Company Quick10K Filing
Quick10K
Hospitality Investors Trust
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-05 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-26 Regulation FD, Exhibits
8-K 2018-11-16 Regulation FD
8-K 2018-09-24 Other Events, Exhibits
8-K 2018-08-29 Regulation FD, Exhibits
8-K 2018-08-21 Regulation FD
8-K 2018-06-26 Shareholder Vote
8-K 2018-06-11 Regulation FD, Exhibits
8-K 2018-05-14 Other Events, Exhibits
8-K 2018-04-26 Regulation FD, Exhibits
8-K 2018-04-23 Other Events
8-K 2018-04-17 Regulation FD
DXCM Dexcom 10,600
ICLR Icon 7,190
GDOT Green Dot 3,250
USNA Usana Health Sciences 1,970
KRG Kite Realty 1,300
DNR Denbury Resources 1,060
SDT Sandridge Mississippian Trust I 28
QTMM Quantum Materials 0
PARF Paradise 0
KRDO Kreido Biofuels 0
HIT 2018-12-31
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10-K Summary.
Note 1 - Organization
Note 2 - Summary of Significant Accounting Policies
Note 3 - Brookfield Investment
Note 4 - Business Combinations
Note 5 - Leases
Note 6 - Mortgage Notes Payable
Note 7 - Promissory Notes Payable
Note 8 - Mandatorily Redeemable Preferred Securities
Note 9 - Accounts Payable and Accrued Expenses
Note 10 - Common Stock
Note 11 - Share-Based Payments
Note 12 - Fair Value Measurements
Note 13 - Commitments and Contingencies
Note 14 - Related Party Transactions and Arrangements
Note 15 - Economic Dependency
Note 16 - Income Taxes
Note 17 - Impairments
Note 18 - Sales of Hotels
Note 19 - Quarterly Results (Unaudited)
Note 20 - Subsequent Events
EX-10.72 hit-exhibit1072xq42018.htm
EX-21.1 hit-exhibit211xq42018.htm
EX-23.1 hit-exhibit231xq42018.htm
EX-31.1 hit-exhibit311xq42018.htm
EX-31.2 hit-exhibit312xq42018.htm
EX-32 hit-exhibit32xq42018.htm

Hospitality Investors Trust Earnings 2018-12-31

HIT 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 hit-201810xk.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2018
 OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 000-55394
HOSPITALITY INVESTORS TRUST, INC.
(Exact name of registrant as specified in its charter) 
Maryland
  
80-0943668
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
Park Avenue Tower, 65 East 55th Street, Suite 801, New York, NY
  
10022
(Address of principal executive offices)
  
(Zip Code)
(571) 529-6390 
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common stock, $0.01 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ 
 
Accelerated filer ¨
Non-accelerated filer x
  
 
Smaller reporting company ¨
 
Emerging growth company x
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x Yes ¨ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
There is no established public market for the registrant's shares of common stock.
The number of outstanding shares of the registrant's common stock on April 15, 2019 was 39,132,451 shares.



HOSPITALITY INVESTORS TRUST, INC.

FORM 10-K
Year Ended December 31, 2018

Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
This Annual Report on Form 10-K may contain registered trademarks, including Hampton Inn®, Hampton Inn and Suites®, Homewood Suites®, Embassy Suites®, DoubleTree® and Hilton Garden Inn®, which are the exclusive property of Hilton Worldwide, Inc.® and its subsidiaries and affiliates, Courtyard® by Marriott, Fairfield Inn and Suites®, TownePlace Suites®, SpringHill Suites®, Residence Inn® and Westin® which are the exclusive property of Marriott International, Inc.® or one of its affiliates, Hyatt House® and Hyatt Place®, which are the exclusive property of Hyatt Hotels Corporation® or one of its affiliates, and Holiday Inn Express and Suites® and Staybridge Suites®, which are the exclusive property of Intercontinental Hotels Group® or one of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.


i




Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Hospitality Investors Trust, Inc. (the "Company" "we" "our" “our company” or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We may require funds, which may not be available on favorable terms or at all, in addition to our operating cash flow and cash on hand to meet our capital requirements.
The interests of the Brookfield Investor may conflict with our interests and the interests of our stockholders, and the Brookfield Investor owns all $396.5 million in liquidation preference units of limited partner interests in our operating partnership entitled “Class C Units” (the “Class C Units”) issued and outstanding as of the date hereof and has significant governance and other rights that could be used to control or influence our decisions or actions.
The prior approval rights of the Brookfield Investor will restrict our operational and financial flexibility and could prevent us from taking actions that we believe would be in the best interest of our business.
We no longer pay distributions and there can be no assurance we will resume paying distributions in the future.
We do not expect to be able to purchase additional properties unless we are able to either sell assets at prices that generate sufficient excess proceeds after repayment of any related debt or obtain additional equity or debt financing and obtain prior approval from the Brookfield Investor.
We have a history of operating losses and there can be no assurance that we will ever achieve profitability.
No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.
Because no public trading market for our shares currently exists and our share repurchase program has been suspended, it is difficult for our stockholders to sell their shares of our common stock.
All of the properties we own are hotels, and we are subject to risks inherent in the hospitality industry.
We primarily own older hotels, which makes us more susceptible to declines in consumer demand, the impact of increases in hotel supply and downturns in economic conditions.
Increases in interest rates could increase the amount of our debt payments.
We have incurred substantial indebtedness, which may limit our future operational and financial flexibility.
We depend on our operating partnership and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to their obligations, which include distribution and redemption obligations to holders of Class C Units.
The amount we would be required to pay holders of Class C Units in a fundamental sale transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.
We are subject to a variety of risks related to our brand-mandated property improvement plans ("PIPs"), such as we may spend more than budgeted amounts to make necessary renovations and the renovations we make may not have the desired effect of improving the competitive position and enhancing the performance of the hotels renovated.
Increases in labor costs could adversely affect the profitability of our hotels.
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we may not be profitable or realize growth in the value of our real estate properties.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.
Our real estate investments are relatively illiquid and subject to some restrictions on sale, and therefore we may not be able to dispose of properties at the time of our choosing or on favorable terms.
Our failure to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT") could have a material adverse effect on us.

All forward-looking statements should also be read in light of the risks identified in Item 1A of this Annual Report on Form 10-K.

ii




PART I

Item 1. Business.
Hospitality Investors Trust, Inc. is a self-managed real estate investment trust (“REIT”) that invests primarily in premium-branded select-service lodging properties in the United States. We were incorporated on July 25, 2013 as a Maryland corporation and elected to be taxed as a REIT beginning with the taxable year ended December 31, 2014. As of December 31, 2018, we own or have an ownership interest in a total of 144 hotels, with a total of 17,321 guestrooms in 33 states.
We believe in affiliating our hotels with premium brands owned by leading international franchisors such as Hilton, Marriott and Hyatt. These brands represent the delivery of consistently high-quality hotel accommodations with value-oriented pricing that we believe appeals to a wide range of customers, including both business and leisure travelers. As of December 31, 2018, all but one of our hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation and Intercontinental Hotels Group or one of their respective subsidiaries or affiliates. Our one unbranded hotel has a direct affiliation with a leading university in Atlanta.
We have primarily acquired lodging properties in the upscale select-service, upscale extended stay and upper midscale select-service chain scale segments located in secondary markets with strong demand generators, such as state capitals, major universities and hospitals, as well as corporate, leisure and retail attractions. We believe properties in these chain scale segments can be operated with fewer employees and provide more stable cash flows than full service hotels, and with less market volatility than similar hotels in primary market locations.
The tables below include the following details for our hotel portfolio as of December 31, 2018, measured by number of rooms:
our top 20 markets as designated by STR, Inc. (“STR”);
chain scale mix1, as designated by STR, and hotel brand; and
hotel location type, as designated by STR.



























                                                 
1 STR generally classifies hotel brands into one of the following six chain scale segments, ranked from highest average daily rate to lowest: luxury, upper upscale, upscale, upper midscale, midscale and economy.


1



 
# of Hotels
 
% by Rooms
Top 20 Markets
 
 
 
Orlando, FL
4

 
4.5
%
Chicago, IL
5

 
4.4
%
Memphis, TN-AR-MS
6

 
3.4
%
Atlanta, GA
3

 
3.1
%
Louisiana South
5

 
2.9
%
West Palm Beach/Boca Raton, FL
4

 
2.8
%
Dallas, TX
3

 
2.6
%
Baltimore, MD
3

 
2.6
%
Jackson, MS
4

 
2.3
%
Columbus, OH
3

 
2.3
%
San Diego, CA
3

 
2.2
%
Kansas City, MO-KS
3

 
2.2
%
Norfolk/Virginia Beach, VA
2

 
2.0
%
Austin, TX
3

 
2.0
%
Seattle, WA
2

 
1.8
%
Tampa/St Petersburg, FL
3

 
1.8
%
Houston, TX
2

 
1.7
%
Lexington, KY
3

 
1.7
%
Denver, CO
2

 
1.6
%
Connecticut Area
2

 
1.6
%
Top 20 Markets
65

 
49.5
%
 
 
 
 
All Other Markets
79

 
50.5
%
 
 
 
 
Total Portfolio
144

 
100.0
%


2


 
# of Hotels
 
% by Rooms
Chain Scale/Brand
 
 
 
Upscale
 
 
 
Courtyard
23

 
16.1
%
Hyatt Place
16

 
12.0
%
Residence Inn
19

 
10.1
%
Homewood Suites
11

 
8.6
%
Springhill Suites
10

 
6.1
%
Hilton Garden Inn
6

 
4.8
%
Hyatt House
1

 
0.9
%
Doubletree
1

 
0.7
%
Staybridge Suites
1

 
0.5
%
Upscale Total
88

 
59.8
%
 
 
 
 
Upper Midscale
 
 
 
Hampton Inn/Hampton Inn & Suites
43

 
29.8
%
Fairfield Inn
7

 
4.6
%
Townplace Suites
2

 
1.1
%
Holiday Inn Express
1

 
0.4
%
Upper Midscale Total
53

 
35.9
%
 
 
 
 
Upper Upscale
 
 
 
Independent
1

 
1.5
%
Embassy Suites
1

 
1.4
%
Westin
1

 
1.4
%
Upper Upscale Total
3

 
4.3
%
 
 
 
 
Total Portfolio
144

 
100.0
%

 
# of Hotels
 
% by Rooms
STR Location
 
 
 
Airport
15

 
10.1
%
Interstate
4

 
2.4
%
Resort
5

 
5.3
%
Small Metro/Town
12

 
7.7
%
Suburban
85

 
56.1
%
Urban
23

 
18.4
%
Total Portfolio
144

 
100.0
%
 
 
 
 
In order to maintain our qualification as a REIT, we cannot operate or manage our hotels. Accordingly, our hotels are operated by national and regional hotel management companies that are not affiliated with us. Our asset management activities seek to encourage and demand our third-party management companies to develop effective sales programs, operate hotels effectively, control costs and develop operational initiatives for our hotels that increase guest satisfaction.
We conducted our initial public offering ("IPO"), from January 2014 until November 2015 without listing shares of our common stock on a national securities exchange, and we have not subsequently listed our shares. There currently is no established trading market for our shares and there may never be one. We suspended paying distributions to our stockholders in connection with our entry into the SPA (as defined below) with Brookfield Strategic Real Estate Partners II Hospitality REIT II

3


LLC (the “Brookfield Investor”) in January 2017. Currently, under the Brookfield Approval Rights (as defined below), prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
We are required to annually publish a per share estimated value of our common stock (“Estimated Per-Share NAV”) pursuant to the rules and regulations of the Financial Industry Regulatory Authority ("FINRA"). On April 23, 2018, our board of directors unanimously approved an updated Estimated Per-Share NAV equal to $13.87 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,505,742 shares of our common stock outstanding on a fully diluted basis as of December 31, 2017 (the “2018 NAV”). We expect to publish our next annual Estimated Per-Share NAV update during the second quarter of 2019.  
In September 2018, our board of directors adopted a Share Repurchase Program (“SRP”) pursuant to which we were offering, subject to certain terms and conditions, liquidity to stockholders by offering to make quarterly repurchases of common stock at a price to be established by the board of directors. In February 2019, our board of directors suspended the SRP. The suspension will remain in effect unless and until our board takes further action to reactivate the SRP. There can be no assurance the SRP will be reactivated on its current terms, different terms or at all.
Brookfield Investment
On January 12, 2017, we, along with our operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (the “OP”), entered into a Securities Purchase, Voting and Standstill Agreement (the “SPA”) with the Brookfield Investor, pursuant to which the Brookfield Investor agreed to make capital investments in our company of up to $400 million by purchasing units of limited partner interest in the OP entitled “Class C Units” (“Class C Units”) through February 2019. As of the date of this Annual Report, the Brookfield Investor has made $379.7 million of capital investments in us by purchasing Class C Units, but it no longer has any obligations or rights to purchase additional Class C Units.
On March 31, 2017, the initial closing under the SPA (the “Initial Closing”) occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:
the sale by us and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share (the “Redeemable Preferred Share”), for a nominal purchase price; and
the sale by us and purchase by the Brookfield Investor of 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.

On February 27, 2018, the second closing under the SPA (the “Second Closing”) occurred, pursuant to which we sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate.
On February 27, 2019, the third and final closing under the SPA (the “Final Closing”) occurred, pursuant to which we sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.
Substantially all of our business is conducted through the OP. We are a general partner and hold all of the units of limited partner interest in the OP entitled “OP Units” ("OP Units"). The Brookfield Investor holds all the issued and outstanding Class C Units, which rank senior in payment of distributions and in the distribution of assets to the OP Units held by us. BSREP II Hospitality II Special GP, OP LLC (the “Special General Partner”), an affiliate of the Brookfield Investor, is the special general partner of the OP, with certain non-economic rights that apply if we fail to redeem the Class C Units when required to do so, including the ability to commence selling the OP’s assets until the Class C Units have been fully redeemed. Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum and are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions"). As of December 31, 2018, the total liquidation preference of the Class C Units was $173.6 million, and as of February 27, 2019, following the Final Closing, the total liquidation preference of the Class C Units was $393.3 million. The Class C Units are convertible into OP Units, which may be redeemed for shares of our common stock or, at our option, the cash equivalent. As of the date of this Annual Report on Form 10-K, the Brookfield Investor owns or controls 40.7% of the voting power of our common stock on an as-converted basis. The SPA also contains certain standstill and voting restrictions applicable to the Brookfield Investor and certain of its affiliates.
Without obtaining the prior approval of the majority of the then outstanding Class C Units, the OP is restricted from taking certain actions including equity issuances, debt incurrences, payment of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales and dispositions. In addition, pursuant to the terms of the

4


Redeemable Preferred Share, the Brookfield Investor has elected and has a continuing right to elect two directors (each, a "Redeemable Preferred Director") to our board of directors and has other governance and board rights, and we are similarly restricted from taking those actions requiring approval of the Class C Units without the prior approval of at least one of the Redeemable Preferred Directors. Prior approval of at least one of the Redeemable Preferred Directors is also required for our annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share (the "Annual Business Plan"), hiring and compensation decisions related to certain key personnel (including our executive officers) and various matters related to the structure and composition of our board of directors. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions.
See Note 3 - Brookfield Investment to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding the terms of the Redeemable Preferred Share, the Class C Units and the Brookfield Approval Rights.
Transition to Self-Management
Prior to the Initial Closing, we had no employees, and we depended on our former external advisor, American Realty Capital Hospitality Advisors, LLC (the “Former Advisor”) to manage certain aspects of our affairs on a day-to-day basis pursuant to our advisory agreement with the Former Advisor. In connection with, and as a condition to, the Brookfield Investor's investment in us at the Initial Closing, the advisory agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, Crestline Hotels & Resorts, LLC (“Crestline”)) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees. As of December 31, 2018, we had 28 full-time employees. The staff at our hotels are employed by our third-party hotel managers.
Investment Objective and Strategies
Our primary business objective is to maximize stockholder value and position ourselves for a liquidity event, such as a listing on a national securities exchange, a merger or a sale, within two to four years, depending on capital markets and macroeconomic conditions. Subject to the Brookfield Approval Rights, including the requirement that at least one Redeemable Preferred Director approve our Annual Business Plan, we have pursued and will continue to pursue this objective through the following investment strategies:
Continued Investment in our Hotels. We engage in a continued process of renovating and improving our hotels. Since acquisition we have reinvested more than $316.8 million in our hotels through PIPs and other capital improvements. This includes amounts spent as part of the approximately $350 million PIP program we are currently undertaking across substantially all the hotels in our portfolio. We expect to complete our PIP program over the next two to three years. As of December 31, 2018, we have substantially completed work on 83 of the 141 hotels that are part of our PIP program, and an additional 16 hotels are in process and expected to be substantially completed early in the second quarter of 2019. We expect the investments we have made, and continue to make, in PIPs will enhance the performance of our hotel portfolio in future years and thereby, we believe, increase our cash flow and the value of our portfolio.
Disciplined Capital Reallocation. We intend to continue to pursue the sale of hotels we determine are non-core to our portfolio and reallocate that capital into acquisition and capital investment opportunities that we believe will produce more attractive stockholder returns. Non-core hotels can include those where the projected return on PIP work does not meet our thresholds, or those with low revenue per available room ("RevPAR"), below-average market quality or near-term franchise expirations.
Upgrade Hotel Portfolio. We intend to resume acquisition of premium-branded select-service hotels on a selective basis subject to capital availability, market conditions and opportunity. We intend for our new acquisition activity to emphasize higher quality hotels based on criteria such as:
generally higher RevPAR compared to the rest of our portfolio;
upgrade market quality by increasing the percentage of our portfolio located in top-50 markets as designated by STR, which percentage is approximately 58% as of December 31, 2018, measured by number of rooms, while still targeting markets with lower volatility;
improve chain scale mix by increasing the percentage of hotels in our portfolio in the upscale select-service segment of the lodging industry;
further diversifying and expanding the Company’s existing hotel portfolio outside of the Southeast and Mid-Atlantic United States; and
lower effective age of our hotels (measured from completion of most recent PIP renovation) and longer franchise agreements.
Acquisitions

