News Column

CAREY WATERMARK INVESTORS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 12, 2014

MD&A is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. MD&A also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our MD&A should be read in conjunction with our 2013 Annual Report.



Business Overview

As described in Item 1 of our 2013 Annual Report, we are a publicly owned, non-listed REIT formed for the purpose of acquiring, owning, disposing of and, through the advisor, managing and seeking to enhance the value of interests in lodging and lodging-related properties. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. We conduct substantially all of our investment activities and own all of our assets through the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, which is owned indirectly by WPC and Watermark Capital Partners, holds a special general partner interest of 0.015% in the Operating Partnership. At June 30, 2014, we held ownership interests in 23 hotels, with a total of 5,408 rooms ( Notes 4 and 5 ), as compared to our ownership interests in 16 hotels, with a total of 2,988 rooms, at June 30, 2013. We use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, including occupancy rate, average daily rate, or ADR, and revenue per available room, or RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as room revenue divided by occupied rooms, is an important statistic for monitoring operating performance at our hotels.



Significant Developments

Public Offering

Since the beginning of our initial public offering on September 15, 2010 through its termination on September 15, 2013, we raised $586.2 million, inclusive of reinvested distributions through the DRIP. During the second quarter of 2014, we fully invested the proceeds from our initial public offering.



Follow-on Public Offering

We commenced a follow-on public offering of up to an additional $350.0 million of our common stock and an additional $300.0 million in shares of common stock through our DRIP on December 20, 2013. We began selling shares in our follow-on offering in January 2014 and have raised $142.9 million through July 31, 2014, of which $93.7 million was raised during the three months ended June 30, 2014. We intend to close the follow-on offering on December 12, 2014. In order to facilitate the final sales of shares, we may reallocate up to $200.0 million of the shares currently reserved for our DRIP to our follow-on offering.



Acquisitions

During the six months ended June 30, 2014, we acquired five hotels with real estate and other hotel assets, net of assumed liabilities and inclusive of contributions from noncontrolling interests totaling $415.3 million ( Note 4 ).

Financings

In connection with our 2014 Acquisitions ( Note 4 ) during the six months ended June 30, 2014, we obtained new non-recourse mortgage financings totaling $266.5 million with a weighted-average annual interest rate and term of 4.2% and 6.9 years, respectively ( Note 9 ).

Distributions

Our second quarter 2014 declared daily distribution was $0.0015109 per share, payable in cash, which equated to $0.5500 per share on an annualized basis, and was paid on July 15, 2014 to stockholders of record on each day during the second quarter. CWI 6/30/2014 10-Q - 24

-------------------------------------------------------------------------------- Our third quarter 2014 declared daily distribution is $0.0014945 per share, payable in cash, which equates to $0.5500 per share on an annualized basis, and will be paid on or about October 15, 2014 to stockholders of record on each day during the third quarter.



Financial and Operating Highlights

(Dollars in thousands, except ADR and RevPAR)

Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Revenue $ 86,857$ 21,015$ 146,542$ 32,314 Acquisition-related expenses 14,998 6,474 15,377 11,866 Net loss attributable to CWI stockholders (12,126 ) (5,417



) (20,700 ) (12,360 )

Cash distributions paid 9,428 2,428 18,737 4,143 Net cash provided by (used in) operating activities 5,085 (2,701 ) Net cash used in investing activities (431,152 ) (322,658 ) Net cash provided by financing activities



369,182 388,075

Supplemental financial measures: FFO (a) (859 ) (1,877 ) (1,271 ) (6,402 ) MFFO (a) 14,281 4,948 14,506 5,786 Combined Portfolio Data: (b) Occupancy 80.3 % 76.4 % 75.9 % 72.7 % ADR $ 204.52$ 147.80$ 192.54$ 143.85 RevPAR $ 164.24$ 112.85$ 146.07$ 104.56 ___________



(a) We consider the performance metrics listed above, including funds from (used

in) operations, or FFO, and modified funds from operations, or MFFO, which

are supplemental measures that are not defined by GAAP, or non-GAAP, to be

important measures in the evaluation of our results of operations, liquidity,

and capital resources. We evaluate our results of operations with a primary

focus on the ability to generate cash flow necessary to meet our objective of

funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.



