BHR 10-Q Quarterly Report Sept. 30, 2014

BRAEMAR HOTELS & RESORTS INC.

10-Ks and 10-Qs

10-Q	Quarter ended Sept. 30, 2025
10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Sept. 30, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013

PROXIES

DEF 14A	Filed on Oct. 1, 2025
DEF 14A	Filed on Oct. 10, 2024
DEF 14A	Filed on June 24, 2024
DEF 14A	Filed on March 28, 2024
DEF 14A	Filed on Dec. 31, 2023
DEF 14A	Filed on March 28, 2023
DEF 14A	Filed on May 11, 2022
DEF 14A	Filed on March 30, 2022
DEF 14A	Filed on March 30, 2021
DEF 14A	Filed on April 1, 2020
DEF 14A	Filed on June 28, 2019
DEF 14A	Filed on May 23, 2018
DEF 14A	Filed on April 28, 2017
DEF 14A	Filed on April 17, 2015
DEF 14A	Filed on April 14, 2014

10-Q 1 prime2014q310-q.htm 10-Q Prime 2014 Q3 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2014



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

For the transition period from ________________ to ________________

Commission file number: 001-35972

ASHFORD HOSPITALITY PRIME, INC.

(Exact name of registrant as specified in its charter)



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

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

(972) 490-9600

(Registrant’s telephone number, including area code)

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

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

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



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

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

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



Common Stock, $0.01 par value per share		25,392,291
(Class)		Outstanding at November 5, 2014

ASHFORD HOSPITALITY PRIME, INC

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	2
Condensed Consolidated and Combined Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	3
Condensed Consolidated and Combined Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013	4
Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2014	5
Condensed Consolidated and Combined Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6
Notes to Condensed Consolidated and Combined Consolidated Financial Statements	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
ITEM 4. CONTROLS AND PROCEDURES	38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	39
ITEM 1A. RISK FACTORS	39
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	39
ITEM 4. MINE SAFETY DISCLOSURES	39
ITEM 5. OTHER INFORMATION	39
ITEM 6. EXHIBITS	40
SIGNATURES	41

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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



	September 30, 2014			December 31, 2013
Assets
Investments in hotel properties, net	$	997,844		$	765,326
Cash and cash equivalents	182,782			143,776
Restricted cash	29,365			5,951
Accounts receivable, net of allowance of $65 and $34, respectively	16,137			7,029
Inventories	624			318
Note receivable	8,098			8,098
Deferred costs, net	4,127			4,064
Prepaid expenses	3,231			2,233
Derivative assets	50			—
Other assets	1,165			4,501
Intangible asset, net	2,565			2,631
Due from related party, net	649			12
Due from third-party hotel managers	6,359			18,480
Total assets	$	1,252,996		$	962,419
Liabilities and Equity
Liabilities:
Indebtedness	$	765,164		$	621,882
Capital lease payable	6			—
Accounts payable and accrued expenses	28,440			17,279
Dividends payable	1,477			1,245
Unfavorable management contract liabilities	356			474
Due to Ashford Trust, net	3,815			13,042
Due to third-party hotel managers	980			649
Intangible liability, net	3,753			3,795
Other liabilities	1,139			926
Total liabilities	805,130			659,292
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests in operating partnership	135,110			159,726
Equity:
Common stock, $0.01 par value, 200,000,000 shares authorized, 25,393,433 and 16,129,112 shares issued and 25,392,791 and 16,129,112 shares outstanding at September 30, 2014 and December 31, 2013, respectively	254			161
Additional paid-in capital	391,096			246,928
Accumulated deficit	(74,921		)	(101,062		)
Treasury stock, at cost, 642 shares at September 30, 2014	(10		)	—
Total stockholders’ equity of the Company	316,419			146,027
Noncontrolling interest in consolidated entity	(3,663		)	(2,626		)
Total equity	312,756			143,401
Total liabilities and equity	$	1,252,996		$	962,419

See Notes to Condensed Consolidated and Combined Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue
Rooms	$	65,253		$	47,184		$	171,484		$	132,852
Food and beverage	15,886			11,014			49,488			37,799
Other	3,615			2,762			9,494			7,737
Total hotel revenue	84,754			60,960			230,466			178,388
Other	30			—			91			—
Total revenue	84,784			60,960			230,557			178,388
Expenses
Hotel operating expenses:
Rooms	14,039			10,330			38,564			30,183
Food and beverage	11,118			8,045			32,377			25,323
Other expenses	23,079			16,997			60,078			46,599
Management fees	3,497			2,679			9,408			7,651
Total hotel expenses	51,733			38,051			140,427			109,756
Property taxes, insurance and other	4,076			3,000			12,127			8,705
Depreciation and amortization	10,657			7,767			30,136			22,864
Advisory services fee	3,117			—			9,256			—
Transaction costs	45			—			1,871			—
Corporate general and administrative	458			2,777			2,453			9,222
Total expenses	70,086			51,595			196,270			150,547
Operating income	14,698			9,365			34,287			27,841
Interest income	10			5			20			19
Interest expense and amortization of loan costs	(10,137		)	(8,380		)	(29,159		)	(24,571		)
Write-off of loan costs and exit fees	—			—			—			(1,971		)
Unrealized gain (loss) on derivatives	3			(9		)	(63		)	(31		)
Income before income taxes	4,574			981			5,085			1,287
Income tax expense	(185		)	(952		)	(622		)	(2,255		)
Net income (loss)	4,389			29			4,463			(968		)
Loss from consolidated entities attributable to noncontrolling interests	154			371			741			575
Net income attributable to redeemable noncontrolling interests in operating partnership	(1,171		)	—			(1,213		)	—
Net income (loss) attributable to the Company	$	3,372		$	400		$	3,991		$	(393	)
Income (loss) per share – basic:
Net income (loss) attributable to common shareholders	$	0.13		$	0.02		$	0.16		$	(0.02	)
Weighted average common shares outstanding – basic	25,298			16,045			24,310			16,045
Income (loss) per share – diluted:
Net income (loss) attributable to common shareholders	$	0.13		$	0.02		$	0.16		$	(0.02	)
Weighted average common shares outstanding – diluted	34,429			24,905			33,315			16,045
Dividends declared per common share	$	0.05		$	—		$	0.15		$	—

See Notes to Condensed Consolidated and Combined Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Net income (loss)	$	4,389		$	29	$	4,463		$	(968	)
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on derivatives	—			—		—			—
Reclassification to interest expense	—			—		—			—
Total other comprehensive income (loss)	—			—		—			—
Total comprehensive income (loss)	4,389			29		4,463			(968		)
Comprehensive loss attributable to noncontrolling interests in consolidated entities	154			371		741			575
Comprehensive income attributable to redeemable noncontrolling interests in operating partnership	(1,171		)	—		(1,213		)	—
Comprehensive income (loss) attributable to the Company	$	3,372		$	400	$	3,991		$	(393	)

See Notes to Condensed Consolidated and Combined Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited, in thousands)



	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Treasury Stock					Noncontrolling Interests in Consolidated Entities			Total			Redeemable Noncontrolling Interest in Operating Partnership
	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Shares		Amount			Noncontrolling Interests in Consolidated Entities			Total			Redeemable Noncontrolling Interest in Operating Partnership
Balance at January 1, 2014	16,129	$	161	$	246,928	$	(101,062	)	—		$	—		$	(2,626	)	$	143,401		$	159,726
Equity-based compensation	—	—		327		—			—		—			—			327			1,460
Issuance of common stock	9,200	92		143,841		—			—		—			—			143,933			—
Issuance of restricted shares/units	64	1		—		—			—		—			—			1			18
Forfeiture of restricted common shares	—	—		—		—			(1	)	(10		)	—			(10		)	—
Dividends declared - common stock	—	—		—		(3,806		)	—		—			—			(3,806		)	—
Distributions to noncontrolling interests	—	—		—		—			—		—			(296		)	(296		)	(1,351		)
Net income (loss)	—	—		—		3,991			—		—			(741		)	3,250			1,213
Redemption value adjustment	—	—		—		25,956			—		—			—			25,956			(25,956		)
Balance at September 30, 2014	25,393	$	254	$	391,096	$	(74,921	)	(1	)	$	(10	)	$	(3,663	)	$	312,756		$	135,110

See Notes to Condensed Consolidated and Combined Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Nine Months Ended September 30,
	2014			2013
Cash Flows from Operating Activities
Net income (loss)	$	4,463		$	(968	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Depreciation and amortization	30,136			22,864
Stock-based compensation	1,787			—
Bad debt expense	—			712
Amortization of loan costs	1,328			544
Write-off of loan costs and exit fees	—			1,971
Amortization of intangibles	(160		)	(161		)
Unrealized loss on derivatives	63			31
Changes in operating assets and liabilities, exclusive of the effect of hotel acquisitions:
Restricted cash	(2,028		)	9,940
Accounts receivable and inventories	(7,566		)	(2,954		)
Prepaid expenses and other assets	(762		)	(284		)
Accounts payable and accrued expenses	6,849			1,181
Due to/from related parties, net	(605		)	—
Due to/from third-party hotel managers	12,452			(2,370		)
Due to/from Ashford Trust	(5,875		)	—
Other liabilities	197			4
Net cash provided by operating activities	40,279			30,510

Cash Flows from Investing Activities
Proceeds from property insurance	54			—
Acquisition of hotel properties, net of cash acquired	(169,609		)	—
Restricted cash related to improvements and additions to hotel properties	(20,845		)	—
Improvements and additions to hotel properties	(17,755		)	(17,380		)
Net cash used in investing activities	(208,155		)	(17,380		)

Cash Flows from Financing Activities
Borrowings on indebtedness	80,000			199,875
Repayments of indebtedness	(5,941		)	(146,654		)
Payments of loan costs and exit fees	(3,277		)	(2,831		)
Payments for derivatives	(93		)	(36		)
Payments for spin-off costs	(1,091		)	—
Payments for dividends	(4,677		)	—
Issuance of common stock	143,933			—
Issuance of restricted shares/units	19			—
Forfeiture of restricted shares/units	(10		)	—
Contributions from owners	—			24,146
Distributions to owners	—			(78,142		)
Distributions to a noncontrolling interest in a consolidated entity	(1,981		)	(15,713		)
Net cash provided by (used in) financing activities	206,882			(19,355		)

Net change in cash and cash equivalents	39,006			(6,225		)
Cash and cash equivalents at beginning of period	143,776			20,313
Cash and cash equivalents at end of period	$	182,782		$	14,088
Supplemental Cash Flow Information
Interest paid	$	27,054		$	23,891
Income taxes paid	719			—
Supplemental Disclosure of Non Cash Investing and Financing Activities
Net other assets and liabilities acquired	$	(3,615	)	$	—
Assumption of debt	69,000			—
Dividends declared but not paid	1,726			—
Financed insurance premiums	—			1,207
Non cash contribution from owners	—			1,109
Distributions declared but not paid to a noncontrolling interest in a consolidated entity	296			887

See Notes to Condensed Consolidated and Combined Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Description of Business

Ashford Hospitality Prime, Inc., together with its subsidiaries (“Ashford Prime”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”), luxury, upper-upscale and upscale hotels. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Ashford Prime elected to be taxed as a REIT under the Internal Revenue Code beginning with the year ended December 31, 2013. Ashford Prime conducts its business and owns substantially all of its assets through its operating partnership, Ashford Hospitality Prime Limited Partnership (“Ashford Prime OP”). In this report, the terms “the Company,” “we,” “us” or “our” refers to Ashford Hospitality Prime, Inc. and, as the context may require, all entities included in its financial statements.