5


Our hotel portfolio has been acquired through a series of portfolio purchases, as shown in the table below.
Acquisition Date
Portfolio
Number of Hotels
Purchase Price(1)
March 2014
Barceló Portfolio
6
$110.1 million
February 2015
Grace Portfolio
116(2)
$1,796.5 million
October 2015
First Summit Portfolio
10
$150.1 million
November 2015
First Noble Portfolio
2
$48.6 million
December 2015
Second Noble Portfolio
2
$59.0 million
February 2016
Third Summit Portfolio
6
$108.3 million
April 2017
Second Summit Portfolio
7
$66.5 million
(1) Exclusive of closing costs
(2) Since the acquisition date, five hotels have been sold reducing the size of this portfolio to 111 properties.
All of our existing hotels are located in the United States.
We have acquired lodging properties by acquiring fee interests or, in some cases, leasehold interests in real property. We also have acquired lodging properties through investments in joint venture entities, including one joint venture entity in which we do not own a controlling interest. Our hotels generally are owned by wholly and majority-owned subsidiaries of our OP, each formed to hold the particular property. In order for the income from our hotel investments to constitute “rents from real property” for purposes of the gross income tests required for REIT qualification, we lease our hotels to a taxable REIT subsidiary which is similarly a wholly or majority-owned subsidiary of our OP.
We do not expect to be able to make future acquisitions unless we are able to either sell assets at prices that generate sufficient excess proceeds after repayment of any related debt or obtain additional equity or debt financing. Our asset sale program is subject to market conditions and there can be no assurance we will be successful in selling assets at our target prices or at all. If we seek to obtain additional equity or debt financing, there can be no assurance we will be able to obtain debt or equity financing on favorable terms, or at all. Moreover, we are restricted under the Brookfield Approval Rights in our ability to make future acquisitions and obtain debt or equity financing, and there can be no assurance any required prior approval would be obtained when requested, or at all.
Property Management Agreements
We contract directly or indirectly, through our taxable REIT subsidiaries, with third-party property management companies to manage our hotel properties.
As of December 31, 2018, 79 of the hotel assets we have acquired were managed by Crestline and 65 of the hotel assets we have acquired were managed by the following other property managers: Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. (38 hotels), InnVentures IVI, LP (2 hotels), McKibbon Hotel Management, Inc. (21 hotels) and LBA Hospitality (4 hotels).
With few exceptions, our management agreements with Crestline are long-term (initial term of 20 years) and are generally terminable by us only for performance related reasons (i.e., failure of the hotel to achieve certain performance thresholds). In connection with the Initial Closing, we agreed with Crestline, which was then an affiliate of the Former Advisor, to the following additional termination rights in connection with a sale of the applicable hotel:
until March 31, 2023, we have the right to terminate Crestline upon sale of the hotel if we replace the sold hotel with a comparable hotel (i.e., a hotel not then managed by Crestline with equal or greater historic annual revenue as the one being sold); and
beginning on April 1, 2021, we have the right to terminate Crestline upon sale of the hotel and payment of a termination fee in an amount equal to 2.5 times the property management fees payable for the trailing 12 months, subject to customary adjustments.
Our management agreements with our other property managers are short-term and generally range from one to five-year initial terms with continuous renewal options but are terminable by us with or without cause and without payment of a fee or penalty on short notice (generally 60-90 days).
For their services under these hotel management agreements, our property managers receive a base property management fee and are also, in some cases, eligible to receive an incentive management fee if hotel operating profit exceeds certain thresholds.

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We pay a base property management fee of generally up to 3.0% of the monthly gross receipts from the properties to the applicable property manager. We reimburse the costs and expenses incurred by the property manager on our behalf pursuant to its duties in accordance with the management agreement.
Franchise Agreements
All but one of our hotels operate under a franchise or license agreement with a national brand that is separate from the agreement with the property manager pursuant to which the operations of the hotel are managed. As of December 31, 2018, the weighted average remaining term of our franchise agreements was approximately 10.5 years. Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the licensed hotel must comply. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. We are required to make related escrow reserve deposits for these expenditures under our indebtedness.
Typically, our franchise agreements provide for a license fee, or royalty, of 5% to 6% of gross room revenues. In addition, we generally pay 1.5% to 4.3% of gross room revenues as a program fee for the system-wide benefit of brand hotels.
Our typical franchise agreement provides for an initial term of 15 to 20 years, although some have shorter terms. The agreements typically provide no renewal or extension rights and are not assignable. If we breach one of these agreements, in addition to losing the right to use the brand name for the applicable hotel, we may be liable, under certain circumstances, for liquidated damages.
Financing Strategies and Policies
As of December 31, 2018, we had $1.5 billion in outstanding indebtedness and $219.7 million in liquidation value of preferred equity interests issued by two of our subsidiaries that indirectly own 111 of our hotels (the “Grace Preferred Equity Interests”) (which is treated as indebtedness for accounting purposes). We used all proceeds from the Final Closing to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests. See “Item 2. Properties - Debt.”
As of December 31, 2018, our loan-to-value ratio was 67.9% including the Grace Preferred Equity Interests, and our loan-to-value ratio excluding the Grace Preferred Equity Interests was 59.3%. These leverage percentages are calculated based on total cost of real estate assets before accumulated depreciation and amortization, and the market value of our real estate assets may be materially lower.
Pursuant to the Brookfield Approval Rights, prior approval of any debt incurrence is required except as specifically set forth in the Annual Business Plan and for the refinancing of existing debt in a principal amount not greater than the amount to be refinanced and on terms no less favorable to us. We are also subject to certain covenants, such as debt service coverage ratios and negative pledges, in our existing indebtedness that restrict our ability to make future borrowings.
The form of our indebtedness may be long term or short term, secured or unsecured, fixed or floating rate or in the form of a revolving credit facility, repurchase agreements or warehouse lines of credit. We will seek to obtain financing on the most favorable terms available.
Except with respect to certain borrowing limits contained in our charter, we may reevaluate and change our debt policy in the future without a stockholder vote. The covenants in our existing indebtedness may not be changed without consent of our lenders. The Brookfield Approval Rights generally cannot be changed without the approval of the Brookfield Investor as well as, with respect to the terms of the Redeemable Preferred Share, a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, any investment opportunities, the ability of our properties and other investments to generate sufficient cash flow to cover debt service requirements and other similar factors.
Tax Status
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2014. We intend to operate in such a manner as to continue to qualify for taxation as a REIT under the Code. However, no assurance can be given that we will operate in a manner so as to continue to qualify as a REIT. We generally, with the exception of our taxable REIT subsidiaries, will not be subject to federal corporate income tax to the extent that we distribute annually all of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regards to the deduction for dividends paid and excluding net capital gain, to our stockholders and comply with various other requirements applicable to REITs. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income and taxable REIT subsidiaries.

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Competition
The hotel industry is highly competitive. This competition could reduce occupancy levels and operating income at our properties, which would adversely affect our operations. We face competition from many sources. We face competition from other hotels both in the immediate vicinity and the geographic market where our hotels are located. Over-building of hotels in the markets in which we operate may increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in labor and other operating costs due to inflation and other factors may not be offset by increased room rates. We also face competition from nationally recognized hotel brands with which we are not associated, as well as from other hotels associated with nationally recognized hotel brands with which we are associated. In addition to competing with traditional hotels and lodging facilities, we compete with alternative lodging companies, including third-party providers of short-term rental properties and serviced apartments, such as Airbnb. We compete based on a number of factors, including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, brand recognition and supply and availability of alternative lodging.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, private investment funds, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. In addition, affiliates of the Brookfield Investor are or may be in the business of making investments in, and have or may have investments in, other businesses similar to and that may compete with our business.
Regulations
Our investments are subject to various federal, state and local laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality and noise pollution. We obtain all permits and approvals that we believe are necessary under current law to operate our investments.
Environmental
As an owner of real property, we are subject to various federal, state and local laws and regulations regarding environmental, health and safety matters. These laws and regulations address, among other things, asbestos, polychlorinated biphenyls, fuel, oil management, wastewater discharges, air emissions, radioactive materials, medical wastes, and hazardous wastes, and in certain cases, the costs of complying with these laws and regulations and the penalties for non-compliance can be substantial. Even with respect to properties that we do not operate or manage, we may be held primarily or jointly and severally liable for costs relating to the investigation and clean-up of any property from which there is or has been an actual or threatened release of a regulated material and any other affected properties, regardless of whether we knew of or caused the release. Such costs typically are not limited by law or regulation and could exceed the property's value. In addition, we may be liable for certain other costs, such as governmental fines and injuries to persons, property or natural resources, as a result of any such actual or threatened release.
We did not make any material capital expenditures in connection with environmental, health, and safety laws, ordinances and regulations in 2018, and do not expect that we will be required to make any such material capital expenditures during 2019.
Employees
As of December 31, 2018, we had 28 full-time employees. The staffs at our hotels are employed by our third-party hotel managers. We now conduct our operations independently of the Former Advisor and its affiliates, with which we have no ongoing affiliation. We have entered into an annually renewable shared services agreement with Crestline pursuant to which Crestline provides us with accounting, tax related, treasury, information technology and other administrative services.
Available Information
We electronically file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings with the SEC. The SEC maintains a website at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.HITREIT.com. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.


Item 1A. Risk Factors.
Set forth below are the risk factors that we believe are material to our investors. The occurrence of any of the risks discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results

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of operations, our ability to pay distributions (although we are not currently paying distributions) and the value of an investment in our common stock.
Risks Related to an Investment in Hospitality Investors Trust, Inc.
We have a history of operating losses and cannot assure our stockholders that we will achieve profitability.
Since inception in July 2013 through December 31, 2018, we have incurred net losses (calculated in accordance with GAAP) equal to $338.6 million. The extent of our future operating losses and the timing of the profitability are highly uncertain, and we may never achieve or sustain profitability.
Because no public trading market for our shares currently exists and our share repurchase program has been suspended, it is difficult for our stockholders to sell their shares of our common stock.
There is no established trading market for shares of our common stock and there can be no assurance one will develop. Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a national securities exchange by a specified date. We currently have no plans to list our shares on a national securities exchange. While there is a secondary market for shares of common stock, we believe the volume of those trades is small in relation to the number of shares outstanding. Until our shares are listed, if ever, stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. In addition, our charter prohibits the ownership of more than 4.9% in value of the aggregate of outstanding shares of capital stock or more than 4.9% in value or number of shares, whichever is more restrictive, of any class or series of our stock, unless exempted by our board of directors, which may inhibit large investors from purchasing our stockholders' shares.
In September 2018, our board of directors adopted the SRP pursuant to which we were offering, subject to certain terms and conditions, liquidity to stockholders by offering to make quarterly repurchases of common stock at a price to be established by the board of directors. In February 2019, our board of directors suspended the SRP. The suspension will remain in effect unless and until our board takes further action to reactivate the SRP. There can be no assurance the SRP will be reactivated on its current terms, different terms or at all. Therefore, it is difficult for stockholders to sell their shares. If a stockholder is able to sell his or her shares, it may only be at a substantial discount to Estimated Per-Share NAV.
We may require funds, which may not be available on favorable terms or at all, in addition to our operating cash flow and cash on hand, to meet our capital requirements.
Our major capital requirements currently include PIPs and other hotel capital expenditures and related lender reserve deposits, interest and principal payments under our indebtedness and distributions payable with respect to Class C Units. Beginning in March 2022, we may also be required to fund redemptions of the Class C Units at the option of the holder. In February 2019, we used proceeds of $219.7 million from the sale of Class C Units to the Brookfield Investor to redeem in full the Grace Preferred Equity Interests, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.
We expect to either extend or refinance our indebtedness at maturity, when the principal payments are due, and we believe our cash on hand and sources of additional liquidity, which are primarily comprised of operating cash flow and could also include proceeds from asset sales and debt or equity issuances, will allow us to meet our ongoing existing capital requirements. However, there can be no assurance the amounts actually generated will be sufficient for these purposes. Accordingly, we may require additional liquidity to meet our capital requirements, which may not be available on favorable terms or at all. Any additional debt or equity capital consisting of common stock, preferred stock or warrants, or any combination thereof as well as certain refinancing transactions may also only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be provided when requested, or at all. If obtained, any additional or alternative debt or equity capital could be on terms that would not be favorable to us or our stockholders, including high interest rates, in the case of debt, and substantial dilution, in the case of issuing equity or convertible debt securities.
Furthermore, our ability to identify and consummate a potential transaction with a source of equity or debt capital is dependent upon a number of factors that may be beyond our control, including market conditions, industry trends and the interest of third parties in our business and assets. In addition, any potential transaction may be subject to conditions, such as obtaining consents from our lenders and franchisors, which we might not be able to meet, and the process of seeking alternative sources of capital is time-consuming, causes our management to divert its focus from our day-to-day business and results in our incurring expenses outside the normal course of operations.
The interests of the Brookfield Investor may conflict with our interests and the interests of our stockholders, and the Brookfield Investor has significant governance and other rights that could be used to control or influence our decisions or actions.

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As the holder of all of the issued and outstanding Class C Units, the Brookfield Investor has interests that are different from our interests and the interests of our stockholders. Moreover, as the holder of the Redeemable Preferred Share and all of the issued and outstanding Class C Units, the Brookfield Investor has the Brookfield Approval Rights, the ability to elect two of the seven directors on our board of directors and approve two independent directors, the right to convert Class C Units into shares of our common stock and other rights, including the redemption and distribution rights associated with the Class C Units, that are significant. These rights can be used, in isolation or in combination, to control or influence, directly or indirectly, various corporate, financial or operational decisions or actions we might otherwise take, or decide not to take, as well as any matter requiring approval of our stockholders.
Under the Brookfield Approval Rights, without obtaining the prior approval of the majority of the then outstanding Class C Units, subject to certain exceptions, the OP is restricted from taking certain actions including equity issuances, debt incurrences, payments of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales. In addition, pursuant to the terms of the Redeemable Preferred Share, we are similarly restricted from taking those actions without the prior approval of at least one of the Redeemable Preferred Directors. Prior approval of at least one of the Redeemable Preferred Directors is also required to approve the Annual Business Plan, as well as hiring and compensation decisions related to certain key personnel (including our executive officers).
As the holder of the Redeemable Preferred Share, for so long as it remains outstanding, the Brookfield Investor has the right to elect two Redeemable Preferred Directors (each of whom may be removed and replaced with or without cause at any time by the Brookfield Investor), as well as to approve (such approval not to be unreasonably withheld, conditioned or delayed) two additional independent directors to be recommended and nominated by our board of directors for election by our stockholders at each annual meeting (each, an "Approved Independent Director"). Prior approval of at least one Redeemable Preferred Directors is also required to approve increasing or decreasing the number of directors on our board of directors and nominating or appointing the chairperson of our board of directors.
As of the date of this Annual Report on Form 10-K, an affiliate of the Brookfield Investor owns 14,786 restricted shares of our common stock ("restricted shares"). Except for such restricted shares and except to the extent of the one vote the holder of the Redeemable Preferred Share has as part of a single class with the holders of our common stock at any annual or special meeting of stockholders and the separate class vote of the Redeemable Preferred Share required for any action, including any amendment to our charter, that would alter the terms of the Redeemable Preferred Share or the rights of its holder, the Brookfield Investor does not own or control any shares of our common stock, and, as such, cannot directly participate in the outcome of matters requiring approval of our stockholders. However, giving effect to the immediate conversion of all 26,881,117.30 Class C Units held by the Brookfield Investor as of the date of this Annual Report on Form 10-K into OP Units which are subsequently redeemed for shares of our common stock in accordance with the terms of the limited partnership agreement of the OP entered into at the Initial Closing (the "A&R LPA"), the Brookfield Investor, on an as-converted basis, would own or control approximately 40.7% of the voting power of our common stock. Any such redemption may also be made in cash instead of shares of our common stock, at our option. We have granted the Brookfield Investor and its affiliates an exemption from the prohibition in our charter on the ownership of more than 4.9% in value of the aggregate of outstanding shares of capital stock or more than 4.9% in value or number of shares, whichever is more restrictive, of any class or series of our stock and a waiver permitting the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of our stock or up to 49.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock.
Pursuant to the SPA, the Brookfield Investor, together with certain of its affiliates, is subject to certain restrictions that limit its ability to use any ownership of shares of our common stock to control or influence our management or policies. These restrictions include customary standstill restrictions related to, among other things, acquisition proposals, proxy solicitations, attempts to elect or remove members of our board of directors, limits on acquiring more than 15% of our common stock then outstanding on an as-converted basis in addition to shares of our common stock on an as-converted basis acquired upon the conversion and subsequent redemption of Class C Units and a requirement to vote any shares of our common stock in excess of 35% of the total number of shares of our common stock in accordance with the recommendations of our board of directors. In addition, at the Initial Closing, as contemplated by and pursuant to the SPA, we granted the Brookfield Investor and its affiliates a waiver of the aggregate share ownership limits, and permitted the Brookfield Investor and its affiliates to own up to 49.9% in the aggregate of the outstanding shares of our common stock. However, these restrictions are generally of limited duration and remain subject to other conditions and exceptions, and there can be no assurance that the Brookfield Investor will not otherwise be able to use its ownership of our common stock, in isolation or in combination with the Brookfield Approval Rights or its other rights as the sole holder of the Redeemable Preferred Share and Class C Units, to control or influence our management or policies, as well as matters required to be submitted to our stockholders for approval.

