Watermark Lodging Trust, Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



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

		For the fiscal year ended December 31, 2019

or

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

		For the transition period from to

Commission File Number: 000-55461

CAREY WATERMARK INVESTORS 2 INCORPORATED

(Exact name of registrant as specified in its charter)



Maryland		46-5765413
(State of incorporation)		(I.R.S. Employer Identification No.)

50 Rockefeller Plaza
New York, New York		10020
(Address of principal executive office)		(Zip Code)

Investor Relations (212) 492-8920

(212) 492-1100

(Registrant’s telephone numbers, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.001 Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

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



Large accelerated filer o	Accelerated filer o	Non-accelerated filer o

Smaller reporting company o	Emerging growth company þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Registrant has no active market for its common stock. Non-affiliates held 28,674,245 and 59,700,870 of Class A and Class T shares, respectively, of outstanding common stock at June 30, 2019.

As of March 6, 2020, there were 33,186,460 shares of Class A common stock and 61,196,124 shares of Class T common stock of registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant incorporates by reference its definitive Proxy Statement with respect to its 2020 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.

INDEX



			Page
PART I
	Item 1.	Business	4
	Item 1A.	Risk Factors	7
	Item 1B.	Unresolved Staff Comments	31
	Item 2.	Properties	32
	Item 3.	Legal Proceedings	33
	Item 4.	Mine Safety Disclosures	33
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
	Item 6.	Selected Financial Data	35
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
	Item 8.	Financial Statements and Supplementary Data	52
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	89
	Item 9A.	Controls and Procedures	89
	Item 9B.	Other Information	89
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	90
	Item 11.	Executive Compensation	90
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	90
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	90
	Item 14.	Principal Accounting Fees and Services	90
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	91
	Item 16.	Form 10-K Summary	94
SIGNATURES

Forward-Looking Statements

This Annual Report on Form 10-K (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements about the impact of hurricanes and other natural disasters on certain hotels, including the condition of the properties and cost estimates and the effect of infectious disease outbreaks, such as the Coronavirus. In addition, on October 22, 2019, we announced that we have entered into a merger agreement with Carey Watermark Investors Incorporated and an internalization agreement with our advisor and subadvisor. These transactions are expected to close in the first quarter of 2020, although there can be no assurance that they will close in our expected timeframe or at all. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission (“SEC”), including but not limited to those described in Item 1A. Risk Factors of this Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

CWI 2 2019 10-K – 2

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part II, Item 8. Financial Statements and Supplementary Data.

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PART I

Item 1. Business.

General Development of Business

Overview

Carey Watermark Investors 2 Incorporated (“CWI 2”) is a publicly owned, non-traded real estate investment trust (“REIT”) that, together with its consolidated subsidiaries, invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. We conduct substantially all of our investment activities and own all of our assets through CWI 2 OP, LP, a Delaware limited partnership (the “Operating Partnership”). We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings 2, LLC (“Carey Watermark Holdings 2”), which is owned indirectly by W. P. Carey Inc. (“WPC”), holds a special general partner interest of 0.015% in the Operating Partnership. In order to qualify as a REIT, we cannot operate hotels directly; therefore, we lease our hotels to our wholly-owned taxable REIT subsidiaries (“TRSs” and collectively the “TRS lessees”). At December 31, 2019, we held ownership interests in 12 hotels, with a total of 4,420 rooms.

We are managed by Carey Lodging Advisors, LLC (our “Advisor”), an indirect subsidiary of WPC, pursuant to an advisory agreement, dated February 9, 2015, as amended, among us, the Operating Partnership and our Advisor (the “Advisory Agreement”). Under the Advisory Agreement, our Advisor is responsible for managing our overall hotel portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. On February 9, 2015, CWA 2, LLC (the “Subadvisor”) entered into a subadvisory agreement with our Advisor (the “Subadvisory Agreement”). The Subadvisor provides services to our Advisor primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent hotel operators that manage the day-to-day operations of our hotels. In addition, the Subadvisor provides us with the services of Mr. Michael G. Medzigian, our Chief Executive Officer, subject to the approval of our independent directors.

WPC is a diversified REIT and leading owner of commercial real estate that is listed on the New York Stock Exchange under the symbol “WPC.” In addition, WPC also manages the portfolios of certain non-traded investment programs.

Watermark Capital Partners, LLC (“Watermark Capital Partners” or “Watermark”) is a private investment firm formed in May 2002 that focuses on assets that benefit from specialized marketing strategies and demographic shifts, including hotels and resorts, resort residential products, recreational projects (e.g., golf and club ownership programs), and new-urbanism and mixed-use projects. The principal of Watermark Capital Partners, Mr. Medzigian, has managed lodging properties valued in excess of $7.0 billion during his over 38 years of experience in the lodging and real estate industries, including as the chief executive officer of Lazard Freres Real Estate Investors, a real estate private equity management organization, and as a senior partner of Olympus Real Estate Corporation, the real estate fund management affiliate of Hicks, Muse, Tate and Furst Incorporated.

We raised offering proceeds in our initial public offering of $280.3 million from our Class A common stock and $571.0 million from our Class T common stock, for an aggregate of $851.3 million. The offering commenced in May 2014 and closed in July 2017. In addition, from inception through December 31, 2019, $28.9 million and $58.2 million of distributions were reinvested in our Class A and Class T common stock, respectively, through our distribution reinvestment plan (“DRIP”). We have fully invested the proceeds from our offering.

On October 22, 2019, we and Carey Watermark Investors Incorporated (“CWI 1”) announced that we have entered into a definitive merger agreement under which we will merge in an all-stock transaction, with CWI 1 surviving the merger as our wholly-owned subsidiary (the “Proposed Merger”). At the effective time of the Proposed Merger, each issued and outstanding share of CWI 1 common stock will be converted into 0.9106 shares of our Class A common stock. The exchange ratio was determined based on our December 31, 2018 estimated net asset value per share (“NAV”) of $11.41 for our Class A shares of common stock and CWI 1’s December 31, 2018 NAV of $10.39. The transaction is expected to close in the first quarter of 2020, subject to the approval of our stockholders and CWI 1’s stockholders, among other conditions. Following the closing of the Proposed Merger, the combined company will complete an internalization transaction with our Advisor and Subadvisor, as a result of which the combined company will become self-managed. For more information regarding the Proposed Merger, please

CWI 2 2019 10-K – 4

see the registration statement and joint proxy statement/prospectus on Form S-4 that we filed with the SEC on January 10, 2020 (the “Form S-4”).

In April 2019, we announced that our Advisor had determined our NAVs as of December 31, 2018 to be $11.41 for both our Class A and Class T shares of common stock. We currently do not intend to have our Advisor determine NAVs as of December 31, 2019, but currently expect that once the Proposed Merger closes, the combined company will determine and report its initial NAV.

We have no employees. At December 31, 2019, WPC had 204 employees who were available to perform services for us under the Advisory Agreement (Note 3) and Watermark Capital Partners had 16 employees who were available to perform services for us under the Subadvisory Agreement.

Narrative Description of Business

Business Objectives and Strategy

We are a publicly owned, non-traded REIT that strives to create value in the lodging industry. Our primary investment objectives are to provide stockholders with current income in the form of quarterly distributions and to increase the value of our portfolio in order to generate long-term capital appreciation.

Our core strategy for achieving these objectives is to build and enhance the value of a portfolio of interests in lodging and lodging related investments. We employ value-added strategies, such as re-branding, renovating, expanding or changing hotel operators, when we believe such strategies will increase the operating results and values of the hotels we acquire. We regularly review the hotels in our portfolio to ensure that they continue to meet our investment criteria. If we were to conclude that a hotel’s value has been maximized, or that it no longer fits within our financial or strategic criteria, we may seek to sell the hotel and use the net proceeds for investments in our existing or new hotels, or to reduce our overall leverage. While we do not operate our hotel properties, both our asset management team and our executive management team monitor and work cooperatively with our hotel operators in all aspects of our hotels' operations, including advising and making recommendations regarding property positioning and repositioning, revenue and expense management, operations analysis, physical design, renovation and capital improvements, guest experience and overall strategic direction. We believe that we can add significant value to our portfolio through our intensive asset management strategies. Our executive and asset management teams have significant experience in hotels, as well as in creating and implementing innovative asset management initiatives.

We will adjust our investment focus from time to time based upon market conditions and our Advisor's views on relative value as market conditions change. Material changes in our investment focus will be described in our periodic reports filed with the SEC; however, these reports would typically be filed after changes in our investment focus have been made, which in some cases may be several months after such changes.

As a REIT, we are allowed to own lodging properties, but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases with certain of our subsidiaries organized as TRSs. The TRS lessees in turn contract with independent property operators that manage the day-to-day operations of our properties.

The lodging properties we have acquired include full-service branded hotels located in urban settings, resort properties and select-service hotels. Full-service hotels generally provide a full complement of guest amenities, including food and beverage services, meeting and conference facilities, concierge and room service and valet parking, among others. Select-service hotels typically have limited food and beverage outlets and do not offer comprehensive business or banquet facilities. Resort properties may include smaller boutique hotels and large-scale integrated resorts. All of our investments to date have been in the United States, however, we may consider, and are not prohibited under our organizational documents from making, investments outside the United States.

Our Portfolio

At December 31, 2019, our portfolio was comprised of our full or partial ownership in 12 hotels with 4,420 guest rooms, all located in the United States. See Item 2. Properties.

CWI 2 2019 10-K – 5

Holding Period

We generally intend to hold our investments in real property for an extended period depending on the type of investment. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation for our stockholders while avoiding increases in risk. No assurance can be given that this objective will be realized.

Financing Strategies

At December 31, 2019, our hotel portfolio, including both the hotels that we consolidate in our financial statements (“Consolidated Hotels”) (as further discussed in Note 4) and the hotels that we record as equity investments in our financial statements (“Unconsolidated Hotels”) (as further discussed in Note 5), was 58% leveraged. Our organizational documents permit us to incur leverage of up to 75% of the total costs of our investments or 300% of our net assets (whichever is less), or a higher amount with the approval of a majority of our independent directors.

Transactions With Affiliates

We may borrow funds or purchase properties from, or enter into joint ventures with, our Advisor, the Subadvisor, or their or our respective affiliates, if we believe that doing so is consistent with our investment objectives and we comply with our investment policies and procedures. A majority of our directors (including the independent directors) must approve any significant investment in which we invest jointly with an entity sponsored and/or managed by our Advisor, the Subadvisor or their or our respective affiliates (Note 3).

Competition

The hotel industry is highly competitive. Hotels we acquire compete with other hotels for guests in our markets. Competitive factors include location, convenience, brand affiliation, room rates, range and the quality of services, facilities and guest amenities or accommodations offered. Competition in the markets in which our hotels operate include competition from existing, newly renovated and newly developed hotels in the relevant segments. Competition can adversely affect the occupancy, average daily rates (“ADR”), and revenue per available room (“RevPAR”) of our hotels, and thus our financial results, and may require us to provide additional amenities, incur additional costs or make capital improvements that we otherwise might not choose to make, which may adversely affect our profitability.

Seasonality

Certain lodging properties are seasonal in nature. Generally, occupancy rates and revenues are greater in the second and third quarters than in the first and fourth quarters. As a result of the seasonality of certain lodging properties, there may be quarterly fluctuations in results of operations of our properties. Quarterly financial results may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may need to enter into short-term borrowings in certain periods in order to offset these fluctuations in revenues, to fund operations or to make distributions to our stockholders.

Certain Environmental and Regulatory Matters

Our hotel properties are subject to various federal, state and local environmental laws and regulations. In connection with our current or prior ownership or operation of hotels, we may potentially be liable for various environmental costs or liabilities (including investigation, clean-up and disposal of hazardous materials released at, on, under, in or from the property). Environmental laws and regulations typically impose responsibility without regard to whether the owner or operator knew of or was responsible for the presence of hazardous materials or contamination, and liability is often joint and several. As part of our efforts to mitigate these risks, we typically engage third parties to perform assessments of potential environmental risks when evaluating new acquisitions or if required to do so by a lender. Such environmental surveys are limited in scope, however, and we remain exposed to contaminates (e.g., such as asbestos and mold) and hazardous or regulated substances used during the routine operations of our hotels (e.g., swimming pool or dry cleaning chemicals). Our hotel properties incur costs to comply with environmental and health and safety laws and regulations and could be subject to fines and penalties for non-compliance.

We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties. And although we are

CWI 2 2019 10-K – 6

not currently aware of any material environmental or health and safety claims pending or threatened against us, a claim may be asserted against us in the future that could have a material adverse effect on us.

Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. We believe that our properties are substantially in compliance with the ADA, however, the obligation to make readily achievable accommodations is an ongoing one and we will continue to assess our properties and make alterations as appropriate.

Available Information

We will supply to any stockholder, upon written request and without charge, a copy of this Report as filed with the SEC. Our filings can also be obtained for free on the SEC’s website at http://www.sec.gov. All filings we make with the SEC, including this Report, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, as well as any amendments to those reports, are available for free on our website, http://www.careywatermark2.com, as soon as reasonably practicable after they are filed with or furnished to the SEC. We are providing our website address solely for the information of investors and do not intend for it to be an active link. We do not intend to incorporate the information contained on our website into this Report or other documents filed with or furnished to the SEC.

Our Code of Business Conduct and Ethics, which applies to all of our officers, including our chief executive officer and chief financial officer, and our directors, is available on our website at http://www.careywatermark2.com. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics within four business days after any such amendments or waivers.

Item 1A. Risk Factors.

Our business, results of operations, financial condition and ability to pay distributions could be materially adversely affected by various risks and uncertainties, including the conditions below. These risk factors may affect our actual operating and financial results and could cause such results to differ materially from our expectations as expressed in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically and we cannot assure you that the factors described below list all risks that may become material to us at any later time.

The Current Coronavirus Pandemic

The extent of the effects on our business from the current novel coronavirus pandemic continue to emerge and cannot be predicted with certainty. We have experienced cancellations of rooms and conferences, and expect that we will continue to do so until the spread of the virus, or the fear of its spread, subsides. In addition, government-imposed restrictions on travel and large gatherings are likely to adversely affect the performance of our hotels in affected areas. Moreover, our operations will be negatively affected if the hotel employees are quarantined as the result of exposure to the virus. These and other effects of the coronavirus could materially and adversely affect our business, results of operations, financial condition, ability to comply with financial covenants and ability to pay dividends and could magnify the adverse effects of the other risks described in this Risk Factors section.

Risks Related to the Proposed Merger

The exchange ratio is fixed and will not be adjusted in the event of any change in the relative values of the shares of CWI 1 common stock or CWI 2’s Class A common stock.

Upon the consummation of the merger, each issued and outstanding share of CWI 1 common stock (or fraction thereof) will be converted into the right to receive 0.9106 shares of CWI 2 Class A common stock. This exchange ratio is fixed pursuant to the merger agreement and will not be adjusted to reflect events or circumstances or other developments of which CWI 1 or CWI 2 become aware or which occur after the date of the merger agreement, or any changes in the relative values of CWI 1 and CWI 2, including:


•	changes in the respective businesses, operations, assets, liabilities, or prospects of CWI 1 and CWI 2;


•	changes in general market and economic conditions, and other factors generally affecting the relative values of CWI 1's and CWI 2's assets;


•	federal, state and local legislation, governmental regulation, and legal developments in the businesses in which CWI 1 and CWI 2 operate; or

CWI 2 2019 10-K – 7


•	other factors beyond the control of CWI 1 and CWI 2, including those described or referred to elsewhere in the "Risk Factors" section in the Form S-4.

Completion of the Proposed Merger is subject to a number of conditions, and if these conditions are not satisfied or waived, the merger will not be completed, which could result in the requirement that CWI 1 or CWI 2 pay certain termination fees or, in certain circumstances, that CWI 1 or CWI 2 pay expenses to the other party.

The merger agreement is subject to many conditions which must be satisfied or waived in order to complete the merger. The internalization is conditioned on, among other things, the consummation of the merger. The mutual conditions of the parties under the merger agreement include, among others: (i) the receipt of all necessary consents and approvals; (ii) the approval of the merger by CWI 1's stockholders; (iii) the approval of the merger by CWI 2's stockholders; and (iv) the absence of any law, order, or other legal restraint or prohibition that would prohibit, restrain, enjoin, or make illegal the merger or any of the transactions contemplated by the merger agreement. In addition, each party's obligation to consummate the merger is subject to certain other conditions, including among others: (a) the accuracy of the other party's representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (b) the other party's compliance with its covenants and agreements contained in the merger agreement; (c) the absence of any circumstances constituting a material adverse effect on the other party; (d) the receipt of certain legal opinions; and (e) certain matters with respect to the internalization documents, including the internalization documents remaining legal, valid, binding obligations of and enforceable against the parties thereto, written confirmation that all of the conditions to closing the internalization have been satisfied or waived, and there being no violation or default under any internalization document. For a more complete summary of the conditions that must be satisfied or waived prior to the consummation of the merger, see the section titled "The Merger Agreement-Conditions to Obligations to Complete the Merger and Other Transactions" in the Form S-4.

There can be no assurance that the conditions to closing the merger or the internalization will be satisfied or waived or that the merger or the internalization will be completed. Failure to consummate the merger or the internalization may adversely affect CWI 1's or CWI 2's results of operations and business prospects for the following reasons, among others: (i) each of CWI 1 and CWI 2 will incur certain transaction costs, regardless of whether the Proposed Merger closes, which could adversely affect each company's respective financial condition, results of operations, and ability to make distributions to its stockholders, and (ii) the Proposed Merger will divert the attention of personnel of the Advisor, CWI 1 Subadvisor, and CWI 2 Subadvisor from ongoing business activities, including the pursuit of other opportunities that could be beneficial to CWI 1 or CWI 2, respectively. In addition, CWI 1 or CWI 2 may terminate the merger agreement under certain circumstances, including among other reasons if the merger is not completed by March 31, 2020 and if the merger agreement is terminated under certain circumstances specified in the merger agreement, either CWI 1 or CWI 2 may be required to pay the other party a termination fee. The merger agreement also provides that one party may be required to reimburse the other party's transaction expenses, not to exceed $5 million, if the merger agreement is terminated under certain circumstances. See the section titled "The Merger Agreement-Termination Expenses" in the Form S-4.

For more information regarding the conditions and risks outlined above, please see the Form S-4.

The pendency of the Proposed Merger could adversely affect the business and operations of CWI 1 and CWI 2.

Prior to the effective date of the Proposed Merger, some vendors of each of CWI 1 and CWI 2 may delay or defer decisions, which could negatively affect the revenues, earnings, cash flows, and expenses of CWI 1 and CWI 2, regardless of whether the merger is completed. Similarly, current and prospective employees of CWI 1 and CWI 2 may experience uncertainty about their future roles with the combined company following the Proposed Merger, which may materially adversely affect the ability of such entities to attract and retain key personnel during the pendency of the merger. In addition, due to operating restrictions in the merger agreement, subject to certain exclusions, each of CWI 1 and CWI 2 may be unable, during the pendency of the merger, to pursue liquidity events, undertake significant capital projects, undertake certain significant financing transactions, and otherwise pursue other actions, even if such actions would prove beneficial.

The ownership percentage of CWI 2 common stockholders will be diluted by the Proposed Merger.

The merger will dilute the ownership percentage of CWI 2 common stockholders and result in CWI 2 common stockholders having a smaller ownership stake in the combined company as compared to their current stake in CWI 2. Immediately following the consummation of the merger, including the issuance of shares of CWI 2 Class A common stock to CWI 1 stockholders pursuant to the merger agreement, it is estimated that former CWI 1 stockholders will hold in the aggregate approximately 58%, and that continuing CWI 2 common stockholders will hold in the aggregate approximately 42% of the issued and outstanding shares of common stock of the combined company. Consequently, CWI 2 common stockholders, as a

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general matter, may have less influence over the management and policies of the combined company after the effective date of the merger than they currently exercise over the management and policies of CWI 2.

The stockholders of the combined company will be further diluted by the issuance of the common stock and Series A preferred stock and units in the CWI 2 Operating Partnership in the internalization.

The merger agreement contains provisions that could discourage a potential competing acquiror of either CWI 1 or CWI 2 or could result in any competing proposal being at a lower price than it might otherwise be.

The merger agreement contains provisions that, subject to certain exceptions, restrict the ability of each of CWI 1 and CWI 2 to solicit, initiate, knowingly encourage, or knowingly facilitate competing third-party proposals to acquire all, or a significant part, of CWI 1 or CWI 2, as applicable. In addition, each of CWI 1 and CWI 2 generally has an opportunity to offer to modify the terms of the Proposed Merger in response to any competing acquisition proposals that may be made under certain circumstances. Upon termination of the merger agreement in certain circumstances, either CWI 1 or CWI 2 may be required to pay a termination fee to the other party, and in certain other circumstances, one party may be required to pay the other party's transaction expenses. For more information, please see the sections titled "The Merger Agreement-Solicitation of Transactions" and "The Merger Agreement-Termination Expenses" in the Form S-4.

These provisions could discourage a potential competing acquiror that might have an interest in acquiring all, or a significant part, of either CWI 1 or CWI 2 from considering or proposing an acquisition, even if the competing acquiror were prepared to pay consideration with a higher per share value than the value proposed to be realized in the merger, or might result in a potential competing acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

The shares of CWI 2 common stock to be received by CWI 1 stockholders as a result of the merger will have rights different from the shares of CWI 1 common stock.

Upon the consummation of the merger, the rights of former CWI 1 stockholders who receive CWI 2 common stock in the merger (and so become common stockholders of the combined company) will be governed by the charter and bylaws of the combined company and the Maryland General Corporation Law. The rights associated with CWI 1 common stock are different from the rights associated with common stock of the combined company. See the section titled "Comparison of Rights of CWI 1 Stockholders and CWI 2 Stockholders" in the Form S-4 for a discussion of the different rights associated with CWI 2 common stock.

There may be unexpected delays in the consummation of the Proposed Merger.

The Proposed Merger is expected to close during the first quarter of 2020, assuming that all of the conditions in the merger agreement are satisfied or waived. The merger agreement provides that either CWI 1 or CWI 2 may terminate the merger agreement if the merger has not occurred by March 31, 2020. Certain events may delay the consummation of the Proposed Merger, including difficulties in obtaining the approval of CWI 1's stockholders and CWI 2's stockholders or satisfying the other closing conditions to which the merger is subject.

Some of CWI 1's, CWI 2's, and their affiliates' directors and officers have interests in the Proposed Merger that are different from, or in addition to, those of the other CWI 1 stockholders and CWI 2 stockholders.

Some of the directors and officers of CWI 2 have interests in the Proposed Merger that are different from, or in addition to, those of CWI 1's stockholders and of CWI 2's stockholders generally. These interests include, among other things, the following: (i) the receipt by WPC and Watermark of consideration valued at $125.0 million in the aggregate (on the basis of CWI 2's estimated net asset value per share of $11.41 as of December 31, 2018) pursuant to the internalization agreement, of which affiliates of WPC will receive consideration valued at $97.4 million in the aggregate value and affiliates of Watermark will receive consideration valued at $27.6 million in the aggregate value; (ii) the CEO employment agreement that will take effect at the closing of the merger; (iii) the payment of $6.95 million to Michael G. Medzigian under the commitment agreement; (iv) the 5,912,950 shares of CWI 1 common stock and 3,755,336 shares of CWI 2 common stock owned by them at December 31, 2019; (v) the continued service of all of the independent directors of CWI 1 and of CWI 2 on the combined company's board of directors, for which they will receive compensation; and (vi) the other benefits described in the section titled "The Companies-The Combined Company-Potential Conflicts of Interest of the Combined Company" in the Form S-4. These interests, among other things, may influence or may have influenced CWI 2's directors to support or approve the merger.

CWI 2 2019 10-K – 9

The Proposed Merger will result in changes to the board of directors of the combined company.

Upon the consummation of the Proposed Merger, the composition of the board of directors of the combined company will be different than those of the current CWI 1 board and the CWI 2 board. The board of directors of the combined company will consist of nine directors, and pursuant to the internalization agreement, the parties thereto have agreed that for so long as WPC beneficially owns capital stock of the combined company with a value, determined in accordance with the internalization agreement, (i) equal to or greater than $100 million, WPC shall have the right to designate two directors for election to the board of directors of the combined company, (ii) equal to or greater than $50 million but less than $100 million, WPC shall have the right to designate one director for election to the board, and (iii) less than $50 million, WPC shall have no right to designate any director for election to the board. In addition, Michael G. Medzigian will be chairman of the combined company's board of directors in accordance with the terms of his employment agreement. See the section titled "The Internalization and the Internalization Agreement-CEO Employment Agreement" in the Form S-4. The new composition of the combined company's board of directors may affect the future decisions of the combined company.

If the merger does not qualify as a tax-free reorganization, there may be adverse tax consequences.

The merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. The closing of the merger is conditioned on, among other things, the receipt by each of CWI 1 and CWI 2 of an opinion of its respective counsel to the effect that the merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. If the merger were to fail to qualify as a tax-free reorganization, then each CWI 1 stockholder generally would recognize gain or loss, as applicable, equal to the difference between (i) the sum of the fair market value of the shares of CWI 2 common stock received by the CWI 1 stockholder in the merger and (ii) the CWI 1 stockholder's adjusted tax basis in its CWI 1 common stock.

Risks Related to the Combined Company Following the Proposed Merger

The combined company may experience adverse consequences as a result of internalization.

The internalization involves a series of transactions and activities to internalize business operations within the combined company, including among others the termination of the existing advisory arrangements with the Advisor, CWI 1 Subadvisor, CWI 2 Subadvisor, and their respective affiliates, the hiring and onboarding of new employees by the combined company, and the assumption of contractual relationships and integration of services by the combined company. There is no guarantee that the internalization will be successful or achieve the results that are expected. If the merger and internalization are consummated, the combined company will be a self-managed REIT. The combined company will no longer bear the costs of the various fees and expense reimbursements previously paid to the Advisor, CWI 1 Subadvisor, CWI 2 Subadvisor, and their affiliates; however, the combined company's expenses will include the compensation and benefits of the combined company's officers, employees, and consultants, as well as overhead expenses. The combined company's employees will provide services historically provided by CWI 1's and CWI 2's external advisor, subadvisors, and their affiliates. The combined company will be subject to potential liabilities that are commonly faced by employers, such as workers' disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and the combined company will bear the cost of the establishment and maintenance of any employee compensation plans. In addition, neither CWI 1 nor CWI 2 has previously operated as a self-managed REIT, and the combined company may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis. If the combined company incurs unexpected expenses as a result of its self-management, its results of operations could be lower than they otherwise would have been.

The combined company's operating results after the Proposed Merger may materially differ from the pro forma information presented in the joint proxy statement/prospectus.

The combined company's operating results after the Proposed Merger may be materially different from those shown in the pro forma information presented in the joint proxy statement/prospectus, which represents only a combination of CWI 1's and CWI 2's historical results. See the section titled "Prospective Financial Information" beginning on page 149. The costs related to the merger and internalization could be higher or lower than currently estimated, depending on how difficult it is to integrate CWI 1's business with CWI 2's business and how difficult it is for the combined company to make the transition from being externally managed to self-managed.

The combined company will have substantial indebtedness upon the consummation of the merger.