We were formed as a Maryland corporation in April 2013 and became a public company on November 19, 2013 when Ashford Hospitality Trust, Inc. (“AHT” or “Ashford Trust”), a NYSE-listed REIT, completed the spin-off of Ashford Prime through the distribution of its outstanding common stock to the Ashford Trust stockholders.

We are advised by Ashford Hospitality Advisors LLC (“Ashford Advisor”), a subsidiary of Ashford Trust, which is staffed by Ashford Trust’s officers and employees, through an advisory agreement. All of the hotels in our portfolio are currently asset-managed by Ashford Advisor. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford Advisor.

On February 27, 2014, Ashford Trust announced that its board of directors approved a plan to spin-off Ashford Advisor into a separate publicly traded company in the form of a taxable distribution. The distribution is expected to be completed in the fourth quarter of 2014. We expect that the proposed spin-off will not affect us and the successor to Ashford Advisor will continue to advise us.

As of September 30, 2014 , Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington”), which is beneficially wholly owned by Mr. Monty J. Bennett, our Chairman and Chief Executive Officer, and Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust, managed one of our ten hotel properties. Third-party management companies managed the remaining hotel properties.

The accompanying consolidated financial statements include the accounts of certain wholly-owned and majority owned subsidiaries of Ashford Prime OP that own and operate ten hotels in six states and the District of Columbia. The portfolio includes eight wholly-owned hotel properties and two hotel properties that are owned through a partnership in which Ashford Prime OP has a controlling interest. These hotels represent 3,707 total rooms, or 3,472 net rooms, excluding those attributable to our partner. As a REIT, Ashford Prime needs to comply with limitations imposed by the Internal Revenue Code related to operating hotels. As of September 30, 2014 , all of our ten hotel properties were leased by wholly-owned or majority-owned subsidiaries that are treated as taxable REIT subsidiaries (“TRS”) for federal income tax purposes (collectively the TRS entities are referred to as “Prime TRS”). Prime TRS then engages hotel management companies to operate the hotels under management contracts. As of September 30, 2014 , eight of the ten hotel properties were leased by Ashford Prime’s wholly-owned TRS and two hotel properties majority owned through a consolidated partnership were leased to a TRS wholly-owned by such consolidated partnership. Each hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from Prime TRS is eliminated in consolidation. The hotels are operated under management contracts with Marriott International, Inc. (“Marriott”), Hilton Worldwide (“Hilton”), Accor Business and Leisure Management, LLC (“Accor”) and Remington, which are eligible independent contractors under the Internal Revenue Code.

With respect to six of the eight initial hotels, the accompanying carve-out financial statements for the three and nine months ended September 30, 2013 include the accounts of the following subsidiaries:



1.	Ashford Plano-M LP



2.	Ashford Seattle Waterfront LP



3.	Ashford Tampa International Hotel Partnership LP



4.	Ashford Seattle Downtown LP

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)



5.	Ashford San Francisco II LP



6.	Ashford Philadelphia Annex LP



7.	Ashford TRS Philadelphia Annex LLC



8.	Ashford TRS Sapphire III LLC



9.	Ashford TRS Sapphire VII LLC

With respect to the other two initial hotels, the accompanying carve-out financial statements for the three and nine months ended September 30, 2013 include the accounts of Ashford HHC Partners III, LP and its subsidiaries which include:



1.	CHH Torrey Pines Hotel Partners, LP



2.	CHH Capital Hotel Partners, LP



3.	CHH III Tenant Parent Corp.



4.	CHH Torrey Pines Tenant Corp.



5.	CHH Capital Tenant Corp.



6.	CHH Torrey Pines Hotel GP, LLC



7.	CHH Capital Hotel GP, LLC

2. Significant Accounting Policies

Basis of Presentation and Principles of Combination and Consolidation —Subsequent to the spin-off, the accompanying historical unaudited consolidated financial statements include the accounts of Ashford Hospitality Prime, Inc. and its majority-owned subsidiaries in which it has a controlling interest. The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

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

For periods prior to the spin-off, the accompanying historical combined consolidated financial statements have been “carved out” of AHT’s consolidated financial statements and reflect significant assumptions and allocations. As these hotels were under AHT’s common control, they have been presented on a combined basis. The combined consolidated financial statements were prepared using the financial position and results of operations of the entities set forth above after adjustments for certain ownership-related activities that had been historically accounted for by AHT. These ownership activities included mortgage indebtedness associated with the eight initial hotels, debt related expenses and other owner related expenses. In addition, the combined consolidated statements of operations for the periods prior to the spin-off include allocations of corporate general and administrative expenses from AHT, which in the opinion of management, are reasonable. The historical financial information is not necessarily indicative of the Company’s future results of operations, financial position and cash flows subsequent to the spin-off.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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


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


•	On February 24, 2014, we acquired the Sofitel Chicago Water Tower and on March 1, 2014, we acquired the Pier House Resort. The results of these hotels are included in our results of operations as of their respective acquisition dates.

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

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

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

Impairment of Investments in Hotel Properties —Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. During the three and nine months ended September 30, 2014 and 2013 , there were no impairment charges.

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

Deferred Costs, net —Deferred loan costs are recorded at cost and amortized over the terms of the related indebtedness using the effective interest method. Deferred franchise fees are recorded at cost and amortized on a straight-line basis over the initial term of the franchise agreement.

Intangible Asset, net and Intangible Liability, net —Intangible asset represents the market value related to a lease agreement obtained in connection with AHT’s acquisition of a hotel property that was below the market rate at the date of the acquisition and is amortized over the remaining term of the lease. Intangible liability represents the market value related to a lease agreement obtained in connection with AHT’s acquisition of a hotel property that was above the market rate at the date of the acquisition and is amortized over the remaining term of the lease. The intangible asset and intangible liability were obtained in connection with the spin-off.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Derivative Instruments —Interest rate derivatives include interest rate caps that provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when actual rates exceed the cap strike rate. These derivatives are subject to master netting settlement arrangements. As the derivatives are subject to master netting settlement arrangements, we report derivatives with the same counterparty net on the consolidated balance sheets.

Derivatives are recorded at fair value in accordance with the applicable authoritative accounting guidance. The changes in fair value are recognized in earnings as “Unrealized gain (loss) on derivatives” in the consolidated and combined consolidated statements of operations.

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

Due to/from Ashford Trust, net —Due to/from Ashford Trust, net represents current receivables and payables resulting from costs associated with our spin-off from AHT as well as payables related to the advisory services fee. These receivables and payables are generally settled within a period not exceeding one year.

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

Unfavorable Management Contract Liabilities —A management agreement assumed by AHT in an acquisition of a hotel in 2007 had terms that were more favorable to the respective manager than typical market management agreements at the acquisition date. This management agreement was assumed in connection with the spin-off. The unfavorable contract liability is amortized as a reduction to incentive management fees on a straight-line basis over the initial term of the related agreement.

Noncontrolling Interests —The redeemable noncontrolling interests in the operating partnership represent the limited partners’ proportionate share of equity in earnings/losses of Ashford Prime OP, which is an allocation of net income attributable to the common unit holders based on the weighted average ownership percentage of these limited partners’ common unit holdings throughout the period. The redeemable noncontrolling interests in Ashford Prime OP is classified in the mezzanine section of the consolidated balance sheets as these redeemable operating units do not meet the requirements for equity classification prescribed by the authoritative accounting guidance because the redemption feature requires the delivery of cash or registered shares at our option. The carrying value of the noncontrolling interests in Ashford Prime OP is based on the greater of the accumulated historical cost or the redemption value.

The noncontrolling interest in a consolidated entity represents an ownership interest of 25% in two hotel properties at September 30, 2014 and December 31, 2013 , and is reported in equity in the consolidated balance sheets.

Net income/loss attributable to redeemable noncontrolling interests in operating partnership and income/loss from consolidated entities attributable to noncontrolling interests in our consolidated entities are reported as deductions/additions from/to net income/loss. Comprehensive income/loss attributable to these noncontrolling interests is reported as reductions/additions from/to comprehensive income/loss.

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

Equity-Based Compensation —Stock/unit-based compensation for non-employees is accounted for at fair value based on the market price of the shares at period end in accordance with applicable authoritative accounting guidance. Subsequently, the then-current fair value of unvested equity at each period end is charged to expense on a straight-line basis over the remaining vesting period of the shares/units. Stock/unit grants to independent directors is recorded at fair value based on the market price of the shares at grant date and this amount is fully expensed as the grants of stock/units are fully vested on the date of grant.

Corporate General and Administrative Expense —Corporate general and administrative expenses are expensed as incurred. Prior to the spin-off, corporate general and administrative expense represented an allocation of certain AHT corporate general and administrative costs including salaries and benefits, stock-based compensation, legal and professional fees, rent expense, insurance expense and office expenses. The costs were allocated based on the pro rata share of our undepreciated gross investments in hotel

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

properties in relation to AHT’s undepreciated gross investments in hotel properties for all indirect costs. All direct costs associated with the operations of the eight initial hotel properties are included in the combined consolidated financial statements.

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

Reclassifications —Amounts within due to related parties, net related to amounts owed to/from Ashford Trust as of December 31, 2013 have been reclassified to due to Ashford Trust, net to conform with the current year presentation. These reclassifications have no effect on our cash flows, equity or net income (loss) previously reported.

Income (Loss) Per Share —For periods prior to the spin-off, basic income (loss) per share was calculated by dividing net income (loss) attributable to the Company by the 16.0 million shares of common stock outstanding upon the completion of the distribution (based on a distribution ratio of one share of Ashford Prime common stock for every five shares of Ashford Trust common stock), including 16,000 shares for initial grants to the five independent members of our board of directors and excluding 84,000 unvested restricted shares. For the three months ended September 30, 2013 , the diluted income per share was calculated by dividing the net income attributable to the Company by 24.9 million shares, which includes 8.9 million shares comprised of 84,000 unvested restricted shares and shares issuable on the conversion of 8.8 million Ashford Prime OP units, which are comprised of 5.0 million units held by Ashford Trust which represents the initial 20% retained ownership interest in Ashford Prime OP and 3.8 million units of Ashford Prime OP held by current Ashford Trust unit holders based on the distribution ratio noted above. For the nine months ended September 30, 2013 , diluted loss per share was calculated by dividing the net loss attributable to the Company by the 16.0 million shares of common stock outstanding upon the completion of the distribution and excluding the additional 8.9 million shares described above as the effect of including these shares would have been anti-dilutive.

