Braemar Hotels & Resorts Inc. - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 2016



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

For the transition period from ________________ to ________________

Commission file number: 001-35972

ASHFORD HOSPITALITY PRIME, INC.

(Exact name of registrant as specified in its charter)



Maryland		46-2488594
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

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

(972) 490-9600

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):



Large accelerated filer	¨	Accelerated filer	þ
Non-accelerated filer	¨	Smaller reporting company	¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Common Stock, $0.01 par value per share		25,644,258
(Class)		Outstanding at August 5, 2016

ASHFORD HOSPITALITY PRIME, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015	3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015	4
Condensed Consolidated Statement of Equity for the Six Months Ended June 30, 2016	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	6
Notes to Condensed Consolidated Financial Statements	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4. CONTROLS AND PROCEDURES	45
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	45
ITEM 1A. RISK FACTORS	46
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	47
ITEM 4. MINE SAFETY DISCLOSURES	47
ITEM 5. OTHER INFORMATION	47
ITEM 6. EXHIBITS	48
SIGNATURES	49

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share amounts)



	June 30, 2016			December 31, 2015
Assets
Investments in hotel properties, net	$	1,019,958		$	1,091,479
Cash and cash equivalents	130,014			105,039
Restricted cash	40,352			33,135
Accounts receivable, net of allowance of $71 and $68, respectively	17,296			13,370
Inventories	1,407			1,451
Note receivable	8,098			8,098
Deferred costs, net	344			755
Prepaid expenses	5,474			3,132
Investment in unconsolidated entity	—			48,365
Investment in Ashford Inc., at fair value	9,744			10,377
Derivative assets	7,001			753
Other assets	2,588			2,543
Intangible assets, net	23,000			23,160
Due from related party, net	532			371
Due from third-party hotel managers	9,771			10,722
Assets held for sale	59,746			—
Total assets	$	1,335,325		$	1,352,750
Liabilities and Equity
Liabilities:
Indebtedness, net	$	776,025		$	835,592
Accounts payable and accrued expenses	58,286			43,568
Dividends and distributions payable	4,962			3,439
Unfavorable management contract liability, net	—			158
Due to Ashford Trust OP, net	15			528
Due to Ashford Inc., net	5,907			6,369
Due to third-party hotel managers	1,193			1,158
Intangible liability, net	3,654			3,682
Other liabilities	1,297			1,181
Liabilities related to assets held for sale	57,859			—
Total liabilities	$	909,198		$	895,675
Commitments and contingencies (Note 15)
5.50% Series B cumulative convertible preferred stock, $0.01 par value, 2,890,850 and 2,600,000 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively	65,997			62,248
Redeemable noncontrolling interests in operating partnership	62,509			61,781
Equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 26,273,885 and 28,471,775 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively	262			285
Additional paid-in capital	408,078			438,347
Accumulated deficit	(104,971		)	(99,773		)
Total stockholders’ equity of the Company	303,369			338,859
Noncontrolling interest in consolidated entities	(5,748		)	(5,813		)
Total equity	297,621			333,046
Total liabilities and equity	$	1,335,325		$	1,352,750

See Notes to Condensed Consolidated Financial Statements.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenue
Rooms	$	79,583		$	67,787		$	148,834		$	122,284
Food and beverage	27,051			21,792			51,916			42,022
Other	5,761			3,221			11,409			6,243
Total hotel revenue	112,395			92,800			212,159			170,549
Other	37			37			70			77
Total revenue	112,432			92,837			212,229			170,626
Expenses
Hotel operating expenses:
Rooms	17,096			14,113			32,915			27,091
Food and beverage	18,267			13,539			35,712			26,608
Other expenses	30,335			22,973			58,674			43,897
Management fees	4,331			3,751			8,138			6,855
Total hotel expenses	70,029			54,376			135,439			104,451
Property taxes, insurance and other	4,514			4,601			9,557			9,196
Depreciation and amortization	11,263			10,559			23,167			21,076
Advisory services fee	5,835			3,042			7,899			6,262
Transaction costs	438			—			438			—
Corporate general and administrative	9,838			1,185			13,761			2,308
Total expenses	101,917			73,763			190,261			143,293
Operating income	10,515			19,074			21,968			27,333
Equity in earnings (loss) of unconsolidated entities	63			(820		)	(2,587		)	(820		)
Interest income	50			5			82			9
Other income (expense)	—			1,153			(10		)	1,292
Interest expense and amortization of loan costs	(10,637		)	(9,129		)	(21,271		)	(18,712		)
Write-off of loan costs and exit fees	—			—			—			(54		)
Unrealized loss on marketable securities	—			(1,323		)	—			—
Unrealized gain (loss) on investments in Ashford Inc.	860			—			(633		)	—
Unrealized gain (loss) on derivatives	2,597			(8		)	6,130			(40		)
Income before income taxes	3,448			8,952			3,679			9,008
Income tax (expense) benefit	(1,156		)	172			(1,526		)	(309		)
Net income	2,292			9,124			2,153			8,699
(Income) loss from consolidated entities attributable to noncontrolling interests	80			(125		)	(65		)	22
Net income attributable to redeemable noncontrolling interests in operating partnership	(184		)	(2,275		)	(34		)	(2,203		)
Net income attributable to the Company	2,188			6,724			2,054			6,518
Preferred dividends	(978		)	(198		)	(1,872		)	(198		)
Net income attributable to common stockholders	$	1,210		$	6,526		$	182		$	6,320
Income per share - basic:
Net income attributable to common stockholders	$	0.04		$	0.27		$	—		$	0.26
Weighted average common shares outstanding – basic	27,916			24,017			28,121			24,043
Income per share - diluted:
Net income attributable to common stockholders	$	0.04		$	0.27		$	—		$	0.26
Weighted average common shares outstanding – diluted	32,418			24,773			28,224			32,519
Dividends declared per common share	$	0.12		$	0.10		$	0.22		$	0.15

See Notes to Condensed Consolidated Financial Statements.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income	$	2,292		$	9,124		$	2,153		$	8,699
Other comprehensive income, net of tax:
Total other comprehensive income	—			—			—			—
Total comprehensive income	2,292			9,124			2,153			8,699
Comprehensive (income) loss attributable to noncontrolling interests in consolidated entities	80			(125		)	(65		)	22
Comprehensive income attributable to noncontrolling interests in operating partnership	(184		)	(2,275		)	(34		)	(2,203		)
Comprehensive income attributable to the Company	$	2,188		$	6,724		$	2,054		$	6,518

See Notes to Condensed Consolidated Financial Statements.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited, in thousands)



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Noncontrolling Interest in Consolidated Entities			Total			Redeemable Noncontrolling Interests in Operating Partnership
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Noncontrolling Interest in Consolidated Entities			Total
Balance at January 1, 2016	28,472		$	285		$	438,347		$	(99,773	)	$	(5,813	)	$	333,046		$	61,781
Repurchase of common stock	(2,263	)	(23		)	(30,139		)	—			—			(30,162		)	—
Equity-based compensation	—		—			(130		)	—			—			(130		)	2,436
Issuance of restricted shares/units	66		—			—			—			—			—			19
Forfeiture of restricted common shares	(1	)	—			—			—			—			—			—
Dividends declared – common stock	—		—			—			(5,975		)	—			(5,975		)	—
Dividends declared – preferred stock	—		—			—			(1,872		)	—			(1,872		)	—
Distributions to noncontrolling interests	—		—			—			—			—			—			(1,166		)
Net income	—		—			—			2,054			65			2,119			34
Redemption value adjustment	—		—			—			595			—			595			(595		)
Balance at June 30, 2016	26,274		$	262		$	408,078		$	(104,971	)	$	(5,748	)	$	297,621		$	62,509

See Notes to Condensed Consolidated Financial Statements.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Six Months Ended June 30,
	2016			2015
Cash Flows from Operating Activities
Net income	$	2,153		$	8,699
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Depreciation and amortization	23,167			21,076
Equity-based compensation	2,306			1,165
Bad debt expense	91			59
Amortization of loan costs	1,639			1,193
Write-off of loan costs and exit fees	—			54
Amortization of intangibles	27			(108		)
Realized and unrealized gain on marketable securities	—			(1,068		)
Realized and unrealized (gain) loss on derivatives	(6,130		)	40
Unrealized loss on investment in Ashford Inc.	633			—
Purchases of trading securities	—			(105,878		)
Sales of trading securities	—			55,654
Equity in loss of unconsolidated entity	2,587			820
Deferred tax (benefit) expense	135			(875		)
Payments for derivatives	(114		)	—
Changes in operating assets and liabilities, exclusive of the effect of hotel acquisitions:
Restricted cash	(13,692		)	(926		)
Accounts receivable and inventories	(4,624		)	(886		)
Prepaid expenses and other assets	(3,218		)	(1,621		)
Accounts payable and accrued expenses	14,046			4,316
Due to/from related party, net	(182		)	(108		)
Due to/from third-party hotel managers	(703		)	(2,385		)
Due to/from Ashford Trust OP, net	(513		)	198
Due to Ashford Inc.	1,827			(142		)
Other liabilities	116			(40		)
Net cash provided by (used in) operating activities	19,551			(20,763		)

Cash Flows from Investing Activities
Acquisition of hotel properties, net of cash acquired	—			(3,750		)
Proceeds from liquidation of AQUA U.S. Fund	43,489			—
Proceeds from property insurance	—			24
Change in restricted cash related to improvements and additions to hotel properties	4,835			1,200
Improvements and additions to hotel properties	(6,947		)	(8,698		)
Net cash provided by (used in) investing activities	41,377			(11,224		)

Cash Flows from Financing Activities
Borrowings on indebtedness	—			70,000
Repayments of indebtedness	(4,252		)	(72,872		)
Payments of loan costs and exit fees	(20		)	(1,048		)
Payments for derivatives	(4		)	(8		)
Repurchase of common stock	(24,705		)	(8,875		)
Payments for dividends and distributions	(7,582		)	(3,310		)
Issuance of preferred stock	4,387			62,823
Issuance of common stock	—			3,104
Forfeiture of restricted shares/units	—			(5		)
Redemption of operating partnership units	—			(5,856		)
Distributions to a noncontrolling interest in a consolidated entity	(3,766		)	(2,938		)
Other	19			—
Net cash provided by (used in) financing activities	(35,923		)	41,015

Net change in cash and cash equivalents	25,005			9,028
Cash and cash equivalents at beginning of period	105,039			171,439
Cash held for sale at end of period	(30		)	—
Cash and cash equivalents at end of period	$	130,014		$	180,467

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	Six Months Ended June 30,
	2016		2015
Supplemental Cash Flow Information
Interest paid	$	19,645	$	17,121
Income taxes paid	348		1,212
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Investment in unconsolidated entity	$	—	$	51,292
Stock repurchase accrued but not paid	5,457		—
Dividends and distributions declared but not paid	4,962		3,518
Capital expenditures accrued but not paid	734		780
Receivable related to liquidation of AQUA U.S. Fund	2,289		—
Accrued preferred stock offering expenses	201		—
Non-cash preferred stock offering expense	479		—

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

Ashford Hospitality Prime, Inc., together with its subsidiaries (“Ashford Prime”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”), luxury, upper-upscale and upscale hotels in gateway and resort locations. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Ashford Prime has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code. Ashford Prime conducts its business and owns substantially all of its assets through its operating partnership, Ashford Hospitality Prime Limited Partnership (“Ashford Prime OP”). In this report, the terms “the Company,” “we,” “us” or “our” refers to Ashford Hospitality Prime, Inc. and, as the context may require, all entities included in its financial statements.

We are advised by Ashford Hospitality Advisors LLC (“Ashford LLC”) through an advisory agreement. Ashford LLC is a subsidiary of Ashford Inc., which was spun-off from, and remains an affiliate of, Ashford Trust. All of the hotels in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.

As of June 30, 2016, Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington Lodging”), which is beneficially wholly-owned by Mr. Monty J. Bennett, our Chairman and Chief Executive Officer, and Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust, managed two of our twelve hotel properties. Third-party management companies managed the remaining hotel properties. On September 17, 2015, Remington Lodging and Ashford Inc. entered into an agreement pursuant to which Ashford Inc. will acquire all of the general partner interest and 80% of the limited partner interests in Remington Lodging. On April 12, 2016, Ashford Inc.’s stockholders approved the acquisition. The acquisition is subject to the satisfaction of various conditions, and if completed, will not impact our management agreements with Remington Lodging.

The accompanying consolidated financial statements include the accounts of such wholly-owned and majority owned subsidiaries of Ashford Prime OP that as of June 30, 2016, own and operate twelve hotels in six states, the District of Columbia and the U.S. Virgin Islands. The portfolio includes ten wholly-owned hotel properties and two hotel properties that are owned through a partnership in which Ashford Prime OP has a controlling interest. These hotels represent 3,952 total rooms, or 3,717 net rooms, excluding those attributable to our partner. As a REIT, Ashford Prime needs to comply with limitations imposed by the Internal Revenue Code related to operating hotels. As of June 30, 2016, eleven of our twelve hotel properties were leased by wholly-owned or majority-owned subsidiaries that are treated as taxable REIT subsidiaries (“TRS”) for federal income tax purposes (collectively the TRS entities are referred to as “Prime TRS”). One hotel property is owned by a TRS entity. Prime TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to the hotel properties are included in the consolidated statements of operations. As of June 30, 2016, nine hotel properties were leased by Ashford Prime’s wholly-owned TRS and two hotel properties majority-owned through a consolidated partnership were leased to a TRS wholly-owned by such consolidated partnership. Each leased hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from Prime TRS is eliminated in consolidation. The hotels are operated under management contracts with Marriott International, Inc. (“Marriott”), Hilton Worldwide (“Hilton”), Accor Business and Leisure Management, LLC (“Accor”) and Remington Lodging, which are eligible independent contractors under the Internal Revenue Code.

2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation—The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of Ashford Hospitality Prime, Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP in the accompanying unaudited consolidated financial statements. We believe the disclosures made herein are adequate to prevent the information presented from being misleading. However, the financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 15, 2016.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Ashford Prime OP is considered to be a variable interest entity (“VIE”), as defined by authoritative accounting guidance. A VIE must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, (ii) an implicit financial responsibility to ensure that a VIE operates as designed, and (iii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. All major decisions related to Ashford Prime OP that most significantly impact its economic performance, including but not limited to operating procedures with respect to business affairs and any acquisitions, dispositions, financings, restructurings or other transactions with sellers, purchasers, lenders, brokers, agents and other applicable representatives, are subject to the approval of our wholly-owned subsidiary, Ashford Prime OP General Partner LLC, its general partner. As such, we consolidate Ashford Prime OP.

The following items affect reporting comparability of our historical consolidated financial statements:


•	Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the three and six months ended June 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.


•	On July 9, 2015, we acquired the Bardessono Hotel and Spa (“Bardessono Hotel”) and on December 15, 2015, we acquired the Ritz-Carlton St. Thomas, USVI (“Ritz-Carlton St. Thomas”). The operating results of these properties are included in our results of operations as of their acquisition dates.

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

Impairment of Investments in Hotel Properties—Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. During the three and six months ended June 30, 2016 and 2015, we have not recorded any impairment charges.