CWI 2 2019 10-K – 10

In connection with the merger, the combined company will assume the indebtedness of CWI 1 and will be subject to risks associated with debt financing, including a risk that the combined company's cash flow could be insufficient to meet required payments on its debt. As of September 30, 2019, CWI 1 had consolidated indebtedness of $1.3 billion and CWI 2 had consolidated indebtedness of $0.8 billion. After giving effect to the merger, the combined company's total pro forma consolidated indebtedness will increase. Taking into account each of CWI 1's and CWI 2's existing indebtedness, and the assumption and consolidation of indebtedness in the merger, the combined company's pro forma consolidated indebtedness as of September 30, 2019, after giving effect to the merger, would be approximately $2.3 billion. In addition, the combined company will issue Series A preferred stock having an aggregate liquidation preference of $65.0 million to WPC in the internalization, and these shares are redeemable at the option of the holder under certain circumstances.

The combined company's indebtedness could have important consequences to holders of its common stock, including:


•	vulnerability of the combined company to general adverse economic and industry conditions;


•	limiting the combined company's ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements;


•	requiring the use of a substantial portion of the combined company's cash flow from operations for the payment of principal and interest on its indebtedness, thereby reducing its ability to use its cash flow to pay distributions, fund working capital, acquisitions, capital expenditures, and general corporate requirements;


•	limiting the combined company's flexibility in planning for, or reacting to, changes in its business and its industry;


•	delaying the combined company's ability to consummate a future liquidity event, such as an initial public offering or public stock exchange listing, or causing any such event to occur at a lower valuation than if the combined company had less indebtedness; and


•	putting the combined company at a disadvantage compared to its competitors with less indebtedness.

If and when the combined company completes a liquidity event, the market value ascribed to the shares of common stock of the combined company upon the liquidity event may be significantly lower than the estimated net asset values per share of CWI 1 and CWI 2 used to establish the exchange ratio in the merger.

In approving and recommending the merger, the CWI 1 special committee and the CWI 2 special committee considered the most recent estimated net asset values per share of CWI 1 and CWI 2, which are as of December 31, 2018. The estimated net asset value per share of the combined company will only be determined after the merger. In the event that the combined company completes a liquidity event after the consummation of the merger, such as an initial public offering or listing of its shares on a national securities exchange, the market value of the shares of the combined company upon the completion of such liquidity event may be significantly lower than the estimated net asset values considered by the CWI 1 special committee and CWI 2 special committee and the estimated net asset value per share of the combined company that may be reflected on the account statements of stockholders of the combined company after the consummation of the merger. For example, if the shares of the combined company are listed on a national securities exchange at some point after the consummation of the merger, the trading price of the shares may be significantly lower than the CWI 2 estimated value per share of $11.41 as of December 31, 2018.

Counterparties to certain significant agreements with CWI 1 or CWI 2 may exercise contractual rights under such agreements in connection with the Proposed Merger.

CWI 1 and CWI 2 are each party to certain agreements that give the counterparty certain rights following a "change in control," including in some cases the right to terminate the agreement. Under some such agreements, the Proposed Merger may constitute a change in control and therefore the counterparty may exercise certain rights under the agreement upon the closing of the Proposed Merger. Any such counterparty may request modifications of its agreements as a condition to granting a waiver or consent under its agreements. There can be no assurances that such counterparties will not exercise their rights under these agreements, including termination rights where available, or that the exercise of any such rights under, or modification of, these agreements will not adversely affect the business or operations of the combined company.

The combined company is subject to the risks of brand concentration.

Of the combined company's hotels, 26 utilize brands owned by Marriott or Hilton as of December 31, 2019. As a result, the combined company's success is dependent in part on the continued success of their brands. A negative public image or other adverse event that becomes associated with those brands, such as the recent cybersecurity incident affecting Marriott hotels, could adversely affect hotels operated under those brands. If those brands suffer a significant decline in appeal to the traveling

CWI 2 2019 10-K – 11

public, the revenues and profitability of the combined company's hotels operated under those brands could be adversely affected.

The combined company cannot assure stockholders that it will be able to continue paying distributions at the rate currently paid by CWI 2 or at all.

The combined company's common stockholders may not receive distributions equivalent to those currently paid by CWI 2 following the Proposed Merger for various reasons, including:


•	the combined company may not have enough cash to pay the cash portions of its distributions due to changes in the combined company's cash requirements, capital spending plans, cash flow, or financial position;


•	decisions on whether, when, and in which amounts to make any future distributions will remain at all times entirely at the discretion of the combined company's board of directors, which reserves the right to change CWI 2's current distribution practices at any time and for any reason; and


•	the combined company may desire to retain cash.

Stockholders of the combined company will have no contractual or other legal right to distributions that have not been authorized by the combined company's board of directors.

Former CWI 1 stockholders should expect to receive a portion of future dividends from the combined company in shares of CWI 2 Class A common stock for the foreseeable future, with the effect that the amount of cash dividends received by former CWI 1 stockholders should be lower after the merger.

The combined company currently expects to continue to pay dividends at the same annual rate as the dividend rate paid by CWI 2 before the merger; however, CWI 2 has historically paid a portion of its dividends in cash and a portion in stock, and the combined company expects to continue to do so for the foreseeable future. Assuming the combined company continues to pay dividends after the merger at the same annual rate as paid by CWI 2 before the merger, former CWI 1 stockholders will see an increase in the overall amount of dividends per share relative to the dividends paid by CWI 1, but the amount paid in cash will be less than the cash dividends per share paid by CWI 1.

The combined company may have adverse tax consequences if CWI 1 or CWI 2 has failed or fails to qualify as a REIT for U.S. federal income tax purposes.

Each of CWI 1 and CWI 2 has operated in a manner that it believes has allowed it to qualify as a REIT for U.S. federal income tax purposes under the Code. Each intends to continue to do so through the time of the Proposed Merger, and the combined company intends to continue operating in such a manner following the Proposed Merger. Neither CWI 1 nor CWI 2 has requested or plans to request a ruling from the IRS that it qualifies as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. In order to qualify as a REIT, each of CWI 1 and CWI 2 must satisfy a number of requirements, including requirements regarding the ownership of its respective stock and the composition of its respective gross income and assets. Also, a REIT must make distributions to stockholders aggregating annually at least 90% of its net taxable income, excluding any net capital gains.

If CWI 1 or CWI 2 fails to qualify as a REIT, or is determined to have failed to qualify as a REIT in a prior year, it will face serious tax consequences that would substantially reduce its cash available for distribution, including cash available to pay dividends to its stockholders, because:


•	such company would be subject to U.S. federal income tax on its net income at regular corporate rates for the years it did not qualify for taxation as a REIT (and, for such years, would not be allowed a deduction for dividends paid to stockholders in computing its taxable income);


•	such company could be subject to the U.S. federal alternative minimum tax (for taxable years ending prior to January 1, 2018) and possibly increased state and local taxes for such periods;


•	unless such company is entitled to relief under applicable statutory provisions of the Code, neither it nor any "successor" company could elect to be taxed as a REIT until the fifth taxable year following the year during which it was disqualified; and


•	for up to five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, such company could be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.

CWI 2 2019 10-K – 12

If CWI 1 failed to qualify as a REIT prior to the closing of the merger, the combined company, if it is determined to be a "successor" to CWI 1, would fail to qualify as a REIT and would be prohibited from making a REIT election for any taxable year prior to the fifth taxable year following the year during which CWI 1 was disqualified. In addition, the combined company would inherit any liability with respect to unpaid taxes of CWI 1 for any periods prior to the merger for which CWI 1 did not qualify as a REIT. As a result of all these factors, CWI 1's or CWI 2's failure to qualify as a REIT could impair the combined company's ability to expand its business and raise capital, and would materially adversely affect the value of its stock. In addition, for years in which the combined company does not qualify as a REIT, it will not otherwise be required to make distributions to stockholders.

The combined company depends on key personnel for its future success, and the loss of key personnel or inability to attract and retain personnel could harm the combined company's business.

The future success of the combined company depends in large part on its ability to hire and retain a sufficient number of qualified personnel. The future success of the combined company also depends upon the service of the combined company's executive officers, who have extensive market knowledge and relationships and will exercise substantial influence over the combined company's operational, financing, acquisition, and disposition activity.

Many of the combined company's other key executive personnel, particularly its senior managers, also have extensive experience. The loss of services of one or more members of the combined company's senior management team, or the combined company's inability to attract and retain highly qualified personnel, could adversely affect the combined company's business, diminish the combined company's investment opportunities, and weaken its relationships with lenders, business partners, and industry personnel, which could materially and adversely affect the combined company.

Key employees may depart either before or after the merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the merger. Accordingly, no assurance can be given that CWI 2 or, following the merger, the combined company will be able to retain key employees to the same extent as in the past.

Risks Related to an Investment in CWI 2 Prior to the Consummation of the Proposed Merger

The prices of shares being offered through our DRIP are determined by our board of directors based upon our NAVs from time to time and may not be indicative of the price at which the shares would trade if they were listed on an exchange or actively traded by brokers.

The prices of the shares being offered through our DRIP are determined by our board of directors in the exercise of its business judgment based upon our NAVs from time to time. The valuation methodologies underlying our NAVs involve subjective judgments. Valuations of real properties do not necessarily represent the price at which a willing buyer would purchase our properties; therefore, there can be no assurance that we would realize the values underlying our NAVs if we were to sell our assets and distribute the net proceeds to our stockholders. In addition, the values of our assets and debt are likely to fluctuate over time. This price may not be indicative of (i) the price at which shares would trade if they were listed on an exchange or actively traded by brokers, (ii) the proceeds that a stockholder would receive if we were liquidated or dissolved or (iii) the value of our portfolio at the time you dispose of your shares.

Our distributions in the past have exceeded, and may in the future exceed, our funds from operations (“FFO”).

Over the life of our company, the regular quarterly cash distributions we pay are expected to be principally sourced from our FFO. However, we have funded a portion of our cash distributions to date using net proceeds from our public offerings and, to a lesser extent, other sources; and there can be no assurance that our FFO will be sufficient to cover our future distributions. We fully covered total distributions declared for the year ended December 31, 2019 using FFO and funded all of these distributions from Net cash provided by operating activities. If our properties are not generating sufficient cash flow or our other expenses require it, we may need to use other sources of funds, such as proceeds from asset sales, borrowings or our DRIP to fund distributions in order to satisfy REIT requirements. If we fund distributions from borrowings, such financing will incur interest costs and need to be repaid.

CWI 2 2019 10-K – 13

Because we have paid, and may continue to pay, distributions from sources other than our FFO, our distributions at any point in time may not reflect the current performance of our properties or our current operating cash flows.

Our charter permits us to make distributions from any source, including the sources described in the risk factor above. Because the amount we pay out in distributions has in the past exceeded, and may in the future continue to exceed, our FFO, distributions to stockholders may not reflect the current performance of our properties or our current operating cash flows. To the extent distributions exceed cash flow from operations, distributions may be treated as a return of investment and could reduce a stockholder’s basis in our stock. A reduction in a stockholder’s basis in our stock could result in the stockholder recognizing more gain upon the disposition of his or her shares, which in turn could result in greater taxable income to such stockholder.

Stockholders’ equity interests may be diluted.

Our stockholders do not have preemptive rights to any shares of common stock issued by us in the future. Therefore, (i) when we sell shares of common stock in the future, including those issued pursuant to our DRIP, (ii) when we issue shares of common stock to our independent directors or to our Advisor and its affiliates for payment of fees in lieu of cash, (iii) when we issue shares of common stock under our 2015 Equity Incentive Plan or (iv) if we issue additional common stock or other securities that are convertible into our common stock, then existing stockholders and investors that purchased their shares in our initial public offering will experience dilution of their percentage ownership in us. Depending on the terms of such transactions, most notably the offer price per share (which may be less than the per share proceeds received by us in our offering) and the value of our properties and our other investments, existing stockholders might also experience a dilution in the book value per share of their investment in us.

Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investment.

Our investment policies may change over time. The methods of implementing our investment policies may also vary as new investment techniques are developed. Except as otherwise provided in our charter, our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by a majority of our directors (including a majority of the independent directors), without the approval of our stockholders. As a result, the nature of your investment could change without your consent. Material changes in our investment focus will be described in our periodic reports filed with the SEC; however, these reports would typically be filed after changes in our investment focus have been made, and in some cases, several months after such changes. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and hotel property market fluctuations, all of which could materially adversely affect our ability to achieve our investment objectives.

We are not required to meet any diversification standards; therefore, our investments may become subject to concentration risks.

Subject to our intention to maintain our qualification as a REIT, we are not required to meet any diversification standards. Therefore, our investments may be concentrated in type, hotel brand or geographic location, which could subject us to significant risks (e.g., increased exposure to hurricane-prone regions) with potentially adverse effects on our ability to achieve our investment objectives.

Our success, including in regard to achieving liquidity, is dependent on the performance of our Advisor and the Subadvisor.

Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our Advisor in the acquisition of investments, the determination of any financing arrangements and the management of our assets. Our Advisor has retained the services of the Subadvisor because the Subadvisor is experienced in investing in and managing hotel properties and other lodging-related assets, including for CWI 1. If either our Advisor or the Subadvisor fails to perform according to our expectations, we could be materially adversely affected. The past performance of WPC (or programs managed by WPC) and Watermark Capital Partners, may not be indicative of our Advisor or Subadvisor’s performance with respect to us. Prior to CWI 1, our Advisor had not previously sponsored a program focused on lodging investments. In addition, our board of directors is beginning the process of evaluating strategic alternatives for us, although there can be no certainty as to the duration of that process or what the results of that process might be. Similarly, we cannot guarantee that our Advisor will be able to achieve liquidity for us in the manner or to the extent WPC has done in the past regarding other programs for which it served as the advisor.

CWI 2 2019 10-K – 14

We are dependent upon our Advisor and our Advisor’s access to the lodging experience of the Subadvisor.

The Advisory Agreement has a term of one year and may be renewed for successive one-year periods. We are subject to the risk that our Advisor will terminate the Advisory Agreement or that the Advisor or the Subadvisor will terminate the Subadvisory Agreement and that no suitable replacement(s) will be found to manage us. We have no employees or separate facilities and are substantially reliant on our Advisor, which has significant discretion as to the implementation and execution of our business strategies. Our Advisor in turn is relying in part on the lodging experience of the Subadvisor. We can offer no assurance that our Advisor will remain our external manager, that the Subadvisor will continue to be retained, or that we will continue to have access to our Advisor’s, WPC’s and/or Watermark Capital Partners’ professionals. If our Advisor terminates the Advisory Agreement or if our Advisor or the Subadvisor terminates the Subadvisory Agreement, we will not have such access and will be required to expend time and money to seek replacements, all of which may impact our ability to execute our business plan and meet our investment objectives.

Moreover, lenders for certain of our assets may insist on change of control provisions in the loan documentation that make the termination, replacement or dissolution of our Advisor events of default or events requiring the immediate repayment of the full outstanding balance of the loan. If such a default or accelerated repayment event occurs with respect to any of our assets, our revenues and distributions to our stockholders may be adversely affected.

Exercising our right to repurchase all or a portion of Carey Watermark Holdings 2’s interests in our Operating Partnership upon certain termination events could be prohibitively expensive and could deter us from terminating the Advisory Agreement.

The termination or resignation of Carey Lodging Advisors, LLC as our Advisor, including by non-renewal of the Advisory Agreement and replacement with an entity that is not an affiliate of our Advisor, would give our Operating Partnership the right, but not the obligation, to repurchase all or a portion of Carey Watermark Holdings 2’s interests in our Operating Partnership at the fair market value of those interests on the date of termination, as determined by an independent appraiser. This repurchase could be prohibitively expensive and require the Operating Partnership to sell assets in order to complete the repurchase. If our Operating Partnership does not exercise its repurchase right, we might be unable to find another entity that would be willing to act as our Advisor while Carey Watermark Holdings 2 owns a significant interest in the Operating Partnership. Even if we do find another entity to act as our Advisor, we may be subject to higher fees than the fees charged by Carey Lodging Advisors, LLC. These considerations could deter us from terminating the Advisory Agreement.

The repurchase of Carey Watermark Holdings 2’s special general partner interest in our Operating Partnership upon the termination of our Advisor in connection with a merger or other extraordinary corporate transaction may discourage certain business combination transactions.

In the event of a merger or other extraordinary corporate transaction in which the Advisory Agreement is terminated and an affiliate of WPC does not replace Carey Lodging Advisors, LLC as our Advisor, the Operating Partnership must either repurchase all or a portion of Carey Watermark Holdings 2’s special general partner interest in our Operating Partnership or obtain Carey Watermark Holdings 2’s consent to the merger. This obligation may deter a transaction in which we are not the surviving entity. This deterrence may limit the opportunity for stockholders to receive a premium for their shares that might otherwise exist if a third party attempted to acquire us through a merger or other extraordinary corporate transaction.

Payment of fees to our Advisor and distributions to our special general partner will reduce cash available for business purposes and distribution.

Our Advisor performs services for us in connection with the selection and acquisition of our investments and the management of our properties. Unless our Advisor continues to elect to receive shares of our common stock in lieu of cash compensation for asset management services, we will pay our Advisor substantial cash fees for these services. In addition, Carey Watermark Holdings 2, as the special general partner of our Operating Partnership, is entitled to certain distributions from our Operating Partnership. The payment of these fees and distributions will reduce the amount of cash available for business purposes or distribution to our stockholders.

CWI 2 2019 10-K – 15

The Subadvisor would likely assert a lack of fiduciary duty as a defense to claims.

The Subadvisor and its affiliated principals believe that they are not in a fiduciary relationship to our stockholders and may assert this position as a defense in any legal proceeding or claim asserting a breach of fiduciary duties by the Subadvisor.

We have limited independence from our Advisor, the Subadvisor and their respective affiliates, who may be subject to conflicts of interest.

Substantially all of our management functions are performed by officers of our Advisor pursuant to the Advisory Agreement and by the Subadvisor pursuant to the Subadvisory Agreement. Additionally, some of the directors of WPC and Watermark Capital Partners are also members of our board of directors. This limited independence, combined with our Advisor’s and Carey Watermark Holdings 2’ interests in us, may result in potential conflicts of interest because of the substantial control that our Advisor has over us and because some of its economic incentives may differ from those of our stockholders. Circumstances under which a conflict could arise among us, our Advisor, the Subadvisor and their affiliates include:


•	our Advisor and the Subadvisor are compensated for certain transactions on our behalf (e.g., for acquisitions of investments, sales and financings), which may cause our Advisor to engage in transactions that generate higher fees, rather than transactions that are more appropriate or beneficial for our business;


•	agreements between us and our Advisor, and between our Advisor and the Subadvisor, including agreements regarding compensation, are not negotiated on an arm’s-length basis, as would occur if the agreements were with unaffiliated third parties;


•	acquisitions of single assets or portfolios of assets from affiliates (including WPC or the other investment programs that it manages), subject to our investment policies and procedures, in the form of a direct purchase of assets, a merger or another type of transaction;


•	competition with WPC, the other entities managed by it and the Subadvisor for investment acquisitions, which are resolved by our Advisor (although our Advisor is required to use its best efforts to present a continuing and suitable investment program to us, allocation decisions present conflicts of interest, which may not be resolved in the manner most favorable to our interests);


•	decisions regarding asset sales, which could impact the timing and amount of fees payable to our Advisor and the Subadvisor as well as allocations and distributions payable to Carey Watermark Holdings 2 pursuant to its special general partner interests;


•	decisions regarding potential liquidity events and business combination transactions (including a merger with other investment programs that WPC manages), which may entitle our Advisor, the Subadvisor and their affiliates to receive additional fees and distributions relating to the liquidations; and


•	the termination and negotiation of the Advisory Agreement and other agreements with our Advisor, the Subadvisor and their affiliates.

There are conflicts of interest with certain of our directors and officers who have duties to WPC and/or to Watermark Capital Partners and entities sponsored or managed by either of them.

WPC and Watermark Capital Partners (and by extension Mr. Medzigian, by virtue of his position in Watermark Capital Partners) have economic interests in other lodging investments and may be subject to conflicts of interests. Most of the officers and certain of the directors of our Advisor or the Subadvisor are also our officers and directors, including Mr. Medzigian and Mr. Jason E. Fox (the chairman of our board of directors who is also the chief executive officer of WPC). Our officers may benefit from the fees and distributions paid to our Advisor, the Subadvisor and Carey Watermark Holdings 2 pursuant to the Advisory and Subadvisory Agreements. In addition, Mr. Medzigian, our chief executive officer and one of our directors, is a principal in other real estate investment transactions and programs that compete with us. Currently, Mr. Medzigian is the chairman and managing partner of Watermark Capital Partners, a private investment and management firm that specializes in real estate private equity transactions involving hotels and resorts, resort residential products, recreational projects (including golf and club ownership programs), and new-urbanism and mixed-use projects.

CWI 2 2019 10-K – 16

Our NAVs are computed by our Advisor relying in part on information that our Advisor provides to a third party.

Our NAVs are computed by our Advisor relying in part upon an annual third-party appraisal of the fair market value of our real estate and third-party estimates of the fair market value of our debt. Any valuation includes the use of estimates and our valuation may be influenced by the information provided to the third party by our Advisor. Because NAVs are estimated values and can change as interest rate and real estate markets fluctuate, there is no assurance that a stockholder will realize a particular NAV in connection with any liquidity event.

If we internalize our management functions, stockholders’ interests could be diluted and we could incur significant self-management costs.

Our board of directors may consider internalizing the functions currently performed for us by our Advisor by, among other methods, acquiring our Advisor and/or the Subadvisor. The method by which we could internalize these functions could take many forms. Any such transaction could result in significant payments to the owners of the Advisor and the Subadvisor. Any such transaction could also result in us repurchasing the Special General Partner’s interest in our Operating Partnership which could result in substantial additional costs. An acquisition of our Advisor or the Subadvisor could also result in dilution of your interests as a stockholder and could reduce earnings per share and FFO per share. There is no assurance that internalizing our management functions will be beneficial to us and our stockholders. The key employees of the Advisor or the Subadvisor who perform services for us may elect not to work directly for us, and instead remain with our Advisor (or another affiliate of WPC) or the Subadvisor. Additionally, we may not realize the perceived benefits of internalization. For example, the costs of operating as an internalized company may be higher than anticipated, the management functions acquired may not be as effective or efficient as those of our Advisor or Subadvisor, or we may not be able to properly integrate a new staff of managers and employees or be able to effectively replicate the services provided previously by our Advisor or the Subadvisor. Internalization transactions, including the acquisition of our Advisor or property managers affiliated with entity sponsors, have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to

spend significant amounts of money defending claims, which would reduce the amount of funds available for us to invest in properties or other investments and to pay distributions. All of these factors could have material adverse effect on our results of operations, financial condition and ability to pay distributions.

We could be adversely affected if WPC sells, transfers or otherwise discontinues its investment management business.

As of June 30, 2017, WPC exited non-traded retail fundraising activities and no longer sponsors new investment programs, although it has stated that it currently expects to continue serving as our Advisor through the end of our life cycle. If WPC sells, transfers or otherwise discontinues its investment management business entirely, we would have to find a new Advisor, who may not be familiar with our company, may not provide the same level of services as our Advisor, and may charge fees that are higher than the fees we pay to our Advisor, all of which may materially adversely affect our performance and delay or otherwise negatively impact our ability to effect a liquidity event. If we terminate the Advisory Agreement and repurchase the Special General Partner’s interest in our Operating Partnership, which we would have the right to do in such circumstances, the costs to us could be substantial.

We could have property losses that are not covered by insurance.

Our property insurance policies provide that all of the claims from each of our hotels resulting from a particular insurable event must be combined together for purposes of evaluating whether the aggregate limits and sub-limits contained in our policies have been exceeded. Therefore, if an insurable event occurs that affects more than one of our hotels, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached. If the total value of the loss exceeds the aggregate limits available, each affected hotel may only receive a proportional share of the amount of insurance proceeds provided for under the policy. We may incur losses in excess of insured limits, and as a result, may be even less likely to receive sufficient coverage for risks that affect multiple properties, such as earthquakes or catastrophic terrorist acts. In addition, catastrophic losses, such as those from successive or massive hurricanes or wildfires, could make the cost of insuring against such types of losses prohibitively expensive or difficult to obtain. Risks such as war, catastrophic terrorist acts, nuclear, biological, chemical or radiological attacks, and some environmental hazards may be deemed to fall completely outside the general coverage limits of our policies, may be uninsurable or may be too expensive to justify insuring against.

CWI 2 2019 10-K – 17

We have encountered, and will likely continue to encounter, disputes concerning whether an insurance provider will pay a particular claim that we believe is covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur, or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In such event, we may nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

We obtain terrorism insurance to the extent required by lenders or franchisors as a part of our all-risk property insurance program, as well as our general liability policy. However, our all-risk policies have limitations, such as per occurrence limits and sub-limits, which may have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act for ‘‘certified’’ acts of terrorism - namely those that are committed on behalf of non-U.S. persons or interests. Furthermore, we do not have full replacement coverage at all of our hotels for acts of terrorism committed on behalf of U.S. persons or interests (‘‘non-certified’’ events) as our coverage for such incidents is subject to sub-limits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological and chemical incidents is excluded under our policies. While the Terrorism Risk Insurance Act will reimburse insurers for losses resulting from nuclear, biological and chemical perils, it does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. As a result of the above, there remains uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.

Compliance with the ADA and the related regulations, rules and orders may adversely affect our financial condition.

Under the ADA, all public accommodations, including hotels, are required to meet certain federal requirements for access and use by disabled persons. Various state and local jurisdictions have also adopted requirements relating to the accessibility of buildings to disabled persons. We make every reasonable effort to ensure that our hotels substantially comply with the requirements of the ADA and other applicable laws. However, we could be liable for both governmental fines and payments to private parties if it were determined that our hotels are not in compliance with these laws. If we were required to make unanticipated major modifications to our hotels to comply with the requirements of the ADA and similar laws, it could materially adversely affect our ability to make distributions to our stockholders and to satisfy our other obligations.

We incur debt to finance our operations, which may subject us to an increased risk of loss.

We incur debt to finance our operations. Our charter and bylaws do not restrict the form of indebtedness we may incur.

The leverage we employ varies depending on our ability to obtain credit facilities, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted leveraged return we expect from our investment portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire. Debt service payments and lender cash management agreements have reduced, and may continue to reduce, our net income available for distributions to our stockholders. Moreover, we may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.

Our participation in joint ventures creates additional risk.

From time to time, we have and may continue to participate in joint ventures to purchase assets together with unaffiliated third parties, Watermark Capital Partners, WPC, or the other entities sponsored or managed by our Advisor or its affiliates, such as CWI 1 or other investment programs that WPC manages. There are additional risks involved in joint venture transactions. As a co-investor in a joint venture, we would not be in a position to exercise sole decision-making authority relating to the property, the joint venture or our investment partner. In addition, there is the potential that our joint venture partner may become bankrupt or that we may have diverging or inconsistent economic or business interests. These diverging interests could, among other things, expose us to liabilities in the joint venture investment in excess of our proportionate share of those liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property. Further, the fiduciary obligation that our Advisor or members of our board of directors may owe to our partner in an affiliated transaction may make it more difficult for us to enforce our rights.

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We are subject to the risks of real estate ownership.

