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 Braemar 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. 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, generally 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 the issuance of 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 Braemar 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% 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, 2018, there were approximately 492,000 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 years ended December 31, 2018 and 2017, approximately 312,000 and 389,000 performance-based LTIP units were cancelled due to the market condition criteria not being met, respectively. Upon the adoption of ASU 2018-07, the corresponding compensation cost is recognized ratably over the service period for the award as the service is rendered, based on the grant date fair value of the award, regardless of the actual outcome of the market condition as opposed to being accounted for at fair value based on the market price of the shares at each quarterly measurement date.

As of December 31, 2018, we have issued a total of 1.2 million LTIP units (including performance-based LTIP units), net of cancellations, all of which, other than approximately 155,000 LTIP units and 281,000 performance-based LTIP units issued from March 2015 to August 2018 had reached full economic parity with, and are convertible into, common units.

The following table presents compensation expense for performance LTIP units and LTIP units (in thousands):



		Year Ended December 31,
Type	Line Item	2018		2017				2016
Performance LTIP units	Advisory services fee	$	785	$	(1,630	)	⁽¹⁾	$	975
LTIP units	Advisory services fee	976		405				1,429
LTIP units - independent directors	Corporate, general and administrative	61		64				44
Total		$	1,822	$	(1,161	)		$	2,448

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⁽¹⁾	The credit to compensation expense is a result of lower fair values as compared to prior periods.

The unamortized cost of the unvested performance-based LTIP units of $1.6 million at December 31, 2018 will be expensed over a period of 2.0 years with a weighted average period of 1.4 years.

The unamortized cost of the unvested LTIP units of $1.9 million at December 31, 2018, will be amortized over a period of 2.2 years with a weighted average period of 1.8 years.

The following table presents the common units redeemed and the fair value upon redemption (in thousands):



	Year Ended December 31,
Line Item	2018		2017		2016
Common units converted to stock	—		194		137
Fair value of units converted	$	—	$	1,761	$	1,925

The following table presents the redeemable noncontrolling interests in Braemar OP (in thousands) and the corresponding approximate ownership percentage of our operating partnership:



	December 31, 2018			December 31, 2017
Redeemable noncontrolling interests in Braemar OP	$	44,885		$	46,627
Adjustments to redeemable noncontrolling interests ⁽¹⁾	$	23		$	—
Ownership percentage of operating partnership	11.22		%	11.43		%

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⁽¹⁾	Reflects the excess of the redemption value over the accumulated historical costs^.

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



	Year Ended December 31,
	2018		2017		2016
Units outstanding at beginning of year	4,790		4,943		4,375
LTIP units issued	144		149		4
Performance-based LTIP units issued	211		281		701
Units redeemed for shares of common stock	—		(194	)	(137	)
Performance-based LTIP units cancelled	(312	)	(389	)	—
Units outstanding at end of year	4,833		4,790		4,943
Units convertible/redeemable at end of year	4,045		4,028		4,083

We allocated net income (loss) to the redeemable noncontrolling interests and declared aggregate cash distributions to the holders of common units and holders of LTIP units, which are recorded as a reduction of redeemable noncontrolling interests in operating partnership, as illustrated in the table below (in thousands):



	Year Ended December 31,
	2018		2017			2016
Net (income) loss attributable to redeemable noncontrolling interests in operating partnership	$	751	$	(2,038	)	$	(1,899	)
Aggregate distributions to holders of common units, LTIP units and performance LTIP units	2,854		2,791			2,331