosvenor Square hotel for sales proceeds of $209.4 million, of which $208.3 million was received during the three months ended March 31, 2014. The proceeds received from the sale of the Marriott London Grosvenor Square hotel includes amounts used to repay the related outstanding mortgage loan balance.


•	We received cash from unconsolidated affiliates of $2.2 million during the three months ended March 31, 2014.


•	We sold unrestricted cash of $15.6 million through dispositions of the Four Seasons Punta Mita Resort and the Marriott London Grosvenor Square hotel during the three months ended March 31, 2014.


•	We acquired unrestricted cash of $7.6 million through our acquisition of the Montage Laguna Beach resort during the three months ended March 31, 2015 and acquired unrestricted cash of $8.7 million through our acquisition of the 50.0% equity interests in the Fairmont Scottsdale Princess Venture during the three months ended March 31, 2014.


•	We disbursed $20.5 million and $20.9 million during the three months ended March 31, 2015 and 2014, respectively, for capital expenditures primarily related to room renovations.


•	Restricted cash and cash equivalents increased by $7.0 million during the three months ended March 31, 2015 and decreased by $5.0 million during the three months ended March 31, 2014.

Financing Activities. Net cash used in financing activities was $123.3 million for the three months ended March 31, 2015 and net cash used in financing activities was $200.1 million for the three months ended March 31, 2014. The significant financing activities during these periods are summarized below:


•	We paid approximately $90.4 million to redeem all of the issued and outstanding shares of our Series B Preferred Stock during the three months ended March 31, 2015.


•	We distributed $0.1 million and $3.8 million to our preferred shareholders during the three months ended March 31, 2015 and 2014, respectively.


•	We made net payments of $80.0 million on our bank credit facility during the three months ended March 31, 2014.


•	We made net payments of $0.4 million and $117.7 million on mortgages during the three months ended March 31, 2015 and 2014, respectively.


•	We paid distributions of $29.4 million to holders of noncontrolling interests in consolidated affiliates from the Essex House Hotel Venture during the three months ended March 31, 2015.


•	We received contributions of $2.5 million from holders of noncontrolling interests in consolidated affiliates related to the Essex House Hotel Venture during the three months ended March 31, 2014.

Dividend Policy

We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with GAAP) to our shareholders so as to comply with REIT provisions of the Tax Code. If necessary for REIT qualification purposes, we may need to distribute any taxable income in cash or by a special dividend. Our dividend policy is subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend on our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant.

In November 2008, our board of directors elected to suspend the quarterly dividend to holders of shares of our common stock beginning in the fourth quarter of 2008. Our board of directors has continued the suspension of the quarterly dividend to holders of shares of our common stock as a measure to preserve liquidity and to continue to reduce leverage.

Our board of directors will continue to evaluate the dividend policy in light of the REIT provisions of the Tax Code, restrictions under our bank credit facility, the overall economic climate and our improving financial results.

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Contractual Obligations

The following table summarizes our future payment obligations and commitments as of March 31, 2015 (in thousands):



	Payments Due by Period
	Total		Less than 1 year⁽¹⁾		1 to 3 years		4 to 5 years		More than 5 years
Long-term debt obligations ⁽²⁾	$	1,856,036	$	118,439	$	396,154	$	599,732	$	741,711
Interest on long-term debt obligations ⁽³⁾	306,220		55,034		137,034		65,665		48,487
Operating lease obligations—ground leases and office space	132,317		2,504		6,563		5,500		117,750
Operating leases—Marriott Hamburg	62,745		3,086		8,229		8,229		43,201
Purchase commitments⁽⁴⁾	10,142		10,142		—		—		—
Total	$	2,367,460	$	189,205	$	547,980	$	679,126	$	951,149


(1)	These amounts represent obligations that are due within fiscal year 2015.


(2)	Long-term debt obligations include our bank credit facility and mortgages and exclude the unamortized discount. Maturity dates assume all extension options are exercised, including conditional options.


(3)	Interest on variable-rate debt obligations is calculated based on the variable rates at March 31, 2015.


(4)	Amounts include executed construction contracts.

Reserve Funds for Capital Expenditures

We maintain each of our hotels in excellent condition and in conformity with applicable laws and regulations and in accordance with the agreed upon requirements in our management agreements with our hotel operators.

We are obligated to maintain reserve funds for capital expenditures at the majority of our hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the management agreements with our hotel operators. As of March 31, 2015, $44.9 million was in restricted cash reserves for future capital expenditures. Generally, our agreements with hotel operators require us to reserve funds at amounts ranging between 4.0% and 5.0% of the individual hotel’s annual revenues and require the funds to be set aside in restricted cash. Expenditures are capitalized as incurred and depreciation begins when the related asset is placed in service. Any unexpended amounts will remain our property upon termination of the management and operating contracts.

Off-Balance Sheet Arrangements

Fairmont Scottsdale Princess Venture

We had a 50.0% ownership interest in FMT Scottsdale Holdings, L.L.C. and Walton/SHR FPH Holdings, L.L.C. (together, the Fairmont Scottsdale Princess Venture), which owns the Fairmont Scottsdale Princess hotel, and accounted for our investment under the equity method of accounting. On March 31, 2014, we acquired the remaining 50.0% interest in the Fairmont Scottsdale Princess Venture that was previously owned by our joint venture partner.

Our equity in earnings of the Fairmont Scottsdale Princess Venture was $4.8 million for the three months ended March 31, 2014.

Hotel del Coronado Venture

We had a 36.4% ownership interest in BSK Del Partners, L.P. (the Hotel del Coronado Venture), which owns the Hotel del Coronado, and accounted for our investment under the equity method of accounting. On June 11, 2014, we acquired the remaining 63.6% interest in the Hotel del Coronado Venture that was previously owned by our joint venture partner.

Our equity in losses of the Hotel del Coronado Venture was $(0.3) million for the three months ended March 31, 2014.

Four Seasons RCPM

We own a 31.0% interest in and act as asset manager for a venture with two unaffiliated parties that developed the Four Seasons RCPM, a luxury vacation home product sold in fractional and whole ownership interests on the property adjacent to the Four Seasons Punta Mita Resort in Mexico. We account for this investment under the equity method of accounting. At March 31,

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2015 and December 31, 2014, our investment in the unconsolidated affiliate amounted to $3.4 million. Our equity in losses of the unconsolidated affiliate was $0 and $(0.1) million for the three months ended March 31, 2015 and 2014, respectively.

Lot H5 Venture

On June 14, 2013, we entered into an amended and restated venture agreement with an unaffiliated third party, forming the Lot H5 Venture. The Lot H5 Venture owns the Lot H5 land parcel, an undeveloped, oceanfront land parcel in Punta Mita, Nayarit, Mexico. We have a preferred position in the Lot H5 Venture that entitles us to receive the first $12.0 million of distributions generated from the Lot H5 Venture, with any excess distributions split equally between the partners. We jointly control the Lot H5 Venture with our partner and account for our interest in the Lot H5 Venture as an equity method investment. At March 31, 2015 and December 31, 2014, our investment in the unconsolidated affiliate amounted to $19.4 million. We had no equity in earnings of the unconsolidated affiliate related to the Lot H5 Venture for the three months ended March 31, 2015 and 2014.

Related Party Transactions

We have in the past engaged in transactions with related parties. See "Item 1. Financial Statements - 12. Related Party Transactions" for a discussion of our transactions with related parties.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our condensed consolidated interim financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements and disclosures. Some of these estimates and assumptions require application of difficult, subjective, and/or complex judgment about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A disclosure of our critical accounting policies which affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements is included in our Annual Report on Form 10-K for the year ended December 31, 2014 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Seasonality

The lodging business is seasonal in nature, and we experience some seasonality in our business. Revenues for hotels in tourist areas, those with significant group business, and in areas driven by greater climate changes are generally seasonal. Quarterly revenues also may be adversely affected by events beyond our control, such as extreme weather conditions and other acts of nature, terror attacks or alerts, airline strikes, economic factors and other considerations affecting travel.

To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into short-term borrowings to pay operating expenses and make distributions to our stockholders.

New Accounting Guidance

See "Item1. Financial Statements—2. Summary of Significant Accounting Policies—New Accounting Guidance."

Non-GAAP Financial Measures

We present five non-GAAP financial measures that we believe are useful to management and investors as key measures of our operating performance: FFO; FFO—Fully Diluted; Comparable FFO; EBITDA; and Comparable EBITDA. Amounts presented in accordance with our definitions of FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA should not be considered as an alternative measure of our net income (loss) or operating performance. FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to comparable GAAP measures such as net

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income (loss) attributable to SHR common shareholders. In addition, adverse economic and market conditions might negatively impact our cash flow. We have provided a quantitative reconciliation of FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss) attributable to SHR common shareholders.

EBITDA and Comparable EBITDA

EBITDA represents net income (loss) attributable to SHR common shareholders excluding: (i) interest expense, (ii) income taxes, including deferred income tax benefits and expenses applicable to our foreign subsidiaries and income taxes applicable to sale of assets; (iii) depreciation and amortization; and (iv) preferred stock dividends. EBITDA also excludes interest expense, income taxes and depreciation and amortization of our unconsolidated affiliates. EBITDA is presented on a full participation basis, which means we have assumed conversion of all redeemable noncontrolling interests of our operating partnership into our common stock. We believe this treatment of noncontrolling interests provides useful information for management and our investors and appropriately considers our current capital structure. We also present Comparable EBITDA, which eliminates the effect of realizing deferred gains on our sale leasebacks, as well as the effect of gains or losses on sales of assets, early extinguishment of debt, impairment losses, foreign currency exchange gains or losses and certain other charges that are highly variable from year to year.

We believe EBITDA and Comparable EBITDA are useful to management and investors in evaluating our operating performance because they provide management and investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe they help management and investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA and Comparable EBITDA as measures in determining the value of acquisitions and dispositions.

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The following table provides a reconciliation of net income attributable to SHR common shareholders to Comparable EBITDA (in thousands):



	Three Months Ended March 31,
	2015			2014
Net income attributable to SHR common shareholders	$	15,811		$	217,158
Depreciation and amortization—continuing operations	37,664			22,205
Depreciation and amortization—discontinued operations	—			1,275
Interest expense—continuing operations	22,785			18,274
Interest expense—discontinued operations	—			1,326
Income taxes—continuing operations	219			39
Income taxes—discontinued operations	—			833
Income taxes—sale of assets	—			20,451
Noncontrolling interests	37			849
Adjustments from consolidated affiliates	(3,837		)	(3,675		)
Adjustments from unconsolidated affiliates	—			5,290
Preferred shareholder dividends	—			9,824
EBITDA	72,679			293,849
Realized portion of deferred gain on sale leaseback	(44		)	(53		)
Gain on consolidation of affiliates	—			(78,117		)
Gain on sale of assets—discontinued operations	—			(176,276		)
Loss on early extinguishment of debt—discontinued operations	—			272
Foreign currency exchange loss (gain)—continuing operations	116			(2		)
Foreign currency exchange gain—discontinued operations	—			(32		)
Hotel acquisition costs	720			—
Non-cash interest rate derivative activity	116			—
Amortization of below market hotel management agreement	513			—
Activist shareholder costs	—			1,533
Comparable EBITDA	$	74,100		$	41,174

Comparable EBITDA increased $32.9 million during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 due to additional earnings generated by the acquisition of the Fairmont Scottsdale Princess hotel, the Hotel del Coronado, the Four Seasons Resort Scottsdale at Troon North and the Montage Laguna Beach resort combined with growth within our Same Store Assets, partially offset by the disposition of the Four Seasons Punta Mita Resort and the Marriott London Grosvenor Square hotel.