Our performance and asset value is, in part, subject to risks incident to the ownership and operation of real estate, including:


•	adverse changes in general or local economic conditions;


•	changes in local conditions, such as changes in traffic patterns, mass transit options and neighborhood characteristics;


•	increases in the cost of property insurance;


•	uninsured property liability, property damage or casualty losses;


•	changes in laws and governmental regulations, including those governing real estate usage, zoning, environmental issues and taxes;


•	changes in operating expenses or unexpected expenditures for capital improvements;


•	exposure to environmental losses; and


•	force majeure and other factors beyond the control of our management.

If available financing declines or interest rates rise, our financial condition and ability to make distributions may be adversely affected.

A reduction in available financing or increased interest rates for real-estate related investments may impact our financial condition by increasing our cost of borrowing, reducing our overall leverage (which may reduce our returns on investment) and making it more difficult for us to obtain financing for ongoing acquisitions. These effects could in turn adversely affect our ability to make distributions to our stockholders.

The anticipated replacement of LIBOR with an alternative reference rate, may adversely affect our interest expense.

Certain instruments within our debt profile are indexed to the London Interbank Offered Rate (“LIBOR”), which is a benchmark rate at which banks offer to lend funds to one another in the international interbank market for short term loans. Concerns regarding the accuracy and integrity of LIBOR led the United Kingdom to publish a review of LIBOR in September 2012. Based on the review, final rules for the regulation and supervision of LIBOR by the Financial Conduct Authority (the “FCA”) were published and came into effect on April 2, 2013. On July 27, 2017, the FCA announced its intention to phase out LIBOR rates by the end of 2021.

We cannot predict the impact of these changes as regulators and the global financial markets debate the transition to a successor benchmark. Assuming that LIBOR becomes unavailable after 2021, the interest rates on our LIBOR-indexed debt will fall back to various alternative methods, any of which could result in higher interest obligations than under LIBOR. Further, the same costs and risks that may lead to the discontinuation or unavailability of LIBOR may make one or more of the alternative methods impossible or impracticable to determine. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates or borrowing costs to borrowers, any of which could have an adverse effect on our financing costs, liquidity, results of operations, and overall financial condition.

We may have difficulty selling our properties and this lack of liquidity may limit our ability to quickly change our portfolio in response to changes in economic or other conditions.

Real estate investments are generally less liquid than many other financial assets, which may limit our ability to quickly adjust our portfolio in response to changes in economic or other conditions. The real estate market is affected by many factors that are beyond our control, including general economic conditions, availability of financing, interest rates and other factors, such as supply and demand. Some of the other factors that could restrict our ability to sell properties include, but are not limited to:


•	inability to agree on a favorable price or on favorable terms;


•	restrictions imposed by third parties, such as an inability to transfer franchise or management agreements;


•	lender restrictions;


•	environmental issues; and


•	property condition.

We may be required to spend funds to correct defects or to make improvements before a property can be sold and such funds may not be readily available. When acquiring lodging properties, we may agree to lock-out provisions that restrict us from selling a property for a period of time or that impose other material restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. Our inability to sell properties may result in us owning lodging facilities that no longer fit within our business strategy. Holding these properties or selling them at a loss may affect our earnings and, in turn, could

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adversely affect the value of our portfolio. These factors, and any others that would impede our ability to respond to adverse changes in the lodging industry or the performance of our properties, could have a material adverse effect on our results of operations and financial condition, as well as our ability to pay distributions to stockholders.

Potential liability for environmental matters could adversely affect our financial condition.

Owners of real estate are subject to numerous federal, state and local environmental laws and regulations. Under these laws and regulations, a current or former owner of real estate may be liable for costs of remediating hazardous substances found on its property, whether or not they were responsible for its presence. Although we subject our properties to an environmental assessment prior to acquisition, we may not be made aware of all the environmental liabilities associated with a property prior to its purchase, or we or a subsequent owner may discover hidden environmental hazards after acquisition. The costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell the property or to borrow using the property as collateral.

Various federal, state and local environmental laws impose responsibilities on an owner or operator of real estate and subject those persons to potential joint and several liabilities. Typical provisions of those laws include:


•	responsibility and liability for the costs of investigation and removal (including at appropriate disposal facilities) or remediation of hazardous or toxic substances in, on or migrating from our real property, generally without regard to our knowledge of, or responsibility for, the presence of the contaminants;


•	liability for claims by third parties based on damages to natural resources or property, personal injuries, or costs of removal or remediation of hazardous or toxic substances in, on or migrating from our property; and


•	responsibility for managing asbestos-containing building materials, and third-party claims for exposure to those materials.

Environmental laws may also impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures.

We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.

Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyberattacks can range from individual attempts to gain unauthorized access to our or our independent hotel operators’ information technology systems to more sophisticated security threats. While we and our independent hotel operators employ a number of measures to prevent, detect and mitigate these threats including password protection, backup servers and annual penetration testing, there is no guarantee such efforts will be successful in preventing a cyberattack. Cybersecurity incidents could compromise the confidential information of financial transactions and records, personal identifying information, reservations, billing and operating data and disrupt and affect the efficiency of our business operations.

We and our independent hotel operators rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We and our independent hotel operators rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We and our independent hotel operators purchase some of our information technology from third-party vendors and we rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information (e.g., individually identifiable information, including information relating to financial accounts). Although we and our independent hotel operators have taken steps to protect the security of our information systems and the data maintained in those systems, our independent hotel operators have encountered information technology issues in the past and it is possible that such safety and security measures will not be able to prevent improper system functions, damage or the improper access or disclosure of personally identifiable information. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.

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The occurrence of cyber incidents to our Advisor, or a deficiency in our Advisor’s cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber incident is an intentional attack that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information, or an unintentional accident or error. Our Advisor uses information technology and other computer resources to carry out important operational activities and to maintain business records. In addition, our Advisor may store or come into contact with sensitive information and data. As our Advisor’s reliance on technology has increased, so have the risks posed to our Advisor’s systems, both internal and outsourced. Our Advisor has implemented systems and processes intended to address ongoing and evolving cyber security risks, secure confidential information, and prevent unauthorized access to or loss of sensitive, confidential, and personal data. Although our Advisor and its service providers employ what they believe are adequate security, disaster recovery and other preventative and corrective measures, their security measures, may not be sufficient for all possible situations and could be vulnerable to, among other things, hacking, employee error, system error, and faculty password management.

In addition, if in handling this information, our Advisor or their respective partners fail to comply with applicable privacy or data security laws, we could face significant legal and financial exposure to claims of governmental agencies and parties whose privacy is compromised. The primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our business relationships in the hotel industry and private data exposure. A significant and extended disruption could damage our business or reputation; cause a loss of revenue; have an adverse effect on tenant relations; cause an unintended or unauthorized public disclosure; or lead to the misappropriation of proprietary, personal identifying and confidential information; all of which could result in us and our Advisor incurring significant expenses to address and remediate or otherwise resolve these kinds of issues. We and our Advisor maintain insurance intended to cover some of these risks, but it may not be sufficient to cover the losses from any future breaches of our Advisor systems. Our Advisor has implemented processes, procedures, and controls to help mitigate these risks, but these measures, as well as our and our Advisor’s increased awareness of a risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident. The release of confidential information may also lead to litigation or other proceedings against us and our Advisor by affected individuals, business partners and/or regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses, and charges recorded against our earnings, reputational harm, could have a material and adverse effect on our business, financial position or results of operations.

Economic conditions may adversely affect the lodging industry.

The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. gross domestic product. It is also sensitive to business and personal discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenues and profitability of our hotel properties, and therefore our net operating profits. An economic downturn could lead to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels and significantly reduced room rates, which would likely adversely impact our revenues and have a negative effect on our profitability.

We are subject to various operating risks common to the lodging industry, which may adversely affect our ability to make distributions to our stockholders.

Our hotel properties and lodging facilities are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:


•	competition from other hotel properties or lodging facilities in our markets;


•	over-building of hotels in our markets, which would adversely affect occupancy and revenues at our hotels;


•	dependence on business and commercial travelers and tourism;


•	increases in energy costs and other expenses, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;


•	increases in operating costs due to inflation and other factors that may not be offset by increased room rates;


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


•	adverse effects of international, national, regional and local economic and market conditions;

CWI 2 2019 10-K – 21

•

unforeseen events beyond our control, such as terrorist attacks, travel related health concerns (including pandemics and epidemics such as the Coronavirus), political instability, governmental restrictions on travel, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents and unusual weather patterns (including natural disasters such as hurricanes, wildfires, tsunamis or earthquakes);


•	adverse effects of a downturn in the lodging industry; and


•	risks generally associated with the ownership of hotel properties and real estate, as discussed in other risk factors.

These risks could reduce our net operating profits, which in turn could adversely affect our ability to make distributions to our stockholders.

Seasonality of certain lodging properties may cause quarterly fluctuations in results of operations of our properties.

Certain lodging properties are seasonal in nature and may lead to quarterly fluctuations in the results of operations of our properties. Generally, occupancy rates and revenues are greater in the second and third quarters than in the first and fourth quarters of each year. Quarterly financial results may also be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may need to enter into short-term borrowings during certain periods in order to offset these fluctuations in revenues, to fund operations or to make distributions to our stockholders.

The cyclical nature of the lodging industry may cause fluctuations in our operating performance.

The lodging industry is highly cyclical in nature. Fluctuations in operating performance are caused largely by general economic and local market conditions, which affect business and leisure travel levels. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry’s performance, and over-building has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A decline in lodging demand, a substantial growth in lodging supply or a deterioration in the improvement of lodging fundamentals as forecast by industry analysts could result in returns that are substantially below expectations, or result in losses, which could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Future terrorist attacks or increased concern about terrorist activities, or the threat or outbreak of a pandemic disease, could adversely affect the travel and lodging industries and may affect the operations of our hotels.

As in the past, terrorist attacks or alerts in the United States and abroad, or the threat of, or actual outbreak of, pandemic disease could reduce both business and leisure travel, resulting in a decline in the lodging sector. Any kind of terrorist activity within the United States or elsewhere could negatively impact both domestic and international markets, as well as our business. Such attacks or threats of attacks could have a material adverse effect on our business, our ability to insure our properties and our operations. The threat of or actual outbreak of a pandemic disease could reduce business and leisure travel, which could have a material adverse effect on our business.

We are subject to the risk of increased lodging operating expenses.

We are subject to the risk of increased lodging operating expenses, including, but not limited to, the following cost elements: wage and benefit costs, including liabilities related to employment matters; repair and maintenance expenses; energy costs; property taxes; insurance costs; and other operating expenses. Any increases in one or more of these operating expenses could have a significant adverse impact on our results of operations, financial position and cash flows.

We are subject to general risks associated with the employment of hotel personnel, particularly with hotels that employ or may employ unionized labor.

While third-party hotel managers are responsible for hiring and maintaining the labor force at each of our hotels, we are subject to many of the costs and risks generally associated with the hotel labor force. Increased labor costs due to collective bargaining activity, minimum wage initiatives and additional taxes or requirements to incur additional employee benefits costs may adversely impact our operating costs. We may also incur increased legal costs and indirect labor costs as a result of contract disputes or other events. Hotels where our managers have collective bargaining agreements with employees could be affected more significantly by labor force activities and additional hotels or groups of employees may become subject to additional collective bargaining agreements in the future. Increased labor organizational efforts or changes in labor laws could lead to disruptions in our operations, increase our labor costs, or interfere with the ability of our management to focus on executing our business strategies (e.g., by consuming management’s time and attention, limiting the ability of hotel managers to reduce

CWI 2 2019 10-K – 22

workforces during economic downturns, etc.). In addition, from time to time, strikes, lockouts, boycotts, public demonstrations or other negative actions and publicity may disrupt hotel operations at any of our hotels, negatively impact our reputation or the reputation of our brands, cause us to lose guests, or harm relationships with the labor forces at our hotels.

Our results of operations, financial position, cash flows and ability to service debt and to make distributions to stockholders depend on the ability of the independent hotel operators to operate and manage the hotels.

As a REIT, we are allowed to own lodging properties, but are prohibited from operating them. Therefore, in order for us to satisfy certain REIT qualification rules, we enter into leases with the TRS lessees for each of our lodging properties. The TRS lessees in turn contract with independent hotel operators that manage the day-to-day operations of our properties. Although we consult with the property operators with respect to strategic business plans, we may be limited, depending on the terms of the applicable operating agreement and REIT qualification rules, in our ability to direct the actions of the independent hotel operators, particularly with respect to daily operations. Thus, even if we believe that our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR, ADR or operating profits, we may not have sufficient rights under a particular property operating agreement to force the property operator to change its method of operation. We can only seek redress if a property operator violates the terms of the applicable property operating agreement with the TRS lessee, and then only to the extent of the remedies provided in the property operating agreement. Our results of operations, financial position, cash flows and ability to service debt and to make distributions to stockholders are, therefore, substantially dependent on the ability of the property operators to successfully operate our hotels. Some of our operating agreements may have lengthy terms, may not be terminable by us before the agreement’s expiration and may require the payment of substantial termination fees. In the event that we are able to and do replace any of our property operators, we may experience significant disruptions at the affected hotels, which may adversely affect our ability to make distributions to our stockholders.

There may be operational limitations associated with management and franchise agreements affecting our properties and these limitations may prevent us from using these properties to their best advantage for our stockholders.

The TRS lessees hold some of our properties and have entered into franchise or license agreements with nationally recognized lodging brands. These franchise agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of our properties in order to maintain uniformity within the franchise system. The franchisors also periodically inspect our properties to ensure that we maintain their standards. We do not know whether these limitations will restrict the business plans we have tailored for each property and/or market.

The standards are subject to change over time, in some cases at the direction of the franchisor, and may restrict the ability of our TRS lessees’ ability, as franchisees, to make improvements or modifications to a property. Conversely, as a condition to the maintenance of a franchise license, a franchisor could also require us to make capital expenditures, even if we do not believe the improvements are necessary, desirable or likely to result in an acceptable return on our investment. Action or inaction by us or our TRS lessees could result in a breach of those standards or other terms and conditions of the franchise agreements and could result in the loss or termination of a franchise license. In addition, when terminating or changing the franchise affiliation of a property, we may be required to incur significant expenses or capital expenditures.

The loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the property covered by the franchise due to the associated loss of name recognition, marketing support and centralized reservation systems provided by the franchisor. In addition, the loss of a franchise license for one or more lodging properties could materially and adversely affect our results of operations, financial position and cash flows, including our ability to service debt and make distributions to our stockholders.

We are subject to the risks of brand concentration.

All of our hotels utilize brands owned by Marriott or Hilton. As a result, our success is dependent in part on the continued success of their brands. A negative public image or other adverse event that becomes associated with those brands, such as the recent cybersecurity incident affecting Marriott hotels, could adversely affect hotels operated under those brands. If those brands suffer a significant decline in appeal to the traveling public, the revenues and profitability of our hotels operated under those brands could be adversely affected.

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We face competition in the lodging industry, which may limit our profitability and returns to our stockholders.

The lodging industry is highly competitive. This competition could reduce occupancy levels and revenues at our properties, which would adversely affect our operations. We face competition from many sources, including from (i) other lodging facilities, both in the immediate vicinity and the geographic market where our lodging properties are located and (ii) nationally recognized lodging brands that we are not associated with. In addition, increases in operating costs due to inflation may not be offset by increased room rates.

We also face competition for investment opportunities. In addition to WPC, Watermark Capital Partners and their respective affiliates, including the other investment programs that WPC manages, we face competition from other REITs, national lodging chains and other entities that may have substantially greater financial resources than us. If our Advisor is unable to compete successfully in the acquisition and management of our lodging properties, our results of operation and financial condition may be adversely affected and may reduce the cash available for distribution to our stockholders.

Because our properties are operated by independent hotel operators, our revenues depend on the ability of such independent hotel operators to compete successfully with other hotels and resorts in their respective markets. Some of our competitors may have substantially greater marketing and financial resources than us. If independent hotel operators are unable to compete successfully or if our competitors’ marketing strategies are effective, our results of operations, financial condition and ability to service debt may be adversely affected and may reduce the cash available for distribution to our stockholders.

The lack of an active public trading market for our shares could make it difficult for stockholders to sell shares quickly or at all. We may amend, suspend or terminate our redemption plan without giving our stockholders advance notice.

There is no active public trading market for our shares and we do not expect one to develop. Moreover, we are not required to ever complete a liquidity event. Our stockholders should not rely on our redemption plan as a method to sell shares promptly because it includes numerous restrictions that limit stockholders’ ability to sell their shares to us and our board of directors may amend, suspend or terminate the plan without advance notice. In particular, the redemption plan provides that we may redeem shares only if we have sufficient funds available for redemption and to the extent the total number of shares for which redemption is requested in any quarter, together with the aggregate number of shares redeemed in the preceding three fiscal quarters, does not exceed 5% of the combined Class A and Class T Shares outstanding as of the last day of the immediately preceding fiscal quarter. Given these limitations, it may be difficult for stockholders to sell their shares promptly or at all. In addition, the price received for any shares sold prior to a liquidity event is likely to be less than the applicable NAV at that time. Investor suitability standards imposed by certain states may also make it more difficult for stockholders to sell their shares to someone in those states.

The limit in our charter on the number of our shares a person may own may discourage a takeover, which might provide our stockholders with liquidity or other advantages.

To assist us in meeting the REIT qualification rules, among other things, our charter prohibits the ownership by one person or affiliated group of more than 9.8% in value of our stock or more than 9.8% in value or number, whichever is more restrictive, of our outstanding shares of common stock, unless exempted (prospectively or retroactively) by our board of directors. This ownership limitation may discourage third parties from making a potentially attractive tender offer for our stockholders’ shares, thereby inhibiting a change of control in us.

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations, and they require management to make estimates, judgments, and assumptions about matters that are inherently uncertain.

Our accounting policies and methods are fundamental to how we record and report our financial position and results of operations. We have identified several accounting policies as being critical to the presentation of our financial position and results of operations because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. Due to the inherent uncertainty of the estimates, judgments, and assumptions associated with these critical accounting policies, we cannot provide any assurance that we will not make significant subsequent adjustments to our consolidated financial statements. If our judgments, assumptions, and allocations prove to be incorrect, or if circumstances change, our business, financial condition, revenues, operating expense, results of operations, liquidity, ability to pay dividends, or stock price may be materially adversely affected.

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If we recognize substantial impairment charges on our properties, our net income may be reduced.

We may incur substantial impairment charges, which we are required to recognize: (i) whenever we determine that the carrying amount of the property is not recoverable and exceeds its fair value and (ii) for equity investments, whenever the estimated fair value of the investment’s underlying net assets in comparison with the carrying value of our interest in the investment has declined on an other-than-temporary basis. By their nature, the timing or extent of impairment charges are not predictable. We may incur non-cash impairment charges in the future, which may reduce our net income, although they should not affect our FFO, which is the metric we use to evaluate our distribution coverage.

We disclose FFO and modified funds from operations (“MFFO”), which are financial measures that are not derived in accordance with U.S. generally accepted accounting principles (“GAAP”), in documents we file with the SEC; however, FFO and MFFO are not equivalent to our net income or loss as determined under GAAP, and stockholders should consider GAAP measures to be more relevant to our operating performance.

We use and disclose to investors FFO and MFFO, which are metrics not derived in accordance with GAAP (“non-GAAP measures”). FFO and MFFO are not equivalent to our net income or loss as determined in accordance with GAAP and investors should consider GAAP measures to be more relevant to evaluating our operating performance. FFO and GAAP net income differ because FFO excludes gains or losses from sales of property and asset impairment write-downs, depreciation and amortization, and is after adjustments for such items related to noncontrolling interests. MFFO and GAAP net income differ because MFFO represents FFO with further adjustments to exclude acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, realized gains and losses from early extinguishment of debt, and the further adjustments of these items related to noncontrolling interests.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance.

Neither the SEC, the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), an industry trade group, nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly.

Conflicts of interest may arise between holders of our common stock and holders of partnership interests in our Operating Partnership.

Our directors and officers have duties to us and our stockholders under Maryland law in connection with their management of us. At the same time, our Operating Partnership was formed in Delaware and we, as general partner, have duties under Delaware law to our Operating Partnership and the limited partners in connection with our management of our Operating Partnership. Our duties as general partner of our Operating Partnership may come into conflict with the duties of our directors and officers to us and our stockholders.

Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our Operating Partnership provides that, for so long as we own a controlling interest in our Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders. The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.

In addition, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees will not be liable or accountable to our Operating Partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. Furthermore, our Operating Partnership is

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required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from, and against, any and all claims arising from operations of our Operating Partnership, unless it is established that: (i) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (ii) the indemnified party actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. These limitations on liability do not supersede the indemnification provisions of our charter.

Maryland law could restrict a change in control, which could have the effect of inhibiting a change in control of us even if a change in control were in our stockholders’ interest.

Provisions of Maryland law applicable to us prohibit business combinations with:


•	any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock, referred to as an interested stockholder;


•	an affiliate or associate who, at any time within the two-year period prior to the date in question, was the beneficial owner of, directly or indirectly, 10% or more of the voting power of our then outstanding stock, also referred to as an interested stockholder; or


•	an affiliate of an interested stockholder.

These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding voting shares and two-thirds of the votes entitled to be cast by holders of our outstanding voting stock (other than voting stock held by the interested stockholder or by an affiliate or associate of the interested stockholder). These requirements could have the effect of inhibiting a change in control of us even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder. In addition, a person is not an interested stockholder if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

Our board of directors may determine that it is in our best interest to classify or reclassify any unissued stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock. However, the issuance of preferred stock must also be approved by a majority of independent directors not otherwise interested in the transaction, who will have access at our expense to our legal counsel or to independent legal counsel. In addition, the board of directors, with the approval of a majority of the entire board and without any action by the stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue. If our board of directors determines to take any such action, it will do so in accordance with the duties it owes to holders of our common stock.

While we believe that we are properly organized as a REIT in accordance with applicable law, we cannot guarantee that the Internal Revenue Service will find that we have qualified as a REIT.

We believe that we are organized in conformity with the requirements for qualification as a REIT under the Internal Revenue Code beginning with our 2008 taxable year and that our current and anticipated investments and plan of operation will enable us to meet and continue to meet the requirements for qualification and taxation as a REIT. Investors should be aware, however, that the Internal Revenue Service or any court could take a position different from our own. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will qualify as a REIT for any particular year.

CWI 2 2019 10-K – 26

Furthermore, our qualification and taxation as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership, and other requirements on a continuing basis. Our ability to satisfy the quarterly asset tests under applicable Internal Revenue Code provisions and Treasury Regulations will depend in part upon our board of directors’ good faith analysis of the fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. While we believe that we will satisfy these tests, we cannot guarantee that this will be the case on a continuing basis.

If we fail to remain qualified as a REIT, we would be subject to federal income tax at corporate income tax rates and would not be able to deduct distributions to stockholders when computing our taxable income.

If, in any taxable year, we fail to qualify for taxation as a REIT and are not entitled to relief under the Internal Revenue Code, we will:


•	not be allowed a deduction for distributions to stockholders in computing our taxable income;


•	be subject to federal and state income tax, including any applicable alternative minimum tax for taxable years ending prior to January 1, 2018, on our taxable income at regular corporate rates; and


•	be barred from qualifying as a REIT for the four taxable years following the year when we were disqualified.

Any such corporate tax liability could be substantial and would reduce the amount of cash available for distributions to our stockholders, which in turn could have an adverse impact on the value of our common stock. This adverse impact could last for five or more years because, unless we are entitled to relief under certain statutory provisions, we will be taxed as a corporation beginning the year in which the failure occurs and for the following four years.

If we fail to qualify for taxation as a REIT, we may need to borrow funds or liquidate some investments to pay the additional tax liability. Were this to occur, funds available for investment would be reduced. REIT qualification involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations, as well as various factual determinations concerning matters and circumstances not entirely within our control. There are limited judicial or administrative interpretations of these provisions. Although we plan to continue to operate in a manner consistent with the REIT qualification rules, we cannot assure you that we will qualify in a given year or remain so qualified.

If we fail to make required distributions, we may be subject to federal corporate income tax.

We intend to declare regular quarterly distributions, the amount of which will be determined, and is subject to adjustment, by our board of directors. To continue to qualify and be taxed as a REIT, we will generally be required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and excluding net capital gain) each year to our stockholders. Generally, we expect to distribute all, or substantially all, of our REIT taxable income. If our cash available for distribution falls short of our estimates, we may be unable to maintain the proposed quarterly distributions that approximate our taxable income and we may fail to qualify for taxation as a REIT. In addition, our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes or the effect of nondeductible expenditures (e.g., capital expenditures, the creation of reserves, or required debt service or amortization payments). To the extent we satisfy the 90% distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. We will also be subject to a 4.0% nondeductible excise tax if the actual amount that we pay out to our stockholders for a calendar year is less than a minimum amount specified under the Internal Revenue Code. In addition, in order to continue to qualify as a REIT, any C-corporation earnings and profits to which we succeed must be distributed as of the close of the taxable year in which we accumulate or acquire such C-corporation’s earnings and profits.

Because certain covenants in our debt instruments may limit our ability to make required REIT distributions, we could be subject to taxation.

Our existing debt instruments include, and our future debt instruments may include, covenants that limit our ability to make required REIT distributions. If the limits set forth in these covenants prevent us from satisfying our REIT distribution requirements, we could fail to qualify for federal income tax purposes as a REIT. If the limits set forth in these covenants do not jeopardize our qualification for taxation as a REIT, but prevent us from distributing 100% of our REIT taxable income, we will be subject to federal corporate income tax, and potentially a nondeductible excise tax, on the retained amounts.

CWI 2 2019 10-K – 27

Because we are required to satisfy numerous requirements imposed upon REITs, we may be required to borrow funds, sell assets, or raise equity on terms that are not favorable to us.

In order to meet the REIT distribution requirements and maintain our qualification and taxation as a REIT, we may need to borrow funds, sell assets, or raise equity, even if the then-prevailing market conditions are not favorable for such transactions. If our cash flows are not sufficient to cover our REIT distribution requirements, it could adversely impact our ability to raise short- and long-term debt, sell assets, or offer equity securities in order to fund the distributions required to maintain our qualification and taxation as a REIT. Furthermore, the REIT distribution requirements may increase the financing we need to fund capital expenditures, future growth, and expansion initiatives, which would increase our total leverage.

In addition, if we fail to comply with certain asset ownership tests at the end of any calendar quarter, we must generally correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate otherwise attractive investments. These actions may reduce our income and amounts available for distribution to our stockholders.

Because the REIT rules require us to satisfy certain rules on an ongoing basis, our flexibility or ability to pursue otherwise attractive opportunities may be limited.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets (including mandatory holding periods prior to disposition), the amounts we distribute to our stockholders, and the ownership of our common stock. Compliance with these tests will require us to refrain from certain activities and may hinder our ability to make certain attractive investments or dispositions, including the purchase of non-qualifying assets, the expansion of non-real estate activities, and investments in the businesses to be conducted by our TRSs, thereby limiting our opportunities and the flexibility to change our business strategy. Furthermore, acquisition opportunities in domestic and international markets may be adversely affected if we need or require target companies to comply with certain REIT requirements prior to closing on acquisitions.

To meet our annual distribution requirements, we may be required to distribute amounts that may otherwise be used for our operations, including amounts that may be invested in future acquisitions, capital expenditures, or debt repayment; and it is possible that we might be required to borrow funds, sell assets, or raise equity to fund these distributions, even if the then-prevailing market conditions are not favorable for such transactions.

