Current Report Filing (8-k)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported): January 29, 2015

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)



Maryland	001-31775	86-1062192
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(IRS employer identification number)

14185 Dallas Parkway, Suite 1100
Dallas, Texas		75254
(Address of principal executive offices)		(Zip code)

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

Check the appropriated box if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14-a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 8.01 OTHER EVENTS.

PIM Highland Holding LLC Financial Statements

As previously reported, Ashford Hospitality Limited Partnership, a Delaware limited partnership and a subsidiary of Ashford Hospitality Trust, Inc., ("Ashford Trust") executed a Letter Agreement (the “Agreement”) dated December 14, 2014, with PRISA III Investments, LLC, a Delaware limited liability company (“Seller”). The Agreement was approved by the investment committee of Prudential Real Estate Investors, the investment manager of Seller, and fully executed and delivered to Ashford Trust on December 15, 2014. Pursuant to the Agreement, Ashford Trust agrees to purchase and Seller agrees to sell (the “Transaction”) all of Seller’s right, title and interest in and to its approximately 28.26% interest in PIM Highland Holding LLC. Prior to the consummation of the Transaction, Ashford Trust owned approximately 71.74% of the PIM Highland Holding LLC and Seller owned approximately 28.26% of PIM Highland Holding LLC. After the consummation of the Transaction, Ashford Trust will own 100% of PIM Highland Holding LLC.

Unaudited Consolidated Financial Statements of PIM Highland Holding LLC and Subsidiaries as of September 30, 2014 and December 31, 2013 and for the nine months ended September 30, 2014 and 2013 are included as Exhibit 99.1 to this Current Report on Form 8-K.

The Ashford Hospitality Select Hotels Financial Statements

As previously reported, Ashford Trust has formed Ashford Hospitality Select, Inc. (“Ashford Select”), a new privately-held company dedicated to investing primarily in existing premium branded, upscale and upper-midscale, select-service hotels, including extended stay hotels, in the United States. Ashford Select is expected to launch in the first half of 2015. Upon launch, Ashford Trust intends to contribute to Ashford Select a high-quality, geographically diverse portfolio of 16 hotels, located in ten states, comprised of 2,560 total guestrooms and operated under upscale or upper-midscale premium brands affiliated with Marriott International, Inc. Ashford Trust expects that Ashford Select will be externally advised by its advisor, Ashford Inc.

Audited Combined Consolidated Financial Statements of The Ashford Hospitality Select Hotels as of December 31, 2013 and 2012, and for the years ended December 31, 2013 and 2012 and Unaudited Interim Condensed Combined Consolidated Financial Statements of The Ashford Hospitality Select Hotels as of September 30, 2014 and December 31, 2013, and for the nine months ended September 30, 2014 and 2013 are included as Exhibit 99.2 to this Current Report on Form 8-K.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Ashford Trust cautions investors that any forward-looking statements presented herein, or which management may express orally or in writing from time to time, are based on management’s beliefs and assumptions at that time. Throughout this report, words such as “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result,” and other similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors beyond Ashford Trust’s control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Ashford Trust cautions investors that while forward-looking statements reflect management’s good-faith beliefs at the time such statements are made, said statements are not guarantees of future performance and are affected by actual events that occur after such statements are made. Ashford Trust expressly disclaims any responsibility to update forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time those statements were made, to anticipate future results or trends.

Some risks and uncertainties that may cause Ashford Trust’s actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, Ashford Trust’s ability to complete the acquisition of the joint venture partner’s interest in PIM Highland Holding LLC or the ability to launch the Ashford Select platform on the terms described above or at all, and those discussed in Ashford Trust’s Annual Report on Form 10- K for the year ended December 31, 2013, as updated in its subsequent Quarterly Reports on Form 10-Q. These risks and uncertainties continue to be relevant to Ashford Trust’s performance and financial condition. Moreover, Ashford Trust operates in a very competitive and rapidly changing environment where new risk factors emerge from time to time. It is not possible for management to predict all such risk factors, nor can management assess the impact of all such risk factors on Ashford Trust’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as indicators of actual results.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.

(d) Exhibits

Exhibit Number Description



23.1		Consent of Ernst & Young LLP
99.1		Unaudited Consolidated Financial Statements of PIM Highland Holding LLC and Subsidiaries as of September 30, 2014 and December 31, 2013 and for the nine months ended September 30, 2014 and 2013.
99.2		Audited Combined Consolidated Financial Statements of The Ashford Hospitality Select Hotels as of December 31, 2013 and 2012, and for the years ended December 31, 2013 and 2012 and Unaudited Interim Condensed Combined Consolidated Financial Statements of The Ashford Hospitality Select Hotels as of September 30, 2014 and December 31, 2013, and for the nine months ended September 30, 2014 and 2013.

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: January 29, 2015

ASHFORD HOSPITALITY TRUST, INC.

By: /s/ DAVID A. BROOKS

David A. Brooks

Chief Operating Officer and General Counsel

EXHIBIT 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-118746, No. 333-124105, No. 333-125423 and No. 333-181499 and Form S-8 No. 333-164428 and No. 333-174448) of our report dated January 29, 2015, with respect to the combined consolidated financial statements of The Ashford Hospitality Select Hotels as of December 31, 2013 and 2012 and for each of the two years in the period ended December 31, 2013 included in Ashford Hospitality Trust, Inc. and subsidiaries’ Current Report on Form 8-K dated January 29, 2015, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

Dallas, Texas

January 29, 2015

EXHIBIT 99.1

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

PIM Highland Holding LLC and Subsidiaries

As of September 30, 2014 and December 31, 2013 and for the nine months ended September 30, 2014 and 2013

PIM Highland Holding LLC and Subsidiaries

Unaudited Consolidated Financial Statements

As of September 30, 2014 and December 31, 2013 and

For the Nine Months Ended September 30, 2014 and 2013

Contents



Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets	1
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)	2
Unaudited Consolidated Statements of Changes in Members' Capital	3
Unaudited Consolidated Statements of Cash Flows	4
Notes to Unaudited Consolidated Financial Statements	5

PIM Highland Holding LLC and Subsidiaries

Consolidated Balance Sheets

(Unaudited, in thousands)



	September 30, 2014		December 31, 2013
Assets
Cash and cash equivalents	$	27,980	$	27,402
Restricted cash	105,425		95,951
Accounts receivable, net of allowance of $171 and $215, respectively	19,315		14,019
Inventories	1,959		1,843
Prepaid expenses	8,877		7,720
Other assets	2,693		4,059
Investment in hotel properties, net	1,201,756		1,205,386
Deferred costs, net of accumulated amortization of $14,457 and $12,892, respectively	1,901		3,466
Deferred tax assets, net	853		879
Intangible assets, net of accumulated amortization of $705 and $554, respectively	6,365		6,516
Due from third-party hotel managers	23,560		23,541
Total assets	$	1,400,684	$	1,390,782

Liabilities and members’ capital
Indebtedness and capital leases	$	1,117,895	$	1,121,261
Accounts payable and accrued expenses	42,850		41,065
Due to affiliates, net	2,336		1,940
Due to third-party hotel managers	217		231
Intangible liabilities, net of accumulated amortization of $551 and $433, respectively	7,164		7,282
Other liabilities	2,174		2,062
Total liabilities	1,172,636		1,173,841

Commitments and contingencies (Note 7)

Members’ capital
Preferred capital	83,696		75,114
Common capital	144,352		141,827
Total members’ capital	228,048		216,941
Total liabilities and members’ capital	$	1,400,684	$	1,390,782

See accompanying notes.

PIM Highland Holding LLC and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited, in thousands)



	Nine Months Ended September 30,
	2014			2013
Revenue
Rooms	$	260,105		$	235,337
Food and beverage	81,078			78,038
Other operating departments	12,063			11,119
Other	316			268
Total revenue	353,562			324,762

Costs and expenses
Rooms	55,581			51,886
Food and beverage	53,112			51,989
Other operating departments	107,370			99,476
Management fees	11,475			10,375
Property taxes, insurance and other	18,191			17,323
Depreciation and amortization	45,724			52,619
Impairment charge	—			5,746
General and administrative	3,281			3,073
Total expenses	294,734			292,487
Operating income	58,828			32,275

Interest income	43			55
Unrealized loss on derivatives	(44		)	—
Interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees	(44,904		)	(48,089		)
Income (loss) before income taxes	13,923			(15,759		)
Income taxes	(2,816		)	(2,379		)
Net income (loss)	$	11,107		$	(18,138	)
Comprehensive income (loss)	$	11,107		$	(18,138	)

See accompanying notes.

PIM Highland Holding LLC and Subsidiaries

Consolidated Statements of Changes in Members’ Capital

(Unaudited, in thousands)



	Preferred Capital				Common Capital
	AHT		PRISA III		AHT		PRISA III		Total
Balance at January 1, 2014	37,557		37,557		101,745		40,082		216,941
Net income	4,291		4,291		1,812		713		11,107
Balance at September 30, 2014	$	41,848	$	41,848	$	103,557	$	40,795	$	228,048

See accompanying notes.

PIM Highland Holding LLC and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited, in thousands)



	Nine Months Ended September 30,
	2014			2013
Cash Flows from Operating activities
Net income (loss)	$	11,107		$	(18,138	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	45,724			52,619
Impairment charge	—			5,746
Amortization of debt premiums/discounts, net	426			1,167
Amortization of deferred loan costs	1,555			3,774
Write-off of deferred costs, exit fees and intangible asset	—			281
Deferred tax expense (benefit)	26			(127		)
Non-cash rent expense	18			7
Amortization of intangibles, net	33			37
Unrealized loss on derivatives	44			—
Change in assets and liabilities:
Restricted cash	(9,474		)	12,593
Accounts receivable	(5,731		)	(5,616		)
Inventories	(116		)	(29		)
Prepaid expenses and other assets	209			(36		)
Accounts payable and accrued expenses	4,486			2,097
Other liabilities	100			—
Due to affiliates, net	396			(978		)
Due from third-party hotel managers	(19		)	2,636
Due to third-party hotel managers	(14		)	20
Net cash provided by operating activities	48,770			56,053

Cash Flows from Investing activities
Insurance proceeds related to property damage	1,286			1,215
Improvements and additions to hotel properties	(45,642		)	(56,524		)
Payment of initial franchise fees	—			(36		)
Net cash used in investing activities	(44,356		)	(55,345		)

Cash Flows from Financing activities
Payments on indebtedness and capital lease	(3,792		)	(4,735		)
Payments of deferred costs and exit fees	—			(17		)
Payments for derivatives	(44		)	—
Net cash used in financing activities	(3,836		)	(4,752		)

Net change in cash and cash equivalents	578			(4,044		)
Cash and cash equivalents at beginning of period	27,402			30,876
Cash and cash equivalents at end of period	$	27,980		$	26,832

Supplemental Cash Flow information
Interest paid	$	43,101		$	42,418
Income taxes paid	408			2,076
Supplemental Disclosure of Investing and Financing Activities
Noncash additions to hotel properties	$	—		$	3,540
Noncash air rights lease	—			55
Accrued but unpaid capital expenditures	1,399			3,212

See accompanying notes.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

As of September 30, 2014 and December 31, 2013 and

for the Nine Months Ended September 30, 2014 and 2013

1. Organization and Business

Organization

On March 10, 2011, Ashford Hospitality Trust, Inc. ("AHT"), through a subsidiary, partnered with an affiliate of Prudential Real Estate Investors ("PREI"), PRISA III Investments ("PRISA III"), to form a joint venture, the PIM Highland Holding LLC (the "Company") to acquire a 28-hotel portfolio.