FFO, FFO-Fully Diluted, and Comparable FFO

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT adopted a definition of FFO in order to promote an industry-wide standard measure of REIT operating performance. NAREIT defines FFO as net income (loss) (computed in accordance with GAAP) excluding losses or gains from sales of depreciable property, impairment of depreciable real estate, real estate-related depreciation and amortization, and our portion of these items related to unconsolidated affiliates. We also present FFO—Fully Diluted, which is FFO plus income or loss on income attributable to redeemable noncontrolling interests of our operating partnership. We also present Comparable FFO, which is FFO—Fully Diluted excluding the impact of any gains or losses on early extinguishment of debt, impairment losses on non-depreciable assets, foreign currency exchange gains or losses and certain other charges that are highly variable from year to year.

We believe that the presentation of FFO, FFO—Fully Diluted and Comparable FFO provides useful information to management and investors regarding our results of operations because they are measures of our ability to fund capital expenditures and expand our business. In addition, FFO is widely used in the real estate industry to measure operating performance without regard to items such as depreciation and amortization.

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The following table provides a reconciliation of net income attributable to SHR common shareholders to Comparable FFO (in thousands):



	Three Months Ended March 31,
	2015			2014
Net income attributable to SHR common shareholders	$	15,811		$	217,158
Depreciation and amortization—continuing operations	37,664			22,205
Depreciation and amortization—discontinued operations	—			1,275
Corporate depreciation	(128		)	(123		)
Gain on sale of assets, net of tax—discontinued operations	—			(155,825		)
Gain on consolidation of affiliates	—			(78,117		)
Realized portion of deferred gain on sale leaseback	(44		)	(53		)
Noncontrolling interests adjustments	(110		)	(98		)
Adjustments from consolidated affiliates	(2,243		)	(1,835		)
Adjustments from unconsolidated affiliates	—			3,506
FFO	50,950			8,093
Redeemable noncontrolling interests	147			947
FFO – Fully Diluted	51,097			9,040
Non-cash interest rate derivative activity—continuing operations	3,229			(2,294		)
Loss on early extinguishment of debt—discontinued operations	—			272
Foreign currency exchange loss (gain)—continuing operations	116			(2		)
Foreign currency exchange gain—discontinued operations	—			(32		)
Amortization of debt discount	650			—
Amortization of below market hotel management agreement	513			—
Hotel acquisition costs	720			—
Activist shareholder costs	—			1,533
Excess of redemption price over carrying amount of redeemed preferred stock	—			3,709
Comparable FFO	$	56,325		$	12,226

Comparable FFO increased $44.1 million during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 due to acquisitions, growth within our Same Store Assets and the redemption of our preferred stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We use methods which incorporate standard market conventions and techniques such as discounted cash flow analysis and option pricing models to determine fair value. All methods of estimating fair value result in general approximation of value and such value may or may not actually be realized.

See “Item 1. Financial Statements – 10. Derivatives” for information on our interest rate cap agreements outstanding as of March 31, 2015.

As of March 31, 2015, our total outstanding mortgages and indebtedness under the bank credit facility totaled approximately $1.9 billion, of which approximately 39.1% was fixed-rate debt. If market rates of interest on our variable rate debt increase by 20%, the increase in interest expense on the variable rate debt would decrease future earnings and cash flows by approximately $0.4 million annually.

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Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of the reduced level of overall economic activity that could exist in that environment. Furthermore, in the event of a 20% increase in the market rates of interest on our variable rate debt as discussed above, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

Currency Exchange Risk

As we have international operations, currency exchange risk arises as a normal part of our business. In particular, we are subject to fluctuations due to changes in foreign exchange as is relates to our leasehold interest in the Marriott Hamburg hotel, which uses the euro. For the three months ended March 31, 2015, approximately 0.3% of our total revenues were generated from the Marriott Hamburg hotel. As a result, fluctuations in the value of foreign currency against the U.S. dollar do not have a significant impact on our reported results.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this quarterly report on Form 10-Q was made under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer. Based upon this evaluation, as of March 31, 2015, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine litigation arising in the ordinary course of business or which is expected to be covered by insurance.

ITEM 1A. RISK FACTORS.

There were no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2014.

A copy of those risk factors, updated for this quarterly report on Form 10-Q, are attached as Exhibit 99.1 to this quarterly report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On January 5, 2015, we redeemed all of the outstanding 3,615,375 shares of our 8.25% Series B Cumulative Redeemable Preferred Stock at a redemption price of $25.00 per share, plus accrued and unpaid dividends from January 1, 2015 up to and including January 5, 2015 in the amount of $0.028646 per share, for a total redemption price of approximately $90.5 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

On May 1, 2015, SHR Austin, LLC (the "Purchaser"), a wholly-owned subsidiary of Strategic Hotel Funding, L.L.C., entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with PR LCP Austin Hotel TH LLC (the "Seller"), pursuant to which the Seller agreed to sell to the Purchaser and the Purchaser agreed to acquire from the Seller the hotel commonly known as the Four Seasons Hotel Austin for $197,000,000, subject to working capital adjustments and prorations provided for in the Purchase and Sale Agreement (the "Acquisition"). The Acquisition, subject to certain closing conditions, is expected to close in the second quarter of 2015.

ITEM 6. EXHIBITS.

The information in the Exhibit Index appearing after the signature page of this Form 10-Q is incorporated by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	STRATEGIC HOTELS & RESORTS, INC.
May 4, 2015	By:	/s/ Raymond L. Gellein, Jr.
	Raymond L. Gellein, Jr. President, Chief Executive Officer and Chairman of the Board (principal executive officer)



May 4, 2015	By:	/s/ Diane M. Morefield
	Diane M. Morefield Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer)

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Exhibit Index



	Exhibit No.	Description of Exhibit

	3.1.a	Articles of Amendment and Restatement of the Company (filed as Exhibit 3.1 to the Company’s Amendment No. 3 to the Registration Statement on Form S-11 (File No. 333-112846), filed with the SEC on June 8, 2004 and incorporated herein by reference).

	3.1.b	Articles of Amendment relating to the Company’s name change to Strategic Hotels & Resorts, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-32223), filed with the SEC on March 15, 2006 and incorporated herein by reference).

	3.1.c	Articles of Amendment (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-32223), filed with the SEC on May 19, 2010 and incorporated herein by reference).

	3.1.d	Articles of Amendment (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-32223), filed with the SEC on April 19, 2012 and incorporated herein by reference).

	3.2	By-Laws of the Company (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-32223), filed with the SEC on November 18, 2008 and incorporated herein by reference).

+*	10.1	Performance Share Award Agreement under Strategic Hotels & Resorts, Inc. Second Amended and Restated 2004 Incentive Plan for Raymond L. Gellein, Jr.

+*	10.2	Form of Performance Share Award Agreement under Strategic Hotels & Resorts, Inc. Second Amended and Restated 2004 Incentive Plan for executives other than Raymond L. Gellein, Jr.

	10.3	Purchase and Sale Agreement and Escrow Instructions, dated as of January 28, 2015, by and among Laguna Beach Luxury Hotel LLC, Ohana Holdings, L.L.C., SHR MLB, LLC and Strategic Hotels & Resorts, Inc. (filed as Exhibit 10.79 to the Company's Annual Report on Form 10-K (File No. 001-32223), filed with the SEC on February 24, 2015 and incorporated herein by reference).

	10.4	Registration Rights Agreement, dated as of January 29, 2015, by and between Strategic Hotels & Resorts, Inc. and Ohana Holdings, L.L.C. (filed as Exhibit 10.80 to the Company's Annual Report on Form 10-K (File No. 001-32223), filed with the SEC on February 24, 2015 and incorporated herein by reference).

	10.5	Amended and Restated Loan Agreement, dated as of January 29, 2015, by and between SHR MLB, LLC, as borrower, and Massachusetts Mutual Life Insurance Company, as lender (filed as Exhibit 10.81 to the Company's Annual Report on Form 10-K (File No. 001-32223), filed with the SEC on February 24, 2015 and incorporated herein by reference).

*	31.1	Certification of Raymond L. Gellein, Jr., Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*	31.2	Certification of Diane M. Morefield, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

**	32.1	Certification of Raymond L. Gellein, Jr., 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 Diane M. Morefield, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	99.1	Disclosure Regarding Forward-Looking Statements and Risk Factors.

*	101.INS	XBRL Instance Document***

*	101.SCH	XBRL Taxonomy Extension Schema Document***

*	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document***

*	101.LAB	XBRL Taxonomy Extension Label Linkbase Document***

*	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document***

*	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document***



+	Represents a management contract or compensatory plan or arrangement.

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*	Filed herewith.



**	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Exchange Act.



***	Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014; (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014; (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014; and (v) Notes to the Condensed Consolidated Financial Statements that have been detail tagged.

Exhibit 10.1

STRATEGIC HOTELS & RESORTS, INC.
SECOND AMENDED AND RESTATED 2004 INCENTIVE PLAN
PERFORMANCE SHARE AWARD AGREEMENT

We are pleased to inform you that you have been awarded by Strategic Hotels & Resorts, Inc. (the “Company”) the opportunity to earn a performance share award (the “Performance Share Award”).

The terms of the Performance Share Award are as set forth in this Performance Share Award Agreement (“Agreement”). This Agreement is granted under the Strategic Hotels & Resorts Second Amended and Restated 2004 Incentive Plan (“Plan”) and, except as expressly provided otherwise herein, is limited by and subject to the express terms and conditions of the Plan, a copy of which has been made available to you. Certain capitalized terms are defined in the Appendix to this Agreement. Capitalized terms that are not defined in this Agreement (including the Appendix) have the meanings given to them in the Plan. The basic terms of the Performance Share Award are summarized as follows:



Employee Name:	RAYMOND GELLEIN, JR.
Target Number of Shares Subject to the Award (“Target Shares”):
Performance Period:	January 2, 2015 (“Start Date”) through December 29, 2017 (“End Date”)

1.Earning Performance Shares Award

Subject to the conditions and limitations set forth herein, the Company will determine and distribute shares of Common Stock to the extent earned as set forth below on a date (“Distribution Date”) in the first calendar quarter of 2018 (no later than March 15, 2018) in which the Committee determines and certifies the Relative SNL Lodging Index TSR Performance Percentage achieved, as described in Section 2 hereof. The Committee will in good faith make such determination and certification and except as set forth in Sections 3, 4 and 6, distribute such shares of Common Stock within the time period set forth in the preceding sentence.

(a) Base Performance Shares

Shares of Common Stock are earned under this Performance Share Award based on the following performance metric (the “Performance Metric”): the Relative SNL Lodging Index TSR Performance.

Shares of Common Stock are earned according to Relative SNL Lodging Index TSR Performance as set forth below:



Percentile Rank	Multiple of Target Shares Earned
85% or Higher	2.0
50%	1.00
25%	0.25
Below 25%	0

The number of Shares that are earned with respect to the Performance Metric shall be interpolated on a straight line basis between the Multiple of Target Shares Earned levels set forth in the schedule above.

(b) Dividend Equivalents:

You shall be credited from the Start Date with dividend equivalents payable in shares of Common Stock with respect to shares of Common Stock you earn under this Performance Share Award until the delivery date, without regard to any deferral election pursuant to Section 6, of such shares of Common Stock (or cash in a Go Private Transaction) under this Agreement. The number of shares of Common Stock you will acquire pursuant to dividend equivalents is determined by assuming that as of each dividend ex-date from the Start Date to such delivery date under this Agreement with respect to the shares of Common Stock you earn under this Agreement without regard to this Section 1(c) plus previously credited shares of Common Stock attributable to prior dividend equivalents under this Section 1(c), a dollar amount equal to the amount of the dividend that would have been paid on such number of shares of Common Stock under this Performance Share Award for such dividend shall be converted into a number of shares of Common Stock equal to the number of whole and fractional shares of Common Stock that could have been purchased at the closing price on the dividend payment date with such dollar amount. In the case of any dividend declared on shares of Common Stock which is payable in shares of Common Stock, you shall be credited with an additional number of shares of Common Stock equal to the product of (x) the number of shares of Common Stock earned under this Agreement without regard to this Section 1(c) plus previously credited shares of Common Stock attributable to prior dividend equivalents under this Section 1(c) and the (y) the number of shares of Common Stock (including any fraction thereof) distributable as a dividend on a share of Common Stock. Such dividend equivalents shall be paid to you in shares of Common Stock, (or cash in a Go Private Transaction (as defined hereafter)) at such time as the Performance Share Award is otherwise paid.