Because the REIT provisions of the Internal Revenue Code limit our ability to hedge effectively, the cost of our hedging may increase, and we may incur tax liabilities.

The REIT provisions of the Internal Revenue Code limit our ability to hedge assets and liabilities that are not incurred to acquire or carry real estate. Generally, income from hedging transactions that have been properly identified for tax purposes (which we enter into to manage interest rate risk with respect to borrowings to acquire or carry real estate assets) do not constitute “gross income” for purposes of the REIT gross income tests (such a hedging transaction is referred to as a “qualifying hedge”). In addition, if we enter into a qualifying hedge, but dispose of the underlying property (or a portion thereof) or the underlying debt (or a portion thereof) is extinguished, we can enter into a hedge of the original qualifying hedge, and income from the subsequent hedge will also not constitute “gross income” for purposes of the REIT gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the REIT gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs could be subject to tax on income or gains resulting from such hedges or expose us to greater interest rate risks than we would otherwise want to bear. In addition, losses in any of our TRSs generally will not provide any tax benefit, except for being carried forward for use against future taxable income in the TRSs.

CWI 2 2019 10-K – 28

Because the REIT rules limit our ability to receive distributions from TRSs, our ability to fund distribution payments using cash generated through our TRSs may be limited.

Our ability to receive distributions from our TRSs is limited by the rules we must comply with in order to maintain our REIT status. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from real estate-related sources, which principally includes gross income from the leasing of our properties. Consequently, no more than 25% of our gross income may consist of dividend income from our TRSs and other non-qualifying income types. Thus, our ability to receive distributions from our TRSs is limited and may impact our ability to fund distributions to our stockholders using cash flows from our TRSs. Specifically, if our TRSs become highly profitable, we might be limited in our ability to receive net income from our TRSs in an amount required to fund distributions to our stockholders commensurate with that profitability.

We use TRSs, which may cause us to fail to qualify as a REIT.

To qualify as a REIT for federal income tax purposes, we hold our non-qualifying REIT assets and conduct our non-qualifying REIT income activities in or through one or more TRSs. The net income of our TRSs is not required to be distributed to us and income that is not distributed to us will generally not be subject to the REIT income distribution requirement. However, there may be limitations on our ability to accumulate earnings in our TRSs and the accumulation or reinvestment of significant earnings in our TRSs could result in adverse tax treatment. In particular, if the accumulation of cash in our TRSs causes the fair market value of our TRS interests and certain other non-qualifying assets to exceed 20% of the fair market value of our assets, we would lose tax efficiency and could potentially fail to qualify as a REIT.

Our ownership of TRSs will be subject to limitations that could prevent us from growing our portfolio and our transactions with our TRSs could cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on an arm’s-length basis.

Overall, no more than 20% of the value of a REIT’s gross assets may consist of interests in TRSs; compliance with this limitation could limit our ability to grow our portfolio. The Internal Revenue Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Internal Revenue Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We will monitor the value of investments in our TRSs in order to ensure compliance with TRS ownership limitations and will structure our transactions with our TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS ownership limitation or be able to avoid application of the 100% excise tax.

Our board of directors, in its sole discretion, determines our dividend rate on a quarterly basis; therefore, our cash distributions are not guaranteed and may fluctuate.

Our board of directors, in its sole discretion, will determine on a quarterly basis the amount of cash to be distributed to our stockholders based on a number of factors, including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity, applicable provisions of the Maryland General Corporation Law, and other factors (including debt covenant restrictions that may impose limitations on cash payments and future acquisitions and divestitures). Consequently, our distribution levels are not guaranteed and may fluctuate.

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from C corporations, which could cause investors to perceive investments in REITs to be relatively less attractive.

The maximum U.S. federal income tax rate for certain qualified dividends payable by C corporations to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced qualified dividend rate. However, for taxable years beginning after December 31, 2017 and before January 1, 2026, under the recently enacted Tax Cuts and Jobs Act, noncorporate taxpayers may deduct up to 20% of certain qualified business income, including "qualified REIT dividends" (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to qualified dividends from C corporations does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends, together with the recently reduced corporate tax rate (21%), could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends.

CWI 2 2019 10-K – 29

Even if we continue to qualify as a REIT, certain of our business activities will be subject to corporate level income tax, which will continue to reduce our cash flows, and we will have potential deferred and contingent tax liabilities.

Even if we qualify for taxation as a REIT, we may be subject to certain (i) federal, state and local taxes on our income and assets, including alternative minimum taxes (for taxable years ending prior to January 1, 2018), (ii) taxes on any undistributed income and state or local income, and (iii) franchise, property, and transfer taxes. In addition, we could be required to pay an excise or penalty tax under certain circumstances in order to utilize one or more relief provisions under the Internal Revenue Code to maintain qualification for taxation as a REIT, which could be significant in amount.

Any TRS assets and operations would continue to be subject, as applicable, to federal and state corporate income taxes and to foreign taxes in the jurisdictions in which those assets and operations are located. Any of these taxes would decrease our earnings and our cash available for distributions to stockholders.

We will also be subject to a federal corporate level tax at the highest regular corporate rate (currently 21%) on all or a portion of the gain recognized from a sale of assets formerly held by any C corporation that we acquire on a carry-over basis transaction occurring within a five-year period after we acquire such assets, to the extent the built-in gain based on the fair market value of those assets on the effective date of the REIT election is in excess of our then tax basis. The tax on subsequently sold assets will be based on the fair market value and built-in gain of those assets as of the beginning of our holding period. Gains from the sale of an asset occurring after the specified period will not be subject to this corporate level tax. We expect to have only a de minimis amount of assets subject to these corporate tax rules and do not expect to dispose of any significant assets subject to these corporate tax rules.

Because dividends received by foreign stockholders are generally taxable, we may be required to withhold a portion of our distributions to such persons.

Ordinary dividends received by foreign stockholders that are not effectively connected with the conduct of a U.S. trade or business are generally subject to U.S. withholding tax at a rate of 30%, unless reduced by an applicable income tax treaty. Additional rules with respect to certain capital gain distributions will apply to foreign stockholders that own more than 10% of our common stock.

The ability of our board of directors to revoke our REIT qualification, without stockholder approval, may cause adverse consequences for our stockholders.

Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and we will be subject to federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on the total return to our stockholders.

Federal and state income tax laws governing REITs and related interpretations may change at any time, and any such legislative or other actions affecting REITs could have a negative effect on us and our stockholders.

Federal and state income tax laws governing REITs or the administrative interpretations of those laws may be amended at any time. Federal, state, and foreign tax laws are under constant review by persons involved in the legislative process, at the Internal Revenue Service and the U.S. Department of the Treasury, and at various state and foreign tax authorities. Changes to tax laws, regulations, or administrative interpretations, which may be applied retroactively, could adversely affect us or our stockholders. We cannot predict whether, when, in what forms, or with what effective dates, the tax laws, regulations, and administrative interpretations applicable to us or our stockholders may be changed. Accordingly, we cannot assure you that any such change will not significantly affect our ability to qualify for taxation as a REIT and/or the attendant tax consequences to us or our stockholders.

CWI 2 2019 10-K – 30

Recent changes to U.S. tax laws could have a negative impact on our business.

On December 22, 2017, the President signed a tax reform bill into law, referred to herein as the “Tax Cuts and Jobs Act,” which among other things:


•	reduces the corporate income tax rate from 35% to 21% (including with respect to our TRSs);


•	reduces the rate of U.S. federal withholding tax on distributions made to non-U.S. shareholders by a REIT that are attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;


•	allows for an immediate 100% deduction of the cost of certain capital asset investments (generally excluding real estate assets), subject to a phase-down of the deduction percentage over time;


•	changes the recovery periods for certain real property and building improvements (e.g., to 30 years (previously 40 years) for residential real property);


•	restricts the deductibility of interest expense by businesses (generally, to 30% of the business’s adjusted taxable income) except, among others, real property businesses electing out of such restriction; generally, we expect our business to qualify as such a real property business;


•	requires the use of the less favorable alternative depreciation system to depreciate real property in the event a real property business elects to avoid the interest deduction restriction above;


•	restricts the benefits of like-kind exchanges that defer capital gains for tax purposes to exchanges of real property;


•	permanently repeals the “technical termination” rule for partnerships, meaning sales or exchanges of the interests in a partnership will be less likely to, among other things, terminate the taxable year of, and restart the depreciable lives of assets held by, such partnership for tax purposes;


•	requires accrual method taxpayers to take certain amounts in income no later than the taxable year in which such income is taken into account as revenue in an applicable financial statement prepared under GAAP, which, with respect to certain leases, could accelerate the inclusion of rental income;


•	eliminates the federal corporate alternative minimum tax;


•	reduces the highest marginal income tax rate for individuals to 37% from 39.6% (excluding, in each case, the 3.8% Medicare tax on net investment income);

•

generally allows a deduction for individuals equal to 20% of certain income from pass-through entities, including ordinary dividends distributed by a REIT (excluding capital gain dividends and qualified dividend income), generally resulting in a maximum effective federal income tax rate applicable to such dividends of 29.6% compared to 37% (excluding, in each case, the 3.8% Medicare tax on net investment income), although regulations may restrict the ability to claim this deduction for non-corporate shareholders depending upon their holding period in our stock; and


•	limits certain deductions for individuals, including deductions for state and local income taxes, and eliminates deductions for miscellaneous itemized deductions (including certain investment expenses).

As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders annually. As a result of the changes to U.S. federal tax laws implemented by the Tax Cuts and Jobs Act, our taxable income and the amount of distributions to our stockholders required to maintain our REIT status, as well as our relative tax advantage as a REIT, could change.

The Tax Cuts and Jobs Act is a complex revision to the U.S. federal income tax laws with impacts on different categories of taxpayers and industries, which will require subsequent rulemaking and interpretation in a number of areas. In addition, many provisions in the Tax Cuts and Jobs Act, particularly those affecting individual taxpayers, expire at the end of 2025. The long-term impact of the Tax Cuts and Jobs Act on the overall economy, government revenues, us, and the real estate industry cannot be reliably predicted at this time. There can be no assurance that the Tax Cuts and Jobs Act will not negatively impact our operating results, financial condition, and future business operations.

Item 1B. Unresolved Staff Comments.

None.

CWI 2 2019 10-K – 31

Item 2. Properties.

Our principal corporate offices are located in the offices of our Advisor at 50 Rockefeller Plaza, New York, New York 10020.

Our Hotels

The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels at December 31, 2019:



Hotels	State	Number of Rooms	% Owned	Acquisition Date	Hotel Type
Consolidated Hotels
Marriott Sawgrass Golf Resort & Spa ^(a)	FL	514	50%	4/1/2015	Resort
Courtyard Nashville Downtown	TN	192	100%	5/1/2015	Select-Service
Embassy Suites by Hilton Denver-Downtown/Convention Center	CO	403	100%	11/4/2015	Full-Service
Seattle Marriott Bellevue ^(b)	WA	384	100%	1/22/2016	Full-Service
Le Méridien Arlington	VA	154	100%	6/28/2016	Full-Service
San Jose Marriott	CA	510	100%	7/13/2016	Full-Service
San Diego Marriott La Jolla	CA	376	100%	7/21/2016	Full-Service
Renaissance Atlanta Midtown Hotel	GA	304	100%	8/30/2016	Full-Service
Ritz-Carlton San Francisco	CA	336	100%	12/30/2016	Full-Service
Charlotte Marriott City Center	NC	446	100%	6/1/2017	Full-Service
		3,619
Unconsolidated Hotels
Ritz-Carlton Key Biscayne ^(c)	FL	443	19.3%	5/29/2015	Resort
Ritz-Carlton Bacara, Santa Barbara ^(d)	CA	358	60%	9/28/2017	Resort
		801

_________


(a)	The remaining 50% interest in this venture is owned by CWI 1.


(b)	On October 16, 2019, we purchased the membership interest in the Seattle Marriott Bellevue venture that we did not already own from an unaffiliated third party for $0.3 million, which increased our ownership interest from 95.4% to 100.0% (Note 10).


(c)	A 47.4% interest in this venture is owned by CWI 1. The remaining 33.3% interest is retained by the original owner. The number of rooms presented includes 141 condo-hotel units that participate in the condo rental program.


(d)	This investment represents a tenancy-in-common interest; the remaining 40% interest is owned by CWI 1.

Our Hotel Management and Franchise Agreements

Hotel Management Agreements

All of our hotels are managed by independent hotel operators pursuant to management or operating agreements, with many also subject to separate license agreements addressing matters pertaining to operation under the designated brand. As of December 31, 2019, we had management or operating agreements with three different management companies related to our Consolidated Hotels. Under these agreements, the managers generally have sole responsibility and exclusive authority for all activities necessary for the day-to-day operation of the hotels, including establishing room rates; securing and processing reservations; procuring inventories, supplies and services; providing periodic inspection and consultation visits to the hotels by the managers’ technical and operational experts; and promoting and publicizing the hotels. The managers provide all managerial and other employees for the hotels; review the operation and maintenance of the hotels; prepare reports, budgets and projections; and provide other administrative and accounting support services to the hotels. These support services include planning and policy services, divisional financial services, product planning and development, employee staffing and training, corporate executive management and certain in-house legal services. We have certain approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.

The initial terms of our management and operating agreements, including those that have been assumed at the time of the hotel acquisition, typically range from five to 40 years, with one or more renewal terms at the option of the manager. The management agreements condition the manager’s right to exercise options for specified renewal terms upon the satisfaction of specified economic performance criteria, or allow us to terminate at will with 30 to 60 days’ notice. For hotels operated with

CWI 2 2019 10-K – 32

separate franchise agreements, the manager typically receives compensation in the form of a base management fee, which is calculated as a percentage (generally ranging from 2.5% to 3.0%) of annual gross revenues, and an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel.

The management agreements relating to six of our Consolidated Hotels contain the right and license to operate the hotels under specified brands. No separate franchise agreements exist and no separate franchise fee is required for these hotels. These management agreements incur a base management fee ranging from 3.0% to 7.0% of hotel revenues. These hotels are all managed by subsidiaries of Marriott.

Franchise Agreements

Four of our Consolidated Hotels operate under franchise or license agreements with national brands that are separate from our management agreements. As of December 31, 2019, we have three franchise agreements with Marriott owned brands and one with a Hilton owned brand.

Typically, franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels.

Our typical franchise agreement provides for a term of 20 to 25 years. The agreements provide no renewal or extension rights and are not assignable. If we breach one of these agreements, in addition to losing the right to use the brand name for the applicable hotel, we may be liable, under certain circumstances, for liquidated damages equal to the fees paid to the franchisor with respect to that hotel during the three immediately preceding years.

Item 3. Legal Proceedings.

At December 31, 2019, we were not involved in any material litigation.

Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures.

Not applicable.

CWI 2 2019 10-K – 33

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Unlisted Shares

There is no active public trading market for our shares. At March 6, 2020, there were 20,355 holders of record of our shares of common stock.

Unregistered Sales of Equity Securities

During the three months ended December 31, 2019, we issued 235,178 shares of Class A common stock to our Advisor as consideration for asset management fees. These shares were issued at our most recently published NAV per share of $11.41 per share. In acquiring our shares, our Advisor represented that such interests were being acquired by it for investment purposes and not with a view to the distribution thereof. Since none of these transactions were considered to have involved a “public offering” within the meaning of Section 4(a)(2) of the Securities Act of 1933, as amended, the shares issued were deemed to be exempt from registration.

All other prior sales of unregistered securities have been reported in our previously filed quarterly reports on Form 10-Q and annual reports on Form 10-K.

Issuer Purchases of Equity Securities

The following table provides information with respect to repurchases of our common stock during the three months ended December 31, 2019:



	Class A			Class T
2019 Period	Total number of shares purchased ^(a)	Average price paid per share		Total number of shares purchased ^(a)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
October 1 – 31	—	$	—	—	$	—	N/A	N/A
November 1 – 30	—	—		—	—		N/A	N/A
December 1 – 31	5,892	10.85		15,532	10.94		N/A	N/A
Total	5,892			15,532

___________

(a)

Represents shares of our Class A and Class T common stock repurchased under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. We generally receive fees in connection with share redemptions. The average price paid per share will vary depending on the number of redemption requests that were made during the period, the number of redemption requests that qualify for treatment as special circumstances under the terms of the plan, and our most recently published NAVs.

Securities Authorized for Issuance Under Equity Compensation Plans

This information will be contained in our definitive proxy statement for the 2020 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.

CWI 2 2019 10-K – 34

Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the consolidated financial statements and related notes in Item 8 (in thousands, except per share amounts and statistical data):



	Years Ended December 31,
	2019			2018			2017			2016			2015
Operating Data
Total hotel revenues	$	367,207		$	362,332		$	340,810		$	177,600		$	49,085
Transaction costs	4,499			1,177			6,511			26,835			13,133
Net income (loss)	949			(349		)	(4,494		)	(17,450		)	(12,063		)
Income attributable to noncontrolling interests	(8,567		)	(7,438		)	(991		)	(3,577		)	(471		)
Net loss attributable to CWI 2 stockholders	(7,618		)	(7,787		)	(5,485		)	(21,027		)	(12,534		)

Basic and diluted loss per share:
Net loss attributable to CWI 2 stockholders — Class A Common Stock	(0.08		)	(0.08		)	(0.06		)	(0.42		)	(1.71		)
Net loss attributable to CWI 2 stockholders — Class T Common Stock	(0.08		)	(0.09		)	(0.07		)	(0.43		)	(1.71		)

Distributions declared per share — Class A Common Stock ^(a)	0.6996			0.6996			0.6955			0.6570			0.3775
Distributions declared per share — Class T Common Stock ^(b)	0.5968			0.5959			0.5919			0.5545			0.3181
Balance Sheet Data
Total assets	$	1,576,982		$	1,605,314		$	1,641,848		$	1,407,717		$	478,979
Net investments in real estate ^(c)	1,424,476			1,473,205			1,514,680			1,282,124			396,864
Non-recourse and limited-recourse debt, net	840,465			833,836			831,329			571,935			207,888
Due to related parties and affiliates ^(d)	2,786			1,984			1,726			231,258			4,985
Other Information
Net cash provided by (used in) operating activities	$	63,502		$	68,956		$	49,720		$	24,559		$	(3,553	)
Cash distributions paid	45,345			44,004			36,446			17,633			621
Supplemental Financial Measures
FFO attributable to CWI 2 stockholders	$	47,877		$	44,668		$	36,919		$	(321	)	$	(8,354	)
MFFO attributable to CWI 2 stockholders	52,417			46,499			44,811			26,086			4,779
Consolidated Hotel Operating Statistics ^(e)
Occupancy	76.3		%	78.2		%	78.3		%	76.8		%	71.8		%
ADR	$	250.92		$	239.41		$	233.72		$	200.39		$	181.86
RevPAR	191.56			187.27			$	182.98		$	153.89		$	130.48

___________

(a)

For the first, second, third and fourth quarters of both 2019 and 2018, $0.0339 of each distribution was payable in shares of our Class A common stock. For the first, second, third and fourth quarters of 2017, $0.0332, $0.0338, $0.0339 and $0.0339 of the distribution was payable in shares of our Class A common stock, respectively. For the first, second, third and fourth quarters of 2016, $0.0250, $0.0263, $0.0332 and $0.0332 of the distribution was payable in shares of our Class A common stock, respectively. For the second, third and fourth quarters of 2015, $0.0129, $0.0250 and $0.0250 of the distribution was payable in shares of our Class A common stock, respectively.

CWI 2 2019 10-K – 35

(b)

For the first, second, third and fourth quarters of both 2019 and 2018, $0.0339 of each distribution was payable in shares of our Class T common stock. For the first, second, third and fourth quarters of 2017, $0.0332, $0.0338, $0.0339 and $0.0339 was payable in shares of our Class T common stock, respectively. For the first, second, third and fourth quarters of 2016, $0.0236, $0.0263, $0.0332 and $0.0332 was payable in shares of our Class T common stock, respectively. For the second, third and fourth quarters of 2015, $0.0122, $0.0236 and $0.0236 was payable in shares of our Class T common stock, respectively.


(c)	Net investments in real estate consist of Net investments in hotels and Equity investments in real estate.

(d)

At December 31, 2016, this amount included $210.0 million due to WPC for borrowings used to fund the acquisition of the Ritz-Carlton San Francisco. During the first quarter of 2017, we fully repaid the $210.0 million loan. This amount also included an accrual of $11.9 million for the distribution and shareholder servicing fee, which as of December 31, 2016 was paid to Carey Financial but is now paid directly to selected dealers, and is therefore no longer included in Due to related parties and affiliates as of December 31, 2017.


(e)	Represents statistical data for our Consolidated Hotels during our ownership period.

CWI 2 2019 10-K – 36

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results.

The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Report and the matters described under Item 1A. Risk Factors. For discussion of our results of operations for the year ended December 31, 2017, please refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II of our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 15, 2019.

Business Overview

We are a publicly owned, non-traded REIT that invests in, and through our Advisor, manages and seeks to enhance the value of, our interests in lodging and lodging-related properties. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. We conduct substantially all of our investment activities and own all of our assets through the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings 2, which is owned indirectly by WPC, holds a special general partner interest of 0.015% in the Operating Partnership.

We raised a total of $851.3 million though our initial public offering, exclusive of DRIP. We have invested our offering proceeds in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality and by hotel renovations. We have invested in hotels and then initiated significant renovations at certain hotels. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations.

Significant Developments

Proposed Merger

On October 22, 2019, we and CWI 1 announced that we have entered into a definitive merger agreement under which we will merge in an all-stock transaction, with CWI 1 surviving the merger as our wholly-owned subsidiary. On January 13, 2020, the joint proxy statement/prospectus on Form S-4 previously filed with the SEC by us and CWI 1 was declared effective. At the effective time of the merger, each issued and outstanding share of CWI 1 common stock will be converted into 0.9106 shares of CWI 2 Class A common stock. The exchange ratio was determined based on our December 31, 2018 NAV of $11.41 for our Class A shares of common stock and CWI 1’s December 31, 2018 NAV of $10.39. The Proposed Merger is expected to close in the first quarter of 2020, subject to the approval of our stockholders and CWI 1’s stockholders, among other conditions. The special stockholder meetings for us and CWI 1 are currently scheduled for March 26, 2020. Following the closing of the Proposed Merger, the combined company will complete an internalization transaction with our Advisor and Subadvisor, as a result of which the combined company will become self-managed.

Please see our Current Report on Form 8-K dated October 22, 2019 for additional information.

The Current Coronavirus Pandemic

CWI 2 2019 10-K – 37

Financial and Operating Highlights

(Dollars in thousands, except ADR and RevPAR)



	Years Ended December 31,
	2019			2018
Hotel revenues	$	367,207		$	362,332
Net loss attributable to CWI 2 stockholders	(7,618		)	(7,787		)

Cash distributions paid	45,345			44,004

Net cash provided by operating activities	63,502			68,956
Net cash used in investing activities	(10,984		)	(11,782		)
Net cash used in financing activities	(44,680		)	(51,346		)

Supplemental Financial Measures: ^(a)
FFO attributable to CWI 2 stockholders	47,877			44,668
MFFO attributable to CWI 2 stockholders	52,417			46,499

Consolidated Hotel Operating Statistics
Occupancy	76.3		%	78.2		%
ADR	$	250.92		$	239.41
RevPAR	191.56			187.27

___________

(a)

We consider FFO and MFFO, which are non-GAAP measures, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

The comparison of our results year over year is influenced by both the number and size of the hotels consolidated in each of the respective years. At both December 31, 2019 and 2018, we owned ten Consolidated Hotels.

CWI 2 2019 10-K – 38

Portfolio Overview

The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels at December 31, 2019:



Hotels	State	Number of Rooms	% Owned	Acquisition Date	Hotel Type
Consolidated Hotels
2015 Acquisitions
Marriott Sawgrass Golf Resort & Spa ^(a)	FL	514	50%	4/1/2015	Resort
Courtyard Nashville Downtown	TN	192	100%	5/1/2015	Select-Service
Embassy Suites by Hilton Denver-Downtown/Convention Center	CO	403	100%	11/4/2015	Full-Service
2016 Acquisitions
Seattle Marriott Bellevue ^(b)	WA	384	100%	1/22/2016	Full-Service
Le Méridien Arlington	VA	154	100%	6/28/2016	Full-Service
San Jose Marriott	CA	510	100%	7/13/2016	Full-Service
San Diego Marriott La Jolla	CA	376	100%	7/21/2016	Full-Service
Renaissance Atlanta Midtown Hotel	GA	304	100%	8/30/2016	Full-Service
Ritz-Carlton San Francisco	CA	336	100%	12/30/2016	Full-Service
2017 Acquisition
Charlotte Marriott City Center	NC	446	100%	6/1/2017	Full-Service
		3,619
Unconsolidated Hotels
Ritz-Carlton Key Biscayne ^(c)	FL	443	19.3%	5/29/2015	Resort
Ritz-Carlton Bacara, Santa Barbara ^(d)	CA	358	60%	9/28/2017	Resort
		801

_________


(a)	The remaining 50% interest in this venture is owned by CWI 1.


(b)	On October 16, 2019, we purchased the membership interest in the Seattle Marriott Bellevue venture that we did not already own from an unaffiliated third party for $0.3 million, which increased our ownership interest from 95.4% to 100.0% (Note 10).


(c)	A 47.4% interest in this venture is owned by CWI 1. The remaining 33.3% interest is retained by the original owner. The number of rooms presented includes 141 condo-hotel units that participate in the resort rental program.


(d)	This investment represents a tenancy-in-common interest; the remaining 40% interest is owned by CWI 1.

Results of Operations

We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value in our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation.

In addition, we use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, such as occupancy rate, ADR and RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors.

The comparability of our results year over year is impacted by, among other factors, the timing of acquisition activity and of any renovation-related activity, including any restoration work due to the impact of Hurricane Irma.

CWI 2 2019 10-K – 39

The following table presents our comparative results of operations (in thousands):



	Years Ended December 31,
	2019			2018			Change
Hotel Revenues	$	367,207		$	362,332		$	4,875

Hotel Operating Expenses	299,108			293,534			5,574

Asset management fees to affiliate and other expenses	10,802			10,932			(130		)
Corporate general and administrative expenses	7,623			7,464			159
Transaction costs	4,499			1,177			3,322
(Gain) loss on hurricane-related property damage	(10		)	682			(692		)
Total Expenses	322,022			313,789			8,233

Operating Income	45,185			48,543			(3,358		)
Interest expense	(39,902		)	(40,226		)	324
Equity in losses of equity method investment in real estate, net	(5,209		)	(5,819		)	610
Other income	965			792			173
Loss on extinguishment of debt	(5		)	(380		)	375
Income Before Income Taxes	1,034			2,910			(1,876		)
Provision for income taxes	(85		)	(3,259		)	3,174
Net Income (Loss)	949			(349		)	1,298
Income attributable to noncontrolling interests	(8,567		)	(7,438		)	(1,129		)
Net Loss Attributable to CWI 2 Stockholders	$	(7,618	)	$	(7,787	)	$	169
Supplemental financial measure:^(a)
MFFO Attributable to CWI 2 Stockholders	$	52,417		$	46,499		$	5,918

___________

(a)

We consider MFFO, a non-GAAP measure, to be an important metric in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

Hotel Revenues

2019 vs. 2018 — For the year ended December 31, 2019 as compared to 2018, hotel revenues increased by $4.9 million. This increase was primarily driven by increases in revenue from the Ritz-Carlton San Francisco, Renaissance Atlanta Midtown Hotel, Charlotte Marriott City Center and Embassy Suites by Hilton Denver-Downtown/Convention Center. The increase in revenue from the Ritz-Carlton San Francisco was largely the result of an increase in group bookings driven by the re-opening of the Moscone Convention Center in the fourth quarter of 2018, while the Renaissance Atlanta Midtown Hotel benefited from Super Bowl LIII in February 2019, as well as incurring renovation-related disruption during 2018. The increases in revenue from the Charlotte Marriott City Center and Embassy Suites by Hilton Denver-Downtown/Convention Center were driven primarily by banquet and catering revenues.