Income Taxes —As a REIT, we generally are not subject to federal corporate income tax on the portion of our net income (loss) that does not relate to taxable REIT subsidiaries. However, Prime TRS is treated as a taxable REIT subsidiary for federal income tax purposes. In accordance with authoritative accounting guidance, we account for income taxes related to Prime TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective bases. In addition, the analysis utilized by us in determining our deferred tax asset valuation allowance involves considerable management judgment and assumptions.

The entities that own the ten hotels are considered partnerships for federal income tax purposes. Partnerships are not subject to U.S. federal income taxes. The partnerships’ revenues and expenses pass through to and are taxed on the owners. The states and cities where the partnerships operate follow the U.S. federal income tax treatment, with the exception of the District of Columbia, Texas, and the city of Philadelphia. Accordingly, we provide for income taxes in these jurisdictions for the partnerships. The entities that operate the ten hotels are considered taxable corporations for U.S. federal, state, and city income tax purposes and have elected to be taxable REIT subsidiaries of Ashford Prime and Ashford Trust (prior to the spin-off). The entities that operate the two hotels owned by a consolidated partnership elected to be treated as taxable REIT subsidiaries (“TRS”) of Ashford Trust in April 2007, when the partnership was acquired by AHT. Prior to the spin-off, income tax expense in the accompanying combined consolidated financial statements was calculated on a “carve-out” basis from AHT.

The “Income Taxes” Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance requires us to determine whether tax positions we have taken or expect to take in a tax return are more likely than not to be sustained upon examination by the appropriate taxing authority based on the technical merits of the positions. Tax positions that do not meet the more likely than not threshold would be recorded as additional tax expense in the current period. We analyze all open tax years, as defined by the statute of limitations for each jurisdiction, which includes the federal jurisdiction and various states. We classify interest and penalties related to underpayment of income taxes as income tax expense. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and cities. Tax years 2010 through 2013 remain subject to potential examination by certain federal and state taxing authorities, and, as more fully described in Note 12, we agreed to extend the statute of limitations for one of our TRS subsidiaries until December 31, 2014 in connection with the final settlement of an income tax examination of that subsidiary.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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

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

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

3. Investments in Hotel Properties, net

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



	September 30, 2014			December 31, 2013
Land	$	202,356		$	129,994
Buildings and improvements	917,744			746,083
Furniture, fixtures and equipment	61,595			44,847
Construction in progress	1,537			4,583
Total cost	1,183,232			925,507
Accumulated depreciation	(185,388		)	(160,181		)
Investments in hotel properties, net	$	997,844		$	765,326

Acquisitions

On February 24, 2014, we acquired a 100% interest in the Sofitel Chicago Water Tower (“Sofitel Chicago”) in Chicago, Illinois pursuant to the previously announced Agreement of Purchase and Sale, dated as of December 23, 2013, by and among the Company and Chestnut OwnerCo, LLC and Chestnut LeaseCo, LLC. We paid an aggregate purchase price of $153.0 million in cash. The acquisition was funded with proceeds from an $80.0 million non-recourse mortgage loan and proceeds from the Company’s underwritten public offering (see Note 11). We have allocated the assets acquired and liabilities assumed using estimated fair value information based on a third party appraisal that was received subsequent to March 31, 2014 and resulted in adjustments to land, buildings and improvements, furniture, fixtures and equipment. These adjustments resulted in $144,000 of additional depreciation expense for the three months ended June 30, 2014, which represents the additional depreciation from the date of the acquisition through March 31, 2014. We are in the process of evaluating property level working capital balances, which amounted to a net liability of $1.8 million . This valuation is considered a Level 3 valuation technique.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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



	Preliminary Allocations as of March 31, 2014		Adjustments			Final Allocations as of June 30, 2014
Land	$	24,043	$	(11,412	)	$	12,631
Buildings and improvements	126,228		8,684			134,912
Furniture, fixtures, and equipment	2,729		2,728			5,457
	$	153,000	$	—		$	153,000

The results of operations of the hotel property have been included in our results of operations since February 24, 2014. For the three and nine months ended September 30, 2014 , we have included total revenue of $11.8 million and $26.3 million , respectively, and net income of $1.8 million and $3.2 million , respectively, in our consolidated statements of operations.

On February 24, 2014, to fund a portion of our acquisition of the Sofitel Chicago, we completed the financing for an $80.0 million mortgage loan. The mortgage loan bears interest at a rate of LIBOR + 2.3% . The stated maturity date of the mortgage loan is March 9, 2016, which may be extended by us for up to three consecutive one -year terms. The mortgage loan is secured by the Sofitel Chicago.

On March 1, 2014, we acquired a 100% interest in the Pier House Resort from Ashford Trust for total consideration of $92.7 million . We assumed the $69.0 million mortgage on the property and paid the balance of the purchase price with cash from our underwritten public offering. We have allocated the assets acquired and liabilities assumed using estimated fair value information based on a third party appraisal that was received subsequent to March 31, 2014 and resulted in adjustments to land and buildings and improvements. These adjustments resulted in a $6,000 reduction of depreciation expense for the three months ended June 30, 2014, which represents lower depreciation from the date of the acquisition through March 31, 2014. We are in the process of evaluating property level working capital balances, which amounted to a net liability of $1.8 million .This valuation is considered a Level 3 valuation technique.

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



	Preliminary Allocations as of March 31, 2014			Adjustments			Final Allocations as of June 30, 2014
Land	$	56,900		$	2,831		$	59,731
Buildings and improvements	30,470			(2,831		)	27,639
Furniture, fixtures, and equipment	5,372			—			5,372
	$	92,742		$	—		$	92,742

Indebtedness	(69,000		)	—			(69,000		)

The results of operations of the hotel property have been included in our results of operations since March 1, 2014. For the three and nine months ended September 30, 2014 , we have included total revenue of $4.3 million and $12.3 million , respectively, and net (loss) income of $(149,000) and $1 million , respectively, in our consolidated statements of operations.

The following table reflects the unaudited pro forma results of operations as if both acquisitions had occurred and the applicable indebtedness was incurred on January 1, 2013, and the removal of $45,000 and $1.7 million of non-recurring transaction costs directly attributable to the transaction for the three and nine months ended September 30, 2014 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Total revenue	$	84,784	$	76,350	$	237,947	$	224,270
Net income	4,434		1,159		5,479		2,203

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

4. Note Receivable

As of September 30, 2014 and December 31, 2013 , we owned a note receivable of $8.1 million from the city of Philadelphia, Pennsylvania. The note bears interest at a rate of 12.85% and matures in 2018. The interest income recorded on the note receivable is offset against the interest expense recorded on the TIF loan of the same amount. See Note 5.

5. Indebtedness

Indebtedness consisted of the following (in thousands):



Indebtedness	Collateral	Maturity	Interest Rate	September 30, 2014		December 31, 2013
Mortgage loan ⁽³⁾	1 hotel	September 2015	LIBOR ⁽¹⁾ +4.90%	$	69,000	$	—
Mortgage loan ⁽⁴⁾	1 hotel	March 2016	LIBOR ⁽¹⁾ +2.30%	80,000		—
Senior credit facility ⁽⁵⁾	Various	November 2016	Base Rate ⁽²⁾ + 1.25% to 2.75% or LIBOR ⁽¹⁾ +2.25% to 3.75%	—		—
Mortgage loan ⁽⁶⁾	1 hotel	April 2017	5.91%	33,976		34,310
Mortgage loan	2 hotels	April 2017	5.95%	124,535		125,748
Mortgage loan	3 hotels	April 2017	5.95%	253,418		255,886
Mortgage loan	2 hotels	February 2018	LIBOR ⁽¹⁾ +3.50%	196,137		197,840
TIF loan ^{(6) (7)}	1 hotel	June 2018	12.85%	8,098		8,098
Total				$	765,164	$	621,882

__________________


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


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


⁽³⁾	This mortgage loan has three one -year extension options beginning September 2015, subject to satisfaction of certain conditions.


⁽⁴⁾	This mortgage loan has three one -year extension options beginning March 2016, subject to satisfaction of certain conditions.


⁽⁵⁾	Our borrowing capacity under our senior credit facility is $150.0 million We have an option, subject to lender approval, to further expand the facility to an aggregate size of $300.0 million . We may use up to $15.0 million for standby letters of credit. The credit facility has two one -year extension options subject to advance notice, satisfaction of certain conditions and a 0.25% extension fee.


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


⁽⁷⁾	The interest expense from the TIF loan is offset against interest income recorded on the note receivable of the same amount. See Note 4.

On March 1, 2014, in connection with the acquisition of the Pier House Resort, we assumed the $69.0 million mortgage on the property.The mortgage loan bears interest at a rate of LIBOR + 4.9% . The stated maturity date of the mortgage loan is September 9, 2015, which may be extended by us for up to three consecutive one -year terms. The mortgage loan is secured by the Pier House Resort.

We are required to maintain certain financial ratios under our senior credit facility. If we violate covenants in any debt agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in our inability to borrow unused amounts under our line of credit, even if repayment of some or all of our borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of the consolidated group. Presently, our existing financial covenants are non-recourse and primarily relate to maintaining minimum debt coverage ratios. As of September 30, 2014 , we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

6. Income (Loss) Per Share

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Net income (loss) attributable to common shareholders – Basic and diluted:
Net income (loss) attributable to the Company	$	3,372		$	400	$	3,991		$	(393	)
Less: Dividends on common stock	(1,265		)	—		(3,793		)	—
Less: Dividends on unvested restricted shares	(5		)	—		(13		)	—
Less: (Income) loss from continuing operations allocated to unvested shares	(8		)	—		(1		)	—
Undistributed net income (loss) allocated to common shareholders	2,094			400		184			(393		)
Add back: Dividends on common stock	1,265			—		3,793			—
Distributed and undistributed net income (loss) - basic	3,359			400		3,977			(393		)
Net income attributable to redeemable noncontrolling interests in operating partnership	1,171			—		1,213			—
Distributed and undistributed net income (loss) - diluted	$	4,530		$	400	$	5,190		$	(393	)

Weighted average common shares outstanding:
Weighted average common shares outstanding - basic	25,298			16,045		24,310			16,045
Effect of unvested restricted shares	—			84		—			—
Effect of assumed conversion of operating partnership units	9,131			8,776		9,005			—
Weighted average common shares outstanding - diluted	34,429			24,905		33,315			16,045

Loss per share – basic:
Net loss allocated to common shareholders per share	$	0.13		$	0.02	$	0.16		$	(0.02	)
Loss per share – diluted:
Net loss allocated to common shareholders per share	$	0.13		$	0.02	$	0.16		$	(0.02	)

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Net income (loss) allocated to common shareholders is not adjusted for:
Income allocated to unvested restricted shares	$	13	$	—	$	14	$	—
Total	$	13	$	—	$	14	$	—
Weighted average diluted shares are not adjusted for:
Effect of unvested restricted shares	46		—		58		84
Effect of assumed conversion of operating partnership units	—		—		—		8,776
Total	46		—		58		8,860

7. Derivative Instruments

Interest Rate Derivatives —We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage the risks, we primarily use interest rate derivatives to hedge our debt as a way to potentially improve cash flows. The interest rate derivatives include interest rate caps, which are subject to master netting settlement arrangements. The maturities on these instruments range from March 2015 to March 2016. All derivatives are recorded at fair value.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

In 2014, we entered into an interest rate cap with a notional amount and strike rate of $80.0 million and 1.50% , respectively, which had an effective date of February 2014, a maturity date of March 2016 and total cost of $93,000 . The instrument was not designated as a cash flow hedge. This instrument caps the interest rate on our mortgage loan with a principal balance of $80.0 million and a maturity date of March 2016. In connection with the $69.0 million mortgage loan assumed in connection with the Pier House Resort acquisition, we acquired an interest rate cap with a notional amount and strike rate of $69.0 million and 1.80% , respectively, which had an effective date of September 2013 and a maturity date of September 2015.