(b) Represents portfolio data for our Consolidated Hotels.

The comparison of our results period over period are influenced by both the number and size of the hotels consolidated in each of the respective periods. At June 30, 2014, we owned 21 Consolidated Hotels, of which five were acquired during the six months ended June 30, 2014, as compared to 12 Consolidated Hotels at June 30, 2013. Revenue, net cash provided by operating activities and MFFO for both the three and six months ended June 30, 2014 were primarily driven by our 2013 and 2014 investment activity.



For the three and six months ended June 30, 2014, we recognized net losses attributable to CWI stockholders of $12.1 million and $20.7 million, respectively, primarily reflecting acquisition-related expenses of $15.0 million and $15.4 million, respectively.

CWI 6/30/2014 10-Q - 25 --------------------------------------------------------------------------------



Results of Operations

We began making investments in 2011 and as such have a limited operating history. We are dependent upon the proceeds raised from our follow-on offering to conduct our acquisition activities. We invest in hotels that may require significant renovations. During the renovation period, hotel operations are disrupted, negatively impacting our results of operations. For each acquisition, we also incur acquisition-related costs and fees that impact our results of operations. We utilize the capital from our offering proceeds and mortgage indebtedness to fund our acquisitions.



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

Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 Change 2014 2013 Change Hotel Revenues $ 86,857$ 21,015$ 65,842$ 146,542$ 32,314$ 114,228 Hotel Expenses 69,747 15,927 53,820 126,382 25,664 100,718 Other Operating Expenses Acquisition-related expenses 14,998 6,474 8,524 15,377 11,866 3,511 Corporate general and administrative expenses 2,708 1,153 1,555 5,514 2,370 3,144 Asset management fees to affiliate and other 1,602 561 1,041 3,019 951 2,068 19,308 8,188 11,120 23,910 15,187 8,723 Operating Loss (2,198 ) (3,100 ) 902 (3,750 ) (8,537 ) 4,787 Other Income and (Expenses) Interest expense (8,344 ) (2,335 ) (6,009 ) (15,297 ) (3,836 ) (11,461 ) Net income from equity investments in real estate 273 350 (77 ) 398 482 (84 ) Interest income 15 - 15 26 - 26 (8,056 ) (1,985 ) (6,071 ) (14,873 ) (3,354 ) (11,519 ) Loss from Operations Before Income Taxes (10,254 ) (5,085 ) (5,169 ) (18,623 ) (11,891 ) (6,732 ) Provision for income taxes (1,684 ) (500 ) (1,184 ) (2,101 ) (547 ) (1,554 ) Net Loss (11,938 ) (5,585 ) (6,353 ) (20,724 ) (12,438 ) (8,286 ) (Income) loss attributable to noncontrolling interests (188 ) 168 (356 ) 24 78 (54 ) Net Loss Attributable to CWI Stockholders $ (12,126 )$ (5,417 )$ (6,709 ) $

(20,700 ) $ (12,360 )$ (8,340 ) CWI 6/30/2014 10-Q - 26

-------------------------------------------------------------------------------- The following table sets forth the average occupancy rate, ADR and RevPAR from of our Consolidated Hotels for the three and six months ended June 30, 2014 and 2013. Same Store Hotels are those we acquired prior to January 1, 2013, which include Hampton Inn Boston Braintree, Hilton Garden Inn New Orleans French Quarter/CBD, Lake Arrowhead Resort and Spa and Courtyard San Diego MissionValley. Recently Acquired Hotels are those that we acquired subsequent to December 31, 2012 and include the remaining Consolidated Hotels listed in Note 4 . In the year of acquisition, this information represents data from the hotels respective acquisition dates through period end. Six Months Ended June 30, 2014 Six Months Ended June 30, 2013 Occupancy Rate ADR RevPAR Occupancy Rate ADR RevPAR Same Store Hotels 75.6 % $ 142.89$ 107.97 68.3 % $ 139.08$ 94.98 Recently Acquired Hotels 75.9 % 204.34 155.17 77.9 % 148.77 115.84 Three Months Ended June 30, 2014 Three Months Ended June 30, 2013 Occupancy Rate ADR RevPAR Occupancy Rate ADR RevPAR Same Store Hotels 78.9 % $ 147.20$ 116.15 72.5 % $ 138.39$ 100.29 Recently Acquired Hotels 80.6 % 216.78 174.75 79.5 % 154.81 123.10 Hotel Revenues



