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, up to one share of our REIT common stock, which is either (i) issued pursuant to an effective registration statement; (ii) included in an effective registration statement providing for the resale of such common stock; or (iii) issued subject to a registration rights agreement.

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 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, 2017, there are approximately 593,000 performance-based LTIP units, representing 200% of the target, outstanding. 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. During the year ended December 31, 2017, approximately 389,000 performance-based LTIP units were forfeited due to the market condition criteria not being met.

The unamortized fair value of performance-based LTIP units of $799,000 at December 31, 2017 will be expensed over a period of 2.0 years, subject to future mark to market adjustments. We recorded a credit to compensation expense of $1.6 million for the year ended December 31, 2017 due to lower fair values as compared to prior periods. For the year ended December 31, 2016, compensation expense was $975,000. No compensation expense was recorded for the year ended December 31, 2015. The related amounts are included in “advisory services fee” on our consolidated statements of operations.

As of December 31, 2017, we have issued a total of 1.1 million LTIP units (including performance-based LTIP units), net of forfeitures, all of which, other than approximately 3,000 units issued in March 2015, 6,000 units issued in May 2015, 312,000 issued in October 2016, 141,000 LTIP units issued in April 2017, 281,000 performance-based LTIP units issued in April 2017 and 6,000 LTIP units issued in June 2017, respectively, had reached full economic parity with, and are convertible into, common units. For the years ended December 31, 2017, 2016 and 2015, compensation expense of $405,000, $1.4 million and $1.3 million was recorded related to LTIP units issued to Ashford LLC’s employees, respectively, and is included in “advisory services fee.” Compensation expense of $64,000, $44,000 and $101,000 associated with LTIP units issued to our independent directors was recorded for the years ended December 31, 2017, 2016 and 2015, 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 of $1.1 million at December 31, 2017, will be amortized over a period of 2.3 years, subject to future mark to market adjustments.

During the year ended December 31, 2017, approximately 194,000 common units with an aggregate redemption fair value of $1.8 million 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, 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.

Redeemable noncontrolling interests in Ashford Prime OP as of December 31, 2017 and 2016, were $46.6 million and $59.5 million, respectively, which represented ownership of our operating partnerships of 11.43% and 13.90%, respectively. The carrying value of redeemable noncontrolling interests as of December 31, 2017 and 2016, included adjustments of $0 million and $8.9 million, respectively, to reflect the excess of redemption value over the accumulated historical cost. For the years ended December 31, 2017, 2016 and 2015, we allocated net income of $2.0 million, net income of $1.9 million, and net loss of $393,000 to the redeemable noncontrolling interests, respectively. We declared aggregate cash distributions to holders of common units and holders of LTIP units of $2.8 million, $2.3 million and $2.2 million for the years ended December 31, 2017, 2016 and 2015, 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,
	2017		2016		2015
Units outstanding at beginning of year	4,943		4,375		8,955
LTIP units issued	149		4		10
Performance-based LTIP units issued	281		701		—
Units redeemed for shares of common stock	(194	)	(137	)	(4,245	)
Units redeemed for cash of $5,856 in 2015	—		—		(345	)
Performance-based LTIP units forfeited	(389	)	—		—
Units outstanding at end of year	4,790		4,943		4,375
Units convertible/redeemable at end of year	4,028		4,083		3,967

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.