8. Fair Value Measurements

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


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

•

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


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

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

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

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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



	Significant Other Observable Inputs (Level 2)		Total
September 30, 2014
Assets
Derivative assets:
Interest rate derivatives	$	50	$	50	⁽¹⁾



	Significant Other Observable Inputs (Level 2)		Total
December 31, 2013
Assets
Derivative assets:
Interest rate derivatives	$	—	$	—	⁽¹⁾

__________________


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

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

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



	Gain (Loss) Recognized in Income
	Three Months Ended September 30,							Nine Months Ended September 30,
	2014			2013				2014				2013
Assets
Derivative assets:
Interest rate derivatives	$	3	⁽¹⁾	$	(9	)	⁽¹⁾	$	(63	)	⁽¹⁾	$	(31	)	⁽¹⁾

__________________


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

9. Summary of Fair Value of Financial Instruments

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

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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



	September 30, 2014				December 31, 2013
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets measured at fair value:
Derivative assets	$	50	$	50	$	—	$	—
Financial assets not measured at fair value:
Cash and cash equivalents	$	182,782	$	182,782	$	143,776	$	143,776
Restricted cash	29,365		29,365		5,951		5,951
Accounts receivable	16,137		16,137		7,029		7,029
Note receivable	8,098		$10,440 to $11,539		8,098		$10,954 to $12,108
Due from related party, net	649		649		12		12
Due from third-party hotel managers	6,359		6,359		18,480		18,480
Financial liabilities not measured at fair value:
Indebtedness	$	765,164	$746,547 to $825,131		$	621,882	$615,880 to $680,710
Accounts payable and accrued expenses	28,440		28,440		17,279		17,279
Dividends payable	1,477		1,477		1,245		1,245
Due to Ashford Trust, net	3,815		3,815		13,042		13,042
Due to third-party hotel managers	980		980		649		649

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

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

Note receivable . Fair value of the note receivable was determined by using similar loans with similar collateral. Since there is very little to no trading activity, we had to rely on our internal analysis of what we believe a willing buyer would pay for this note at September 30, 2014 and December 31, 2013 . We estimated the fair value of the note receivable to be approximately 28.9% to 42.5% higher than the carrying value of $8.1 million at September 30, 2014 , and approximately 35.3% to 49.5% higher than the carrying value of $8.1 million at December 31, 2013 . This is considered a Level 2 valuation technique.

Derivative assets . Fair value of the interest rate derivatives are determined using the net present value of the expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of the Company and the counterparties. See Notes 2, 7 and 8 for a complete description of the methodology and assumptions utilized in determining fair values.

Indebtedness . Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. We estimated the fair value of the total indebtedness to be approximately 97.6% to 107.8% of the carrying value of $765.2 million at September 30, 2014 , and approximately 99.0% to 109.5% of the carrying value of $621.9 million at December 31, 2013 . This is considered a Level 2 valuation technique.

10. Redeemable Noncontrolling Interests in Operating Partnership

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

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

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

As of September 30, 2014 , we have issued a total of 355,000 LTIP units, none of which have reached full economic parity with the common units. Expense of $370,000 and $1.5 million was recognized for the three and nine months ended September 30, 2014 , respectively, of which $370,000 and $1.4 million , respectively, associated with LTIP units issued to Ashford Advisor’s employees is included in “Advisory services fee” and $49,000 associated with LTIP units issued to our independent directors is included in “Corporate general and administrative” expense in our consolidated statements of operations for the nine months ended September 30, 2014 . No expense was recognized during the three and nine months ended September 30, 2013 . As the LTIP units are issued to non-employees, the compensation expense was determined based on the share price as of the end of the period. The fair value of the unamortized LTIP units will be amortized over a period of 2.5 years.

During the three and nine months ended September 30, 2014 , no operating partnership units were presented for redemption or converted to shares of our common stock. Redeemable noncontrolling interests in Ashford Prime OP as of September 30, 2014 and December 31, 2013 were $135.1 million and $159.7 million , respectively, which represented ownership of our operating partnership of 25.77% and 35.26% , respectively. The carrying value of redeemable noncontrolling interests as of September 30, 2014 and December 31, 2013 included adjustments of $30.0 million and $56.0 million , respectively, to reflect the excess of redemption value over the accumulated historical costs. For the three and nine months ended September 30, 2014 , we allocated net income of $1.2 million and $1.2 million , respectively, to the redeemable noncontrolling interests. No net income/loss was allocated to redeemable noncontrolling interests for the three and nine months ended September 30, 2013 . We declared cash distributions to Ashford Prime OP unit holders of $456,000 and $1.4 million for the three and nine months ended September 30, 2014 , respectively. These distributions are recorded as a reduction of redeemable noncontrolling interests in operating partnership. No cash distributions were declared for the three and nine months ended September 30, 2013 .

11. Equity and Stock-Based Compensation

Equity Offering —On January 21, 2014, we commenced an underwritten public offering of 8.0 million shares of common stock at $16.50 per share for gross proceeds of $132.0 million . The offering closed on January 29, 2014. We granted the underwriters a 30 -day option to purchase up to an additional 1.2 million shares of common stock. On February 4, 2014, the underwriters fully exercised their option and purchased an additional 1.2 million shares of our common stock at a price of $16.50 per share. The net proceeds from the sale of the shares after underwriting discounts and offering expenses were approximately $143.9 million .

Dividends —Common stock dividends declared for the three and nine months ended September 30, 2014 were $1.3 million and $3.8 million , respectively. There were no dividends declared for the three and nine months ended September 30, 2013 .

Stock-Based Compensation —Stock-based compensation expense for both the three and nine months ended September 30, 2014 was $61,000 and $327,000 , respectively, of which $61,000 and $130,000 , respectively, is associated with shares of our common stock issued to Ashford Advisor’s employees and included in “Advisory services fee” and $197,000 is associated with shares of our common stock issued to our independent directors and included in “Corporate general and administrative” expense on our consolidated statements of operations for the nine months ended September 30, 2014 . There was no stock-based compensation expense for the three and nine months ended September 30, 2013 .

Noncontrolling Interests in Consolidated Entities —A partner had noncontrolling ownership interests of 25% in two hotel properties with a total carrying value of $(3.7) million and $(2.6) million , respectively at September 30, 2014 and December 31, 2013 . Loss from consolidated entities attributable to these noncontrolling interests was $154,000 and $741,000 for the three and nine months ended September 30, 2014 , respectively. Losses from consolidated entities attributable to these noncontrolling interests were $371,000 and $575,000 for the three and nine months ended September 30, 2013 , respectively.

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

12. Commitments and Contingencies

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

Management Fees —Under management agreements for our hotel properties existing at September 30, 2014 , we pay a) monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by our independent directors, if required. These management agreements expire from December 31, 2023 through December 31, 2041, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.

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

Income Taxes —We and our subsidiaries file income tax returns in the federal jurisdiction and various states and cities. Tax years 2010 through 2013 remain subject to potential examination by certain federal and state taxing authorities.

As part of our formation transactions in connection with the spin-off, AHT contributed its indirect interest in CHH III Tenant Parent Corp., the parent of the TRS lessees for two of our initial properties, which we elected to treat as a TRS. AHT also elected to treat CHH III Tenant Parent Corp. as a TRS.

In September 2010, the Internal Revenue Service (“IRS”) completed an audit of CHH for the tax year ended December 31, 2007. The IRS issued a notice of proposed adjustment based on Section 482 of the Internal Revenue Code that reduced the amount of rent AHT charged CHH. AHT owned a 75% interest in the hotel properties and CHH. In connection with the CHH audit, the IRS selected AHT for audit for the same tax year. In October 2011, the IRS issued an income tax adjustment to AHT as an alternative to the CHH proposed adjustment. The AHT adjustment was based on the REIT 100% federal excise tax on its share of the amount by which the rent was held to be greater than the arm’s length rate. AHT strongly disagreed with the IRS’ position and appealed its cases to the IRS Appeals Office. In determining amounts payable by CHH under its leases, AHT engaged a third party to prepare a transfer pricing study which concluded that the lease terms were consistent with arms’ length terms as required by applicable Treasury regulations. AHT believed the IRS transfer pricing methodologies applied in the audits contained flaws and that the IRS adjustments to the rent charged were inconsistent with the U.S. federal tax laws related to REITs and true leases. The IRS Appeals Office reviewed the AHT and CHH cases in 2012. In July 2013, the IRS Appeals Office issued “no-change letters” for CHH and AHT indicating that the 2007 tax returns were accepted as filed and the examinations resulted in no deficiencies. The statute of limitations for IRS assessments relating to the 2007 tax returns expired on March 31, 2014.