Notwithstanding anything to the contrary herein:

(1) No more than the Target Shares will be earned under this Performance Share Award if the Company TSR is less than or equal to 100%.

(2) No shares of Common Stock will be earned under this Performance Share Award if the Performance Date Average Price is less than or equal to $6.34 (50% of the Start Date Average Price), with such dollar amount subject to adjustment consistent with Section 14.1 of the Plan.

(d) Example:

An example of a calculation of the earning of a Performance Share Award is set forth in Exhibit A.

2. Determining Performance Metric

As set forth above, the earning of shares of Common Stock under this Performance Share Award depends upon one Performance Metric: the Relative SNL Lodging Index TSR. Shares of Common Stock are earned solely under that relative TSR measure. Relative TSR will be based on the Company’s TSR performance relative to the equally-weighted TSRs of the common stock of each Index Company included in the SNL Lodging Index (the “Index”) as applicable as of the Performance Date, excluding the Company if it is part of the Index. TSR is calculated as share price appreciation plus the reinvestment of dividends during the applicable period.

To determine relative performance, the baseline metrics are the 60-trading day average closing price of a share of Common Stock of the Company and of a share of common stock of each Index Company, with the last of the 60-trading days falling on December 29, 2014. This 60-trading day average establishes both the Company’s Start Date Average Price and the Index Company Baseline Stock Price against which future Company stock performance and the stock performance of Index Companies within the applicable Index will be compared. If a company was added to the applicable Index after the Start Date, such company’s average closing stock price for the 60-trading days prior to joining the Index will be used for purposes of determining the Index Company Baseline Stock Price. In the event such Index Company does not have a trading history prior to joining the Index, the average closing stock price for the 60-trading days starting on the day the Index Company joined the Index will be used for purposes of determining the Index Company Baseline Stock Price. Any companies included in the applicable Index as of the Start Date but which are no longer included in the applicable Index as of the Performance Date will not be included in the TSR analysis with respect to such Index.

The 60-trading day average closing price of a share of Common Stock and of a share of each Index Company with the last trading day of such 60-trading day period ending on the Performance Date (establishing both the “Performance Date Average Price” and the “Index Company Performance Date Average Price”, respectively) is separately determined. (The Performance Date Average Price and the Index Company Performance Date Average Prices shall be automatically adjusted to account for any stock split or similar change in capitalization in a manner as set forth in Section 14.1 of the Plan.)

Company performance will be measured by dividing the Performance Date Average Price plus Company dividends reinvested as of each dividend ex-date between Start Date and the

Performance Date by the Start Date Average Price, with the quotient expressed as a percentage of the Start Date Average Price (the “Company TSR”). The performance for each Index Company will be measured separately by dividing the Index Company Performance Date Average Price plus Index Company dividends reinvested as of each dividend ex-date between Start Date and the Performance Date by the Index Company Baseline Stock Price, with the quotient expressed as a percentage of the Index Company Baseline Stock Price (the “Index Company TSR”). Therefore, the TSR for the Company and each Index Company equals the change in value between Start Date Average Price and the Performance Date Average Price, plus dividends reinvested as of each dividend ex-date between Start Date and Performance Date, as a percentage of the Start Date Stock Price.

The Company’s TSR will be ranked against the Index Company TSRs of the Index Companies within the SNL Lodging Index to determine the Company’s Percentile Rank for purposes of Relative SNL Lodging Index TSR Performance Metric.

An example including the calculation of Start Date Average Price and a calculation of Company TSR for a prior three year period is set forth in Exhibit B.

3. Change of Control

Notwithstanding any other provision of this Agreement, if a Change of Control occurs prior to December 29, 2017 the end date for the Performance Period shall be treated as the date immediately prior to the Change of Control rather than December 29, 2017 and the relative TSR ranking for the Performance Metrics will be determined based on a shortened Performance Period (“Change of Control Performance Period”) and TSRs for Index Companies that shall be determined based on the 60-trading day average closing price of each Index Company’s common stock with the last trading day of such 60-trading day period ending immediately prior to the date of public announcement of the Change of Control. For purposes of the calculation of the Company’s TSR for the Change of Control Performance Period, the Company’s Performance Date Average Price shall be the fair market value of a share of Common Stock in the Change of Control. The Company’s TSR for the Change of Control Performance Period shall equal the Performance Date Average Price as determined pursuant to the preceding sentence plus dividends reinvested as of each dividend ex-date between the Start Date and the Performance Date, as a percentage of the Start Date Stock Price.

Although the date of public announcement of the Change of Control determines the end date of the 60-trading day period for determining the TSRs for Index Companies, payments under this Section 3 shall not be made unless the Change of Control closes. In the absence of such a closing, this Section 3 shall be ineffective and inapplicable to determinations applicable to this Performance Share Award.

All payments under this Performance Share Award with respect to a Change of Control constituting a Go Private Change of Control Transaction may be paid in, at the Company’s discretion, either (1) shares of Common Stock prior to the Go Private Change of Control Transaction at such time and in such manner that you may participate fully as a holder of shares of Common Stock in the Go Private Change of Control Transaction or (2) cash. For purposes of

this Performance Share Award, a “Go Private Change of Control Transaction” shall be deemed to have occurred if on or immediately following the Change of Control no shares of Common Stock or other common stock of the Company (or any successor) are traded on a national securities exchange.

4. Termination of Employment or Services

If the Company terminates your employment or service relationship for Cause or you terminate your employment or services relationship other than as a result of a Constructive Termination or at the end of the Agreement Term under your Employment Agreement with the Employer dated as of November 19, 2012 (“Employment Agreement”), you shall have no right to any shares of Common Stock under this Performance Share Award and this Performance Share Award will immediately terminate without the payment of any further consideration to you.

If your employment or service relationship with the Employer terminates prior to a Change of Control because of death, Disability, Constructive Termination, Termination by the Employer other than for Cause or by either you or the Employer other than for Cause at the end of the Agreement Term under the Employment Agreement, you will become fully vested in the shares of Common Stock that you would have earned under this Performance Share Award if you had remained employed through December 29, 2017 and such shares of Common Stock shall be payable in accordance with the Plan as though you had remained employed with the Employer.

You will become fully vested in the shares of Common Stock earned under this Performance Share Award on a Change of Control and such shares of Common Stock (or cash if the Change of Control is a Go Private Transaction) shall be payable to you upon such Change of Control.

5. Distributions of Shares of Common Stock

Except as otherwise provided by a deferral election pursuant to Section 6 of this Agreement or by virtue of a Change of Control as described in Section 3 and 4, shares of Common Stock earned pursuant to Sections 1, 2, 3 or 4 shall be distributed in the first calendar quarter of 2018 (no later than March 15, 2018).

If, however, you elect to defer payment of the shares of Common Stock as provided in Section 6 of this Agreement, the shares of Common Stock shall be issued as set forth in the Deferral Election Agreement entered into between you and the Committee.

6. Deferral Election

Subject to Section 13, you may elect to defer delivery of the shares of Common Stock that would otherwise be due by virtue of the satisfaction of the requirements for distribution of shares of Common Stock under this Performance Share Award Agreement. The Committee shall, in its sole discretion, establish the rules and procedures for such deferral elections and payment deferrals.

7. No Rights as Shareholder

You shall not have voting or any other rights as a shareholder of the shares of Common Stock with respect to the Performance Share Award until shares of Common Stock are actually delivered to you pursuant to Section 4 or 5. Upon delivery of shares of Common Stock pursuant to this Performance Share Award, you will obtain full voting and other rights as a shareholder of the Company.

8. Securities Law Compliance

Notwithstanding any other provision of this Agreement, you may not sell the shares of Common Stock acquired pursuant to this Performance Share Award unless such shares of Common Stock are registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such sale would be exempt from the registration requirements of the Securities Act. The sale of such shares of Common Stock must also comply with other applicable laws and regulations governing the shares of Common Stock, and you may not sell the shares of Common Stock if the Company determines that such sale would not be in material compliance with such laws and regulations.

9. Transfer Restrictions

Any sale, transfer, assignment, encumbrance, pledge, hypothecation, conveyance in trust, gift, transfer by bequest, or other transfer or disposition of any kind, whether voluntarily or by operation of law, directly or indirectly, of this Performance Share Award shall be strictly prohibited and void except a transfer after death by will or by the applicable laws of descent and distribution.

10. Independent Tax Advice

You acknowledge that determining the actual tax consequences to you of receiving this Performance Share Award or shares of Common Stock or cash thereunder or deferring or disposing of shares of Common Stock or cash may be complicated. These tax consequences will depend, in part, on your specific situation and may also depend on the resolution of currently uncertain tax law and other variables not within the control of the Company. You are aware that you should consult a competent and independent tax advisor for a full understanding of the specific tax consequences to you of receiving, deferring or disposing of the Performance Share Award or shares of Common Stock or cash hereunder. Prior to executing this Agreement, you either have consulted with a competent tax advisor independent of the Company to obtain tax advice concerning the Performance Share Award with respect to your specific situation or have had the opportunity to consult with such a tax advisor but chose not to do so.

11. Withholding and Disposition of Shares of Common Stock

or cash. Notwithstanding the previous sentence, you acknowledge and agree that the Employer has the right to deduct from payments of any kind otherwise due to you any federal, state or local taxes of any kind required by law to be withheld with respect this Performance Share Award, including, without limitation, the receipt of shares of Common Stock or cash.

12. General Provisions

12.1 No Waiver. No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.

12.2 Undertaking. You hereby agree to take whatever additional action and execute whatever additional documents the Committee may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either you, the Performance Share Award or the shares of Common Stock or cash acquired pursuant to the express provisions of this Agreement.

12.3 Recoupment. Notwithstanding any other provisions in this Agreement to the contrary, you acknowledge that you will be subject to recoupment policies adopted by the Company pursuant to the requirements of Dodd-Frank Wall Street Reform and Consumer Protection Act or other law or the listing requirements of any national securities exchange on which shares of Common Stock of the Company are listed.

12.4 Agreement Is Entire Contract. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof.

12.5 Successors and Assigns. The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and you and your legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.

12.6 No Employment or Service Contract. This Agreement does not confer upon you any right with respect to continuance of employment by the Employer, nor does it interfere in any way with the right of your employer to terminate your employment or services at any time, subject to the terms of the Employment Agreement.

12.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but which, upon execution, will constitute one and the same instrument.

12.8 Governing Law. This Agreement will be construed and administered in accordance with and governed by the laws of the State of Illinois.

13. Section 409A Compliance

The Company intends that any distribution of shares of Common Stock or cash, deferral and other provisions applicable to your Performance Share Award fully comply with the payout and other limitations and restrictions imposed under Section 409A of the Internal Revenue Code of 1986, as amended (“Code”), as clarified or modified by IRS guidance, including without limitation, treating the date you have a separation from service under Code Section 409A as the date you terminate employment or your service relationship for purposes of this Agreement – in each case if and to the extent such Code Section 409A is otherwise applicable to your Performance Share Award and such compliance is necessary to avoid the penalties otherwise imposed under Code Section 409A. In this connection, the Company and you agree that the payout timing provisions applicable to the Performance Share Award, and the terms of any deferral and other rights regarding such Performance Share Award, shall be deemed modified, if and to the extent necessary to comply with the payout and other limitations and restrictions imposed under Code Section 409A, as clarified or modified by IRS guidance – in each case if and to the extent such Code Section 409A is otherwise applicable to your Performance Share Award and such compliance is necessary to avoid the penalties otherwise imposed under Code Section 409A, including, without limitation, any necessary delay in payment (but not vesting) of the Performance Share Award to avoid Code Section 409A adverse consequences with respect to a payment that is subject to Code Section 409A if a Change of Control occurs that does not constitute a permissible distribution trigger for a payment that is subject to Code Section 409A. This Performance Share Award is subject to Section 17.5 of the Plan.

REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 23^rd day of February 2015.

STRATEGIC HOTELS & RESORTS, INC.

/s/ Paula C. Maggio

By: Paula C. Maggio


Its:	Executive Vice President, General Counsel & Secretary

RAYMOND GELLEIN, JR.

(Employee Name)

/s/ Raymond Gellein, Jr.

(Employee Signature)

EXHIBIT A

EXAMPLE OF PERFORMANCE SHARE AWARD CALCULATION



	Company % TSR Rank	Multiple

SNL Lodging Index	72	1.61



	Multiple		Target Grant

	1.61	X	10,000	=	Base Grant 16,100

Dividend Equivalents as calculated in the table below.					Dividend Equivalents 1,949

					Total Grant
					with Dividend _______
					Equivalents 14,799

A-1

Calculation of Dividend Equivalents assuming 2015-2017 was identical to 2005-2007:



Date	Stock Price		Dividends Per Share		Shares Including Dividends Reinvested

Initial Shares					12,850
4/20/05 Dividend Payment Date		$14.25		$0.22	13,048
7/20/05 Dividend Payment Date		$18.06		$0.22	13,207
10/20/05 Dividend Payment Date		$17.03		$0.22	13,378
1/20/06 Dividend Payment Date		$21.04		$0.22	13,518
4/20/06 Dividend Payment Date		$22.94		$0.23	13,653
7/10/06 Dividend Payment Date		$20.52		$0.23	13,806
10/10/06 Dividend Payment Date		$20.83		$0.23	13,959
1/10/07 Dividend Payment Date		$20.80		$0.23	14,113
4/10/07 Dividend Payment Date		$22.84		$0.24	14,262
7/10/07 Dividend Payment Date		$23.21		$0.24	14,409
10/10/07 Dividend Payment Date		$22.24		$0.24	14,564
1/10/08 Dividend Payment Date		$14.89		$0.24	14,799

A-2

EXHIBIT B

EXAMPLE OF PRICE CALCULATION

Start Date Average Price was calculated as set forth below:



Date	Close	Date	Close
31-Dec-14	13.23	17-Nov-14	12.85
30-Dec-14	13.48	14-Nov-14	12.85
29-Dec-14	13.58	13-Nov-14	12.92
26-Dec-14	13.57	12-Nov-14	12.75
24-Dec-14	13.55	11-Nov-14	12.74
23-Dec-14	13.56	10-Nov-14	12.67
22-Dec-14	13.50	7-Nov-14	12.52
19-Dec-14	13.31	6-Nov-14	12.69
18-Dec-14	13.34	5-Nov-14	12.69
17-Dec-14	13.25	4-Nov-14	12.77
16-Dec-14	12.87	3-Nov-14	12.95
15-Dec-14	12.87	31-Oct-14	12.85
12-Dec-14	13.12	30-Oct-14	12.67
11-Dec-14	13.09	29-Oct-14	12.67
10-Dec-14	13.06	28-Oct-14	12.69
9-Dec-14	13.06	27-Oct-14	12.48
8-Dec-14	12.81	24-Oct-14	12.36
5-Dec-14	12.83	23-Oct-14	12.31
4-Dec-14	12.76	22-Oct-14	12.03
3-Dec-14	12.81	21-Oct-14	11.94
2-Dec-14	12.83	20-Oct-14	11.74
1-Dec-14	13.03	17-Oct-14	11.60
28-Nov-14	13.28	16-Oct-14	11.58
26-Nov-14	13.09	15-Oct-14	11.24
25-Nov-14	13.02	14-Oct-14	11.35
24-Nov-14	13.01	13-Oct-14	11.23
21-Nov-14	12.91	10-Oct-14	11.30
20-Nov-14	13.02	9-Oct-14	11.55
19-Nov-14	12.94	8-Oct-14	11.69
18-Nov-14	13.03	7-Oct-14	11.25



Average		$12.68

Performance Date Average Price, Index Company Baseline Stock Price and Index Company Performance Date Average Price shall be calculated in the same manner as the Start Date Average Price was calculated.

B-1

EXAMPLE OF TSR CALCULATION

Below is a calculation of TSR for the Company from 2005 to 2007:



Date	Stock Price		Dividends Per Share		Value of $100 Initial Investment		TSR

12/31/04 60 Day Avg.		$14.82				$100.00
3/29/05 Dividend Ex-Date		$14.30		$0.22		$97.98
6/28/05 Dividend Ex-Date		$17.96		$0.22		$124.56
9/28/05 Dividend Ex-Date		$17.70		$0.22		$124.28
12/16/05 Dividend Ex-Date		$20.35		$0.22		$144.43
3/29/06 Dividend Ex-Date		$22.90		$0.23		$164.16
6/28/06 Dividend Ex-Date		$20.06		$0.23		$145.45
9/27/06 Dividend Ex-Date		$20.04		$0.23		$146.98
12/22/06 Dividend Ex-Date		$21.14		$0.23		$156.73
3/23/07 Dividend Ex-Date		$23.54		$0.24		$176.30
6/22/07 Dividend Ex-Date		$22.20		$0.24		$168.07
9/24/07 Dividend Ex-Date		$20.95		$0.24		$160.42
12/24/07 Dividend Ex-Date		$18.37		$0.24		$142.50
12/31/07 60 Day Avg.		$21.61				$167.64	167.64	%

A comparable methodology for determining TSR for the Company and Index Companies during the Performance Period or Change of Control Performance Period shall be used.

B-2

APPENDIX

“Cause” has the meaning assigned to it in the Employment Agreement whether or not the Agreement Term under the Employment Agreement has ended.

“Constructive Termination” has the meaning assigned to it in the Employment Agreement whether or not the Agreement Term under the Employment Agreement has ended.

“Employment Agreement” means your Employment Agreement with the Company dated November 19, 2012.

“Index Company” means each of the companies including in the SNL Lodging Index.

“Index Company Baseline Stock Price” means the baseline common stock price for each Index Company.

“Performance Date” means the earlier of the End Date or the date of a Change of Control.

“Performance Date Average Price” means the average closing price of a share of Common Stock during the 60-trading day period ending on the End Date if the Performance Date is the End Date or the fair market value of a share of Common Stock on the date of a Change of Control if the Performance Date is the date of a Change of Control.

“Start Date Average Price” means the average closing price of a Share during the 60-day trading period immediately prior to the Start Date.

“TSR” means the total shareholder return.

B-3

STRATEGIC HOTELS & RESORTS, INC.
SECOND AMENDED AND RESTATED 2004 INCENTIVE PLAN
PERFORMANCE SHARE AWARD AGREEMENT

We are pleased to inform you that you have been awarded by Strategic Hotels & Resorts, Inc. (the “Company”) the opportunity to earn a performance share award (the “Performance Share Award”) subject to your waiver of a provision in your Executive Agreement as set forth in Section 15 below.



Employee Name:
Target Number of Shares Subject to the Award (“Target Shares”):
Performance Period:	January 2, 2015 (“Start Date”) through December 29, 2017 (“End Date”)

1.Earning Performance Shares Award

(a) Base Performance Shares

Shares of Common Stock are earned under this Performance Share Award based on the following performance metric (the “Performance Metric”): the Relative SNL Lodging Index TSR Performance.

Shares of Common Stock are earned according to Relative SNL Lodging Index TSR Performance as set forth below:



Percentile Rank	Multiple of Target Shares Earned
85% or Higher	2.0
50%	1.00
25%	0.25
Below 25%	0

(b) Dividend Equivalents:

Except as otherwise provided by a deferral election pursuant to Section 7 of this Agreement, the aggregate dividends that would have been paid with respect to an ex date occurring from the Start Date through the date of distribution of shares of Common Stock or cash under this Performance Share Award Agreement on the aggregate of the shares of Common Stock earned (including, without limitation, those shares of Common Stock deemed earned but paid in cash in a Go Private Transaction (as defined hereafter)) under this Agreement without regard to this Section 1(c) shall be paid to you in cash at approximately the same time as the distribution of shares of Common Stock or in a Go Private Transaction, cash under this Performance Share Award.

Notwithstanding anything to the contrary herein:

(1) No more than the Target Shares will be earned under this Performance Share Award if the Company TSR is less than or equal to 100%.

(d) Example:

An example of a calculation of the earning of a Performance Share Award is set forth in Exhibit A.

2. Determining Performance Metric

To determine relative performance, the baseline metrics are the 60-trading day average closing price of a share of Common Stock of the Company and of a share of common stock of each Index Company, with the last of the 60-trading days falling on December 31, 2014. This 60-trading day average establishes both the Company’s Start Date Average Price and the Index Company Baseline Stock Price against which future Company stock performance and the stock performance of Index Companies within the applicable Index will be compared. If a company was added to the applicable Index after the Start Date, such company’s average closing stock price for the 60-trading days prior to joining the Index will be used for purposes of determining the Index Company Baseline Stock Price. In the event such Index Company does not have a trading history prior to joining the Index, the average closing stock price for the 60-trading days starting on the day the Index Company joined the Index will be used for purposes of determining the Index Company Baseline Stock Price. Any companies included in the applicable Index as of the Start Date but which are no longer included in the applicable Index as of the Performance Date will not be included in the TSR analysis with respect to such Index.

Company performance will be measured by dividing the Performance Date Average Price plus Company dividends reinvested as of each dividend ex-date between Start Date and the Performance Date by the Start Date Average Price, with the quotient expressed as a percentage of the Start Date Average Price (the “Company TSR”). The performance for each Index Company will be measured separately by dividing the Index Company Performance Date Average Price plus Index Company dividends reinvested as of each dividend ex-date between Start Date and the Performance Date by the Index Company Baseline Stock Price, with the quotient expressed as a percentage of the Index Company Baseline Stock Price (the “Index Company TSR”).

Therefore, the TSR for the Company and each Index Company equals the change in value between Start Date Average Price and the Performance Date Average Price, plus dividends reinvested as of each dividend ex-date between Start Date and Performance Date, as a percentage of the Start Date Stock Price.

An example including the calculation of Start Date Average Price and a calculation of Company TSR for a prior three year period is set forth in Exhibit B.

3. Change of Control

Notwithstanding any other provision of this Agreement,if a Change of Control occurs prior to December 29, 2017 the end date for the Performance Period shall be treated as the date immediately prior to the Change of Control rather than December 29, 2017 and the relative TSR ranking for the Performance Metrics will be determined based on a shortened Performance Period (“Change of Control Performance Period”) and TSRs for Index Companies that shall be determined based on the 60-trading day average closing price of each Index Company’s common stock with the last trading day of such 60-trading day period ending immediately prior to the date of public announcement of the Change of Control. For purposes of the calculation of the Company’s TSR for the Change of Control Performance Period, the Company’s Performance Date Average Price shall be the fair market value of a share of Common Stock in the Change of Control. The Company’s TSR for the Change of Control Performance Period shall equal the Performance Date Average Price as determined pursuant to the preceding sentence plus dividends reinvested as of each dividend ex-date between the Start Date and the Performance Date, as a percentage of the Start Date Stock Price.

All payments under this Performance Share Award with respect to a Change of Control constituting a Go Private Change of Control Transaction shall be paid in cash. For purposes of this Performance Share Award, a “Go Private Change of Control Transaction” shall be deemed to have occurred if on or immediately following the Change of Control no shares of Common Stock or other common stock of the Company (or any successor) are traded on a national securities exchange.

4. Termination of Employment or Services

If you terminate your employment or service relationship with the Employer voluntarily (not including (i) a Constructive Termination in 2017 or in anticipation of (and a Change of

Control occurs), on or following a Change of Control or (ii) death or Disability at any time) or if the Company terminates your employment or service relationship (not including a termination of employment or service relationship without Cause in 2017 or in anticipation of (and a Change of Control occurs), on or following a Change of Control), you shall have no right to any shares of Common Stock under this Performance Share Award and this Performance Share Award will immediately terminate without the payment of any further consideration to you.