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The Brookfield Investor may have an interest in our pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in us, even though such transactions might involve risks to our stockholders, or in preventing us from pursuing a transaction that might otherwise be beneficial to our stockholders. The scope and potential impact of the exercise of the redemption rights of holders of Class C Units may also have a significant impact on our decision-making in certain circumstances, including whether or not we pursue a liquidation, sale of all or substantially all of the assets, dissolution or winding-up, whether voluntary or involuntary, sale, merger, reorganization, reclassification or recapitalization or other similar event (each, a “Fundamental Sale Transaction”).
Moreover, the Brookfield Investor and its affiliates engage in a broad spectrum of business and investment activities, which may include activities where their interests conflict with ours or those of our stockholders, including activities related to additional investments they may make in companies in the hospitality and related industries. In addition, Bruce G. Wiles, our chairman and a Redeemable Preferred Director, is the president and chief operating officer of Thayer Lodging Group LLC, a Brookfield Company, a subsidiary of Brookfield Asset Management Inc. ("BAM"), and an affiliate of the Brookfield Investor. The articles supplementary governing the Redeemable Preferred Share provide that none of the Brookfield Investor or any of its affiliates, or any of their respective directors, executive officers, employees, agents, representatives, incorporators, stockholders, equityholders, controlling persons, principals, managers, advisors, managing members, members, general partners, limited partners or portfolio companies has any obligation to refrain from competing with us, making investments in or having relationships with competing businesses. Under the articles supplementary, we have agreed to renounce any interest or expectancy, or right to be offered an opportunity to participate in, any business opportunity or corporate opportunity presented to the Brookfield Investor or its affiliates (which may include, without limitation, any Redeemable Preferred Director). The Brookfield Investor or its affiliates also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may be unavailable to us.
To the extent the interests of the Brookfield Investor conflict with our interests or the interests of our stockholders, this conflict may not be resolved in our favor or in favor of our stockholders due to the significant governance and other rights of the Brookfield Investor. Moreover, the rights and interests of the Brookfield Investor will limit or preclude the ability of our other stockholders to influence corporate matters.
The Brookfield Approval Rights, including the requirement that we conduct our operations in accordance with the Annual Business Plan approved by at least one Redeemable Preferred Director, restrict our operational and financial flexibility and could prevent us from taking actions that we believe would be in the best interest of our business.
In general, the Brookfield Approval Rights restrict us from taking various financial and operational actions without the prior approval of a majority of the then outstanding Class C Units as well the prior approval of at least one Redeemable Preferred Director. The prior approval of at least one Redeemable Preferred Director is also required for our board of directors to approve the Annual Business Plan. The Annual Business Plan with respect to each fiscal year is required to include projections for such year with respect to revenues, operating expenses and property-level capital expenditures, as well as any plans for asset sales or dispositions and a liquidity plan.
If the proposed Annual Business Plan (or any portion thereof) is rejected, we will work with the Redeemable Preferred Directors in good faith to resolve the objections, and we are permitted to continue to operate in accordance with the Annual Business Plan then in effect for the prior fiscal year. However, there is no assurance we will be able to resolve any objection on terms that are favorable to us, or our stockholders. During February 2019, our board of directors, including the Redeemable Preferred Directors, unanimously approved the 2019 Annual Business Plan.
The restrictions with respect to the Annual Business Plan reduce our flexibility in conducting our operations and could prevent us from taking actions that we believe would be in the best interest of our business. Failure to comply with the Annual Business Plan or otherwise comply with the Brookfield Approval Rights could result in a material breach under the A&R LPA, which, if not cured or waived, could give rise to a right for the holders of Class C Units to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “Risks Related to Our Corporate Structure - The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
Financial and operating covenants in the agreements governing our indebtedness may also limit our operational and financial flexibility, and failure to comply with these covenants could cause an event of default under our indebtedness.
We may not be successful in achieving our business objective and executing our investment strategies.

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Our primary business objective is to maximize stockholder value and position ourselves for a liquidity event, such as a listing on a national securities exchange, a merger or a sale, within two to four years, depending on capital markets and macroeconomic conditions. Our ability to successfully achieve this objective also depends on the success of our investment strategies. Our investment strategies include the continued investment in our hotels through our ongoing PIP program, selling hotels we determine are non-core to our portfolio and reallocating that capital into investment opportunities that we believe will produce more attractive stockholder returns and upgrading our portfolio through hotel acquisitions. Our ability to fund these strategies, to a certain extent, depends on our ability to generate additional capital, which is not assured for a variety of reasons and may not be available on favorable terms, or at all. Moreover, prior approval of the Brookfield Investor is required for several elements of our strategies, and there can be no assurance any required prior approval would be obtained when requested, or at all. There are many other risks and challenges related to our achieving the expected benefits associated with these strategies, and there can be no assurance we will be successful in doing so. These risks and challenges include the following:
we do not expect to be able to purchase additional properties unless we are able to either sell assets at prices that generate sufficient excess proceeds after repayment of any related debt or can obtain additional equity or debt financing;
our asset sale program is subject to market conditions and there can be no assurance we will be successful in selling assets at our target prices or at all;
if we seek to obtain additional equity or debt financing, there can be no assurance we will be able to obtain debt or equity financing on favorable terms, or at all;
the hotels we acquire may fail to perform as expected and market conditions may result in lower than expected occupancy and room rates;
the improvements and renovations we make at our hotels, primarily through our ongoing PIP program, may not have the desired effect of enhancing hotel performance due to a variety of factors, including factors beyond our control such as competition from new hotel supply in markets where we primarily own older hotels, which has contributed to declines in occupancy at our hotels in prior periods and may continue to have this effect;
material and other renovation costs may increase due to factors beyond our control, including as a result of the recent and proposed tariffs by the U.S. government and the potential of a trade war between the U.S. and China, and, on a larger scale, internationally, and we may spend more than budgeted amounts to make necessary improvements or renovations to the hotels we have acquired and any other hotels we may acquire in the future;
some of the hotels we acquire in the future may be located in unfamiliar markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;
we expect that any agreements we enter into for the acquisition of hotels in the future, will be subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction and other conditions that are not within our control, which may not be satisfied, and we may be unable to complete an acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs; and
we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete.

Our hotel assets have been and may continue to be subject to impairment charges.
We are required to make subjective assessments as to whether there are any impairments in the value of our assets. Upon the occurrence of certain “triggering events” under GAAP, we are required to test our hotel investments for impairment. These triggering events include significant declines in market value of the asset, significant declines in operating performance and significant adverse changes in economic conditions. A property’s value is considered to be impaired if the estimate of the future undiscounted cash flows is less than the carrying value of the property. In our estimate of cash flows, we consider factors such as trends and prospects and the effects of demand and competition on expected future operating income. If we are evaluating the potential sale of an asset, the undiscounted future cash flows consider the most likely course of action as of the balance sheet date based on current plans, intended holding periods and available market information. Additionally, we recorded goodwill in connection with the consummation of the transactions pursuant to the Framework Agreement at the Initial Closing, and we are also required to annually assess this goodwill for impairment. We have incurred impairment charges, which have an immediate direct impact on our earnings, including $26.4 million of impairment on our long-lived assets and $3.4 million of goodwill impairment during the year ended December 31, 2018. There can be no assurance that we will not take additional charges in the future. Any future impairment could have a material adverse effect on our results in the period in which the charge is taken.
The loss of a brand license for any reason, including due to our failure to make required capital expenditures, could adversely affect our financial condition and results of operations.

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All but one of our hotels operate under licensed brands pursuant to franchise agreements with hotel brand companies. The maintenance of the brand licenses for our hotels is subject to the hotel brand companies’ operating standards and other terms and conditions, including the requirement for us to make capital expenditures pursuant to PIPs. PIPs were required in connection with the acquisition of substantially all of our hotels and, likely, will be required in connection with the acquisition of any additional hotels in the future. As of December 31, 2018, we substantially completed work on 83 of the 141 hotels that are part of our $350 million PIP program, and an additional 16 hotels are in process and expected to be substantially completed early in the second quarter of 2019. We expect to spend approximately $52.5 million as part of our PIP program and other capital improvements during 2019.
In addition to PIP obligations, we are required under our franchise agreements to perform periodic capital improvements to bring the physical condition of our hotels into compliance with the specifications and standards the hotel franchisor or hotel brand has developed. We refer to these obligations as cyclical renovations and they normally apply to soft goods (such as carpeting, bedspreads, artwork and upholstery) and case goods (furniture and fixtures such as armoires, chairs, beds, desks, tables, mirrors and lighting fixtures). Moreover, upon regular inspection of our hotels or in connection with any future revisions to our franchise or hotel management agreements or a refinancing of our indebtedness, franchisors may determine that additional renovations are required by us.
We may need to seek additional debt or equity capital consisting of common stock, preferred stock or warrants, or any combination thereof to fund PIPs and other hotel capital expenditures and related lender reserve deposits, which may not be available on favorable terms or at all, and may only be obtained subject to the Brookfield Approval Rights.
To manage our liquidity, we continue to selectively defer certain capital expenditures. We believe such deferrals are prudent in light of our liquidity position and the expected return on investments. However, these decisions could adversely affect the performance of the applicable hotels and could result in further negotiations with the franchisors as to compliance with brand standards.
If we default on a franchise agreement as a result of our failure to comply with the PIP or other requirements, the franchisor may have the right to terminate the applicable agreement, we may be required to pay the franchisor liquidated damages, and we may also be in default under the applicable indebtedness encumbering the hotel. In addition, if we do not have enough reserves for or access to capital to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, we may be required to defer necessary improvements to a property, which may cause that property to suffer from a greater risk of obsolescence, a decline in value, or decreased cash flow.
If we were to lose a brand license for any reason, including failure to meet the requirements of our PIPs, we would be required to re-brand the affected hotel. As a result, the underlying value of the affected hotel could decline significantly from the loss of associated name recognition, marketing support, participation in guest loyalty programs and the centralized system provided by the franchisor, which, among other things, could reduce income from the affected hotel and require us to recognize an impairment charge on the hotel. Furthermore, the loss of a franchise license at a particular hotel could harm our relationship with the hotel brand company, which could impede our ability to operate other hotels under the same brand, limit our ability to obtain new franchise licenses from the franchisor in the future on favorable terms, or at all, and cause us to incur significant costs to obtain a new franchise license for the particular hotel (including a likely requirement of a property improvement plan for the new brand, a portion of the costs of which would be related solely to the change in brand rather than substantively improving the property).
Moreover, the loss of a franchise license could also be an event of default under our indebtedness that secures the property if we are unable to find a suitable replacement. Additionally, we are required pursuant to the terms of our existing indebtedness to make periodic PIP reserve deposits to cover a portion of the estimated costs of the PIPs. We estimate we are required to make an aggregate of $17.9 million in periodic PIP reserve deposits during 2019, and we will also be required to make additional PIP reserve payments during future periods. Any failure to make PIP reserve deposits when required could lead to a default under the related indebtedness.
We no longer pay distributions and there can be no assurance we will resume paying distributions in the future.
We have not paid cash distributions to our stockholders since 2016. Currently, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share. There can be no assurance that we will resume paying distributions in cash or shares of common stock in the future. Our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all.

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To the extent we pay cash distributions in the future, they may be funded from sources other than cash flow from operations. Funding distributions from any of sources other than cash flow from operations may negatively impact the value of an investment in our common stock. We funded all of our cash distributions from our inception in July 2013 through the suspension of cash distributions in March 2016 using proceeds from our IPO or our DRIP, which reduced the capital available for other purposes that could increase the value of an investment in our common stock. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. We also may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT status.

We are dependent on Crestline, which manages a large number of hotels in our portfolio pursuant to long-term management agreements, in various aspects of our business.
As of December 31, 2018, Crestline managed 79 of our 144 hotels.  Thus, a substantial portion of our revenues is generated by hotels managed by Crestline.  Further, most of our management agreements with Crestline have an initial term of 20 years and are generally only terminable by us prior to expiration for performance-related reasons, except, until March 31, 2023, we have an "on-sale" termination right if we replace the sold hotel with a comparable hotel not then managed by Crestline, and beginning on April 1, 2021, we will have an “on-sale” termination right upon payment of a fee. This significant concentration of operational risk in one hotel management company makes us more vulnerable economically than if our hotel management was more evenly diversified among several hotel management companies, or if our management agreements with Crestline included broader termination rights. We also have also entered into an annually renewable shared services agreement with Crestline pursuant to which Crestline provides us with certain accounting, tax related, treasury, information technology and other administrative services, and an annually renewable joint occupancy agreement pursuant to which we share office space with Crestline. We cannot provide assurance that Crestline will satisfy its obligations to us or effectively and efficiently operate our hotel properties. Any adverse developments in Crestline’s business, financial strength or the failure or inability of Crestline to satisfy its obligations to us or effectively and efficiently operate our hotel properties could adversely affect our financial position, results of operations and cash flows.
Our rights and the rights of our stockholders to recover claims against our officers, directors and the Former Advisor are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, our officers and the Former Advisor and the Former Advisor’s affiliates and permits us to indemnify our employees and agents. We have entered into an indemnification agreement with each of our directors and officers, as well as the Former Advisor and certain of its affiliates and certain former directors and officers, providing for indemnification of such indemnitees consistent with the provisions of our charter. While the Advisory Agreement and all our other agreements with the Former Advisor and its affiliates have now terminated, the Framework Agreement we have entered into with the Former Advisor and certain of its affiliates provides that existing indemnification rights under our organizational documents, the Advisory Agreement, certain property management agreements and the existing indemnification agreement between the Company, its directors and officers, and the Former Advisor and certain of its affiliates will survive the Initial Closing solely with respect to claims from third parties. We and our stockholders also may have more limited rights against our directors, officers, employees and agents, and the Former Advisor and its affiliates than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. At the Initial Closing, we entered into a general mutual waiver and release with the Former Advisor and certain of its affiliates, which generally provides that we have released the Former Advisor and its affiliates from all claims arising prior to the Initial Closing (whether known or unknown), except for certain claims related to the termination of our arrangements with the Former Advisor and transition to self-management. Pursuant to these indemnification arrangements, we have funded defense costs incurred by certain of our current and former directors, officers and the Former Advisor and its affiliates, and we may become obligated to fund additional such costs in the future.
Estimated Per-Share NAV is based upon subjective judgments, assumptions and opinions about future events.
On April 23, 2018, our board of directors approved an updated Estimated Per-Share NAV equal to $13.87 as of December 31, 2017, which was published on the same date. It is currently anticipated that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year. In connection with these future determinations, we will engage an

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independent valuer to perform appraisals of our real estate assets in accordance with valuation guidelines established by our board of directors. As with any methodology used to estimate value, the valuation methodologies that will be used by any independent valuer to value our properties involve subjective judgments concerning factors such as comparable sales, projected future revenue and expenses, capitalization and discount rates, and projections of future cash flows.
 Under our valuation guidelines, our independent valuer estimates the market value of our principal real estate and real estate-related assets, and we determine the net value of our real estate and real estate-related assets and liabilities taking into consideration such estimate provided by the independent valuer. We review the valuation provided by the independent valuer for consistency with its determinations of value and our valuation guidelines and the reasonableness of the independent valuer's conclusions. Our board of directors reviews the appraisals and valuations and makes a final determination of the Estimated Per-Share NAV. Although the valuations of our real estate assets by the independent valuer are reviewed by us and approved by our board of directors, neither we nor our board of directors will independently verify the appraised value of our properties. Therefore, these valuations do not necessarily represent the price at which we would be able to sell an asset, and the appraised value of a particular property may be greater or less than its potential realizable value.
Our Estimated Per-Share NAV may differ significantly from our actual net asset value of a share of our common stock at any given time and does not reflect the price that shares of our common stock would trade at if listed on a national securities exchange, the price that shares would trade in secondary markets or the price a third party would pay to acquire us.
Estimated Per-Share NAV is determined annually and therefore does not reflect changes occurring subsequent to the date of valuation.
On April 23, 2018, our board of directors approved an updated Estimated Per-Share NAV equal to $13.87 as of December 31, 2017, which was published on the same date. It is currently anticipated that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year. In connection with any valuation, our board’s determination of the value of our real estate and real estate-related assets will be partly based on appraisals of our properties, which we expect will only be appraised in connection with the annual valuation.
Because valuations will only occur periodically, Estimated Per-Share NAV may not accurately reflect material events that would impact our actual net asset value and may suddenly change materially if the appraised values of our properties change materially or the actual operating results differ from what we originally budgeted. In connection with any annual valuation, our estimate of the value of our real estate and real estate-related assets will be partly based on appraisals of our properties, which we expect will only be appraised in connection with any valuation. Any changes in value that may have occurred since the most recent periodic valuation will not be reflected in Estimated Per-Share NAV, and there may be a sudden change in the Estimated Per-Share NAV when new appraisals and other material events are reflected. If our actual operating results cause our actual net asset value to change, such change will only be reflected in our Estimated Per-Share NAV when an annual valuation is completed.
Our Estimated Per-Share NAV may differ significantly from our actual net asset value of a share of our common stock at any given time and does not reflect the price that shares of our common stock would trade at if listed on a national securities exchange, the price that shares would trade in secondary markets or the price a third party would pay to acquire us.
Our business could suffer in the event we, our property managers or any other party that provides us with services essential to our operations experiences system failures or cyber-incidents or a deficiency in cybersecurity.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan, our internal information technology networks and related systems and those of our property managers and other parties that provide us with services essential to our operations are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business.
A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber-incident is an intentional attack or an unintentional event that can result in third parties gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems and those of our property managers and other parties that provide us with services essential to our operations. In addition, the risk of a cyber-incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted attacks and intrusions evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.