AHT and PREI had previously invested in two mezzanine loans (tranches 4 and 6) secured by the 28-hotel portfolio through two separate joint ventures. The mezzanine loans had been in default since August 2010. One of the joint ventures contributed 100% of its equity interests in a wholly owned subsidiary that held the note for tranche 6 to the Company for no consideration. The other joint venture contributed the interest it held in tranche 4 to the Company in exchange for common and preferred equity interests, which were immediately distributed to AHT and PRISA III. The preferred equity interest earns an accrued but unpaid 15% annual return with priority over common equity distributions. AHT and PREI III each invested additional cash of $150 million and $50 million, respectively, in the Company and received ownership interests of 71.74% and 28.26%, respectively, in the Company’s common equity. The Company acquired the 28-hotel portfolio through foreclosure of the mezzanine loan (tranche 6) and assumption of the senior debt and mezzanine loan tranches.

The Company is co-managed by PREI and Ashford Hospitality Limited Partnership, the operating partnership of AHT, for its administrative functions and engages third-party or affiliated hotel management companies to operate the hotels under management contracts. As of September 30, 2014 and December 31, 2013, Remington Lodging and Hospitality LLC ("Remington Lodging") managed 21 of the 28 hotel properties held by the Company. All major decisions related to the Company, including establishment of policies and operating procedures with respect to business affairs, incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four people with AHT and PRISA III each designating two of those people.

The structure of the Company is designed to allow the parents of its owners to continue to qualify as real estate investment trusts ("REIT"), which are generally not subject to federal income taxes. In keeping with this objective, the Company operates its 28 properties through a taxable REIT subsidiary ("TRS") entity.

The members of the Company hold the following ownership percentage interests:



Member	Preferred Equity	Common Equity
AHT	50.00%	71.74%
PRISA III	50.00%	28.26%

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

The following table (unaudited) represents certain information related to the Company’s properties:



		Service	Total
Hotel Property	Location	Type	Rooms
Courtyard by Marriott	Boston, MA	Select	315
Courtyard by Marriott	Denver, CO	Select	202
Courtyard by Marriott	Gaithersburg, MD	Select	210
Courtyard by Marriott	Savannah, GA	Select	156
Crowne Plaza	Atlanta, GA	Full	495
Hampton Inn	Parssippany, NJ	Select	152
Hilton	Boston, MA	Full	390
Hilton	Parssippany, NJ	Full	354
Hilton	Tampa, FL	Full	238
Hilton Garden Inn	Austin, TX	Select	254
Hilton Garden Inn	Baltimore, MD	Select	158
Hilton Garden Inn	Virginia Beach, VA	Select	176
Hyatt Regency	Hauppauge, NY	Full	358
Hyatt Regency	Savannah, GA	Full	351
Marriott	Irving, TX	Full	491
Marriott	Houston, TX	Full	300
Marriott	Omaha, NE	Full	300
Marriott	San Antonio, TX	Full	251
Marriott Residence Inn	Tampa, FL	Select	109
Renaissance	Nashville, TN	Full	673
Renaissance	Palm Springs, CA	Full	410
Renaissance	Portsmouth, VA	Full	249
Ritz-Carlton	Atlanta, GA	Full	444
Sheraton	Annapolis, MD	Full	196
Silversmith	Chicago, IL	Full	143
The Churchill	Washington, DC	Full	173
The Melrose	Washington, DC	Full	240
Westin	Princeton, NJ	Full	296
Total			8,084




6

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

2. Summary of Significant Accounting Policies

Allocations and Distributions

Under current lender restrictions, no cash distributions are allowed to AHT and PRISA III (the "Members"). Once such restrictions are removed, cash flow shall be distributed to the Members in the following order of priority: (a) first, to the Members pari passu, in accordance with their Default Capital Contribution Preferred Return Accounts, as defined in the Company’s operating agreement(the Agreement), until such accounts have been reduced to zero; (b) next, to the Members pari passu, in accordance with their Default Capital Contribution Accounts, as defined in the Agreement, in payment of their Default Capital Contributions, as defined in the Agreement, until such accounts have been reduced to zero; (c) next, to the Members pari passu, in accordance with the balances in their Preferred Equity Return Accounts, as defined in the Agreement, in payment of their Preferred Equity Returns, as defined in the Agreement, until such accounts have been reduced to zero; (d) next, to the Members pari passu, in accordance with the balances in their Preferred Equity Accounts, as defined in the Agreement, in payment of their Preferred Equity Contributions, as defined in the Agreement, until such accounts have been reduced to zero; (e) next, to the Members pari passu, in accordance with their Percentage Interests, as defined in the Agreement, until Hypothetical Investor, as defined in the Agreement, would have received a 15% IRR had the distributions been made to Members and Hypothetical Member in accordance with the Hypothetical Percentage Interests, as defined in the Agreement; (f) next, until Hypothetical Investor would have received a 20% IRR, to the Members pari passu, in accordance with their Hypothetical Percentage Interests, except that the amount representing distributions to Hypothetical Investor shall be paid as follows: (i) to PRISA III, an amount equal to 15% of the Available Promote Amount, as defined in the Agreement; and (ii) the remainder to AHT; (g) next, until Hypothetical Investor would have received a 25% IRR, to the Members pari passu, in accordance with their Hypothetical Percentage Interests, except that the amount representing distributions to the Hypothetical Investor shall be paid as follows: (i) to PRISA III, an amount equal to the 20% of the Available Promote Amount, as defined in the Agreement; and (ii) the remainder to AHT; and (h) next, to the Members pari passu, in accordance with their Hypothetical Percentage Interests, except that the amounts representing distributions to the Hypothetical Investor shall be paid as follows: (i) to PRISA III, an amount equal to 25% of the Available Promote Amount, as defined in the Agreement; and (ii) the remainder to AHT.

Net income or loss is allocated to the members in accordance with the previously described priority based upon how capital would be distributed to the Members using a hypothetical liquidation at book value.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of the Company and its subsidiaries. Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the nine months ended September 30, 2014 are not necessarily indicative of the Company's future results of operations, financial position and cash flows for the year ending December 31, 2014. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements. These historical combined financial statements and related notes should be read in conjunction with the historical audited combined financial statements.

Subsequent events for the nine months ended September 30, 2014, were evaluated through January 29, 2015, the date the Company issued its financial statements.

Use of Estimates

The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and held in banks and short-term investments with an initial maturity of three months or less when purchased.

Restricted Cash

Restricted cash includes reserves held in escrow for hotel renovations, normal replacements of furniture, fixtures and equipment, real estate taxes, and insurance, pursuant to certain requirements in the hotel management, franchise, and loan agreements. Restricted cash also includes cash reserved for debt service.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consists of amounts owed by guests staying in the hotels at September 30, 2014 and December 31, 2013, and amounts due from business customers or groups. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of guests to make required payments for services. The allowance is maintained at a level believed adequate to absorb estimated receivable losses. The estimate is based on past receivable loss experience, known and inherent credit risks, current economic conditions and other relevant factors including specific reserves for certain accounts.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

Inventories

Inventories, primarily consisting of food, beverage, and operating supplies, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Investment in Hotel Properties

Investments in hotel properties are recorded and allocated to land, property, and equipment and identifiable intangible assets based on the fair value at the acquisition date in accordance with the applicable accounting guidance. Hotel properties are depreciated over the estimated useful life of the assets and leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related assets. Hotel properties are depreciated using the straight-line method over lives ranging from 7.5 to 39 years for buildings and improvements and 3 to 5 years for new furniture, fixtures and equipment acquired since March 10, 2011. Furniture, fixtures and equipment acquired on March 10, 2011, are depreciated over useful lives ranging from 1 to 3.75 years.

Expenditures for major renewals and betterments are capitalized and depreciated over the related assets’ estimated useful lives. Expenditures for repairs and maintenance are expensed when incurred.

Assets Held For Sale and Discontinued Operations

The Company classifies assets as held for sale when management has obtained a firm commitment from a buyer, and consummation of the sale is considered probable and expected within one year. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from the Company's ongoing operations, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) the Company will not have any significant continuing involvement subsequent to the disposal.

Impairment of Investment in Hotel Properties

The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located, and/or it becomes more likely than not that a hotel property will be sold before its previously estimated useful life expires. When such conditions exist, the Company performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. In estimating the undiscounted cash flows, the Company makes many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures, and fair values, which considers capitalization rates, discount rates, and comparable selling prices. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value is recorded and an impairment loss recognized. See Note 4.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

Deferred Loan Costs

Deferred loan costs are recorded at cost and reported in deferred costs in the consolidated balance sheets. Amortization of deferred loan costs is computed using a method that approximates the effective interest method over the term of the related debt and is reported in interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees in the consolidated statements of operations and comprehensive income (loss). Amortization of deferred loan costs was $1.6 million and $3.8 million for the nine months ended September 30, 2014 and 2013, respectively.

Intangible Assets and Liabilities

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

Due to/from Affiliates

Due to/from affiliates primarily represents current receivables and payables resulting from transactions related to hotel management and project management with affiliated entities. Due from affiliates results primarily from funds held by Remington Lodging to pay for shared costs incurred as well as reimbursements for certain property general and administrative costs. Due to affiliates results primarily from hotel management and project management fees incurred as well as costs associated with the management of the day-to-day operations of the Company incurred by AHT, including corporate administrative services such as accounting, insurance, marketing support, asset management, and other services customary to the operations of a national brand hotel concept. Both due to and due from affiliates are generally settled within a period not exceeding one year.

Due to/from Third-Party Hotel Managers

Due from third-party hotel managers primarily consists of amounts due from third-party hotel managers related to cash reserves held at the Marriott International, Inc. ("Marriott") corporate level related to operating, capital improvements, insurance, real estate taxes, and other items. Due to third-party hotel managers primarily consists of shared costs related to property operations that are reimbursable to Hyatt Corporation ("Hyatt").

Revenue Recognition

The Company’s revenues are derived from their operations and include revenues from the rental of rooms, food and beverage sales, telephone usage and other service revenue. Additionally, air rights lease income is earned on a certain hotel property. Revenue is recognized when rooms are occupied and services have been performed. Sales and occupancy taxes on such revenues are recognized net of associated revenues. Lease income on the air rights lease is recognized on a straight-line basis over the lease term and is included in other revenue in the consolidated statements of operations and other comprehensive income (loss). Cash received from customers in advance for events occurring after the end of the year has been recorded as deposits and is included in accounts payable and accrued expenses in the consolidated balance sheets. At September 30, 2014

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

and December 31, 2013, the Company had such deposits of $5.8 million and $4.5 million, respectively.

Advertising Costs

Advertising, promotional, sales, and marketing costs are charged to expense as incurred. The Company incurred advertising costs totaling $1.3 million and $1.4 million for the nine months ended September 30, 2014 and 2013, respectively, which are included in other operating departments expense in the consolidated statements of operations and comprehensive income (loss).

Other Operating Departments

Other operating departments expenses primarily include advertising costs, utility costs, lease expense, incentive management fees, franchise fees and other hotel-level administrative expenses.

Income Taxes

Under the provisions of the Internal Revenue Code and applicable state laws, the Company is subject to taxation of income on the profits and losses of its TRS. The tax consequences of other Company revenues and expenses, unrelated to the operation of the hotel properties, will accrue to the Members. Certain of these other revenues and expenses may be treated differently in the Company’s income tax return than in the accompanying consolidated financial statements. Therefore, amounts reported in the consolidated financial statements may not be the same as the amounts reported in the Members’ income tax returns.

The “Income Taxes” Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance requires us to determine whether tax positions we have taken or expect to take in a tax return are more likely than not to be sustained upon examination by the appropriate taxing authority based on the technical merits of the positions. Tax positions that do not meet the more likely than not threshold would be recorded as additional tax expense in the current period. We analyze all open tax years, as defined by the statute of limitations for each jurisdiction, which includes the federal jurisdiction and various states. The Company and its TRS file income tax returns in the U.S. federal jurisdiction and in various states. Tax years 2011 through 2014 remain subject to potential examination by certain federal and state taxing authorities. In September 2013, the Internal Revenue Service ("IRS") notified PIM Highland JV that its 2011 Federal partnership income tax return was selected for examination. In September 2014, the IRS issued a "no adjustments letter" indicating that the subject return was accepted as filed.