If during 2017, other than in anticipation of (and a Change of Control occurs), on or following a Change of Control, either the Employer terminates your employment or service relationship without Cause or you terminate your employment or service relationship with the Employer as a result of a Constructive Termination, you will become fully vested in a pro-rata portion of the shares of Common Stock that you would have earned under this Performance Share Award if you had remained employed through December 29, 2017 determined by multiplying the number of shares of Common Stock that you would have earned under this Performance Share Award if you had remained employed through December 29, 2017 by a fraction with the numerator equal to the number of full calendar months from the January 1, 2015 until your termination of employment or services and the denominator equal to 36 (the number of full calendar months from January 1, 2015 until December 29, 2017). Such pro rata portion of the Performance Share Award shall be paid in accordance with the Plan.

If, other than on or following a Change of Control, your employment or service relationship with the Employer terminates because of death, Disability or Retirement, you will become fully vested in a pro-rata portion of the shares of Common Stock that you would have earned under this Performance Share Award if you had remained employed through December 29, 2017 determined by multiplying the number of shares of Common Stock that you would have earned under this Performance Share Award by a fraction with the numerator equal to the number of full calendar months from the January 1, 2015 until your termination of employment or services and the denominator equal to 36 (the number of full calendar months from the January 1, 2015 until December 29, 2017). Such pro rata portion of the Performance Share Award shall be paid in accordance with the Plan.

If your employment or service relationship with the Employer terminates because of death, Disability or Retirement on or after a Change of Control or by the Employer without Cause in anticipation of (and a Change of Control occurs), on or after a Change of Control of the Company or in a Constructive Termination in anticipation of (and a Change of Control occurs), on or after a Change of Control, you are fully vested in the shares of Common Stock earned under this Performance Share Award and such Performance Share Award shall be paid as soon as practicable following the earlier of your termination of employment or service relationship or the Distribution Date in accordance with the Plan.

5. Acknowledgement of No Single-Trigger Change of Control Vesting

By signing this Performance Share Award, you hereby acknowledge that you have no right to accelerated vesting of the Performance Share Award upon a Change of Control, except on or after a Change of Control with respect to a termination of your employment or service relationship by the Employer because of death, Disability or Retirement or in anticipation of

(and a Change of Control occurs), on or after a Change of Control with respect to a termination of your employment or service relationship by the Employer without Cause or in a Constructive Termination as set forth in Section 4.

6. Distributions of Shares of Common Stock

Except as otherwise provided by a deferral election pursuant to Section 7 of this Agreement or by virtue of a Change of Control as described in Section 3 and 4, shares of Common Stock earned pursuant to Sections 1, 2, 3 or 4 shall be distributed in the first calendar quarter of 2018 (no later than March 15, 2018).

If, however, you elect to defer payment of the shares of Common Stock as provided in Section 7 of this Agreement, the shares of Common Stock shall be issued as set forth in the Deferral Election Agreement entered into between you and the Committee.

7. Deferral Election

Subject to Section 14, you may elect to defer delivery of the shares of Common Stock that would otherwise be due by virtue of the satisfaction of the requirements for distribution of shares of Common Stock under this Performance Share Award Agreement. The Committee shall, in its sole discretion, establish the rules and procedures for such deferral elections and payment deferrals.

8. No Rights as Shareholder

You shall not have voting or any other rights as a shareholder of the shares of Common Stock with respect to the Performance Share Award until shares of Common Stock are actually delivered to you pursuant to Section 4 or 6. Upon delivery of shares of Common Stock pursuant to this Performance Share Award, you will obtain full voting and other rights as a shareholder of the Company.

9. Securities Law Compliance

10. Transfer Restrictions

prohibited and void except a transfer after death by will or by the applicable laws of descent and distribution.

11. Independent Tax Advice

12. Withholding and Disposition of Shares of Common Stock

You agree to make arrangements satisfactory to the Employer for the payment of any federal, state, local or foreign withholding tax obligations that arise with respect to this Performance Share Award, including, without limitation, the receipt of shares of Common Stock or cash. Notwithstanding the previous sentence, you acknowledge and agree that the Employer has the right to deduct from payments of any kind otherwise due to you any federal, state or local taxes of any kind required by law to be withheld with respect this Performance Share Award, including, without limitation, the receipt of shares of Common Stock or cash.

13. General Provisions

13.1 No Waiver. No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.

13.2 Undertaking. You hereby agree to take whatever additional action and execute whatever additional documents the Committee may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either you, the Performance Share Award or the shares of Common Stock or cash acquired pursuant to the express provisions of this Agreement.

13.3 Agreement Is Entire Contract. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof.

13.4 Successors and Assigns. The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and you and your legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law,

whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.

13.5 No Employment or Service Contract. This Agreement does not confer upon you any right with respect to continuance of employment by the Employer, nor does it interfere in any way with the right of your employer to terminate your employment or services at any time.

13.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but which, upon execution, will constitute one and the same instrument.

13.7 Governing Law. This Agreement will be construed and administered in accordance with and governed by the laws of the State of Illinois.

14. Section 409A Compliance

The Company intends that any distribution of shares of Common Stock or cash, deferral and other provisions applicable to your Performance Share Award fully comply with the payout and other limitations and restrictions imposed under Section 409A of the Internal Revenue Code of 1986, as amended (“Code”), as clarified or modified by IRS guidance, including without limitation, treating the date you have a separation from service under Code Section 409A as the date you terminate employment or your service relationship for purposes of this Agreement – in each case if and to the extent such Code Section 409A is otherwise applicable to your Performance Share Award and such compliance is necessary to avoid the penalties otherwise imposed under Code Section 409A. In this connection, the Company and you agree that the payout timing provisions applicable to the Performance Share Award, and the terms of any deferral and other rights regarding such Performance Share Award, shall be deemed modified, if and to the extent necessary to comply with the payout and other limitations and restrictions imposed under Code Section 409A, as clarified or modified by IRS guidance – in each case if and to the extent such Code Section 409A is otherwise applicable to your Performance Share Award and such compliance is necessary to avoid the penalties otherwise imposed under Section 409A. This Performance Share Award is subject to Section 17.5 of the Plan.

15. Waiver of Accelerated Vesting in Executive Agreement

The grant of this Performance Share Award and the ability to earn any shares of Common Stock or cash hereunder is contingent upon your waiver of the accelerated vesting provisions of Section 3(c) of your Executive Agreement with respect to this Performance Share Award. The accelerated vesting provisions of Section 3(c) of your Executive Agreement do not apply to this Performance Share Award.

REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 23^rd day of February 2015 and specifically agree that the accelerated vesting provisions of Section 3(c) of the Executive Agreement do not apply to this Performance Share Award and this Performance Share Award shall serve as an amendment to the Executive Agreement solely with respect to vesting under this Performance Share Award.

STRATEGIC HOTELS & RESORTS, INC.

By: Paula C. Maggio


Its:	Executive Vice President, General Counsel & Secretary

(Employee Name)

(Employee Signature)

EXHIBIT A

EXAMPLE OF PERFORMANCE SHARE AWARD CALCULATION



	Company % TSR Rank	Multiple

SNL Lodging Index	72	1.61



Multiple		Target Grant

1.61	X	10,000	=	Base Grant 16,100

The example above does not include dividend equivalents payable in cash.

A-1

EXHIBIT B

EXAMPLE OF PRICE CALCULATION

Start Date Average Price was calculated as set forth below:



Date	Close	Date	Close
31-Dec-14	13.23	17-Nov-14	12.85
30-Dec-14	13.48	14-Nov-14	12.85
29-Dec-14	13.58	13-Nov-14	12.92
26-Dec-14	13.57	12-Nov-14	12.75
24-Dec-14	13.55	11-Nov-14	12.74
23-Dec-14	13.56	10-Nov-14	12.67
22-Dec-14	13.50	7-Nov-14	12.52
19-Dec-14	13.31	6-Nov-14	12.69
18-Dec-14	13.34	5-Nov-14	12.69
17-Dec-14	13.25	4-Nov-14	12.77
16-Dec-14	12.87	3-Nov-14	12.95
15-Dec-14	12.87	31-Oct-14	12.85
12-Dec-14	13.12	30-Oct-14	12.67
11-Dec-14	13.09	29-Oct-14	12.67
10-Dec-14	13.06	28-Oct-14	12.69
9-Dec-14	13.06	27-Oct-14	12.48
8-Dec-14	12.81	24-Oct-14	12.36
5-Dec-14	12.83	23-Oct-14	12.31
4-Dec-14	12.76	22-Oct-14	12.03
3-Dec-14	12.81	21-Oct-14	11.94
2-Dec-14	12.83	20-Oct-14	11.74
1-Dec-14	13.03	17-Oct-14	11.60
28-Nov-14	13.28	16-Oct-14	11.58
26-Nov-14	13.09	15-Oct-14	11.24
25-Nov-14	13.02	14-Oct-14	11.35
24-Nov-14	13.01	13-Oct-14	11.23
21-Nov-14	12.91	10-Oct-14	11.30
20-Nov-14	13.02	9-Oct-14	11.55
19-Nov-14	12.94	8-Oct-14	11.69
18-Nov-14	13.03	7-Oct-14	11.25



Average		$12.68

B-1

EXAMPLE OF TSR CALCULATION

Below is a calculation of TSR for the Company from 2005 to 2007:



Date	Stock Price		Dividends Per Share		Value of $100 Initial Investment		TSR

12/31/04 60 Day Avg.		$14.82				$100.00
3/29/05 Dividend Ex-Date		$14.30		$0.22		$97.98
6/28/05 Dividend Ex-Date		$17.96		$0.22		$124.56
9/28/05 Dividend Ex-Date		$17.70		$0.22		$124.28
12/16/05 Dividend Ex-Date		$20.35		$0.22		$144.43
3/29/06 Dividend Ex-Date		$22.90		$0.23		$164.16
6/28/06 Dividend Ex-Date		$20.06		$0.23		$145.45
9/27/06 Dividend Ex-Date		$20.04		$0.23		$146.98
12/22/06 Dividend Ex-Date		$21.14		$0.23		$156.73
3/23/07 Dividend Ex-Date		$23.54		$0.24		$176.30
6/22/07 Dividend Ex-Date		$22.20		$0.24		$168.07
9/24/07 Dividend Ex-Date		$20.95		$0.24		$160.42
12/24/07 Dividend Ex-Date		$18.37		$0.24		$142.50
12/31/07 60 Day Avg.		$21.61				$167.64	167.64	%

A comparable methodology for determining TSR for the Company and Index Companies during the Performance Period or Change of Control Performance Period shall be used.

B-2

APPENDIX

“Executive Agreement” means your Agreement with the Company dated ____________.

“Constructive Termination” has the meaning assigned to it in your Executive Agreement.

“Cause” has the meaning assigned to it in your Executive Agreement.

“Index Company” means each of the companies including in the SNL Lodging Index.

“Index Company Baseline Stock Price” means the baseline common stock price for each Index Company.

“Performance Date” means the earlier of the End Date or the date of a Change of Control.

“Retirement” means retirement on or after age 62 from the Employer.

“Start Date Average Price” means the average closing price of a Share during the 60-day trading period immediately prior to the Start Date.

“TSR” means the total shareholder return.

B-3

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Raymond L. Gellein, Jr., certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Strategic Hotels & Resorts, 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 officer 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 officer 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 function):


(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: May 4, 2015

/s/ Raymond L. Gellein, Jr.

Raymond L. Gellein, Jr.

Chief Executive Officer

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Diane M. Morefield, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Strategic Hotels & Resorts, 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 officer 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 officer 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 function):


(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: May 4, 2015

/s/ Diane M. Morefield

Diane M. Morefield

Chief Financial Officer

Exhibit 32.1

SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with the Quarterly Report of Strategic Hotels & Resorts, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Raymond L. Gellein, Jr., 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:


1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 4, 2015

/s/ Raymond L. Gellein, Jr.