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The remediation costs and lost revenues experienced by a victim of a cyber-incident may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. In addition, a security breach or other significant disruption involving our information technology networks and related systems or those of our property managers or any other party that provides us with services essential to our operations could:
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;
affect our ability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information (including information about guests at our hotels), which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by guests at our hotels;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of franchise or other agreements; or
adversely impact our reputation among hotel guests and investors generally.
Although we, our property managers and other parties that provide us with services essential to our operations intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by us, our property managers and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
Risks Related to Our Corporate Structure
We depend on the OP and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to their obligations, which include distribution and redemption obligations to holders of Class C Units.
We are a holding company with no business operations of our own. Our only significant assets are and will be OP Units, representing all the equity interests in the OP other than Class C Units. We conduct, and intend to continue to conduct, all of our business operations through the OP. Accordingly, our only source of cash to pay our obligations is distributions from the OP and its subsidiaries of their net earnings and cash flows. The Class C Units rank senior to the OP Units and all other equity interests in the OP with respect to priority in payment of distributions and in the distribution of assets in the event of the liquidation, dissolution or winding-up of the OP, whether voluntary or involuntary, or any other distribution of the assets of the OP among its equity holders for the purpose of winding up its affairs.
Each of our OP’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. Our stockholders’ claims as stockholders are structurally subordinated to all existing and future liabilities and obligations of the OP and its subsidiaries, including distribution and redemption obligations to the holders of Class C Units and property-level obligations to lenders and trade creditors. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the OP and its subsidiaries will be available to satisfy our stockholders’ claims as stockholders only after all of our liabilities and obligations and the liabilities and obligations of the OP and its subsidiaries have been paid in full. As of February 27, 2019, following the Final Closing, our outstanding obligations that would be senior to any claims by our stockholders in the event of our bankruptcy, liquidation or reorganization included $393.3 million in liquidation preference of Class C Units and $915.0 million in principal outstanding under outstanding mortgage and mezzanine debt.
We are not currently paying cash distributions to our common stockholders, and our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all. Moreover, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share. Our ability to pay cash distributions is also subject to the seniority of Class C Units with respect to all distributions by the OP, and we will not be able to make any cash distributions to our common stockholders if we are not able to meet our quarterly distributions obligations to the holders of Class C Units. We are also required to make periodic payments of interest to our lenders that have priority over any cash distributions to holders of our common stock.
Our stockholders’ interests in us will be diluted to the extent we issue additional Class C Units as PIK Distributions.
As of February 27, 2019, following the Final Closing, approximately $393.3 million in liquidation preference of Class C Units was outstanding. Pursuant to the A&R LPA, Class C Units are convertible into OP Units at an initial conversion price of

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$14.75, subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions, and OP Units are, in turn, generally redeemable for shares of our common stock on a one-for-one-basis or the cash value of a corresponding number of shares, at our election.
Further dilution could also occur with respect to additional Class C Units we issue in the future. Although the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise, it has received and is entitled to continue to receive, with respect to each Class C Unit it holds, quarterly PIK Distributions payable in Class C Units at a rate of 5% per annum. Moreover, if we fail to pay the quarterly cash distributions on Class C Units when due, the per annum rate for cash distributions will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. Any accrued and unpaid distributions would be part of the liquidation preference of Class C Units that are convertible into OP Units and subsequently redeemable for shares of our common stock.
Subject to the Brookfield Approval Rights, we may also conduct future offerings of common stock or equity securities that are senior to our common stock for purposes of dividend distributions or upon liquidation. We also have issued, and expect to continue to issue, share-based awards to our directors, officers and employees. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. To the extent we issue additional equity interests, our stockholders’ percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our real estate investments, our investors may also experience dilution in the book value and fair value of their shares.
Additionally, any convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.
The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.
The amount we would be required to pay holders of Class C Units upon the consummation of any Fundamental Sale Transaction, which would generally include any merger or acquisition transaction whereby all shares of our common stock or substantially all of our assets would be sold to a third party, prior to March 31, 2022, would include a substantial premium to the liquidation preference. Upon the consummation of a Fundamental Sale Transaction, the holders of Class C Units are entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any other limited partnership interests in the OP:
in the case of a Fundamental Sale Transaction consummated after February 27, 2019 and prior to January 1, 2022, an amount per Class C Unit in cash equal to (x) two times the purchase price under the SPA of such Class C Unit (with the purchase price for Class C Units issued as PIK Distributions being zero for these purposes), less (y) all cash distributions actually paid to date; and
in the case of a Fundamental Sale Transaction consummated on or after January 1, 2022, an amount per Class C Unit in cash equal to the liquidation preference of such Class C Unit plus a make whole premium for such Class C Unit calculated based on a discount rate of 5% and the assumption that such Class C Unit had not been redeemed until March 31, 2022, the fifth anniversary of the Initial Closing.

The premium required to be paid to redeem the Class C Units upon consummation of a Fundamental Sale Transaction may have the effect of delaying, deferring or preventing a transaction that might otherwise provide a premium price for holders of our common stock. In addition, subject to the Brookfield Approval Rights, we could issue preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock.
If we are unable to obtain the financing required to redeem any Class C Units when required to do so, the Brookfield Investor will be able to elect a majority of our board of directors and may cause us, through the exercise of the rights of the Special General Partner, to commence selling our assets until the Class C Units have been fully redeemed.
As of February 27, 2019, following the Final Closing, approximately $393.3 million in liquidation preference of Class C Units was outstanding. Although the Brookfield Investor no longer has any obligation or right to purchase additional Class C Units, future quarterly PIK Distributions will increase the liquidation preference of the outstanding Class C Units.
From time to time on or after March 31, 2022, the fifth anniversary of the Initial Closing, and at any time following the rendering of a judgment enjoining or otherwise preventing the holders of Class C Units, the Brookfield Investor or the Special General Partner from exercising their respective rights, any holder of Class C Units may, at its election, require us to redeem any or all of its Class C Units for an amount in cash equal to the liquidation preference. In addition, upon the occurrence of

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certain events related to our failure to qualify as a REIT or the occurrence of a material breach by us of certain provisions of the A&R LPA, in each case, subject to certain notice and cure rights, holders of Class C Units have the right to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “-The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
Three months after the failure of the OP to redeem Class C Units when required to do so:
the Special General Partner will have, subject to first obtaining any approval (including the approval of our stockholders) required by applicable Maryland law, the exclusive right, power and authority to sell the assets or properties of the OP for cash upon engaging a reputable, national third party sales broker or investment bank reasonably acceptable to holders of a majority of the then outstanding Class C Units to conduct an auction or similar process designed to maximize the sales price, and the proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on us;
the holder of the Redeemable Preferred Share would have the right to increase the size of our board of directors by a number of directors that would result in the holder of the Redeemable Preferred Share being entitled to nominate and elect a majority of our board of directors and fill the vacancies created by the expansion of our board of directors, subject to compliance with the provisions of our charter requiring at least a majority of our directors to be “Independent Directors”;
the 5% per annum PIK Distribution rate would increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%; and
the standstill (but not the standstill on voting) provisions otherwise applicable to the Brookfield Investor and certain of its affiliates would terminate.
Any exercise of these rights following our failure to redeem any Class C Units when required to do so could have a material and adverse effect on our business and results of operations, as well as the value of shares of our common stock. There can be no assurance that we will be able to obtain the financing required to redeem any Class C Units when required to do so on favorable terms, or at all. Moreover, such financing may be subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be obtained when requested, or at all.
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 4.9% in value of the aggregate of our outstanding shares of stock or more than 4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock. At the Initial Closing, as contemplated by and pursuant to the SPA, we granted the Brookfield Investor and its affiliates a waiver of these aggregate share ownership limits, and permitted the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of our stock or up to 49.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock, subject to certain terms and conditions.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholder’s ability to exit the investment.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.

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A person is not an interested stockholder under the statute if our board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, our board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by our board of directors.
After the five-year prohibition, any such business combination between the Maryland corporation and an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving the Brookfield Investor and certain affiliates of the Brookfield Investor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and the Brookfield Investor and certain affiliates of the Brookfield Investor. As a result, the Brookfield Investor and certain affiliates of the Brookfield Investor may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer to acquire us.
Maryland law limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the acquiror, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means, subject to certain exceptions, the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.
We are an “emerging growth company,” as defined under the federal securities laws, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We expect to remain an “emerging growth company” until December 31, 2019, the last day of the fiscal year following the fifth anniversary of the commencement of our IPO. Emerging growth companies are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with new audit rules adopted by the PCAOB after April 5, 2012 (unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold shareholder advisory votes on executive compensation.
Additionally, an “emerging growth company” may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we have elected to “opt out” of such extended transition period, and will therefore comply with new or

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revised accounting standards on the applicable dates on which the adoption of such standards is required for non-emerging growth companies. Our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
Our stockholders have limited voting rights under our charter and Maryland law.
Pursuant to Maryland law and our charter, our stockholders are entitled to vote only on the following matters without concurrence of our board of directors: (a) election or removal of directors; (b) amendment of our charter, as provided in Article XIII of our charter; (c) our dissolution; and (d) to the extent required under Maryland law our merger or consolidation with another entity or the sale or other disposition of all or substantially all of our assets. With respect to all other matters, our board of directors must first adopt a resolution declaring that a proposed action is advisable and direct that such matter be submitted to our stockholders for approval or ratification. Certain matters our board of directors may otherwise direct to be submitted to our stockholders for approval or ratification may also be subject to the Brookfield Approval Rights such that stockholder approval or ratification may not be sufficient for the matter to be decided or become effective. These limitations on voting rights may limit our stockholders’ ability to influence decisions regarding our business.
Subject to the Brookfield Approval Rights, our board of directors may change our investment policies without stockholder approval, which could alter the nature of our stockholder’s investments.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies also may vary as the commercial debt markets change, new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders subject to the Brookfield Approval Rights. We may make adjustments to our portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, our current investments. As a result, the nature of our stockholders’ investments could change without their consent. A change in our investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations.
Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we may not be profitable or realize growth in the value of our properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.

These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our properties.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.
Our investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses and a decrease in revenues, earnings and assets. An economic slowdown or recession, in addition to other non-economic factors such as an excess supply of properties, could have a material negative impact on the values of our investments. Declining real estate values will reduce the value of our properties, as well as our ability to refinance our properties and use the value of our existing properties to support the purchase or investment in additional properties. A severe weakening of the economy or a recession could also lead to lower occupancy, which could create an oversupply of rooms resulting in reduced rates to maintain occupancy. There can be no assurance that our real estate investments will not be adversely impacted by a severe slowing of the economy or a recession. Because we primarily own older hotels, we are more susceptible to declines in consumer demand, the impact of increases in hotel supply and downturns in economic conditions. Fluctuations in interest rates, limited availability of capital and other economic conditions beyond our control could negatively impact our portfolio and decrease the value of an investment in our common stock.

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We have obtained only limited warranties when we purchase properties and have only limited recourse if our due diligence did not identify any issues that lower the value of our properties.
We may continue to purchase properties in their “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose, and with limited recourse against the prior owners or other third parties with respect to unknown liabilities such as the costs of cleaning up undisclosed environmental contamination. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of income from that property.
Our real estate investments are relatively illiquid and subject to some restrictions on sale, and therefore we may not be able to dispose of properties at the time of our choosing or on favorable terms.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements. In addition, substantially all of our properties serve as collateral under our indebtedness and we have agreed to restrictions under our indebtedness that prohibit the sale of certain of our properties at all or unless certain conditions have been met, including the payment of release prices, the maintenance of financial ratios and/or the payment of yield maintenance premiums. We may agree to similar restrictions, or other restrictions, such as a limitation on the amount of debt that can be placed or repaid on a property, with respect to other properties in the future. Our inability to sell a property when we desire to do so may cause us to reduce our selling price for the property. Moreover, most dispositions we could make would be subject to the Brookfield Approval Rights and there can be no assurance this prior approval will be obtained when requested, or at all. We have agreed in the A&R LPA that, three months after the failure of the OP to redeem Class C Units when required to do so, the Special General Partner will have certain rights to sell the assets or properties of the OP for cash upon engaging a reputable, national third party sales broker or investment bank to conduct an auction or similar process designed to maximize the sales price, but there can be assurance this process will be successful in achieving the intended outcome. Moreover, the proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on the Company or the OP.
Upon sales of properties or assets, we may become subject to contractual indemnity obligations and incur material liabilities and expenses, including tax liabilities, change of control costs, prepayment penalties, required debt repayments, transfer taxes and other transaction costs. For example, subject to a replacement right and a right to terminate upon payment of a termination fee beginning in April 2021, four years after the Initial Closing, most of our management agreements with Crestline are not terminable in connection with a sale, which would require us to obtain the consent of Crestline to terminate the management agreement to effect a sale of a property, which may not be available on commercially reasonable terms, or at all. In addition, the payment of any release price and repayment of mortgage indebtedness will reduce the net proceeds we receive from any asset sales. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a property could adversely impact us.
We have financed and may in the future finance properties with restrictive covenants, which may limit our ability to sell and refinance properties, which could have an adverse effect on our stockholders’ investments.
Our existing indebtedness includes customary restrictive covenants which limit our ability to freely sell and refinance properties. For example, these provisions may require us to pay a yield maintenance premium or a release price to the lender and satisfy other financial or other covenants in order to release the property from the lender’s liens. Therefore, these provisions affect our ability to turn our investments into cash. They could also impair our ability to take actions during the loan term that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares, relative to the value that would result if the restrictive covenants did not exist. In particular, the restrictive covenants could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
If we are found to be in breach of a ground lease or are unable to renew a ground lease, we could be materially and adversely affected.
A total of ten hotels in our portfolio are on land subject to ground leases or their equivalent. For these hotels, we only own a long-term leasehold or similar interest, and we have no economic interest in the land or buildings at the expiration of the ground lease and will not share in the income stream derived from the lease or in any increase in value of the land associated

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with the underlying property. Our ground leases generally have a remaining term of at least 10 years (including renewal options).
If we are found to be in breach of a ground lease, we could lose the right to use the hotel. We could also be in default under the applicable indebtedness. In addition, unless we can purchase a fee interest in the underlying land and improvements or extend the terms of these leases before their expiration, as to which no assurance can be given, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. Our ability to exercise any extension options relating to our ground leases is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options, and we can provide no assurances that we will be able to exercise any available options at such time. Our ability to exercise any extension option is further subject to conditions contained in the applicable indebtedness and the Brookfield Approval Rights. Furthermore, we can provide no assurances that we will be able to renew any ground lease upon its expiration. If we were to lose the right to use a hotel due to a breach or non-renewal of the ground lease, we would be unable to derive income from such hotel and would be required to purchase an interest in another hotel to attempt to replace that income.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We own two of our hotels through joint venture arrangements and, subject to the Brookfield Approval Rights, may enter into other joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments in existing or new hotels. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. In addition, to the extent our participation represents a minority interest, which is the case with one of the two hotels we have invested in through joint venture arrangements and could be the case for any future joint venture arrangements, a majority of the participants may be able to take actions which are not in our best interests because of our lack of full control. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
Covenants, conditions and restrictions may restrict our ability to operate a property, which may adversely affect our operating costs and reduce our cash flows.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with such properties, there are significant covenants, conditions and restrictions, which restrict the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties.
We may not be able to offset increased hotel operating costs, including labor costs, with higher room rates or other expense reduction measures.

Certain of the expenses associated with operating our hotels, such as essential hotel staff, real estate taxes and insurance, are relatively fixed. They do not necessarily decrease directly with a reduction in revenue at the hotels and may be subject to increases that are not related to the performance of our hotels or the increase in the rate of inflation.
Additionally, certain costs, such as expenses for labor (housekeeping and room operations), reservation systems, room supplies, linen and laundry services, are not fixed and may increase in the future. In the event of a significant decrease in demand, our hotel managers may not be able to reduce the size of hotel work forces in order to decrease compensation costs.
Moreover, labor costs increased during 2017 and 2018, primarily due to U.S. labor market tightening, job creation and government regulations surrounding wages, healthcare and other benefits, and we anticipate this trend will continue during 2019. Our managers have not been, and may continue not to be, able to fully offset any fixed or increased expenses with higher room rates. Any initiative to achieve higher room rates is subject to a variety of risks and uncertainties, including that higher room rates may reduce occupancy. There can also can be assurance any other initiatives that may be pursued to grow revenues will be successful. Moreover, any of our efforts to reduce operating costs also could adversely affect the future growth of our business and the value of our hotel properties.
Our real properties are subject to property taxes that may increase in the future, which could adversely affect our cash flow.

