Redeemable Noncontrolling Interests in Operating Partnership

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

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

The compensation committee of the board of directors of the Company approves performance-based LTIP units to certain executive officers from time to time. The award agreements provide for the grant of a target number of performance-based LTIP units that will be settled in common units of the Ashford Prime OP, if and when the applicable vesting criteria have been achieved following the end of the performance and service period. The target number of performance-based LTIP units may be adjusted from 0% to 200% of the target number based on achievement of a specified relative total stockholder return based on the formula determined by the Company’s Compensation Committee on the grant date. As of December 31, 2016, a total of 701,000 performance-based LTIP units representing 200% of the target were issued. The performance criteria for the performance-based LTIP units are based on market conditions under the relevant literature, and the performance-based LTIP units were granted to non-employees.

The unamortized fair value of performance-based LTIP units of $2.9 million at December 31, 2016 will be expensed over a period of 2.0 years, subject to future mark to market adjustments. Compensation expense of $975,000 was recorded for the year ended December 31, 2016, and is included in “advisory services fee” on our condensed consolidated statements of operations. No compensation expense was recorded for the year ended December 31, 2015.

As of December 31, 2016, we have issued a total of 1.1 million LTIP units (including performance-based LTIP units), all of which, other than approximately 3,000 units issued in March 2015 and 6,000 units issued in May 2015, 389,000 issued in June 2015 and 312,000 issued in October 2016, respectively, had reached full economic parity with, and are convertible into, common units. For the years ended December 31, 2016, 2015 and 2014, compensation expense of $1.4 million, $1.3 million and $1.9 million was recorded related to LTIP units issued to Ashford LLC’s employees, respectively, and is included in “advisory services fee.” Compensation expense of $44,000, $101,000 and $49,000 associated with LTIP units issued to our independent directors was recorded for the years ended December 31, 2016, 2015 and 2014, respectively, and is included in “corporate general and administrative” expense in our consolidated statements of operations. The fair value of the unrecognized cost of LTIP units, which was $406,000 at December 31, 2016, will be amortized over a period of 2.3 years, subject to future mark to market adjustments.

During the year ended December 31, 2016, approximately 137,000 common units with an aggregate fair value of $1.9 million at redemption were redeemed by the holders and, at our election, we issued shares of our common stock to satisfy the redemption price. During the year ended December 31, 2015, approximately 345,000 common units with an aggregate fair value of $5.9 million at redemption were redeemed by the holders and, at our election, we issued cash to satisfy the redemption price. Excluding the Ashford Trust redemption of our OP common units, during the year ended December 31, 2015, approximately 100,000 common units with an aggregate fair value of $1.6 million at redemption were redeemed by the holders and, at our election, we issued shares of our common stock to satisfy the redemption price. During the year ended December 31, 2014, approximately 176,000 operating partnership units with a fair value of $3.1 million were redeemed for cash at our election.

Redeemable noncontrolling interests in Ashford Prime OP as of December 31, 2016 and 2015, were $59.5 million and $61.8 million, respectively, which represented ownership of our operating partnerships of 13.90% and 12.75%, respectively. The carrying value of redeemable noncontrolling interests as of December 31, 2016 and 2015, included adjustments of $8.9 million and $12.5 million, respectively, to reflect the excess of redemption value over the accumulated historical cost. For the years ended December 31, 2016, 2015 and 2014, we allocated net income of $1.9 million, net loss of $393,000, and net income of $496,000, to the redeemable noncontrolling interests, respectively. We declared aggregate cash distributions to holders of common units and holders of LTIP units of $2.3 million, $2.2 million and $1.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. These distributions are recorded as a reduction of redeemable noncontrolling interests in operating partnership.

A summary of the activity of the units in our operating partnership is as follows (in thousands):



	Year Ended December 31,
	2016		2015		2014
Units outstanding at beginning of year	4,375		8,955		8,776
LTIP units issued	4		10		355
Performance LTIP units issued	701		—		—
Units redeemed for shares of common stock	(137	)	(4,245	)	—
Units redeemed for cash of $5,856 in 2015 and $3,074 in 2014	—		(345	)	(176	)
Units outstanding at end of year	4,943		4,375		8,955
Units convertible/redeemable at end of year	4,083		3,967		8,259

Ashford Trust Distribution of Ashford Prime Common Stock and Ashford Prime OP Common Units—On July 13, 2015, Ashford Trust announced that its board of directors had declared the distribution (1) to its stockholders of approximately 4.1 million shares of common stock of Ashford Prime to be received by Ashford Trust upon redemption of Ashford Prime OP common units and (2) to the common unit holders of Ashford Hospitality Trust Limited Partnership of its remaining common units of Ashford Prime OP. The distribution occurred on July 27, 2015, to stockholders and common unit holders of record as of the close of business of the New York Stock Exchange on July 20, 2015. The distribution had an aggregate fair value of approximately $61.7 million at redemption. As a result of the distribution, Ashford Trust has no ownership interest in Ashford Prime.