These increases were partially offset by a decrease in revenue from Sawgrass Golf Resort & Spa, resulting from a decrease in group bookings as compared to 2018, as well as the impact of Hurricane Dorian, which resulted in decreased demand leading up to the hurricane, as well as closure of the hotel for approximately one week in September 2019. Additionally, 2018 revenue for the hotel included $0.9 million of business interruption income.

Hotel Operating Expenses

Room expense, food and beverage expense and other operating department costs (including but not limited to expenses related to departments such as parking, spa and gift shops) fluctuate based on various factors, including occupancy, labor costs, utilities and insurance costs.

CWI 2 2019 10-K – 40

2019 vs. 2018 — For the year ended December 31, 2019 as compared to 2018, hotel operating expenses increased by $5.6 million. This increase was primarily driven by increases in expenses from the Ritz-Carlton San Francisco, Renaissance Atlanta Midtown Hotel, Charlotte Marriott City Center and Embassy Suites by Hilton Denver-Downtown/Convention Center, partially offset by a decrease from Sawgrass Golf Resort & Spa, consistent with the fluctuations in revenue discussed above.

Transaction Costs

2019 — During the year ended December 31, 2019, transactions costs were $4.5 million and represented legal, accounting, financial advisory and other transaction costs related to the Proposed Merger and related transactions.

2018 — During the year ended December 31, 2018, transaction costs were $1.2 million. In connection with our acquisition of the Ritz-Carlton San Francisco on December 30, 2016, we funded a $10.0 million net operating income guarantee reserve at closing into a restricted cash account, which guaranteed us minimum predetermined net operating income amounts over a period of approximately two years, with any remaining funds at the end of the two year period to be remitted back to the seller. Throughout the two year period, we made draws against this reserve and at December 31, 2018 (the end of the two year period), we estimated that a total of $1.2 million would be remitted to the seller and recognized this as transaction costs during the year ended December 31, 2018. During the second quarter of 2019, $1.2 million was remitted to the seller.

(Gain) Loss on Hurricane-Related Property Damage

2018 — During the year ended December 31, 2018, we recognized a loss on hurricane-related property damage of $0.7 million from the Marriott Sawgrass Golf Resort & Spa. This loss was comprised of a $1.4 million loss resulting from pre-existing damage at the hotel (which was discovered as a result of the hurricane and was not covered by insurance), partially offset by a $0.7 million gain resulting from a decrease in the estimate to repair property damage at the hotel.

We and CWI 1 maintain insurance on all of our hotels, with an aggregate policy limit of $500.0 million for both property damage and business interruption. Our insurance policies are subject to various terms and conditions, including property damage and business interruption deductibles on each hotel, which range from 2% to 5% of the insured value. We currently estimate our aggregate casualty insurance claim for our Consolidated Hotels related to Hurricane Irma to be in the range of $5.0 million to $10.0 million, which includes estimated clean up, repair and rebuilding costs, and estimate our aggregate business interruption insurance claim to be approximately $1.0 million. We currently estimate the collective casualty insurance claim for us and CWI 1 combined to be in the range of $70.0 million to $80.0 million and the collective business interruption insurance claim to be in the range of $25.0 million to $35.0 million. As the restoration work continues to be performed, the estimated total costs will change. We believe that we maintain adequate insurance coverage on our hotels and are working closely with the insurance carriers and claims adjuster to obtain the maximum amount of insurance recovery provided under the policies. However, we can give no assurances as to the amounts of such claims, the timing of payments or the ultimate resolution of the claims.

We experienced a reduction in revenues as a result of Hurricane Irma. Our business interruption insurance covers lost revenue through the period of property restoration and for up to 12 months after the hotels are back to full operations. We have retained consultants to assess our business interruption claims and are currently reviewing our losses with our insurance carriers. We recorded revenue for covered business interruption related to Hurricane Irma of $0.9 million during the year ended December 31, 2018. We record revenue for covered business interruption when both the recovery is probable and contingencies have been resolved with the insurance carriers.

Interest Expense

2019 vs. 2018 — For the year ended December 31, 2019 as compared to 2018, interest expense decreased by $0.3 million. Interest expense is comprised primarily of interest expense related to our mortgage loans. Our average outstanding debt balance was $836.5 million and $835.8 million during the years ended December 31, 2019 and 2018, respectively. Our weighted-average interest rate was 4.4% and 4.5% during the years ended December 31, 2019 and 2018, respectively.

CWI 2 2019 10-K – 41

Equity in Losses of Equity Method Investments in Real Estate, Net

Equity in losses of equity method investments in real estate, net represents earnings from our equity investments in Unconsolidated Hotels recognized in accordance with each investment agreement and is based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period (Note 5). We are required to periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. No other-than-temporary impairment charges were recognized during the years ended December 31, 2019 or 2018.

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value (“HLBV”) method, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):



	Years Ended December 31,
Unconsolidated Hotels	2019			2018
Ritz-Carlton Bacara, Santa Barbara Venture ^(a)	$	(5,918	)	$	(7,314	)
Ritz-Carlton Key Biscayne Venture ^(b)	709			1,495
Total equity in losses of equity method investments in real estate, net	$	(5,209	)	$	(5,819	)

___________


(a)	The decrease in our share of equity in (losses) from the venture for the year ended December 31, 2019 as compared to the same period in 2018 reflects an improvement in the operating results of the venture.


(b)	The decrease in our share of equity in earnings from the venture for the year ended December 31, 2019 as compared to the same period in 2018 is primarily the result of a decrease in the hotel’s net income, which was impacted by renovations at the hotel.

Loss on Extinguishment of Debt

2019 — During the year ended December 31, 2019, we recognized a loss on extinguishment of debt of less than $0.1 million related to the refinancing of the Marriott Sawgrass Golf Resort & Spa mortgage loan (Note 8).

2018 — During the year ended December 31, 2018, we recognized a loss on extinguishment of debt of $0.4 million related to the refinancing of the Renaissance Atlanta Midtown senior mortgage and mezzanine loans (Note 8).

Provision for Income Taxes

For the year ended December 31, 2019 as compared to the same period in 2018, our provision for income taxes decreased by $3.2 million, largely driven by the release of a $2.3 million valuation allowance for deferred tax assets during the first quarter of 2019 related to Marriott Sawgrass Golf Resort & Spa, due to, in part, the TRS achieving three years of cumulative pre-tax income during the current year period. We determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred taxes of $2.3 million are realizable.

Income Attributable to Noncontrolling Interests

The following table sets forth our income attributable to noncontrolling interests (in thousands):



	Years Ended December 31,
Venture	2019			2018
Marriott Sawgrass Golf Resort & Spa Venture	$	(2,305	)	$	(1,971	)
Operating Partnership — Available Cash Distribution (Note 3)	(6,262		)	(5,467		)
	$	(8,567	)	$	(7,438	)

CWI 2 2019 10-K – 42

Modified Funds from Operations

MFFO is a non-GAAP measure we use to evaluate our business. For a definition of MFFO and a reconciliation to net income attributable to CWI 2 stockholders, see Supplemental Financial Measures below.

2019 vs. 2018 — For the year ended December 31, 2019 as compared to 2018, MFFO increased by $5.9 million, primarily as a result of a net increase in income from hotel operations.

Liquidity and Capital Resources

Our principal demands for funds will be for the payment of operating expenses, interest and principal on current and future indebtedness and distributions to stockholders. Liquidity is affected adversely by unanticipated costs and greater-than-anticipated operating expenses. We expect to meet our liquidity requirement from cash generated from operations. To the extent that these funds are insufficient to satisfy our cash flow requirements, additional funds may be provided from asset sales, long- and/or short-term borrowings, proceeds from mortgage financings or refinancings.

Sources and Uses of Cash During the Year

We have fully invested the proceeds from our initial public offering. We use the cash flow generated from hotel operations to meet our normal recurring operating expenses, service debt and fund distributions to our shareholders. Our cash flows fluctuate from period to period due to a number of factors, including the financial and operating performance of our hotels, the timing of purchases or dispositions of hotels, the timing and characterization of distributions from equity method investments in hotels and the seasonality in the demand for our hotels. Also, hotels we own may undergo renovations, during which they may experience disruptions, possibly resulting in reduced revenue and operating income. Despite these fluctuations, we believe that we will continue to generate sufficient cash from operations and from our equity method investments to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources, proceeds available under our Working Capital Facility (as defined in Note 3), through its expiration, which, as amended, is the later of March 31, 2020 or the close date of the Proposed Merger, the proceeds of mortgage loans, sales of assets, or distributions reinvested in our common stock through our DRIP. We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.

2019

Operating Activities — For the year ended December 31, 2019 as compared to 2018, net cash provided by operating activities decreased by $5.5 million. The year ended December 31, 2019 included transaction costs paid in connection with the Proposed Merger and related transactions totaling $3.4 million.

Investing Activities — During 2019, net cash used in investing activities was $11.0 million. We funded $10.6 million of capital expenditures for our Consolidated Hotels and capital contributions of $5.7 million to the Ritz-Carlton Bacara, Santa Barbara Venture, which was used, in part, to fund a renovation at the hotel. Also, we made a payment of $2.1 million to Watermark in consideration of the commitments of Watermark and Mr. Medzigian to wind down and ultimately liquidate a private fund that was formed to raise capital to invest in lodging properties, and to devote their business activities exclusively to the affairs of us and CWI 1 and certain other activities, as discussed in Note 3. We received distributions received from equity investments in excess of cumulative equity income totaling $7.4 million.

Financing Activities — During 2019, net cash used in financing activities was $44.7 million, primarily as a result of scheduled payments and prepayments of mortgage financing totaling $83.3 million (of which $78.0 million was made in connection with the refinancing of the Sawgrass Golf Resort & Spa mortgage loan during the fourth quarter of 2019 (Note 8)), cash distributions paid to stockholders of $45.3 million, distributions to noncontrolling interests totaling $13.5 million and redemptions of our common stock pursuant to our redemption plan totaling $11.1 million, as described below. These cash outflows were partially offset by proceeds of $90.0 million from the refinancing of the Sawgrass Golf Resort & Spa loan and the reinvestment of distributions in shares of our common stock through our DRIP, net of distribution and shareholder servicing fee payments, totaling $20.5 million.

CWI 2 2019 10-K – 43

2018

Operating Activities — For the year ended December 31, 2018 as compared to 2017, net cash provided by operating activities increased by $19.2 million. Net cash provided by operating activities during the year ended December 31, 2017 reflected the $7.2 million acquisition fee paid to our Advisor related to the acquisition of the Ritz-Carlton San Francisco on December 30, 2016, which was paid in the first quarter of 2017, as well as $6.5 million of acquisition-related expenses paid primarily related to our acquisition of the Charlotte Marriott City Center on June 1, 2017. The remaining increase for the year ended December 31, 2018 as compared to the same period in 2017 was largely attributable to net cash flow from operations generated by the Charlotte Marriott City Center.

Investing Activities — During 2018, net cash used in investing activities was $11.8 million, primarily as a result of funding $16.9 million of capital expenditures for our Consolidated Hotels, partially offset by distributions received from equity investments in excess of cumulative equity income totaling $5.6 million.

Financing Activities — During 2018, net cash used in financing activities was $51.3 million, primarily as a result of scheduled payments and prepayments of mortgage financing totaling $47.5 million substantially made in connection with the refinancing of the Renaissance Atlanta Midtown senior mortgage and mezzanine loans during the third quarter of 2018 (Note 8), cash distributions paid to stockholders of $44.0 million, redemptions of our common stock pursuant to our redemption plan totaling $19.3 million and distributions to noncontrolling interests totaling $9.2 million, partially offset by proceeds of $49.0 million from the refinancing of the Renaissance Atlanta Midtown loans and the reinvestment of distributions in shares of our common stock through our DRIP, net of distribution and shareholder servicing fee payments, totaling $20.7 million.

Distributions

Our current objectives are to generate sufficient cash flow over time to provide stockholders with distributions and to manage a portfolio of investments with potential for capital appreciation throughout varying economic cycles. During the year ended December 31, 2019, we paid distributions to stockholders, excluding distributions paid in shares of our common stock, totaling $45.3 million, which were comprised of cash distributions of $19.1 million and distributions that were reinvested in shares of our common stock by stockholders through our DRIP of $26.2 million. From inception through December 31, 2019, we declared distributions, excluding distributions paid in shares of our common stock, to stockholders totaling $155.7 million, which were comprised of cash distributions of $62.2 million and distributions that were reinvested in shares of our common stock by stockholders through our DRIP of $93.5 million.

We believe that FFO, a non-GAAP measure, is an appropriate metric to evaluate our ability to fund distributions to stockholders. For a discussion of FFO, see Supplemental Financial Measures below. Over the life of our company, the regular quarterly cash distributions we pay are expected to be principally sourced from our FFO or our Cash flow from operations. However, we have funded a portion of our cash distributions to date using net proceeds from our public offering and there can be no assurance that our FFO or our Cash flow from operations will be sufficient to cover our future distributions. We fully covered total distributions declared for the year ended December 31, 2019 using FFO and funded all of these distributions from Net cash provided by operating activities. We expect that, in the future, if distributions cannot be fully sourced from net cash provided by operating activities, they may be sourced from other sources of cash, such as financings, borrowings, or sales of assets.

Redemptions

We maintain a quarterly redemption program pursuant to which we may, at the discretion of our board of directors, redeem shares of our common stock from stockholders seeking liquidity. During the year ended December 31, 2019, we redeemed 349,992 shares and 678,256 shares of our Class A and Class T common stock, respectively, pursuant to our redemption plan, comprised of 91 redemption requests and 158 redemption requests, respectively, and all at an average price per share of $10.84. As of the date of this Report, we have fulfilled all of the valid redemption requests that we received during the year ended December 31, 2019. We funded all share redemptions during the year ended December 31, 2019 with proceeds from the sale of shares of our common stock pursuant to our DRIP.

CWI 2 2019 10-K – 44

Summary of Financing

The table below summarizes our non-recourse debt, net (dollars in thousands):



	December 31,
	2019			2018
Carrying Value
Fixed rate ^(a)	$	483,019		$	485,121
Variable rate ^(a):
Amount subject to interest rate swaps	186,642			99,718
Amount subject to interest rate caps	170,804			248,997
	357,446			348,715
	$	840,465		$	833,836
Percent of Total Debt
Fixed rate	57		%	58		%
Variable rate	43		%	42		%
	100		%	100		%
Weighted-Average Interest Rate at End of Year
Fixed rate	4.3		%	4.3		%
Variable rate ^(b)	4.1		%	4.9		%

_________


(a)	Aggregate debt balance includes deferred financing costs totaling $3.1 million as of both December 31, 2019 and 2018.


(b)	The impact of our derivative instruments (Note 7) are reflected in the weighted-average interest rates.

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met.

Cash Resources

At December 31, 2019, our cash resources consisted of cash totaling $81.7 million, of which $13.5 million was designated as hotel operating cash. We also had the $25.0 million Working Capital Facility, all of which was available to be drawn at December 31, 2019, with its maturity date the later of March 31, 2020 or the closing of the Proposed Merger. Our cash resources can be used for working capital needs, debt service and other commitments, such as renovation commitments as noted below, as well as to fund any future investments.

Cash Requirements and Liquidity

During the next 12 months, we expect that our cash requirements will include paying costs incurred in connection with the Proposed Merger and related transactions, distributions to our stockholders, reimbursing our Advisor for costs incurred on our behalf, fulfilling our renovation commitments (Note 9), funding hurricane-related repair and remediation costs in excess of insurance proceeds received, making scheduled mortgage loan principal payments, including scheduled balloon payments of $219.5 million on three mortgage loans (one loan was refinanced as of the date of this Report), as well as other normal recurring operating expenses. We currently intend to refinance the scheduled balloon payments, although there can be no assurance that we will be able to do so on favorable terms, if at all.

We expect to use cash generated from operations and mortgage financing to fund these cash requirements, in addition to amounts held in escrow to fund our renovation commitments.

CWI 2 2019 10-K – 45

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. At December 31, 2019 and 2018, $26.7 million and $20.4 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures.

Off-Balance Sheet Arrangements and Contractual Obligations

The table below summarizes our debt, off-balance sheet arrangements and other contractual obligations (primarily our capital commitments) at December 31, 2019, and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):



	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Non-recourse debt — principal ^(a)	$	843,607	$	224,614	$	539,115	$	79,878	$	—
Interest on borrowings ^(b)	72,796		30,114		40,496		2,186		—
Contractual capital commitments^(c)	11,457		11,457		—		—		—
Annual distribution and shareholder servicing fee ^(d)	5,276		5,276		—		—		—
	$	933,136	$	271,461	$	579,611	$	82,064	$	—

___________


(a)	Excludes deferred financing costs totaling $3.1 million.


(b)	For variable-rate debt, interest on borrowings is calculated using the swapped or capped interest rate, when in effect.


(c)	Capital commitments represent our remaining contractual renovation commitments at our Consolidated Hotels, which does not reflect any remaining restoration work as a result of Hurricane Irma (Note 9).


(d)	Represents the estimated liability for the present value of the future distribution and shareholder servicing fees in connection with our Class T common stock (Note 3).

Equity Method Investments

At December 31, 2019, we owned equity interests in two Unconsolidated Hotels, one solely with CWI 1 and another together with CWI 1 and an unrelated third party. Our ownership interest and summarized financial information for these investments at December 31, 2019 is presented below. Summarized financial information provided represents the total amounts attributable to these investments and does not represent our proportionate share (dollars in thousands):



	Ownership Interest at			Total Third-		Third-Party Debt
Venture	December 31, 2019	Total Assets		Party Debt		Maturity Date
Ritz-Carlton Key Biscayne Venture	19.3%	$	321,730	$	185,104	8/2021
Ritz-Carlton Bacara, Santa Barbara Venture	60%	378,772		228,434		9/2021
		$	700,502	$	413,538

Environmental Obligations

Our hotels are subject to various federal, state and local environmental laws. Under these laws, governmental entities have the authority to require the current owner of the property to perform or pay for the cleanup of contamination (including hazardous substances, waste or petroleum products) at, on, under or emanating from the property and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned the property at the time it became contaminated, it is possible we could incur cleanup costs or other environmental liabilities even after we sell properties. Contamination at, on, under or emanating from our properties also may expose us to liability to private parties for costs of remediation and/or personal injury or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on our properties, environmental laws also may impose

CWI 2 2019 10-K – 46

restrictions on the manner in which the property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. We are not aware of any past or present environmental liability for non-compliance with environmental laws that we believe would have a material adverse effect on our business, financial condition, liquidity or results of operations.

In connection with the purchase of hotels, we have independent environmental consultants conduct a Phase I environmental site assessment prior to purchase. Phase I site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. None of the existing Phase I site assessments on our hotels revealed any past or present environmental condition that we believe would have a material adverse effect on our business, financial condition, liquidity or results of operations.

Critical Accounting Estimates

Our significant accounting policies are described in Note 2. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates. Those accounting policies that require significant estimation and/or judgment are described under Critical Accounting Policies and Estimates in Note 2. The recent accounting changes that may potentially impact our business are described under Recent Accounting Requirements in Note 2.

Supplemental Financial Measures

In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO, and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, are provided below.

FFO and MFFO

Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to nor a substitute for net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as restated in December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above. However, NAREIT’s definition of FFO does not distinguish between the conventional method of equity accounting and the HLBV method of accounting for unconsolidated partnerships and jointly-owned investments.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization, as well as impairment charges of real estate-related

CWI 2 2019 10-K – 47

assets, provides a more complete understanding of our performance to investors and to management; and when compared year over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. It should be noted, however, that the property’s asset group’s estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above, due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect subsequent to the establishment of NAREIT’s definition of FFO. Management believes these cash-settled expenses, such as acquisition fees that are typically accounted for as operating expenses, do not affect our overall long-term operating performance. Publicly-registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-traded REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-traded REITs, the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) (“IPA”), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect the operating performance of a non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. MFFO should only be used to assess the sustainability of a company’s operating performance after a company’s offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company’s operating performance during the periods in which properties are acquired.

We define MFFO consistent with the IPA’s Practice Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”), issued by the IPA in November 2010. This Practice Guideline defines MFFO as FFO further adjusted for the following items, included in the determination of GAAP net income or loss, as applicable: acquisition fees and expenses; accretion of discounts and amortization of premiums on debt investments; where applicable, payments of loan principal made by our equity investees accounted for under the HLBV model where such payments reduce our equity in earnings of equity method investments in real estate, nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income or loss; nonrecurring gains or losses included in net income or loss from the extinguishment or sale of debt, hedges, derivatives or securities holdings, where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for Consolidated and Unconsolidated Hotels, with such adjustments calculated to

CWI 2 2019 10-K – 48

reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses that are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities. We account for certain of our equity investments using the HLBV model which is based on distributable cash as defined in the operating agreement.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that MFFO and the adjustments used to calculate it allow us to present our performance in a manner that takes into account certain characteristics unique to non-traded REITs, such as their limited life, defined acquisition period and targeted exit strategy, and is therefore a useful measure for investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or loss as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly.

CWI 2 2019 10-K – 49

FFO and MFFO were as follows (in thousands):



	Years Ended December 31,
	2019			2018
Net loss attributable to CWI 2 stockholders	$	(7,618	)	$	(7,787	)
Adjustments:
Depreciation and amortization of real property	47,837			46,403
Proportionate share of adjustments for partially owned entities — FFO adjustments	7,658			6,052
Total adjustments	55,495			52,455
FFO attributable to CWI 2 stockholders (as defined by NAREIT)	47,877			44,668
Transaction costs ^(a)	4,499			1,177
Other rent adjustments	44			(67		)
(Gain) loss on hurricane-related property damage ^(b)	(10		)	682
Loss on extinguishment of debt	5			380
Proportionate share of adjustments for partially owned entities — MFFO adjustments	2			(341		)
Total adjustments	4,540			1,831
MFFO attributable to CWI 2 stockholders	$	52,417		$	46,499

___________

(a)

Transaction costs for the year ended December 31, 2019 are costs incurred in connection with the Proposed Merger and related transactions and included legal, accounting, financial advisory and other transaction costs. We have excluded these costs because of their non-recurring nature. For the year ended December 31, 2018, transaction costs represented acquisition-related costs and fees associated with an acquisition of a Consolidated Hotel. We have excluded theses costs as they are considered outside the normal course of operations. By excluding expensed transaction costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties.


(b)	We excluded the (gain) loss on hurricane-related property damage because of its non-recurring nature.

CWI 2 2019 10-K – 50

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We currently have limited exposure to financial market risks, including changes in interest rates. We currently have no foreign operations and are not exposed to foreign currency fluctuations.

Interest Rate Risk

The values of our real estate and related fixed-rate debt obligations are subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our assets to decrease.

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we generally seek non-recourse mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans, and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. See Note 7 for additional information on our interest rate swaps and caps.

At December 31, 2019, all of our long-term debt bore interest at fixed rates, was swapped to a fixed rate or was subject to an interest rate cap. Our debt obligations are more fully described in Note 8 and under Liquidity and Capital Resources in Item 7 above. The following table presents principal cash outflows for our Consolidated Hotels based upon expected maturity dates of our debt obligations outstanding at December 31, 2019 and excludes deferred financing costs (in thousands):



	2020		2021		2022		2023		2024		Thereafter		Total		Fair Value
Fixed-rate debt	$	4,319	$	4,497	$	395,618	$	79,878	$	—	$	—	$	484,312	$	484,873
Variable-rate debt	$	220,295	$	49,000	$	90,000	$	—	$	—	$	—	$	359,295	$	359,295

The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of an interest rate swap, or that has been subject to an interest rate cap, is affected by changes in interest rates. A decrease or increase in interest rates of 1.0% would change the estimated fair value of this debt at December 31, 2019 by an aggregate increase of $14.9 million or an aggregate decrease of $16.1 million, respectively. Annual interest expense on our variable-rate debt that is subject to an interest rate cap at December 31, 2019 would increase or decrease by $1.7 million for each respective 1.0% change in annual interest rates.

CWI 2 2019 10-K – 51

Item 8. Financial Statements and Supplementary Data.



TABLE OF CONTENTS	Page No.

Report of Independent Registered Public Accounting Firm	53

Consolidated Balance Sheets as of December 31, 2019 and 2018	54

Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017	55

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2018 and 2017	56

Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017	57

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017	59

Notes to Consolidated Financial Statements	61

Schedule II — Valuation and Qualifying Accounts for the Years Ended December 31, 2019, 2018 and 2017	86

Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2019	87

Notes to Schedule III for the Years Ended December 31, 2019, 2018 and 2017	88

Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist.

CWI 2 2019 10-K – 52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Carey Watermark Investors 2 Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Carey Watermark Investors 2 Incorporated and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive loss, of equity, and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, NY

March 12, 2020

We have served as the Company's auditor since 2014.

CWI 2 2019 10-K – 53

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	December 31,
	2019			2018
Assets
Investments in real estate:
Hotels, at cost	$	1,468,888		$	1,464,933
Accumulated depreciation	(157,581		)	(113,184		)
Net investments in hotels	1,311,307			1,351,749
Equity investments in real estate	113,169			121,456
Cash and cash equivalents	81,713			76,823
Restricted cash	30,062			27,114
Accounts receivable, net	25,719			18,826
Other assets	15,012			9,346
Total assets	$	1,576,982		$	1,605,314
Liabilities and Equity
Non-recourse debt, net	$	840,465		$	833,836
Accounts payable, accrued expenses and other liabilities	59,471			61,913
Due to related parties and affiliates	2,786			1,984
Distributions payable	11,616			11,178
Total liabilities	914,338			908,911
Commitments and contingencies (Note 9)
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued	—			—
Class A common stock, $0.001 par value; 320,000,000 shares authorized; 32,762,005 and 31,023,863 shares, respectively, issued and outstanding	33			31
Class T common stock, $0.001 par value; 80,000,000 shares authorized; 60,623,093 and 59,006,632 shares, respectively, issued and outstanding	61			59
Additional paid-in capital	852,051			825,896
Distributions and accumulated losses	(210,224		)	(156,823		)
Accumulated other comprehensive (loss) income	(157		)	1,205
Total stockholders’ equity	641,764			670,368
Noncontrolling interests	20,880			26,035
Total equity	662,644			696,403
Total liabilities and equity	$	1,576,982		$	1,605,314

See Notes to Consolidated Financial Statements.