In June 2012, the IRS completed audits of CHH and AHT for the tax years ended December 31, 2008 and 2009. With respect to the 2009 tax year, the IRS has not proposed any adjustments to CHH or AHT. For the 2008 tax year, the IRS issued notices of proposed adjustments for both AHT and CHH. The AHT adjustment was for $3.3 million of U.S. federal excise taxes and represented the amount by which the IRS asserted that the rent charged to CHH was greater than the arms’ length rate pursuant to IRC Section 482. The CHH adjustment was for $1.6 million of additional income, which would have resulted in approximately $467,000 of additional U.S. federal income taxes and potential state income taxes of $83,000 , net of federal benefit. The CHH adjustment represented the IRS’ imputation of compensation to CHH under IRC Section 482 for agreeing to be a party to the lessor entity’s bank loan agreement. Until the spin-off, AHT owned a 75% interest in the lessor entity. AHT strongly disagreed with both of the IRS adjustments for the reasons noted under the 2007 audits, and in addition, AHT believed the IRS misinterpreted certain terms of the lease, third-party hotel management agreements, and bank loan agreements. AHT appealed the cases to the IRS Appeals Office, and the IRS assigned the same Appeals team that oversaw the 2007 cases to the 2008 cases. AHT’s representatives attended the Appeals conferences for the 2008 cases in August 2013 and in February, April and May of 2014. In August 2014, AHT reached a final settlement with the IRS Appeals Office resolving all issues that arose in the 2008 audits of CHH and AHT. In connection

Table of Contents

ASHFORD HOSPITALITY PRIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Continued)

with the settlement, AHT agreed to an adjustment to reduce the TRS rent expense and thereby increase CHH’s taxable income by $660,000 . However, due to net operating losses available for utilization by CHH in the 2008 tax year and the expiration of the statute of limitations for the 2009 CHH tax year, the IRS Appeals Office issued “no-change letters” for CHH and AHT indicating that the examinations resulted in no deficiencies. U.S. federal income tax assessment statutes of limitations generally limit the time the IRS has to make assessments to within three years after a return is due or filed, whichever is later. As a result, the IRS requested and AHT agreed to extend the assessment statute of limitations for both CHH and AHT for the 2008 tax year to December 31, 2014. Accordingly, the IRS will have the right to reopen the cases until December 31, 2014. However, the IRS typically only reopens closed cases in very limited circumstances, none of which AHT believes are applicable to its cases. As part of the separation and distribution, Ashford Trust agreed to indemnify us and CHH for (i) any expenses incurred in connection with the audits and (ii) any additional taxes, interest or penalty incurred upon resolution of the audit and any tax liability incurred as a result of such indemnity payment. However, if Ashford Trust is unable to pay the amounts required under the indemnity for any reason, we, through our ownership of CHH, would bear the burden of the additional taxes, interest and penalties owed by CHH.

13. Segment Reporting

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

14. Subsequent Events

On October 27, 2014, our Board of Directors approved a share repurchase program under which the Company may purchase up to $100.0 million of the Company’s common stock from time to time beginning on November 4, 2014. The specific timing, manner, price, amount and other terms of the repurchases will be at management’s discretion and will depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason.

Table of Contents

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

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

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

FORWARD-LOOKING STATEMENTS

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


•	our business and investment strategy;


•	our projected operating results and dividend rates;


•	our ability to obtain future financing arrangements;


•	our understanding of our competition;


•	market trends;


•	projected capital expenditures;


•	anticipated acquisitions or dispositions; and


•	the impact of technology on our operations and business.

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

•

factors discussed in our Form 10-K for the year ended December 31, 2013 , as filed with the Securities and Exchange commission on March 31, 2014 (the “ 2013 10-K”), including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties,” as updated in our subsequent Quarterly Reports on Form 10-Q;


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


•	our ability to deploy the capital contributions we received in the spin-off and raise additional capital at reasonable costs to repay debts, invest in our properties and fund future acquisitions;


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


•	the degree and nature of our competition;


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


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


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

Table of Contents


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


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

When considering forward looking statements, you should keep in mind the matters summarized under “Item 1A. Risk Factors” of our 2013 10-K and any subsequent updates to this disclosure in our Quarterly Reports on Form 10-Q, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our actual results and performance to differ significantly from those contained in our forward looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law.

Overview

We are an externally-advised Maryland corporation that invests primarily in high revenue per available room (“RevPAR”), luxury, upper-upscale and upscale hotels. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Two times the U.S. national average was $137 for the year ended December 31, 2013 . We elected to be taxed as a REIT under the Internal Revenue Code beginning in the year ended December 31, 2013. We conduct our business and own substantially all of our assets through our operating partnership, Ashford Prime OP.

We were formed as a Maryland corporation in April 2013 and became a public company on November 19, 2013 when Ashford Trust, a NYSE-listed REIT, completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. As of November 5, 2014, Ashford Trust beneficially owned common units of Ashford Prime OP representing 14.4% of our company on a fully-diluted basis.

We operate in the direct hotel investment segment of the hotel lodging industry. As of November 5, 2014 , we owned interests in ten hotels in six states and the District of Columbia with 3,707 total rooms, or 3,472 net rooms, excluding those attributable to our partner. The hotels in our current portfolio are predominantly located in U.S. gateway markets with favorable growth characteristics resulting from multiple demand generators. We own eight of our hotel properties directly, and the remaining two hotel properties through an investment in a majority-owned consolidated entity.

We are advised by Ashford Advisor, which is staffed by Ashford Trust’s officers and employees, through an advisory agreement. All of the hotels in our portfolio are currently asset-managed by Ashford Advisor. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford Advisor.

Recent Developments

In the first quarter of 2014, we conducted an underwritten public offering of a total of 9.2 million shares of common stock at $16.50 per share for net proceeds of approximately $143.9 million .

On February 24, 2014, we completed the acquisition of the Sofitel Chicago Water Tower in Chicago, Illinois for an aggregate purchase price of $153.0 million in cash. On February 24, 2014, to fund a portion of our acquisition of the Sofitel Chicago Water Tower, we completed the financing for an $80.0 million mortgage loan.

On March 1, 2014, we closed our acquisition of the Pier House Resort from Ashford Trust for total consideration of $92.7 million. We assumed the $69.0 million mortgage on the property and paid the balance of the purchase price with cash from our underwritten public offering.

On May 13, 2014, the independent directors of the Company approved an amended and restated advisory agreement with Ashford Advisor, effective as of January 1, 2014. The amendments, among other things, permit Ashford Advisor to have other advisory clients, extend the term of the advisory agreement and modify certain terms of the annual incentive fee and the termination fee.

Table of Contents

On October 27, 2014, our Board of Directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time beginning on November 4, 2014. The specific timing, manner, price, amount and other terms of the repurchases will be at management’s discretion and will depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. We believe that the public market continues to value the Company at a discount to its private market value, and that buying back our common stock will result in value creation for our shareholders.

Discussion of Presentation

The discussion below relates to the financial condition and results of operation of Ashford Prime. For periods prior to the spin-off, the combined consolidated historical financial statements have been prepared on a “carve-out” basis from Ashford Trust’s consolidated financial statements using the historical results of operations, cash flows, assets and liabilities attributable to the eight initial properties we acquired from Ashford Trust in connection with the spin-off and include allocations of income, expenses, assets and liabilities from Ashford Trust. These allocations reflect significant assumptions, and the financial statements do not fully reflect what our financial positions, results of operations and cash flows would have been had we been a stand-alone publicly traded company owning the eight initial properties during all periods presented. As a result, historical financial information is not necessarily indicative of our future results of operations, financial positions and cash flows.

Corporate general and administrative expense represents an allocation of certain Ashford Trust corporate general and administrative costs including salaries and benefits, stock based compensation, legal and professional fees, rent expense and office expenses. Any expenses that were determined to be directly related to any hotel property or specific transaction were allocated directly to the related hotel. However, any indirect costs were allocated pro rata across all hotels owned by Ashford Trust, including the eight initial properties contributed to us, based on the gross investment value for all such hotels. Indirect costs are primarily attributable to certain ownership costs related to specific hotel properties but paid by Ashford Trust. Indirect costs are included in “Other expenses” in the consolidated and combined consolidated financial statements. Additionally, interest income reflects earnings on amounts held as reserves by lenders and property managers.

Key Indicators of Operating Performance

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


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

•

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

•

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

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

Table of Contents

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue comprised approximately 77% and 74% of our total hotel revenue for the three and nine months ended September 30, 2014 , respectively, and is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.

We also use FFO, AFFO, EBITDA and Adjusted EBITDA as measures of the operating performance of our business. See “Non-GAAP Financial Measures.”

LIQUIDITY AND CAPITAL RESOURCES

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


•	advisory fees payable to Ashford Advisor;


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


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


•	distributions necessary to qualify for taxation as a REIT; and


•	capital expenditures to improve our hotels.

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

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

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

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

As noted above, on October 27, 2014, our Board of Directors approved a share repurchase program under which the Company may purchase up to $100 million of the Company’s common stock from time to time beginning on November 4, 2014. The specific timing, manner, price, amount and other terms of the repurchases will be at management’s discretion and will depend on market conditions, corporate and regulatory requirements and other factors. The Company is not required to repurchase shares under the repurchase program, and may modify, suspend or terminate the repurchase program at any time for any reason. The Company intends to sell the Philadelphia Courtyard Downtown and may also consider selling other hotels in its portfolio. The net proceeds of such sales may be used to fund the share repurchase program.

Table of Contents

Revolving Credit Facility

Concurrently with completion of the spin-off, on November 19, 2013, we entered into a three-year, $150 million secured revolving credit facility, which we believe will provide us with significant financial flexibility to fund future acquisitions and hotel redevelopments.

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

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

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

•

Consolidated indebtedness (less cash and cash equivalents and amounts represented by marketable securities) to EBITDA not to exceed 7.00x initially, with such ratio being reduced beginning December 1, 2014 to 6.5x and beginning December 1, 2015 to 5.75x; provided however, that a one-time allowance will be made if we are out of compliance with such covenant by an amount of 0.50x for the first three fiscal quarters following a significant acquisition occurring after November 30, 2014. Our ratio was 5.85x at September 30, 2014 .


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


•	Consolidated fixed charge coverage ratios not less than 1.15x initially, with such ratio being increased beginning December 1, 2014 to 1.25x and beginning December 1, 2015 to 1.35x. Our ratio was 1.55x at September 30, 2014 .


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


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


•	Secured debt that is secured by real property (excluding the eight hotels we acquired in connection with the spin-off and, if we exercise our option to acquire it, the Crystal Gateway Marriott) not to exceed 70% of the as–is appraised value of such real property.

All financial covenants are tested and certified by the borrower on a quarterly basis. The amounts and effects of the Pier House Resort acquisition will be excluded in the calculation of the financial covenants for the first four quarters following such acquisition. We were in compliance with all covenants at September 30, 2014 .

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

Borrowings under the credit facility bear interest, at our option, at either LIBOR for a designated interest period plus an applicable margin, or the base rate (as defined in the credit agreement) plus an applicable margin. The applicable margin for borrowings under the credit facility for base rate loans range from 1.25% to 2.75% per annum and the applicable margin for borrowings under the credit facility for LIBOR loans range from 2.25% to 3.75% per annum, depending on the ratio of consolidated indebtedness to EBITDA described above, with the lowest rate applying if such ratio is less than 4x, and the highest rate applying if such ratio is greater than 6.5x.

The facility is a three-year interest-only facility with all outstanding principal being due at maturity, subject to two one-year extension options and certain terms and conditions. The credit facility has an accordion feature whereby the aggregate commitments may be expanded up to $300 million, subject to certain terms and conditions. No amounts were drawn under the facility as of September 30, 2014 .

Table of Contents

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

Sources and Uses of Cash

As of September 30, 2014 , we had $182.8 million of cash and cash equivalents, compared to $143.8 million at December 31, 2013 . We anticipate that our principal sources of funds to meet our cash requirements will include cash on hand, positive cash flow from operations and capital market activities.