The Company accounts for federal and state income taxes of its TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and other respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

Other Comprehensive Income (Loss)

As there are no transactions requiring presentation in other comprehensive income (loss), but not in net income (loss), the Company’s net income (loss) equates to other comprehensive income (loss).

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of guest and trade accounts receivable. Concentration of credit risk with respect to guest and trade accounts receivable is limited due to the wide variety of customers and industries to which the Company’s services are sold, as well as the dispersion of customers across many geographic areas. Cash and cash equivalents are placed with reputable institutions, and the balances may at times exceed federally insured deposit levels; however, the Company has not experienced any losses in such accounts. The Company has entered into interest rate derivatives with a financial institution and believes that the counterparty’s nonperformance risk is limited.

Fair Value of Financial Instruments

Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:


•	Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.

•

Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.


•	Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

The fair values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, due to affiliates, net, due from third-party hotel managers, and due to third-party hotel managers approximate their carrying values because of the short-term maturity of these financial instruments. The fair value of the mortgage and mezzanine indebtedness is determined by using future cash flows determined using a forward interest rate yield curve, discounted at the current replacement rate for these instruments. The current replacement rate was determined by using the index to which the financial instrument is tied, and adjusted for the credit spreads. The interest rate derivatives are not designated as cash flow hedges. Fair value of the interest rate derivatives are determined using the net present value of the expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of the Company and the counterparties. They are marked to market at the balance sheet dates and included in other assets in the consolidated balance sheets. The changes in the fair value are recognized in

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

earnings as unrealized loss on derivatives in the consolidated statements of operations and comprehensive income (loss). See Notes 6 and 8.

Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity(“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. Upon adoption of this standard, we will be required to evaluate whether a disposal meets the discontinued operations requirements under ASU 2014-08. We will make the additional disclosures upon adoption. Upon adoption, we anticipate that the operations of sold hotel properties through the date of their disposal will be included in continuing operations.

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

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

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

3. Investment in Hotel Properties

Investment in hotel properties consisted of the following (in thousands):



	September 30,			December 31,
	2014			2013
Land	$	181,340		$	181,340
Buildings and improvements	1,058,371			1,037,082
Furniture, fixtures, and equipment	106,181			122,473
Construction in progress	6,892			11,691
Total cost	1,352,784			1,352,586
Accumulated depreciation	(151,028		)	(147,200		)
Investment in hotel properties, net	$	1,201,756		$	1,205,386

Construction in progress includes renovations at the hotel properties, which are expected to be completed at various dates throughout the subsequent fiscal year. At September 30, 2014 and December 31, 2013, $1.4 million and $4.3 million, respectively, of construction in progress was included in accounts payable and accrued expenses in the consolidated balance sheets.

4. Impairment of Investment in Hotel Property

At September 30, 2013, the Sheraton hotel property in Annapolis, Maryland had a reasonable probability of being sold. Based on our assessment of the purchase price obtained from potential buyers, we recorded an impairment charge of $5.7 million for the nine months ended September 30, 2013. The impairment charge was based on methodologies discussed in Note 2, which are considered Level 3 valuation techniques. At September 30, 2014 and December 31, 2013, the fair value of this property was approximately $3.5 million.




14

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

5. Indebtedness and Capital Leases

Mortgage and mezzanine indebtedness and capital leases of the Company were as follows (in thousands):



				September 30,		December 31,
Indebtedness	Collateral	Maturity	Interest Rate	2014		2013
Mortgage loan (3)	25 hotels	March 2015 (2)	LIBOR (1) + 3.00%	$	424,000	$	424,000
Mortgage loan (3)	25 hotels	March 2015 (2)	LIBOR (1) + 3.00%	106,000		106,000
Mezzanine loan (5)	28 hotels	March 2015 (2)	LIBOR (1)(4) + 6.00%	129,923		130,327
Mezzanine loan (5)	28 hotels	March 2015 (2)	LIBOR (1)(4) + 7.00%	123,683		124,069
Mezzanine loan (5)	28 hotels	March 2015 (2)	LIBOR (1)(4) + 9.50%	106,014		106,345
Mezzanine loan (5) (6)	28 hotels	March 2015 (2)	LIBOR (1) + 2.00%	18,425		18,425
Mortgage loan	1 hotel	January 2018	4.38%	100,231		101,497
Mortgage loan	2 hotels	January 2018	4.44%	109,607		110,976
Capital leases	Equipment	Various	Various	12		48
				1,117,895		1,121,687
Discount and premium, net				—		(426		)
Total				$	1,117,895	$	1,121,261

________________________

⁽¹⁾ LIBOR rate at September 30, 2014 and December 31, 2013 was 0.157% and 0.168%, respectively.

⁽²⁾ Each of these loans has two one-year extension options beginning March 2014. The first of these options were exercised on March 7, 2014.

⁽³⁾ These loans are secured by the same 25 hotel properties.

⁽⁴⁾ These loans are subject to a LIBOR floor of 1%.

⁽⁵⁾ These loans are secured by the Company’s equity interests in certain subsidiaries.

⁽⁶⁾ The effective interest rate at inception was 12.14%.

During the nine months ended September 30, 2014 and 2013, the Company recognized discount amortization of approximately $426,000 and $1.2 million, respectively. The amortization/accretion of the premiums/discount is computed using a method that approximates the effective interest method, which is included in interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees in the consolidated statements of operations and comprehensive income (loss).

The Company was in compliance with all debt covenants at September 30, 2014. The assets of certain of the Company's subsidiaries, which are separate legal entities, are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of the Company, AHT, PREI, PRISA III, or any other person and the liabilities of such subsidiaries do not constitute the obligations of the Company, AHT, PREI or PRISA III.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

6. Derivatives

On March 10, 2011 (Inception), the Company entered into five interest rate cap agreements with total notional amounts of $949.1 million to mitigate the interest rate risk of its floating-rate mortgage loans and mezzanine loans at a strike rate of 6% through March 2014, the related indebtedness maturities, for an up-front cost of $2.1 million. These interest rate derivatives were not designated as hedges. These interest rate derivatives matured and terminated on March 9, 2014, and were replaced with five new interest rate cap agreements with total notional amounts of $909.0 million for an up-front cost of $44,000. The new interest rate derivatives mature on March 9, 2015, to coincide with the maturity of the related indebtedness. At September 30, 2014 and December 31, 2013, the interest rate caps had a fair value of zero, which was determined in accordance with authoritative accounting guidance.

The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities (Level 2 inputs). The Company also incorporates credit valuation adjustments (Level 3 inputs) to appropriately reflect both the Company’s nonperformance risk and the counterparty’s nonperformance risk in the fair value measurements. The Company has determined that when a majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with the derivatives utilize Level 3 inputs that the Company considers significant (10% or more) to the overall valuation of its derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. At September 30, 2014 and December 31, 2013, credit valuation adjustments utilizing Level 3 inputs used to determine the fair value was less than 10% of the overall valuation of the derivatives; therefore, the overall valuation is classified as using Level 2 inputs. During the nine months ended September 30, 2014 the Company recorded an unrealized loss of $44,000 in the consolidated statements of operations and comprehensive income (loss) for the change in fair value of these interest rate caps. There was no unrealized gain or loss recognized during the nine months ended September 30, 2013.

7. Commitments and Contingencies

Ground and Building Leases

On March 8, 2013, the Company entered into a series of agreements with the City of Nashville and Davidson County relating to the Nashville Renaissance hotel that included converting the Company's leasehold interest in the Nashville Renaissance hotel, which was set to expire in 2087, to fee simple ownership for $10, extending the current lease term of some adjacent facilities to 2112, and entering into a new, 30-year lease beginning January 1, 2014, for 80,000 square feet of meeting space and pre-function space located at the existing Nashville Convention Center, which is adjacent to the hotel, the exclusive right to provide catering and audio/visual services for events in the meeting space, the obligation to invest $5.0 million in the renovation of the meeting space and the right to receive reimbursements of real estate taxes spent during the first five years of the meeting space lease, not to exceed the amount of capital expenditures. In consideration for this, the

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

Company pays $1 per year plus 30% of the gross revenues from the catering and audio/visual services provided within the meeting space. The Company recorded the land at fair value of approximately $3.5 million included in “Investment in hotel properties, net” on the consolidated balance sheets and recorded a deferred gain equal to the fair value of the land in “Other liabilities” on the consolidated balance sheet. The deferred gain is being amortized over 15 years, the noncancelable portion of the meeting space lease. Furthermore, the Company is expensing the $5.0 million obligation to renovate the meeting space, offset by any property tax credits received from the City of Nashville and Davidson County, over the noncancelable portion of the meeting space lease.

For the nine months ended September 30, 2014 and 2013, the Company recognized total rent expense of $2.3 million and $2.6 million, respectively, which is included in other operating departments on the consolidated statements of operations and comprehensive income (loss).

Percentage and incentive rent is accrued when it becomes probable that the specified thresholds will be achieved. No percentage or incentive rent was recognized for the nine months ended September 30, 2014 and 2013, as the thresholds were not met.

Management Agreements

As of September 30, 2014, the hotel properties were operated pursuant to long-term agreements with three management companies: Remington Lodging (21 hotels), Marriott (6 hotels), and Hyatt (1 hotel). These management agreements expire from 2021 to 2044. Each management company receives a base management fee generally between 1.5% and 7% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the hotels have received a priority return on their investment in the hotel. For the nine months ended September 30, 2014 and 2013, the Company recorded base management fees of $11.5 million and $10.4 million, respectively, and incentive management fees of $3.5 million and $1.5 million, respectively. The incentive management fees are included in other operating departments expense in the consolidated statements of operations and comprehensive income (loss).

Franchise Agreements

As of September 30, 2014, 18 of the 28 hotels operated pursuant to franchise agreements from national hotel companies. Pursuant to the franchise agreements, the hotels pay a royalty fee generally between 2.5% and 6% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor costs that amount to between 1.0% and 4.0% of room revenues from the hotels. Seven of the hotel properties, consisting of the Hyatt Regency Savannah hotel, the Dallas/Fort Worth Airport Marriott hotel, the Nashville Renaissance hotel, the Ritz-Carlton Atlanta Downtown hotel, the Courtyard Boston Tremont hotel, the Courtyard Denver Airport hotel, and the Courtyard Gaithersburg Washingtonian Center hotel, are managed by Hyatt or Marriott. The management agreements for these seven hotel properties allow the hotel properties to operate under the respective brand. The other three hotel properties, consisting of the Churchill hotel, the Melrose hotel, and the Silversmith hotel, operate as independent hotels. Franchise fees were $15.4 million and $13.8 million for the nine months ended September 30, 2014 and 2013, respectively, and are

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

included in other operating departments expense on the consolidated statements of operations and comprehensive income (loss).

Property Improvement Reserves

Pursuant to its management, franchise, and loan agreements, the Company is required to establish a property improvement reserve for each hotel to cover the cost of replacing furniture, fixtures and equipment at the hotels. Contributions to the property improvement reserve are based on a percentage of gross revenues or receipts at each hotel, generally in the range of 4.75% to 6.75% of gross revenues each month over the term of the agreements.

Litigation

The Company is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss from these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, the Company does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect on the consolidated financial position or results of operations. However, the final results of legal proceedings cannot be predicted with certainty and if the Company were to fail to prevail in one or more of these legal matters, and the associated realized losses exceed current estimates of the range of potential losses, the consolidated financial position or results of operations could be materially adverely affected in future periods.