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Our real properties are subject to real property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insure against liability claims and provide for the costs of defense. Similarly, we may not have adequate coverage against the risk of direct physical damage or to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property. Moreover, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The Terrorism Risk Insurance Act of 2002 (the "TRIA"), under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event that the TRIA is not renewed or replaced, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance our properties could be impaired. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses.
Terrorist attacks and other acts of violence, civilian unrest or war may affect the markets in which we operate our business and our profitability.
Our properties are located in major metropolitan areas as well as densely populated sub-markets that are susceptible to terrorist attack. In addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could have a negative effect on our business.
More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the worldwide financial markets and economy. Increased economic volatility could adversely affect our properties' ability to conduct their operations profitably or our ability to borrow money or issue capital stock at acceptable prices.
Competition with third parties in acquiring investments may reduce our profitability and the return on our stockholders' investments.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, private investment funds, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. In addition, affiliates of the Brookfield Investor are or may be in the business of making investments in, and have or may have investments in, other businesses similar to and that may compete with our business. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties, our profitability will be reduced and our stockholders may experience a lower return on their investments.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
Our hotel portfolio was acquired in a series of portfolio transactions covering multiple properties. For example, we acquired interests in 116 hotels in one transaction when we acquired the Grace Portfolio. We may again attempt to acquire multiple properties in a single transaction, subject to the Brookfield Approval Rights. Portfolio acquisitions are more complex

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and expensive than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions also may result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. We may be required to accumulate a large amount of cash in order to acquire multiple properties in a single transaction. We would expect the returns that we earn on such cash to be less than the ultimate returns in real property. Any of the foregoing events may have an adverse effect on our operations.
Our property managers may fail to integrate their subcontractors into their operations in an efficient manner.
Our property managers may rely on multiple subcontractors for on-site property management of our properties. If our property managers are unable to integrate these subcontractors into their operations in an efficient manner, they may have to expend substantial time and money coordinating with these subcontractors, which could have a negative impact on the revenues generated from such properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
We are subject to various federal, state and local laws and regulations that (a) regulate certain activities and operations that may have environmental or health and safety effects, such as the management, generation, release or disposal of regulated materials, substances or wastes, (b) impose liability for the costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site, or other releases of hazardous materials or regulated substances, and (c) regulate workplace safety. Compliance with these laws and regulations could increase our operational costs. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position and cash flows. Under various federal, state and local environmental laws (including those of foreign jurisdictions), a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property.
Accordingly, we may incur significant costs to defend against claims of liability, to comply with environmental regulatory requirements, to remediate any contaminated property, or to pay personal injury claims.
Moreover, environmental laws also may impose liens on property or other restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us or our property managers from operating such properties. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations or the discovery of currently unknown conditions or non-compliance may impose material liability under environmental laws.
Costs associated with complying with the Americans with Disabilities Act of 1990 may decrease our cash flows.
Our properties may be subject to the Americans with Disabilities Act of 1990, as amended (the “Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party to ensure compliance with the Disabilities Act. We cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. Any of our funds used for Disabilities Act compliance will reduce our net income and our cash flows.

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Risks Related to the Lodging Industry
Our hotels are subject to all the risks common to the hotel industry and subject to market conditions that affect all hotel properties.
All of the properties we own are hotels, subject to all the risks of the hotel industry. Adverse trends in the hotel industry could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:
increases in supply of hotel rooms that exceed increases in demand;
increases in energy costs and other travel expenses that reduce business and leisure travel;
reduced business and leisure travel due to continued geo-political uncertainty, including terrorism, economic slowdowns, natural disasters and other world events impacting the global economy and the travel and hotel industries;
reduced business and leisure travel from other countries to the United States, where all of our hotels are currently located, due to the strength of the U.S. Dollar as compared to the currencies of other countries;
adverse effects of declines in general and local economic activity;
adverse effects of a downturn in the hotel industry; and
risks generally associated with the ownership of hotels and real estate, as discussed below.
We do not have control over the market and business conditions that affect the value of our lodging properties. Hotel properties are subject to varying degrees of risk generally common to the ownership of hotels, many of which are beyond our control, including the following:
increased competition from other existing hotels in our markets;
new hotels entering our markets, which may adversely affect the occupancy levels and average daily rates of our lodging properties;
declines in business and leisure travel;
increases in energy costs, increased threat of terrorism, terrorist events, airline strikes or other factors that may affect travel patterns and reduce the number of business and leisure travelers;
increases in labor and other operating costs due to inflation and other factors that may not be offset by increased room rates;
unavailability of labor and increases in minimum wage levels which increase the cost associated with hourly employees at our hotels;
changes in, and the related costs of compliance with, governmental laws and regulations, fiscal policies and zoning ordinances;
inability to adapt to dominant trends in the hotel industry or introduce new concepts and products that take advantage of opportunities created by changing consumer spending patterns and demographics; and
adverse effects of international, national, regional and local economic and market conditions.
The hotel business is seasonal, which affects our results of operations from quarter to quarter.
The hotel industry is seasonal in nature. This seasonality can cause quarterly fluctuations in our financial condition and operating results. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. We can provide no assurances that our cash flows will be sufficient to offset any shortfalls that occur as a result of these fluctuations.
We do not operate our lodging properties.
We cannot and do not directly or indirectly operate our lodging properties and, as a result, we depend on the ability of third-party property managers, to operate our hotel properties successfully. Because of certain REIT qualification rules, we cannot directly operate any lodging properties we own or actively participate in the decisions affecting their daily operations. Thus, even if we believe our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory operating results, we may not be able to require the management company to change their method of operation of our lodging properties. Any negative publicity or other adverse developments that affect that operator and/or its affiliated brands generally may adversely affect our results of operations, financial condition, and consequently cash flows thereby impacting our ability to meet our capital requirements. There can be no assurance that any management company we engage will manage any lodging properties we acquire in an efficient and satisfactory manner.
We rely on third-party property managers to establish and maintain adequate internal controls over financial reporting at our lodging properties. In doing so, the property manager should have policies and procedures in place that allow it to effectively monitor and report to us the operating results of our lodging properties which ultimately are included in our consolidated financial statements. Because the operations of our lodging properties ultimately become a component of our consolidated financial statements, we evaluate the effectiveness of the internal controls over financial reporting at all our lodging properties, in connection with the certifications we provide in our quarterly and annual reports on Form 10-Q and Form

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10-K, respectively, pursuant to the Sarbanes-Oxley Act of 2002. If such controls are not effective, the accuracy of the results of our operations that we report could be affected. Accordingly, our ability to conclude that, as a company, our internal controls are effective is significantly dependent upon the effectiveness of internal controls that the property managers implement at our lodging properties. It is possible that we could have a significant deficiency or material weakness as a result of the ineffectiveness of the internal controls at one or more of our lodging properties.
If we replace or terminate any property manager, we may be required by the terms of the relevant management agreement to pay substantial termination fees, and we may experience significant disruptions at the affected lodging properties. We may not be able to make arrangements with a management company with substantial prior lodging experience in the future. If we experience such disruptions, it may adversely affect our results of operations, financial condition and our cash flows, including our ability to meet our capital requirements.
Our use of the taxable REIT subsidiary structure increases our expenses.
A taxable REIT subsidiary structure subjects us to the risk of increased lodging operating expenses. The performance of our taxable REIT subsidiaries will be based on the operations of our lodging properties. Our operating risks include not only changes in hotel revenues and changes to our taxable REIT subsidiaries’ ability to pay the rent due to us under the leases, but also increased hotel operating expenses, including, but not limited to, the following cost elements:
wage and benefit costs;
repair and maintenance expenses;
energy costs;
property taxes;
insurance costs; and
other operating expenses.
Any increases in one or more these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.
Restrictive covenants and other provisions in franchise agreements could preclude us from taking actions with respect to the sale, refinancing or rebranding of a hotel that would otherwise be in our best interest.
Our franchise agreements are long-terms agreements with general prohibitions against or prohibitive payments for early termination and generally contain restrictive covenants and other provisions that do not provide us with flexibility to sell, refinance or rebrand a hotel without the consent of the franchisor. For example, the terms of these agreements may restrict our ability to sell a hotel unless the purchaser is not a competitor of the franchisor, enters into a replacement franchise agreement and meets specified other conditions. In addition, our franchise agreements restrict our ability to rebrand particular hotels without the consent of the franchisor, which could result in significant operational disruptions and litigation if we do not obtain the consent. We could be forced to pay consent or termination fees to franchisors (or litigate with them) under these agreements as a condition to changing franchise brands of our hotels (or consent or termination fees to Crestline under our management agreements with them as a condition to changing management), and these fees could deter us from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense. In addition, our lenders generally must consent before we modify hotel management agreements or franchise agreements. Any default under a franchise agreement could also be a default under the indebtedness that secures the property.
There are risks associated with our property managers employing hotel employees.
We are generally subject to risks associated with the employment of hotel employees. The lodging properties we acquire are leased to one or more taxable REIT subsidiaries, which enter into property management agreements with a third-party property manager to operate the properties. Hotel operating revenues and expenses for these properties are included in our consolidated results of operations. As a result, although we do not employ or manage the labor force at our lodging properties, we are subject to many of the costs and risks generally associated with the hotel labor force. The property manager is responsible for hiring and maintaining the labor force at each of our lodging properties and for establishing and maintaining the appropriate processes and controls over such activities. From time to time, the operations of our lodging properties may be disrupted through strikes, public demonstrations or other labor actions and related publicity. We may also incur increased legal costs and indirect labor costs as a result of the aforementioned disruptions, or contract disputes or other events. Our property managers may be targeted by union actions or adversely impacted by the disruption caused by organizing activities.
The increase in the use of third-party internet travel intermediaries and the increase in alternative lodging channels, such as Airbnb, could adversely affect our profitability.
Many of our managers and franchisors contract with third-party internet travel intermediaries, including, but not limited to expedia.com, priceline.com, hotels.com, orbitz.com, and travelocity.com. These internet intermediaries are generally paid

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commissions and transaction fees by our managers and franchisors for sales of our rooms through such agencies. If bookings through the internet intermediaries increase, they may be able to negotiate higher commissions, reduced room rates or other contract concessions from our managers or our franchisors. In addition, internet intermediaries use extensive marketing, which could result in hotel consumers developing brand loyalties to the internet intermediary instead of our franchise brands. Further, internet intermediaries emphasize pricing and quality indicators, such as a star rating system, at the expense of brand identification.
In addition to competing with traditional hotels and lodging facilities, we compete with alternative lodging, including third-party providers of short-term rental properties and serviced apartments, such as Airbnb. We compete based on a number of factors, including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, brand recognition and supply and availability of alternative lodging.
Our lack of diversification in property type and hotel brands increases the risk of investment.
There is no limit on the number of properties of a particular hotel brand that we may acquire. As of December 31, 2018, based on the number of hotels, 43.1% of our hotels were franchised with Hilton Worldwide, 43.1% with Marriott International and 11.8% with Hyatt Hotels Corporation, and no other brand accounts for more than 2.0% of our hotels. The risks of brand concentration include reductions in business following negative publicity relating to one of our licensed brands or arising from or after a dispute with a hotel brand company.
Our board of directors reviews our properties and investments in terms of geographic and hotel brand diversification, and any failure to remain diversified could adversely affect our results of operations and increase the risk of our stockholders’ investments.
Risks Related to Debt Financing
Our incurrence of substantial indebtedness limits our future operational and financial flexibility.
We have incurred substantial indebtedness in acquiring the properties we currently own, and substantially all of these real properties have been pledged as security under our indebtedness. We may incur additional indebtedness, subject to the Brookfield Approval Rights, pursuant to which we are required to obtain prior approval before incurring any indebtedness, except for permitted refinancings and as set forth in the Annual Business Plan.
Our incurrence of mortgage and mezzanine indebtedness, and any other indebtedness we may incur, limit our future operational and financial flexibility in ways that could have a material adverse effect on our results of operations and financial condition such as:
requiring us to use a substantial portion of our cash flow from operations to service indebtedness;
limiting our ability to obtain additional financing to fund our capital requirements;
increasing the costs of incurring additional debt as potential future lenders may charge higher interest rates if they lend to us in the future due to our current level of indebtedness;
increasing our exposure to floating interest rates;
limiting our ability to compete with other companies that are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or exploiting business opportunities to the extent we are limited in our ability to access the financing required to pursue these opportunities;
making us less attractive to potential investors due our level of indebtedness;
restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our indebtedness;
exposing us to potential events of default (if not cured or waived) under covenants contained in our debt instruments that could have a material adverse effect on our business, financial condition and operating results;
increasing our vulnerability to a downturn in general economic conditions; and
limiting our ability to react to changing market conditions in our industry.

In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property or properties securing the loan that is in default, thus reducing the value of an investment in our common stock. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees on behalf of the entities that own our properties to lenders of mortgage debt. When we provide a guaranty on behalf of an entity

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that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. Substantially all of our mortgages to date contain cross-collateralization or cross-default provisions, meaning that a default on a single property could affect multiple properties, and any mortgages we enter into in the future may contain cross-collateralization or cross-default provisions. If any of our properties are foreclosed upon due to a default, our business and results of operations could be adversely affected.
We may not be able to extend the maturity date of, or refinance, our indebtedness, on acceptable terms.
Substantially all of our properties have been pledged as security for our indebtedness, and we expect to extend or refinance this indebtedness when it comes due.
Our ability to refinance debt will be affected by our financial condition and various other factors existing at the relevant time, including factors beyond our control such as capital and credit market conditions, the state of the national and regional economies, local real estate conditions and the equity in and value of the related collateral. Any refinancing may also require prior approval under the Brookfield Approval Rights if it is not as specifically set forth in the Annual Business Plan or in a principal amount not greater than the amount to be refinanced and on terms no less favorable to us. If we are not able to extend these loans or any of our other indebtedness or refinance them when they mature, we will be required to seek alternative financing to continue our operations. No assurance can be given that any extension, refinancing or alternative financing will be available when required or that we will be able to negotiate acceptable terms. Moreover, if interest rates are higher when these loans are refinanced or replaced with alternative financing, our cash flow would be reduced.
Increases in interest rates could increase the amount of our debt payments.
We have incurred substantial indebtedness, of which approximately $1.2 billion outstanding as of December 31, 2018 bears interest at variable interest rates. Accordingly, increases in interest rates would increase our interest costs, which could reduce our cash flows. In addition, if we need to repay existing debt during periods of rising interest rates, we could, subject to the Brookfield Approval Rights, be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Interest-only indebtedness may increase our risk of default.
We have financed our property acquisitions using interest-only mortgage and mezzanine indebtedness and may continue to do so in the future. As of December 31, 2018, all $1.5 billion of our mortgage and mezzanine indebtedness was interest-only. For all of this indebtedness, interest-only is payable monthly during the loan term, and a “balloon” payment of the entire principal amount is payable at maturity. These required balloon payments may increase our risk of default under the related loan. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or sell assets, subject to the Brookfield Approval Rights. There can be no assurance the required prior approval will be obtained when requested, or at all. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell assets at prices sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to our stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT or to meet our obligations to the holders of Class C Units. Any of these results would have a material adverse effect on the value of an investment in our common stock.
Our derivative financial instruments that we may use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on an investment in our common stock.
We use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging strategy can protect us completely. We cannot assure our stockholders that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% gross income tests.
U.S. Federal Income Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We elected to be taxed as a REIT commencing with our taxable year ended December 31, 2014 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other

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requirements on a continuing basis. The REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to remain qualified as a REIT is not binding on the Internal Revenue Service ("IRS") and is not a guarantee that we will qualify, or continue to qualify, as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can qualify or remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at the corporate rate. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, upon the occurrence of certain events related to our failure to qualify as a REIT, subject to certain notice and cure rights, holders of Class C Units have the right to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “-The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
Even though we have qualified as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even if we maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT and that do not meet a safe harbor available under the Code (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. We also may decide to retain net capital gains we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of the OP or at the level of the other companies through which we indirectly own our assets, such as our taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
To continue to qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholder’s overall return.
In order to continue to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to pay distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholder’s investments.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding

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prohibited transactions by REITs, while we qualify as a REIT and provided we do not meet a safe harbor available under the Code, we will be subject to a 100% penalty tax on the net income recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including the OP, but generally excluding taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. During such time as we qualify as a REIT, we intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary (but such taxable REIT subsidiary will incur corporate rate income taxes with respect to any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. No assurance can be given that any particular property we own, directly or through any subsidiary entity, including the OP, but generally excluding taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to a 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 20% (25% for our taxable years beginning prior to January 1, 2018) of the gross value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. Accordingly, we may use our taxable REIT subsidiaries generally to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT.
Furthermore, in order to ensure the income we receive from our hotels qualifies as “rents from real property,” generally we must lease our hotels to taxable REIT subsidiaries (which are owned by our OP) which must engage “eligible independent contractors” to operate the hotels on their behalf. These taxable REIT subsidiaries and other taxable REIT subsidiaries that we may form will be subject to applicable U.S. federal, state, local and foreign income tax on their taxable income. While we will be monitoring the aggregate value of the securities of our taxable REIT subsidiaries and intend to conduct our affairs so that such securities will represent less than 20% of the value of our total assets, there can be no assurance that we will be able to comply with the taxable REIT subsidiary limitation in all market conditions. In addition, the Code imposes a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. Such transactions include, for example, intercompany loans between the parent REIT as lender and the taxable REIT subsidiary as borrower and rental arrangements between the parent REIT as landlord and the taxable REIT subsidiary as tenant.
If the OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
If the IRS were to successfully challenge the status of the OP as a partnership or disregarded entity for U.S. federal income tax purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on our stockholder’s investments. In addition, if any of the partnerships or limited liability companies through which the OP owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, such partnership or limited liability company would be subject to taxation as a corporation, thereby reducing distributions to the OP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
If our “qualified lodging facilities” are not properly leased to a taxable REIT subsidiary or the managers of such “qualified lodging facilities” do not qualify as “eligible independent contractors,” we could fail to qualify as a REIT.
In general, we cannot operate any lodging facilities and can only indirectly participate in the operation of “qualified lodging facilities” on an after-tax basis through leases of such properties to our taxable REIT subsidiaries. A “qualified lodging facility” is a hotel, motel, or other establishment in which more than one-half of the dwelling units are used on a transient basis at which or in connection with which wagering activities are not conducted. Rent paid by a lessee that is a “related party tenant”