Net Cash Flows Provided by Operating Activities . Net cash flows from operating activities were inflows of $40.3 million and $30.5 million for the nine months ended September 30, 2014 and 2013 , respectively. Cash flows from operations are impacted by changes in hotel operations as well as changes in restricted cash due to the timing of cash deposits for certain loans as well as the timing of collecting receivables from hotel guests, paying vendors, settling with related parties and settling with hotel managers.

During the nine months ended September 30, 2014 , we reimbursed Ashford Trust $13.6 million for transaction costs from the spin-off.

Net Cash Flows Used in Investing Activities . For the nine months ended September 30, 2014 , investing activities used net cash flows of $208.2 million . These cash outlays were primarily attributable to cash outflows of $169.6 million attributable to the acquisitions of the Chicago Sofitel and the Pier House Resort, $17.8 million of capital improvements made to various hotel properties and $20.8 million of net deposits to restricted cash for capital expenditures. Previously, this cash was held in accounts in the name of a third-party hotel manager and included in “Due from third party hotel managers” as of December 31, 2013 on our consolidated balance sheet. As of September 30, 2014 , this cash is held in accounts in our name and is classified as “Restricted cash” on our consolidated balance sheet. For the nine months ended September 30, 2013 , investing activities used net cash flows of $17.4 million . These cash outlays were attributable to capital improvements made to various hotel properties.

Net Cash Flows Provided by (Used in) Financing Activities. For the nine months ended September 30, 2014 , net cash flows provided by financing activities were $206.9 million . Cash inflows primarily consisted of net proceeds of $143.9 million from our underwritten public offering and borrowings on indebtedness of $80.0 million . These inflows were partially offset by cash outlays of $5.9 million for repayments of indebtedness, $4.7 million for payments of dividends, $1.1 million for payments of spin-off costs, payments of loan costs and exit fees of $3.3 million , $2.0 million for distributions to noncontrolling interests in our consolidated entities and payments for derivatives of $93,000 . For the nine months ended September 30, 2013 , net cash flows used in financing activities were $19.4 million . Cash outlays primarily consisted of $146.7 million for repayments of indebtedness, $15.7 million for distributions to noncontrolling interests in our consolidated entities, $78.1 million of distributions to Ashford Trust and payments of loan costs and exit fees of $2.8 million . These outflows were partially offset by borrowings on indebtedness of $199.9 million and contributions from Ashford Trust of $24.1 million .

Table of Contents

RESULTS OF OPERATIONS

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

The following table summarizes the changes in key line items from our statements of operations for the three months ended September 30, 2014 and 2013 (in thousands except percentages):



	Three Months Ended September 30,
	2014			2013			$ Change			% Change
Revenue
Rooms	$	65,253		$	47,184		$	18,069		38.3	%
Food and beverage	15,886			11,014			4,872			44.2
Other	3,615			2,762			853			30.9
Total hotel revenue	84,754			60,960			23,794			39.0
Other	30			—			30
Total revenue	84,784			60,960			23,824			39.1
Expenses
Hotel operating expenses:
Rooms	14,039			10,330			3,709			35.9
Food and beverage	11,118			8,045			3,073			38.2
Other expenses	23,079			16,997			6,082			35.8
Management fees	3,497			2,679			818			30.5
Total hotel expenses	51,733			38,051			13,682			36.0
Property taxes, insurance and other	4,076			3,000			1,076			35.9
Depreciation and amortization	10,657			7,767			2,890			37.2
Advisory services fee	3,117			—			3,117
Transaction costs	45			—			45
Corporate general and administrative	458			2,777			(2,319		)	(83.5	)
Total expenses	70,086			51,595			18,491			35.8
Operating income	14,698			9,365			5,333			56.9
Interest income	10			5			5			100.0
Interest expense and amortization of loan costs	(10,137		)	(8,380		)	1,757			21.0
Unrealized gain (loss) on derivatives	3			(9		)	12			133.3
Income before income taxes	4,574			981			3,593			366.3
Income tax expense	(185		)	(952		)	(767		)	(80.6	)
Net income	4,389			29			4,360			15,034.5
Loss from consolidated entities attributable to noncontrolling interests	154			371			(217		)	(58.5	)
Net income attributable to redeemable noncontrolling interests in operating partnership	(1,171		)	—			(1,171		)
Net income attributable to the Company	$	3,372		$	400		$	2,972		743.0	%

Table of Contents

Net income represents the operating results of our hotel properties for the three months ended September 30, 2014 and 2013 . The results of the Chicago Sofitel are included since its acquisition on February 24, 2014 and the results of the Pier House Resort are included since its acquisition on March 1, 2014. The following table illustrates the key performance indicators of our hotels for the periods indicated:



	Three Months Ended September 30,
	2014			2013
Occupancy	86.61		%	84.97		%
ADR (average daily rate)	$	220.93		$	201.62
RevPAR (revenue per available room)	$	191.33		$	171.32
Rooms revenue (in thousands)	$	65,253		$	47,184
Total hotel revenue (in thousands)	$	84,754		$	60,960

Net income attributable to the Company. Net income attributable to the Company in creased $3.0 million , or 743.0% to $3.4 million as a result of the factors discussed below.

Rooms Revenue . Rooms revenue from our hotels in creased $18.1 million , or 38.3% , to $65.3 million during the three months ended September 30, 2014 (the “ 2014 quarter ”) compared to the three months ended September 30, 2013 (the “ 2013 quarter ”). During the 2014 quarter , we experienced a 164 basis point in crease in occupancy and a 9.6% in crease in room rates as the economy continued to improve. Rooms revenue increased $11.8 million as a result of the acquisitions of the Chicago Sofitel and the Pier House Resort during 2014 . Rooms revenue also increased (i) $1.5 million at the Seattle Marriott Waterfront as a result of 15.1% higher room rates and a 296 basis point increase in occupancy at the hotel; (ii) $1.3 million at the San Francisco Courtyard Downtown as a result of 13.2% higher room rates and a 227 basis point increase in occupancy at the hotel; (iii) $1.0 million at the Capital Hilton as a result of 14.8% higher room rates; (iv) $807,000 at the Seattle Courtyard Downtown as a result of 17.6% higher room rates and a 161 basis point increase in occupancy at the hotel; (v) $531,000 at the Philadelphia Courtyard Downtown as a result of 5.7% higher room rates and a 251 basis point increase in occupancy at the hotel; (vi) $507,000 at the Plano Marriott Legacy Town Center as a result of major renovation at this hotel in 2013; and (vii) $371,000 at the Hilton La Jolla Torrey Pines as a result of 9.0% higher room rates. We also experienced a modest increase in rooms revenue of $184,000 at the Tampa Renaissance as a result of a 389 basis point increase in occupancy and a 1.5% increase in room rates.

Food and Beverage Revenue . Food and beverage revenues from our hotels in creased $4.9 million , or 44.2% , to $15.9 million during the 2014 quarter . This in crease is primarily attributable to an increase in total food and beverage revenue of $3.5 million in the 2014 quarter as a result of the acquisitions of the Chicago Sofitel and the Pier House Resort in 2014 and higher food and beverage revenues of $692,000 at the Plano Marriott Legacy Town Center as a result of a major renovation in 2013, $644,000 at the Capital Hilton and the Hilton La Jolla Torrey Pines as a result of increased catering at these hotels in the 2014 quarter and $177,000 at the Tampa Renaissance and Seattle Courtyard Downtown as a result of increased occupancy at these hotels in the 2014 quarter . These increases were partially offset by lower food and beverage revenue of $134,000 at the Philadelphia Courtyard Downtown, the Seattle Marriott Waterfront and the San Francisco Courtyard Downtown as a result of a decrease in catering at these hotels in the 2014 quarter .

Other Hotel Revenue . Other hotel revenue, which consists mainly of telecommunications, parking and rentals, in creased $853,000 , or 30.9% , to $3.6 million , primarily attributable to the acquisitions of the Chicago Sofitel and the Pier House Resort in 2014 . These increases were partially offset by lower other revenue at the Seattle Marriott Waterfront, the Capital Hilton and the Seattle Courtyard Downtown.

Other Non-Hotel Revenue . Other non-hotel revenue was $30,000 in the 2014 quarter . There was no other non-hotel revenue in the 2013 quarter .

Rooms Expense . Rooms expense in creased $3.7 million , or 35.9% , to $14.0 million in the 2014 quarter . The in crease is attributable to increased rooms revenue. Rooms margin in creased 40 basis points from 78.1% to 78.5% .

Food and Beverage Expense . Food and beverage expense in creased $3.1 million , or 38.2% , to $11.1 million during the 2014 quarter . The increase is attributable to increased food and beverage revenue.

Other Operating Expenses . Other operating expenses in creased $6.1 million , or 35.8% , to $23.1 million in the 2014 quarter . Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced an in crease of $378,000 in direct expenses and an in crease of $5.7 million in indirect expenses and incentive management fees in the 2014 quarter . The direct expenses were

Table of Contents

1.8% of total hotel revenue for the 2014 quarter and 1.8% for the 2013 quarter . The increase in indirect expenses is primarily attributable to higher incentive management fees, general and administrative costs, marketing costs and repair and maintenance costs.

Management Fees . Base management fees in creased $818,000 , or 30.5% , to $3.5 million in the 2014 quarter as a result of higher hotel revenue in the 2014 quarter .

Property Taxes, Insurance and Other . Property taxes, insurance and other in creased $1.1 million , or 35.9% , to $4.1 million in the 2014 quarter . The increase is primarily attributable to the acquisitions of the Chicago Sofitel and the Pier House Resort in 2014 and higher accruals based on higher estimated property tax value assessments.

Depreciation and Amortization . Depreciation and amortization in creased $2.9 million , or 37.2% , to $10.7 million for the 2014 quarter due to the acquisitions of the Chicago Sofitel and the Pier House Resort in 2014 and capital expenditures incurred since September 30, 2013 .

Advisory Services Fee. We recorded an advisory services fee of $3.1 million to Ashford Advisor in the 2014 quarter , which was comprised of a base advisory fee of $2.2 million , equity-based compensation of $431,000 associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Advisor in connection with providing advisory services, reimbursable overhead and internal audit costs of $400,000 , and insurance advisory costs of $37,000 .

Transaction Costs. We recorded transaction costs of $45,000 related to the acquisitions of the Chicago Sofitel and the Pier House Resort.

Corporate General and Administrative . Corporate general and administrative expenses de creased $2.3 million , or 83.5% , to $458,000 in the 2014 quarter . Corporate general and administrative expenses primarily consist of public company costs and professional fees. Prior to the spin-off, corporate general and administrative expense represented an allocation of certain AHT corporate general and administrative costs including salaries and benefits, stock-based compensation, legal and professional fees, rent expense, insurance expense and office expenses. The costs were allocated based on the pro rata share of our undepreciated gross investments in hotel properties in relation to AHT’s undepreciated gross investments in hotel properties for all indirect costs.

Interest Income . Interest income in creased $5,000 , or 100.0% , to $10,000 for the 2014 quarter .