Assets Held for Sale—We classify assets as held for sale when we have obtained a firm commitment from a buyer, and consummation of the sale is considered probable and expected within one year. The related operations of assets held for sale are reported as discontinued if the disposal is a component of an entity or group of components that represents a strategic shift that has (or will have) a major effect on our operations and cash flows. The definitive agreement to sell the Courtyard Seattle Downtown entered into on May 20, 2016 and was sold on July 1, 2016. As such, this hotel has been reclassified as held for sale assets as of June 30, 2016. Depreciation and amortization were ceased as of the date the assets were deemed held for sale. The sale of this hotel does not represent a strategic shift that has (or will have) a major effect on our operations or financial results. Therefore, the results of operations of the Courtyard Seattle Downtown were not reclassified to discontinued operations for the three and six months ended June 30, 2016. On July 1, 2016, the sale was completed.

Investment in Unconsolidated Entity—We held an investment in an unconsolidated entity, in which we had an ownership interest of 45.3% that was accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the entity’s net income/loss. We liquidated our investment on April 30, 2016. We reviewed the investment in unconsolidated entity for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. Any impairment is recorded in equity in loss in unconsolidated entity. No such impairment was recorded in the three and six months ended June 30, 2016. We also hold approximately 195,000 shares of Ashford Inc. common stock, which represented an approximate 9.6% ownership interest in Ashford Inc. and had a fair value of $9.7 million at June 30, 2016. This investment would typically be accounted for under the equity method of accounting, under ASC 323-10 - Investments - Equity Method and Joint Ventures since we exercise significant influence. However, we have elected to record our investment in Ashford Inc. using the fair value option under ASC 825-10 - Fair Value Option - Financial Assets and Financial Liabilities.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Our investments in certain unconsolidated entities are considered to be variable interests in the underlying entities. VIEs, as defined by authoritative accounting guidance, must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIEs activities that most significantly impact the VIEs economic performance, (ii) an implicit financial responsibility to ensure that a VIE operates as designed, and (iii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Because we do not have the power and financial responsibility to direct the unconsolidated entities’ activities and operations, we are not considered to be the primary beneficiary of these entities on an ongoing basis, and therefore such entities should not be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.

Marketable Securities—Prior to our investment in the Ashford Quantitative Alternative Master Fund, LP (the “AQUA U.S. Fund”, formerly known as the REHE Fund), we held marketable securities. Marketable securities included U.S. treasury bills, publicly traded equity securities and put and call options on certain publicly traded equity securities. All of our investments in marketable securities were recorded at fair value. Put and call options were considered derivatives. The fair value of these investments was determined based on the closing price as of the balance sheet date. The cost of securities sold was determined by using the high cost method. Net investment income, including interest income (expense), dividends, realized gains and losses, and costs of investment, is reported as a component of “other income.”

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

Equity-Based Compensation—Stock/unit-based compensation for non-employees is accounted for at fair value based on the market price of the shares at period end in accordance with applicable authoritative accounting guidance that results in recording expense, included in “advisory services fee,” and “management fees” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. Performance stock units (“PSUs”) and performance-based Long-Term Incentive Plan (“LTIP”) units granted to certain executive officers are accounted for at fair value at period end based on a Monte Carlo simulation valuation model that results in recording expense, included in “advisory services fee,” equal to the fair value of the award in proportion to the requisite service period satisfied during the period. Stock/unit grants to independent directors are recorded at fair value based on the market price of the shares at grant date, which amount is fully expensed as the grants of stock/units are fully vested on the date of grant.

Recently Adopted Accounting Standards—In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). The ASU amends the consolidation guidance for VIEs and general partners’ investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We have adopted this standard effective January 1, 2016, and the adoption of this standard did not have an impact on our financial position, results of operations or cash flows.

Recently Issued Accounting Standards—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which defers the effective date to fiscal periods beginning after December 15, 2017. The FASB has also issued additional updates that further clarify the requirements of Topic 606 and provide implementation guidance. Early adoption is permitted for fiscal periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method.

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

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires an entity to: (i) measure equity investments at fair value through net income, with

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(unaudited)

certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. ASU 2016-01 provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. It also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Certain provisions of ASU 2016-01 are eligible for early adoption. We are evaluating the impact that ASU 2016-01 will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

3. Investments in Hotel Properties, net

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



	June 30, 2016			December 31, 2015
Land	$	210,696		$	227,620
Buildings and improvements	967,542			1,017,086
Furniture, fixtures and equipment	63,566			68,529
Construction in progress	2,315			2,386
Total cost	1,244,119			1,315,621
Accumulated depreciation	(224,161		)	(224,142		)
Investments in hotel properties, net	$	1,019,958		$	1,091,479

Final Purchase Price Allocation

Ritz-Carlton St. Thomas

On December 15, 2015, we acquired a 100% interest in the Ritz-Carlton St. Thomas in St. Thomas, U.S. Virgin Islands for total consideration of $64.0 million. Subsequent to the close of the transaction, we completed the financing of a $42.0 million mortgage loan. See note 7. We prepared a purchase price allocation of the assets acquired and liabilities assumed. The final purchase price allocation was prepared with the assistance of a third-party appraisal firm during the three months ended March 31, 2016. The final purchase price allocation resulted in adjustments to land, buildings and improvements and furniture, fixtures and equipment, which resulted in a $25,000 increase in depreciation expense for the six months ended June 30, 2016. This valuation is considered a Level 3 valuation technique.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):



	Preliminary Allocations as of December 31, 2015		Adjustments			Final Allocations as of June 30, 2016
Land	$	25,264	$	269		$	25,533
Buildings and improvements	34,853		(3,100		)	31,753
Furniture, fixtures, and equipment	3,883		2,831			6,714
	$	64,000	$	—		$	64,000

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(unaudited)

4. Assets Held For Sale

On May 20, 2016, one of our subsidiaries entered into a definitive agreement to sell the Courtyard Seattle Downtown for $84.5 million in cash. At June 30, 2016, the Courtyard Seattle Downtown was classified as held for sale in the consolidated balance sheet based on methodologies discussed in note 2. Since the sale of the hotel property does not represent a strategic shift that has (or will have) a major effect on our operations or financial results, its results of operations were not reported as discontinued operations in the consolidated financial statements. Depreciation and amortization were ceased as of the date the assets were deemed held for sale. For the three and six months ended June 30, 2016, total revenue of $4.8 million and $8.0 million, respectively, and net income of $780,000 and $660,000, respectively, was included in our consolidated statements of operations. The sale closed on July 1, 2016.

The major classes of assets and liabilities related to assets held for sale included in the consolidated balance sheet at June 30, 2016 were as follows:



	June 30, 2016
Assets
Investments in hotel properties, net	$	55,450
Cash and cash equivalents	30
Restricted cash	1,640
Accounts receivable	877
Prepaid expenses	35
Other assets	25
Due from related party, net	1,689
Assets held for sale	$	59,746

Liabilities
Indebtedness, net	$	56,523
Accounts payable and accrued expenses	1,239
Unfavorable management contract liability, net	97
Liabilities related to assets held for sale	$	57,859

5. Note Receivable

As of June 30, 2016 and December 31, 2015, we owned a note receivable of $8.1 million from the city of Philadelphia, Pennsylvania. The note bears interest at a rate of 12.85% and matures in 2018. The interest income recorded on the note receivable is offset against the interest expense recorded on the TIF loan of the same amount. See note 7.

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(unaudited)

6. Investment in Unconsolidated Entity

AQUA U.S. Fund

In June 2015, for consideration of certain marketable securities, we obtained a 45.3% ownership interest in the AQUA U.S. Fund, previously named the REHE Fund. The AQUA U.S. Fund is managed by Ashford Investment Management, LLC (“AIM”), an indirect subsidiary of Ashford Inc. As of and for the three and six months ended June 30, 2016, the AQUA U.S. Fund was consolidated by Ashford Inc. The AQUA U.S. Fund invests substantially all of its assets in the Ashford Quantitative Alternatives Master Fund, LP (the “Master Fund”), previously named the AIM Real Estate Hedged Equity Master Fund, LP, and as a consequence of our investment in the AQUA U.S. Fund, we obtained an indirect interest in the Master Fund. Our maximum exposure of loss is limited to our investment in the AQUA U.S. Fund.

During the second quarter of 2016, we liquidated our investment in the AQUA U.S. Fund subject to a 5% hold back which is expected to be paid upon completion of the audit of the AQUA U.S. Fund’s financial statements, or sooner at the general partner’s discretion. As of June 30, 2016, we have a receivable from the AQUA U.S. Fund of $2.3 million.

The following tables summarize the condensed balance sheet as of December 31, 2015 and the condensed statements of operations for the three and six months ended June 30, 2016 and 2015 of the AQUA U.S. Fund (in thousands):

Ashford Quantitative Alternative (U.S.) Fund, LP

Condensed Balance Sheet

(unaudited)



	December 31, 2015
Total assets	$	106,792
Partners’ capital	106,792
Total liabilities and partners’ capital	$	106,792
Our ownership interest in the AQUA U.S. Fund	$	48,365

Ashford Quantitative Alternative (U.S.) Fund, LP

Condensed Statements of Operations

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Total investment income	$	34		$	216		$	52		$	223
Net expenses	(73		)	(33		)	(262		)	(31		)
Net investment income (expense)	(39		)	183			(210		)	192
Net unrealized gain (loss) on investments	(178		)	(3,028		)	940			(2,982		)
Net realized gain (loss) on investments	470			1,033			(6,331		)	1,030
Net income (loss) attributable to the AQUA U.S. Fund	$	253		(1,812		)	$	(5,601	)	(1,760		)
Our equity in earnings (loss) of the AQUA U.S. Fund	$	63		$	(820	)	$	(2,587	)	$	(820	)

The Master Fund generally invests in publicly traded equity securities and put and call options on publicly traded equity securities. The AQUA U.S. Fund records its investment in the Master Fund at its proportionate share of net assets. Income (loss) and distributions are allocated to the AQUA U.S. Fund’s partners based on their ownership percentage of the AQUA U.S. Fund. Our equity in loss in the AQUA U.S. Fund represented our share of the AQUA U.S. Fund’s loss for the three and six months ended June 30, 2016 and 2015. We were not obligated to pay any portion of the management fee or the performance allocation in favor of the AQUA U.S. Fund’s investment manager and general partner, respectively, but did share pro-rata in all other applicable expenses of the AQUA U.S. Fund. As of December 31, 2015, we owned an approximate 45.3% ownership interest in the AQUA U.S. Fund.

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(unaudited)

Ashford Inc.

As of June 30, 2016 and December 31, 2015, we held approximately 195,000 shares of Ashford Inc. common stock. This represented an approximate 9.6% and 9.7% ownership interest in Ashford Inc. as of June 30, 2016 and December 31, 2015, respectively. See notes 10 and 11.

As we exercise significant influence over Ashford Inc., this investment would typically be accounted for under the equity method of accounting, under ASC 323-10 - Investments - Equity Method and Joint Ventures. However, we have elected to record our investment in Ashford Inc. using the fair value option under ASC 825-10 - Fair Value Option - Financial Assets and Financial Liabilities. We have elected to use the fair value option to account for our investment in Ashford Inc. as the fair value is readily available since Ashford Inc. common stock is traded on a national exchange. The fair value of our investment in Ashford Inc. is included in “investment in Ashford Inc., at fair value” on our condensed consolidated balance sheets, and changes in market value are included in “unrealized loss on investment in Ashford Inc.” on our condensed consolidated statement of operations.

The following tables summarize the condensed balance sheets as of June 30, 2016 and December 31, 2015, and the condensed statements of operations for the three and six months ended June 30, 2016, of Ashford Inc. (in thousands):

Ashford Inc.

Condensed Consolidated Balance Sheets

(unaudited)



	June 30, 2016		December 31, 2015
Total assets	$	126,312	$	166,991
Total liabilities	37,608		30,115
Redeemable noncontrolling interests	1,267		240
Total stockholders’ equity of Ashford Inc.	32,374		32,165
Noncontrolling interests in consolidated entities	55,063		104,471
Total equity	87,437		136,636
Total liabilities and equity	$	126,312	$	166,991
Our investment in Ashford Inc., at fair value	$	9,744	$	10,377

Ashford Inc.

Condensed Consolidated Statements of Operations

(unaudited)



	Three Months Ended June 30,			Six Months Ended June 30,
	2016			2016
Total revenue	$	18,152		$	31,561
Total operating expenses	(20,344		)	(34,265		)
Operating loss	(2,192		)	(2,704		)
Realized and unrealized loss on investment in unconsolidated entity	—			(1,460		)
Realized and unrealized (gain) loss on investments	236			(5,448		)
Other	22			(80		)
Income tax expense	655			15
Net loss	(1,279		)	(9,677		)
(Income) loss from consolidated entities attributable to noncontrolling interests	(182		)	6,366
Net loss attributable to redeemable noncontrolling interests	355			473
Net loss attributable to Ashford Inc.	$	(1,106	)	$	(2,838	)
Our unrealized gain (loss) on investment in Ashford Inc.	$	860		$	(633	)

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(unaudited)

7. Indebtedness

Indebtedness consisted of the following (in thousands):



Indebtedness	Collateral	Maturity	Interest Rate	June 30, 2016			December 31, 2015
Secured revolving credit facility⁽³⁾	None	November 2016	Base Rate⁽²⁾+ 1.25% to 2.75% or LIBOR⁽¹⁾ + 2.25% to 3.75%	$	—		$	—
Mortgage loan⁽⁴⁾	1 hotel	March 2017	LIBOR⁽¹⁾+ 2.30%	80,000			80,000
Mortgage loan⁽⁵⁾	1 hotel	March 2017	LIBOR⁽¹⁾ + 2.25%	70,000			70,000
Mortgage loan⁽⁶⁾	1 hotel	April 2017	5.91%	33,134			33,381
Mortgage loan ⁽⁹⁾	2 hotel	April 2017	5.95%	121,475			122,374
Mortgage loan	3 hotels	April 2017	5.95%	247,191			249,020
Mortgage loan⁽⁵⁾	1 hotel	December 2017	LIBOR⁽¹⁾+ 4.95%	40,000			40,000
Mortgage loan⁽⁵⁾	1 hotel	December 2017	LIBOR⁽¹⁾ + 4.95%	42,000			42,000
TIF loan^{(6) (7)}	1 hotel	June 2018	12.85%	8,098			8,098
Mortgage loan⁽⁸⁾	2 hotels	November 2019	LIBOR⁽¹⁾ + 2.65%	194,082			195,359
				835,980			840,232
Deferred loan costs, net				(3,432		)	(4,640		)
Total indebtedness				$	832,548		$	835,592
Indebtedness related to assets held for sale⁽⁹⁾		April 2017	5.95%	56,556
Deferred loan costs, net				(33		)
				$	776,025

__________________


⁽¹⁾	LIBOR rates were 0.465% and 0.430% at June 30, 2016 and December 31, 2015, respectively.


⁽²⁾	Base Rate, as defined in the secured revolving credit facility agreement, is the greater of (i) the prime rate set by Bank of America, or (ii) federal funds rate + 0.5%.

⁽³⁾

Our borrowing capacity under our secured revolving credit facility is $150.0 million. We have an option, subject to lender approval, to further increase the borrowing capacity to an aggregate of $300.0 million. We may use up to $15.0 million for standby letters of credit. The secured revolving credit facility has two one-year extension options subject to advance notice, satisfaction of certain conditions and a 0.25% extension fee.


⁽⁴⁾	This loan has three one-year extension options, subject to satisfaction of certain conditions, of which the first was exercised in March 2016.


⁽⁵⁾	This loan has three one-year extension options, subject to satisfaction of certain conditions.


⁽⁶⁾	These loans are collateralized by the same property.


⁽⁷⁾	The interest expense from the TIF loan is offset against interest income recorded on the note receivable of the same amount. See note 5.


⁽⁸⁾	This loan has two one-year extension options, subject to satisfaction of certain conditions.