Raymond L. Gellein, Jr.

Chief Executive Officer

Exhibit 32.2

SECTION 906 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

In connection with the Quarterly Report of Strategic Hotels & Resorts, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Diane M. Morefield, 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:


1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 4, 2015

/s/ Diane M. Morefield

Diane M. Morefield

Chief Financial Officer

Exhibit 99.1

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Our quarterly report on Form 10-Q for the quarter ended March 31, 2015, our annual report on Form 10-K for the year ended December 31, 2014, our 2014 annual report to shareholders, any of our other quarterly reports on Form 10-Q or current reports on Form 8-K, or any other oral or written statements made in press releases or otherwise by or on behalf of Strategic Hotels & Resorts, Inc., may contain forward-looking statements within the meaning of the Section 21E of the Exchange Act, which involve certain risks and uncertainties. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These forward-looking statements are identified by their use of such terms and phrases as “intends,” “intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,” “expected,” “project,” “projected,” “projections,” “plans,” “predicts,” “potential,” “seeks,” “anticipates,” “anticipated,” “should,” “could,” “may,” “will,” “designed to,” “foreseeable future,” “believe,” “believes” and “scheduled” and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Our actual results may differ significantly from any results expressed or implied by these forward-looking statements. Some, but not all, of the factors that might cause such a difference include, but are not limited to:



•		the effects of economic conditions and disruptions in financial markets upon business and leisure travel and the hotel markets in which we invest;



•		our liquidity and refinancing demands;



•		our ability to obtain, refinance or extend maturing debt;



•		our ability to maintain compliance with covenants contained in our debt facilities;



•		stagnation or deterioration in economic and market conditions, particularly impacting business and leisure travel spending in the markets where our hotels and resorts operate and in which we invest, including luxury and upper upscale product;



•		general volatility of the capital markets and the market price of our shares of common stock;



•		availability of capital;



•		our ability to dispose of properties in a manner consistent with our investment strategy and liquidity needs;



•		hostilities and security concerns, including future terrorist attacks, or the apprehension of hostilities, in each case that affect travel within or to the United States, Germany or other countries where we invest;



•		difficulties in identifying properties to acquire and completing acquisitions;



•		our failure to maintain effective internal control over financial reporting and disclosure controls and procedures;



•		risks related to natural disasters;



•		increases in interest rates and operating costs, including insurance premiums and real property taxes;



•		contagious disease outbreaks;



•		delays and cost-overruns in construction and development;



•		marketing challenges associated with entering new lines of business or pursuing new business strategies;



•		our failure to maintain our status as a real estate investment trust, or REIT;



•		changes in the competitive environment in our industry and the markets where we invest;



•		changes in real estate and zoning laws or regulations;



•		legislative or regulatory changes, including changes to laws governing the taxation of REITs;



•		changes in generally accepted accounting principles, policies and guidelines;



•		litigation, judgments or settlements; and



•		the risk factors set forth below.

Risks related to our business

Economic conditions and disruptions in the financial markets may adversely affect our business, results of operations and liquidity.

The United States and global equity and credit markets have at times experienced significant price volatility, dislocations and liquidity disruptions since 2008, all of which caused market prices of the stock of many companies to fluctuate substantially and the spreads on prospective and outstanding debt financings to widen considerably. These circumstances led to a decline in business and consumer confidence, resulted in a decline of real estate values, and impacted liquidity in the global financial markets, which made terms for financings less attractive, and, in some cases, resulted in the lack of availability of certain types of financing. Continued uncertainty in the equity and credit markets may impact negatively our ability to access additional short-term and long-term financing on reasonable terms or at all, which would impact negatively our liquidity and financial condition. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing and may impact negatively our ability to enter into derivative contracts in order to hedge risks associated with changes in interest rates. In addition, a downturn and/or uncertainty in U.S. and global financial markets could, directly or indirectly, adversely affect the value of our properties and lodging demand and therefore our business, financial condition and results of operations. The ultimate impact of these events and the effects they may have on our business, financial condition and liquidity are unpredictable and may not be immediately apparent.

We incurred losses in recent fiscal years due to the recent economic downturn, and we may incur losses in the future.

We incurred net losses of $58.3 million, $4.9 million and $230.8 million for our 2012, 2011 and 2010 fiscal years, respectively, due to the recent economic downturn that negatively impacted business and leisure travel. In the event the current economic recovery stalls and negative economic conditions return, we will likely incur additional losses. There can be no assurance that we will maintain profitable operations and generate net income for our stockholders in the near term or at all.

Our financial covenants may adversely affect our financial position, results of operations and liquidity.

The agreement governing our bank credit facility and certain other agreements include financial and other covenants that must be met for us to remain in compliance with those agreements. Those agreements also contain customary restrictions, requirements and other limitations, including restrictions on our ability to incur additional indebtedness. Importantly, our bank credit facility contains financial covenants that must be met, including the maintenance of stipulated minimum levels of tangible net worth and fixed charge coverage, and maximum levels of leverage and borrowing base availability. Availability under our bank credit facility is based on, among other factors, the lesser of the calculation of 1.4 times debt service coverage based on the greater of the in-place interest rate or 7.0% debt constant for the borrowing base assets or a 55% advance rate against the appraised value of the borrowing base assets. Our ability to borrow under our bank credit facility is subject to compliance with these financial and other covenants, and our ability to comply with these covenants will be impacted by, among other things, any deterioration in our operations brought on by the recent economic downturn, potential further declines in our property values and additional borrowings to maintain our liquidity and fund our capital and financing obligations.

Our available capacity under the bank credit facility and compliance with financial covenants in future periods will depend substantially on the financial results of our hotels and resorts, and in particular, the results of the borrowing base assets, which include the Four Seasons Jackson Hole hotel, the Four Seasons Silicon Valley hotel, the Marriott Lincolnshire Resort, the Ritz-Carlton Half Moon Bay hotel and the Ritz-Carlton Laguna Niguel hotel. If the financial results of our hotels and resorts deteriorate, or if our property values decline, the maximum availability under the bank credit facility may decline to a level below our short-term borrowing needs. If that were to occur, outstanding borrowings exceeding the maximum availability under the bank credit facility would need to be repaid to avoid a default under the bank credit facility, absent an amendment or waiver. If we are unable to borrow under our bank credit facility or to refinance existing indebtedness, we may be prevented from funding our working capital needs.

In the event that the current economic recovery stalls and negative economic conditions return and our business significantly deteriorates, we may be required to take further steps to acquire the funds necessary to satisfy our short-term cash needs, including possibly liquidating some of our assets on terms that would be less attractive than would be obtainabl

e after conditions in the economy, the credit markets and the hotel markets improve. If negative conditions return, our business deteriorates and we do not achieve a successful disposition of assets or increase our liquidity through alternative channels or modify or obtain a waiver to certain terms of our bank credit facility, we may breach one or more of our financial covenants or the maximum availability under the bank credit facility may fall below our short-term borrowing needs. A default under the bank credit facility would allow the lenders to declare all amounts outstanding under the facility to become due and payable.

We have substantial debt, a portion of which is variable-rate debt, and upon maturity, we plan to extend or refinance with new debt, which may not be available when required on optimal terms or at all.

We have a substantial amount of outstanding indebtedness, a portion of which bears interest at a variable-rate, and to the extent available, we may borrow additional variable-rate debt under our bank credit facility. When we seek to refinance our outstanding indebtedness, our interest expense may increase. Increases in interest rates on our existing variable-rate indebtedness, or on new indebtedness we incur when refinancing our existing indebtedness, would increase our interest expense, which could harm our cash flow and our ability to pay distributions. As of March 31, 2015, we had total debt of approximately $1.9 billion, and approximately 60.9% of our total debt had variable interest rates.

Our significant debt may negatively affect our business and financial results, including:



	•		requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which reduces the amounts available for distributions to our stockholders and funds available for operations, capital expenditures, future business opportunities and other purposes;



	•		making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions;



	•		limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and



	•		requiring us to dispose of properties to make required payments of interest and principal.

Since we anticipate that our internally generated cash will be adequate to repay only a portion of our indebtedness prior to maturity, we expect that we will be required to repay debt through refinancings and/or equity offerings. The amount of our existing indebtedness may adversely affect our ability to repay debt through refinancings. See the discussion under the subheading “Debt Maturity:” in Note 8 of the Notes to our Unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this quarterly report on Form 10-Q for the quarter ended March 31, 2015 for quantified information regarding our debt maturities as of March 31, 2015. There can be no assurance that we will be able to refinance our debt with new borrowings on favorable terms or at all or raise capital through the sale of equity. If we are unable to refinance or restructure our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of our properties on disadvantageous terms, or forfeit the property securing such indebtedness, which might result in losses to us and which might adversely affect cash available for distributions to our stockholders. Alternatively, any debt we may arrange may carry a higher rate of interest or the shares we issue in any equity offering may require a higher rate of dividends or other dilutive terms. As a result, certain growth initiatives could prove more costly or not economically feasible. A failure to retain or refinance our bank credit facility or to add new or replacement debt facilities could have a material adverse effect on our business, financial condition and results of operations.

We also could incur additional debt in connection with future acquisitions of real estate. We may, in some instances, to the extent available, borrow under our bank credit facility or borrow new funds to acquire properties. In addition, we may incur mortgage debt by obtaining loans secured by a portfolio of some or all of the real estate properties we acquire. If necessary or advisable, we may also borrow funds to satisfy the requirement that we distribute to stockholders at least 90% of our annual REIT taxable income or to ensure otherwise that we maintain our qualification as a REIT for U.S. federal income tax purposes.

Our working capital and liquidity reserves may not be adequate to cover all of our cash needs and we may have to obtain financing from either affiliated or unaffiliated sources. If the United States and global financial markets experience another downturn or turmoil, sufficient financing may not be available or, if available, may not be available on reasonable terms. Additional borrowings for working capital purposes will increase our interest expense, and therefore may harm our financial condition and results of operations.

Our organizational documents do not limit the amount of indebtedness that we may incur. To the extent we become more leveraged, the resulting increase in our debt service obligations would reduce cash available for distributions to our stockholders and could adversely affect our ability to make payments on our outstanding indebtedness and harm our financial condition.

We own primarily upper upscale and luxury hotels and resorts, and the upper upscale and luxury segments of the lodging market are highly competitive and generally subject to greater volatility than other segments of the market, which could negatively affect our profitability.

The upper upscale and luxury segments of the hotel business are highly competitive. Our hotels and resorts compete on the basis of location, room rates and quality, service levels, reputation and reservations systems, among many other factors. There are many competitors in our hotel chain scale segments, and many of these competitors have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and room revenue at our hotels and resorts, which would harm our operations. Over-building in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. We also face competition from nationally recognized hotel brands with which we are not associated. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale and luxury hotels and resorts when compared to other classes of hotels and resorts.

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

In addition, hotel properties may not readily be converted to alternative uses if they were to become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements and as a result our ability to sell the property would be limited. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly harm our financial condition and results of operations.

Certain of our long-lived assets, intangible assets, investments in unconsolidated affiliates and goodwill have in the past become impaired and may become impaired in the future.

We periodically review each of our hotels and resorts and any related goodwill for possible impairment. Based on the results of these analyses, in fiscal years 2013 and 2012 we wrote off $0.7 million and $14.6 million, respectively, to impairment losses to reduce the carrying value of long-lived assets to their estimated fair values. Our other hotels and related goodwill may become impaired, or our hotels which have previously become impaired may become further impaired, in the future, which may adversely affect our financial condition and results of operations.

We rely to a significant extent on our president and chief executive officer, Mr. Raymond L. Gellein, Jr., the loss of whom could have a material adverse effect on our business.