For the three and six months ended June 30, 2014 as compared to the same periods in 2013, hotel revenues increased by $65.8 million and $114.2 million, respectively.

Same Store Hotel revenues totaled $10.7 million and $19.7 million for the three and six months ended June 30, 2014 as compared to $9.3 million and $17.3 million for the comparable prior year periods. The increase in revenues is largely attributable to the completion of planned renovations at Hampton Inn Boston Braintree and Lake Arrowhead Resort and Spa. Hampton Inn Boston Braintree experienced significant renovation-related disruption during the first quarter of 2013, while Lake Arrowhead Resort and Spa experienced significant renovation-related disruption during both the first and second quarters of 2013, which negatively impacted their results during those periods. The improvement in occupancy rates, ADR and RevPAR for the three and six months ended June 30, 2014 as compared to the same periods in 2013 are a direct result of these factors. Recently Acquired Hotel revenues totaled $76.2 million and $126.8 million for the three and six months ended June 30, 2014 as compared to $11.7 million and $15.0 million during the comparable prior year periods. We acquired eight hotels during the six months ended June 30, 2013 and four hotels throughout the remainder of 2013. We acquired five hotels during the six months ended June 30, 2014. As illustrated by the acquisition dates listed in Note 4 , these results are not comparable year over year because of hotel acquisitions in 2013 and 2014. Hotel Expenses For the three months ended June 30, 2014 and 2013, our Consolidated Hotels incurred aggregate hotel operating expenses of $69.7 million and $15.9 million, respectively, representing 80.3% and 75.8% of hotel revenues, respectively. For the six months ended June 30, 2014 and 2013, our Consolidated Hotels incurred aggregate hotel operating expenses of $126.4 million and $25.7 million, respectively, representing 86.2% and 79.4% of hotel revenues, respectively. The increase in hotel expenses as a percentage of hotel revenue was primarily a result of the change in revenue mix from the addition of six full-service hotels in 2013, which generally have higher hotel expenses than select-service hotels. For the three months ended June 30, 2014 and 2013, hotel expenses attributable to our Same Store Hotels were $9.0 million and $7.9 million, respectively, representing 84.8% and 84.4% of hotel revenues, respectively. For the six months ended June 30, 2014 and 2013, hotel expenses attributable to our Same Store Hotels were $17.3 million and $15.1 million, respectively, representing 87.7% and 87.4%, respectively, of hotel revenues. For the three months ended June 30, 2014 and 2013, hotel expenses attributable to our Recently Acquired Hotels were $60.7 million and $8.0 million, respectively. For the six months ended June 30, 2014 and 2013, hotel expenses attributable to our Recently Acquired Hotels were $109.1 million and $10.6 million, respectively. As illustrated by the acquisition dates listed in Note 4 , these results are not comparable year over year because of hotel acquisitions in 2013 and 2014. CWI 6/30/2014 10-Q - 27 --------------------------------------------------------------------------------



Acquisition-Related Expenses

We immediately expense acquisition-related costs and fees associated with acquisitions of our Consolidated Hotels that are accounted for as business combinations.

For the three and six months ended June 30, 2014, acquisition-related expenses were $15.0 million and $15.4 million, respectively, and relate to our 2014 Acquisitions.