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of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. A taxable REIT subsidiary that leases lodging facilities from us will not be treated as a “related party tenant” with respect to our lodging facilities that are managed by an independent management company, so long as the independent management company qualifies as an “eligible independent contractor.”
Each of the management companies that enters into a management contract with our taxable REIT subsidiaries must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our taxable REIT subsidiaries to be qualifying income for purposes of the REIT gross income tests. An “eligible independent contractor” is an independent contractor that, at the time such contractor enters into a management or other agreement with a taxable REIT subsidiary to operate a “qualified lodging facility,” is actively engaged in the trade or business of operating “qualified lodging facilities” for any person not related, as defined in the Code, to us or the taxable REIT subsidiary. Among other requirements, in order to qualify as an independent contractor a manager must not own, directly or by applying attribution provisions of the Code, more than 35% of our outstanding shares of stock (by value), and no person or group of persons can own more than 35% of our outstanding shares and 35% of the ownership interests of the manager (taking into account only owners of more than 5% of our shares and, with respect to ownership interest in such managers that are publicly traded, only holders of more than 5% of such ownership interests). The ownership attribution rules that apply for purposes of the 35% thresholds are complex. There can be no assurance that the levels of ownership of our stock by our managers and their owners will not be exceeded.
If our leases to our taxable REIT subsidiaries are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” In order for such rent to qualify as “rents from real property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
We may choose to pay distributions in our own stock to meet REIT requirements, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash portion of distributions they receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may pay distributions that are payable in cash or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell stock or other assets owned by them (including, if possible, our shares received in such distribution), at a time that may be disadvantageous, in order to obtain the cash necessary to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce our stockholder’s anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. For tax years beginning after December 31, 2017, noncorporate stockholders are entitled to a 20% deduction with respect to these ordinary REIT dividends which would, if allowed in full, result in a maximum effective federal income tax rate on them of 29.6% (or 33.4% including the 3.8% surtax on net investment income); although, the 20% deduction is scheduled to sunset after December 31, 2025. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income, taxable at capital gains rates, generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has

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the effect of reducing the tax basis of a stockholder’s investment in our common stock. Distributions that exceed our current and accumulated earnings and profits and a stockholder's tax basis in our common stock generally will be taxable as capital gains.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends. Tax rates could be changed in future legislation.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or in certain cases to hedge previously acquired hedges entered into to manage risks associated with property that has been disposed of or liabilities that have been extinguished, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than securities that qualify for the 75% asset test and securities of qualified REIT subsidiaries and taxable REIT subsidiaries) generally cannot exceed 10% of the outstanding voting securities of any one issuer, 10% of the total value of the outstanding securities of any one issuer, or 5% of the value of our assets as to any one issuer. In addition, no more than 20% of the value of our total assets may consist of stock or securities of one or more taxable REIT subsidiaries and no more than 25% of our assets may be represented by publicly offered REIT debt instruments that do not otherwise qualify under the 75% asset test. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we intend to continue to qualify to be taxed as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to corporate-level U.S. federal income tax (as well as applicable state and local corporate tax) on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders. Moreover, our failure to qualify as a REIT could give rise to holders of Class C Units having the right to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “-The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability.

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In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisors with respect to the impact of recent legislation on their investments in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
The share ownership restrictions of the Code for REITs and the 4.9% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 4.9% in value of the aggregate of our outstanding shares of stock and more than 4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 4.9% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
Our ability to utilize our net operating loss carryforwards to reduce our future taxable income would be limited if an ownership change (as defined in Section 382 of the Code) occurs, which could result in more taxable income and greater distribution requirements in order to maintain our REIT status in future tax years.
We have significant net operating loss (“NOL”) carryforwards for federal and state income tax purposes. Generally, NOL carryforwards can be used to reduce future taxable income.  Our ability to utilize these NOL carryforwards would be severely limited if we were to experience an “ownership change,” as defined in Section 382 of the Code. In general terms, an ownership change can occur whenever one or more “5% stockholders” collectively change the ownership of a company by more than 50 percentage points within a three-year period.  For these purposes, in certain circumstances options are deemed to be exercised.  Moreover, in certain circumstances ownership interests that are not treated as stock or as an option may be treated as stock if treating the interest as stock would cause an ownership change.
An ownership change generally limits the amount of NOL carryforwards a company may use in a given year to the aggregate fair market value of the company’s common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.  (The long-term tax-exempt interest rate for ownership changes that occur in March 2019 is 2.39%.)   If we were to experience an ownership change, our ability to use our NOL carryforwards would be severely limited.
  Our Class C Units are convertible into OP Units, subject to certain limitations. Our OP Units generally are redeemable for shares of our common stock on a one-for-one-basis or the cash value of a corresponding number of shares, at our election.  Accordingly, Class C Units might be viewed as options to acquire our common stock that are treated as exercised, or

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alternatively might be viewed as ownership interests that, although they are not treated as stock or as an option, could be treated as non-stock interests treated as stock for purposes of Section 382.
To minimize the risk that we experience an ownership change, in connection with the Initial Closing we lowered the ownership limit contained in our charter to 4.9% in value of the aggregate of our outstanding shares of stock or more than 4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock.  However, the Brookfield Investor and its affiliates have been granted a waiver of this ownership limit, but are not allowed to acquire or own more than 49.9% of our outstanding shares of common stock.  We do not believe that we have undergone an ownership change in connection with the Initial Closing, the Second Closing or the Final Closing.  The determination as to whether we experience an ownership change for purposes of Section 382 of the Code is complex.  No assurance can be given that we will not undergo an ownership change that would have a significant impact on our ability to utilize our NOL carryforwards.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980, (“FIRPTA”), capital gain distributions attributable to sales or exchanges of “U.S. real property interests,” (“USRPIs”), generally will be taxed to a non-U.S. stockholder (other than a qualified pension plan, entities wholly owned by a qualified pension plan and certain foreign publicly traded entities) as if such gain were effectively connected with a U.S. trade or business.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long as we are “domestically-controlled.” We will be domestically-controlled if at all times during a specified testing period, less than 50% in value of our stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure our stockholders, that we will a domestically-controlled qualified investment entity.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.


Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our Hotels
The following table presents certain additional information about the properties we owned at December 31, 2018:
Property
Location
Number of Rooms
Ownership Percentage of Hotel
Baltimore Courtyard(2)
Baltimore, MD
205
100%
Providence Courtyard(2)
Providence, RI
219
100%
Stratford Homewood Suites(3)
Stratford, CT
135
100%
Georgia Tech Hotel(1)(9)
Atlanta, GA
252
N/A
Westin Virginia Beach
Virginia Beach, VA
236
31%
Hilton Garden Inn Blacksburg(7)
Blacksburg, VA
137
57%
Courtyard Asheville(4)
Asheville, NC
78
100%

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Courtyard Athens Downtown(4)
Athens, GA
105
100%
Courtyard Bowling Green Convention Center(4)
Bowling Green, KY
93
100%
Courtyard Chicago Elmhurst Oakbrook Area(4)
Elmhurst, IL
140
100%
Courtyard Columbus Downtown(6)
Columbus, OH
150
100%
Courtyard Dallas Market Center(4)(8)
Dallas, TX
184
100%
Courtyard Dalton(5)
Dalton, GA
93
100%
Courtyard Flagstaff(6)
Flagstaff, AZ
164
100%
Courtyard Gainesville(4)
Gainesville, FL
81
100%
Courtyard Houston I 10 West Energy Corridor(5)
Houston, TX
176
100%
Courtyard Jacksonville Airport Northeast(4)
Jacksonville, FL
81
100%
Courtyard Jackson Ridgeland(6)
Jackson, MS
117
100%
Courtyard Knoxville Cedar Bluff(4)
Knoxville, TN
78
100%
Courtyard Lexington South Hamburg Place(4)
Lexington, KY
90
100%
Courtyard Louisville Downtown(4)
Louisville, KY
140
100%
Courtyard Memphis Germantown(6)
Germantown, TN
93
100%
Courtyard Mobile(8)
Mobile, AL
78
100%
Courtyard Orlando Altamonte Springs Maitland(4)
Orlando, FL
112
100%
Courtyard San Diego Carlsbad(5)
Carlsbad, CA
145
100%
Courtyard Sarasota Bradenton(4)
Sarasota, FL
81
100%
Courtyard Tallahassee North I 10 Capital Circle(4)
Tallahassee, FL
93
100%
DoubleTree Baton Rouge(6)
Baton Rouge, LA
127
100%
Embassy Suites Orlando International Drive Jamaican Court(4)
Orlando, FL
246
100%
Fairfield Inn & Suites Atlanta Vinings
Atlanta, GA
142
100%
Fairfield Inn & Suites Baton Rouge South(6)
Baton Rouge, LA
78
100%
Fairfield Inn & Suites Bellevue(6)
Bellevue, WA
144
100%
Fairfield Inn & Suites Dallas Market Center(4)
Dallas, TX
116
100%
Fairfield Inn & Suites Denver(6)
Denver, CO
160
100%
Fairfield Inn & Suites Memphis Germantown(6)
Germantown, TN
80
100%
Fairfield Inn & Suites Spokane(6)
Spokane, WA
84
100%
Hampton Inn & Suites Boynton Beach(4)
Boynton Beach, FL
165
100%
Hampton Inn & Suites El Paso Airport(6)
El Paso, TX
139
100%
Hampton Inn & Suites Nashville Franklin Cool Springs(4)
Franklin, TN
127
100%
Hampton Inn Albany Wolf Road Airport(4)
Albany, NY
153
100%
Hampton Inn Austin North at IH 35 & Highway 183(5)
Austin, TX
121
100%
Hampton Inn Baltimore Glen Burnie(4)(8)
Glen Burnie, MD
116
100%
Hampton Inn Beckley(4)
Beckley, WV
108
100%
Hampton Inn Birmingham Mountain Brook(4)(8)
Birmingham, AL
129
100%
Hampton Inn Boca Raton(4)
Boca Raton, FL
94
100%
Hampton Inn Boca Raton Deerfield Beach(4)
Deerfield Beach, FL
106
100%
Hampton Inn Boston Peabody(4)
Peabody, MA
120
100%
Hampton Inn Champaign Urbana(5)
Urbana, IL
130
100%
Hampton Inn Charlotte Gastonia(4)
Gastonia, NC
108
100%

35




Hampton Inn Chicago Gurnee(4)
Gurnee, IL
134
100%
Hampton Inn Chicago Naperville(5)
Naperville, IL
129
100%
Hampton Inn Cleveland Westlake(4)
Westlake, OH
122
100%
Hampton Inn College Station(5)
College Station, TX
133
100%
Hampton Inn Colorado Springs Central Airforce Academy
Colorado Springs, CO
125
100%
Hampton Inn Columbia I 26 Airport(4)
West Columbia, SC
120
100%
Hampton Inn Columbus Dublin(4)
Dublin, OH
123
100%
Hampton Inn Dallas Addison(4)
Addison, TX
158
100%
Hampton Inn Detroit Madison Heights South Troy(4)
Madison Heights, MI
123
100%
Hampton Inn Detroit Northville(4)
Northville , MI
124
100%
Hampton Inn East Lansing(5)
East Lansing, MI
86
100%
Hampton Inn Fort Collins(6)
Ft. Collins, CO
75
100%
Hampton Inn Fort Wayne Southwest(6)
Ft. Wayne, IN
118
100%
Hampton Inn Grand Rapids North(4)
Grand Rapids, MI
84
100%
Hampton Inn Indianapolis Northeast Castleton(5)
Indianapolis, IN
128
100%
Hampton Inn Kansas City Airport(4)
Kansas City, MO
120
100%
Hampton Inn Kansas City Overland Park(4)
Overland Park, KS
133
100%
Hampton Inn Knoxville Airport(5)
Alcoa, TN
118
100%
Hampton Inn Medford(6)
Medford, OR
75
100%
Hampton Inn Memphis Poplar(4)
Memphis, TN
124
100%
Hampton Inn Milford(5)
Milford, CT
148
100%
Hampton Inn Morgantown(4)
Morgantown, WV
107
100%
Hampton Inn Norfolk Naval Base(4)(8)
Norfolk, VA
117
100%
Hampton Inn Orlando International Drive Convention Center(5)
Orlando, FL
170
100%
Hampton Inn Palm Beach Gardens(4)
Palm Beach Gardens, FL
116
100%
Hampton Inn Pickwick Dam at Shiloh Falls(4)
Counce, TN
50
100%
Hampton Inn Scranton at Montage Mountain(4)
Moosic, PA
129
100%
Hampton Inn St Louis Westport(4)
Maryland Heights, MO
122
100%
Hampton Inn State College(4)
State College, PA
119
100%
Hampton Inn West Palm Beach Florida Turnpike(4)
West Palm Beach, FL
110
100%
Hilton Garden Inn Albuquerque North Rio Rancho(5)
Rio Rancho, NM
129
100%
Hilton Garden Inn Austin Round Rock(4)
Round Rock, TX
122
100%
Hilton Garden Inn Fort Collins(6)
Ft. Collins, CO
120
100%
Hilton Garden Inn Louisville East(5)
Louisville, KY
112
100%
Hilton Garden Inn Monterey(6)
Monterey, CA
204
100%
Holiday Inn Express & Suites Kendall East Miami(4)
Miami, FL
66
100%
Homewood Suites Augusta(5)
Augusta, GA
65
100%
Homewood Suites Boston Peabody(4)
Peabody, MA
85
100%
Homewood Suites Chicago Downtown(4)
Chicago, IL
233
100%
Homewood Suites Hartford Windsor Locks(4)
Windsor Locks, CT
132
100%
Homewood Suites Jackson Ridgeland(6)
Ridgeland, MS
91
100%
Homewood Suites Memphis Germantown(4)
Germantown, TN
92
100%

36




Homewood Suites Orlando International Drive Convention Center(5)
Orlando, FL
252
100%
Homewood Suites Phoenix Biltmore(4)(8)
Phoenix , AZ
124
100%
Homewood Suites San Antonio Northwest(4)
San Antonio, TX
123
100%
Homewood Suites Seattle Downtown(5)
Seattle, WA
162
100%
Hyatt House Atlanta Cobb Galleria(6)
Atlanta, GA
149
100%
Hyatt Place Albuquerque Uptown(4)
Albuquerque, NM
126
100%
Hyatt Place Baltimore Washington Airport(4)
Linthicum Heights, MD
127
100%
Hyatt Place Baton Rouge I 10(4)
Baton Rouge, LA
126
100%
Hyatt Place Birmingham Hoover(4)
Birmingham, AL
126
100%
Hyatt Place Chicago Schaumburg(6)
Schaumburg, IL
127
100%
Hyatt Place Cincinnati Blue Ash(4)
Blue Ash, OH
125
100%
Hyatt Place Columbus Worthington(4)
Columbus, OH
124
100%
Hyatt Place Indianapolis Keystone(4)
Indianapolis, IN
124
100%
Hyatt Place Kansas City Overland Park Metcalf(4)
Overland Park, KS
124
100%
Hyatt Place Las Vegas(4)
Las Vegas, NV
202
100%
Hyatt Place Memphis Wolfchase Galleria(4)
Memphis, TN
126
100%
Hyatt Place Miami Airport West Doral(4)
Miami, FL
124
100%
Hyatt Place Minneapolis Airport South(4)
Bloomington, MN
126
100%
Hyatt Place Nashville Franklin Cool Springs(4)
Franklin, TN
126
100%
Hyatt Place Richmond Innsbrook(4)
Glen Allen, VA
124
100%
Hyatt Place Tampa Airport Westshore(4)
Tampa, FL
124
100%
Residence Inn Boise Downtown(4)
Boise, ID
104
100%
Residence Inn Chattanooga Downtown(4)
Chattanooga, TN
76
100%
Residence Inn Fort Myers(4)
Fort Myers, FL
78
100%
Residence Inn Fort Wayne Southwest(6)
Ft. Wayne, IN
109
100%
Residence Inn Jackson Ridgeland(6)
Ridgeland, MS
100
100%
Residence Inn Jacksonville Airport(5)
Jacksonville, FL
78
100%
Residence Inn Knoxville Cedar Bluff(4)
Knoxville, TN
78
100%
Residence Inn Lexington South Hamburg Place(4)
Lexington, KY
91
100%
Residence Inn Los Angeles Airport El Segundo(4)
El Segundo, CA
150
100%
Residence Inn Macon(4)
Macon, GA
78
100%
Residence Inn Mobile(4)(8)
Mobile, AL
66
100%
Residence Inn Memphis Germantown(6)
Germantown, TN
78
100%
Residence Inn Portland Downtown Lloyd Center(4)
Portland, OR
168
100%
Residence Inn San Diego Rancho Bernardo Scripps Poway(4)
San Diego, CA
95
100%
Residence Inn Sarasota Bradenton(4)
Sarasota, FL
78
100%
Residence Inn Savannah Midtown(4)
Savannah, GA
66
100%
Residence Inn Tallahassee North I 10 Capital Circle(4)
Tallahassee, FL
78
100%
Residence Inn Tampa North I 75Fletcher(4)(10) Fletcher(4)
Tampa, FL
78
100%
Residence Inn Tampa Sabal Park Brandon(4)
Tampa, FL
102
100%
Springhill Suites Asheville(5)
Asheville, NC
88
100%
Springhill Suites Austin Round Rock(4)
Round Rock, TX
104
100%
SpringHill Suites Baton Rouge South(6)
Baton Rouge, LA
78
100%