8. Fair Value of Financial Measurements

The following summarizes the carrying amounts and estimated fair values of financial instruments (in thousands):



	September 30, 2014				December 31, 2013
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
Financial assets:
Cash and cash equivalents	$	27,980	$	27,980	$	27,402	$	27,402
Restricted cash	105,425		105,425		95,951		95,951
Accounts receivable	19,315		19,315		14,019		14,019
Due from third-party hotel managers	23,560		23,560		23,541		23,541

Financial liabilities:
Indebtedness and capital leases	$	1,117,895	$	1,122,347	$	1,121,261	$	1,131,789
Accounts payable and accrued expenses	42,850		42,850		41,065		41,065
Due to affiliates, net	2,336		2,336		1,940		1,940
Due to third-party hotel managers	217		217		231		231

Cash, cash equivalents and restricted cash. These financial assets bear interest at market rates and have maturities of less than 90 days. The carrying values approximate fair value due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.

PIM Highland Holding LLC and Subsidiaries

Notes to Consolidated Financial Statements (unaudited, continued)

Accounts receivable, accounts payable and accrued expenses, due to/from affiliates, net and due to/from third-party hotel managers. The carrying values of these financial instruments approximate their fair values due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.

Indebtedness and capital leases. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. For the indebtedness valuations, the Company used estimated future cash flows discounted at applicable index forward curves adjusted for credit spreads. The carrying values of capital leases approximate their fair values due to the short duration remaining of these financial instruments. This is considered a Level 2 valuation technique.

9. Subsequent Event

On December 19, 2014, AHT and PREI announced that they have signed a definitive agreement in which AHT will acquire the remaining common and preferred ownership interest in the Company for $250.1 million. AHT's buyout will be funded with cash and is expected to be completed sometime during the first quarter of 2015, subject to customary closing conditions, and simultaneous with an anticipated refinancing of the Company's debt.

EXHIBIT 99.2

THE ASHFORD HOSPITALITY SELECT HOTELS

INDEX TO FINANCIAL STATEMENTS



		Page
Audited Combined Consolidated Financial Statements

Report of Independent Auditors		F-2
Combined Consolidated Balance Sheets		F-3
Combined Consolidated Statements of Operations		F-4
Combined Consolidated Statements of Comprehensive Income (Loss)		F-5
Combined Consolidated Statements of Equity		F-6
Combined Consolidated Statements of Cash Flows		F-7
Notes to Combined Consolidated Financial Statements		F-8

Unaudited Interim Combined Consolidated Financial Statements

Condensed Combined Consolidated Balance Sheets		F-19
Condensed Combined Consolidated Statements of Operations		F-20
Condensed Combined Consolidated Statements of Comprehensive Loss		F-21
Condensed Combined Consolidated Statement of Equity		F-22
Condensed Combined Consolidated Statements of Cash Flows		F-23
Notes to Condensed Combined Consolidated Financial Statements		F-24

F-1

Report of Independent Auditors

The Board of Directors of

Ashford Hospitality Trust, Inc. and subsidiaries

We have audited the accompanying combined consolidated financial statements of The Ashford Hospitality Select Hotels (the Company), which comprise the combined consolidated balance sheets as of December 31, 2013 and 2012, and the related combined consolidated statements of operations, comprehensive loss, equity and cash flows for the years then ended, and the related notes to the combined consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined consolidated financial position of The Ashford Hospitality Select Hotels at December 31, 2013 and 2012, and the combined consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Dallas, Texas

January 29, 2015

F-2

THE ASHFORD HOSPITALITY SELECT HOTELS

COMBINED CONSOLIDATED BALANCE SHEETS

(in thousands)



	December 31,
	2013		2012
Assets
Investments in hotel properties, net	$	283,445	$	289,530
Cash and cash equivalents	9,148		2,529
Restricted cash	2,029		715
Accounts receivable, net of allowance of $7 and $21, respectively	2,161		2,043
Inventories	57		52
Deferred costs, net	859		409
Prepaid expenses	866		928
Other assets	102		59
Due from third-party hotel managers	6,360		5,177
Total assets	$	305,027	$	301,442
Liabilities and Equity
Liabilities:
Indebtedness	$	23,275	$	11,792
Accounts payable and accrued expenses	4,504		3,193
Unfavorable management contract liabilities	395		527
Due to related party, net	134		231
Due to third-party hotel managers	143		32
Deferred tax liability, net	1,798		1,791
Other liabilities	307		222
Total liabilities	30,556		17,788
Commitments and contingencies (Note 8)
Equity:
Owner’s equity of the Company	273,424		281,641
Noncontrolling interest in consolidated entities	1,047		2,013
Total equity	274,471		283,654
Total liabilities and equity	$	305,027	$	301,442

See Notes to Combined Consolidated Financial Statements.

F-3

THE ASHFORD HOSPITALITY SELECT HOTELS

COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)



	Year Ended December 31,
	2013			2012
Revenue
Rooms	$	72,940		$	71,197
Food and beverage	2,556			2,242
Other	1,749			1,705
Total hotel revenue	77,245			75,144
Expenses
Hotel operating expenses:
Rooms	18,778			18,236
Food and beverage	1,778			1,620
Other expenses	22,400			21,610
Management fees	4,418			4,298
Total hotel expenses	47,374			45,764
Property taxes, insurance and other	4,476			4,268
Depreciation and amortization	12,255			11,871
Corporate general and administrative	5,167			4,233
Total expenses	69,272			66,136
Operating income	7,973			9,008
Interest income	7			14
Interest expense and amortization of loan costs	(13,245		)	(12,781		)
Write-off of loan costs and exit fees	(127		)	—
Unrealized loss on derivatives	—			—
Loss before income taxes	(5,392		)	(3,759		)
Income tax expense	(524		)	(527		)
Net loss	(5,916		)	(4,286		)
(Income) loss from consolidated entities attributable to noncontrolling interest	(14		)	12
Net loss attributable to the Company	$	(5,930	)	$	(4,274	)

See Notes to Combined Consolidated Financial Statements.

F-4

THE ASHFORD HOSPITALITY SELECT HOTELS

COMBINED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)



	Year Ended December 31,
	2013			2012
Net loss	$	(5,930	)	$	(4,274	)
Other comprehensive income (loss), net of tax:
Total other comprehensive income (loss)	—			—
Total comprehensive loss	(5,930		)	(4,274		)
Comprehensive (income) loss attributable to a noncontrolling interest in consolidated entities	(14		)	12
Comprehensive loss attributable to the Company	$	(5,944	)	$	(4,262	)

See Notes to Combined Consolidated Financial Statements.

F-5

THE ASHFORD HOSPITALITY SELECT HOTELS

COMBINED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)



	Owner’s Equity			Noncontrolling Interest in Consolidated Entities			Total
Balance at January 1, 2012	$	285,286		$	2,025		$	287,311
Net loss	(4,274		)	(12		)	(4,286		)
Contributions from owner, net	629			—			629
Balance at December 31, 2012	$	281,641		$	2,013		$	283,654
Distributions to noncontrolling interest	—			(980		)	(980		)
Net income (loss)	(5,930		)	14			(5,916		)
Distributions to owner, net	(2,287		)	—			(2,287		)
Balance at December 31, 2013	$	273,424		$	1,047		$	274,471

See Notes to Combined Consolidated Financial Statements.

F-6

THE ASHFORD HOSPITALITY SELECT HOTELS

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Year Ended December 31,
	2013			2012
Cash Flows from Operating Activities
Net loss	$	(5,916	)	$	(4,286	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Depreciation and amortization	12,255			11,871
Amortization of loan costs	775			584
Amortization of intangibles	(132		)	(132		)
Bad debt expense	46			44
Deferred tax expense (benefit)	7			(42		)
Gain on insurance settlement	(28		)	—
Write-off of deferred loan costs	127			—
Changes in operating assets and liabilities—
Restricted cash	(179		)	(7		)
Accounts receivable and inventories	(108		)	(84		)
Prepaid expenses and other assets	799			886
Accounts payable and accrued expenses	(157		)	(788		)
Other liabilities	200			—
Due to/from related party	(97		)	21
Due to/from third-party hotel managers	(1,172		)	577
Net cash provided by operating activities	6,420			8,644
Cash Flows from Investing Activities
Improvements and additions to hotel properties	(6,506		)	(9,149		)
Restricted cash related to improvements and additions to hotel properties	(1,135		)	(135		)
Proceeds from insurance claims	21			58
Net cash used in investing activities	(7,620		)	(9,226		)
Cash Flows from Financing Activities
Borrowings on indebtedness	18,200			—
Repayments of indebtedness	(6,717		)	(335		)
Payments of loan costs and prepayment penalties	(672		)	—
Contributions (distributions) from/to owner, net	(2,992		)	112
Net cash provided by (used in) financing activities	7,819			(223		)
Net change in cash and cash equivalents	6,619			(805		)
Cash and cash equivalents at beginning of year	2,529			3,334
Cash and cash equivalents at end of year	$	9,148		$	2,529
Supplemental Cash Flow Information
Interest paid	$	12,503		$	12,141
Income taxes paid	$	16		$	88
Supplemental Disclosure of Non Cash Investing and Financing Activities
Financed insurance premiums	$	780		$	935
Non cash contributions from owner	$	705		$	517
Accrued but unpaid capital expenditures	$	95		$	411
Distributions declared but not paid to a noncontrolling interest in consolidated entities	$	980		$	—

See Notes to Combined Consolidated Financial Statements.

F-7

THE ASHFORD HOSPITALITY SELECT HOTELS

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2013 and 2012

1. Organization and Description of Business

Ashford Hospitality Trust, Inc. (“AHT”) is a self-advised real estate investment trust (“REIT”) as defined in the Internal Revenue Code (“Code”) and was formed in Maryland on May 13, 2003. AHT commenced operations in August 2003 and has been focused on investing in the hospitality industry across all segments and in all methods including direct real estate, securities, equity, and debt. AHT owns its lodging investments and conducts its business through the majority-owned Ashford Hospitality Limited Partnership (“AHLP”), an operating partnership that was formed in Delaware on May 13, 2003. The general partner of AHLP is Ashford OP Limited Partner LLC, a Delaware limited liability company. AHLP will continue into perpetuity unless earlier dissolved or terminated pursuant to law or the provisions of the AHLP limited partnership agreement. The accompanying combined consolidated financial statements include the accounts of certain wholly-owned and majority owned subsidiaries of AHLP that own and operate 16 hotels in ten states. The portfolio includes 14 wholly-owned hotel properties and two hotel properties that are owned through a partnership in which AHT has an 85% controlling interest with Interstate Hotels & Resorts, Inc. ("Interstate") holding the remaining 15%. These hotels represent 2,560 total rooms, or 2,533 net rooms, excluding those attributable to our partner. As of December 31, 2013, 13 of the 16 hotel properties were leased by AHT’s indirect wholly-owned subsidiaries that are treated as taxable REIT subsidiaries ("TRS") for federal income tax purposes, one was owned by an AHT indirect wholly-owned subsidiary that is treated as a TRS and two hotel properties owned through a consolidated partnership were leased to two TRSs wholly-owned by such consolidated partnership. Each leased hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from the TRS is eliminated in combination and/or consolidation. The hotels are operated under management contracts with Marriott International, Inc., Interstate and Remington Lodging and Hospitality LLC, together with its affiliates ("Remington Lodging"), which is beneficially owned owned by Mr. Monty J. Bennett, AHT's Chairman and Chief Executive Officer and Mr. Archie Bennett, Jr., AHT's Chairman Emeritus, which are eligible independent contractors under the Code.