CWI 2 2019 10-K – 54

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)



	Years Ended December 31,
	2019			2018			2017
Revenues
Hotel Revenues
Rooms	$	253,044		$	247,099		$	229,109
Food and beverage	92,400			93,555			92,150
Other operating revenue	20,954			20,744			19,551
Business interruption income	809			934			—
Total Hotel Revenues	367,207			362,332			340,810
Expenses
Rooms	56,189			57,008			53,554
Food and beverage	67,857			68,132			66,337
Other hotel operating expenses	4,612			5,292			5,674
General and administrative	33,694			32,455			29,817
Sales and marketing	31,601			30,562			30,218
Property taxes, insurance, rent and other	22,918			19,973			18,061
Management fees	13,046			13,014			12,148
Repairs and maintenance	12,848			12,099			11,377
Utilities	8,732			8,862			8,474
Depreciation	47,611			46,137			43,729
Total Hotel Operating Expenses	299,108			293,534			279,389
Asset management fees to affiliate and other expenses	10,802			10,932			8,995
Corporate general and administrative expenses	7,623			7,464			6,403
Transaction costs	4,499			1,177			6,511
(Gain) loss on hurricane-related property damage	(10		)	682			2,699
Total Expenses	322,022			313,789			303,997
Operating Income	45,185			48,543			36,813
Interest expense	(39,902		)	(40,226		)	(35,824		)
Equity in losses of equity method investment in real estate, net	(5,209		)	(5,819		)	(1,482		)
Other income	965			792			155
Loss on extinguishment of debt	(5		)	(380		)	(256		)
Income (loss) before income taxes	1,034			2,910			(594		)
Provision for income taxes	(85		)	(3,259		)	(3,900		)
Net Income (Loss)	949			(349		)	(4,494		)
Income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $6,262, $5,467 and $5,078, respectively)	(8,567		)	(7,438		)	(991		)
Net Loss Attributable to CWI 2 Stockholders	$	(7,618	)	$	(7,787	)	$	(5,485	)

Class A Common Stock
Net loss attributable to CWI 2 stockholders	$	(2,509	)	$	(2,443	)	$	(1,740	)
Basic and diluted weighted-average shares outstanding	32,260,398			30,390,179			27,825,037
Basic and diluted loss per share	$	(0.08	)	$	(0.08	)	$	(0.06	)

Class T Common Stock
Net loss attributable to CWI 2 stockholders	$	(5,109	)	$	(5,344	)	$	(3,745	)
Basic and diluted weighted-average shares outstanding	60,499,745			58,842,820			54,686,084
Basic and diluted loss per share	$	(0.08	)	$	(0.09	)	$	(0.07	)

See Notes to Consolidated Financial Statements.

CWI 2 2019 10-K – 55

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)



	Years Ended December 31,
	2019			2018			2017
Net Income (Loss)	$	949		$	(349	)	$	(4,494	)
Other Comprehensive (Loss) Income
Unrealized (loss) gain on derivative instruments	(1,309		)	(171		)	484
Comprehensive Loss	(360		)	(520		)	(4,010		)

Amounts Attributable to Noncontrolling Interests
Net income	(8,567		)	(7,438		)	(991		)
Unrealized (gain) loss on derivative instruments	(53		)	3			(7		)
Comprehensive income attributable to noncontrolling interests	(8,620		)	(7,435		)	(998		)
Comprehensive Loss Attributable to CWI 2 Stockholders	$	(8,980	)	$	(7,955	)	$	(5,008	)

See Notes to Consolidated Financial Statements.

CWI 2 2019 10-K – 56

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share amounts)



	CWI 2 Stockholders
	Common Stock										Additional Paid-In Capital			Distributions and Accumulated Losses			Accumulated Other Comprehensive Income (Loss)			Total CWI 2 Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
	Class A					Class T
	Shares		Amount			Shares		Amount
Balance at January 1, 2019	31,023,863		$	31		59,006,632		$	59		$	825,896		$	(156,823	)	$	1,205		$	670,368		$	26,035		$	696,403
Net (loss) income														(7,618		)				(7,618		)	8,567			949
Shares issued, net of offering costs	726,688		1			1,581,775		2			26,137									26,140						26,140
Shares issued to affiliates	944,647		1								10,707									10,708						10,708
Distributions to noncontrolling interests																				—			(13,478		)	(13,478		)
Purchase of membership interest from noncontrolling interest																				—			(297		)	(297		)
Shares issued under share incentive plans	19,352		—								248									248						248
Stock-based compensation to directors	18,476		—								210									210						210
Stock dividends issued	378,971		—			712,942		1												1						1
Distributions declared ($0.6996 and $0.5968 per share to Class A and Class T, respectively)														(45,783		)				(45,783		)				(45,783		)
Other comprehensive (loss) income																	(1,362		)	(1,362		)	53			(1,309		)
Repurchase of shares	(349,992	)	—			(678,256	)	(1		)	(11,147		)							(11,148		)				(11,148		)
Balance at December 31, 2019	32,762,005		$	33		60,623,093		$	61		$	852,051		$	(210,224	)	$	(157	)	$	641,764		$	20,880		$	662,644

Balance at January 1, 2018	29,510,914		$	29		57,871,712		$	58		$	807,377		$	(104,809	)	$	1,373		$	704,028		$	27,757		$	731,785
Net (loss) income														(7,787		)				(7,787		)	7,438			(349		)
Shares issued, net of offering costs	769,324		1			1,640,727		1			27,067									27,069						27,069
Shares issued to affiliates	943,271		1								10,392									10,393						10,393
Distributions to noncontrolling interests																				—			(9,157		)	(9,157		)
Shares issued under share incentive plans	17,535		—								216									216						216
Stock-based compensation to directors	15,384		—								171									171						171
Stock dividends issued	370,644		1			719,272		1												2						2
Distributions declared ($0.6996 and $0.5959 per share to Class A and Class T, respectively)														(44,227		)				(44,227		)				(44,227		)
Other comprehensive loss																	(168		)	(168		)	(3		)	(171		)
Repurchase of shares	(603,209	)	(1		)	(1,225,079	)	(1		)	(19,327		)							(19,329		)				(19,329		)
Balance at December 31, 2018	31,023,863		$	31		59,006,632		$	59		$	825,896		$	(156,823	)	$	1,205		$	670,368		$	26,035		$	696,403

(Continued)

CWI 2 2019 10-K – 57

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED STATEMENTS OF EQUITY

(Continued)

(in thousands, except share and per share amounts)



	CWI 2 Stockholders
	Common Stock								Additional Paid-In Capital			Distributions and Accumulated Losses			Accumulated Other Comprehensive (Loss) Income		Total CWI 2 Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
	Class A				Class T
	Shares		Amount		Shares		Amount
Balance at January 1, 2017	22,414,128		$	22	40,447,362		$	40	$	573,135		$	(59,115	)	$	896	$	514,978		$	35,131		$	550,109
Net (loss) income												(5,485		)			(5,485		)	991			(4,494		)
Shares issued, net of offering costs	6,027,028		6		17,129,299		17		232,827								232,850						232,850
Shares issued to affiliates	1,064,066		1						11,393								11,394						11,394
Distributions to noncontrolling interests																	—			(8,372		)	(8,372		)
Purchase of membership interest from noncontrolling interest									(3,524		)						(3,524		)				(3,524		)
Shares issued under share incentive plans	14,071		—						190								190						190
Stock-based compensation to directors	15,384		—						165								165						165
Stock dividends issued	320,922		—		615,421		1										1						1
Distributions declared ($0.6955 and $0.5919 per share to Class A and Class T, respectively)												(40,209		)			(40,209		)				(40,209		)
Other comprehensive income															477		477			7			484
Repurchase of shares	(344,685	)	—		(320,370	)	—		(6,809		)						(6,809		)				(6,809		)
Balance at December 31, 2017	29,510,914		$	29	57,871,712		$	58	$	807,377		$	(104,809	)	$	1,373	$	704,028		$	27,757		$	731,785

See Notes to Consolidated Financial Statements.

CWI 2 2019 10-K – 58

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Years Ended December 31,
	2019			2018			2017
Cash Flows — Operating Activities
Net income (loss)	$	949		$	(349	)	$	(4,494	)
Adjustments to net income (loss):
Depreciation	47,611			46,137			43,729
Asset management fees to affiliates settled in shares	10,734			10,400			8,670
Equity in losses of equity method investments in real estate, net	5,209			5,819			1,482
Amortization of deferred financing costs, deferred key money and other	1,149			1,297			830
Business interruption income	(809		)	(934		)	—
Amortization of stock-based compensation	566			486			436
(Gain) loss on hurricane-related property damage	(10		)	682			2,699
Loss on extinguishment of debt	5			380			254
Net changes in other assets and liabilities	(5,341		)	2,436			1,360
Business interruption insurance proceeds	1,690			53			—
Distributions of earnings from equity method investments	1,342			2,305			1,310
Receipt of key money and other deferred incentive payments	305			—			2,688
Increase (decrease) in due to related parties and affiliates	102			407			(7,786		)
Funding of hurricane-related remediation work	—			(163		)	(1,458		)
Net Cash Provided by Operating Activities	63,502			68,956			49,720
Cash Flows — Investing Activities
Capital expenditures	(10,607		)	(16,915		)	(17,049		)
Distributions from equity investments in excess of cumulative equity income	7,418			5,619			—
Capital contributions to equity investments in real estate	(5,745		)	(486		)	(2,433		)
Payment of Watermark commitment fee	(2,050		)	—			—
Acquisitions of hotels	—			—			(168,884		)
Purchase of equity interest	—			—			(96,288		)
Deposits released for hotel investments	—			—			1,521
Hurricane-related property insurance proceeds	—			—			7
Net Cash Used in Investing Activities	(10,984		)	(11,782		)	(283,126		)
Cash Flows — Financing Activities
Proceeds from mortgage financing	90,000			49,000			301,900
Scheduled payments and prepayments of mortgage principal	(83,299		)	(47,502		)	(42,000		)
Distributions paid	(45,345		)	(44,004		)	(36,446		)
Net proceeds from issuance of shares	20,531			20,670			237,650
Distributions to noncontrolling interests	(13,478		)	(9,157		)	(8,372		)
Repurchase of shares	(11,148		)	(19,327		)	(6,809		)
Deferred financing costs	(1,521		)	(809		)	(2,090		)
Purchase of membership interest from noncontrolling interest	(297		)	—			(3,524		)
Withholding on restricted stock units	(108		)	(99		)	(81		)
Purchase of interest rate cap	(15		)	(118		)	(16		)
Repayment of notes payable to affiliate	—			—			(210,000		)
Deposits released for mortgage financing	—			—			2,235
Deposits for mortgage financing	—			—			(725		)
Net Cash (Used in) Provided by Financing Activities	(44,680		)	(51,346		)	231,722
Change in Cash and Cash Equivalents and Restricted Cash During the Year
Net increase (decrease) in cash and cash equivalents and restricted cash	7,838			5,828			(1,684		)
Cash and cash equivalents and restricted cash, beginning of year	103,937			98,109			99,793
Cash and cash equivalents and restricted cash, end of year	$	111,775		$	103,937		$	98,109

See Notes to Consolidated Financial Statements.

CWI 2 2019 10-K – 59

CAREY WATERMARK INVESTORS 2 INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

Supplemental Cash Flow Information (in thousands):



	Years Ended December 31,
	2019		2018		2017
Interest paid, net of amounts capitalized	$	37,963	$	38,193	$	33,135
Income taxes paid	$	4,429	$	2,248	$	4,721

See Notes to Consolidated Financial Statements.

CWI 2 2019 10-K – 60

CAREY WATERMARK INVESTORS 2 INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Business and Organization

Organization

We are managed by Carey Lodging Advisors, LLC (our “Advisor”), an indirect subsidiary of WPC. Our Advisor manages our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. CWA 2, LLC (the “Subadvisor”), a subsidiary of Watermark Capital Partners LLC (“Watermark Capital Partners” or “Watermark”), provides services to our Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that manage the day-to-day operations of our hotels. In addition, the Subadvisor provides us with the services of Mr. Michael G. Medzigian, our Chief Executive Officer, subject to the approval of our independent directors.

We held ownership interests in 12 hotels at December 31, 2019, including ten hotels that we consolidate (“Consolidated Hotels”) and two hotels that we record as equity investments (“Unconsolidated Hotels”), at December 31, 2019.

Public Offering

We raised offering proceeds in our initial public offering of $280.3 million from our Class A common stock and $571.0 million from our Class T common stock. The offering commenced on May 22, 2014 and closed on July 31, 2017. We have fully invested the proceeds from our initial public offering. In addition, from inception through December 31, 2019, $28.9 million and $58.2 million of distributions were reinvested in our Class A and Class T common stock, respectively, as a result of our distribution reinvestment plan.

Proposed Merger

On October 22, 2019, we and Carey Watermark Investors Incorporated (“CWI 1”) announced that we had entered into a definitive merger agreement under which we will merge in an all-stock transaction, with CWI 1 surviving the merger as our wholly-owned subsidiary (the “Proposed Merger”). On January 13, 2020, the joint proxy statement/prospectus on Form S-4 previously filed with the SEC by us and CWI 1 was declared effective. The Proposed Merger is expected to close in the first quarter of 2020, subject to the approval of our stockholders and CWI 1’s stockholders, among other conditions. The special stockholder meetings for both us and CWI 1 are currently scheduled for March 26, 2020. Following the close of the Proposed Merger, the combined company will complete an internalization transaction with our Advisor and Subadvisor, as a result of which the combined company will become self-managed.

The Proposed Merger is expected to be accounted for as a business combination in accordance with current authoritative accounting guidance. We expect to conclude that CWI 1 will be the accounting acquiror in the merger as (i) CWI 1’s pre-merger stockholders will have a majority of the voting power in the combined company after the merger and (ii) CWI 1 is significantly larger than us when considering assets and revenues. As CWI 1 is expected to be the accounting acquiror while we will be the legal acquiror, the merger will be accounted for as a reverse acquisition, and therefore, the historical financial information included in the combined company’s financial statements would represent the pre-merger information of CWI 1.

CWI 2 2019 10-K – 61

Notes to Consolidated Financial Statements

Note 2. Summary of Significant Accounting Policies

Critical Accounting Policies and Estimates

Accounting for Acquisitions

In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, we evaluate the existence of goodwill or a gain from a bargain purchase. We capitalize acquisition-related costs and fees associated with asset acquisitions. We immediately expense acquisition-related costs and fees associated with business combinations, which are included in Transaction costs in the consolidated statements of operations.

Impairments

We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangible assets may be impaired or that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, or when there are adverse changes in the demand for lodging due to declining national or local economic conditions. We may incur impairment charges on long-lived assets, including real estate, related intangible assets, assets held for sale and equity investments. Our policies and estimates for evaluating whether these assets are impaired are presented below.

Real Estate — For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of, among other things, net operating income (“NOI”), residual values and holding periods.

Our investment objective is to hold properties on a long-term basis. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the loss as the excess of the carrying value of the property’s asset group over its estimated fair value. The estimated fair value of the property’s asset group is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for the inherent risk associated with each investment.

Equity Investments in Real Estate — We evaluate our equity investments in real estate on a periodic basis to determine if there are any indicators that the value of our equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, we measure the charge as the excess of the carrying value of our investment over its estimated fair value.

Other Accounting Policies

Basis of Consolidation — Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity (“VIE”), and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply the accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Certain decision-making rights within a loan or joint-

CWI 2 2019 10-K – 62

Notes to Consolidated Financial Statements

venture agreement can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At December 31, 2019 and 2018, we considered two and four entities to be VIEs, of which we consolidated one and three, respectively, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):



	December 31,
	2019		2018
Net investments in hotels	$	123,833	$	566,272
Total assets	145,218		603,403

Non-recourse debt, net	$	88,747	$	320,603
Total liabilities	104,046		350,920

Reclassifications — Certain prior period amounts have been reclassified to conform to the current period presentation.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Restricted Cash — Restricted cash consists primarily of amounts escrowed pursuant to the terms of our mortgage debt to fund planned renovations and improvements, property taxes, insurance, and normal replacement of furniture, fixtures and equipment at our hotels. The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):



	December 31,
	2019		2018		2017
Cash and cash equivalents	$	81,713	$	76,823	$	68,527
Restricted cash	30,062		27,114		29,582
Total cash and cash equivalents and restricted cash	$	111,775	$	103,937	$	98,109

Share Repurchases — Share repurchases are recorded as a reduction of common stock par value and additional paid-in capital under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions, and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors.

Real Estate — We carry land, buildings and personal property at cost less accumulated depreciation. We capitalize improvements and we expense replacements, maintenance and repairs that do not improve or extend the life of the respective assets as incurred. Renovations and/or replacements at the hotel properties that improve or extend the life of the assets are capitalized and depreciated over their useful lives, and repairs and maintenance are expensed as incurred. We capitalize interest and certain other costs, such as incremental labor costs relating to hotels undergoing major renovations and redevelopments.

Gain/Loss on Sale — We recognize gains and losses on the sale of properties when the transaction meets the definition of a contract, criteria are met for the sale of one or more distinct assets and control of the properties is transferred.

CWI 2 2019 10-K – 63

Notes to Consolidated Financial Statements

Equity Investments in Real Estate — We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.

Cash — Our cash is held in the custody of several financial institutions, and these balances, at times, exceed federally-insurable limits. We seek to mitigate this risk by depositing funds only with major financial institutions.

Other Assets and Liabilities — At both December 31, 2019 and 2018, Other assets consists primarily of prepaid expenses, deferred tax assets and hotel inventories in the consolidated financial statements. At December 31, 2019, Other assets also included deferred costs related to an agreement entered into with Watermark and Mr. Medzigian (see Note 3 for further discussion). At both December 31, 2019 and 2018, Other liabilities, which are included in Accounts payable, accrued expenses and other liabilities, consists primarily of unamortized key money and other deferred incentive payments, hotel advance deposits, accrued distribution and shareholder servicing fees and sales and use and occupancy taxes payable.

Deferred Financing Costs — Deferred financing costs represent costs to obtain mortgage financing. We amortize these charges to interest expense over the term of the related mortgage using a method which approximates the effective interest method. Deferred financing costs are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability.

Segments — We operate in one business segment, hospitality, with domestic investments.

Hotel Revenue Recognition — Revenue consists of amounts derived from hotel operations, including the sale of rooms, food and beverage and revenue from other operating departments, such as parking, spa, resort fees and gift shops, and is presented on a disaggregated basis on the consolidated statements of operations. These revenues are recorded net of any sales or occupancy taxes, which are collected from our guests as earned. All rebates or discounts are recorded as a reduction in revenue and there are no material contingent obligations with respect to rebates or discounts offered by us.

We recognize revenue when control of the promised good or service is transferred to the guest, in an amount that reflects the consideration we expect to receive in exchange for the promised good or service. Room revenue is generated through contracts with guests whereby the guest agrees to pay a daily rate for the right to use a hotel room and applicable amenities for an agreed upon length of stay. Our contract performance obligations are fulfilled at the end of the day that the guest is provided the room and revenue is recognized daily at the contract rate. Food and beverage revenue, including restaurant and banquet and catering services, are recognized at a point in time once food and beverage has been provided. Other operating department revenue for services such as parking, spa and other ancillary services, is recognized at a point in time when the goods and services are provided to the guest. We may engage third parties to provide certain services at the hotel, for example, audiovisual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenues as appropriate (i.e., gross vs. net).

Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some guests prepaying for their rooms prior to the stay. For package revenue, where ancillary guest services are included with the guests’ hotel reservations in a package arrangement, we allocate revenue based on the stand-alone selling price for each of the components of the package. We applied a practical expedient to not disclose the value of unsatisfied performance obligations for contracts that have an original expected length of one year or less. Any contracts that have an original expected length of greater than one year are insignificant.

Asset Retirement Obligations — Asset retirement obligations relate to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized cost is depreciated over the estimated remaining life of the related long-lived asset. Revisions to estimated retirement obligations result in adjustments to the related capitalized asset and corresponding liability.

In order to determine the fair value of the asset retirement obligations, we make certain estimates and assumptions including, among other things, projected cash flows, the borrowing interest rate and an assessment of market conditions that could significantly impact the estimated fair value. These estimates and assumptions are subjective.

CWI 2 2019 10-K – 64

Notes to Consolidated Financial Statements

Capitalized Costs — We capitalize interest and certain other costs, such as property taxes, land leases, property insurance and incremental labor costs relating to hotels undergoing major renovations and redevelopments. We begin capitalizing interest as we incur disbursements, and capitalize other costs when activities necessary to prepare the asset ready for its intended use are underway. We cease capitalizing these costs when construction is substantially complete.

Depreciation and Amortization — We compute depreciation for hotels and related building improvements using the straight-line method over the estimated useful lives of the properties (limited to 40 years for buildings and ranging from four years up to the remaining life of the building at the time of addition for building improvements), site improvements (generally four to 15 years), and furniture, fixtures and equipment (generally one to 12 years).

Organization and Offering Costs — During our offering period, costs incurred in connection with the raising of capital were recorded as deferred offering costs. Upon receipt of offering proceeds, we charged the deferred costs to stockholders’ equity. Under the terms of the Advisory Agreement as described in Note 3, we reimbursed our Advisor for organization and offering costs incurred up to regulatory limits. Organization costs were expensed as incurred and are included in corporate general and administrative expenses in the financial statements.

Derivative Instruments — We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated and qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. In accordance with fair value measurement guidance, counterparty credit risk is measured on a net portfolio position basis.

Income Taxes — We elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, we are required, among other things, to distribute at least 90% of our REIT net taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT.

We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.

We elect to treat certain of our corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may perform additional services for our investments and generally may engage in any real estate or non-real estate-related business (except for the operation or management of health care facilities or lodging facilities or providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal, state and local income taxes.

Significant judgment is required in determining our tax provision and in evaluating our tax positions. We establish tax reserves based on a benefit recognition model, which could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. We derecognize the tax position when it is no longer more likely than not of being sustained.

Our earnings and profits, which determine the taxability of distributions to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation and timing differences of certain income and expense recognitions, for federal income tax purposes. Deferred income taxes relate primarily to our TRSs and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of our TRSs and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors (Note 12).

We recognize deferred income taxes in certain of our subsidiaries taxable in the United States. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes as described in Note 12). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years.

CWI 2 2019 10-K – 65

Notes to Consolidated Financial Statements

Deferred income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities. We provide a valuation allowance against our deferred income tax assets when we believe that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).

Share-Based Payments — We have granted Class A restricted stock units (“RSUs”) to certain employees of the Subadvisor. RSUs issued to employees of the Subadvisor generally vest over three years, and are subject to continued employment. We also issued Class A common stock to our directors as part of their director compensation. The expense recognized for share-based payment transactions for awards made to directors is based on the grant date fair value estimated in accordance with current accounting guidance for share-based payments. Share-based payment transactions for awards made to employees of the Subadvisor are based on the fair value of the services received. We recognize these compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the award. We include share-based payment transactions within Corporate general and administrative expense.

Transaction Costs — Transaction costs for the year ended December 31, 2019 are costs incurred in connection with the Proposed Merger and related transactions, discussed in Note 1, and included legal, accounting, financial advisory and other transaction costs. For the years ended December 31, 2018 and 2017, transaction costs represented acquisition-related costs and fees associated with acquisitions of our Consolidated Hotels that were accounted for as business combinations. These costs are expensed as incurred in the consolidated statements of operations.

Income Attributable to Noncontrolling Interests — Earnings attributable to noncontrolling interests are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

Loss Per Share — Loss per share, as presented, represents both basic and diluted per-share amounts for all periods presented in the consolidated financial statements. We calculate loss per share using the two-class method to reflect the different classes of our outstanding common stock. Loss per basic share of common stock is calculated by dividing Net loss attributable to CWI 2 by the weighted-average number of shares of common stock issued and outstanding during the year. The allocation of Net loss attributable to CWI 2 is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the years ended December 31, 2019, 2018 and 2017.

Recent Accounting Requirements

The following ASUs, promulgated by the Financial Accounting Standards Board (“FASB”), are applicable to us:

Pronouncements Adopted as of December 31, 2019

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract: the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, are capitalized and recorded on the balance sheet. For lessors, however, the new standard remains generally consistent with existing guidance, but has been updated to align with certain changes to the lessee model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

We adopted this guidance for our interim and annual periods beginning January 1, 2019 using the modified retrospective method, applying the transition provisions at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented. We elected the package of practical expedients as permitted under the transition guidance, which allowed us to not reassess: (i) whether arrangements contain leases, (ii) lease classification and (iii) initial direct costs. The adoption of the lease standard did not result in a cumulative effect adjustment recognized in the opening balance of retained earnings as of January 1, 2019. On January 1, 2019, we recognized a right-of-use asset and a corresponding lease liability related to our operating leases of $1.5 million and $2.3 million, respectively, in Other assets and Accounts payable, accrued expenses and other liabilities, respectively, in our consolidated balance sheet.

CWI 2 2019 10-K – 66

Notes to Consolidated Financial Statements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees, which will align the accounting for such payments to nonemployees with the existing requirements for share-based payments granted to employees (with certain exceptions). These share-based payments will now be measured at the grant-date fair value of the equity instrument issued. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

Note 3. Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

We have an advisory agreement with our Advisor (the “Advisory Agreement”) to perform certain services for us under a fee arrangement, including managing our overall business, our investments, and certain administrative duties. The agreement that is currently in effect will expire on March 31, 2020, unless renewed or extended pursuant to its terms. Our Advisor also has a subadvisory agreement with the Subadvisor (the “Subadvisory Agreement”) whereby our Advisor pays 25% of its fees that it earns under the Advisory Agreement and Available Cash Distributions (as defined below) and 30% of the subordinated incentive distributions to the Subadvisor in return for certain personnel services.

The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):



	Years Ended December 31,
	2019		2018		2017
Amounts Included in the Consolidated Statements of Operations
Asset management fees	$	10,734	$	10,400	$	8,670
Available Cash Distributions	6,262		5,467		5,078
Personnel and overhead reimbursements	4,170		4,069		3,514
Acquisition fees	—		—		4,415
Interest expense	—		—		332
Accretion of interest on annual distribution and shareholder servicing fee ^(a)	—		—		198
	$	21,166	$	19,936	$	22,207

Other Transaction Fees Incurred
Watermark commitment agreement	$	2,850	$	—	$	—
Capitalized loan refinancing fees	225		245		280
Selling commissions and dealer manager fees	—		—		13,199
Annual distribution and shareholder servicing fee ^(a)	—		—		8,439
Capitalized acquisition fees for equity method investment ^(b)	—		—		6,195
Organization and offering costs	—		—		1,453
	$	3,075	$	245	$	29,566

___________


(a)	Starting with the payment of the third quarter 2017 distribution and shareholder servicing fee (which was paid in October 2017), we began making payments directly to selected dealers rather than through Carey Financial, LLC (“Carey

CWI 2 2019 10-K – 67

Notes to Consolidated Financial Statements

Financial”), a subsidiary of WPC and the former dealer manager of our offering; therefore, this activity is no longer considered a related party transaction.


(b)	Our Advisor elected to receive 50% of the acquisition fee related to our investment in the Ritz-Carlton Bacara, Santa Barbara Venture in shares of our Class A common stock and 50% in cash.