⁽⁹⁾	This mortgage loan included a balance of $56.6 million related to the Courtyard Seattle Downtown that is included in “liabilities related to assets held for sale” on the condensed consolidated balance sheet. Approximately $65 million of the mortgage loan was repaid upon the sale of Courtyard Seattle Downtown which occurred on July 1, 2016. See notes 4 and 18.

We are required to maintain certain financial ratios under our secured revolving credit facility. If we violate covenants in any debt agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in our inability to borrow unused amounts under our line of credit, even if repayment of some or all of our borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of the consolidated group. As of June 30, 2016, we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.

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(unaudited)

8. Income Per Share

The following table reconciles the amounts used in calculating basic and diluted income per share (in thousands, except per share amounts):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income attributable to common stockholders - Basic and diluted:
Net income attributable to the Company	$	2,188		$	6,724		$	2,054		$	6,518
Less: Dividends on preferred stock	(978		)	(198		)	(1,872		)	(198		)
Less: Dividends on common stock	(3,140		)	(2,418		)	(5,977		)	(3,616		)
Less: Dividends on unvested performance stock units	(19		)	(35		)	(54		)	(35		)
Less: Dividends on unvested restricted shares	(13		)	(8		)	(22		)	(13		)
Less: Net income allocated to unvested performance stock units	—			(9		)	—			(3		)
Less: Net income allocated to unvested restricted shares	—			(14		)	—			(10		)
Undistributed net income (loss) allocated to common stockholders	(1,962		)	4,042			(5,871		)	2,643
Add back: Dividends on common stock	3,140			2,418			5,977			3,616
Distributed and undistributed net income - basic	$	1,178		$	6,460		$	106		$	6,259
Net income attributable to redeemable noncontrolling interests in operating partnership	184			—			—			2,203
Dividends on preferred stock	—			198			—			—
Distributed and undistributed net income - diluted	$	1,362		$	6,658		$	106		$	8,462

Weighted average common shares outstanding:
Weighted average common shares outstanding – basic	27,916			24,017			28,121			24,043
Effect of assumed conversion of operating partnership units	4,413			—			—			8,476
Effect of assumed conversion of preferred stock	—			756			—			—
Incentive fee shares	89			—			103			—
Weighted average common shares outstanding – diluted	32,418			24,773			28,224			32,519

Income per share - basic:
Net income allocated to common stockholders per share	$	0.04		$	0.27		$	—		$	0.26
Income per share - diluted:
Net income allocated to common stockholders per share	$	0.04		$	0.27		$	—		$	0.26

Due to their anti-dilutive effect, the computation of diluted income per share does not reflect the adjustments for the following items (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Net income allocated to common stockholders is not adjusted for:
Income allocated to unvested restricted shares	$	13	$	22	$	22	$	23
Income allocated to unvested performance stock units	19		44		54		38
Income attributable to redeemable noncontrolling interests in operating partnership	—		2,275		34		—
Dividends on preferred stock	978		—		1,872		198
Total	$	1,010	$	2,341	$	1,982	$	259
Weighted average diluted shares are not adjusted for:
Effect of unvested restricted shares	63		14		55		25
Effect of unvested performance stock units	108		27		54		14
Effect of assumed conversion of operating partnership units	—		8,437		4,589		—
Effect of assumed conversion of preferred stock	3,562		—		3,501		378
Total	3,733		8,478		8,199		417

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(unaudited)

9. Derivative Instruments

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

For the six months ended June 30, 2016, concurrent with the extension of our $80.0 million mortgage loan, we extended our existing interest rate cap with a notional amount of $80.0 million, maturity date of March 2017 and a strike rate of 5.78% for a total cost of $4,500. This instrument was not designated as a cash flow hedge.

In 2015, we entered into interest rate caps with notional amounts totaling $139.5 million and strike rates ranging from 2.0% to 4.50%. These interest rate caps had effective dates from March 2015 to December 2015, and maturity dates from March 2017 to January 2018, for a total cost of $117,000. These instruments were not designated as cash flow hedges. These instruments cap the interest rates on our mortgage loans with principal balances of $152.0 million and maturity dates from March 2017 to December 2017. We also entered into interest rate floors with a total notional amount of $3.0 billion and strike rates of -0.25%. These interest rate floors had effective dates of July 2015 and maturity dates of July 2020, for a total cost of $3.5 million.

As of June 30, 2016, we had interest rate caps with notional amounts totaling $368.0 million and strike rates ranging from 2.00% to 5.78%. These instruments had maturity dates ranging from December 2016 to January 2018. As of June 30, 2016, we had interest rate floors with notional amounts totaling $3.0 billion with strike rates of -0.25%. These instruments have a maturity date of July 2020.

Options on Futures Contracts—In March 2016, we purchased an option on Eurodollar futures for an upfront cost of $124,000 and a maturity date of June 2017. In 2015, we purchased options on Eurodollar futures for upfront costs of $372,000 and maturity dates ranging from September 2016 to March 2017.

10. Fair Value Measurements

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


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

•

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


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

The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the Level 2 inputs). We also incorporate credit valuation adjustments (the Level 3 inputs) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk.

The fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. These expected future cash flows are probability-weighted projections based on the contract terms, accounting for both the magnitude and likelihood of potential payments, which are both computed using the appropriate LIBOR forward curve and market implied volatilities as of the valuation date (Level 2 inputs).

The fair value of options on futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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



	Quoted Market Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Total
June 30, 2016
Assets
Derivative assets:
Interest rate derivatives - floors	$	—	$	6,824	$	6,824	⁽¹⁾
Interest rate derivatives - caps	—		3		3		⁽¹⁾
Options on futures contracts	174		—		174		⁽¹⁾
	174		6,827		7,001
Non-derivative assets:
Investment in Ashford Inc.	9,744		—		9,744
Total	$	9,918	$	6,827	$	16,745



	Quoted Market Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Total
December 31, 2015
Assets
Derivative assets:
Interest rate derivatives - floors	$	—	$	578	$	578	⁽¹⁾
Interest rate derivatives - caps	—		58		58		⁽¹⁾
Options on futures contracts	117		—		117		⁽¹⁾
	117		636		753
Non-derivative assets:
Investment in Ashford Inc.	10,377		—		10,377
Total	$	10,494	$	636	$	11,130

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

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(unaudited)

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

The following table summarizes the effect of fair value measured assets and liabilities on the condensed consolidated statements of operations (in thousands):



	Gain (Loss) Recognized in Income
	Three Months Ended June 30,								Six Months Ended June 30,
	2016				2015				2016				2015
Assets
Derivative assets:
Interest rate derivatives - floors	$	2,687			$	—			$	6,247			$	—
Interest rate derivatives - caps	(13		)		(8		)		(60		)		(40		)
Equity put options	—				(388		)		—				(1,017		)
Equity call options	—				(31		)		—				23
Options on futures contracts	(77		)		—				(57		)		—

Non-derivative assets:
Investment in Ashford Inc.	860				—				(633		)		—
Equity - American Depositary Receipt	—				(75		)		—				(75		)
Equity securities	—				(828		)		—				560
U.S. treasury securities	—				(97		)		—				53
Total	3,457				(1,427		)		5,497				(496		)
Liabilities
Derivative liabilities:
Short equity put options	—				373				—				680
Short equity call options	—				797				—				844
Net	$	3,457			$	(257	)		$	5,497			$	1,028
Total combined
Interest rate derivatives - floors	$	2,687			$	—			$	6,247			$	—
Interest rate derivatives - caps	(13		)		(8		)		(60		)		(40		)
Options on futures contracts	(77		)		—				(57		)		—
Total derivatives	2,597			⁽¹⁾	(8		)	⁽¹⁾	6,130			⁽¹⁾	(40		)	⁽¹⁾
Unrealized gain (loss) on investment in Ashford Inc.	860				—				(633		)		—
Unrealized loss on marketable securities	—				(1,323		)		—				—
Realized gain (loss) on marketable securities	—			⁽²⁾	1,074			⁽²⁾	—			⁽²⁾	1,068			⁽²⁾
Net	$	3,457			$	(257	)		$	5,497			$	1,028

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


⁽²⁾	Reported as “other income (expense)” in the condensed consolidated statements of operations.

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(unaudited)

11. Summary of Fair Value of Financial Instruments

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

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



	June 30, 2016				December 31, 2015
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets and liabilities measured at fair value:
Investment in Ashford Inc.	$	9,744	$	9,744	$	10,377	$	10,377
Derivative assets	7,001		7,001		753		753
Financial assets not measured at fair value:
Cash and cash equivalents	$	130,014	$	130,014	$	105,039	$	105,039
Restricted cash	40,352		40,352		33,135		33,135
Accounts receivable, net	17,296		17,296		13,370		13,370
Note receivable	8,098		8,945 to 9,887		8,098		9,157 to 10,120
Due from related party, net	532		532		371		371
Due from third-party hotel managers	9,771		9,771		10,722		10,722
Financial liabilities not measured at fair value:
Indebtedness	$	835,980	$792,978 to $876,449		$	840,232	$801,058 to $885,379
Accounts payable and accrued expenses	58,286		58,286		43,568		43,568
Dividends and distributions payable	4,962		4,962		3,439		3,439
Due to Ashford Trust OP, net	15		15		528		528
Due to Ashford Inc.	5,907		5,907		6,369		6,369
Due to third-party hotel managers	1,193		1,193		1,158		1,158

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

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

Note receivable. Fair value of the note receivable was determined by using similar loans with similar collateral. Since there is very little to no trading activity, we relied on our internal analysis of what we believe a willing buyer would pay for this note at June 30, 2016 and December 31, 2015. We estimated the fair value of the note receivable to be approximately 10.5% to 22.1% higher than the carrying value of $8.1 million at June 30, 2016 and approximately 13.1% to 25.0% higher than the carrying value of $8.1 million at December 31, 2015. This is considered a Level 2 valuation technique.

Investment in Ashford Inc. Fair value of the investment in Ashford Inc. is based on the quoted closing price on the balance sheet date. This is considered a Level 1 valuation technique.

Derivative assets. Fair value of the interest rate derivatives is determined using the net present value of the expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of us and the counterparties. Fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. The fair values of options on futures contracts are valued at their last reported settlement price as of the measurement date. See notes 2, 9 and 10 for a complete description of the methodology and assumptions utilized in determining fair values.

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(unaudited)

Indebtedness. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. We estimated the fair value of the total indebtedness to be approximately 94.9% to 104.8% of the carrying value of $836.0 million at June 30, 2016 and approximately 95.3% to 105.4% of the carrying value of $840.2 million at December 31, 2015. This is considered a Level 2 valuation technique.

12. Redeemable Noncontrolling Interests in Operating Partnership

Redeemable noncontrolling interests in the operating partnership represents the limited partners’ proportionate share of equity and their allocable share of equity in earnings/losses of Ashford Prime OP, which is an allocation of net income/loss attributable to the common unitholders based on the weighted average ownership percentage of these limited partners’ common units of limited partnership interest in the operating partnership (“common units”) and units issued under our Long-Term Incentive Plan (the “LTIP units”) that are vested. Beginning one year after issuance, each common unit may be redeemed, by the holder, for either cash or, at our sole discretion, one share of our common stock.

LTIP units, which are issued to certain executives and employees of Ashford LLC as compensation, have vesting periods of three years. Additionally, certain independent members of the board of directors have elected to receive LTIP units as part of their compensation, which are fully vested upon grant. Upon reaching economic parity with common units, each vested LTIP unit can be converted by the holder into one common unit which can then be redeemed for cash or, at our election, settled in our common stock. An LTIP unit will achieve parity with the common units upon the sale or deemed sale of all or substantially all of the assets of our operating partnership at a time when our stock is trading at a level in excess of the price it was trading on the date of the LTIP issuance. More specifically, LTIP units will achieve full economic parity with common units in connection with (i) the actual sale of all or substantially all of the assets of our operating partnership or (ii) the hypothetical sale of such assets, which results from a capital account revaluation, as defined in the partnership agreement, for our operating partnership.

On June 8, 2015, the compensation committee of the board of directors of the Company approved performance-based LTIP units to certain executive officers. The award agreements provide for the grant of a target number of approximately 195,000 performance-based LTIP units that will be settled in common units of the Ashford Prime OP, if and when the applicable vesting criteria have been achieved following the end of the performance and service period, which began on January 1, 2015 and ends on December 31, 2017. The target number of performance-based LTIP units may be adjusted from 0% to 200% based on achievement of a specified relative total stockholder return based on the formula determined by the Company’s Compensation Committee on the grant date. A total of 389,000 performance-based LTIP units representing 200% of the target were issued. The performance criteria for the performance-based LTIP units are based on market conditions under the relevant literature, and the performance-based LTIP units were granted to non-employees. The unamortized fair value of performance-based LTIP units of $2.4 million at June 30, 2016 will be expensed over a period of 1.5 years. Compensation expense of 1.0 million and $691,000 was recorded for the three and six months ended June 30, 2016, and is included in “advisory service fee” on our condensed consolidated statements of operations. No compensation expense was recorded for the three and six months ended June 30, 2015.

As of June 30, 2016, we have issued a total of 760,000 LTIP units (including performance-based LTIP units), all of which, other than approximately 3,000 units issued in March 2015, 6,000 units issued in May 2015 and 389,000 issued in June 2015, respectively, had reached full economic parity with, and are convertible into, common units. For the three and six months ended June 30, 2016, expense of $627,000 and $713,000 was recorded related to LTIP units issued to Ashford LLC’s employees, respectively. For the three and six months ended June 30, 2015, expense of $226,000 and $628,000, respectively, was associated with LTIP units issued to Ashford LLC’s employees. These amounts are included in “advisory services fee.” Expense of $44,000 was recorded for both the three and six months ended June 30, 2016 and expense of $102,000 was recorded for both the three and six months ended June 30, 2015, respectively, which was related to LTIP units issued to our independent directors. These amounts are included in “corporate general and administrative” expense in our condensed consolidated statements of operations. The fair value of the unrecognized cost of LTIP units, which was $1.2 million at June 30, 2016, will be amortized over a period of 2.8 years.

During the three and six months ended June 30, 2016, no common units were redeemed by the holders. During the three months ended June 30, 2015, approximately 113,000 common units with an aggregate fair value of $1.8 million at redemption were redeemed by the holders and, at our election, we issued cash at an average price of $16.23 per unit to satisfy the redemption price. During the six months ended June 30, 2015, approximately 345,000 common units with an aggregate fair value of $5.9 million at redemption were redeemed by the holders and, at our election, we issued cash at an average price of $16.97. Additionally, 30,000 common units with an aggregate fair value of $497,000 at redemption were converted to shares of our common stock during the six months ended June 30, 2015.

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(unaudited)

Redeemable noncontrolling interests in Ashford Prime OP as of June 30, 2016 and December 31, 2015, were $62.5 million and $61.8 million, respectively, which represented ownership of our operating partnership of 13.19% and 12.75%, respectively. The carrying value of redeemable noncontrolling interests as of June 30, 2016 and December 31, 2015, included adjustments of $12.0 million and $12.5 million, respectively, to reflect the excess of redemption value over the accumulated historical costs. For the three and six months ended June 30, 2016, we allocated net income of $184,000 and $34,000 to the redeemable noncontrolling interests, respectively. For the three and six months ended June 30, 2015, we allocated net income of $2.3 million and $2.2 million to the redeemable noncontrolling interests, respectively. For the three and six months ended June 30, 2016, we declared aggregate cash distributions to holders of common units and holders of LTIP units of $572,000 and $1.1 million, respectively. For the three and six months ended June 30, 2015, we declared aggregate cash distributions to holders of common units and holders of LTIP units of $859,000 and $1.3 million, respectively, These distributions are recorded as a reduction of redeemable noncontrolling interests in operating partnership.