Corporate General and Administrative Expenses

For the three and six months ended June 30, 2014 as compared to the same period in 2013, corporate general and administrative expenses increased by $1.6 million and $3.1 million, respectively, primarily due to the reimbursement to the advisor for the cost of personnel allocable to their time devoted to providing administrative services to us. This reimbursement commenced in the first quarter of 2014 and totaled $0.8 million and $1.6 million, respectively, for the three and six months ended June 30, 2014. Prior to the first quarter of 2014, such expenses had not been allocated to us by the advisor ( Note 3 ). In addition, for the three and six months ended June 30, 2014 as compared to the same period in 2013, professional fees increased $0.2 million and $0.7 million, respectively, state franchise, excise and tourism taxes increased $0.1 million and $0.3 million, respectively, and rent expense increased $0.1 million and $0.2 million, respectively. Professional fees, which include legal, accounting and investor-related expenses incurred in the normal course of business, increased primarily as a result of an increase in the size of our hotel portfolio in the current year periods compared to the prior periods, as well as costs associated with our follow-on offering.



Asset Management Fees to Affiliate and Other

Asset management fees to affiliate and other primarily represent fees paid to the advisor. We pay the advisor an annual asset management fee equal to 0.50% of the aggregate Average Market Value of our Investments, both as defined in our advisory agreement with our advisor ( Note 3 ). For the three and six months ended June 30, 2014 as compared to the same periods in 2013, asset management fees to affiliate and other increased by $1.0 million and $2.1 million, respectively, which reflects our Recently Acquired Hotels.



Operating Loss

For the three and six months ended June 30, 2014, operating loss was $2.2 million and $3.8 million, respectively, as compared to a loss of $3.1 million and $8.5 million for the three and six months ended June 30, 2013, respectively. The increase in acquisition-related expenses for both the three and six months ended June 30, 2014 as compared to the same periods in the prior year was more than offset by the impact of our 2013 and 2014 investment activity on our operating results. The comparison of our results period over period are influenced by both the number and size of the hotels consolidated in each of the respective periods. Interest Expense For the three and six months ended June 30, 2014 as compared to the same periods in 2013, interest expense increased by $6.0 million and $11.5 million respectively, primarily as a result of mortgage financing obtained in connection with our Recently Acquired Hotels.



Net Income from Equity Investments in Real Estate

Net income from equity investments in real estate represents earnings from our equity investments in Unconsolidated Hotels recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment's net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period ( Note 5 ). We are required to periodically compare an investment's carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. For both the three and six months ended June 30, 2014 as compared to the same periods in 2013, net income from equity investments decreased $0.1 million. In July 2013, we sold our interest in the Long Beach Venture, which resulted in decreases in income from equity investments of $0.6 million and $0.7 million, respectively, when comparing the three and six months CWI 6/30/2014 10-Q - 28 -------------------------------------------------------------------------------- ended June 30, 2014 to the same periods in 2013. These decreases were partially offset by increases in income from the Hyatt French Quarter Venture of $0.3 million and $0.4 million for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013, primarily as a result of improved operating results at the hotel and lower interest expense incurred by the venture as a result of refinancing its outstanding mortgage loan during the third quarter of 2013, as well as decreases in losses from the Westin Atlanta Venture of $0.2 million for both the three and six months ended June 30, 2014 as compared to the same periods in 2013. The decreases in losses from the Westin Atlanta Venture were primarily a result of the completion of guest room renovations, which commenced in September 2013 and were completed during April 2014. The hotel experienced an overall weak demand prior to and during the renovation period. Additionally, in accordance with the joint venture agreement, our venture partner has made capital contributions to fund renovations, thereby increasing its ownership percentage in the venture, which has decreased our allocable share of losses incurred by the venture.



Net Loss Attributable to CWI Stockholders

For the three and six months ended June 30, 2014 as compared to the same periods in 2013, the resulting net loss attributable to CWI stockholders increased by $6.7 million and $8.3 million, respectively.



Modified Funds from Operations

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

Supplemental Financial Measures below.