With respect to 14 of the 16 hotels, the accompanying combined consolidated financial statements include the accounts of the following subsidiaries of AHT:



1.	Ashford Buena Vista LP
2.	Ashford Louisville LP
3.	Ashford Tipton Lakes LP
4.	Ashford Jacksonville IV LP
5.	Ashford Orlando Sea World LP
6.	Ashford Salt Lake LP
7.	Ashford Overland Park LP
8.	Ashford Ruby Palm Desert I LP
9.	Ashford Gaithersburg LP
10.	Ashford Centerville LP
11.	Ashford Ft. Lauderdale Weston I LLC
12.	Ashford Ft. Lauderdale Weston II LLC
13.	Ashford Ft. Lauderdale Weston III LLC
14.	Ashford LV Hughes Center LP
15.	Ashford BWI Airport LP

With respect to 14 of the 16 hotels, the accompanying combined consolidated financial statements include certain of the accounts of the following subsidiaries of AHT:



1.	Ashford TRS Lessee I LLC
2.	Ashford TRS VI Corporation
3.	Ashford TRS Pool I LLC
4.	Ashford TRS Lessee III LLC
5.	Ashford TRS Sapphire LLC

F-8

With respect to the other two hotels, the accompanying combined consolidated financial statements include the accounts of Ashford IHC Partners, LP and its subsidiaries which include:



1.	RI Manchester Hotel Partners, LP
2.	CY Manchester Hotel Partners, LP
3.	RI Manchester Tenant Corporation
4.	CY Manchester Tenant Corporation
5.	CY-CIH Manchester Parent, LLC
6.	RI-CIH Manchester Parent, LLC

The 16 hotels which are owned and operated through each of the aforementioned entities are collectively referred to as “The Ashford Hospitality Select Hotels”. In this report, the terms “the Company,” “we,” “us” or “our” refers to The Ashford Hospitality Select Hotels.

2. Significant Accounting Policies

Basis of Presentation and Principles of Combination and Consolidation—The accompanying historical combined consolidated financial statements of The Ashford Hospitality Select Hotels have been “carved out” of AHT’s consolidated financial statements and reflect significant assumptions and allocations. These hotels are under AHT’s common control. The combined consolidated financial statements were prepared using the financial position and results of operations of the entities set forth above after adjustments for certain ownership related activities that have been historically accounted for by AHT. These ownership activities include mortgage indebtedness associated with the 16 hotels, debt related expenses and other owner related expenses. In addition, the combined consolidated statements of operations include allocations of corporate general and administrative expenses from AHT, which in the opinion of management, are reasonable. The historical financial information is not necessarily indicative of the Company’s future results of operations, financial position and cash flows. All significant inter-company accounts and transactions between combined consolidated entities have been eliminated in these historical combined consolidated financial statements.

Marriott International, Inc. (“Marriott”) manages seven of our properties. For these Marriott-managed hotels, the 2012 fiscal year reflects twelve weeks of operations in each of the first three quarters of the year and 16 weeks for the fourth quarter of the year. Beginning in 2013, the fiscal quarters end on March 31, June 30, September 30 and December 31. Therefore, in any given period, period-over-period results will have different ending dates. For Marriott-managed hotels, the fourth quarter of 2012 ended December 28, 2012.

Subsequent events have been evaluated through January 29, 2015, the date the Company issued its financial statements.

Use of Estimates—The preparation of these combined consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand or held in banks and short-term investments with an initial maturity of three months or less at the date of purchase.

Restricted Cash—Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of approximately 4% to 5% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. For purposes of the combined consolidated statements of cash flows, changes in restricted cash caused by using such funds for debt service, real estate taxes and insurance are shown as operating activities. Changes in restricted cash caused by using such funds for furniture, fixtures and equipment replacements are included in cash flows from investing activities.

Accounts Receivable—Accounts receivable consists primarily of hotel guest receivables. We generally do not require collateral. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of guests to make required payments for services. The allowance is maintained at a level believed adequate to absorb estimated receivable losses. The estimate is based on past receivable loss experience, known and inherent credit risks, current economic conditions, and other relevant factors, including specific reserves for certain accounts.

F-9

Inventories—Inventories, which primarily consist of food, beverages, and gift store merchandise, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

Investments in Hotel Properties—Hotel properties are generally stated at cost. For hotel properties owned through our majority-owned entities, the carrying basis attributable to the partners’ minority ownership is recorded at historical cost, net of any impairment charges, while the carrying basis attributable to our majority ownership is recorded based on the allocated purchase price of our ownership interests in the entities. All improvements and additions which extend the useful life of the hotel properties are capitalized.

Impairment of Investments in Hotel Properties—Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. For the years ended December 31, 2013 and 2012, we did not record any impairment charges.

Assets Held for Sale and Discontinued Operations—We classify assets as held for sale when we have obtained a firm commitment from a buyer, and consummation of the sale is considered probable and expected within one year. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from our ongoing operations, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) we will not have any significant continuing involvement subsequent to the disposal.

Deferred Costs, net—Deferred loan costs are recorded at cost and amortized over the terms of the related indebtedness using the effective interest method.

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

Due to/from Third-Party Hotel Managers—Due from third-party hotel managers primarily consists of amounts due from Marriott related to cash reserves held at the Marriott corporate level related to operating, capital improvements, insurance, real estate taxes, and other items. Due to third-party hotel managers primarily consists of amounts due to Marriott and/or Interstate related to rebilled expenses.

Unfavorable Management Contract Liabilities—A management agreement assumed by AHT in an acquisition of a hotel in 2007 has terms that are more favorable to the respective manager than typical market management agreements at the acquisition date. As a result, AHT recorded an unfavorable contract liability related to that management agreement totaling $1.3 million based on the present value of expected cash outflows over the initial term of the related agreement. The unfavorable contract liability, with an unamortized balance of $395,000 and $527,000 as of December 31, 2013 and 2012, respectively, is amortized as a reduction to incentive management fees on a straight-line basis of $132,000 over the initial term of the related agreement which runs through December 31, 2016.

Noncontrolling Interest in Consolidated Entities—The noncontrolling interest in consolidated entities represents an ownership interest of 15% in two hotel properties at December 31, 2013 and 2012 and is reported in equity in the combined consolidated balance sheets.

Income/loss from consolidated entities attributable to noncontrolling interest in our consolidated entities are reported as deductions/additions from/to net income/loss. Comprehensive income/loss attributable to this noncontrolling interest is reported as reductions/additions from/to comprehensive income/loss.

Revenue Recognition—Hotel revenues, including room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, parking and space rentals, are recognized when services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.

F-10

Other Expenses—Other expenses include telephone charges, guest laundry, valet parking, and hotel-level general and administrative expenses, sales and marketing expenses, repairs and maintenance, franchise fees and utility costs. They are expensed as incurred.

Advertising Costs—Advertising costs are charged to expense as incurred. For the years ended December 31, 2013 and 2012, we incurred advertising costs of $282,000 and $314,000, respectively. Advertising costs are included in “Other expenses” in the combined consolidated statements of operations.

Corporate General and Administrative Expense—Corporate general and administrative expense represents an allocation of certain AHT corporate general and administrative costs including salaries and benefits, stock based compensation, legal and professional fees, rent expense, insurance expense and office expenses. The costs were allocated based on the pro rata share of our net investments in hotel properties in relation to AHT’s net investments in hotel properties for all indirect costs. All direct costs associated with the operations of the 16 hotel properties are included in the combined consolidated financial statements.

Depreciation and Amortization—Hotel properties are depreciated over the estimated useful life of the assets and leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related assets. Presently, hotel properties are depreciated using the straight-line method over lives ranging from 7.5 to 39 years for buildings and improvements and 3 to 5 years for furniture, fixtures and equipment. While we believe our estimates are reasonable, a change in estimated useful lives could affect depreciation expense and net income (loss) as well as resulting gains or losses on potential hotel sales.

Income Taxes—The Company’s financial statement income and taxable income have been “carved out of” of AHLP and prepared on a separate return basis. The combined consolidated entities that operate our 16 hotels and own one of our hotels are considered taxable corporations for U.S. federal, state and city income tax purposes. The consolidated entities that operate the two hotels owned by our consolidated partnership elected to be treated as taxable REIT subsidiaries (“TRS”) in April 2007 when the related partnership interest was acquired by AHT. The other entities that own our hotels are considered partnerships for federal income tax purposes. Partnerships are not subject to U.S. federal income taxes. These partnerships’ revenues and expenses pass through to and are taxes on the owners. The states and cities where the partnerships operate generally follow the U.S. federal income tax treatment. Accordingly, we have not provided for income taxes for the partnerships.

In accordance with authoritative accounting guidance, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. In addition, the analysis utilized by us in determining our deferred tax asset valuation allowance involves considerable management judgment and assumptions.

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

Recently Adopted Accounting Standards—In May 2011, the FASB issued accounting guidance for common fair value measurement and disclosure requirements. The guidance requires disclosures of (i) quantitative information about the significant unobservable inputs used for level 3 measurements; (ii) description of the valuation processes surrounding level 3 measurements; (iii) narrative description of the sensitivity of recurring level 3 measurements to unobservable inputs; (iv) hierarchy classification for items whose fair value is only disclosed in the footnotes; and (v) any transfers between level 1 and 2 of the fair value hierarchy. The new accounting guidance was effective during interim and annual periods beginning after December 15, 2011. We have adopted this accounting guidance and provided the additional required disclosures in Notes 6 and 7. The adoption of this accounting guidance did not affect our financial position or results of operations.

F-11

to the real estate is transferred to legally satisfy the debt. The new accounting guidance is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. This guidance was adopted early. The adoption of this accounting guidance did not affect our financial position or results of operations.

In December 2011 and further amended in November 2012, the FASB issued accounting guidance to require disclosures about offsetting assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements that are either netted on the balance sheet or subject to an enforceable master netting agreement or similar arrangement. The new accounting guidance is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013 and the disclosures should be reported retrospectively for all comparative periods presented. The adoption of this accounting guidance did not have a material impact on our financial position and results of operations.

Recently Issued Accounting Standards—In April 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. Upon adoption of this standard, we will be required to evaluate whether a disposal meets the discontinued operations requirements under ASU 2014-08. We will make the additional disclosures upon adoption. Upon adoption, we anticipate that the operations of sold hotel properties through the date of their disposal will be included in continuing operations.

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

3. Investments in Hotel Properties, net

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



	December 31,
	2013			2012
Land	$	52,590		$	52,590
Buildings and improvements	279,730			277,780
Furniture, fixtures and equipment	20,684			19,171
Construction in progress	1,297			1,289
Total cost	354,301			350,830
Accumulated depreciation	(70,856		)	(61,300		)
Investments in hotel properties, net	$	283,445		$	289,530

The cost of land and depreciable property, net of accumulated depreciation, for federal income tax purposes was approximately $278.0 million and $283.8 million as of December 31, 2013 and 2012, respectively.

For the years ended December 31, 2013 and 2012, depreciation expense was $12.2 million and $11.8 million, respectively.

F-12

4. Deferred Costs, net

Deferred costs, net consisted of the following (in thousands):



	December 31,
	2013			2012
Deferred loan costs	$	707		$	228
Deferred franchise fees	443			443
Total costs	1,150			671
Accumulated amortization	(291		)	(262		)
Deferred costs, net	$	859		$	409

For the years ended December 31, 2013 and 2012, amortization of loan costs was $775,000 and $584,000, respectively, of which $705,000 and $517,000, respectively was allocated. See Note 5.

5. Indebtedness

Indebtedness and the carrying values of related collateral were as follows (in thousands):



				December 31, 2013				December 31, 2012
Indebtedness	Collateral	Maturity	Interest Rate	Debt Balance		Book Value of Collateral		Debt Balance		Book Value of Collateral
Mortgage loan	1 hotel	May 2014	8.32%	5,075		8,994		5,285		9,043
Mortgage loan⁽¹⁾	1 hotel	January 2024	5.49%	10,800		17,223		—		—
Mortgage loan	1 hotel	January 2024	5.49%	7,400		8,623		—		—
Mortgage loan⁽¹⁾	1 hotel	April 2034	Greater of 6.00% or Prime + 1.00%	—		—		6,507		18,024
Total				$	23,275	$	34,840	$	11,792	$	27,067

________


(1)	In December 2013, AHT refinanced our $6.5 million loan due April 2034 with a $10.8 million loan due January 2024. The new loan provides for a fixed interest rate of 5.49% with no extension option.