Interest Expense and Amortization of Loan Costs . Interest expense and amortization of loan costs in creased $1.8 million , or 21.0% , to $10.1 million for the 2014 quarter as a result of the acquisitions of the Chicago Sofitel and the Pier House Resort in 2014 , partially offset by a lower weighted average interest rate. The average LIBOR rates for the 2014 quarter and the 2013 quarter were 0.15% and 0.19% , respectively.

Unrealized Gain (Loss) on Derivatives . Unrealized gain (loss) on derivatives in creased $12,000 , from a loss of $9,000 to a gain of $3,000 . Unrealized gain (loss) on derivatives represents unrealized gains or losses on our interest rate caps. The fair value of the interest rate caps is primarily based on movements in the LIBOR forward curve and the passage of time.

Income Tax Expense . Income tax expense de creased $767,000 , or 80.6% , to $185,000 . The de crease in tax expense in the 2014 quarter is primarily due to the utilization of a TRS net operating loss in the 2014 quarter that was generated after the spin-off during the period from November 19, 2013 through December 31, 2013.

Loss from Consolidated Entities Attributable to Noncontrolling Interests . The noncontrolling interest partners in consolidated entities were allocated losses of $154,000 and $371,000 for the 2014 quarter and the 2013 quarter , respectively. At September 30, 2014 , noncontrolling interests in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.

Net Income Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net income of $1.2 million for the 2014 quarter . Redeemable noncontrolling interests represented ownership interests of 25.77% as of September 30, 2014 . No income was allocated during the 2013 quarter as there were no noncontrolling interests in the operating partnership prior to our spin-off from Ashford Trust.

Table of Contents

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

The following table summarizes the changes in key line items from our statements of operations for the nine months ended September 30, 2014 and 2013 (in thousands except percentages):



	Nine Months Ended September 30,
	2014			2013			$ Change			% Change
Revenue
Rooms	$	171,484		$	132,852		$	38,632		29.1	%
Food and beverage	49,488			37,799			11,689			30.9
Other	9,494			7,737			1,757			22.7
Total hotel revenue	230,466			178,388			52,078			29.2
Other	91			—			91
Total revenue	230,557			178,388			52,169			29.2
Expenses
Hotel operating expenses:
Rooms	38,564			30,183			8,381			27.8
Food and beverage	32,377			25,323			7,054			27.9
Other expenses	60,078			46,599			13,479			28.9
Management fees	9,408			7,651			1,757			23.0
Total hotel expenses	140,427			109,756			30,671			27.9
Property taxes, insurance and other	12,127			8,705			3,422			39.3
Depreciation and amortization	30,136			22,864			7,272			31.8
Advisory services fee	9,256			—			9,256
Transaction costs	1,871			—			1,871
Corporate general and administrative	2,453			9,222			(6,769		)	(73.4	)
Total expenses	196,270			150,547			45,723			30.4
Operating income	34,287			27,841			6,446			23.2
Interest income	20			19			1			5.3
Interest expense and amortization of loan costs	(29,159		)	(24,571		)	4,588			18.7
Write-off of loan costs and exit fees	—			(1,971		)	(1,971		)	(100.0	)
Unrealized loss on derivatives	(63		)	(31		)	32			103.2
Income before income taxes	5,085			1,287			3,798			295.1
Income tax expense	(622		)	(2,255		)	(1,633		)	(72.4	)
Net income (loss)	4,463			(968		)	5,431			561.1
Loss from consolidated entities attributable to noncontrolling interests	741			575			166			28.9
Net income attributable to redeemable noncontrolling interests in operating partnership	(1,213		)	—			(1,213		)
Net income (loss) attributable to the Company	$	3,991		$	(393	)	$	4,384		1,115.5	%

Table of Contents

Net income (loss) represents the operating results of our hotel properties for the nine months ended September 30, 2014 and 2013 . The results of the Chicago Sofitel are included since its acquisition on February 24, 2014 and the results of the Pier House Resort are included since its acquisition on March 1, 2014. The following table illustrates the key performance indicators of our hotels for the periods indicated:



	Nine Months Ended September 30,
	2014			2013
Occupancy	82.53		%	80.77		%
ADR (average daily rate)	$	211.90		$	201.33
RevPAR (revenue per available room)	$	174.87		$	162.61
Rooms revenue (in thousands)	$	171,484		$	132,852
Total hotel revenue (in thousands)	$	230,466		$	178,388

Net income (loss) attributable to the Company. Net income attributable to the Company increased $4.4 million , or 1,115.5% from a net loss of $393,000 to net income of $4.0 million as a result of the factors discussed below.

Rooms Revenue . Rooms revenue from our hotels in creased $38.6 million , or 29.1% , to $171.5 million during the nine months ended September 30, 2014 (the “ 2014 period ”) compared to the nine months ended September 30, 2013 (the “ 2013 period ”). During the 2014 period , we experienced a 176 basis point in crease in occupancy and a 5.3% in crease in room rates as the economy continued to improve. Rooms revenue increased $28.1 million as a result of the acquisitions of the Chicago Sofitel and the Pier House Resort during the 2014 period . Rooms revenue also increased (i) $3.0 million at the San Francisco Courtyard Downtown primarily as a result of 14.6% higher room rates at the hotel; (ii) $2.4 million at the Hilton La Jolla Torrey Pines as a result of a major renovation at the hotel in 2013; (iii) $2.2 million at the Seattle Marriott Waterfront as a result of 11.0% higher room rates and a 193 basis point increase in occupancy at the hotel; (iv) $1.6 million at the Seattle Courtyard Downtown as a result of 11.4% higher room rates and a 544 basis point increase in occupancy at the hotel; (v) $888,000 at the Plano Marriott Legacy Town Center as a result of major renovations at the hotel in 2013; (vi) $770,000 at the Tampa Renaissance as a result of 5.1% higher room rates and a 291 basis point increase in occupancy at the hotel; and (vii) $281,000 at the Capital Hilton as a result of 2.4% higher room rates at the hotel. These increases were partially offset by lower rooms revenue of $552,000 million at the Philadelphia Courtyard as the result of a major renovation at that hotel in the first quarter of 2014 and overall market conditions in the Philadelphia market during the second quarter of 2014.

Food and Beverage Revenue . Food and beverage revenues from our hotels in creased $11.7 million , or 30.9% , to $49.5 million during the 2014 period . This in crease is primarily attributable to an increase in total food and beverage revenue of $8.7 million as a result of the acquisitions of the Chicago Sofitel and the Pier House Resort in the 2014 period and higher food and beverage revenue of $1.3 million at the Hilton La Jolla Torrey Pines and $852,000 at the Plano Marriott Legacy Town Center as a result of major renovations at those hotels in the 2013 period and $101,000 at the Philadelphia Courtyard as a result of increased catering at this hotel. Additional increases resulted from higher food and beverage revenue of $620,000 at the Tampa Renaissance, the Seattle Courtyard Downtown and the Seattle Marriott Waterfront as a result of increased occupancy at these hotels in the 2014 period . These increases were partially offset by lower food and beverage revenue of $35,000 at the Capital Hilton, which was primarily attributable to the presidential inauguration in the 2013 period and a decrease in catering during the second quarter of 2014, offset by increased catering during the third quarter of 2014.

Other Hotel Revenue . Other hotel revenue, which consists mainly of telecommunications, parking and rentals, in creased $1.8 million , or 22.7% , to $9.5 million , primarily attributable to the acquisitions of the Chicago Sofitel and the Pier House Resort in the 2014 period and higher other revenue at the Hilton La Jolla Torrey Pines as a result of a major renovation at that hotel in the 2013 period . These increases were partially offset by lower other revenue at the Seattle Marriott Waterfront and the Capital Hilton.

Other Non-Hotel Revenue . Other non-hotel revenue was $91,000 in the 2014 period . There was no other non-hotel revenue in the 2013 period .

Rooms Expense . Rooms expense in creased $8.4 million , or 27.8% , to $38.6 million in the 2014 period . The in crease is attributable to increased rooms revenue. Rooms margin in creased 20 basis points from 77.3% to 77.5% .

Food and Beverage Expense . Food and beverage expense in creased $7.1 million , or 27.9% , to $32.4 million during the 2014 period . The increase is attributable to increased food and beverage revenue.

Table of Contents

Other Operating Expenses . Other operating expenses in creased $13.5 million , or 28.9% , to $60.1 million in the 2014 period . Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced an in crease of $875,000 in direct expenses and an in crease of $12.6 million in indirect expenses and incentive management fees in the 2014 period . The direct expenses were 1.7% of total hotel revenue for the 2014 period and 1.8% for the 2013 period . The in crease in indirect expenses is primarily attributable to higher marketing costs, general and administrative costs, incentive management fees, repairs and maintenance costs and energy costs.

Management Fees . Base management fees in creased $1.8 million , or 23.0% , to $9.4 million in the 2014 period as a result of higher hotel revenue in the 2014 period .

Property Taxes, Insurance and Other . Property taxes, insurance and other in creased $3.4 million , or 39.3% , to $12.1 million in the 2014 period . The increase is primarily attributable to the acquisitions of the Chicago Sofitel and the Pier House Resort in the 2014 period and higher accruals based on higher estimated property tax value assessments.

Depreciation and Amortization . Depreciation and amortization in creased $7.3 million , or 31.8% , to $30.1 million for the 2014 period due to the acquisitions of the Chicago Sofitel and the Pier House Resort in the 2014 period and capital expenditures incurred since September 30, 2013 .

Advisory Services Fee. We recorded an advisory services fee of $9.3 million to Ashford Advisor in the 2014 period , which was comprised of a base advisory fee of $6.5 million , equity-based compensation of $1.5 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Advisor in connection with providing advisory services, reimbursable overhead, internal audit and asset management costs of $1.2 million and insurance advisory costs of $37,000 .

Transaction Costs. We recorded transaction costs of $1.9 million related to the acquisitions of the Chicago Sofitel and the Pier House Resort, as well as our spin-off from Ashford Trust.

Corporate General and Administrative . Corporate general and administrative expenses de creased $6.8 million , or 73.4% , to $2.5 million in the 2014 period . Corporate general and administrative expenses primarily consist of public company costs and professional fees. Prior to the spin-off, corporate general and administrative expense represented an allocation of certain AHT corporate general and administrative costs including salaries and benefits, stock-based compensation, legal and professional fees, rent expense, insurance expense and office expenses. The costs were allocated based on the pro rata share of our undepreciated gross investments in hotel properties in relation to AHT’s undepreciated gross investments in hotel properties for all indirect costs.

Interest Income . Interest income in creased $1,000 , or 5.3% , to $20,000 for the 2014 period .

Interest Expense and Amortization of Loan Costs . Interest expense and amortization of loan costs in creased $4.6 million , or 18.7% , to $29.2 million for the 2014 period as a result of the acquisitions of the Chicago Sofitel and the Pier House Resort in the 2014 period , as well as the refinancing of our $141.7 million mortgage loan in the 2013 period , partially offset by a lower weighted average interest rate. The average LIBOR rates for the 2014 period and the 2013 period were 0.15% and 0.19% , respectively.