On February 1, 2016, Prime GP, as general partner of Ashford Prime OP, entered into the Second Amended and Restated Agreement of Limited Partnership of Ashford Hospitality Prime Limited Partnership (the “Amended Partnership Agreement”). The Amended Partnership Agreement broadens in various ways the rights of the general partner. As consideration for the limited partners of Ashford Prime OP to approve the Amended Partnership Agreement, we agreed to create and provide qualified limited partners the opportunity to purchase shares of Series C Preferred Stock of the Company (the “Series C Preferred Stock”). See note 13.

On April 7, 2016, in response to feedback from the investor community, the Company determined to refrain from issuing the Series C Preferred Stock unless and until the issuance of the Series C Preferred Stock, in a form and manner that complies with all applicable state and federal laws and stock exchange rules, shall have been approved by the Company’s stockholders (the “Series C Approval”). Accordingly, Ashford Prime OP General Partner LLC, Ashford Prime OP’s general partner, has agreed to reverse the amendments made in the Amended Partnership Agreement unless and until the Series C Approval has been sought and obtained.

13. Equity and Stock-Based Compensation

Dividends—Common stock dividends declared for the three and six months ended June 30, 2016, were $3.2 million and $6.0 million, respectively. Common stock dividends declared for the three and six months ended June 30, 2015, were $2.5 million and $3.7 million, respectively.

Performance Stock Units—On June 8, 2015, the compensation committee of the board of directors of the Company approved grants of PSUs to certain executive officers. The award agreements provide for the grant of a target number of approximately 155,000 PSUs that will be settled in shares of common stock of the Company, if and when the applicable vesting criteria have been achieved following the end of the performance and service period, which began on January 1, 2015 and ends on December 31, 2017. The target number of PSUs may be adjusted from 0% to 200% based on achievement of a specified relative total stockholder return based on the formula determined by the Company’s Compensation Committee on the grant date. The performance criteria for the PSUs are based on market conditions under the relevant literature, and the PSUs were granted to non-employees. At June 30, 2016, the outstanding PSUs had an unamortized fair value of $1.9 million which is expected to be recognized over a period of 1.50 years. Compensation expense of $810,000 and $412,000 was recorded for the three and six months ended June 30, 2016, respectively, and is included in “advisory service fee” on our condensed consolidated statements of operations. For both the three and six months ended June 30, 2015, $137,000 of expense was associated with PSUs issued to certain executive officers and included in “advisory services fee.”

Restricted Stock Units—For the three and six months ended June 30, 2016, expense of $246,000 and $269,000, respectively, was associated with restricted shares of our common stock issued to Ashford LLC’s employees and included in “advisory services fee” on our condensed consolidated statements of operations. For the three and six months ended June 30, 2015, this expense was $78,000 and $145,000, respectively. Expense of $177,000 was recorded for both the three and six months ended June 30, 2016 and expense of $153,000 was recorded for both the three and six months ended June 30, 2015, respectively, which was associated with shares of our common stock issued to our independent directors was recorded and included in “corporate general and administrative” expense on our condensed consolidated statements of operations. At June 30, 2016, the unrecognized cost of the unvested shares of restricted stock issued to Ashford LLC’s employees was $1.1 million which will be expensed over a period of 2.75 years.

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(unaudited)

Stock Repurchases—On October 27, 2014, our board of directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time. The repurchase program does not have an expiration date. The specific timing, manner, price, amount and other terms of the repurchases are at management’s discretion and depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. On April 8, 2016, our board of directors authorized utilizing up to $50 million to repurchase common stock. For the three and six months ended June 30, 2016, we repurchased 2.2 million shares for approximately $30.0 million. During the six months ended June 30, 2015, we repurchased 471,000 shares for approximately $8.1 million. As of June 30, 2016, we have purchased a cumulative 3.6 million shares of our common stock, for approximately $54.2 million, since the program’s inception on November 4, 2014.

Series C Preferred Stock—On February 1, 2016, Prime GP, as general partner of Ashford Prime OP, entered into the Amended Partnership Agreement. The Amended Partnership Agreement broadens in various ways the rights of the general partner. As consideration for the limited partners of Ashford Prime OP to approve the Amended Partnership Agreement, we agreed to create and provide qualified limited partners the opportunity to purchase shares of Series C Preferred Stock of the Company.

On April 7, 2016, in response to feedback from the investor community, the Company determined to refrain from issuing the Series C Preferred Stock unless and until the issuance of the Series C Preferred Stock, in a form and manner that complies with all applicable state and federal laws and stock exchange rules, shall have been approved by the Company’s stockholders. Accordingly, Ashford Prime OP General Partner LLC, Ashford Prime OP’s general partner, has agreed to reverse the amendments in the Amended Partnership Agreement unless and until the Series C Approval has been sought and obtained.

Noncontrolling Interest in Consolidated Entities—A partner had a noncontrolling ownership interest of 25% in two hotel properties with a total carrying value of $(5.7) million and $(5.8) million at June 30, 2016 and December 31, 2015, respectively. Our ownership interest is reported in equity in the consolidated balance sheets. Noncontrolling interests in consolidated entities were allocated net loss of $80,000 and net income of $65,000 for the three and six months ended June 30, 2016, respectively, and allocated net income of $125,000 and net loss of $22,000 for the three and six months ended June 30, 2015, respectively.

14. 5.5% Series B Cumulative Convertible Preferred Stock

On June 9, 2015, we entered into a purchase agreement for the sale of 2.6 million shares of our 5.5% Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) to a financial institution, which resold the Series A Preferred Stock to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) at an initial offering price of $25.00 per share, with an aggregate underwriting discount of $1.5 million (net purchase price of $24.4125 per share). The net proceeds from the offering of the Series A Preferred Stock after the underwriting discount and other expenses were $62.2 million.

On December 4, 2015, we entered into an agreement to exchange the 5.50% Series A Preferred Stock, par value $0.01 per share for an equal number of shares of our 5.50% Series B Cumulative Convertible Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”). The terms and conditions of the Series B Preferred Stock are substantially similar to the Series A Preferred Stock for which it is being exchanged, except that, in contemplation of a public offering of the Series B Preferred Stock, either pursuant to the terms of the Series B Registration Rights Agreement or the Preemptive Rights Agreement, the Series B Preferred Stock contains certain customary anti-dilution provisions. Also in connection with the Exchange, the Company, together with Ashford Prime OP and Ashford LLC, entered into a registration rights agreement for the benefit of certain holders of the Series B Preferred Stock.

Each share of Series B Preferred Stock is convertible at any time, at the option of the holder, into a number of whole shares of common stock at an initial conversion price of $18.90 (which represents an initial conversion rate of 1.3228 shares of our common stock, subject to certain adjustments). The Series B Preferred Stock is also subject to conversion upon certain events constituting a change of control. Holders of the Series B Preferred Stock have no voting rights, subject to certain exceptions.

Commencing June 11, 2016, the Company may, at its option, cause the Series B Preferred Stock to be converted in whole or in part, on a pro-rata basis, into fully paid and nonassessable shares of the Company’s common stock at the conversion price, provided that the “Closing Bid Price” (as defined in the Articles Supplementary) of the Company’s common stock shall have equaled or exceeded 110% of the conversion price for the immediately preceding 45 consecutive trading days ending three days prior to the date of notice of conversion. In the event of such mandatory conversion, the Company shall pay holders of the Series B Preferred Stock any additional dividend payment to make the holder whole on dividends expected to be received through June 11, 2019, in an amount equal to the net present value, where the discount rate is the dividend rate on the Series B Preferred Stock, of

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the difference between (i) the annual dividend payments the holders of Series B Preferred Stock would have received in cash from the date of the mandatory conversion to June 11, 2019, and (ii) the common stock quarterly dividend payments the holders of Series B Preferred Stock would have received over the same time period had such holders held common stock.

On April 26, 2016, in connection with a previously announced required public offering, we issued 290,850 shares of our Series B Preferred Stock at $17.24 per share for gross proceeds of $5.0 million. The Series B Preferred Stock offering includes accrued and unpaid dividends since April 15, 2016. Dividends on the Series B Preferred Stock will accrue at a rate of 5.50% on the liquidation preference of $25.00 per share. The offering closed on April 29, 2016. The net proceeds, after deducting underwriting discounts, advisory fees, commissions and other estimated offering expenses payable by the company, were approximately $4.2 million.

At June 30, 2016, we had 2.9 million outstanding shares of Series B Preferred Stock. Due to certain redemption features that are not under our control, the Series B Preferred Stock is classified outside of permanent equity.

The Series B Preferred Stock dividend for all issued and outstanding shares is set at $1.375 per annum per share. For the three and six months ended June 30, 2016, we declared dividends of $978,000 and $1.9 million, respectively, with respect to shares of Series B Preferred Stock. For the three and six months ended June 30, 2015, we declared dividends of $198,000 with respect to shares of Series A Preferred Stock.

15. Commitments and Contingencies

Restricted Cash—Under certain management and debt agreements for our hotel properties existing at June 30, 2016, escrow payments are required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt and management agreements, we escrow 4% to 5% of gross revenues for capital improvements.

Management Fees—Under management agreements for our hotel properties existing at June 30, 2016, we pay a) monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by our independent directors, if required. These management agreements expire from May 31, 2023, through December 31, 2065, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.

Litigation—On February 3, 2016, Sessa Capital (Master), L.P. (“Sessa”) filed an action (the “Maryland Action”) in the Circuit Court for Baltimore City, Maryland, captioned Sessa Capital (Master) L.P. v. Bennett, et al., Case No. 24-C-16-000557 (Baltimore City Cir. Ct. 2016), against Ashford Prime, the members of the Ashford Prime board of directors, Ashford LLC and Ashford Inc. The Maryland Action generally alleged that the directors of Ashford Prime breached their fiduciary duties in connection with the June 2015 amendments to the Company’s advisory agreement with Ashford LLC. The Maryland Action also alleged that Ashford Inc. aided and abetted those breaches of fiduciary duties. On February 29, 2016, the Company filed a motion to dismiss the Maryland Action. On March 14, 2016, Sessa voluntarily dismissed the Maryland Action.

On February 25, 2016, Ashford Prime filed a lawsuit (the “Texas Federal Action”) in the United States District Court for the Northern District of Texas, captioned Ashford Hospitality Prime, Inc. v. Sessa Capital (Master), L.P., et al., No. 16-cv-00527 (N.D. Texas 2016) (DCG), against Sessa, related entities, and Sessa’s proposed director nominees John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers and Chris D. Wheeler. The Texas Federal Action generally alleges that the defendants violated federal securities laws because Sessa’s proxy materials contain numerous false claims, material misrepresentations and omissions relating to, among other things, the proposed nominees, the financial risks associated with Sessa’s efforts to gain control of the board and Sessa’s plans and strategy for the Company and its assets. Among other remedies, the Texas Federal Action seeks to enjoin Sessa from proceeding with its proxy contest. The outcome of this action is pending.

On March 8, 2016, Ashford Prime filed a lawsuit (the “Texas State Action”) in the District Court of Dallas County, Texas, captioned Ashford Hospital Prime, Inc. v. Sessa Capital (Master) L.P., et al., Cause No. DC-16-02738, against Sessa, related entities, and Sessa’s proposed director nominees John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers and Chris D. Wheeler. The Texas State Action generally alleges that Sessa’s purported notice of proposed nominees for election to the Ashford Prime board of directors is invalid due to numerous failures by the defendants to comply with material provisions in the Company’s bylaws. Among other things, the Texas State Action seeks a declaratory judgment confirming the inability of Sessa’s proposed director nominees to stand for election at the 2016 annual meeting of stockholders. On March 14, 2016, Sessa

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removed the Texas State Action from state court to the U.S. District Court for the Northern District of Texas with Cause No. 16-cv-00713. The outcome of this action is pending.

On March 14, 2016, Sessa filed counterclaims and a motion for a preliminary injunction in the Texas Federal Action. These counterclaims include substantially the same claims as previously asserted by Sessa in the Maryland Action, and also allege that the directors of Ashford Prime breached their fiduciary duties in connection with the approval of the Series C Preferred Stock for issuance and the February 2016 amendments to the Amended Partnership Agreement (as defined below). Among other things, Sessa seeks an injunction prohibiting the issuance of shares of Series C Preferred Stock and requiring the board to approve the Sessa candidates, or in the alternative, prohibiting the solicitation of proxies until the board approves the Sessa candidates. On April 2, 2016, Sessa amended its counterclaims alleging that the Company had violated federal proxy solicitation laws by, among other things, stating that Sessa had not complied with the Company’s bylaws and that its purported director nominations are invalid. On April 6, 2016, the Court granted expedited discovery in connection with Sessa’s motion for preliminary injunction and the Company’s anticipated motion for preliminary injunction in the Texas State Action. On April 8, 2016, the Company notified the court that Sessa’s claims relating to the Series C Preferred Stock were moot after the Company unwound the OP Unit enfranchisement preferred equity transaction for the Company’s OP unitholders. On April 13, 2016, the Company filed its motion for preliminary injunction seeking an order declaring that Sessa’s slate of nominees is invalid and enjoining Sessa from submitting the nominees to stockholders for election to the Board. On May 20, 2016, the court denied Sessa’s motion for a preliminary injunction and granted the Company’s motion for a preliminary injunction. Sessa appealed the district court’s decision to the United States Court of Appeals for the Fifth Circuit on May 23, 2016. Sessa’s appeal is fully briefed and the court heard oral argument on August 2, 2016. There are currently no claims for monetary damages, but Sessa seeks reimbursement for its attorneys’ fees and costs.

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

16. Segment Reporting

We operate in one business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refer to owning hotels through either acquisition or new development. We report operating results of direct hotel investments on an aggregate basis as substantially all of our hotel investments have similar economic characteristics and exhibit similar long-term financial performance. As of June 30, 2016 and December 31, 2015, all of our hotel properties were in the U.S. and its territories.

17. Related Party Transactions

Ashford LLC, a subsidiary of Ashford Inc., acts as our advisor, and as a result, we pay advisory fees to Ashford LLC. We are required to pay Ashford LLC a quarterly base fee that is a percentage of our total market capitalization on a declining sliding scale, subject to a minimum quarterly base fee, as payment for managing our day-to-day operations in accordance with our investment guidelines. We are also required to pay Ashford LLC an incentive fee that is based on our total return performance as compared to our peer group as well as to reimburse Ashford LLC for certain reimbursable overhead and internal audit, insurance claims advisory and asset management services, as specified in the advisory agreement. We also record equity-based compensation expense for equity grants of common stock and LTIP units awarded to our officers and employees of Ashford LLC in connection with providing advisory services equal to the fair value of the award in proportion to the requisite service period satisfied during the period.

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ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes the advisory services fees incurred (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Advisory services fee
Base advisory fee	$	2,206	$	2,164	$	4,231	$	4,369
Reimbursable expenses ⁽¹⁾	645		436		1,297		982
Equity-based compensation ⁽²⁾	2,699		442		2,086		911
Incentive fee	285		—		285		—
	$	5,835	$	3,042	$	7,899	$	6,262

________


⁽¹⁾	Reimbursable expenses include overhead, internal audit, insurance claims advisory and asset management services.


⁽²⁾	Equity-based compensation is associated with equity grants of Ashford Prime’s common stock and LTIP units awarded to officers and employees of Ashford LLC.