The following table presents a summary of amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):



	December 31,
	2019		2018
Amounts Due to Related Parties and Affiliates
Reimbursable costs due to our Advisor	$	956	$	1,100
Asset management fees and other due to our Advisor	894		884
Watermark commitment agreement	800		—
Due to other related parties and affiliates	136		—
	$	2,786	$	1,984

Asset Management Fees, Disposition Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.55% of the aggregate Average Market Value of our Investments (as defined in the Advisory Agreement). Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement are met. If our Advisor elects to receive all or a portion of its fees in shares of our Class A common stock, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share (“NAV”) for Class A shares. For the years ended December 31, 2019, 2018 and 2017, we settled $10.7 million, $10.4 million and $8.3 million, respectively, of asset management fees in shares of our Class A common stock at our Advisor’s election. At December 31, 2019, our Advisor owned 3,506,798 shares (3.8%) of our total outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Acquisition Fees to our Advisor

Pursuant to our Advisory Agreement, our Advisor is entitled to acquisition fees of 2.5% of the total investment cost of the properties acquired, including on our proportionate share of equity method investments and loans originated by us. The total fees to be paid may not exceed 6% of the aggregate contract purchase price of all investments, as measured over a period specified in our Advisory Agreement.

Available Cash Distributions

Carey Watermark Holdings 2’s special general partner interest entitles it to receive distributions of 10% of Available Cash, as defined in the agreement of limited partnership of the Operating Partnership (“Available Cash Distributions”) generated by the Operating Partnership, subject to certain limitations. Available Cash Distributions are included in Income attributable to noncontrolling interests in the consolidated financial statements.

Personnel and Overhead Reimbursements

Under the terms of the Advisory Agreement, our Advisor generally allocates expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and our affiliate CWI 1, based on total pro rata hotel revenues on a quarterly basis. Pursuant to the Subadvisory Agreement, after we reimburse our Advisor, it will subsequently reimburse the Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our board of directors. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements and are settled in cash. We have also granted RSUs to employees of the Subadvisor pursuant to our 2015 Equity Incentive Plan.

CWI 2 2019 10-K – 68

Notes to Consolidated Financial Statements

Selling Commissions and Dealer Manager Fees

Pursuant to our former dealer manager agreement with Carey Financial, Carey Financial received a selling commission for sales of our Class A and Class T common stock. From March 2016 to April 2017, Carey Financial received a selling commission of $0.82 and $0.22 per share sold and a dealer manager fee of $0.35 and $0.30 per share sold for the Class A and Class T common stock, respectively. In connection with the extension of our initial public offering in 2017, we adjusted our offering prices in April 2017 to reflect our NAVs as of December 31, 2016, with a selling commission of $0.84 and $0.23 per share sold and a dealer manager fee of $0.36 and $0.31 per share sold for the Class A and Class T common stock, respectively, which were paid through the termination of our offering on July 31, 2017. The selling commissions were re-allowed and a portion of the dealer manager fees could have been re-allowed to selected dealers. These amounts are recorded in Additional paid-in capital in the consolidated financial statements. During the year ended December 31, 2017, we paid selling commissions and dealer manager fees totaling $13.2 million.

Through June 30, 2017, Carey Financial was entitled to receive an annual distribution and shareholder servicing fee in connection with our Class T common stock, which it may have re-allowed to selected dealers. Beginning with the payment for the third quarter of 2017, which was paid in October 2017, the distribution and shareholder servicing fee was paid by us directly to selected dealers rather than through Carey Financial; therefore, this activity is no longer considered a related party transaction. The amount of the distribution and shareholder servicing fee is 1.0% of the NAV of our Class T common stock. The distribution and shareholder servicing fee accrues daily and is payable quarterly in arrears. We currently expect that we will cease incurring the distribution and shareholder servicing fee during the third quarter of 2020, at which time the total underwriting compensation paid in respect of the offering will reach 10.0% of the gross offering proceeds. During the year ended December 31, 2017, $9.0 million of distribution and shareholder servicing fees were charged to stockholder’s equity and $3.6 million of such fees were paid to Carey Financial, which it may have re-allowed to selected dealers. During the years ended December 31, 2019, 2018 and 2017, we paid $5.6 million, $5.8 million and $1.5 million, respectively, of distribution and shareholder servicing fees to selected dealers.

Organization and Offering Costs

Pursuant to the Advisory Agreement, we were liable for certain expenses related to our public offering, which were deducted from the gross proceeds of the offering. We reimbursed Carey Financial and selected dealers for reasonable bona fide due diligence expenses incurred that were supported by a detailed and itemized invoice. Our Advisor was reimbursed for all organization expenses and offering costs incurred in connection with our offering (excluding selling commissions and the dealer manager fees), which terminated on July 31, 2017. Through the life of our initial public offering, our Advisor incurred organization and offering costs on our behalf of approximately $9.1 million, all of which has been paid. During the offering period, costs incurred in connection with raising of capital are recorded as deferred offering costs. Upon receipt of offering proceeds, we charged the deferred offering costs to stockholders’ equity. During the year ended December 31, 2017, $2.8 million of deferred offering costs were charged to stockholders’ equity.

Other Transactions with Affiliates

Proposed Merger

In connection with the Proposed Merger, we have entered into an internalization agreement with WPC and Watermark, as well as separate transition services agreements with each. Immediately following the closing of the Proposed Merger:


(i)	the advisory agreements with WPC for both us and CWI 1 will terminate;

(ii)

the operating partnerships of both us and CWI 1 will redeem the special general partnership interests that WPC and Watermark currently hold, for which they will receive, in the aggregate, approximately $97.4 million in consideration, comprised of $65.0 million in shares of our preferred stock and 2,840,549 shares in our Class A common stock valued at approximately $32.4 million. Watermark will receive 2,417,996 limited partnership units in our Operating Partnership with an aggregate value of $27.6 million;


(iii)	the combined company will internalize the management services currently provided by WPC;


(iv)	WPC will provide certain transition services at cost to us for periods generally up to 12 months from the closing of the Proposed Merger; and


(v)	Watermark will provide certain transition services at cost to us and we will provide certain transaction services at cost to them for periods generally up to six months from the closing of the Proposed Merger.

CWI 2 2019 10-K – 69

Notes to Consolidated Financial Statements

Commitment Agreement

On October 1, 2019, we, CWI 1, Watermark and Mr. Medzigian, the chief executive officer of both us and CWI 1 entered into a commitment agreement pursuant to which we and CWI 1 agreed to pay Watermark a total of $6.95 million in consideration of the commitments of Watermark and Mr. Medzigian to wind down and ultimately liquidate a private fund that was formed to raise capital to invest in lodging properties, and to devote their business activities exclusively to the affairs of us and CWI 1 and certain other activities set forth in the commitment agreement, with the exception of the wind-down of the private fund and performing asset management services for two hotels owned by WPC (one of which was subsequently sold). Of the total $6.95 million, $5.0 million was paid on October 25, 2019, of which $2.0 million was allocated to and paid by us, and was included in Other assets in the consolidated balance sheet at December 31, 2019 as a deferred cost. The remaining balance of $1.95 million was paid on January 15, 2020, of which $0.8 million was allocated to and paid by us, and was included as a payable in Due to other related parties and affiliates and a deferred cost in Other assets in the consolidated balance sheet at December 31, 2019.

Working Capital Facility

In October 19, 2017, our Operating Partnership entered into a $25.0 million secured credit facility with WPC to fund our working capital needs (the “Working Capital Facility”). The Working Capital Facility was scheduled to mature on December 31, 2019 and was extended to the later of March 31, 2020 or the closing date of the Proposed Merger, which is currently expected to occur during the first quarter of 2020. The interest rate for any borrowing made under the Working Capital Facility during this extension would increase to the London Interbank Offered Rate (“LIBOR”) plus 3.0% from the current interest rate of LIBOR plus 1.0%. If the Advisory Agreement expires or is terminated, the Working Capital Facility would mature at that time. We serve as guarantor of the Working Capital Facility and have pledged our unencumbered equity interest in certain properties as collateral, as further described in the related pledge and security agreement. At both December 31, 2019 and 2018, no amounts were outstanding under the Working Capital Facility.

Jointly-Owned Investments

At December 31, 2019, we owned interests in three ventures with CWI 1: the Marriott Sawgrass Golf Resort & Spa, a Consolidated Hotel, and the Ritz-Carlton Key Biscayne and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third-party also owns an interest in the Ritz-Carlton Key Biscayne.

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):



	December 31,
	2019			2018
Buildings	$	1,090,693		$	1,093,865
Land	236,078			236,078
Furniture, fixtures and equipment	93,333			93,766
Building and site improvements	42,318			38,670
Construction in progress	6,466			2,554
Hotels, at cost	1,468,888			1,464,933
Less: Accumulated depreciation	(157,581		)	(113,184		)
Net investments in hotels	$	1,311,307		$	1,351,749

During the years ended December 31, 2019 and 2018, we retired fully depreciated furniture, fixtures and equipment aggregating $3.2 million and $1.0 million, respectively.

CWI 2 2019 10-K – 70

Notes to Consolidated Financial Statements

Hurricane-Related Disruption

The Marriott Sawgrass Golf Resort & Spa was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a short period of time. Below is a summary of the items that comprised the (gain) loss recognized by the venture related to Hurricane Irma (in thousands):



(in thousands)	Years Ended December 31,
	2019			2018			2017
Net write-off (write-up) of fixed assets ^(a)	$	3,476		$	(173	)	$	4,938
Remediation work performed	—			133			1,476
(Increase) decrease to property damage insurance receivables	(3,486		)	722			(3,715		)
(Gain) loss on hurricane-related property damage	$	(10	)	$	682		$	2,699

___________


(a)	Includes write-offs totaling $1.4 million during the year ended December 31, 2018 resulting from pre-existing damage (which was discovered as a result of Hurricane Irma and was not covered by insurance).

During the year ended December 31, 2018, $0.9 million was recorded in the consolidated financial statements as Business interruption income related to Hurricane Irma. We did not record business interruption income related to Hurricane Irma during either the years ended December 31, 2019 or 2017.

As the restoration work continues to be performed, the estimated total cost will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed.

Construction in Progress

At December 31, 2019 and 2018, construction in progress, recorded at cost, was $6.5 million and $2.6 million, respectively, and related to renovations at certain of our hotels. Upon substantial completion of renovation work, costs are reclassified from construction in progress to buildings, building and site improvements and furniture, fixture and equipment, as applicable, and depreciation will commence.

We capitalize qualifying interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.1 million, $0.3 million and $0.4 million of such costs during the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, 2018 and 2017, accrued capital expenditures were $1.4 million, $1.4 million and $0.5 million, respectively, representing non-cash investing activity.

CWI 2 2019 10-K – 71

Notes to Consolidated Financial Statements

Pro Forma Financial Information

The following unaudited consolidated pro forma financial information presents our financial results as if the acquisition that we completed during the year ended December 31, 2017, and the new financing related to this acquisition, had occurred on January 1, 2016. This transaction was accounted for as a business combination. The pro forma financial information is not necessarily indicative of what the actual results would have been had the acquisition actually occurred on the dates listed above, nor does it purport to represent the results of operations for future periods.

(Dollars in thousands)



	Year Ended December 31, 2017
Pro forma total revenues	$	356,634

Pro forma net income	$	1,391
Pro forma income attributable to noncontrolling interests	(991		)
Pro forma net income attributable to CWI 2 stockholders	$	400

Class A Common Stock
Pro forma net income attributable to CWI 2 stockholders	$	260

Class T Common Stock
Pro forma net income attributable to CWI 2 stockholders	$	140

All acquisition costs for the acquisition we completed during the year ended December 31, 2017 are presented as if they were incurred on January 1, 2016.

Note 5. Equity Investments in Real Estate

At December 31, 2019, we owned equity interests in two Unconsolidated Hotels, one with CWI 1 and one together with CWI 1 and an unrelated third party. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Advisor that we incur and other-than-temporary impairment charges, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income or loss to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. Therefore, we follow the hypothetical liquidation at book value (“HLBV”) method in determining our share of these ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):



Unconsolidated Hotels	State	Number of Rooms	% Owned		Hotel Type	Carrying Value at December 31,
Unconsolidated Hotels	State	Number of Rooms	% Owned		Hotel Type	2019		2018
Ritz-Carlton Bacara, Santa Barbara Venture ^{(a) (b)}	CA	358	60	%	Resort	$	77,837	$	85,110
Ritz-Carlton Key Biscayne Venture^{(c) (d)}	FL	443	19.3	%	Resort	35,332		36,346
		801				$	113,169	$	121,456

___________


(a)	This investment represents a tenancy-in-common interest; the remaining 40% interest is owned by CWI 1.

CWI 2 2019 10-K – 72

Notes to Consolidated Financial Statements


(b)	We received $1.3 million of net cash distributions from this investment during the year ended December 31, 2019, which included our share of key money received from Marriott during the third quarter of 2019.

(c)

CWI 1 acquired a 47.4% interest in the venture on the same date. The remaining 33.3% interest is retained by the original owner. The number of rooms presented includes 141 condo-hotel units that participate in the resort rental program. This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.


(d)	We received cash distributions of $1.7 million from this investment during the year ended December 31, 2019.

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which is based on the HLBV model, as well as amortization adjustments related to basis differentials from acquisitions of investments (in thousands):



	Years Ended December 31,
	2019			2018			2017
Ritz-Carlton Bacara, Santa Barbara Venture	$	(5,918	)	$	(7,314	)	$	(4,235	)
Ritz-Carlton Key Biscayne Venture	709			1,495			2,753
Total equity in losses of equity method investments in real estate, net	$	(5,209	)	$	(5,819	)	$	(1,482	)

No other-than-temporary impairment charges were recognized during the years ended December 31, 2019, 2018 and 2017.

At December 31, 2019 and 2018, the unamortized basis differences on our equity investments were $7.5 million and $7.8 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.2 million, $0.3 million and $0.1 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Hurricane-Related Disruption

The Ritz-Carlton Key Biscayne was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a short period of time. During the years ended December 31, 2019, 2018, and 2017, the venture recorded a loss on hurricane-related property damage of less than $0.1 million, a gain of $0.8 million and a loss of $3.6 million, respectively; however, there was no net impact to our investment in the venture under the HLBV method of accounting as a result of our priority return on investment.

CWI 2 2019 10-K – 73

Notes to Consolidated Financial Statements

The following tables present combined summarized financial information of our equity method investments in real estate. Amounts provided are the total amounts attributable to the ventures and do not represent our proportionate share (in thousands):



	2019								2018								2017
	Total		Ritz-Carlton Bacara, Santa Barbara Venture			Ritz-Carlton Key Biscayne Venture			Total		Ritz-Carlton Bacara, Santa Barbara Venture			Ritz-Carlton Key Biscayne Venture			Total		Ritz-Carlton Bacara, Santa Barbara Venture (a)			Ritz-Carlton Key Biscayne Venture
Balance Sheet – As of December 31,
Real estate, net	$	636,372	$	358,723		$	277,649		$	643,145	$	362,386		$	280,759		$	646,943	$	367,035		$	279,908
Other assets	64,130		20,049			44,081			66,027		20,093			45,934			78,059		28,294			49,765
Total assets	700,502		378,772			321,730			709,172		382,479			326,693			725,002		395,329			329,673
Debt	413,538		228,434			185,104			415,973		227,535			188,438			416,335		226,636			189,699
Other liabilities	50,973		30,350			20,623			42,099		23,092			19,007			34,567		16,382			18,185
Total liabilities	464,511		258,784			205,727			458,072		250,627			207,445			450,902		243,018			207,884
Members’ equity	235,991		119,988			116,003			251,100		131,852			119,248			274,100		152,311			121,789
Percentage of ownership in equity investee			60		%	19.3		%			60		%	19.3		%			60		%	19.3		%
Pro-rata equity carrying value	94,382		71,993			22,389			102,126		79,111			23,015			114,892		91,387			23,505
Basis differential adjustment	7,602		5,844			1,758			7,757		5,999			1,758			8,026		6,197			1,829
HLBV adjustment	11,185		—			11,185			11,573		—			11,573			11,820		—			11,820
Carrying value	$	113,169	$	77,837		$	35,332		$	121,456	$	85,110		$	36,346		$	134,738	$	97,584		$	37,154



	2019									2018									2017
	Total			Ritz-Carlton Bacara, Santa Barbara Venture			Ritz-Carlton Key Biscayne Venture			Total			Ritz-Carlton Bacara, Santa Barbara Venture			Ritz-Carlton Key Biscayne Venture			Total			Ritz-Carlton Bacara, Santa Barbara Venture (a)			Ritz-Carlton Key Biscayne Venture
Income Statement – For the year ended December 31,
Hotel revenues	$	174,282		$	83,247		$	91,035		$	179,199		$	81,670		$	97,529		$	99,800		$	15,269		$	84,531
Hotel operating expenses	158,535			78,474			80,061			164,601			79,955			84,646			95,423			18,906			76,517
Other operating expenses	67			8			59			179			86			93			59			52			7
Other income and (expenses) ^(b)	(21,818		)	(14,203		)	(7,615		)	(20,384		)	(13,494		)	(6,890		)	(14,395		)	(3,161		)	(11,234		)
(Provision for) benefit from income taxes	(410		)	(166		)	(244		)	(141		)	—			(141		)	1,121			(208		)	1,329
Net (loss) income	(6,548		)	(9,604		)	3,056			(6,106		)	(11,865		)	5,759			(8,956		)	(7,058		)	(1,898		)
Percentage of ownership in equity investee				60		%	19.3		%				60		%	19.3		%				60		%	19.3		%
Pro-rata equity in (losses) earnings of equity method investments in real estate	(5,172		)	(5,762		)	590			(6,008		)	(7,119		)	1,111			(4,601		)	(4,235		)	(366		)
Basis differential adjustment	(227		)	(156		)	(71		)	(266		)	(195		)	(71		)	(71		)	—			(71		)
HLBV adjustment	190			—			190			455			—			455			3,190			—			3,190
Equity in (losses) earnings of equity method investments in real estate	$	(5,209	)	$	(5,918	)	$	709		$	(5,819	)	$	(7,314	)	$	1,495		$	(1,482	)	$	(4,235	)	$	2,753

___________


(a)	We purchased our 60% interest in this venture on September 28, 2017.


(b)	Other income and (expenses) for the years ended December 31, 2019 and 2018 for the Ritz-Carlton Bacara, Santa Barbara Venture is primarily comprised of interest expense related to its outstanding mortgage loans.

CWI 2 2019 10-K – 74

Notes to Consolidated Financial Statements

Note 6. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

Derivative Assets — Our derivative assets, which are included in Other assets in the consolidated financial statements, are comprised of interest rate caps and swaps (Note 7).

The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the years ended December 31, 2019 or 2018. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income and (expenses) in the consolidated financial statements.

Our non-recourse debt, which we have classified as Level 3, had a carrying value of $840.5 million and $833.8 million at December 31, 2019 and 2018, respectively, and an estimated fair value of $844.2 million and $825.8 million at December 31, 2019 and 2018, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both December 31, 2019 and 2018.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that the carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its carrying value or its fair value, less estimated cost to sell. The estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for the inherent risk associated with each investment. We determined that the significant inputs used to value these investments fall within Level 3 for fair value reporting. We did not recognize any impairment charges during the years ended December 31, 2019, 2018, or 2017.

CWI 2 2019 10-K – 75

Notes to Consolidated Financial Statements

Note 7. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment, as well as the approval, reporting and monitoring of derivative financial instrument activities.

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):



Derivatives Designated as Hedging Instruments		Asset Derivatives Fair Value at December 31,
Derivatives Designated as Hedging Instruments	Balance Sheet Location	2019		2018
Interest rate swaps	Other assets	$	121	$	1,368
Interest rate caps	Other assets	—		57
		$	121	$	1,425

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both December 31, 2019 and 2018, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized losses of $0.3 million, and unrealized gains of $0.5 million and $0.3 million in Other comprehensive loss on derivatives in connection with our interest rate swaps and caps during the years ended December 31, 2019, 2018, and 2017, respectively.

We reclassified $1.0 million, $0.7 million, and $0.2 million from Other comprehensive loss on derivatives into Interest expense during the years ended December 31, 2019, 2018 and 2017, respectively.

Amounts reported in Other comprehensive loss related to our interest rate swaps and caps will be reclassified to Interest expense as interest expense or income is incurred on our variable-rate debt. At December 31, 2019, we estimated that less than $0.1 million will be reclassified as Interest income during the next 12 months related to our interest rate swaps and caps.

CWI 2 2019 10-K – 76

Notes to Consolidated Financial Statements

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at December 31, 2019 were designated as cash flow hedges and are summarized as follows (dollars in thousands):



	Number of	Notional		Fair Value at
Interest Rate Derivatives	Instruments	Amount		December 31, 2019
Interest rate swaps	2	$	187,910	$	121
Interest rate caps	3	171,385		—
				$	121

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of December 31, 2019. At December 31, 2019, both our total credit exposure and the maximum exposure to any single counterparty were $0.2 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At December 31, 2019, we had not been declared in default on any of our derivative obligations. At both December 31, 2019 and 2018, we had no derivatives that were in a net liability position.

Note 8. Debt

Our debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt on our Consolidated Hotels (dollars in thousands):



				Carrying Amount at December 31,
Consolidated Hotels	Interest Rate	Rate Type	Maturity Date	2019		2018
Seattle Marriott Bellevue ^{(a) (b) (c)}	3.88%	Variable	1/2020	$	97,895	$	99,719
Le Méridien Arlington ^{(b) (c)}	4.44%	Variable	6/2020	34,755		34,787
San Jose Marriott ^{(b) (c)}	4.44%	Variable	7/2020	87,460		87,880
Renaissance Atlanta Midtown Hotel ^{(b) (d)}	3.96%	Variable	8/2021	48,589		48,332
Ritz-Carlton San Francisco	4.59%	Fixed	2/2022	142,923		142,887
Charlotte Marriott City Center	4.53%	Fixed	6/2022	102,636		102,488
Courtyard Nashville Downtown	4.15%	Fixed	9/2022	54,965		55,051
Marriott Sawgrass Golf Resort & Spa ^{(b) (d)}	3.76%	Variable	11/2022	88,747		77,997
Embassy Suites by Hilton Denver-Downtown/Convention Center	3.90%	Fixed	12/2022	98,073		99,818
San Diego Marriott La Jolla	4.13%	Fixed	8/2023	84,422		84,877
				$	840,465	$	833,836

___________


(a)	On January 22, 2020, we refinanced this loan with a new $98.8 million non-recourse mortgage loan. The loan has a floating annual interest rate of LIBOR plus 2.7%, which has effectively been fixed at 4.2% through an interest rate swap agreement, and a maturity date of January 22, 2023.

CWI 2 2019 10-K – 77

Notes to Consolidated Financial Statements


(b)	These mortgage loans have variable interest rates, which have effectively been capped or converted to fixed rates through the use of interest rate caps or swaps (Note 7). The interest rates presented for these mortgage loans reflect the rates in effect at December 31, 2019 through the use of an interest rate cap or swap, as applicable.


(c)	These mortgage loans have one-year extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.


(d)	These mortgage loans have two one-year extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. At December 31, 2019, we were in compliance with the applicable covenants for each of our mortgage loans.

Financing Activity During 2019

On November 1, 2019, we refinanced the $78.0 million Marriott Sawgrass Golf Resort & Spa mortgage loan with a new mortgage loan of $90.0 million. The loan has a floating annual interest rate of LIBOR plus 2.3%, which has effectively been fixed at 3.8% through an interest rate swap agreement, and a maturity date of November 1, 2022. We recognized a net loss on extinguishment of debt of less than $0.1 million on this refinancing during the year ended December 31, 2019.

Financing Activity During 2018

On August 8, 2018, we refinanced the Renaissance Atlanta Midtown senior mortgage and mezzanine loans totaling $34.0 million and $13.5 million, respectively, with one non-recourse mortgage loan totaling $49.0 million, which has a floating annual interest rate of LIBOR plus 2.3% (with the interest rate decreasing to LIBOR plus 2.0% upon achieving a specific minimum debt service coverage ratio as described in the loan agreement). We have entered into an interest rate cap agreement with respect to this variable rate loan. The new loan matures in August 2021. We recognized a net loss on extinguishment of debt of $0.4 million on this refinancing during the year ended December 31, 2018.

Scheduled Debt Principal Payments

Scheduled debt principal payments during each of the next five calendar years following December 31, 2019 are as follows (in thousands):



Years Ending December 31,	Total
2020 ^(a)	$	224,614
2021	53,497
2022	485,618
2023	79,878
2024	—
Total principal payments	843,607
Unamortized deferred financing costs	(3,142		)
Total	$	840,465

__________


(a)	Balance included a $97.7 million scheduled balloon payment on a consolidated mortgage loan, which was refinanced on January 22, 2020.

CWI 2 2019 10-K – 78

Notes to Consolidated Financial Statements

Note 9. Commitments and Contingencies

At December 31, 2019, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Hotel Management Agreements

As of December 31, 2019, our Consolidated Hotel properties were operated pursuant to long-term management agreements with three different management companies, with initial terms ranging from five to 40 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 2.5% to 3.0% of hotel revenues. Six of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 7.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $13.0 million, $13.0 million and $12.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Franchise Agreements

Four of our Consolidated Hotels operated under franchise or license agreements with national brands that are separate from our management agreements. As of December 31, 2019, we had three franchise agreements with Marriott-owned brands and one with a Hilton-owned brand related to our Consolidated Hotels. Our typical franchise agreement provides for a term of 20 to 25 years. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $5.5 million, $5.6 million and $6.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of December 31, 2019 and 2018, $26.7 million and $20.4 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. At December 31, 2019, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts at December 31, 2019 totaled $11.5 million. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources, proceeds available under our Working Capital Facility and/or other sources of available capital, including cash flow from operations.

CWI 2 2019 10-K – 79

Notes to Consolidated Financial Statements

Ritz-Carlton San Francisco NOI Guarantee Reserve

In connection with our acquisition of the Ritz-Carlton San Francisco on December 30, 2016, at closing we funded a $10.0 million NOI guarantee reserve into a restricted cash account, which guaranteed us minimum predetermined NOI amounts over a period of approximately two years, with any remaining funds at the end of the two year period to be remitted back to the seller. Throughout the two year period, we made draws against this reserve and at December 31, 2018 (the end of the two year period), we estimated that a total of $1.2 million would be remitted to the seller and recorded a liability in Accounts payable, accrued expenses and other liabilities and a corresponding amount in Transaction costs in the consolidated financial statements. During the second quarter of 2019, $1.2 million was remitted to the seller.

Note 10. Loss Per Share and Equity

Loss Per Share

The following table presents loss per share (in thousands, except share and per share amounts):



	Year Ended December 31, 2019
	Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss			Basic and Diluted Loss Per Share
Class A common stock	32,260,398	$	(2,509	)	$	(0.08	)
Class T common stock	60,499,745	(5,109		)	(0.08		)
Net loss attributable to CWI 2 stockholders		$	(7,618	)



	Year Ended December 31, 2018
	Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss			Basic and Diluted Loss Per Share
Class A common stock	30,390,179	$	(2,443	)	$	(0.08	)
Class T common stock	58,842,820	(5,344		)	(0.09		)
Net loss attributable to CWI 2 stockholders		$	(7,787	)



	Year Ended December 31, 2017
	Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss			Basic and Diluted Loss Per Share
Class A common stock	27,825,037	$	(1,740	)	$	(0.06	)
Class T common stock	54,686,084	(3,745		)	(0.07		)
Net loss attributable to CWI 2 stockholders		$	(5,485	)

The allocation of Net loss attributable to CWI 2 stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the period. The allocation for the Class A common stock excludes the accretion of interest on the annual distribution and shareholder servicing fee of $0.4 million, $0.6 million and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively, since this fee is only applicable to holders of Class T common stock (Note 3).