Our continued success will depend to a significant extent on the efforts and abilities of our president and chief executive officer, Mr. Raymond L. Gellein, Jr. Mr. Gellein has served as our president and chief executive officer since November 2012 and has served as our chairman of the board since August 2010. Mr. Gellein is an experienced hotel industry senior executive and operator. As chairman of the board, president, and chief executive officer, Mr. Gellein is actively engaged in our management and determines our strategic direction, especially with regard to our operational, financing, acquisition and disposition activities. Mr. Gellein's departure could have a material adverse effect on our operations, financial condition and operating results. Pursuant to Mr. Gellein’s employment agreement, as amended, Mr. Gellein will serve as our president and chief executive officer through December 31, 2015, subject to earlier termination under certain circumstances described in the agreement. We can make no assurance that Mr. Gellein’s employment agreement will be extended beyond its current expiration date.

The geographic concentration of our hotels in California makes us more susceptible to an economic downturn or natural disaster in that state.

As of May 1, 2015, eight of the hotels and resorts we own were located in California, the greatest concentration of our portfolio of properties in any state. California has been historically at greater risk to certain acts of nature, such as fire, floods and earthquakes, than other states, and has also been subject to a more pronounced economic downturn than other states. It is also possible that a change in California laws applicable to hotels and resorts and the lodging industry may have a greater impact on us than a change in comparable laws in another jurisdiction where we have hotels and resorts. Accordingly, our business, financial condition and results of operations may be particularly susceptible to a natural disaster, downturn or changes in the California economy.

We have suspended the payment of dividends on our common stock.

In November 2008, we suspended payment of our dividend on our shares of common stock. We can provide no assurance as to when we will resume paying dividends on our common stock, if ever.

If we fail to maintain effective internal control over financial reporting and disclosure controls and procedures in the future, we may not be able to accurately report our financial results, which could have an adverse effect on our business.

If our internal control over financial reporting and disclosure controls and procedures are not effective, we may not be able to provide reliable financial information. If we discover deficiencies in our internal controls, we will make efforts to remediate these deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or in their remediation. Any failure to maintain effective controls in the future could adversely affect our business or cause us to fail to meet our reporting obligations. Such non-compliance could also result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our consolidated financial statements. In addition, perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts and others could be adversely affected.

Rising operating expenses and costs of capital improvements could reduce our cash flow, earnings before interest expense, taxes, depreciation and amortization (EBITDA) and funds available for future distributions.

Our properties are subject to operating risks common to the lodging industry in general. If a property’s occupancy or room rates drop to the point where its revenues are insufficient to cover its operating expenses, then we could be required to spend additional funds for that property’s operating expenses. Our properties are continually subject to increases in real estate and other tax rates, wages and benefits, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which may reduce our cash flow, EBITDA and funds available for future distributions to our stockholders.

Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. Some of these capital improvements are mandated by health, safety or other regulations. These capital improvements may give rise to (i) a possible shortage of available cash to fund capital improvements, (ii) the possibility that financing for these capital improvements may not be available to us on affordable terms and (iii) uncertainties as to market demand or a loss of market demand after capital improvements have begun. The costs of these capital improvements could adversely affect our financial condition and amounts available for distributions to our stockholders.

Our business and operating results depend in large part upon the performance of third-party hotel management companies that manage our hotels and resorts.

Our hotels and resorts are managed by third-party hotel management companies pursuant to management agreements or, with respect to the Marriott Hamburg hotel, the lease applicable to that property. Therefore, our business and operating results depend in large part upon the performance of these hotel management companies under these management agreements.

Under the terms of these management agreements, the third-party hotel managers control the daily operations of our hotels and resorts. We do not have the authority to require any hotel or resort to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels and resorts are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, net revenue per available room or average daily rate, we may not be able to force the hotel management companies in question to change their methods of operation of our hotels and resorts. Additionally, in the event that we need to replace any hotel management company, we may be required by the terms of the applicable management agreement to pay a substantial termination fee and may experience disruptions at any affected hotel. The effectiveness of the hotel management companies in managing our hotels and resorts will, therefore, significantly affect the revenues, expenses and value of our hotels and resorts. Occasionally, we have discovered accounting and other errors at some of our properties relating to the improper recording of income statement expenses, misstated inventories and other items apparently caused by poor accounting practices and oversight. In the event our third-party hotel management companies are not able to implement and maintain appropriate accounting or other controls with respect to our properties, our business, results of operations and financial condition could be adversely affected.

Additionally, the hotel management companies that operate our hotels and resorts and their affiliates own, operate, or franchise properties other than our properties, including properties that directly compete with our properties. Therefore, a hotel management company may have different interests than our own with respect to short-term or long-term goals and objectives, including interests relating to the brand under which such hotel management company operates. Such differences may be significant depending upon many factors, including the remaining term of the applicable management agreement, trade area restrictions with respect to competitive practices by the hotel management company or its affiliates or differing policies, procedures or practices. Any of these factors may adversely impact the operation and profitability of a hotel or resort, which could harm our financial condition and results of operations.

All revenues generated at our hotels and resorts, including credit card receivables, are deposited by the payors into accounts maintained and controlled by the relevant hotel management company, which pays operating and other expenses for the relevant hotel (including real and personal property taxes), pays itself management fees in accordance with the terms of the applicable management agreement and makes deposits into any reserve funds required by the applicable management agreement. In the event of a bankruptcy or insolvency involving a hotel management company, there is a risk that the payment of operating and other expenses for the relevant hotel and payment of revenues to us may be delayed or otherwise impaired. The bankruptcy or insolvency of a hotel management company may significantly impair its ability to provide services required under the management agreement.

Certain of the employees at our hotels and resorts are covered by collective bargaining agreements and labor disputes may disrupt operations or increase costs at our hotels and resorts.

Our hotel management companies act as employer of the hotel-level employees. At certain of our hotels, these employees are covered by collective bargaining agreements. At the current time, the collective bargaining agreement at the Hotel del Coronado has expired. At this time, we cannot predict when or whether a new agreement will be reached and what the impact of prolonged negotiations could be. If an agreement is reached, or if any of our hotels not currently operating under a collective bargaining agreement enters into one, such agreements may cause us to incur additional expenses related to the employees at our hotels, thereby reducing our profits and impacting our financial results negatively. Additionally, if agreements are not reached and there are labor disputes, including strikes, operations at our hotels could suffer due to the diversion of business to other hotels or increased costs of operating the hotels during such a labor dispute, thereby impacting our financial results negatively.

The outbreak of an epidemic or pandemic disease may have an adverse impact on our financial results.

An outbreak of an epidemic or pandemic disease may have a significant adverse impact on travel and the lodging industry. As a consequence, our financial results of operations may be adversely effected.

Our renovation and development activities are subject to timing, budgeting and other risks.

We are in the process of renovating several of our properties and expect to continue similar activities in the future. In addition, we have in the past, and may in the future, develop and redevelop certain properties. These renovation, development, and redevelopment activities and the pursuit of acquisition and other corporate opportunities expose us to certain risks, including those relating to:



	•		construction delays or cost overruns that may increase project costs and, as a result, make the project uneconomical;



	•		displacement in revenue during the period of renovation;



	•		defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify any such situation;



	•		the failure to complete construction of a property on schedule;



	•		insufficient occupancy rates at a completed project impeding our ability to pay operating expenses or achieve targeted rates of return on investment;



	•		the incurrence of acquisition and/or predevelopment costs in connection with projects that are delayed or not pursued to completion;



	•		natural disasters such as earthquakes, hurricanes, floods or fires that could adversely impact a project;



	•		receipt of zoning, occupancy, building, land-use or other required governmental permits and authorizations; and



	•		governmental restrictions on the nature or size of a project or timing of completion.

In the case of an unsuccessful project, we may be required to write off capitalized costs associated with the project and such write-offs may be significant and adversely affect our financial condition and results of operations.

We face competition for the acquisition of real estate properties.

We compete with institutional pension funds, private equity investors, other REITs, owner-operators of hotels and resorts and others who are engaged in real estate investment activities that focus on the acquisition of hotels and resorts. These competitors

may drive up the price we must pay for real estate property, other assets or other companies we seek to acquire or may succeed in acquiring those real estate properties, other assets or other companies themselves. In addition, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater resources, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of entities competing for suitable investment properties may increase in the future. This would result in increased demand for these real estate properties, other assets or other companies and therefore increase the prices required to be paid for them. If we pay higher prices for real estate properties, other assets or other companies, our profitability may be reduced. Also, future acquisitions of real property, other assets or other companies may not yield the returns we expect and, if financed using our equity, may result in stockholder dilution. We also may not be successful in identifying or consummating acquisitions and investments in unconsolidated affiliates on satisfactory terms. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for intangible assets. We also may incur significant expenses in connection with acquisition or other corporate opportunities we pursue but do not consummate.

Investing through partnerships decreases our ability to manage risk.

In addition to acquiring or developing hotels and resorts directly, we have from time to time invested, and expect to continue to invest in hotels and ancillary businesses, as a partner. Partners often have shared control over the operation of the assets. Therefore, investments may involve risks such as the possibility that the partner in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a partner might subject hotels, resorts and businesses to additional risk. We may be unable to take action without the approval of our partners, and alternatively, our partners could take actions without our consent. Additionally, should a partner become bankrupt, we could become liable for our partner’s share of liabilities.

Our business and operations would suffer in the event of system failures.

Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.

Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.

The hospitality industry is under increasing attack by cyber-criminals in the United States and other jurisdictions in which we operate. These attacks can be deliberate attacks or unintentional events that could cause interruptions or delays in our business, loss of data, or render our management companies unable to process reservations. Accordingly, an extended interruption in the ability of any system to function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.

While we carry property and business operation interruption insurance, we may not be sufficiently compensated for all losses we may incur. These losses include not only a loss of revenues but also potential reputational damage to the brands which manage our hotels, our brand and litigation, fines or regulatory action against us. Furthermore, we may also incur substantial remediation costs to repair system damage as well as satisfy liabilities for stolen assets or information that may further reduce our profits.

Risks related to the lodging and real estate industries

A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including those described elsewhere herein as well as the following:



	•		increased competition from new supply or existing hotel properties in our markets, which would likely adversely affect occupancy and revenues at our hotels and resorts;



	•		dependence on business, commercial and leisure travelers and tourism;



	•		dependence on group and meeting/conference business;



	•		increases in energy costs, airline bankruptcies, airline strikes or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists;



	•		risks generally associated with the ownership of hotel properties and real estate, as we discuss in more detail below;



	•		general economic and business conditions affecting the lodging and travel industry, both nationally and locally, including a prolonged U.S. recession;



	•		increases in operating costs due to inflation, labor costs (including the impact of unionization), workers’ compensation and health-care related costs (including the impact of the Patient Protection and Affordable Care Act), utility costs, insurance and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates;



	•		changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; and



	•		adverse effects of international market conditions, which may diminish the desire for leisure travel or the need for business travel, as well as national, regional and local economic and market conditions in which our hotels and resorts operate and where our customers live.

These factors could have an adverse effect on our financial condition and results of operations, which may affect our ability to make distributions to our stockholders.

Uninsured and underinsured losses could adversely affect our financial condition and results of operations, which may affect our ability to make distributions to our stockholders.

Various types of catastrophic losses, such as losses due to wars, terrorist acts, earthquakes, floods, hurricanes or pollution or other environmental matters generally are either uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. Although our earthquake insurance coverage is limited, as of May 1, 2015, eight of our hotels and resorts were located in California, which has been historically at a greater risk for certain acts of nature (such as fire, floods and earthquakes) than other states. Our InterContinental Miami hotel is located in an area that is prone to hurricanes and/or floods.

In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. In the event of a significant loss that is covered by insurance, our deductible may be high and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position in the damaged or destroyed property.