37




SpringHill Suites Denver(6)
Denver, CO
125
100%
SpringHill Suites Flagstaff(6)
Flagstaff, AZ
113
100%
Springhill Suites Grand Rapids North(4)
Grand Rapids, MI
76
100%
Springhill Suites Houston Hobby Airport(4)
Houston, TX
122
100%
Springhill Suites Lexington Near The University Of Kentucky(4)
Lexington, KY
108
100%
SpringHill Suites San Antonio Medical Center Northwest (8)
San Antonio, TX
112
100%
Springhill Suites San Diego Rancho Bernardo Scripps Poway(4)
San Diego, CA
138
100%
Staybridge Suites Jackson(6)
Ridgeland, MS
92
100%
TownePlace Suites Baton Rouge South(6)
Baton Rouge, LA
90
100%
TownePlace Suites Savannah Midtown(5)
Savannah, GA
93
100%
 
 
17,321
 
 
 

 
________________
(1)
We own the leasehold interest in the property and account for it as an operating lease
(2)
Encumbered by the Baltimore Courtyard & Providence Courtyard Loan (Barceló Portfolio) as of December 31, 2018; the Baltimore Courtyard & Providence Courtyard Loan was refinanced on April 5, 2019 (see Note 20 - Subsequent Events to our accompanying consolidated financial statements in this Annual Report on Form 10-K)
(3)
Encumbered by the Additional Grace Mortgage Loan, as part of the Barceló Portfolio
(4)
Encumbered by the 87-Pack Loans as part of the Grace Portfolio
(5)
Encumbered by the Additional Grace Mortgage Loan as part of the Grace Portfolio
(6)
Encumbered by the Refinanced Term Loan as part of the Summit and Noble Portfolios
(7)
Encumbered by the Hilton Garden Inn Blacksburg Joint Venture Loan
(8)
Subject to a ground lease. Our ground leases generally have a remaining term of at least 10 years (including renewal options).
(9)
Encumbered by the Refinanced Term Loan, as part of the Barceló Portfolio


Debt

As of December 31, 2018, we had $1.5 billion in outstanding indebtedness and $219.7 million in liquidation value of Grace Preferred Equity Interests (which is treated as indebtedness for accounting purposes). Substantially all of our hotel assets have been pledged as collateral under this indebtedness. During February 2019, we used all proceeds from the Final Closing to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests.

In February 2015, we acquired the Grace Portfolio for a purchase price of $1.8 billion. The Grace Portfolio includes 91 hotels which comprise what we sometimes refer to as Equity Inns Portfolio I and 20 hotels which comprise what we sometimes refer to as Equity Inns Portfolio II. The Grace Preferred Equity Interests effectively represented seller financing of the portion of the purchase price of our February 2015 acquisition of the Grace Portfolio between the equity portion funded by us and the mortgage and mezzanine debt provided by our lenders.



38




The following table summarizes certain information regarding our debt obligations as of December 31, 2018:
Use of Proceeds/Collateral
Principal Balance as of December 31, 2018
(In Thousands)
Number of rooms
Debt per Room
Interest Rate
Maturity Date
87 properties in Grace Portfolio - Equity Inns Portfolio I (87 - Pack Mortgage Loan)
$805,000
10,044
$80,147
LIBOR plus 2.56%
May 1, 2019; 1st ext. May 1, 2020; 2nd ext. May 1, 2021; 3rd ext. May 1, 2022
87 properties in Grace Portfolio - Equity Inns Portfolio I (87 - Pack Mezzanine Loan)
$110,000
10,044
$10,952
LIBOR plus 6.50%
May 1, 2019; 1st ext. May 1, 2020; 2nd ext. May 1, 2021; 3rd ext. May 1, 2022
91 properties in Grace Portfolio - Equity Inns Portfolio I ( Grace Preferred Equity Interests)
$169,847
10,501
$16,174
(i) Until August 27, 2016 a rate equal to 7.50% per annum, and (ii) thereafter, a rate equal to 8.00% per annum
Repay in full by no later than February 27, 2019
Equity Inns Portfolio II & Homewood Suites Stratford (Additional Grace Mortgage Loan)
$232,000
2,691
$86,213
4.96%
October 6, 2020
20 properties in Grace Portfolio - Equity Inns Portfolio II ( Grace Preferred Equity Interests)
$49,900
2,556
$19,523
(i) Until August 27, 2016 a rate equal to 7.50% per annum, and (ii) thereafter, a rate equal to 8.00% per annum
Repay in full by no later than February 27, 2019
Summit, Noble, Georgia Tech -28 Properties (Refinanced Term Loan)
$310,000
3,332
$93,037
LIBOR plus 3.00%
May 1, 2019; 1st ext. May 1, 2020; 2nd ext. May 1, 2021; 3rd ext. May 1, 2022
Baltimore Courtyard & Providence Courtyard (Baltimore Courtyard & Providence Courtyard Loan)(1)
$45,500
424
$107,311
4.30%
April 6, 2019
Hilton Garden Inn
Blacksburg (Hilton Garden Inn Blacksburg Joint Venture Loan)
$10,500
137
$76,642
4.31%
June 6, 2020
                                                        
(1)
The Baltimore Courtyard & Providence Courtyard Loan was refinanced on April 5, 2019 (see Note 20 - Subsequent Events to our accompanying consolidated financial statements in this Annual Report on Form 10-K).

Item 3. Legal Proceedings.
We are not a party to any material pending legal or regulatory proceedings, other than as set forth below.
A special litigation committee of the Company's board of directors (the “SLC”) has been empowered by a resolution adopted by the board of directors to investigate claims asserted in shareholder demand letters sent to the board by counsel for two stockholders of the Company, Tom Milliken and Stuart Wollman, as well as the allegations contained in an Amended Complaint filed by Mr. Milliken in the United States District Court for the Southern District of New York (the “Federal Court Action”). The resolution creating the SLC also empowers the SLC to determine whether to pursue actions against the defendants in the Federal Court Action. The SLC, which is represented by independent counsel, has substantially completed its investigation of the claims contained in the demand letters and Federal Court Action (collectively “the Claims”).

39




The SLC has determined it appropriate to pursue certain but not all of the Claims asserted. The defendants associated with these claims include Nicholas Schorsch, William Kahane, the Company’s former external advisor and property managers, and the parent of the former sponsor of the Company, along with individuals associated with the parent. These claims include the following: (1) breach of fiduciary duty and corporate waste regarding the property management agreements entered into with affiliates of the Company’s former external advisor and fees paid pursuant to those agreements; (2) breach of fiduciary duty and corporate waste regarding the amendment to the advisory agreement with its former external advisor and fees paid pursuant to the amended agreement; and (3) breach of fiduciary duty, corporate waste, aiding and abetting breach of fiduciary duty and unjust enrichment relating to fees paid by the Company in connection with the restructuring/termination of agreements regarding the management of the properties acquired by the Company.
The Company’s current chief executive officer, Jonathan P. Mehlman, received a portion of the fees/compensation discussed above. The SLC has been in discussion with Mr. Mehlman regarding those fees/compensation and Mr. Mehlman has agreed in principle subject to signing a definitive settlement agreement and receiving court approval to pay back to the Company a portion of the fees he received in resolution of the Claims as they pertain to him. The SLC intends to present this resolution to the Court in order to seek Court approval and dismissal as to Mr. Mehlman. The SLC has otherwise determined not to pursue claims against the remaining current directors and officers named as defendants in the Federal Court Action.
The SLC is in the process of preparing a report regarding its investigation and will be working with the Company to submit the SLC’s report as well as any necessary motions to address any other claims that the SLC may seek to settle, any claims the SLC may seek to pursue that could not otherwise be settled and dismissal of the claims the SLC has determined not to pursue. For the claims that the SLC seeks to pursue, the Company will request that it be substituted as the plaintiff to replace the current shareholder plaintiff in the Federal Court Action.
The Claims do not seek recovery of losses from or damages against the Company, but instead allege that the Company has sustained damages as a result of actions by the defendants, and therefore no accrual of any potential liability was necessary as of December 31, 2018, other than for incurred out-of-pocket legal fees and expenses.

Item 4. Mine Safety Disclosures.
None.

40


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our shares of common stock are not traded on a national securities exchange. There currently is no established trading market for our shares and there may never be one. Even if a stockholder is able to find a buyer for his or her shares, the stockholder may not sell his or her shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws.
On April 23, 2018, our board of directors unanimously approved an updated Estimated Per-Share NAV equal to $13.87 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,505,742 shares of our common stock outstanding on a fully diluted basis as of December 31, 2017. We anticipate that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year. We expect to publish our next annual Estimated Per-Share NAV update during the second quarter of 2019.
The Estimated Per-Share NAV does not represent:
the price at which shares of our common stock would trade at on a national securities exchange;
the amount a stockholder would obtain if he or she tried to sell his or her shares of common stock; or
the amount stockholders would receive if we liquidated our assets and distributed the proceeds after paying all of its expenses and liabilities.
Accordingly, with respect to the Estimated Per-Share NAV, we can give no assurance that:
a stockholder would be able to resell his or her shares of common stock at Estimated Per-Share NAV;
a stockholder would ultimately realize distributions per share of common stock equal to Estimated Per-Share NAV upon liquidation of our assets and settlement of our liabilities or a sale of us;
shares of our common stock would trade at a price equal to or greater than Estimated Per-Share NAV if they were listed on a national securities exchange; or
the methodology used to establish the Estimated Per-Share NAV would be acceptable to FINRA for use on customer account statements, or that the Estimated Per-Share NAV will satisfy the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Code with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.
Further, the Estimated Per-Share NAV was calculated as of a specific date, and the value of shares of common stock will fluctuate over time as a result of, among other things, developments related to individual assets, changes in the real estate and capital markets, including changes in interest rates, completion or commencement of capital improvements related to individual assets, and acquisitions or dispositions of assets and the distribution of proceeds from the sale of real estate to stockholders.
Stockholders should not rely on the Estimated Per-Share NAV in making a decision to buy or sell shares of our common stock.
Holders
As of December 31, 2018, we had 39,134,628 shares of common stock outstanding held by a total of 19,310 stockholders.
Distributions
We elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with the tax year ended December 31, 2014. As a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard for the deduction for dividends paid and excluding net capital gains, to our stockholders annually. Our distribution policy is subject to revision at the discretion of our board of directors, and may be changed at any time. There can be no assurance that we will resume paying distributions in shares of common stock or in cash at any time in the future. Our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all.
We paid monthly cash distributions based on an annual rate of $1.70 per share from April 2014 until March 2016. We paid monthly stock distributions from April 2016 until January 2017. Stock distributions from April 2016 through June 2016 were based on an annual rate of $1.70 per share, and $1.46064 per share from July 1, 2016 through January 13, 2017. On January 13, 2017, in connection with our entry into the SPA with the Brookfield Investor, we suspended paying distributions to our stockholders entirely.


41




Currently, under the Brookfield Approval Rights, prior approval of at least one of the Redeemable Preferred Directors is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
Following the Initial Closing, commencing on June 30, 2017, holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero.
Also commencing on June 30, 2017, holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum. If we fail to redeem the Brookfield Investor when required to do so pursuant to the A&R LPA, the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%.
The number of Class C Units delivered in respect of the PIK Distributions on any distribution payment date is equal to the number obtained by dividing the amount of PIK Distribution by $14.75.

Following the Initial Closing, the holders of Class C Units are also entitled to tax distributions under the certain limited circumstances described in the A&R LPA.
For the year ended December 31, 2017, the Company paid cash distributions of $7.9 million and PIK Distributions of 355,349.60 Class C Units to the Brookfield Investor, as the sole holder of the Class C Units. For the year ended December 31, 2018, the Company paid cash distributions of $12.5 million and PIK Distributions of 564,870.56 Class C Units to the Brookfield Investor, as the sole holder of the Class C Units.


Share-based Compensation
We have adopted an employee and director incentive restricted share plan (as amended and/or restated, the “RSP”), which provides us with the ability to grant awards of restricted shares and restricted stock units in respect of shares of our common stock ("RSUs") to our directors, officers and employees, as well as the directors and employees of entities that provide services to us. See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters - Share-based Compensation” for further details.
Unregistered Sales of Equity Securities and Use of Proceeds.
We did not sell any equity securities that were not registered under the Securities Act during the year ended December 31, 2018, except with respect to which information has been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our common stock is currently not listed on a national securities exchange. There is no established trading market for shares of our common stock and there can be no assurance one will develop. We currently have no plans to list shares of our common stock on a national securities exchange. In September 2018, our board of directors adopted the SRP pursuant to which we were offering, subject to certain terms and conditions, liquidity to stockholders by offering to make quarterly repurchases of common stock at a price to be established by the board of directors. In February 2019, our board of directors suspended the SRP. The suspension will remain in effect unless and until our board takes further action to reactivate the SRP. There can be no assurance the SRP will be reactivated on its current terms, different terms or at all.

We repurchased shares of our common stock pursuant to the SRP during the quarter ended December 31, 2018. The following table summarizes the repurchases of shares under the SRP cumulatively through December 31, 2018.
 
 
Number of Shares Repurchased
 
Cost of Shares Repurchased
 
Weighted-Average Price per Share
 
 
 
 
(In thousands)
 
 
Year ended December 31, 2018
 
208,977

 
$
1,881

 
$
9.00

Cumulative repurchases as of December 31, 2018
 
208.977

 
$
1,881

 
$
9.00



42


Item 6. Selected Financial Data.
The following selected financial data as of December 31, 2018, 2017, 2016, 2015, and 2014, should be read in conjunction with the accompanying consolidated financial statements of Hospitality Investors Trust, Inc. and the notes thereto and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” below. The hospitality assets and operations owned by Barceló Crestline Corporation and its consolidated subsidiaries, or the Barceló Portfolio (in such capacity, the "Predecessor") are included for the period from January 1, 2014 to March 20, 2014.
Balance sheet data (In thousands)
 
December 31, 2018
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
Total real estate investments, at cost
 
$
2,542,791

 
$
2,489,289

 
$
2,391,407

 
$
2,211,347

 
$
98,545

Total assets
 
$
2,337,287

 
$
2,420,653

 
$
2,353,411

 
$
2,347,839

 
$
333,374

Mortgage notes payable, net
 
$
1,507,509

 
$
1,495,777

 
$
1,410,925

 
$
1,341,033

 
$
45,500

Total liabilities
 
$
1,790,070

 
$
1,797,287

 
$
1,793,968

 
$
1,706,630

 
$
131,579

Total equity
 
$
384,069

 
$
495,322

 
$
559,443

 
$
641,209

 
$
201,795


 
 
Successor
 
Predecessor
 
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
For the Period from March 21 to December 31, 2014
 
For the Period from January 1 to March 20, 2014
Operating data (In thousands)
 
 
 
Total revenues
 
$
606,059

 
$
621,075

 
$
599,592

 
$
446,184

 
$
34,871

 
$
8,245

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Rooms
 
148,630

 
147,814

 
139,169

 
99,543

 
5,411

 
1,405

Food and beverage
 
16,471

 
16,158

 
15,986

 
12,774

 
3,785

 
1,042

Management fees
 
16,757

 
23,643

 
42,560

 
22,107

 
1,498

 
289

Other property-level operating expenses
 
240,509

 
242,925

 
230,546

 
171,488

 
13,049

 
3,490

Acquisition and transaction related costs
 
64

 
498

 
25,270

 
64,513

 
10,884

 

General and administrative
 
19,831

 
18,889

 
15,806

 
11,621

 
2,316

 

Depreciation and amortization
 
111,730

 
105,237

 
101,007

 
68,500

 
2,796

 
994

Impairment of goodwill and long-lived assets
 
29,796

 
32,689

 
2,399

 

 

 

Rent
 
6,716

 
6,569

 
6,714

 
6,249

 
3,879

 
933

Total operating expenses
 
$
590,504

 
$
594,422

 
$
579,457

 
$
456,795

 
$
43,618

 
$
8,153

Operating income (loss)
 
15,555

 
26,653

 
20,135

 
(10,611
)
 
(8,747
)
 
92

Interest expense
 
(106,199
)
 
(98,865
)
 
(92,264
)
 
(80,667
)
 
(5,958
)
 
(531
)
Other income (expense)
 
1,798

 
(1,260
)
 
1,169

 
(491
)
 
103

 

Equity in earnings (losses) of unconsolidated entities
 
187

 
403

 
399

 
238

 
352

 
(166
)
Total other expenses, net
 
(104,214
)
 
(99,722
)
 
(90,696
)
 
(80,920
)
 
(5,503
)
 
(697
)
Loss before taxes
 
$
(88,659
)
 
$
(73,069
)
 
$
(70,561
)
 
$
(91,531
)
 
$
(14,250
)
 
$
(605
)
Income tax (benefit) expense
 
(2,606
)
 
(1,926
)
 
1,371

 
3,106

 
591

 

Net loss and comprehensive loss
 
$
(86,053
)
 
$
(71,143
)
 
$
(71,932
)
 
$
(94,637
)
 
$
(14,841
)
 
$
(605
)