For the three and six months ended June 30, 2014 as compared to the same periods in 2013, MFFO increased by $9.3 million and $8.7 million, respectively, principally reflecting our 2013 and 2014 investment activity.

Financial Condition

Our initial public offering terminated on September 15, 2013 and we commenced our follow-on offering on December 20, 2013. We expect to use uninvested capital raised from our follow-on offering to continue to acquire hotels and to own and manage our expanded hotel portfolio as well as seek to enhance the value of our interests in lodging and lodging-related properties. As a REIT, we are not subject to U.S. federal income taxes on amounts distributed to stockholders provided we meet certain conditions, including distributing at least 90% of our taxable income to stockholders. Our distributions since inception have exceeded our earnings and our FFO and have been primarily paid from offering proceeds. We expect that future distributions will be paid in whole or in part from offering proceeds, borrowings and other sources, without limitation, particularly during the period before we have substantially invested the remaining proceeds from our initial public offering and the net proceeds from our follow-on offering. As a REIT, we are permitted to own lodging properties but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases for each of our lodging properties with our wholly-owned taxable REIT subsidiaries, collectively, the TRS Lessees. The TRS Lessees in turn contract with independent hotel management companies that manage day-to-day operations of our hotels under the oversight of the subadvisor.



Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements generally through existing cash and escrow balances and cash flow generated from our hotels, if any. We may also use short-term borrowings from the advisor or its affiliates to fund acquisitions, at the advisor's discretion, as described below in Cash Resources. We expect that cash flow from operations will be negatively impacted in the period of acquisition by several factors, primarily acquisition-related costs, renovation disruption and other administrative costs related to our regulatory reporting requirements specific to each acquisition. Once our funds are fully invested and any renovations are completed, we believe that our hotels will generate positive cash flow. However, until our offering proceeds are fully invested and any renovations have been completed, it may be necessary to use uninvested proceeds from our follow-on offering to fund a portion of our operating activities, as well as to fund distributions. Over time, we expect to meet our long-term liquidity requirements, including funding additional hotel property acquisitions, through cash on hand and long-term secured and unsecured borrowings. To the extent that our working capital reserve is insufficient to satisfy our cash requirements, additional funds may be provided from future cash generated from operations or through short-term borrowings from the advisor or its affiliates, as described below in Cash Resources. In addition, we may incur indebtedness in connection with the acquisition of real estate, refinance the CWI 6/30/2014 10-Q - 29 --------------------------------------------------------------------------------



debt thereon, arrange for the leveraging of any previously unfinanced property or reinvest the proceeds of financings or refinancings in additional properties.

Sources and Uses of Cash During the Period

We expect to use the cash flow generated from hotel operations to meet our normal recurring operating expenses and service debt. Our cash flows fluctuate from period to period due to a number of factors, which may include, among other things, the financial and operating performance of our hotels, the timing of purchases of hotels, the timing and characterization of distributions from equity method investments in hotels and seasonality in the demand for our hotels. Also, many hotels we invest in require renovations. During periods of renovation, the hotel may experience disruptions, possibly resulting in reduced revenue and operating income. Despite these fluctuations, we believe that, as we continue to invest the proceeds from our follow-on offering, we will generate sufficient cash from operations and from our equity method investments to meet our normal recurring short-term and long-term liquidity needs. However, through the date of this Report, our investments have not generated sufficient cash flow from operations to meet our short-term liquidity needs, which we expect will continue until we have fully invested the proceeds from our follow-on offering and any renovations at our hotels have been completed. Therefore, we expect to use existing cash resources, as described below in Cash Resources, and the issuance of securities in our follow-on offering to meet these needs. We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.



Operating Activities

During the six months ended June 30, 2014, net cash provided by operating activities was $5.1 million as compared to net cash used in operations of $2.7 million for the same period in 2013. Net cash inflow during the six months ended June 30, 2014 primarily resulted from net cash flow from hotel operations due to our investment activity during 2014 and 2013, which more than offset acquisition-related expenses and other operating costs. Net cash inflow during the six months ended June 30, 2014 was positively impacted by both the number and size of our Recently Acquired Hotels. Net cash outflows during the six months ended June 30, 2013 primarily resulted from acquisition-related expenses that we incurred and the impact of renovation-related disruptions on hotel operating results during the period.