At June 30, 2016 and December 31, 2015, the balance in due to Ashford Trust OP, net, which is associated with reimbursable expenses, was $15,000 and $528,000, respectively. At June 30, 2016 and December 31, 2015, the balance in due to Ashford Inc., which is associated with the advisory services fee, was $5.9 million and $6.4 million, respectively.

18. Subsequent Events

On May 23, 2016, the Company announced it had entered into a definitive agreement to sell the 250-room Courtyard Seattle Downtown for $84.5 million in cash. The sale closed on July 1, 2016. The Company received net proceeds from the disposition of approximately $14.5 million following the repayment of approximately $65 million in debt and other transaction costs.

Subsequent to June 30, 2016, in connection with its stock repurchase program, the Company repurchased an additional 630,000 shares for approximately $9.0 million.

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

As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “we,” “us,” “our”, the “Company” or “Ashford Prime” refer to Ashford Hospitality Prime, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Prime Limited Partnership, a Delaware limited partnership, which we refer to as “our operating partnership” or “Ashford Prime OP.” “Ashford Trust” or “AHT” refers to Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.” “Ashford LLC” refers to Ashford Hospitality Advisors LLC, a Delaware limited liability company and a wholly-owned subsidiary of Ashford Inc., an affiliate of Ashford Trust. “Remington Lodging” refers to Remington Lodging and Hospitality LLC, a Delaware limited liability company, a property management company owned by Mr. Monty J. Bennett, our chief executive officer and chairman, and his father, Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust. “Our TRSs” refers to our taxable REIT subsidiaries, including Ashford Prime TRS Corporation, a Delaware corporation, which we refer to as “Ashford Prime TRS,” and its subsidiaries, together with the two taxable REIT subsidiaries that lease our two hotels held in a consolidated entity and are wholly-owned by that entity.

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International®, Hilton Worldwide®, Sofitel® and Accor®.

FORWARD-LOOKING STATEMENTS

Throughout this Form 10-Q, we make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature:


•	our business and investment strategy;


•	our projected operating results and dividend rates;


•	our ability to obtain future financing arrangements;


•	our understanding of our competition;


•	market trends;


•	projected capital expenditures;


•	anticipated acquisitions or dispositions; and


•	the impact of technology on our operations and business.

Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, taking into account all information currently available to us, our actual results and performance could differ materially from those set forth in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements include, but are not limited to:

•

factors discussed in our Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2016 (the “2015 10-K”), including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties,” as updated in our subsequent Quarterly Reports on Form 10-Q;


•	general volatility of the capital markets, the general economy or the hospitality industry, whether the result of market events or otherwise;


•	our ability to deploy capital and raise additional capital at reasonable costs to repay debts, invest in our properties and fund future acquisitions;

•unanticipated increases in financing and other costs, including a rise in interest rates;


•	the degree and nature of our competition;


•	actual and potential conflicts of interest with Ashford Trust, Ashford LLC, Ashford Inc., Remington Lodging, our executive officers and our non-independent directors;


•	changes in personnel of Ashford LLC or the lack of availability of qualified personnel;


•	changes in governmental regulations, accounting rules, tax rates and similar matters;

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•	legislative and regulatory changes, including changes to the Internal Revenue Code and related rules, regulations and interpretations governing the taxation of real estate investment trusts (“REITs”); and


•	limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes.

When considering forward-looking statements, you should keep in mind the matters summarized under “Item 1A. Risk Factors” of our 2015 10-K and any subsequent updates to this disclosure in our Quarterly Reports on Form 10-Q, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law.

Overview

We are a Maryland corporation formed in April 2013. We became a public company on November 19, 2013 when Ashford Trust, a NYSE-listed REIT, completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. We invest primarily in high revenue per available room (“RevPAR”), luxury, upper-upscale and upscale hotels. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Two times the U.S. national average was $157 for the year ended December 31, 2015. We have elected to be taxed as a REIT under the Internal Revenue Code beginning in the year ended December 31, 2013. We conduct our business and own substantially all of our assets through our operating partnership, Ashford Prime OP.

We operate in the direct hotel investment segment of the hotel lodging industry. As of August 5, 2016, we owned interests in eleven hotels in six states, the District of Columbia and St. Thomas, U.S. Virgin Islands with 3,702 total rooms, or 3,467 net rooms, excluding those attributable to our joint venture partner. The hotels in our current portfolio are predominantly located in U.S. gateway markets with favorable growth characteristics resulting from multiple demand generators. We own ten of our hotel properties directly, and the remaining two hotel properties through an investment in a majority-owned consolidated entity.

We are advised by Ashford LLC, a subsidiary of Ashford Inc., and an affiliate of the Company and Ashford Trust, through an advisory agreement. All of the hotels in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.

Recent Developments

On April 7, 2016, in response to feedback from the investor community, the Company determined to refrain from issuing the Series C Preferred Stock unless and until the issuance of the Series C Preferred Stock, in a form and manner that complies with all applicable state and federal laws and stock exchange rules, shall have been approved by the Company’s stockholders. Accordingly, Ashford Prime OP General Partner LLC, Ashford Prime OP’s general partner, has agreed to reverse the amendments made in the Amended Partnership Agreement unless and until the Series C Approval has been sought and obtained.

On April 8, 2016, the Company announced a number of immediate and longer-term initiatives designed to enhance value for its stockholders, which include:


•	Utilizing up to $50 million to initiate a stock repurchase program;


•	Amending the Company’s 2016 dividend policy commencing with the second quarter by increasing the expected quarterly cash dividend for the Company’s common stock by 20%, from $0.10 per diluted share to $0.12 per diluted share. This equates to an annual rate of $0.48 per diluted share, representing a 4.4% yield based on the Company’s closing stock price on April 7, 2016;


•	Liquidating our investment in the AQUA U.S. Fund and utilizing the cash to fund the share repurchase plan;


•	Immediately unwinding the OP Unit enfranchisement preferred equity transaction for the Company’s OP unit holders, previously announced on February 2, 2016; and

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•	Commencing the sale process for up to four of the Company’s assets that do not have the RevPAR level and product quality consistent with the long-term vision of Ashford Prime. The assets include the Courtyard Philadelphia Downtown Hotel, Courtyard Seattle Downtown Hotel, Renaissance Tampa Hotel and Marriott Legacy Center Hotel in Plano, Texas.

Additionally, the Company reaffirmed its focused strategy of investing in luxury hotels in resort and gateway markets while targeting a conservative leverage level of Net Debt/EBITDA of 5.0x or less.

On April 26, 2016, in connection with a previously announced required public offering, we issued 290,850 shares of our 5.50% Series B Preferred Stock at $17.24 per share for gross proceeds of $5.0 million. The Series B preferred stock offering includes accrued and unpaid dividends since April 15, 2016. Dividends on the Preferred Stock accrue at a rate of 5.50% on the liquidation preference of $25.00 per share. The offering closed on April 29, 2016. The net proceeds from the sale of the shares after underwriting discounts and commissions were approximately $4.2 million.

On June 7, 2016, the Weisman Group sent a letter to Mr. Monty J. Bennett, our Chief Executive Officer and Chairman, which outlined a non-binding proposal to acquire the assets of the Company for a total consideration of $1.48 billion (including refinancing of all existing debt of the Company). On June 27, 2016, the Company delivered a letter to the Weisman Group in response to the Weisman Group’s proposal. On July 21, 2016, in a letter to Mr. Monty J. Bennett, the Weisman Group proposed a revised non-binding proposal to acquire the Company for $1.54 billion.

As of June 30, 2016, as part of the $50 million stock repurchase program we repurchased 2.2 million shares for approximately $30.0 million. Subsequent to June 30, 2016, we repurchased an additional 630,000 shares for approximately $9.0 million.

Key Indicators of Operating Performance

We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel’s contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include:


•	Occupancy-Occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period.

•

ADR-ADR means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate.

•

RevPAR-RevPAR means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales or parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period). RevPAR improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. RevPAR improvements attributable to increases in ADR are generally accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (including housekeeping services, utilities and room supplies) and could also result in increased other operating department revenue and expense. Changes in ADR typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs.

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as

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on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue comprised approximately 70.8% and 70.2% of our total hotel revenue for the three and six months ended June 30, 2016, respectively, and is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.

We also use funds from operations (“FFO”), Adjusted FFO (“AFFO”), earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA as measures of the operating performance of our business. See “Non-GAAP Financial Measures.”

LIQUIDITY AND CAPITAL RESOURCES

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


•	advisory fees payable to Ashford LLC;


•	recurring maintenance necessary to maintain our hotels in accordance with brand standards;


•	interest expense and scheduled principal payments on outstanding indebtedness, including our secured revolving credit facility (see “Contractual Obligations and Commitments”);


•	distributions necessary to qualify for taxation as a REIT;


•	dividends on preferred stock; and


•	capital expenditures to improve our hotels.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our secured revolving credit facility.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotels and scheduled debt payments. We expect to meet our long-term liquidity requirements through various sources of capital, including our secured revolving credit facility and future equity and preferred equity issuances, existing working capital, net cash provided by operations, hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

Our hotels will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of hotels may require significant capital outlays. We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.

Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of our hotels decline. When these provisions are triggered, substantially all of the profit generated by our hotels is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. Cash is not distributed to us at any time after the cash trap provisions have been triggered until we have cured the performance issues. Currently, none of the cash trap provisions of our loans are triggered.

In connection with our spin-off from Ashford Trust, we indemnified Ashford Trust for certain carve-out guarantees and environmental indemnities associated with three of our loans, for which Ashford Trust is still jointly and severally liable. Certain of these guarantees represent a guaranty of material amounts, and if we are required to make indemnification payments under those guarantees, our liquidity could be adversely affected.

On October 27, 2014, our board of directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time. The repurchase program does not have an expiration date. The specific timing, manner, price, amount and other terms of the repurchases are at management’s discretion and depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares

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under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. On April 8, 2016, our board of directors authorized utilizing up to $50 million to repurchase common stock. From April 8, 2016 through August 5, 2016 we repurchased 2.9 million shares of our common stock for approximately $39.0 million. As of August 5, 2016, we have purchased a cumulative 4.3 million shares of our common stock, for approximately $63.2 million, since the program’s inception on November 4, 2014.

On April 26, 2016, in connection with a previously announced required public offering, we issued 290,850 shares of our 5.50% Series B Preferred Stock at $17.24 per share for gross proceeds of $5.0 million. The Series B preferred stock offering includes accrued and unpaid dividends since April 15, 2016. Dividends on the Preferred Stock will accrue at a rate of 5.50% on the liquidation preference of $25.00 per share. The offering closed on April 29, 2016. The net proceeds from the sale of the shares after underwriting discounts and commissions were approximately $4.2 million.

Secured Revolving Credit Facility

We have a three-year, $150 million secured revolving credit facility, which we believe provides us with significant financial flexibility to fund future acquisitions and hotel redevelopments. The secured revolving credit facility is provided by a syndicate of financial institutions with Bank of America, N.A. serving as the administrative agent to Ashford Prime OP, as the borrower. We and certain of our subsidiaries guarantee the secured revolving credit facility, which is secured by a pledge of 100% of the equity interests we hold in Ashford Prime OP and 100% of the equity interest issued by any guarantor (other than Ashford Prime) or any other subsidiary of ours that is not restricted under its loan documents or organizational documents from having its equity pledged (subject to certain exclusions), all mortgage receivables held by the borrower or any guarantor, and certain deposit accounts and securities accounts held by the borrower and any guarantor. The proceeds of the secured revolving credit facility may be used for working capital, capital expenditures, property acquisitions, and any other lawful purposes.

The secured revolving credit facility also contains customary terms, covenants, negative covenants, events of default, limitations and other conditions for credit facilities of this type. Subject to certain exceptions, we are subject to restrictions on incurring additional indebtedness, mergers and fundamental changes, sales or other dispositions of property, changes in the nature of our business, investments, and capital expenditures.

We also are subject to certain financial covenants, as set forth below, which are tested by the borrower on a consolidated basis (net of the amounts attributable to the non-controlling interest held by our partner in a majority-owned consolidated entity) and include, but are not limited to, the following:

•

Consolidated indebtedness (less cash and cash equivalents and amounts represented by marketable securities) to EBITDA not to exceed 6.25x and beginning September 30, 2016 to 5.75x; provided, however, that a one-time allowance will be made if we are out of compliance with such covenant by an amount of 0.50x for the first three fiscal quarters following a significant acquisition occurring after November 30, 2014. This ratio was 5.92x at June 30, 2016.


•	Consolidated recourse indebtedness other than the secured revolving credit facility not to exceed $50,000,000.


•	Consolidated fixed charge coverage ratio not less than 1.35x. This ratio was 1.78x at June 30, 2016.


•	Indebtedness of the consolidated parties that accrues interest at a variable rate (other than the secured revolving credit facility) that is not subject to a “cap,” “collar,” or other similar arrangement not to exceed 25% of consolidated indebtedness.


•	Consolidated tangible net worth not less than 75% of the consolidated tangible net worth on the closing date of the secured revolving credit facility plus 75% of the net proceeds of any future equity issuances.


•	Secured debt that is secured by real property (excluding the eight hotels we acquired in connection with the spin-off) not to exceed 70% of the as-is appraised value of such real property.

All financial covenants are tested and certified by the borrower on a quarterly basis. Due to the significant acquisition of Ritz-Carlton St. Thomas in December 2015, our maximum consolidated leverage ratio was raised from 5.75x to 6.25x for three fiscal quarters following the acquisition. As such, we were in compliance with all covenants at June 30, 2016.

The secured revolving credit facility includes customary events of default, and the occurrence of an event of default will permit the lenders to terminate commitments to lend under the secured revolving credit facility and accelerate payment of all amounts outstanding thereunder. If a default occurs and is continuing, we will be precluded from making distributions on our shares of common stock (other than those required to allow us to qualify and maintain our status as a REIT, so long as such default does not arise from a payment default or event of insolvency).

Borrowings under the secured revolving credit facility bear interest, at our option, at either LIBOR for a designated interest period plus an applicable margin, or the base rate (as defined in the credit agreement) plus an applicable margin. The applicable margin for borrowings under the secured revolving credit facility for base rate loans range from 1.25% to 2.75% per annum and the applicable margin for borrowings under the secured revolving credit facility for LIBOR loans range from 2.25% to 3.75% per

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annum, depending on the ratio of consolidated indebtedness to EBITDA described above, with the lowest rate applying if such ratio is less than 4x, and the highest rate applying if such ratio is greater than 6.5x.

The secured revolving credit facility is a three-year interest-only facility with all outstanding principal being due at maturity on November 21, 2016, subject to two one-year extension options if certain terms and conditions are satisfied. The secured revolving credit facility has an accordion feature whereby the aggregate commitments may be increased up to $300 million, subject to certain terms and conditions and a 0.25% extension fee. No amounts were drawn under the secured revolving credit facility as of June 30, 2016.

We intend to repay indebtedness incurred under our secured revolving credit facility from time to time out of net cash provided by operations and from the net proceeds of issuances of additional equity and debt securities, as market conditions permit.

Sources and Uses of Cash

As of June 30, 2016, we had $130.0 million of cash and cash equivalents, compared to $105.0 million at December 31, 2015.

We anticipate that our principal sources of funds to meet our cash requirements will include cash on hand, positive cash flow from operations and capital market activities.