43


Less: Net income attributable to non-controlling interest
 
85

 
244

 
315

 
189

 

 

Net loss before dividends and accretion
 
$
(86,138
)
 
$
(71,387
)
 
$
(72,247
)
 
$
(94,826
)
 
$
(14,841
)
 
$
(605
)
Deemed dividend related to beneficial conversion feature of Class C Units
 

 
(4,535
)
 

 

 

 

Dividends on Class C Units (cash and PIK)
 
(20,830
)
 
(13,103
)
 

 

 

 

Accretion of Class C Units
 
(2,581
)
 
(1,668
)
 

 

 

 

Net loss attributable to common stockholders
 
$
(109,549
)
 
$
(90,693
)
 
$
(72,247
)
 
$
(94,826
)
 
$
(14,841
)
 
$
(605
)
Other data:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in) operations
 
$
66,782

 
$
80,212

 
$
68,235

 
$
18,108

 
$
(9,650
)
 
$
(556
)
Cash flows used in investing activities
 
$
(97,034
)
 
$
(141,034
)
 
$
(148,493
)
 
$
(716,787
)
 
$
(122,082
)
 
$
(551
)
Cash flows provided by (used in) financing activities
 
$
(6,083
)
 
$
102,165

 
$
39,978

 
$
681,498

 
$
263,593

 
$
(937
)

44


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties.
Overview

Hospitality Investors Trust, Inc. is a self-managed REIT that invests primarily in premium-branded select-service lodging properties in the United States. As of December 31, 2018, we own or have an ownership interest in a total of 144 hotels, with a total of 17,321 guestrooms in 33 states.
We believe in affiliating our hotels with premium brands owned by leading international franchisors such as Hilton, Marriott and Hyatt. As of December 31, 2018, all but one of our hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation and Intercontinental Hotels Group or one of their respective subsidiaries or affiliates. Our one unbranded hotel has a direct affiliation with a leading university in Atlanta.
We have primarily acquired lodging properties in the upscale select-service, upscale extended stay and upper midscale select-service chain scale segments located in secondary markets with strong demand generators, such as state capitals, major universities and hospitals, as well as corporate, leisure and retail attractions. We believe properties in these chain scale segments can be operated with fewer employees and provide more stable cash flows than full service hotels, and with less market volatility than similar hotels in primary market locations.
We conducted our IPO from January 2014 until November 2015 without listing shares of our common stock on a national securities exchange, and we have not subsequently listed our shares. There currently is no established trading market for our shares and there may never be one. We are required to annually publish an Estimated Per-Share NAV pursuant to the rules and regulations of FINRA. On April 23, 2018, our board of directors unanimously approved an updated 2018 NAV equal to $13.87 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,505,742 shares of our common stock outstanding on a fully diluted basis as of December 31, 2017. We expect to publish our next annual Estimated Per-Share NAV update during the second quarter of 2019.
On January 12, 2017, we, along with our operating partnership, the OP, entered into the SPA with the Brookfield Investor to secure a commitment by the Brookfield Investor to make capital investments in us necessary for us to meet our short-term and long-term liquidity requirements and obligations.
On March 31, 2017, the Initial Closing occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:
the sale by us and purchase by the Brookfield Investor of the Redeemable Preferred Share, for a nominal purchase price; and
the sale by us and purchase by the Brookfield Investor of 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.
On February 27, 2018, the Second Closing occurred, pursuant to which we sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate.
On February 27, 2019, the Final Closing occurred, pursuant to which we sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.
Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash
distributions at a rate of 7.50% per annum and are also entitled to receive, with respect to each Class C Unit, fixed, quarterly,
cumulative PIK Distributions payable in Class C Units at a rate of 5% per annum. As of the date of this Annual Report, the Brookfield Investor has made $379.7 million of capital investments in us by purchasing Class C Units in the OP, and the total liquidation preference of the Class C Units was $396.5 million. The Class C Units are convertible into OP Units, which may be redeemed for shares of our common stock or, at our option, the cash equivalent. As of the date of this Annual Report on Form 10-K, the Brookfield Investor owns or controls 40.7% of the voting power of our common stock on an as-converted basis. The SPA also contains certain standstill and voting restrictions applicable to the Brookfield Investor and certain of its affiliates.

45


Without obtaining the prior approval of the majority of the then outstanding Class C Units, and/or at least one of the two directors elected to our board of directors by the Brookfield Investor pursuant to its rights as the holder of the Redeemable Preferred Share, we are restricted from taking certain operational and governance actions. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions.
An affiliate of the Brookfield Investor, the Special General Partner, is the special general partner of the OP, with certain non-economic rights that apply if we fail to redeem the Class C Units when required to do so, including the ability to commence selling the OP’s assets until the Class C Units have been fully redeemed.
We conduct substantially all of our business through the OP. We are a general partner and hold all of the OP Units. The Brookfield Investor holds all the issued and outstanding Class C Units, which rank senior in payment of distributions and in the distribution of assets to the OP Units held by us.
We do not currently pay distributions to our stockholders, and have not paid cash distributions since April 2016, when they were suspended to preserve liquidity, or stock distributions since January 2017, when we entered into the SPA. Currently, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
Prior to the Initial Closing, we had no employees, and we depended on the Former Advisor to manage certain aspects of our affairs on a day-to-day basis pursuant to our advisory agreement. In connection with, and as a condition to, the Brookfield Investor’s investment in us at the Initial Closing, the advisory agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, Crestline) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees.
Highlights of our 2018 performance and current liquidity and financial position, and outlook for future performance include:
We continued to execute on our PIP reinvestment strategy across our portfolio. During the year, we performed PIP work on 53 hotels and completed PIP work on 37 hotels.
2018 room revenues decreased $15.9 million, or 3%, versus 2017, driven by lower occupancy primarily as a result of room displacement due to an increased number of hotels being renovated versus 2017, the positive impact of hurricane revenue in the 2017 period that was not repeated in the 2018 period and the impact of four non-core hotel sales during 2017 and early 2018. Our hotels have continued to perform generally consistent with their competitive sets.
We continue to be impacted by increasing labor costs at our hotels, and we have been unable to fully offset this increase by raising room rates or through cost or other efficiencies. We anticipate the trend of increasing labor costs will continue during 2019. Further, future RevPAR growth, if any, may not keep pace with increasing labor costs.
We believe the performance of our portfolio is correlated to the performance of the economy overall, and many economic indicators such as GDP growth, positive employment trends and consumer confidence currently appear to be healthy. However, we have experienced new supply in many of our markets and general deceleration of growth in revenue per available room, or RevPAR, during 2017 and 2018. Competition from new supply has contributed to occupancy and/or RevPar declines in certain markets. These trends may continue in 2019.
During February 2019, we used the proceeds from the Final Closing with the Brookfield Investor to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units.
As of December 31, 2018, our loan-to-value ratio was 67.9% including the Grace Preferred Equity Interests, and our loan-to-value ratio excluding the Grace Preferred Equity Interests was 59.3%. These leverage percentages are calculated based on total cost of real estate assets before accumulated depreciation and amortization, and the market value of our real estate assets may be materially lower.
Substantially all our properties have been pledged as security for our indebtedness, and we expect to extend or refinance this indebtedness when it comes due. Our ability to refinance debt will be affected by our financial condition and various other factors existing at the relevant time, including factors beyond our control such as capital and credit market conditions, the state of the national and regional economies, local real estate conditions and the equity in and value of the related collateral.
We are dependent upon and continue to utilize our cash on hand, operating cash flow and other sources of liquidity which could include asset sales and debt or equity issuances to satisfy our ongoing existing capital requirements, including our PIP obligations and interest payable on our indebtedness and distributions payable with respect to Class C Units. We believe these sources will allow us to meet our capital requirements. However, there can be no assurance the amounts generated will be sufficient for these purposes.
Our customers fall into three broad groups: transient business, group business and contract business. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our

46


hotels. Group business represents significant blocks of rooms for event-driven business and is primarily corporate users but can also include social events such as wedding parties. Contract business is also primarily comprised of corporate users for fixed rate longer term in nature business such as airline crews.
Our revenues are comprised of rooms revenue, food and beverage revenue and other revenue which accounted for approximately 94.5%, 3.2%, and 2.3%, respectively, of our total revenues for the year ended December 31, 2018. Hotel operating expenses (which exclude acquisition and transaction costs, general and administrative, depreciation and amortization and impairment of goodwill and long-lived assets) represent approximately 72.7% of our total operating expenses for the year ended December 31, 2018.

Critical Accounting Policies and Estimates
Real Estate Investments
We allocate the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and furniture, fixtures and equipment. We utilize various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which are recorded at fair value. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Prior to January 1, 2018, our acquisitions of hotel properties were accounted for as acquisitions of existing businesses, and all transaction costs associated with the acquisitions, were expensed as incurred. As a result of a change in applicable GAAP guidance, beginning January 1, 2018, our acquisitions of hotel properties are anticipated to be accounted for as acquisitions of groups of assets rather than business combinations, although the determination will be made on a transaction-by-transaction basis. If we conclude that an acquisition will be accounted for as a group of assets, the transaction costs associated with the acquisition will be capitalized as part of the assets acquired.
Our investments in real estate, including transaction costs, that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of our assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.
We are required to make subjective assessments as to the useful lives of our assets for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Impairment of Long Lived Assets

Upon the occurrence of certain “triggering events” under the provisions of the Accounting Standards Codification section 360-Property, Plant and Equipment, we review our hotel investments which are considered to be long-lived assets under GAAP for impairment.  These triggering events include significant declines in market value of the asset, significant declines in operating performance and significant adverse changes in economic conditions. If a triggering event occurs and circumstances indicate the carrying amount of the property may not be recoverable, we perform a recoverability test which compares the carrying amount to an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If we determine we are unable to recover the carrying amount of the asset over the useful life, impairment is deemed to exist and an impairment loss will be recorded to the extent that the carrying amount exceeds the estimated fair value of the property which results in an immediate charge to net income.
Revenue Recognition

47


Our revenue is primarily from rooms, food and beverage, and other, and is disaggregated on our Consolidated Statement of Operations and Comprehensive Loss.
Room sales are driven by fixed fee charged to a hotel guest to stay at the hotel property for an agreed-upon period. A majority of our room reservations are cancellable and we transfer promised goods and services to the hotel guest as of the date upon which the hotel guest occupies a room and at the same time earns and recognizes revenue. We offer advance purchase reservations that are paid for by the hotel guest in advance and we recognize deferred revenue as a result of such reservations. Our obligation to the hotel guest is satisfied as of the date upon which the hotel guest occupies a room. Our room revenue accounted for 94.5%, 94.7%, and 94.5% of our total revenue for the years ended December 31, 2018, 2017, and 2016, respectively. Food, beverage, and other revenue are recognized at the point of sale on the date of the transaction as the hotel guest simultaneously obtains control of the good or service.
Class C Units
We initially measured the Class C Units at fair value net of issuance costs. We are required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the five-year period prior to the holder's redemption option becoming exercisable. However, if it becomes probable that the Class C Units will become redeemable prior to such date, we will adjust the carrying value of the Class C Units to the maximum liquidation preference.
Until the Final Closing, we could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under Accounting Standards Codification section 480 - Distinguishing Liabilities from Equity, and we accounted for it as a liability. The fair value of the contingent forward liability was initially recognized at zero since the contingent forward contract was executed at fair market value. We determined the value of the contingent forward liability was $1.4 million as of December 31, 2017 (See Note 13 - Commitment and Contingencies to our accompanying consolidated financial statements included in this Annual Report on Form 10-K). On February 27, 2019, we used the proceeds from the sale of Class C Units to the Brookfield Investor at the Final Closing to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units. Accordingly, at December 31, 2018, we recognized the fair value of the contingent forward liability as income through current earnings, and thereby extinguished the liability.

Revenue Performance Metrics
We measure hotel revenue performance by evaluating revenue metrics such as:
Occupancy percentage (“Occ”) - Occ represents the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occ measures the utilization of our hotels' available capacity.
Average Daily Rate (“ADR”) - ADR represents total hotel room revenues divided by the total number of rooms sold in a given period.
Revenue per Available room, RevPAR - RevPAR is the product of ADR and Occ.
Occ, ADR, and RevPAR are commonly used measures within the hotel industry to evaluate hotel operating performance. ADR and RevPAR do not include food and beverage or other revenues generated by the hotels. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget, to prior periods and to the hotel competitive set in the market, as well as on a company-wide and regional basis. Our hotel competitive sets generally include branded hotels of similar size, location, age and chain scale (as designated by STR).
Our Occ, ADR and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel property construction, and the pricing strategies of competitors. In addition, our Occ, ADR and RevPAR performance is dependent on the continued success of our franchisors and brands.
We generally expect that room revenues will make up a significant majority of our total revenues, and our revenue results will therefore be highly dependent on maintaining and improving Occ and ADR, which drive RevPAR.
Results of Operations
We are currently undertaking an approximately $350 million PIP program across substantially all the hotels in our portfolio. As of December 31, 2018, we have substantially completed work on 83 of the 141 hotels that are part of our PIP program, and an additional 16 hotels are in process and expected to be substantially completed early in the second quarter of 2019. We expect to complete our PIP program over the next two to three years. PIP renovation work has adversely impacted,

48


and is expected to continue to adversely impact, our operating results due to the disruption to the operations of the hotels while renovation work is ongoing. We anticipate that as we complete PIP renovations, our RevPAR at the renovated hotels will increase for a period of time (generally one to two years) and then moderate as the hotel stabilizes. However, we cannot provide any assurance that the PIP renovations at our hotels will have the desired effect of improving the competitive position and enhancing the performance of the hotels renovated. We also anticipate that the hotels in our portfolio that are scheduled for PIP renovations in the future but have not yet been renovated will experience decreases in RevPAR growth and could experience RevPAR declines until they are renovated.

Our results of operations have in the past, and may continue to be, impacted by our acquisition and disposition activities. Our hotel portfolio has been acquired through a series of portfolio purchases, as shown in the table below.

Acquisition Date
Portfolio
Number of Hotels
Purchase Price(1)
March 2014
Barceló Portfolio
6
$110.1 million
February 2015
Grace Portfolio
116(2)
$1,796.5 million
October 2015
First Summit Portfolio
10
$150.1 million
November 2015
First Noble Portfolio
2
$48.6 million
December 2015
Second Noble Portfolio
2
$59.0 million
February 2016
Third Summit Portfolio
6
$108.3 million
April 2017
Second Summit Portfolio
7
$66.5 million
(1) Exclusive of closing costs
(2) Since the acquisition date, five hotels have been sold reducing the size of this portfolio to 111 properties.

We believe that the continued execution of our investment strategies, including our hotel reinvestment program, will maximize long-term value for our stockholders and position us for future success and a potential liquidity event for our investors. While it is our intention to achieve a liquidity event, there can be no assurance as to when or if we will ultimately be able to do so and as to the terms of any such liquidity event.

Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Room revenues for the portfolio were $572.4 million for the year ended December 31, 2018, compared to room revenues of $588.3 million for the year ended December 31, 2017. The decrease in room revenues was driven by lower occupancy primarily as a result of an aggregate of 53 hotels under renovation pursuant to the Company's PIP program at some point during the full year 2018, a positive revenue impact in the 2017 period of hurricanes in our Texas and Florida markets that was not repeated in the 2018 period and a lower number of total rooms in the portfolio due to the sale of three hotels during the fourth quarter of 2017, and one hotel during the first quarter of 2018. 53 hotels were under renovation at some point during the full year 2018, which represented approximately 3,900 nights when a room could not be used due to ongoing renovations, compared to 12 hotels that were under renovation at some point during the full year 2017, which represented approximately 1,400 nights when a room could not be used due to renovations. The decrease in occupancy was also driven by a slow return to normal occupancy for hotels that had recently completed renovations and reduced guest demand combined with increased hotel supply especially in markets where we have not yet completed PIP renovations. The occupancy declines for our hotels were generally consistent with our hotels' competitive sets for the comparable periods. The occupancy declines were offset in part by an increase in ADR and by the impact of the acquisition of seven hotels in April 2017.
The table below presents actual operating information of the hotels in our portfolio for the periods in which we have owned them.
 
 
Year Ended
Total Portfolio
 
December 31, 2018
 
December 31, 2017
Number of rooms
 
17,321

 
17,483

Occ
 
73.9
%
 
75.9
%
ADR
 
$
124.33

 
$
122.64

RevPAR
 
$
91.83

 
$
93.10



49


Our results of operations include the hotels we own beginning on the date of each hotel's acquisition and the hotels that we have sold through the date of disposition. The next table below presents pro-forma operating information for the hotels in our portfolio as of December 31, 2018, as if we had owned each hotel for the full periods presented.
 
 
Year Ended
Pro forma (144 hotels)
 
December 31, 2018
 
December 31, 2017
Number of rooms
 
17,321

 
17,321

Occ
 
73.9
 %
 
76.4
%
ADR
 
$
124.39

 
$
123.29

RevPAR
 
$
91.97

 
$
94.25

RevPAR change
 
(2.4
)%
 
 
The information in the next table below presents pro-forma operating information for only the hotels that we classify as not under renovation as of December 31, 2018. We consider hotels to be under renovation beginning in the quarter that they start material renovations and continuing until the end of the fourth full quarter following the substantial completion of the renovations. Therefore, hotels classified as not under renovation are those that as of December 31, 2018, have not been materially renovated (or for which material renovations have not started) or had material renovations completed more than four full quarters prior to the three months ended December 31, 2018 (i.e., completed on or prior to September 30, 2017).