Investing Activities

During the six months ended June 30, 2014, we used offering proceeds totaling $415.3 million for our 2014 Acquisitions ( Note 4 ), funded $10.5 million of capital expenditures for our Consolidated Hotels and placed funds into and released funds from lender-held escrow accounts totaling $33.6 million and $28.0 million, respectively, for renovations, property taxes and insurance.



Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2014 was $369.2 million, primarily as a result of mortgage financing obtained in connection with our 2014 Acquisitions totaling $266.5 million ( Note 9 ) and raising funds through the issuance of shares of our common stock in our follow-on offering totaling $108.4 million, net of issuance costs during the six months ended June 30, 2014. In addition, we received proceeds from a loan from WPC for $11.0 million to fund, in part, an acquisition ( Note 3 ) and contributions from noncontrolling interest of $7.9 million ( Note 4 ). These inflows were partially offset by cash distributions paid to stockholders of $18.7 million, which were comprised of cash distributions of $7.4 million and distributions that were reinvested in shares of our common stock by stockholders through our DRIP of $11.3 million, deferred financing costs of $2.1 million and distributions to noncontrolling interests totaling $1.1 million, comprised entirely of the Available Cash Distribution by the Operating Partnership ( Note 3 ). Our objectives are to generate sufficient cash flow over time to provide stockholders with distributions and to seek investments with potential for capital appreciation throughout varying economic cycles. From inception through June 30, 2014, we declared distributions, excluding distributions paid in shares of our common stock, to stockholders totaling $47.1 million, which were comprised of cash distributions of $19.7 million and $27.4 million of distributions that were reinvested by stockholders in shares of our common stock pursuant to our DRIP. We have determined that FFO, a non-GAAP metric, is the most appropriate metric to evaluate our ability to fund distributions to stockholders. For a discussion of FFO, see Supplemental Financial Measures below. To date, we have not yet generated sufficient FFO to fund all our distributions; therefore, we funded substantially all of our cash distributions through June 30, 2014 from the proceeds of our initial public offering and follow-on offering, with a portion being funded from FFO. CWI 6/30/2014 10-Q - 30 -------------------------------------------------------------------------------- We maintain a quarterly redemption program pursuant to which we may, at the discretion of our board of directors, redeem shares of our common stock from stockholders seeking liquidity. During the fourth quarter of 2013, we received requests to redeem 39,733 shares of our common stock pursuant to our redemption plan. In December 2013, our board of directors approved a deferral to January 2014 of redemptions that would have otherwise occurred during December 2013 in order to correspond with our follow-on offering and the establishment of our offering price; therefore, these requests were satisfied in January 2014. Additionally, during the six months ended June 30, 2014, we received requests to redeem 84,738 shares of our common stock pursuant to our redemption plan, all of which were redeemed in the same period. We redeemed all of these requests at an average price per share of $9.60 in accordance with the terms of that plan. We funded all of the share redemptions during the six months ended June 30, 2014 from the proceeds of the sale of shares of our common stock pursuant to our DRIP.



Summary of Financing

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

June 30, 2014 December 31, 2013 Carrying Value Fixed rate $ 590,398 $ 358,424 Variable rate 238,310 204,634 Total $ 828,708 $ 563,058 Percent of Total Debt Fixed rate 71 % 64 % Variable rate 29 % 36 % 100 % 100 % Weighted-Average Interest Rate at End of Period Fixed rate 4.5 % 4.6 % Variable rate (a) 4.7 % 4.9 % ___________



(a) At June 30, 2014, all of our variable-rate debt was effectively converted to

fixed-rate debt through interest rate swap derivative instruments or was

subject to an interest rate cap, but for which the applicable interest rate

was below the interest rate cap at June 30, 2014. These rates are reflected

in the weighted-average interest rate.