Net Cash Flows Provided by (Used in) Operating Activities. Net cash flows provided by operating activities were $19.6 million for the six months ended June 30, 2016. Net cash flows used in operating activities were $20.8 million for the six months ended June 30, 2015. Cash flows from operations are impacted by changes in hotel operations of our ten comparable hotel properties and the operating results of the Bardessono Hotel, which was acquired on July 9, 2015 and the operating results of the Ritz-Carlton St. Thomas, which was acquired on December 15, 2015. Cash flows from operations are also impacted by changes in restricted cash due to the timing of cash deposits for certain loans as well as the timing of collecting receivables from hotel guests, paying vendors, settling with related parties and settling with hotel managers. Cash flows from operations for the six months ended June 30, 2015 were negatively impacted by $50 million as a result of the net purchases of marketable securities.

Net Cash Flows Provided by (Used in) Investing Activities. For the six months ended June 30, 2016, net cash flows provided by investing activities were $41.4 million. These cash inflows were primarily attributable to approximately $43.5 million of net proceeds received from the liquidation of AQUA U.S. Fund and $4.8 million of net reductions to restricted cash for capital expenditures. These inflows were partially offset by $6.9 million of capital improvements made to various hotel properties. For the six months ended June 30, 2015, investing activities used net cash flows of $11.2 million. These cash outlays were primarily attributable to cash outflows of $8.7 million of capital improvements made to various hotel properties and a $3.8 million deposit attributable to the acquisition of the Bardessono Hotel and Spa, partially offset by $1.2 million of net reductions to restricted cash for capital expenditures.

Net Cash Flows Provided by (Used in) Financing Activities. For the six months ended June 30, 2016, net cash flows used in financing activities were $35.9 million. Cash outflows primarily consisted of $24.7 million for the repurchase of common stock under our share repurchase program, $7.6 million for payments of dividends and distributions, $4.3 million for repayments of indebtedness, $3.8 million for distributions to the holder of a noncontrolling interest in consolidated entities, $20,000 for payments of loan costs and exit fees and $4,000 for payments for derivatives. These cash outflows were partially offset by $4.4 million of net proceeds from the issuance of preferred stock as well as other cash inflows of $19,000. For the six months ended June 30, 2015, net cash flows provided by financing activities were $41.0 million. Cash inflows primarily consisted of borrowings on indebtedness of $70.0 million, proceeds from the issuance of preferred stock of $62.8 million and proceeds from a private placement of common stock of $3.1 million. These inflows were partially offset by cash outlays of $72.9 million for repayments of indebtedness, $8.9 million for the purchase of our common stock primarily under our share repurchase program, $5.9 million for the redemption of operating partnership units, $3.3 million for payments of dividends and distributions, $2.9 million for distributions to the holder of a noncontrolling interest in consolidated entities, payments of loan costs and exit fees of $1.0 million and payments for derivatives of $8,000.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

The following table summarizes the changes in key line items from our statements of operations for the three months ended June 30, 2016 and 2015 (in thousands except percentages):



	Three Months Ended June 30,
	2016			2015			$ Change			% Change
Revenue
Rooms	$	79,583		$	67,787		$	11,796		17.4	%
Food and beverage	27,051			21,792			5,259			24.1
Other	5,761			3,221			2,540			78.9
Total hotel revenue	112,395			92,800			19,595			21.1
Other	37			37			—			—
Total revenue	112,432			92,837			19,595			21.1
Expenses
Hotel operating expenses:
Rooms	17,096			14,113			2,983			21.1
Food and beverage	18,267			13,539			4,728			34.9
Other expenses	30,335			22,973			7,362			32.0
Management fees	4,331			3,751			580			15.5
Total hotel expenses	70,029			54,376			15,653			28.8
Property taxes, insurance and other	4,514			4,601			(87		)	(1.9	)
Depreciation and amortization	11,263			10,559			704			6.7
Advisory services fee	5,835			3,042			2,793			91.8
Transaction costs	438			—			438
Corporate general and administrative	9,838			1,185			8,653			730.2
Total expenses	101,917			73,763			28,154			38.2
Operating income	10,515			19,074			(8,559		)	(44.9	)
Equity in earnings (loss) of unconsolidated entity	63			(820		)	883			107.7
Interest income	50			5			45			900.0
Other income	—			1,153			1,153			—
Interest expense and amortization of loan costs	(10,637		)	(9,129		)	1,508			16.5
Unrealized loss on marketable securities	—			(1,323		)	(1,323		)	—
Unrealized gain on investment in Ashford Inc.	860			—			860
Unrealized gain (loss) on derivatives	2,597			(8		)	2,605			32,562.5
Income before income taxes	3,448			8,952			(5,504		)	(61.5	)
Income tax (expense) benefit	(1,156		)	172			1,328			772.1
Net income	2,292			9,124			(6,832		)	(74.9	)
(Income) loss from consolidated entities attributable to noncontrolling interests	80			(125		)	205			164.0
Net income attributable to redeemable noncontrolling interests in operating partnership	(184		)	(2,275		)	(2,091		)	(91.9	)
Net income attributable to the Company	$	2,188		$	6,724		$	(4,536	)	(67.5	)%

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Net income represents the operating results of our hotel properties for the three months ended June 30, 2016 and 2015. The following table illustrates the key performance indicators of our hotels for the periods indicated:



	Three Months Ended June 30,
	2016			2015
Occupancy	86.47		%	86.41		%
ADR (average daily rate)	$	255.90		$	232.44
RevPAR (revenue per available room)	$	221.29		$	200.86
Rooms revenue (in thousands)	$	79,583		$	67,787
Total hotel revenue (in thousands)	$	112,395		$	92,800

The following table illustrates the key performance indicators of the ten hotel properties that were included for the full three months ended June 30, 2016 and 2015:



	Three Months Ended June 30,
	2016			2015
Occupancy	86.54		%	86.41		%
ADR (average daily rate)	$	237.08		$	232.44
RevPAR (revenue per available room)	$	205.17		$	200.86
Rooms revenue (in thousands)	$	69,266		$	67,787
Total hotel revenue (in thousands)	$	94,124		$	92,800

Net income attributable to the Company. Net income attributable to the Company decreased $4.5 million, or 67.5% from $6.7 million for the three months ended June 30, 2015 (the “2015 quarter”) to $2.2 million for the three months ended June 30, 2016 (the “2016 quarter”) as a result of the factors discussed below.

Rooms Revenue. Rooms revenue from our hotels increased $11.8 million, or 17.4%, to $79.6 million during the 2016 quarter compared to the 2015 quarter. During the 2016 quarter, we experienced a six basis point increase in occupancy and a 10.1% increase in room rates. Rooms revenue from our ten comparable hotel properties increased $1.5 million due to higher room rates of 2.0% and a 13 basis point increase in occupancy. Rooms revenue increased (i) $6.6 million at the Ritz-Carlton St. Thomas as a result of its acquisition in December 2015; (ii) $3.7 million at the Bardessono Hotel as a result of its acquisition in July 2015; (iii) $522,000 at the Seattle Marriott Waterfront primarily as a result of 5.9% higher room rates and a 93 basis point increase in occupancy at the hotel; (iv) $492,000 at the Tampa Renaissance as a result of 12.6% higher room rates and a 64 basis point increase in occupancy at the hotel; (v) $449,000 at the Seattle Courtyard Downtown as a result of 3.4% higher room rates and a 675 basis point increase in occupancy at the hotel; (vi) $430,000 at the Capital Hilton as a result of 1.9% higher room rates and a 135 basis point increase in occupancy at the hotel; (vii) $57,000 at the Plano Marriott Legacy Town Center as a result of 0.2% higher room rates and a 65 basis point increase in occupancy at the hotel; and (viii) $22,000 at the Pier House Resort as a result of 4.3% higher room rates partially offset by a 333 basis point decrease in occupancy at the hotel. These increases were slightly offset by decreases of (i) 184,000 at the San Francisco Courtyard Downtown as a result of a 518 basis point decrease in occupancy partially offset by higher rooms rates of 3.8% at the hotel; (ii) $149,000 at the Philadelphia Courtyard as a result of 0.2% lower rooms rates and a 147 basis point decrease in occupancy at the hotel; (iii) $143,000 at the Hilton La Jolla Torrey Pines as a result of a 98 basis point decrease in occupancy and 1.3% lower room rates at the hotel; and (iv) $18,000 decrease at Sofitel Chicago Water Tower due to 2.7% decrease in room rates partially offset by a 226 basis point increase in occupancy.

Food and Beverage Revenue. Food and beverage revenues from our hotels increased $5.3 million, or 24.1%, to $27.1 million during the 2016 quarter compared to the 2015 quarter. This increase is primarily attributable to an increase in food and beverage revenue of $4.6 million at the Ritz-Carlton St. Thomas and $895,000 at the Bardessono Hotel as a result of their acquisitions in December 2015 and July 2015, respectively. We experienced an additional aggregate increase in food and beverage revenue of $750,000 at the Seattle Marriott Waterfront, Capital Hilton, Sofitel Chicago Water Tower and Seattle Courtyard Downtown. These increases were partially offset by a lower food and beverage revenue of $947,000 from the Hilton La Jolla Torrey Pines, San Francisco Courtyard Downtown, Plano Marriott Legacy Town Center, Philadelphia Courtyard, Pier House Resort and Tampa Renaissance.

Other Hotel Revenue. Other hotel revenue, which consists mainly of telecommunications, parking and rentals, increased $2.5 million, or 78.9%, to $5.8 million during the 2016 quarter compared to the 2015 quarter. The increase is primarily attributable to an increase in other hotel revenue of $2.1 million at the Ritz-Carlton St. Thomas and $401,000 at the Bardessono Hotel due to their

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acquisitions in December 2015 and July 2015, respectively. There was also an aggregate increase of $423,000 at the Hilton La Jolla Torrey Pines, Plano Marriott Legacy Town Center, Seattle Marriott Waterfront and Tampa Renaissance. The increase was partially offset by lower other revenue at the Sofitel Chicago Water Tower, Capital Hilton, Pier House Resort, San Francisco Courtyard Downtown, Seattle Courtyard Downtown and Philadelphia Courtyard of approximately $382,000.

Other Non-Hotel Revenue. Other non-hotel revenue was $37,000 in both the 2016 quarter and the 2015 quarter. Other non-hotel revenue is comprised of Texas margin tax recoveries from guests.

Rooms Expense. Rooms expense increased $3.0 million, or 21.1%, to $17.1 million in the 2016 quarter compared to the 2015 quarter. The increase is primarily attributable to an increase in rooms revenue and the acquisitions of the Ritz-Carlton St. Thomas and the Bardessono Hotel in 2015.

Food and Beverage Expense. Food and beverage expense increased $4.7 million, or 34.9%, to $18.3 million during the 2016 quarter compared to the 2015 quarter. The increase is primarily attributable to the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015, partially offset by lower food and beverage revenue at our ten comparable hotel properties.

Other Operating Expenses. Other operating expenses increased $7.4 million, or 32.0%, to $30.3 million in the 2016 quarter compared to the 2015 quarter. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced an increase of $753,000 in direct expenses and an increase of $6.6 million in indirect expenses and incentive management fees in the 2016 quarter. Direct expenses were 1.5% of total hotel revenue for the 2016 quarter and 1.1% for the 2015 quarter. The increase in direct expenses is comprised of an increase of a $1.1 million as a result of the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015, partially offset by a decrease of $321,000 at our ten comparable hotel properties. The increase in indirect expenses is primarily attributable to (i) an increase in general and administrative costs of $2.7 million, including $815,000 from our ten comparable hotel properties and $1.9 million from the two hotel properties acquired in 2015; (ii) an increase in marketing costs of $1.4 million, comprised of $373,000 from our ten comparable hotel properties and $1.0 million from the two acquired hotel properties; (iii) an increase in repairs and maintenance of $801,000, including an increase of $924,000 from our two acquired hotel properties partially offset by a decrease of $123,000 from our ten comparable hotel properties; (iv) an increase in lease expense of $435,000, comprised of an increase of $461,000 from our two acquired hotel properties partially offset by a decrease of $25,000 from our ten comparable hotel properties; (v) an increase of $625,000 in incentive management fees, including $689,000 from our ten comparable hotel properties partially offset by a $64,000 decrease from our two acquired hotel properties; and (vi) an increase in energy costs of $609,000, comprised of an increase of $654,000 from our two acquired hotel properties, partially offset by a $44,000 decrease from our ten comparable hotel properties.

Management Fees. Base management fees increased $580,000, or 15.5%, to $4.3 million in the 2016 quarter compared to the 2015 quarter. The increase is comprised of an increase of $548,000 as a result of the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015 as well as an increase of $32,000 from our ten comparable hotel properties due to higher hotel revenue in the 2016 quarter.

Property Taxes, Insurance and Other. Property taxes, insurance and other decreased $87,000, or 1.9%, to $4.5 million in the 2016 quarter compared to the 2015 quarter as a result of lower assessments at certain hotel properties offset by higher property taxes, insurance and other as a result of the acquisitions of the Ritz-Carlton St. Thomas and the Bardessono Hotel in 2015.

Depreciation and Amortization. Depreciation and amortization increased $704,000, or 6.7%, to $11.3 million for the 2016 quarter compared to the 2015 quarter. The increase is due to $1.4 million of depreciation and amortization associated with the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015 and higher depreciation of $403,000 attributable to capital expenditures at our ten comparable hotel properties that have occurred since June 30, 2015, partially offset by lower depreciation of $823,000 as a result of fully depreciated furniture, fixtures and equipment and $230,000 from ceasing depreciation on the Seattle Courtyard Downtown upon it being classified as held for sale.

Advisory Services Fee. Advisory services fee increased $2.8 million, or 91.8%, to $5.8 million in the 2016 quarter compared to the 2015 quarter as a result of increases in equity-based compensation of $2.3 million, incentive fee of $285,000, reimbursable expenses of $209,000 as well as base advisory fee of $42,000. We are party to an advisory agreement with our advisor, Ashford LLC, a subsidiary of Ashford Inc. In the 2016 quarter, we recorded an advisory services fee of $5.8 million which included a base advisory fee of $2.2 million, reimbursable expenses of $645,000, equity-based compensation of $2.7 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. in connection with providing advisory services as well as an incentive fee of $285,000. In the 2015 quarter, we incurred an advisory services fee of $3.0 million, which included a base advisory fee of $2.2 million, reimbursable expenses of $436,000 and equity-based compensation of $442,000 associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc.

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Transaction Costs. In the 2016 quarter, we recorded transaction costs of $438,000 related to payment of transfer taxes.

Corporate General and Administrative. Corporate general and administrative expenses increased $8.7 million, or 730.2%, to $9.8 million in the 2016 quarter compared to the 2015 quarter as a result of increases in professional fees of $7.6 million, primarily related to the proxy contest and litigation, miscellaneous expenses of $962,000 and public company costs of $96,000. These increases were partially offset by lower equity-based compensation to non-employee directors of $33,000.

Equity in Earnings (Loss) of Unconsolidated Entity. We recorded equity in earnings of unconsolidated entity of $63,000 in the 2016 quarter and equity in loss of $820,000 in the 2015 quarter related to our investment in the AQUA U.S. Fund. This investment was liquidated in the 2016 quarter.

Interest Income. Interest income increased $45,000, or 900.0%, to $50,000 for the 2016 quarter compared to the 2015 quarter.

Other Income. We did not recognize any other income for the 2016 quarter. Other income was $1.2 million for the 2015 quarter due to a realized gain on marketable securities of $1.1 million and $78,000 of dividends related to marketable securities.

Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs increased $1.5 million, or 16.5%, to $10.6 million for the 2016 quarter compared to the 2015 quarter as a result of the increase in interest expense and amortization of loan costs from the financings associated with the acquisitions of the Bardessono Hotel and Ritz-Carlton St. Thomas in 2015. The average LIBOR rates for the 2016 quarter and the 2015 quarter were 0.42% and 0.18%, respectively.