CWI 2 2019 10-K – 80

Notes to Consolidated Financial Statements

Reclassifications Out of Accumulated Other Comprehensive (Loss) Income

The following tables present a reconciliation of changes in Accumulated other comprehensive (loss) income by component for the periods presented (in thousands):



	Years Ended December 31,
Gains and Losses on Derivative Instruments	2019			2018			2017
Beginning balance	$	1,205		$	1,373		$	896
Other comprehensive (loss) income before reclassifications	(335		)	544			265
Amounts reclassified from accumulated other comprehensive income to:
Interest expense	(1,004		)	(715		)	219
Equity in losses of equity method investments in real estate, net	30			—			—
Total	(974		)	(715		)	219
Net current period other comprehensive (loss) income	(1,309		)	(171		)	484
Net current period other comprehensive (income) loss attributable to noncontrolling interests	(53		)	3			(7		)
Ending balance	$	(157	)	$	1,205		$	1,373

Distributions

Distributions paid to stockholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. Our distributions per share are summarized as follows:



	Years Ended December 31,
	2019				2018				2017
	Class A		Class T		Class A		Class T		Class A		Class T
Return of capital	$	0.4679	$	0.3826	$	0.4656	$	0.3817	$	0.3541	$	0.2866
Ordinary income	0.0961		0.0785		0.0984		0.0807		0.2037		0.1649
Total distributions paid	$	0.5640	$	0.4611	$	0.5640	$	0.4624	$	0.5578	$	0.4515

The following table presents the quarterly per share distributions declared by our board of directors for the fourth quarter of 2019, payable in cash and in shares of our Class A and Class T common stock to stockholders of record on December 31, 2019:



Class A Common Stock						Class T Common Stock
Cash		Shares		Total		Cash		Shares		Total
$	0.1410	$	0.0339	$	0.1749	$	0.1154	$	0.0339	$	0.1493

These distributions were paid on January 15, 2020 in the aggregate amount of $11.6 million. Distributions that are payable in shares of our Class A and Class T common stock are recorded at par value in our consolidated financial statements.

During the year ended December 31, 2019, our board of directors declared distributions in the aggregate amount of $18.1 million for our Class A common stock and $27.7 million for our Class T common stock, which equates to $0.6996 per share and $0.5968 per share, respectively.

CWI 2 2019 10-K – 81

Notes to Consolidated Financial Statements

Purchases of Membership Interests

On October 16, 2019, we purchased the membership interest in the Seattle Marriott Bellevue venture that we did not already own from an unaffiliated third party for $0.3 million, which equaled the carrying value of the noncontrolling interest, and increased our ownership interest in the hotel from 95.4% to 100.0%.

On March 30, 2017, we purchased the membership interest in the Courtyard Nashville Downtown venture from an unaffiliated third party for $3.5 million. Our acquisition of the membership interest is accounted for as an equity transaction, and we recorded an adjustment of approximately $3.5 million to Additional paid-in capital in our consolidated statement of equity for the year ended December 31, 2017 related to the difference between the carrying value and the purchase price. No gain or loss was recognized in the consolidated statement of operations.

Note 11. Share-Based Payments

2015 Equity Incentive Plan

We maintain the 2015 Equity Incentive Plan, which authorizes the issuance of shares of stock-based awards to our officers and

employees of the Subadvisor who perform services on our behalf. The 2015 Equity Incentive Plan provides for the grant of RSUs and dividend equivalent rights. A maximum of 2,000,000 shares may be granted, of which 1,838,894 shares remained available for future grants at December 31, 2019.

A summary of the RSU activity for the years ended December 31, 2019, 2018 and 2017 follows:



	RSU Awards
			Weighted-Average
			Grant Date
	Shares		Fair Value
Nonvested at January 1, 2017	56,153		$	10.36
Granted	49,344		10.74
Vested ^(a)	(21,745)		10.31
Forfeited	(24,747)		10.57
Nonvested at January 1, 2018	59,005		10.61
Granted	34,295		11.11
Vested ^(a)	(26,403	)	10.51
Forfeited	(3,909	)	10.96
Nonvested at January 1, 2019	62,988		10.90
Granted	42,541		11.41
Vested ^(a)	(28,801	)	10.82
Forfeited	(2,653	)	10.68
Nonvested at December 31, 2019 ^(b)	74,075		$	11.23

___________


(a)	RSUs generally vest over three years, are subject to continued employment and are forfeited upon the recipient’s employment termination prior to vesting. The total fair value of shares vested during the year ended December 31, 2019, 2018 and 2017 was $0.3 million, $0.3 million and $0.2 million, respectively.


(b)	We currently expect to recognize stock-based compensation expense totaling approximately $0.5 million over the remaining vesting period. The awards to employees of the Subadvisor had a weighted-average remaining contractual term of 1.7 years at December 31, 2019.

Shares Granted to Directors

As part of their director compensation, we issued shares to our independent directors. During the year ended December 31, 2019, we issued a total of 18,475 shares of Class A common stock to our independent directors comprised of 2,700 shares at $11.11 per share and 15,775 shares at $11.41 per share. During the years ended December 31, 2018 and 2017, we issued 15,384 shares and 15,384 shares, respectively, of Class A common stock to our independent directors, at $11.11 and $10.74 per share, respectively.

CWI 2 2019 10-K – 82

Notes to Consolidated Financial Statements

Stock-Based Compensation Expense

For the years ended December 31, 2019, 2018 and 2017, we recognized stock-based compensation expense related to RSU awards to employees of the Subadvisor under the 2015 Equity Incentive Plan and equity compensation issued to our independent directors aggregating $0.6 million, $0.5 million and $0.4 million, respectively. Stock-based compensation expense is included within Corporate general and administrative expenses in the consolidated financial statements. We have not recognized any income tax benefit in earnings for our share-based compensation arrangements since the inception of this plan.

Note 12. Income Taxes

As a REIT, we are permitted to own lodging properties but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases for each of our lodging properties with TRS lessees. The TRS lessees in turn contract with independent hotel management companies that manage day-to-day operations of our hotels under the oversight of the Subadvisor.

The components of our provision for income taxes for the periods presented are as follows (in thousands):



	Years Ended December 31,
	2019			2018		2017
Federal
Current	$	1,953		$	2,227	$	2,787
Deferred	(1,873		)	141		248
	80			2,368		3,035

State and Local
Current	425			873		880
Deferred	(420		)	18		(15		)
	5			891		865
Total Provision	$	85		$	3,259	$	3,900

Deferred income taxes at December 31, 2019 and 2018 consist of the following (in thousands):



	At December 31,
	2019			2018
Deferred Tax Assets
Deferred revenue — key money	$	1,478		$	1,696
Accrued vacation payable and deferred rent	1,544			1,265
Net operating loss carryforwards	785			617
Interest expense limitation	39			—
Gift card liability	1			2
Other	403			453
Total deferred income taxes	4,250			4,033
Valuation allowance	(782		)	(2,956		)
Total deferred tax assets	3,468			1,077
Deferred Tax Liabilities
Deferred rent	(119		)	—
Other	(80		)	(100		)
Total deferred tax liabilities	(199		)	(100		)
Net Deferred Tax Asset	$	3,269		$	977

CWI 2 2019 10-K – 83

Notes to Consolidated Financial Statements

A reconciliation of the provision for income taxes with the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the periods presented is as follows (dollars in thousands):



	Years Ended December 31,
	2019			2018			2017
Pre-tax income from taxable subsidiaries	$	12,016		$	13,768		$	9,581

Federal provision at statutory tax rate ^(a)	$	2,524		$	2,892		$	3,353
Valuation allowance	(2,174		)	(127		)	(1,020		)
Income not subject to federal tax	(513		)	(555		)	(1,102		)
State and local taxes, net of federal provision	387			539			644
Other	(174		)	477			126
Non-deductible expenses	35			33			42
Revaluation of deferred taxes due to Tax Cuts and Jobs Act ^(b)	—			—			1,857
Total provision	$	85		$	3,259		$	3,900

___________


(a)	The applicable statutory tax rate was 21%, 21%, and 35% for the years ended December 31, 2019, 2018 and 2017, respectively.


(b)	The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, lowered the U.S. corporate income tax rate from 35% to 21%. This amount reflects the net impact of the Tax Cuts and Jobs Act on our domestic TRSs.

The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction. At December 31, 2019, we had federal net operating losses that may be carried forward indefinitely and no state or local net operating losses. As of December 31, 2019 and 2018, we recorded a valuation allowance of $0.8 million and $3.0 million, respectively, related to these net operating loss carryforwards and other deferred tax assets. The decrease in the valuation allowance was primarily the result of the release of a $2.3 million valuation allowance for deferred tax assets during the first quarter of 2019 related to Marriott Sawgrass Golf Resort & Spa, due to, in part, the TRS achieving three years of cumulative pre-tax income during the current year period. We determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred taxes of $2.3 million are realizable.

The net deferred tax assets in the table above are comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of $3.3 million and $1.0 million at December 31, 2019 and 2018, respectively, which are included in Other assets in the consolidated balance sheets.

Our taxable subsidiaries recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.

We had no unrecognized tax benefits at December 31, 2019 and 2018.

Our tax returns are subject to audit by taxing authorities. The statute of limitations varies by jurisdiction and ranges from three to four years. Such audits can often take years to complete and settle. The tax years 2015 through 2018 remain open to examination by the major taxing jurisdictions to which we are subject.

CWI 2 2019 10-K – 84

Notes to Consolidated Financial Statements

Note 13. Selected Quarterly Financial Data (Unaudited)

(Dollars in thousands, except per share amounts)



	Three Months Ended
	March 31, 2019			June 30, 2019			September 30, 2019			December 31, 2019
Revenues	$	96,006		$	95,094		$	88,432		$	87,675
Operating expenses	80,597			80,997			79,452			80,976
Net income (loss)	5,453			2,799			(2,325		)	(4,978		)
Income attributable to noncontrolling interests	(4,429		)	(1,840		)	(369		)	(1,929		)
Net income (loss) attributable to CWI 2 stockholders	$	1,024		$	959		$	(2,694	)	$	(6,907	)
Basic and diluted income (loss) per share — Class A common stock ^(a)	$	0.01		$	0.01		$	(0.03	)	$	(0.07	)
Basic and diluted income (loss) per share — Class T common stock ^(a)	$	0.01		$	0.01		$	(0.03	)	$	(0.07	)



	Three Months Ended
	March 31, 2018			June 30, 2018			September 30, 2018			December 31, 2018
Revenues	$	91,179		$	98,100		$	87,177		$	85,876
Operating expenses	77,622			81,784			76,650			77,733
Net income (loss)	1,584			4,334			(1,411		)	(4,856		)
Income attributable to noncontrolling interests	(3,078		)	(1,249		)	(1,194		)	(1,917		)
Net (loss) income attributable to CWI 2 stockholders	$	(1,494	)	$	3,085		$	(2,605	)	$	(6,773	)
Basic and diluted (loss) income per share — Class A common stock ^(a)	$	(0.02	)	$	0.04		$	(0.03	)	$	(0.07	)
Basic and diluted (loss) income per share — Class T common stock ^(a)	$	(0.02	)	$	0.03		$	(0.03	)	$	(0.08	)

___________


(a)	Income (loss) per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while income (loss) per share for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters income (loss) per share may not equal the full-year income (loss) per share.

CWI 2 2019 10-K – 85

CAREY WATERMARK INVESTORS 2 INCORPORATED

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2019, 2018 and 2017

(in thousands)



Description	Balance at Beginning of Year		Other Additions		Deductions			Balance at End of Year
Year Ended December 31, 2019
Valuation reserve for deferred tax assets	$	2,956	$	150	$	(2,324	)	$	782

Year Ended December 31, 2018
Valuation reserve for deferred tax assets	$	3,083	$	632	$	(759	)	$	2,956

Year Ended December 31, 2017
Valuation reserve for deferred tax assets	$	4,102	$	—	$	(1,019	)	$	3,083

CWI 2 2019 10-K – 86

CAREY WATERMARK INVESTORS 2 INCORPORATED

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2019

(in thousands)



			Initial Cost to Company				Costs Capitalized Subsequent to Acquisition ^(a)		(Decrease) Increase In Net Investments ^(b)			Gross Amount at which Carried at Close of Period ^(c)										Life on which Depreciation in Latest Statement of Income is Computed
Description	Encumbrances		Land		Buildings		Costs Capitalized Subsequent to Acquisition ^(a)		(Decrease) Increase In Net Investments ^(b)			Land		Buildings		Total		Accumulated Depreciation ^(c)		Date of Construction	Date Acquired
Marriott Sawgrass Golf Resort & Spa	$	88,747	$	26,400	$	93,551	$	23,755	$	(7,710	)	$	26,400	$	109,596	$	135,996	$	17,482	1987	Apr 2015	4 – 40 yrs.
Courtyard Nashville Downtown	54,965		8,500		47,443		2,291		51			8,500		49,785		58,285		6,359		1998	May 2015	4 – 40 yrs.
Embassy Suites by Hilton Denver-Downtown/Convention Center	98,073		13,000		153,358		2,921		—			13,000		156,279		169,279		16,814		2010	Nov 2015	4 – 40 yrs.
Seattle Marriott Bellevue	97,895		19,500		149,111		391		—			19,500		149,502		169,002		14,712		2015	Jan 2016	4 – 40 yrs.
Le Méridien Arlington	34,755		8,900		43,191		1,593		—			8,900		44,784		53,684		4,363		2007	Jun 2016	4 – 40 yrs.
San Jose Marriott	87,460		7,509		138,319		1,635		—			7,509		139,954		147,463		12,319		2003	Jul 2016	4 – 40 yrs.
San Diego Marriott La Jolla	84,422		20,264		110,300		5,365		32			20,264		115,697		135,961		10,554		1985	Jul 2016	4 – 40 yrs.
Renaissance Atlanta Midtown Hotel	48,589		8,600		64,441		3,448		—			8,600		67,889		76,489		5,955		2009	Aug 2016	4 – 40 yrs.
Ritz-Carlton San Francisco	142,923		98,605		170,372		1,620		—			98,605		171,992		270,597		13,116		1991	Dec 2016	4 – 40 yrs.
Charlotte Marriott City Center	102,636		24,800		127,287		246		—			24,800		127,533		152,333		8,286		1983	Jun 2017	4 – 40 yrs.
	$	840,465	$	236,078	$	1,097,373	$	43,265	$	(7,627	)	$	236,078	$	1,133,011	$	1,369,089	$	109,960

___________


(a)	Consists of the cost of improvements subsequent to acquisition, including construction costs primarily for renovations pursuant to our contractual obligations.


(b)	The decrease in net investment of the Marriott Sawgrass Golf Resort & Spa was related primarily to the net write-off of assets damaged by Hurricane Irma (Note 4).


(c)	A reconciliation of hotels and accumulated depreciation follows:

CWI 2 2019 10-K – 87

CAREY WATERMARK INVESTORS 2 INCORPORATED

NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

(in thousands)



	Reconciliation of Hotels
	Years Ended December 31,
	2019			2018		2017
Beginning balance	$	1,368,613		$	1,357,258	$	1,191,218
Improvements	3,664			11,250		18,587
(Write-off) write-up of assets damaged by hurricane (Note 4)	(3,170		)	105		(4,633		)
Write-off of fully depreciated assets	(18		)	—		—
Additions	—			—		152,086
Ending balance	$	1,369,089		$	1,368,613	$	1,357,258



	Reconciliation of Accumulated Depreciation for Hotels
	Years Ended December 31,
	2019			2018		2017
Beginning balance	$	78,078		$	47,221	$	18,506
Depreciation expense	31,900			30,857		28,715
Write-off of fully depreciated assets	(18		)	—		—
Ending balance	$	109,960		$	78,078	$	47,221

At December 31, 2019, the aggregate cost of real estate that we and our consolidated subsidiaries own for federal income tax purposes was approximately $1.5 billion.

CWI 2 2019 10-K – 88

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.

Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of December 31, 2019 at a reasonable level of assurance.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

We assessed the effectiveness of our internal control over financial reporting at December 31, 2019. In making this assessment, we used criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we concluded that, at December 31, 2019, our internal control over financial reporting was effective based on those criteria.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting

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

Item 9B. Other Information.

None.

CWI 2 2019 10-K – 89

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

CWI 2 2019 10-K – 90

PART IV

Item 15. Exhibits and Financial Statement Schedules.

The following exhibits are filed with this Report, except where indicated.



Exhibit No.	Description	Method of Filing
2.1	Agreement and Plan of Merger, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Apex Merger Sub LLC.	Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on October 22, 2019

2.2	Internalization Agreement, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, CWI OP, LP, Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, W. P. Carey Inc., Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, Carey Lodging Advisors, LLC, Watermark Capital Partners, LLC, CWA, LLC, and CWA 2, LLC.	Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K, filed on October 22, 2019

3.1	Second Articles of Amendment and Restatement of Carey Watermark Investors 2 Incorporated	Incorporated by reference to Exhibit 3.1 to Form 10‑Q filed on May 15, 2015

3.2	Amended and Restated Bylaws of Carey Watermark Investors 2 Incorporated	Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 27, 2018

4.1	Amended and Restated Distribution Reinvestment Plan	Incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 14, 2016

4.2	Form of Notice to Stockholder	Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-11 (File No. 333-196681) filed on August 7, 2014

4.3	Description of Securities under Section 12 of the Exchange Act	Filed herewith

10.1	Advisory Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, and Carey Lodging Advisors, LLC	Incorporated by reference to Exhibit 10.1 to Form 10‑Q filed on May 15, 2015

10.2	Subadvisory Agreement dated February 9, 2015 between Carey Lodging Advisors, LLC, and CWA 2, LLC	Incorporated by reference to Exhibit 10.2 to Form 10‑Q filed on May 15, 2015

10.3	Agreement of Limited Partnership of CWI 2 OP, LP dated as of February 9, 2015, by and among Carey Watermark Investors 2 Incorporated and Carey Watermark Holdings 2, LLC	Incorporated by reference to Exhibit 10.3 to Form 10‑Q filed on May 15, 2015

10.4	2015 Equity Incentive Plan	Incorporated by reference to Exhibit 10.6 to Form 10‑Q filed on May 15, 2015

10.5	Indemnification Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated and CWA2, LLC	Incorporated by reference to Exhibit 10.7 to Form 10‑Q filed on May 15, 2015

10.6	Form of Indemnification Agreement between Carey Watermark Investors 2 Incorporated and its directors and executive officers	Incorporated by reference to Exhibit 10.8 to Form 10‑Q filed on May 15, 2015

10.7	Amended and Restated Limited Liability Company Agreement of CWI Sawgrass Holdings, LLC dated April 1, 2015	Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 2, 2015

CWI 2 2019 10-K – 91



Exhibit No.	Description	Method of Filing
10.8	First Amendment to Advisory Agreement, dated as of June 30, 2015, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC.	Incorporated by reference to Exhibit 10.2 to W. P. Carey Inc.’s Quarterly Report on Form 10-Q (File No. 001-13779) filed on August 7, 2015.

10.9	Amended and Restated Limited Liability Company Operating Agreement of CWI Key Biscayne Hotel, LLC, by and between CWI OP, LP and CWI 2 OP, LP dated as of May 29, 2015	Incorporated by reference to Exhibit 10.1 to current Report on Form 8-K filed on June 4, 2015

10.10	Second Amendment to Advisory Agreement, dated as of June 13, 2017, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC	Incorporated by reference to Exhibit 10.27 to W. P. Carey Inc.’s Annual Report on Form 10-K (File No. 001-13779) filed February 23, 2018

10.11	Payment Guaranty, between W.P. Carey Inc. as Lender, and Carey Watermark Investors 2 Inc. as Guarantor, dated as of October 19, 2017	Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017

10.12	Pledge and Security Agreement between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Pledgor, dated October 19, 2017	Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017

10.13	Promissory Note, between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Borrower, dated as of October 19, 2017	Incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017

10.14	First Amendment to the Loan Agreement, between W. P. Carey, as Lender, and CWI 2 OP, LP, as Borrower, effective September 30, 2018	Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10‑Q for the Quarter ended September 30, 2018

10.15	Commitment Agreement, dated as of October 1, 2019, among Watermark Capital Partners, LLC, Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Michael Medzigian.	Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on October 22, 2019

10.16	Second Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective September 30, 2019	Filed herewith

10.17	Third Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective January 16, 2020	Filed herewith

10.18	Transition Services Agreement, dated as of October 22, 2019, between Watermark Capital Partners, LLC, and Carey Watermark Investors 2 Incorporated.	Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on October 22, 2019

10.19	Transition Services Agreement, dated as of October 22, 2019, between W. P. Carey Inc., and Carey Watermark Investors 2 Incorporated.	Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K, filed on October 22, 2019

10.20	Employment Agreement, dated as of October 22, 2019, between Carey Watermark Investors 2 Incorporated and Michael G. Medzigian.	Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K, filed on October 22, 2019

CWI 2 2019 10-K – 92



Exhibit No.	Description	Method of Filing
21.1	List of Registrant Subsidiaries	Filed herewith

23.1	Consent of PricewaterhouseCoopers LLP	Filed herewith

23.2	Consent of RSM US LLP	Filed herewith

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

99.1	Financial statements of the Ritz-Carlton Bacara, Santa Barbara Hotel	Filed herewith

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

CWI 2 2019 10-K – 93

Item 16. Form 10-K Summary.

None.

CWI 2 2019 10-K – 94

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



			Carey Watermark Investors 2 Incorporated
Date:	March 12, 2020
		By:	/s/ Michael G. Medzigian
			Michael G. Medzigian
			Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Signature	Title	Date

/s/ Michael G. Medzigian	Chief Executive Officer and Director	March 12, 2020
Michael G. Medzigian	(Principal Executive Officer)

/s/ Mallika Sinha	Chief Financial Officer	March 12, 2020
Mallika Sinha	(Principal Financial Officer)

/s/ Noah K. Carter	Chief Accounting Officer	March 12, 2020
Noah K. Carter	(Principal Accounting Officer)

/s/ Jason E. Fox	Chairman of the Board and Director	March 12, 2020
Jason E. Fox

/s/ Katherine G. Lugar	Director	March 12, 2020
Katherine G. Lugar

/s/ Robert E. Parsons, Jr.	Director	March 12, 2020
Robert E. Parsons, Jr.

/s/ William H. Reynolds, Jr.	Director	March 12, 2020
William H. Reynolds, Jr.

CWI 2 2019 10-K – 95

EXHIBIT INDEX

The following exhibits are filed with this Report, except where indicated.



Exhibit No.	Description	Method of Filing
2.1	Agreement and Plan of Merger, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Apex Merger Sub LLC.	Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on October 22, 2019

2.2	Internalization Agreement, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, CWI OP, LP, Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, W. P. Carey Inc., Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, Carey Lodging Advisors, LLC, Watermark Capital Partners, LLC, CWA, LLC, and CWA 2, LLC.	Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K, filed on October 22, 2019

3.1	Second Articles of Amendment and Restatement of Carey Watermark Investors 2 Incorporated	Incorporated by reference to Exhibit 3.1 to Form 10‑Q filed on May 15, 2015

3.2	Amended and Restated Bylaws of Carey Watermark Investors 2 Incorporated	Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 27, 2018

4.1	Amended and Restated Distribution Reinvestment Plan	Incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 14, 2016

4.2	Form of Notice to Stockholder	Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-11 (File No. 333-196681) filed on August 7, 2014

4.3	Description of Securities under Section 12 of the Exchange Act	Filed herewith

10.1	Advisory Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, and Carey Lodging Advisors, LLC	Incorporated by reference to Exhibit 10.1 to Form 10‑Q filed on May 15, 2015

10.2	Subadvisory Agreement dated February 9, 2015 between Carey Lodging Advisors, LLC, and CWA 2, LLC	Incorporated by reference to Exhibit 10.2 to Form 10‑Q filed on May 15, 2015

10.3	Agreement of Limited Partnership of CWI 2 OP, LP dated as of February 9, 2015, by and among Carey Watermark Investors 2 Incorporated and Carey Watermark Holdings 2, LLC	Incorporated by reference to Exhibit 10.3 to Form 10‑Q filed on May 15, 2015

10.4	2015 Equity Incentive Plan	Incorporated by reference to Exhibit 10.6 to Form 10‑Q filed on May 15, 2015

10.5	Indemnification Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated and CWA2, LLC	Incorporated by reference to Exhibit 10.7 to Form 10‑Q filed on May 15, 2015

10.6	Form of Indemnification Agreement between Carey Watermark Investors 2 Incorporated and its directors and executive officers	Incorporated by reference to Exhibit 10.8 to Form 10‑Q filed on May 15, 2015

10.7	Amended and Restated Limited Liability Company Agreement of CWI Sawgrass Holdings, LLC dated April 1, 2015	Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 2, 2015

10.8	First Amendment to Advisory Agreement, dated as of June 30, 2015, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC.	Incorporated by reference to Exhibit 10.2 to W. P. Carey Inc.’s Quarterly Report on Form 10-Q (File No. 001-13779) filed on August 7, 2015.

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Exhibit No.	Description	Method of Filing
10.9	Amended and Restated Limited Liability Company Operating Agreement of CWI Key Biscayne Hotel, LLC, by and between CWI OP, LP and CWI 2 OP, LP dated as of May 29, 2015	Incorporated by reference to Exhibit 10.1 to current Report on Form 8-K filed on June 4, 2015

10.10	Second Amendment to Advisory Agreement, dated as of June 13, 2017, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC	Incorporated by reference to Exhibit 10.27 to W. P. Carey Inc.’s Annual Report on Form 10-K (File No. 001-13779) filed February 23, 2018

10.11	Payment Guaranty, between W.P. Carey Inc. as Lender, and Carey Watermark Investors 2 Inc. as Guarantor, dated as of October 19, 2017	Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017

10.12	Pledge and Security Agreement between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Pledgor, dated October 19, 2017	Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017

10.13	Promissory Note, between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Borrower, dated as of October 19, 2017	Incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017

10.14	First Amendment to the Loan Agreement, between W. P. Carey, as Lender, and CWI 2 OP, LP, as Borrower, effective September 30, 2018	Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10‑Q for the Quarter ended September 30, 2018

10.15	Commitment Agreement, dated as of October 1, 2019, among Watermark Capital Partners, LLC, Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Michael Medzigian.	Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on October 22, 2019

10.16	Second Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective September 30, 2019	Filed herewith

10.17	Third Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective January 16, 2020	Filed herewith

10.18	Transition Services Agreement, dated as of October 22, 2019, between Watermark Capital Partners, LLC, and Carey Watermark Investors 2 Incorporated.	Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on October 22, 2019

10.19	Transition Services Agreement, dated as of October 22, 2019, between W. P. Carey Inc., and Carey Watermark Investors 2 Incorporated.	Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K, filed on October 22, 2019

10.20	Employment Agreement, dated as of October 22, 2019, between Carey Watermark Investors 2 Incorporated and Michael G. Medzigian.	Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K, filed on October 22, 2019

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Exhibit No.	Description	Method of Filing
21.1	List of Registrant Subsidiaries	Filed herewith

23.1	Consent of PricewaterhouseCoopers LLP	Filed herewith

23.2	Consent of RSM US LLP	Filed herewith

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

99.1	Financial statements of the Ritz-Carlton Bacara, Santa Barbara Hotel	Filed herewith

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

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