Cash Resources

At June 30, 2014, our cash resources consisted of cash totaling $52.5 million, of which $27.7 million was designated as hotel operating cash. Our cash resources may be used to fund future investments and can be used for working capital needs, debt service and other commitments, such as renovation commitments as noted below. In January 2013, our board of directors and the board of directors of WPC approved unsecured loans to us of up to $50.0 million in the aggregate, for the purpose of facilitating acquisitions approved by our investment committee that we might not otherwise have sufficient available funds to complete. On June 25, 2014, we obtained an $11.0 million loan from WPC to fund, in part, our acquisition of the dual-branded Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center ( Note 3 ). This loan was repaid in full on July 22, 2014. Cash Requirements During the next 12 months, we expect that our cash payments will include acquiring new investments, paying distributions to our stockholders, making scheduled debt payments, reimbursing the advisor for costs incurred on our behalf, fulfilling our intended renovation commitments ( Note 10 ), funding operating and other lease commitments, and paying normal recurring operating expenses. Balloon payments totaling $38.5 million on our consolidated mortgage loan obligations are due during the next 12 months. Our advisor intends to refinance certain of these loans, although there can be no assurance that we will be able to do so on favorable terms, if at all. Ground lease and office lease commitments totaling $3.3 million are expected to be funded during the next 12 months. We expect to fund future investments, renovations, operating and other lease commitments and scheduled debt maturities on our mortgage loans through funds raised from our follow-on offering, cash on hand, cash generated from operations, or, for CWI 6/30/2014 10-Q - 31 --------------------------------------------------------------------------------



acquisitions and renovations, through short-term borrowings from the advisor or its affiliates and amounts held in escrow accounts, respectively.

Off-Balance Sheet Arrangements and Contractual Obligations

The table below summarizes our debt, off-balance sheet arrangements, and other contractual obligations at June 30, 2014 and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands): Less than More than Total 1 year 1-3 years 3-5 years 5 years Non-recourse debt - Principal (a) $ 828,798$ 30,444$ 111,500$ 282,795$ 404,059 Note payable to affiliate (b) 11,000 11,000 - - - Interest on borrowings (c) 202,636 38,115 70,123 51,006 43,392 Capital commitments (d) 28,834 28,834 - - - Operating and other lease commitments (e) 677,624 3,343 6,893 7,180 660,208 Asset retirement obligations, net (f) 468 - - - 468 Due to related party (g) 626 626 - - - $ 1,749,986$ 112,362$ 188,516$ 340,981$ 1,108,127



___________

(a) Excludes unamortized discount of $0.1 million.

(b) This note was repaid in full in July 2014 ( Note 3 ).

(c) For variable-rate debt, interest on borrowings is calculated using the

swapped or capped interest rate, when in effect.

(d) Capital commitments represent our remaining contractual renovation

commitments at our Consolidated Hotels.

(e) Operating commitments consist of rental obligations under ground leases.

Other lease commitments consist of rent obligations under ground leases and

our share of future rents payable pursuant to the advisory agreement for the

purpose of leasing office space used for the administration of real estate

entities. At June 30, 2014, this balance primarily related to our commitments

on ground leases for two hotels, which expire in 2087 and 2099 and have rent

obligations consistently increasing throughout their respective terms,

therefore the most significant commitments occur near the conclusion of the

leases.

(f) Represents the future amounts of obligations estimated for the removal of

asbestos and environmental waste in connection with one of our acquisitions

upon the retirement or sale of the asset.

(g) Represents amounts advanced by the advisor for organization and offering

costs, subject to a limitation of 4% of offering proceeds under the advisory

agreement, that we were obligated to pay at June 30, 2014 ( Note 3 ).