Unrealized Loss on Marketable Securities. There was no unrealized gain/loss on marketable securities for the 2016 quarter compared to the 2015 quarter. Unrealized loss on marketable securities of $1.3 million for the 2015 quarter was due to the realization of a previously unrealized gain when we made an equity-method investment in the AQUA U.S. Fund.

Unrealized Gain on Investment in Ashford Inc. Unrealized gain on investment in Ashford Inc. of $860,000 represents the fair value adjustment for the 2016 quarter on our investment in Ashford Inc. There was no unrealized gain/loss on investment in Ashford Inc. for the 2015 quarter. The fair value is based on the closing market price of Ashford Inc. common stock at the end of the period.

Unrealized Gain (Loss) on Derivatives. Unrealized gain on derivatives was $2.6 million for the 2016 quarter and consisted of a $2.7 million unrealized gain on interest rate floors, partially offset by a $77,000 unrealized loss on options on futures contracts and an unrealized loss on interest rate caps of $13,000. In the 2015 quarter, we had an unrealized loss of $8,000 on interest rate caps. The fair value of the interest rate caps and floors are primarily based on movements in the LIBOR forward curve and the passage of time. The fair value of options on futures contracts is the last reported settlement price as of the measurement date.

Income Tax (Expense) Benefit. Income tax (expense) benefit changed by $1.3 million, or 772.1% from income tax benefit of $172,000 for the 2015 quarter to income tax expense of $1.2 million for the 2016 quarter. This change was primarily due to the partial release in the 2015 quarter of the valuation allowance previously recorded in the full amount of the deferred tax asset held by our wholly-owned TRS as well as an increase in consolidated taxable income in the 2016 quarter compared to the 2015 quarter.

(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests. The noncontrolling interest partners in consolidated entities were allocated loss of $80,000 and an income of $125,000 for the 2016 quarter and the 2015 quarter, respectively. At June 30, 2016, noncontrolling interests in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.

Net Income Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net income of $184,000 and $2.3 million for the 2016 quarter and the 2015 quarter, respectively. Redeemable noncontrolling interests in Ashford Prime OP represented ownership interests of 13.19% and 25.85% as of June 30, 2016 and 2015, respectively.

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Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

The following table summarizes the changes in key line items from our statements of operations for the six months ended June 30, 2016 and 2015 (in thousands except percentages):



	Six Months Ended June 30,
	2016			2015			$ Change			% Change
Revenue
Rooms	$	148,834		$	122,284		$	26,550		21.7	%
Food and beverage	51,916			42,022			9,894			23.5
Other	11,409			6,243			5,166			82.7
Total hotel revenue	212,159			170,549			41,610			24.4
Other	70			77			(7		)	(9.1	)
Total revenue	212,229			170,626			41,603			24.4
Expenses
Hotel operating expenses:
Rooms	32,915			27,091			5,824			21.5
Food and beverage	35,712			26,608			9,104			34.2
Other expenses	58,674			43,897			14,777			33.7
Management fees	8,138			6,855			1,283			18.7
Total hotel expenses	135,439			104,451			30,988			29.7
Property taxes, insurance and other	9,557			9,196			361			3.9
Depreciation and amortization	23,167			21,076			2,091			9.9
Advisory services fee	7,899			6,262			1,637			26.1
Transaction costs	438			—			438
Corporate general and administrative	13,761			2,308			11,453			496.2
Total expenses	190,261			143,293			46,968			32.8
Operating income	21,968			27,333			(5,365		)	(19.6	)
Equity in loss of unconsolidated entity	(2,587		)	(820		)	1,767			215.5
Interest income	82			9			73			811.1
Other income (expense)	(10		)	1,292			1,302			100.8
Interest expense and amortization of loan costs	(21,271		)	(18,712		)	2,559			13.7
Write-off of loan costs and exit fees	—			(54		)	(54		)	(100.0	)
Unrealized loss on investment in Ashford Inc.	(633		)	—			633
Unrealized gain (loss) on derivatives	6,130			(40		)	6,170			15,425.0
Income before income taxes	3,679			9,008			(5,329		)	(59.2	)
Income tax expense	(1,526		)	(309		)	1,217			393.9
Net income	2,153			8,699			(6,546		)	(75.3	)
(Income) loss from consolidated entities attributable to noncontrolling interests	(65		)	22			87			395.5
Net income attributable to redeemable noncontrolling interests in operating partnership	(34		)	(2,203		)	(2,169		)	(98.5	)
Net income attributable to the Company	$	2,054		$	6,518		$	4,464		(68.5	)%

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Net income (loss) represents the operating results of our hotel properties for the six months ended June 30, 2016 and 2015.

The following table illustrates the key performance indicators of our hotel properties for the periods indicated:



	Six Months Ended June 30,
	2016			2015
Occupancy	82.12		%	82.50		%
ADR (average daily rate)	$	251.98		$	220.86
RevPAR (revenue per available room)	$	206.93		$	182.21
Rooms revenue (in thousands)	$	148,834		$	122,284
Total hotel revenue (in thousands)	$	212,159		$	170,549

The following table illustrates the key performance indicators of the ten hotel properties that were included for the full six months ended June 30, 2016 and 2015:



	Six Months Ended June 30,
	2016			2015
Occupancy	82.13		%	82.50		%
ADR (average daily rate)	$	227.91		$	220.86
RevPAR (revenue per available room)	$	187.18		$	182.21
Rooms revenue (in thousands)	$	126,391		$	122,284
Total hotel revenue (in thousands)	$	174,117		$	170,549

Net income attributable to the Company. Net income attributable to the Company decreased $4.5 million, or 68.5%, to $2.1 million for the six months ended June 30, 2016 (the “2016 period”) compared to the six months ended June 30, 2015 (the “2015 period”) as a result of the factors discussed below.

Rooms Revenue. Rooms revenue from our hotels increased $26.6 million, or 21.7%, to $148.8 million during the 2016 period compared to the 2015 period. During the 2016 period, we experienced a 14.1% increase in room rates and a 38 basis point decrease in occupancy. Rooms revenue from our ten comparable hotel properties increased $4.1 million due to higher room rates of 3.2%, partially offset by a 37 basis point decrease in occupancy. Rooms revenue increased (i) $16.4 million at the Ritz-Carlton St. Thomas as a result of its acquisition in December 2015; (ii) $6.0 million at the Bardessono Hotel as a result of its acquisition in July 2015; (iii) $1.3 million at the Capital Hilton primarily as a result of 2.6% higher room rates and a 235 basis point increase in occupancy at the hotel; (iv) $1.0 million at the Tampa Renaissance as a result of 10.9% higher room rates and a 78 basis point increase in occupancy at the hotel; (v) $979,000 at the San Francisco Courtyard Downtown as a result of 9.9% higher room rates partially offset by a 414 basis point decrease in occupancy at the hotel; (vi) $664,000 at the Seattle Courtyard Downtown as a result of 3.3% higher room rates and a 508 basis point increase in occupancy at the hotel; (vii) $635,000 at the Seattle Marriott Waterfront as a result of 5.4% higher room rates partially offset by a 58 basis point decrease in occupancy at the hotel; (viii) $224,000 at the Plano Marriott Legacy Town Center as a result of 2.4% higher room rates partially offset by a 53 basis point decrease in occupancy at the hotel; and (ix) $133,000 at the Pier House Resort as a result of 2.9% higher room rates partially offset by a 196 basis point decrease in occupancy at the hotel. These increases were partially offset by decreases of (i) $395,000 at the Philadelphia Courtyard due to 1.7% lower room rates and a 152 basis point decrease in occupancy at the hotel; (ii) $257,000 at the Sofitel Chicago Water Tower as a result of 3.3% lower room rates partially offset by a 48 basis point increase in occupancy at the hotel; and (iii) $201,000 at the Hilton La Jolla Torrey Pines due a 313 basis point decrease in occupancy partially offset by 1.5% higher room rates.

Food and Beverage Revenue. Food and beverage revenue from our hotel properties increased $9.9 million, or 23.5%, to $51.9 million during the 2016 period compared to the 2015 period. This increase is primarily attributable to an increase in food and beverage revenue of $8.8 million at the Ritz-Carlton St. Thomas and $1.6 million at the Bardessono Hotel as a result of their acquisitions in 2015. We experienced an additional aggregate increase in food and beverage revenue of $617,000 at the Sofitel Chicago Water Tower, Seattle Marriott Waterfront, Seattle Courtyard Downtown and Tampa Renaissance. These increases were partially offset by a lower food and beverage revenue of $1.2 million from the Plano Marriott Legacy Town Center, Pier House Resort, Capital Hilton, Philadelphia Courtyard, San Francisco Courtyard Downtown and Hilton La Jolla Torrey Pines.

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Other Hotel Revenue. Other hotel revenue, which consists mainly of telecommunications, parking and rentals, increased $5.2 million, or 82.7%, to $11.4 million during the 2016 period compared to the 2015 period. This increase is primarily attributable to an increase in other hotel revenue of $4.3 million at the Ritz-Carlton St. Thomas and $824,000 at the Bardessono Hotel due to their acquisitions in 2015. There was also an aggregate increase of $636,000 at the Hilton La Jolla Torrey Pines, Plano Marriott Legacy Town Center, Philadelphia Courtyard, Seattle Marriott Waterfront and San Francisco Courtyard Downtown. The increases were partially offset by lower other revenue at the Sofitel Chicago Water Tower, Capital Hilton, Tampa Renaissance, Pier House Resort and Seattle Courtyard Downtown of approximately $616,000.

Other Non-Hotel Revenue. Other non-hotel revenue decreased $7,000, or 9.1%, to $70,000 in the 2016 period compared to the 2015 period. The decrease is attributable to decreased Texas margin tax recoveries from guests.

Rooms Expense. Rooms expense increased $5.8 million, or 21.5%, to $32.9 million in the 2016 period compared to the 2015 period. The increase is primarily attributable to an increase in rooms revenue and the acquisitions of the Ritz-Carlton St. Thomas and the Bardessono Hotel in 2015.

Food and Beverage Expense. Food and beverage expense increased $9.1 million, or 34.2%, to $35.7 million during the 2016 period compared to the 2015 period. The increase is primarily attributable to the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015, partially offset by lower food and beverage revenue at our ten comparable hotel properties.

Other Operating Expenses. Other operating expenses increased $14.8 million, or 33.7%, to $58.7 million in the 2016 period compared to the 2015 period. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced an increase of $1.6 million in direct expenses and an increase of $13.1 million in indirect expenses and incentive management fees in the 2016 period compared to the 2015 period. Direct expenses were 1.7% of total hotel revenue for the 2016 period and 1.1% for the 2015 period. The increase in direct expenses is comprised of an increase of a $2.2 million as a result of the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015 partially offset by a decrease of $548,000 at our ten comparable hotel properties. The increase in indirect expenses is primarily attributable to increases in (i) general and administrative costs of $5.2 million, including $1.1 million from our ten comparable hotel properties and $4.1 million from the two hotel properties acquired in 2015; (ii) marketing costs of $2.6 million, comprised of $671,000 from our ten comparable hotel properties and $1.9 million from the two acquired hotel properties; (iii) repairs and maintenance of $1.8 million, including an increase of $1.9 million from our two acquired hotel properties partially offset by a decrease of $96,000 from our ten comparable hotel properties; (iv) lease expense of $784,000, comprised of an increase of $804,000 from our two acquired hotel properties partially offset by a decrease of $20,000 from our ten comparable hotel properties; (v) incentive management fees of $1.8 million, including $1.2 million from our ten comparable hotel properties and $568,000 from our two acquired hotel properties; and (vi) energy costs of $1.0 million, comprised of an increase of $1.2 million from our two acquired hotel properties, partially offset by a $128,000 decrease from our ten comparable hotel properties.

Management Fees. Base management fees increased $1.3 million, or 18.7%, to $8.1 million in the 2016 period. The increase is comprised of an increase of $1.1 million as a result of the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015 and $141,000 from our ten comparable hotel properties due to higher hotel revenue in the 2016 period.

Property Taxes, Insurance and Other. Property taxes, insurance and other increased $361,000, or 3.9%, to $9.6 million in the 2016 period. The increase is attributable to the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015.

Depreciation and Amortization. Depreciation and amortization increased $2.1 million, or 9.9%, to $23.2 million for the 2016 period compared to the 2015 period. The increase is due to $2.7 million of depreciation and amortization associated with the acquisitions of the Bardessono Hotel and the Ritz-Carlton St. Thomas in 2015 and higher depreciation of $809,000 attributable to capital expenditures at our ten comparable hotel properties that have occurred since June 30, 2015, partially offset by lower depreciation of $1.2 million as a result of fully depreciated furniture, fixtures and equipment and $194,000 from ceasing depreciation on the Seattle Courtyard Downtown upon it being classified as held for sale.

Advisory Services Fee. Advisory services fee increased $1.6 million, or 26.1%, to $7.9 million in the 2016 period compared to the 2015 period as a result of increases in equity-based compensation of $1.2 million, incentive fee of $285,000, reimbursable expenses of $315,000 partially offset by a decrease in base advisory fee of $138,000. We are party to an advisory agreement with our advisor, Ashford LLC, a subsidiary of Ashford Inc. In the 2016 period, we recorded an advisory services fee of $7.9 million which included a base advisory fee of $4.2 million, reimbursable expenses of $1.3 million, equity-based compensation of $2.1 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. in connection with providing advisory services as well as an incentive fee of $285,000. In the 2015 period, we incurred an advisory services fee of $6.3 million, which included a base advisory fee of $4.4 million reimbursable expenses of $982,000 and equity-based compensation of $911,000 associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc.

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Transaction Costs. In the 2016 period, we recorded transaction costs of $438,000 related to payment of transfer taxes.

Corporate General and Administrative. Corporate general and administrative expenses increased $11.5 million, or 496.2%, to $13.8 million in the 2016 period compared to the 2015 period as a result of increases in professional fees of $9.7 million, primarily related to the proxy contest and litigation and miscellaneous expenses of $1.9 million partially offset by lower equity-based compensation to non-employee directors of $33,000 and lower public company costs of $84,000.

Equity in Loss of Unconsolidated Entity. We recorded equity in loss of unconsolidated entity of $2.6 million in the 2016 period and $820,000 in the 2015 period related to our investment in the AQUA U.S. Fund. This investment was liquidated in the 2016 period.

Interest Income. Interest income increased $73,000, or 811.1%, to $82,000 for the 2016 period compared to the 2015 period.

Other Income (Expense). For the 2016 period, we incurred $10,000 of commissions on purchases of options on Eurodollar futures. Other income of $1.3 million in the 2015 period was related to realized gain of $1.1 million and $223,000 of dividends on marketable securities.

Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs increased $2.6 million, or 13.7%, to $21.3 million for the 2016 period compared to the 2015 period as a result of the increase in interest expense and amortization of loan costs from the financings associated with the acquisitions of the Bardessono Hotel and Ritz-Carlton St. Thomas in 2015. The average LIBOR rates for the 2016 period and the 2015 period were 0.42% and 0.18%, respectively.

Unrealized Loss on Investment in Ashford Inc. Unrealized loss on investment in Ashford Inc. of $633,000 represents the fair value adjustment for the 2016 period on our investment in Ashford Inc. There was no unrealized gain/loss on investment in Ashford Inc. for the 2015 period. The fair value is based on the closing market price of Ashford Inc. common stock at the end of the period.