As of December 31, 2013 and 2012, AHT held mortgage loans of $199.7 million and $203.4 million, respectively, in which certain of our properties were held as collateral with other hotel properties of AHT which have been excluded from our indebtedness. Additionally, the restricted cash balances and deferred loan costs are also excluded. These amounts are not included in our financial position as we are not the sole obligor on the various loan pools. The related interest expense and amortization of loan costs associated with these loans is included in our results of operations for the years ended December 31, 2013 and 2012.

In December 2013, AHT refinanced our $6.5 million loan due April 2034, with a $10.8 million loan due January 2024. The new loan provides for a fixed interest rate of 5.49%. The new loan continues to be secured by the Residence Inn Jacksonville. Additionally, AHT completed the financing for a $7.4 million loan due January 2024. The new loan provides for a fixed interest rate of 5.49% and is secured by the Residence Inn Manchester. We have an 85% ownership interest in the property, with Interstate holding the remaining 15%. Our share of the excess loan proceeds were added to our unrestricted cash balance. The refinancing was treated as an extinguishment and resulted in the write-off of $65,000 of deferred loan costs.

The maturities and scheduled amortization of indebtedness as of December 31, 2013 for each of the following five years and thereafter are as follows (in thousands):




2014	$	5,288
2015	244
2016	255
2017	272
2018	288
Thereafter	16,928
Total	$	23,275

F-13

December 31, 2013, we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.

6. Fair Value Measurements

Fair Value Hierarchy—Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:


•	Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.

•


•	Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

There were no financial instruments measured at fair value as of December 31, 2013 and 2012.

7. Summary of Fair Value of Financial Instruments

Determining the estimated fair values of certain financial instruments such as indebtedness requires considerable judgment to interpret market data. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled.

The carrying amounts and estimated fair values of financial instruments were as follows (in thousands):



	December 31, 2013				December 31, 2012
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets not measured at fair value:
Cash and cash equivalents	$	9,148	$	9,148	$	2,529	$	2,529
Restricted cash	$	2,029	$	2,029	$	715	$	715
Accounts receivable	$	2,161	$	2,161	$	2,043	$	2,043
Due from third-party hotel managers	$	6,360	$	6,360	$	5,177	$	5,177
Financial liabilities not measured at fair value:
Indebtedness	$	23,275	$24,325 to $26,886		$	11,792	$11,692 to $12,923
Accounts payable and accrued expenses	$	4,504	$	4,504	$	3,193	$	3,193
Due to related party, net	$	134	$	134	$	231	$	231
Due to third-party hotel managers	$	143	$	143	$	32	$	32

Accounts receivable, Accounts payable and accrued expenses, due to/from third-party hotel managers and due to related party, net. The carrying values of these financial instruments approximate their fair values due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.

Indebtedness. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. For the December 31, 2013 and 2012 indebtedness valuations, we used estimated future cash flows discounted at applicable index

F-14

forward curves adjusted for credit spreads. We estimated the fair value of the total indebtedness to be approximately 104.5% to 115.5% of the carrying value of $23.3 million at December 31, 2013, and approximately 99.2% to 109.6% of the carrying value of $11.8 million at December 31, 2012. This is considered a Level 2 valuation technique.

8. Commitments and Contingencies

Restricted Cash—Under certain management and debt agreements for our hotel properties existing at December 31, 2013, escrow payments are required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt and management agreements, we escrow 4% to 5% of gross revenues for capital improvements.

Franchise Fees—Under franchise agreements for our hotel properties existing at December 31, 2013, we pay franchisor royalty fees between 5% and 5.5% of gross room revenue. Additionally, we pay fees for marketing, reservations, and other related activities aggregating between 2% and 2.5% of gross room revenue and, in some cases, food and beverage revenues. These franchise agreements expire on varying dates between 2017 and 2031. When a franchise term expires, the franchisor has no obligation to renew the franchise. A franchise termination could have a material adverse effect on the operations or the underlying value of the affected hotel due to loss of associated name recognition, marketing support, and centralized reservation systems provided by the franchisor. A franchise termination could also have a material adverse effect on cash available for distribution to shareholders. In addition, if we breach the franchise agreement and the franchisor terminates a franchise prior to its expiration date, we may be liable for up to three times the average annual fees incurred for that property.

Our results of operations included franchise fees of $2.6 million and $2.4 million for the years ended December 31, 2013 and 2012, respectively.

Management Fees—Under management agreements for our hotel properties existing at December 31, 2013, we pay a) monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by AHT’s independent directors, if required. These management agreements expire from December 31, 2020 through December 31, 2032, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.

Leases—For the years ended December 31, 2013 and 2012, we recognized rent expense of $88,000 and $121,000, respectively, which is included in other expenses in the combined consolidated statements of operations. Future minimum rentals due under non-cancelable leases are as follows for each of the years ending December 31, (in thousands):




2014	$	30
2015	21
2016	8
2017	6
2018	5
Thereafter	—
Total	$	70

Capital Commitments—At December 31, 2013, we had capital commitments of $2.8 million relating to general capital improvements that are expected to be paid in the next twelve months.

Litigation—The Company is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the combined consolidated financial position or results of operations of the Company. However, the final results of legal proceedings cannot be predicted with certainty and if the Company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the Company’s current estimates of the range of potential losses, the Company’s combined consolidated financial position or results of operations could be materially adversely affected in future periods.

F-15

9. Equity

Noncontrolling Interest in Consolidated Entities—At December 31, 2013 and 2012, noncontrolling interest in consolidated entities represented an ownership interest of 15% in two hotel properties with a total carrying value of $1.0 million and $2.0 million, respectively. Income (loss) from consolidated entities attributable to this noncontrolling interest was $14,000 and $(12,000) for the years ended December 31, 2013 and 2012, respectively.

10. Income Taxes

At December 31, 2013, 13 of our 16 hotel properties were leased byAHT to a wholly-owned taxable corporation while one hotel was owned directly by that same wholly-owned taxable corporation. The remaining 2 properties were owned by a consolidated partnership (in which AHT participates) and leased to two taxable corporations wholly-owned by such consolidated partnership. Income tax expense is prepared on a carve-out basis.

Income tax expense for the taxable corporation that leases and operates 13 of the hotel properties and owns and operates 1 of the hotel properties has been calculated on a separate standalone basis. For 2013 and 2012, the results of the operations of these 14 hotel properties were included in the consolidated tax returns of various jurisdictions for a taxable subsidiary of AHT. Income tax expense for the taxable corporations wholly-owned by a consolidated partnership, which were calculated on a separate standalone basis, have been included in the accompanying combined consolidated financial statements at the same amounts included in AHT’s consolidated financial statements.

The following table reconciles the income tax expense at statutory rates based on the taxable corporations' recognized net book income before income taxes of $1.6 million and $1.1 million for the years ended December 31, 2013 and 2012, respectively, to the actual income tax (expense) benefit recorded (in thousands):



	Year Ended December 31,
	2013			2012
Income tax expense at federal statutory income tax rate of 35%	$	(569	)	$	(393	)
State income tax expense, net of federal income tax benefit	(68		)	(38		)
Valuation allowance	113			(96		)
Total income tax expense	$	(524	)	$	(527	)

The components of income tax expense are as follows (in thousands):



	Year Ended December 31,
	2013			2012
Current:
Federal	$	(466	)	$	(515	)
State	(50		)	(54		)
Total current	(516		)	(569		)
Deferred:
Federal	(4		)	38
State	(4		)	4
Total deferred	(8		)	42
Total income tax expense	$	(524	)	$	(527	)

For each the years ended December 31, 2013 and 2012, income tax expense did not include any interest and penalties paid to taxing authorities. At December 31, 2013 and 2012, we determined that there were no amounts to accrue for interest and penalties due to taxing authorities.

F-16

Our net deferred tax liability consisted of the following (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Allowance for doubtful accounts	$	3		$	8
Unearned income	120			86
Unfavorable management contract liability	153			204
Federal and state net operating losses	1,103			1,252
Accrued expenses	59			50
Valuation allowance	(1,165		)	(1,279		)
Total deferred tax assets	273			321
Deferred tax liability:
Tax property basis less than book basis	(2,071		)	(2,112		)
Net deferred tax liability	$	(1,798	)	$	(1,791	)

With respect to the two taxable corporations wholly-owned by a consolidated partnership, we believe the deferred tax assets are not more likely than not to be realized as a result of a three year history of cumulative losses, the limitation imposed by the Code on the utilization of net operating losses of acquired subsidiaries, and the lack of availability to carry back such losses. With respect to the deferred tax assets associated with the 14 properties leased to a wholly-owned taxable corporation, we believe such deferred tax assets are more likely than not to be realized based on the future reversal of existing taxable temporary differences. Thus, we recorded a valuation allowance of $1.2 million and $1.3 million, at December 31, 2013 and 2012 respectively, to fully offset deferred tax assets of the two taxable corporations wholly-owned by a consolidated partnership. The following table summarizes the changes in the valuation allowance (in thousands):



	Year Ended December 31,
	2013			2012
Balance at beginning of year	$	1,279		$	1,182
Additions charged to other deferred tax assets	37			97
Deductions	(151		)	—
Balance at end of year	$	1,165		$	1,279

11. Segment Reporting

We operate in one business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refer to owning hotels through either acquisition or new development. We report operating results of direct hotel investments on an aggregate basis as substantially all of our hotel investments have similar economic characteristics and exhibit similar long-term financial performance. As of December 31, 2013 and 2012, all of our hotel properties were domestically located.

12. Related Party Transactions

AHT has management agreements with Remington Lodging, which is beneficially wholly owned by its chairman and chief executive officer and its chairman emeritus. Under the agreements, AHT pays on behalf of our hotels Remington Lodging a) monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues as well as annual incentive management fees, if certain operational criteria are met, b) project management fees of up to 4% of project costs, c) market service fees including purchasing, design and construction management not to exceed 16.5% of project budget cumulatively, including project management fees, and d) other general fees at current market rates as approved by AHT’s independent directors, if required. These management agreements expire between March 24, 2021 and September 1, 2024, with renewal options.

F-17

The following fees were incurred related to the management agreements with Remington Lodging (in thousands):



	Year Ended December 31,
	2013		2012
Property management fees, including incentive property management fees	$	1,110	$	954
Market service and project management fees	585		775
	$	1,695	$	1,729

Management agreements with Remington Lodging include exclusivity clauses that requires AHT to engage Remington, unless its independent directors either (i) unanimously vote not to hire Remington or (ii) by a majority vote elect not to engage Remington because either special circumstances exist such that it would be in the best interest of AHT not to engage Remington, or, based on the Remington’s prior performance, it is believed that another manager or developer could perform the management, development or other duties materially better.

The operations of the Company have been principally funded by AHT. AHT uses a centralized approach to cash management and the financing of its operations. During the periods covered by these financial statements, AHT provided the capital to fund our operating and investing activities, which are presented as a component of owner’s equity. Contributions (distributions) from/to AHT, net were $(2.3) million and $629,000 for the years ended December 31, 2013 and 2012, respectively.

As the Company’s financial statements have been carved out of AHT, corporate general and administrative expense represents an allocation of certain AHLP corporate general and administrative costs. See Note 2.

13. Concentration of Risk

Our investments are all concentrated within the hotel industry. Our investment strategy is to acquire primarily premium branded select-service hotels, including extended stay hotels located in U.S. and international markets. At present, all of our hotels are located domestically with two hotels located in the Orlando, FL area comprising 25.9% of total revenues for the year ended December 31, 2013, three hotels located in the Washington, D.C. area comprising 14.2% of total revenues for the year ended December 31, 2013, two hotels located in Palm Desert, CA comprising 10.0 % of total revenues for the year ended December 31, 2013 and two hotels in Manchester, CT comprising 8.2% of total revenues for the year ended December 31, 2013. During 2013, the Orlando Residence inn Sea World hotel generated revenues in excess of 10% of total revenues amounting to 16.2% of total hotel revenue.