Certain events, such as Hurricanes Katrina and Rita in 2005, have historically made it more difficult and expensive to obtain property and casualty insurance, including coverage for windstorm, flood and earthquake damage, and such events could occur again. We may encounter difficulty in obtaining or renewing property insurance, including coverage for windstorm, flood and earthquake damage, or casualty insurance on our properties at the same levels of coverage, under similar terms and in a timely manner due to a lack of capacity in the insurance markets or a lack of availability of such insurance at commercially reasonable rates. Insurance we would be able to obtain may be more limited and for some catastrophic risks (e.g., earthquake, flood, windstorm and terrorism) may not be generally available to fully cover potential losses. Even if we would be able to obtain new policies with desired levels and with limitations, we cannot be sure that we would be able to obtain such insurance at premium rates that are commercially reasonable or that there would not be gaps in our coverage. If we did not obtain adequate insurance on our properties for certain risks or in a timely manner, it would expose us to uninsured losses and could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments which require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of our properties.

We obtain terrorism insurance to cover any property damage caused by any terrorism act under a separate stand-alone policy of insurance, and also have terrorism insurance under our general liability program and in our program for directors’ and officers’ coverage. We may not be able to recover fully under our existing terrorism insurance for losses caused by some types of terrorist acts, and federal terrorism legislation does not ensure that we will be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels in the future. Many insurers only provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Program Reauthorization Act of 2015, or TRIPRA, which extended the Terrorism Risk Insurance Act of 2002 through the end of 2020. While TRIPRA will reimburse insurers for losses resulting from nuclear, radiological, biological and chemical perils, TRIPRA does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. Any damage related to war and to nuclear, biological and chemical incidents, therefore, is excluded under our policies. In addition, we have no assurance that this

legislation will be extended beyond 2020. As a result of the above, there remains uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.

The threat of terrorism has historically adversely affected the lodging industry generally and these adverse effects may worsen if there are further terrorist events.

The threat of terrorism has historically caused a significant decrease in hotel occupancy and average daily rates due to disruptions in business and leisure travel patterns and concerns about travel safety. Future terrorist acts, terrorism alerts or outbreaks of hostilities could have a negative effect on travel and on our business.

Seasonal variations in revenue at our hotels and resorts can be expected to cause quarterly fluctuations in our revenues.

Revenues for hotels and resorts in tourist areas generally are substantially greater during tourist season than other times of the year. To the extent that cash flows from operations are insufficient during any quarter, due to seasonal fluctuations in revenues, we may have to enter into short-term borrowings to fund operations, pay interest expense or make distributions to our stockholders.

We consider acquisition opportunities in the ordinary course of our business, which may not perform as anticipated.

In the ordinary course of our business and when our liquidity position permits, we consider strategic acquisitions. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and the risk that any actual costs for rehabilitating, repositioning, renovating and improving identified in the pre-acquisition process will exceed estimates.

Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations.

Our properties are subject to various U.S. federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if the contamination pre-dated our ownership of the property or we did not know of or were not responsible for the contamination. These laws may also force a party who owned a property at the time of its contamination, but no longer owns the property, to be responsible for the cleanup. In addition to the costs of clean-up, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. These laws can also impose liability on parties that arrange for the disposal of wastes at an offsite property that becomes contaminated.

In addition, some of these environmental laws can restrict the use of a property and place conditions on various activities. An example would be laws that require a business using hazardous substances on a property (such as swimming pool and lawn care chemicals) to manage them carefully and to notify local officials that the chemicals are being used. Failure to comply with these laws could result in fines and penalties or expose us to third-party liability.

From time to time, the United States Environmental Protection Agency, or EPA, designates certain sites affected by hazardous substances as Superfund sites. Superfund sites can cover large areas, affecting many different parcels of land. The EPA may choose to pursue parties regardless of their actual contribution to the contamination. The Los Angeles Marriott Burbank Airport hotel, which we sold in September 2006, is located within a federal Superfund site. The area was designated as a Superfund site because groundwater underneath the area is contaminated. We have not been named, and do not expect to be named, as a party responsible for the clean-up of the groundwater contamination; however, there can be no assurance regarding potential future developments concerning this site.

The presence of any environmental conditions at our properties could result in remediation and other costs and liabilities and adversely affect our financial condition and results of operations.

We have reviewed environmental reports prepared by our consultants and consultants retained by our lenders at various times, which disclose certain conditions on our properties and the use of hazardous substances in operation and maintenance activities that could pose a risk of environmental contamination or impose liability on us. At some properties these include on-site dry cleaning operations, petroleum storage in underground storage tanks, past tank removals and the known or suspected presence of asbestos, mold or thorium.

The costs to clean up a contaminated property or defend against a related claim or to comply with environmental laws could be material and could adversely affect the funds available for distributions to our stockholders. Future laws or regulations may impose material environmental liabilities on us, the current environmental condition of our properties may be affected by the condition of the properties in the vicinity of our properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us and currently unknown environmental liabilities related to our properties may be identified.

If we are not in compliance with the Americans with Disabilities Act of 1990, we may face significant costs to modify our properties and/or be subject to fines.

Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels and resorts, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.

We derive revenues from outside the United States, which subjects us to different legal, monetary and political risks, as well as currency exchange risks, and may cause unpredictability in our cash flows.

A portion of our investments are in properties located outside the United States. International investments and operations generally are subject to various political and other risks that are different from and in addition to those for U.S. investments and operations, including:



	•		enactment of laws prohibiting or restricting the foreign ownership of property;



	•		laws restricting us from removing profits earned from activities within the country to the United States (i.e., nationalization of assets located within a country);



	•		changes in laws, regulations and policies, including land use, zoning and environmental laws, and in real estate and other tax rates;



	•		exchange rate fluctuations;



	•		change in the availability, cost and terms of mortgage funds resulting from varying national economic policies or changes in interest rates;



	•		high administrative costs; and



	•		terrorism, war or civil unrest.

Unfavorable legal, regulatory, economic or political changes such as those described above could adversely affect our financial condition and results of operations.

Risks related to our organization and structure

Provisions of our organizational documents may limit the ability of a third party to acquire control of our company and may depress our stock price.

In order for us to maintain our status as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, actually or constructively, by five or fewer individuals at any time during the last half of each taxable year. To make sure that we will not fail to qualify as a REIT under this test, subject to some exceptions, our charter prohibits any individual from owning beneficially or constructively more than 9.8% of the value of outstanding shares of our stock or more than 9.8% of the value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock. Any attempt to own or transfer shares of our capital stock in excess of the ownership limit without the consent of our board of directors will be void, and could result in the shares being automatically transferred to a charitable trust. This ownership limitation may prevent an acquisition of control of our company by a third party without our board of directors’ grant of an exemption from the ownership limitation, even if our stockholders believe the change of control is in their interest.

Our charter authorizes our board of directors to cause us to issue up to 350,000,000 shares of common stock and up to 150,000,000 shares of preferred stock. Additionally, our charter authorizes our board of directors to amend our charter without stockholder approval to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of our stock that we have authority to issue, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our stock, even if stockholders believe that a change of control is in their interest.

Our charter permits the removal of a director only upon the affirmative vote of two-thirds of the votes entitled to be cast, generally in the election of directors, and provides that vacancies may only be filled by a majority of the remaining directors. Our bylaws require advance notice of a stockholder’s intention to nominate directors or present business for consideration by

stockholders at an annual meeting of our stockholders. These provisions may delay, defer or prevent a transaction or change in control that involves a premium price for our common stock or that for other reasons may be desired by our stockholders.

Provisions of Maryland law may limit the ability of a third party to acquire control of our company.

Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares, including:



	•		“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special super majority stockholder voting requirements on these combinations;



	•		“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares; and



	•		“unsolicited takeover” provisions of Maryland law permit our board of directors, without stockholder approval, to implement a classified board as well as impose other restrictions on the ability of a third party to acquire control.

We have opted out of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, we may, by amendment to our bylaws, become subject to the control share provisions of the MGCL in the future.

You have limited control as a stockholder regarding any changes we make to our policies.

Our board of directors approves our major policies, including our investment objectives, financing, growth and distributions. Our board of directors may amend or revise these and other policies without a vote of our stockholders. This means that our stockholders will have limited control over changes in our policies.

Tax risks

If we fail to maintain our status as a REIT, our distributions will not be deductible by us, and our income will be subject to U.S. federal taxation, reducing our earnings available for distribution.

We currently qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, which we refer to herein as the Tax Code. The requirements for this qualification, however, are complex and require annual distributions to our stockholders tied to our taxable income (irrespective of available cash from operations), quarterly asset tests and diversity of stock ownership rules. If we fail to meet these requirements, our distributions to our stockholders will not be deductible by us and we will have to pay a corporate U.S. federal level tax on our income. This would substantially reduce our cash available to pay distributions to our stockholders. In addition, such a tax liability might cause us to borrow funds, liquidate some of our investments or take other steps, which could negatively affect our results of operations. Moreover, if our REIT status is terminated because of our failure to meet a technical REIT requirement or if we voluntarily revoke our election, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost.

Even if we maintain our status as a REIT, we may become subject to U.S. federal, state, local or foreign taxes on our income or property reducing our earnings available for distribution.

Even if we maintain our status as a REIT, we may become subject to U.S. federal income and other taxes and state and local taxes. For example, if we have net income from a “prohibited transaction,” that income will be subject to a 100% tax. A “prohibited transaction” is, in general, the sale or other disposition of inventory or property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on that income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of that tax liability. In addition, the REIT rules impose various taxes and penalties on transactions with taxable REIT subsidiaries that are determined not to be priced at an arm’s

length, and on a REIT that has to avail itself of certain cure provisions in the Tax Code for the failure to meet all of the REIT qualification requirements. We cannot assure you that we will be able to continue to satisfy the REIT requirements, or that it will be in our best interests to continue to do so.

We may also be subject to state and local taxes on our income or property, either directly or at the level of our operating partnerships or at the level of the other companies through which we indirectly own our assets. Foreign countries impose taxes on our hotels and resorts and our operations within their jurisdictions. We may not fully benefit from a foreign tax credit against our U.S. federal income tax liability for the foreign taxes we pay. As a result, our foreign taxes may reduce our income and available cash flow from our foreign hotels and resorts, which, in turn, could reduce our ability to make distributions to our stockholders.

Certain of our entities, including our foreign entities, are subject to corporate income taxes. Consequently, these entities are subject to potential audit. There can be no assurance that certain tax positions the entities have taken will not be challenged by taxing authorities and if the challenge is successful, could result in increased tax expense, which could be material.

If the leases of our hotels and resorts to our taxable REIT subsidiaries, or Affiliate Leases, are not respected as true leases for federal income tax purposes, we would fail to maintain our status as a REIT.

To continue to qualify as a REIT, we must satisfy two gross income tests under which specified percentages of our gross income must be certain types of passive income, such as rent. The rent paid pursuant to our Affiliate Leases will only qualify for purposes of the gross income tests if such Affiliate Leases are respected as true leases for U.S. federal income tax purposes and are not treated as service contracts, transfers between unconsolidated affiliates or some other type of arrangement. If our Affiliate Leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.

Our taxable REIT subsidiaries, or TRSs, are subject to special rules that may result in increased taxes.

The REIT has to pay a 100% penalty tax on certain payments that it receives from a TRS if the economic arrangements between the REIT and the TRS are not comparable to similar arrangements between unrelated parties. The Internal Revenue Service, or IRS, may successfully assert that the economic arrangements of any of our inter-company transactions, including our Affiliate Leases, are not comparable to similar arrangements between unrelated parties.

We may be required to pay a penalty tax upon the sale of a hotel.

The U.S. federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current laws, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a hotel (or other property) constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors or the IRS may successfully assert that one or more of our sales are prohibited transactions; consequently, we may be required to pay a penalty tax if we have gains on any such transactions.

Dividends payable by REITs do not qualify for the reduced tax rates applicable to certain dividends.

The maximum federal tax rate for certain dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for this reduced rate. Although this legislation does not directly adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular qualified corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less competitive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the comparative value of the stock of REITs, including our common stock.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To remain qualified as a REIT for federal income tax purposes, we must continually satisfy requirements and tests under the tax law concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego or limit attractive business or investment opportunities. For example, we may not lease to our TRS any hotel where gaming or wagering activities are conducted. Therefore, compliance with the REIT requirements may hinder our ability to operate solely to maximize profits.

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