Supplemental Financial Measures

In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, supplemental non-GAAP measures, which are uniquely defined by our management. We believe that these measures are useful to investors to consider because it may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO and reconciliations of FFO and MFFO to the most directly comparable GAAP measures are provided below. FFO and MFFO Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, or NAREIT, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to nor a substitute for net income or loss as determined under GAAP. We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate and depreciation and amortization; and after adjustments for unconsolidated partnerships and jointly-owned investments. CWI 6/30/2014 10-Q - 32 -------------------------------------------------------------------------------- Adjustments for unconsolidated partnerships and jointly-owned investments are calculated to reflect FFO. However, NAREIT's definition of FFO does not distinguish between the conventional method of equity accounting and the hypothetical liquidation at book value method of accounting for unconsolidated partnerships and jointly-owned investments. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization as well as impairment charges of real estate-related assets, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. While impairment charges are excluded from the calculation of FFO described above, investors are cautioned that, due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect in 2009. These other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. We intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our assets or another similar transaction) not later than six years following the termination of the initial public offering, which occurred on September 15, 2013. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and once essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and most of our acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of a company's operating performance after a company's offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company's operating performance during the periods in which properties are acquired. CWI 6/30/2014 10-Q - 33

-------------------------------------------------------------------------------- We define MFFO consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; accretion of discounts and amortization of premiums on debt investments; where applicable, payments of loan principal made by our equity investees accounted for under the hypothetical liquidation model where such payments reduce our income from equity investments in real estate, nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for Consolidated and Unconsolidated Hotels, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate and hedge risk, we retain an outside consultant to review all our hedging agreements. In as much as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such infrequent gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. In addition, we also add back payments of loan principal made by our equity investees accounted for under the hypothetical liquidation model to the extent such payments reduce our income from equity investments in real estate. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as infrequent items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for assessing operating performance. We account for certain of our equity investments using the hypothetical liquidation model which is based on distributable cash as defined in the operating agreement. Equity income for the period recognized under this model may be net of the equity investee's payments of loan principal. Under GAAP, payments of loan principal do not impact net income. We do not consider payments of loan principal to be a factor in determining our operating performance and therefore add back the equity investee's payments of loan principal to the extent they have impacted our equity income recognized in the period. Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information. Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. CWI 6/30/2014 10-Q - 34 -------------------------------------------------------------------------------- Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly.



FFO and MFFO were as follows (in thousands):

Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Net loss attributable to CWI stockholders $ (12,126 )$ (5,417 )$ (20,700 )$ (12,360 ) Adjustments: Depreciation and amortization of real property 10,592 3,012 19,657 4,813 Proportionate share of adjustments for partially-owned entities - FFO adjustments 675 528 (228 ) 1,145 FFO - as defined by NAREIT (859 ) (1,877 ) (1,271 ) (6,402 ) Acquisition expenses (a) 14,998 6,474 15,377 11,866 Other depreciation, amortization and non-cash charges 23 23 42 49 Straight-line and other rent adjustments 1,014 - 1,617 - Proportionate share of adjustments for partially-owned entities - MFFO adjustments (895 ) 328 (1,259 ) 273 Total adjustments 15,140 6,825 15,777 12,188 MFFO $ 14,281$ 4,948$ 14,506$ 5,786 ___________



(a) In evaluating investments in real estate, management differentiates the costs

to acquire the investment from the operations derived from the investment.

Such information would be comparable only for non-listed REITs that have

completed their acquisition activity and have other similar operating

characteristics. By excluding expensed acquisition costs, management believes

MFFO provides useful supplemental information that is comparable for each

type of real estate investment and is consistent with management's analysis

of the investing and operating performance of our properties. Acquisition

fees and expenses include payments to our advisor or third parties.

Acquisition fees and expenses under GAAP are considered operating expenses

and as expenses included in the determination of net income and income from

continuing operations, both of which are performance measures under GAAP. All

paid and accrued acquisition fees and expenses will have negative effects on

returns to investors, the potential for future distributions, and cash flows

generated by us, unless earnings from operations or net sales proceeds from

the disposition of properties are generated to cover the purchase price of

the property, these fees and expenses and other costs related to the

property.


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