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions. At December 31, 2013, our exposure risk related to our cash is spread among a diversified group of investment grade financial institutions.

14. Subsequent Events

On May 1, 2014, AHT refinanced our $5.1 million loan due May 2014 with a $6.9 million loan due May 2024, with no extension options. The new loan provides for a fixed interest rate of 4.99%. The new loan continues to be secured by the same hotel property, the Courtyard Hartford-Manchester in Manchester, Connecticut.

On July 25, 2014, AHT completed the financing for two of our mortgage loans. The first loan, totaling $62.9 million, has a two-year initial term with three one-year extension options and provides for a floating interest rate of LIBOR +4.35%. It is secured by the Las Vegas Residence Inn, the BWI Airport SpringHill Suites, the Gaithersburg SpringHill Suites, the Tipton Lakes Courtyard Columbus and the Centreville SpringHill Suites. The second loan, totaling $67.5 million, has a ten-year term and provides for a fixed interest rate of 5.2%. It is secured by the Lake Buena Vista Residence Inn Orlando, the Louisville Courtyard and the Fort Lauderdale Courtyard.

On January 2, 2015, AHT completed the financing for two of our mortgage loans totaling $79.4 million, which are secured by the Courtyard Overland Park, Residence Inn Salt Lake City Cottonwood, Residence Inn Orlando Sea World, Courtyard Palm Desert and Residence Inn Palm Desert. The new loans each provide for a fixed interest rate of 4.45% with a ten-year term.

F-18

THE ASHFORD HOSPITALITY SELECT HOTELS

CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS

(in thousands)



	September 30, 2014		December 31, 2013
	(Unaudited)
Assets
Investments in hotel properties, net	$	281,532	$	283,445
Cash and cash equivalents	4,767		9,148
Restricted cash	19,425		2,029
Accounts receivable, net of allowance of $14 and $7, respectively	2,409		2,161
Inventories	68		57
Deferred costs, net	2,722		859
Prepaid expenses	1,212		866
Derivative assets	40		—
Other assets	110		102
Due from third-party hotel managers	1,796		6,360
Total assets	$	314,081	$	305,027
Liabilities and Equity
Liabilities:
Indebtedness	$	155,336	$	23,275
Accounts payable and accrued expenses	5,724		4,504
Unfavorable management contract liabilities	297		395
Due to related party, net	191		134
Due to third-party hotel managers	51		143
Deferred tax liability, net	1,742		1,798
Other liabilities	294		307
Total liabilities	163,635		30,556
Commitments and contingencies (Note 8)
Equity:
Owner’s equity of the Company	149,646		273,424
Noncontrolling interest in consolidated entities	800		1,047
Total equity	150,446		274,471
Total liabilities and equity	$	314,081	$	305,027

See Notes to Condensed Combined Consolidated Financial Statements.

F-19

THE ASHFORD HOSPITALITY SELECT HOTELS

CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)



	Nine Months Ended September 30,
	2014			2013
	(Unaudited)
Revenue
Rooms	$	60,598		$	56,218
Food and beverage	1,916			1,924
Other	1,311			1,307
Total hotel revenue	63,825			59,449
Expenses
Hotel operating expenses:
Rooms	15,216			14,258
Food and beverage	1,456			1,340
Other expenses	18,462			17,115
Management fees	3,467			3,428
Total hotel expenses	38,601			36,141
Property taxes, insurance and other	3,364			3,394
Depreciation and amortization	9,796			9,131
Corporate general and administrative	4,261			4,143
Total expenses	56,022			52,809
Operating income	7,803			6,640
Interest income	6			6
Interest expense and amortization of loan costs	(10,031		)	(9,909		)
Write-off of loan costs and exit fees	(3,415		)	—
Unrealized loss on derivatives	(29		)	—
Loss before income taxes	(5,666		)	(3,263		)
Income tax expense	(307		)	(393		)
Net loss	(5,973		)	(3,656		)
Income from consolidated entities attributable to noncontrolling interest	(8		)	(19		)
Net loss attributable to the Company	$	(5,981	)	$	(3,675	)

See Notes to Condensed Combined Consolidated Financial Statements.

F-20

THE ASHFORD HOSPITALITY SELECT HOTELS

CONDENSED COMBINED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)



	Nine Months Ended September 30,
	2014			2013
	(Unaudited)
Net loss	$	(5,981	)	$	(3,675	)
Other comprehensive income, net of tax:
Total other comprehensive income	—			—
Total comprehensive loss	(5,981		)	(3,675		)
Comprehensive income attributable to a noncontrolling interest in consolidated entities	(8		)	(19		)
Comprehensive loss attributable to the Company	$	(5,989	)	$	(3,694	)

See Notes to Condensed Combined Consolidated Financial Statements.

F-21

THE ASHFORD HOSPITALITY SELECT HOTELS

CONDENSED COMBINED CONSOLIDATED STATEMENT OF EQUITY

(unaudited)

(in thousands)



	Owner’s Equity			Noncontrolling Interest in Consolidated Entities			Total
Balance at January 1, 2014	$	273,424		$	1,047		$	274,471
Distributions to a noncontrolling interest	—			(255		)	(255		)
Net income (loss)	(5,981		)	8			(5,973		)
Distributions to owner, net	(117,797		)	—			(117,797		)
Balance at September 30, 2014	$	149,646		$	800		$	150,446

See Notes to Condensed Combined Consolidated Financial Statements.

F-22

THE ASHFORD HOSPITALITY SELECT HOTELS

CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Nine Months Ended September 30,
	2014			2013
	(unaudited)
Cash Flows from Operating Activities
Net loss	$	(5,973	)	$	(3,656	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Depreciation and amortization	9,796			9,131
Amortization of loan costs	471			578
Amortization of intangibles	(98		)	(99		)
Bad debt expense	33			49
Deferred tax expense (benefit)	(56		)	5
Write-off of deferred loan costs	3,415			—
Unrealized loss on derivatives	29			—
Changes in operating assets and liabilities—
Restricted cash	(6,971		)	(177		)
Accounts receivable and inventories	(301		)	(289		)
Prepaid expenses and other assets	(354		)	399
Accounts payable and accrued expenses	1,744			1,220
Other liabilities	—			200
Due to/from related party	57			(171		)
Due to/from third-party hotel managers	4,472			(1,648		)
Net cash provided by operating activities	6,264			5,542
Cash Flows from Investing Activities
Improvements and additions to hotel properties	(7,454		)	(3,885		)
Restricted cash related to improvements and additions to hotel properties	(10,425		)	(90		)
Proceeds from insurance claims	43			14
Net cash used in investing activities	(17,836		)	(3,961		)
Cash Flows from Financing Activities
Borrowings on indebtedness	137,320			—
Repayments of indebtedness	(5,259		)	(253		)
Payments of loan costs and exit fees	(2,057		)	—
Payments for derivatives	(69		)	—
Distributions to owner, net	(121,509		)	(913		)
Distributions to a noncontrolling interest in consolidated entities	(1,235		)	—
Net cash provided by (used in) financing activities	7,191			(1,166		)
Net change in cash and cash equivalents	(4,381		)	415
Cash and cash equivalents at beginning of period	9,148			2,529
Cash and cash equivalents at end of period	$	4,767		$	2,944
Supplemental Cash Flow Information
Interest paid	$	8,931		$	8,779
Income taxes paid	$	—		$	16
Supplemental Disclosure of Non Cash Investing and Financing Activities
Financed insurance premiums	$	—		$	780
Non cash contribution from owner	$	3,712		$	526
Accrued but unpaid capital expenditures	$	532		$	101

See Notes to Condensed Combined Consolidated Financial Statements.

F-23

THE ASHFORD HOSPITALITY SELECT HOTELS

NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Ashford Hospitality Trust, Inc. (“AHT”) is a self-advised real estate investment trust (“REIT”) as defined in the Internal Revenue Code (“Code”) and was formed in Maryland on May 13, 2003. AHT commenced operations in August 2003 and has been focused on investing in the hospitality industry across all segments and in all methods including direct real estate, securities, equity, and debt. AHT owns its lodging investments and conducts its business through the majority-owned Ashford Hospitality Limited Partnership (“AHLP”), an operating partnership that was formed in Delaware on May 13, 2003. The general partner of AHLP is Ashford OP Limited Partner LLC, a Delaware limited liability company. AHLP will continue into perpetuity unless earlier dissolved or terminated pursuant to law or the provisions of the AHLP limited partnership agreement. The accompanying condensed combined consolidated financial statements include the accounts of certain wholly-owned and majority owned subsidiaries of AHLP that own and operate 16 hotels in ten states. The portfolio includes 14 wholly-owned hotel properties and two hotel properties that are owned through a partnership in which AHT has an 85% controlling interest with Interstate Hotels & Resorts, Inc. ("Interstate") holding the remaining 15%. These hotels represent 2,560 total rooms, or 2,533 net rooms, excluding those attributable to our partner. As of September 30, 2014, 13 of the 16 hotel properties were leased by AHT’s indirect wholly-owned subsidiaries that are treated as taxable REIT subsidiaries ("TRS") for federal income tax purposes, one was owned by an AHT indirect wholly-owned subsidiary that is treated as a TRS and two hotel properties owned through a consolidated partnership were leased to two TRSs wholly-owned by such consolidated partnership. Each leased hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from the TRS is eliminated in combination and/or consolidation. The hotels are operated under management contracts with Marriott International, Inc., Interstate and Remington Lodging and Hospitality LLC, together with its affiliates ("Remington Lodging"), which is beneficially owned owned by Mr. Monty J. Bennett, AHT's Chairman and Chief Executive Officer and Mr. Archie Bennett, Jr., AHT's Chairman Emeritus, which are eligible independent contractors under the Code.

With respect to 14 of the 16 hotels, the accompanying condensed combined consolidated financial statements include the accounts of the following subsidiaries of AHT:



1.	Ashford Buena Vista LP
2.	Ashford Louisville LP
3.	Ashford Tipton Lakes LP
4.	Ashford Jacksonville IV LP
5.	Ashford Orlando Sea World LP
6.	Ashford Salt Lake LP
7.	Ashford Overland Park LP
8.	Ashford Ruby Palm Desert I LP
9.	Ashford Gaithersburg LP
10.	Ashford Centerville LP
11.	Ashford Ft. Lauderdale Weston I LLC
12.	Ashford Ft. Lauderdale Weston II LLC
13.	Ashford Ft. Lauderdale Weston III LLC
14.	Ashford LV Hughes Center LP
15.	Ashford BWI Airport LP

With respect to 14 of the 16 hotels, the accompanying condensed combined consolidated financial statements include certain of the accounts of the following subsidiaries of AHT:



1.	Ashford TRS Lessee I LLC
2.	Ashford TRS VI Corporation
3.	Ashford TRS Pool I LLC (through 7/25/14)
4.	Ashford TRS Lessee III LLC (through 7/25/14)
5.	Ashford TRS Sapphire LLC (through 7/25/14)
6.	Ashford TRS Pool B LLC (after 7/25/14)
7.	Ashford TRS Pool C1 LLC (after 7/25/14)

F-24

With respect to the other two hotels, the accompanying condensed combined consolidated financial statements include the accounts of Ashford IHC Partners, LP and its subsidiaries which include:



1.	RI Manchester Hotel Partners, LP
2.	CY Manchester Hotel Partners, LP
3.	RI Manchester Tenant Corporation
4.	CY Manchester Tenant Corporation
5.	CY-CIH Manchester Parent, LLC
6.	RI-CIH Manchester Parent, LLC

2. Significant Accounting Policies

Basis of Presentation and Principles of Combination and Consolidation—The accompanying historical unaudited condensed combined consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These historical condensed combined consolidated financial statements of The Ashford Hospitality Select Hotels have been “carved out” of AHT’s consolidated financial statements and reflect significant assumptions and allocations. The hotels are under AHT’s common control. The condensed combined consolidated financial statements were prepared using the financial position and results of operations of the entities set forth above after adjustments for certain ownership related activities that have been historically accounted for by AHT. These ownership activities include mortgage indebtedness associated with the 16 hotels, debt related expenses and other owner related expenses. In addition, the condensed combined consolidated statements of operations include allocations of corporate general and administrative expenses from AHT, which in the opinion of management, are reasonable. The historical financial information is not necessarily indicative of the Company’s future results of operations, financial position and cash flows. All significant inter-company accounts and transactions between combined consolidated entities have been eliminated in these historical condensed combined consolidated financial statements. These historical condensed combined consolidated financial statements and related notes should be read in conjunction with the historical audited combined consolidated financial statements included in this document.