Write-off of Loan Costs and Exit Fees . In the 2014 period , we did not incur any write-offs of loan costs. In the 2013 period , we wrote off unamortized loan costs of $472,000 and incurred additional loan costs of $1.5 million in connection with the refinancing of our $141.7 million mortgage loan due August 2013, which had an outstanding balance of $141.0 million. The mortgage loan was replaced with a $199.9 million mortgage loan due February 2018.

Unrealized Loss on Derivatives . Unrealized loss on derivatives in creased $32,000 , or 103.2% , to $63,000 . Unrealized loss on derivatives represents unrealized losses on our interest rate caps. The fair value of the interest rate caps is primarily based on movements in the LIBOR forward curve and the passage of time.

Income Tax Expense . Income tax expense de creased $1.6 million , or 72.4% , to $622,000 . The de crease in tax expense in the 2014 period is primarily due to the utilization of a TRS net operating loss in the 2014 period that was generated after the spin-off during the period from November 19, 2013 through December 31, 2013.

Loss from Consolidated Entities Attributable to Noncontrolling Interests . The noncontrolling interest partners in consolidated entities were allocated losses of $741,000 and $575,000 for the 2014 period and the 2013 period , respectively. At September 30, 2014 , noncontrolling interests in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.

Table of Contents

represented ownership interests of 25.77% as of September 30, 2014 . No income was allocated during the 2013 period as there were no noncontrolling interests in the operating partnership prior to our spin-off from Ashford Trust.

Seasonality

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

Contractual Obligations and Commitments

There have been no material changes since December 31, 2013 , outside of the ordinary course of business, to contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2013 10-K.

Off-Balance Sheet Arrangements

We currently have no off-balance-sheet arrangements with any party.

Critical Accounting Policies

Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2013 10-K. There have been no material changes in these critical accounting policies.

Non-GAAP Financial Measures

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

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

Table of Contents

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss)	$	4,389		$	29		$	4,463		$	(968	)
Loss from consolidated entities attributable to noncontrolling interests	154			371			741			575
Net income attributable to redeemable noncontrolling interests in operating partnership	(1,171		)	—			(1,213		)	—
Net income (loss) attributable to the Company	3,372			400			3,991			(393		)
Interest expense and amortization of loan costs ⁽¹⁾	9,656			7,894			27,736			23,218
Depreciation and amortization ⁽¹⁾	9,845			6,979			27,715			20,498
Interest income ⁽¹⁾	(9		)	(5		)	(19		)	(18		)
Income tax expense	185			952			622			2,255
Net income attributable to redeemable noncontrolling interests in operating partnership	1,171			—			1,213			—
EBITDA	24,220			16,220			61,258			45,560
Amortization of unfavorable management contract liability	(40		)	(40		)	(119		)	(119		)
Transaction costs	45			—			1,871			173
Write-off of loan costs and exit fees	—			—			—			1,971
Unrealized (gain) loss on derivatives	(3		)	9			63			31
Modification of rent terms ⁽¹⁾	—			534			—			534
Compensation adjustment related to modified employment terms	—			—			573			—
Non-employee equity-based compensation	435			—			1,218			—
Adjusted EBITDA	$	24,657		$	16,723		$	64,864		$	48,150

__________________


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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Interest expense and amortization of loan costs	$	(481	)	$	(486	)	$	(1,423	)	$	(1,353	)
Depreciation and amortization	(812		)	(788		)	(2,421		)	(2,366		)
Interest income	1			—			1			1
Modification of rent terms	—			(178		)	—			(178		)

We calculate FFO and AFFO in the following table. FFO is calculated on the basis defined by NAREIT, which is net income (loss) attributable to the Company, computed in accordance with GAAP, excluding gains or losses on sales of properties and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets and redeemable noncontrolling interests in operating partnership. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. Our calculation of AFFO excludes write-off of loan costs and exit fees, transaction costs and non-cash items such as compensation adjustments related to modified employment terms, unrealized (gain) loss on derivatives and modification of rent terms. FFO and AFFO exclude amounts attributable to the portion of a partnership owned by the third party. We consider FFO and AFFO to be appropriate measures of our ongoing normalized operating performance as a REIT. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than us. FFO and AFFO do not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income or loss as an indication of our financial performance or GAAP cash flows from operating activities as a measure of our liquidity. FFO and AFFO are also not indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO and AFFO should be considered along with our net income or loss and cash flows reported in the financial statements.

Table of Contents

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Net income (loss)	$	4,389		$	29	$	4,463		$	(968	)
Loss from consolidated entities attributable to noncontrolling interests	154			371		741			575
Net income attributable to redeemable noncontrolling interests in operating partnership	(1,171		)	—		(1,213		)	—
Net income (loss) attributable to the Company	3,372			400		3,991			(393		)
Depreciation and amortization on real estate ⁽¹⁾	9,845			6,979		27,715			20,498
Net income attributable to redeemable noncontrolling interests in operating partnership	1,171			—		1,213			—
FFO available to the Company	14,388			7,379		32,919			20,105
Write-off of loan costs and exit fees	—			—		—			1,971
Transaction costs	45			—		1,871			173
Compensation adjustment related to modified employment terms	—			—		573			—
Modification of rent terms ⁽¹⁾	—			534		—			534
Unrealized (gain) loss on derivatives	(3		)	9		63			31
AFFO available to the Company	$	14,430		$	7,922	$	35,426		$	22,814

____________________


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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Depreciation and amortization on real estate	$	(812	)	$	(788	)	$	(2,421	)	$	(2,366	)
Modification of rent terms	—			(178		)	—			(178		)

Table of Contents

Hotel Properties

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



Hotel Property	Location	Service Type	Total Rooms	% Owned		Owned Rooms
Hotel Property	Location	Service Type	Total Rooms	% Owned		Owned Rooms
Fee Simple Properties
Hilton	Washington, D.C.	Full	547	75	%	410
Marriott	Seattle, WA	Full	358	100	%	358
Marriott	Plano, TX	Full	404	100	%	404
Courtyard by Marriott	Philadelphia, PA	Select	499	100	%	499
Courtyard by Marriott	Seattle, WA	Select	250	100	%	250
Courtyard by Marriott	San Francisco, CA	Select	405	100	%	405
Sofitel Chicago Water Tower	Chicago, IL	Full	415	100	%	415
Pier House Resort	Key West, FL	Full	142	100	%	142
Ground Lease Properties
Hilton ^(a)	La Jolla, CA	Full	394	75	%	296
Renaissance ^(b)	Tampa, FL	Full	293	100	%	293
Total			3,707			3,472

________

^(a) The ground lease expires in 2043.

^(b) The ground lease expires in 2080.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring our variable-rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under GAAP guidance.

To the extent that we acquire assets or conduct operations in an international jurisdiction, we will also have currency exchange risk. We may enter into certain hedging arrangements in order to manage interest rate and currency fluctuations.

At September 30, 2014 , our total indebtedness of $765.2 million included $345.1 million of variable-rate debt. The impact on the results of operations of a 25-basis point change in interest rate on the outstanding balance of variable-rate debt at September 30, 2014 would be approximately $863,000 per year. Interest rate changes will have no impact on the remaining $420.1 million of fixed rate debt.

The above amounts were determined based on the impact of hypothetical interest rates on our borrowings and assume no changes in our capital structure. The information presented above includes those exposures that existed at September 30, 2014 , but it does not consider exposures or positions that could arise after that date. Accordingly, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

Table of Contents


ITEM 4.	CONTROLS AND PROCEDURES

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act)) as of September 30, 2014 (“Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms; and (ii) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

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

Table of Contents

PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

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


ITEM 1A.	RISK FACTORS

The discussion of our business and operations and risk factors discussed in this report should be read together with the risk factors contained in Item 1A of our 2013 10-K, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner.


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

Purchases of Equity Securities by the Issuer

The following table provides the information with respect to purchases of our common stock during each of the months in the third quarter of 2014:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plan
Common stock:
July 1 to July 31	—	$	—	—
August 1 to August 31	150	$	16.65	—
September 1 to September 30	—	$	—	—
Total	150	$	16.65	—

__________________

These shares were repurchased from Ashford Trust when Ashford Trust employees, who held restricted shares of Ashford Prime common stock received in the spin-off, forfeited the shares to Ashford Trust upon termination of employment.


ITEM 3.	DEFAULT UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

None.


ITEM 5.	OTHER INFORMATION

On November 3, 2014, Ashford Prime entered into the Second Amended and Restated Advisory Agreement by and between Ashford Hospitality Prime, Inc., a Maryland corporation, Ashford Hospitality Prime Limited Partnership, a Delaware limited partnership, and Ashford Hospitality Advisors LLC, a Delaware limited liability company. This agreement amends our existing Advisory Agreement with Ashford Advisor to provide that the covenant restricting us from soliciting or hiring employees of Ashford Advisor after the Advisory Agreement terminates does not apply if the agreement terminates due to an Advisor Change of Control (as defined in the Advisory Agreement). The Second Amended and Restated Advisory Agreement is included as Exhibit 10.1 to this Form 10-Q.

Table of Contents


ITEM 6.	EXHIBITS



Exhibit	Description
2.1	Separation and Distribution Agreement between Ashford Hospitality Prime, Inc., Ashford Hospitality Trust, Inc. and the other parties thereto (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on November 12, 2013)
2.2	Separation and Distribution Agreement Correction between Ashford Hospitality Prime, Inc., Ashford Hospitality Trust, Inc. and the other parties thereto (incorporated by reference to Exhibit 2.2 of the Registration Statement on Form S-11 filed on December 19, 2013)
3.1	Articles of Amendment and Restatement of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on November 12, 2013)
3.2	Amended and Restated Bylaws of Ashford Hospitality Prime, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on November 12, 2013)
10.1*	Second Amended and Restated Advisory Agreement by and between Ashford Hospitality Prime, Inc., Ashford Hospitality Prime Limited Partnership, and Ashford Hospitality Advisors LLC, dated November 3, 2014.
31.1*	Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
31.2*	Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2014 are formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated and Combined Consolidated Statements of Operations; (iii) Consolidated and Combined Consolidated Statements Comprehensive Income (Loss); (iii) Consolidated Statement of Changes in Equity; (iv) Consolidated and Combined Consolidated Statements of Cash Flows; and (v) Notes to the Consolidated and Combined Consolidated Financial Statements. In accordance with Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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

___________________________________

* Filed herewith.

Table of Contents

SIGNATURES

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

ASHFORD HOSPITALITY PRIME, INC.



Date:	November 7, 2014	By:	/s/ MONTY J. BENNETT
		Monty J. Bennett
		Chief Executive Officer

Date:	November 7, 2014	By:	/s/ DERIC S. EUBANKS
		Deric S. Eubanks
		Chief Financial Officer

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Default Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

BHR 10-Q Quarter ended Sept. 30, 2014