Unrealized Gain (Loss) on Derivatives. Unrealized gain on derivatives of $6.1 million for the 2016 period consisted of a $6.2 million unrealized gain on interest rate floors, partially offset by an unrealized loss on interest rate caps of $60,000 and a$57,000 unrealized loss on options on futures contracts. In the 2015 period, we had an unrealized loss of $40,000 on interest rate caps. The fair value of the interest rate caps and floors are primarily based on movements in the LIBOR forward curve and the passage of time. The fair value of options on futures contracts is the last reported settlement price as of the measurement date.

Income Tax Expense. Income tax expense increased $1.2 million, or 393.9%, to $1.5 million for the 2016 period compared to the 2015 period. This increase was primarily due to the partial release in the 2015 period of the valuation allowance previously recorded in the full amount of the deferred tax asset held by our wholly-owned TRS as well as an increase in consolidated taxable income in the 2016 period compared to the 2015 period.

(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interest. The noncontrolling interest partner in consolidated entities was allocated income of $65,000 and loss of $22,000 for the 2016 period and the 2015 period, respectively. At June 30, 2016, noncontrolling interest in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.

Net Income Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net income of $34,000 and $2.2 million for the 2016 period and the 2015 period, respectively. Redeemable noncontrolling interests represented ownership interests in Ashford Prime OP of 13.19% and 25.85% as of June 30, 2016 and 2015, respectively.

Seasonality

Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months and some during the winter months. This seasonality pattern can cause fluctuations in our quarterly lease revenue under our percentage leases. We anticipate that our cash flows from the operations of our properties and cash on hand will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flows from operations and cash on hand are insufficient during any quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize borrowings to fund distributions required to maintain our REIT status. However, we cannot make any assurances that we will make distributions in the future.

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Contractual Obligations and Commitments

There have been no material changes since December 31, 2015, outside of the ordinary course of business, to contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2015 10-K.

Off-Balance Sheet Arrangements

In the normal course of business, we may form or invest in partnerships or joint ventures. We evaluate each partnership and joint venture to determine whether the entity is a variable interest entity (“VIE”). If the entity is determined to be a VIE we assess whether we are the primary beneficiary and need to consolidate the entity. For further discussion see note 2 to our condensed consolidated financial statements.

Critical Accounting Policies

Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2015 10-K. There have been no material changes in these critical accounting policies.

Non-GAAP Financial Measures

The following non-GAAP presentations of EBITDA, Adjusted EBITDA, FFO and AFFO are made to help our investors evaluate our operating performance.

EBITDA is defined as net income (loss) attributable to the Company before interest expense and amortization of loan costs, interest income, income taxes, depreciation and amortization and redeemable noncontrolling interests in the operating partnership. We adjust EBITDA to exclude certain additional items such as write-off of loan costs and exit fees, strategic alternatives and other deal costs, transaction costs and non-cash items such as amortization of unfavorable management contract liabilities, unrealized (gain) loss on investments, unrealized (gain) loss on derivatives, other (income) expense, non-employee stock/unit-based compensation and the Company’s portion of unrealized loss of investment in securities investment fund. Unless otherwise indicated, EBITDA and Adjusted EBITDA exclude amounts attributable to the portion of a partnership owned by the third party. We present EBITDA and Adjusted EBITDA because we believe they reflect more accurately the ongoing performance of our hotel assets and other investments and provide more useful information to investors as they are indicators of our ability to meet our future debt payment requirements, working capital requirements and they provide an overall evaluation of our financial condition. EBITDA and Adjusted EBITDA as calculated by us may not be comparable to EBITDA and Adjusted EBITDA reported by other companies that do not define EBITDA and Adjusted EBITDA exactly as we define the terms. EBITDA and Adjusted EBITDA do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as determined by GAAP as an indicator of liquidity.

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The following table reconciles net income to EBITDA and Adjusted EBITDA (in thousands) (unaudited):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income	$	2,292		$	9,124		$	2,153		$	8,699
(Income) loss from consolidated entities attributable to noncontrolling interests	80			(125		)	(65		)	22
Net income attributable to redeemable noncontrolling interests in operating partnership	(184		)	(2,275		)	(34		)	(2,203		)
Net income attributable to the Company	2,188			6,724			2,054			6,518
Interest income	(50		)	(5		)	(82		)	(9		)
Interest expense and amortization of loan costs ⁽¹⁾	10,230			8,751			20,459			17,959
Depreciation and amortization ⁽¹⁾	10,557			9,840			21,757			19,628
Income tax expense	1,156			(172		)	1,526			309
Net income attributable to redeemable noncontrolling interests in operating partnership	184			2,275			34			2,203
EBITDA available to the Company and OP unitholders	24,265			27,413			45,748			46,608
Amortization of unfavorable management contract liabilities	(23		)	(40		)	(62		)	(79		)
Write-off of loan costs and exit fees	—			—			—			54
Transaction costs	438			—			438			—
Unrealized (gain) loss on investments	(860		)	1,323			633			—
Unrealized (gain) loss on derivatives ⁽¹⁾	(2,597		)	7			(6,130		)	36
Other (income) expense	—			(1,153		)	10			(1,292		)
Non-cash, non-employee stock/unit-based compensation	2,920			696			2,307			1,166
Legal and advisory costs	8,913			40			12,226			312
Company’s portion of unrealized loss of investment in securities investment fund	(63		)	820			2,587			820
Adjusted EBITDA available to the Company and OP unitholders	$	32,993		$	29,106		$	57,757		$	47,625

__________________


⁽¹⁾	Net of adjustment for noncontrolling interest in consolidated entities. The following table presents the amounts of the adjustments for non-controlling interest for each line item:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Interest expense and amortization of loan costs	$	(407	)	$	(378	)	$	(812	)	$	(753	)
Depreciation and amortization	(706		)	(719		)	(1,410		)	(1,448		)
Unrealized loss on derivatives	—			(1		)	—			(4		)

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

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satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO and AFFO should be considered along with our net income or loss and cash flows reported in the consolidated and combined consolidated financial statements.

The following table reconciles net income to FFO and Adjusted FFO (in thousands) (unaudited):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income	$	2,292		$	9,124		$	2,153		$	8,699
(Income) loss from consolidated entities attributable to noncontrolling interests	80			(125		)	(65		)	22
Net income attributable to redeemable noncontrolling interests in operating partnership	(184		)	(2,275		)	(34		)	(2,203		)
Preferred dividends	(978		)	(198		)	(1,872		)	(198		)
Net income attributable to the Company	1,210			6,526			182			6,320
Depreciation and amortization on real estate ⁽¹⁾	10,557			9,840			21,757			19,628
Net income attributable to redeemable noncontrolling interests in operating partnership	184			2,275			34			2,203
FFO available to common stockholders and OP unitholders	11,951			18,641			21,973			28,151
Preferred dividends	978			198			1,872			198
Unrealized (gain) loss on investments	(860		)	1,323			633			—
Unrealized (gain) loss on derivatives ⁽¹⁾	(2,597		)	7			(6,130		)	36
Other (income) expense	—			(1,153		)	10			(1,292		)
Transaction costs	438			—			438			—
Non-cash, non-employee stock/unit-based compensation	2,920			696			2,307			1,166
Legal and advisory costs	8,913			40			12,226			312
Write-off of loan costs and exit fees	—			—			—			54
Company’s portion of unrealized loss of investment in securities investment fund	(63		)	820			2,587			820
Adjusted FFO available to the Company and OP unitholders	$	21,680		$	20,572		$	35,916		$	29,445

____________________


⁽¹⁾	Net of adjustment for noncontrolling interest in consolidated entities. The following table presents the amounts of the adjustments for non-controlling interest for each line item:



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Depreciation and amortization on real estate	$	(706	)	$	(719	)	$	(1,410	)	$	(1,448	)
Unrealized loss on derivatives	—			(1		)	—			(4		)

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Hotel Properties

The following table presents certain information related to our hotel properties:



Hotel Property	Location	Service Type	Total Rooms	% Owned		Owned Rooms
Hotel Property	Location	Service Type	Total Rooms	% Owned		Owned Rooms
Fee Simple Properties
Hilton	Washington, D.C.	Full	550	75	%	413
Marriott	Seattle, WA	Full	358	100		358
Marriott	Plano, TX	Full	404	100		404
Courtyard by Marriott	Philadelphia, PA	Select	499	100		499
Courtyard by Marriott⁽¹⁾	Seattle, WA	Select	250	100		250
Courtyard by Marriott	San Francisco, CA	Select	405	100		405
Sofitel	Chicago, IL	Full	415	100		415
Pier House Resort	Key West, FL	Full	142	100		142
Ritz Carlton	St. Thomas, USVI	Full	180	100		180
Ground Lease Properties
Hilton ⁽²⁾	La Jolla, CA	Full	394	75	%	296
Renaissance ⁽³⁾	Tampa, FL	Full	293	100		293
Bardessono Hotel and Spa ⁽⁴⁾	Yountville, CA	Full	62	100		62
Total			3,952			3,717

________


⁽¹⁾	The hotel property was sold on July 1, 2016.


⁽²⁾	The ground lease expires in 2043.


⁽³⁾	The ground lease expires in 2080.


⁽⁴⁾	The initial ground lease expires in 2055. The ground lease contains two 25-year extension options, at our election.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates. To the extent that we acquire assets or conduct operations in an international jurisdiction, we will also have currency exchange risk. We may enter into certain hedging arrangements in order to manage interest rate and currency fluctuations. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

At June 30, 2016, our total indebtedness of $836.0 million included $426.1 million of variable-rate debt. The impact on the results of operations of a 25-basis point change in interest rate on the outstanding balance of variable-rate debt at June 30, 2016, would be approximately $1.1 million per year. Interest rate changes will have no impact on the remaining $409.9 million of fixed rate debt.

The above amounts were determined based on the impact of hypothetical interest rates on our borrowings and assume no changes in our capital structure. The information presented above includes those exposures that existed at June 30, 2016, but it does not consider exposures or positions that could arise after that date. Accordingly, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

We have entered into interest rate floors with an aggregate notional amount and strike rate of $3.0 billion and -0.25%, respectively for an initial total upfront cost of $3.5 million. Our total exposure is capped at our initial total upfront cost of $3.5 million.

We have purchased options on Eurodollar futures to hedge our cash flow risk for total upfront costs of $496,000. Eurodollar futures prices reflect market expectations for interest rates on three month Eurodollar deposits for specific dates in the future, and the final settlement price is determined by three-month LIBOR on the last trading day. Options on Eurodollar futures provide the ability to limit losses while maintaining the possibility of profiting from favorable changes in the futures prices. As the purchaser, our maximum potential loss is limited to the initial premium paid for the Eurodollar option contracts, while our potential gain has no limit. These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.

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ITEM 4.	CONTROLS AND PROCEDURES

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2016 (“Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms; and (ii) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

Sessa Litigation

On February 3, 2016, Sessa Capital (Master), L.P. (“Sessa”) filed an action (the “Maryland Action”) in the Circuit Court for Baltimore City, Maryland, captioned Sessa Capital (Master) L.P. v. Bennett, et al., Case No. 24-C-16-000557 (Baltimore City Cir. Ct. 2016), against Ashford Prime, the members of the Ashford Prime board of directors, Ashford LLC and Ashford Inc. The Maryland Action generally alleged that the directors of Ashford Prime breached their fiduciary duties in connection with the June Amendments to the Company’s advisory agreement with Ashford LLC. The Maryland Action also alleged that Ashford Inc. aided and abetted those breaches of fiduciary duties. On February 29, 2016, the Company filed a motion to dismiss the Maryland Action. On March 14, 2016, Sessa voluntarily dismissed the Maryland Action.

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injunction and granted the Company’s motion for a preliminary injunction. Sessa appealed the district court’s decision to the United States Court of Appeals for the Fifth Circuit on May 23, 2016. Sessa’s appeal is fully briefed and the court heard oral argument on August 2, 2016. There are currently no claims for monetary damages, but Sessa seeks reimbursement for its attorneys’ fees and costs.

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


ITEM 1A.	RISK FACTORS

The discussion of our business and operations and risk factors discussed in this report should be read together with the risk factors contained in Item 1A of our 2015 10-K, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner.


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

Purchases of Equity Securities by the Issuer

The following table provides the information with respect to purchases of our common stock during each of the months in the second quarter of 2016:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plan
Common stock:
April 1 to April 30 ^{(1) (2)}	6,758	$	10.25	—	$	75,835,840
May 1 to May 31 ⁽²⁾	526,884	11.30		526,752	69,881,505
June 1 to June 30 ⁽²⁾	1,719,853	13.97		1,719,800	45,848,159
Total	2,253,495	$	13.34	2,246,552

__________________


⁽¹⁾	Includes shares that were withheld to cover tax-withholding requirements related to the vesting of restricted shares of our common stock issued to employees of our advisor pursuant to the Company’s stockholder-approved stock incentive plan.


⁽²⁾	Includes shares that were repurchased from Ashford Trust when former Ashford Trust employees who held restricted shares of Ashford Prime common stock they received in the spin-off, forfeited the shares to Ashford Trust upon termination of employment.

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ITEM 3.	DEFAULT UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

None.


ITEM 5.	OTHER INFORMATION

None.

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ITEM 6.	EXHIBITS



Exhibit		Description
3.1		Articles of Amendment and Restatement of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 29, 2016)
3.2		Articles of Amendment of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on April 29, 2016)
3.3		Articles Supplementary of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on May 18, 2015)
3.4		Articles Supplementary for 5.50% Series A Cumulative Convertible Preferred Stock of Ashford Hospitality Prime, Inc., as amended by a Certificate of Correction, as filed with the State Department of Assessments and Taxation Maryland ON June 11, 2015 (incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K filed on April 29, 2016)
3.5		Articles Supplementary for 5.50% Series B Cumulative Convertible Preferred Stock of Ashford Hospitality Prime, Inc., accepted for record and certified by the Maryland State Department of Assessments and Taxation on December 4, 2015 (incorporated by reference to Exhibit 3.5 to the Current Report on Form 8-K filed on April 29, 2016)
3.6		Articles Supplementary for the Series C Preferred Stock of Ashford Hospitality Prime, Inc., as filed with the State Department of Assessments and Taxation of Maryland on February 1, 2016 (incorporated by reference to Exhibit 3.6 to the Current Report on Form 8-K filed on April 29, 2016)
3.7		Articles Supplementary Establishing Additional Shares of Series B Preferred Stock of Ashford Hospitality Prime, Inc., accepted for record and certified by the Maryland State Department of Assessments and Taxation on April 27, 2016 (incorporated by reference to Exhibit 3.7 to the Current Report on Form 8-K filed on April 29, 2016)
3.8		Second Amended and Restated Bylaws of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 9, 2016)
12*		Statement Regarding Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends
31.1*		Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
31.2*		Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 are formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements Comprehensive Income; (iii) Consolidated Statement of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated Financial Statements. In accordance with Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

101.INS	XBRL Instance Document	Submitted electronically with this report.
101.SCH	XBRL Taxonomy Extension Schema Document	Submitted electronically with this report.
101.CAL	XBRL Taxonomy Calculation Linkbase Document	Submitted electronically with this report.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Submitted electronically with this report.
101.LAB	XBRL Taxonomy Label Linkbase Document	Submitted electronically with this report.
101.PRE	XBRL Taxonomy Presentation Linkbase Document	Submitted electronically with this report.

___________________________________

* Filed herewith.

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SIGNATURES

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

ASHFORD HOSPITALITY PRIME, INC.



Date:	August 9, 2016	By:	/s/ MONTY J. BENNETT
			Monty J. Bennett
			Chief Executive Officer

Date:	August 9, 2016	By:	/s/ DERIC S. EUBANKS
			Deric S. Eubanks
			Chief Financial Officer