The following items affect reporting comparability related to our historical condensed combined consolidated financial statements:


•	Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

Subsequent events have been evaluated through January 29, 2015, the date the Company issued its financial statements.

Use of Estimates—The preparation of these condensed combined consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand or held in banks and short-term investments with an initial maturity of three months or less at the date of purchase.

Restricted Cash—Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of approximately 4% to 5% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. For purposes of the condensed combined consolidated statements of cash flows, changes in restricted cash caused by using such funds for debt service, real estate taxes and insurance are shown as operating activities. Changes in restricted cash caused by using such funds for furniture, fixtures and equipment replacements are included in cash flows from investing activities.

F-25

Impairment of Investments in Hotel Properties—Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. During the nine months ended September 30, 2014 and 2013, we have not recorded any impairment charges.

Deferred Costs, net—Deferred loan costs are recorded at cost and amortized over the terms of the related indebtedness using the effective interest method.

Derivative Instruments and Hedging—Interest rate derivatives include interest rate caps, which are designated as cash flow hedges, and provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when actual rates exceed the cap strike rate. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. These derivatives are subject to master netting settlement arrangements. As the derivatives are subject to master netting settlement arrangements, we report derivatives with the same counterparty net on the condensed combined consolidated balance sheets.

Derivatives are recorded at fair value in accordance with the applicable authoritative accounting guidance. For interest rate derivatives designated as cash flow hedges, the effective portion of changes in the fair value is reported as a component of “Accumulated Other Comprehensive Loss” (“OCI”) in the equity section of the condensed combined consolidated balance sheets. The amount recorded in OCI is reclassified to interest expense in the same period or periods during which the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings as “Unrealized loss on derivatives” in the condensed combined consolidated statements of operations.

F-26

Unfavorable Management Contract Liabilities—A management agreement assumed by AHT in an acquisition of a hotel in 2007 has terms that are more favorable to the respective manager than typical market management agreements at the acquisition date. As a result, AHT recorded an unfavorable contract liability related to that management agreement totaling $1.3 million based on the present value of expected cash outflows over the initial term of the related agreement. The unfavorable contract liability is amortized as a reduction to incentive management fees on a straight-line basis over the initial term of the related agreement.

Noncontrolling Interest in Consolidated Entities—The noncontrolling interest in a consolidated entities represents an ownership interest of 15% in two hotel properties at September 30, 2014 and December 31, 2013 and is reported in equity in the condensed combined consolidated balance sheets.

Income/loss from consolidated entities attributable to noncontrolling interest in our consolidated entities are reported as deductions/additions from/to net income/loss. Comprehensive income/loss attributable to these noncontrolling interest is reported as reductions/additions from/to comprehensive income/loss.

The total carrying value of the noncontrolling interest in consolidated entities was $800,000 and $1.0 million at September 30, 2014 and December 31, 2013, respectively. Noncontrolling interest in consolidated entities were allocated income of $8,000 and $19,000 for the nine months ended September 30, 2014 and 2013, respectively.

The operations of the Company have been principally funded by AHT. AHT uses a centralized approach to cash management and the financing of its operations. During the periods covered by these financial statements, AHT provided the capital to fund our operating and investing activities, which are presented as a component of owner’s equity. Distributions to AHT, net were $117.8 million and $387,000 for the nine months ended September 30, 2014 and 2013, respectively.

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

F-27

In December 2011, the FASB issued accounting guidance to clarify how to determine whether a reporting entity should derecognize the in substance real estate upon loan defaults when it ceases to have controlling interest in a subsidiary that is in substance real estate. Under this guidance, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related non-recourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its financial statements until legal title to the real estate is transferred to legally satisfy the debt. The new accounting guidance is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. This guidance was adopted early. The adoption of this accounting guidance did not affect our financial position or results of operations.

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

F-28

3. Investments in Hotel Properties, net

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



	September 30, 2014			December 31, 2013
Land	$	52,590		$	52,590
Buildings and improvements	282,487			279,730
Furniture, fixtures and equipment	22,457			20,684
Construction in progress	1,494			1,297
Total cost	359,028			354,301
Accumulated depreciation	(77,496		)	(70,856		)
Investments in hotel properties, net	$	281,532		$	283,445

4. Indebtedness

Indebtedness was as follows (in thousands):



Indebtedness	Collateral	Maturity	Interest Rate	September 30, 2014		December 31, 2013
Mortgage loan^{(2) (3)}	1 hotel	May 2014	8.32%	$	—	$	5,075
Mortgage loan⁽²⁾	5 hotels	August 2016	LIBOR ⁽¹⁾ +4.35%	62,900		—
Mortgage loan	1 hotel	January 2024	5.49%	7,337		7,400
Mortgage loan	1 hotel	January 2024	5.49%	10,709		10,800
Mortgage loan⁽³⁾	1 hotel	May 2024	4.99%	6,870		—
Mortgage loan	3 hotels	August 2024	5.20%	67,520		—
Total				$	155,336	$	23,275

________


(1)	LIBOR rates were 0.157% at September 30, 2014.


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


(3)	On May 1, 2014, AHT refinanced our $5.1 million loan due May 2014 with a $6.9 million loan due May 2024 with no extension options. The new loan provides for a fixed interest rate of 4.99%.

As of September 30, 2014 and December 31, 2013, AHT held mortgage loans of $79.3 million and $199.7 million, respectively, in which certain of our properties were held as collateral with other hotel properties of AHT which have been excluded from our indebtedness. Additionally, the restricted cash balances and deferred loan costs are also excluded. These amounts are not included in our financial position as we are not the sole obligor on the various loan pools. The related interest expense and amortization of loan costs associated with these loans is included in our results of operations for the nine months ended September 30, 2014 and 2013.

The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of the combined consolidated group. Presently, our existing covenants are non-recourse. As of September 30, 2014, we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.

F-29

5. Derivative Instruments and Hedging

Interest Rate Derivatives—We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage the risks, we primarily use interest rate derivatives to hedge our debt as a way to potentially improve cash flows. The interest rate derivatives include interest rate caps, which are subject to master netting settlement arrangements. All derivatives are recorded at fair value.

In 2014, AHT entered into our interest rate caps with total notional amounts of $102.0 million to cap the interest rates on mortgage loans with maturities between May 2015 and August 2016 and strike rates between 2.25% and 2.59%. These instruments had total costs of $69,000 and were not designated as cash flow hedges. At September 30, 2014, floating interest rate mortgage loans with principal balances of $62.9 million were capped by interest rate hedges. At December 31, 2013 and during 2013, there were no interest rate caps.

6. Fair Value Measurements


•	Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.

•


•	Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

We have determined that when a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counter-parties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period.

F-30

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):



	Significant Other Observable Inputs (Level 2)		Total
September 30, 2014
Assets
Derivative assets:
Interest rate derivatives	$	40	$	40	(1)

December 31, 2013
Assets
Derivative assets:
Interest rate derivatives	$	—	$	—	(1)


(1)	Reported as “Derivative assets” in the condensed combined consolidated balance sheets.

Effect of Fair Value Measured Assets and Liabilities on Condensed Combined Consolidated Statements of Operations

The following tables summarizes the effect of fair value measured assets and liabilities on the condensed combined consolidated statements of operations for the nine months ended September 30, 2014 and 2013 (in thousands):



	Gain or (Loss) Recognized in Income Nine Months Ended September 30,
	2014				2013
Assets
Derivative assets:
Interest rate derivatives	$	(29	)	(1)	$	—	(1)


(1)	Reported as “Unrealized loss on derivatives” in the condensed combined consolidated statements of operations.

F-31

7. Summary of Fair Value of Financial Instruments



	September 30, 2014				December 31, 2013
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets measured at fair value:
Derivative assets	$	40	$	40	$	—	$	—
Financial assets not measured at fair value:
Cash and cash equivalents	$	4,767	$	4,767	$	9,148	$	9,148
Restricted cash	$	19,425	$	19,425	$	2,029	$	2,029
Accounts receivable	$	2,409	$	2,409	$	2,161	$	2,161
Due from third-party hotel managers	$	1,796	$	1,796	$	6,360	$	6,360
Financial liabilities not measured at fair value:
Indebtedness	$	155,336	$154,730 to $171,018		$	23,275	$24,325 to $26,886
Accounts payable and accrued expenses	$	5,724	$	5,724	$	4,504	$	4,504
Due to related party, net	$	191	$	191	$	134	$	134
Due to third-party hotel managers	$	51	$	51	$	143	$	143

Derivative assets. Fair value of the interest rate derivatives are determined using the net present value of the expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of the Company and the counterparties. See Notes 2, 5 and 6 for a complete description of the methodology and assumptions utilized in determining fair values.

Indebtedness. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. We estimated the fair value of the total indebtedness to be approximately 99.6% to 110.1% of the carrying value of $155.3 million at September 30, 2014, and approximately 104.5% to 115.5% of the carrying value of $23.3 million at December 31, 2013. This is considered a Level 2 valuation technique.

8. Commitments and Contingencies

Restricted Cash—Under certain management and debt agreements for our hotel properties existing at September 30, 2014, escrow payments are required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt and management agreements, we escrow 4% to 5% of gross revenues for capital improvements.

Franchise Fees—Under franchise agreements for our hotel properties existing at September 30, 2014, we pay franchisor royalty fees between 5% and 5.5% of gross room revenue. Additionally, we pay fees for marketing, reservations, and other related activities aggregating between 2% and 2.5% of gross room revenue and, in some cases, food and beverage revenues. These franchise agreements expire on varying dates between 2017 and 2031. When a franchise term expires, the franchisor has no obligation to renew the franchise. A franchise termination could have a material adverse effect on the operations or the underlying value of the affected hotel due to loss of associated name recognition, marketing support, and centralized reservation systems provided by the

F-32

franchisor. A franchise termination could also have a material adverse effect on cash available for distribution to shareholders. In addition, if we breach the franchise agreement and the franchisor terminates a franchise prior to its expiration date, we may be liable for up to three times the average annual fees incurred for that property.

Our results of operations included franchise fees of $2.5 million and $1.9 million for the nine months ended September 30, 2014 and 2013, respectively.

Management Fees—Under management agreements for our hotel properties existing at September 30, 2014, we pay a)monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by AHT’s independent directors, if required. These management agreements expire from December 31, 2020 through December 31, 2032, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.

9. Segment Reporting

We operate in one business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refer to owning hotels through either acquisition or new development. We report operating results of direct hotel investments on an aggregate basis as substantially all of our hotel investments have similar economic characteristics and exhibit similar long-term financial performance. As of September 30, 2014 and December 31, 2013, all of our hotel properties were domestically located.

10. Subsequent Event

F-33

Ashford Hospitality (NYSE:AHT)
Historical Stock Chart
From Jun 2024 to Jul 2024