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Item 5.02.
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Departure of Directors or Certain Officers; Election
of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
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2018 Executive Compensation Program
On March 7, 2018, the Compensation Committee
of the Company’s Board of Directors (the “Board”) approved the elements of the 2018 executive compensation program
for the following executive officers of the Company:
Daniel P. Hansen, President and Chief Executive Officer;
Gregory A. Dowell, Executive Vice President, Chief
Financial Officer and Treasurer; (1)
Jonathan P. Stanner, Executive Vice President, Chief
Investment Officer;
Craig J. Aniszewski, Executive Vice President and
Chief Operating Officer;
Christopher R. Eng, Executive Vice President, General
Counsel, Chief Risk Officer and Secretary; and
Paul Ruiz, Senior Vice President and Chief Accounting
Officer.
(1) As previously announced, Mr. Dowell is
retiring from the Company effective March 31, 2018 and was not included in the 2018 executive compensation program.
The key elements of the 2018 executive compensation
program are summarized below. For the development of the 2018 executive compensation program, the Compensation Committee retained
Frederic W. Cook & Co, Inc. (“FW Cook”). FW Cook provided the Compensation Committee with advisory services only
with respect to executive and Board compensation, and worked with management only at the request and under the direction of the
Compensation Committee. FW Cook reviewed the compensation components for the prior year’s program and advised the Compensation
Committee on the appropriateness of those components. The Compensation Committee’s approval of the 2018 executive compensation
program was based on various factors, including, among others, recommendations made by FW Cook.
2018 Annual Base Salaries.
For 2018,
the base salaries to be paid to the Company’s executive officers are as follows:
Mr. Hansen will be paid $700,000;
Mr. Dowell will be paid $375,000; (1)
Mr. Stanner will be paid $425,000;
Mr. Aniszewski will be paid $450,000;
Mr. Eng will be paid $350,000; and
Mr. Ruiz will be paid $300,000.
(1) As previously announced, Mr. Dowell is
retiring from the Company effective March 31, 2018 and was not included in the 2018 executive compensation program. Mr.
Dowell will be paid his base salary through his retirement date.
2018 Incentive Awards (Cash Bonuses).
The Compensation Committee approved incentive awards that provide the executive officers an opportunity to earn additional
cash compensation based on the achievement of company-specific performance goals and, at the Compensation Committee’s discretion,
each executive officer’s individual performance and contribution to the Company in 2018. As more fully described below, incentive
awards that are earned will be settled in cash on or before March 15, 2019. The Company entered into incentive award agreements
with each of the executive officers effective as of March 7, 2018 setting forth the terms and conditions of the incentive awards.
Under the incentive award agreements,
the executives will be entitled to cash payments based on the extent to which company-specific and individual performance goals
have been achieved. In the first quarter of 2019, the Compensation Committee will evaluate whether the company-specific performance
goals have been achieved and the awards have been earned at the threshold, target or maximum level and whether individual performance
goals have been achieved. For 2018, the goals established by the Compensation Committee relate to:
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Budgeted amounts of AFFO per share (the “AFFO Component”, weighted as 60% of total);
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Budgeted amounts of same-store RevPAR growth (the “RevPAR Component”, weighted as 20% of total); and
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Individual performance and contribution to the Company in 2018 (the “Individual Performance Component”, weighted
as 20% of total).
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For purposes of the AFFO Component,
AFFO per share will be calculated as the Company’s net income or loss as set forth in its audited consolidated financial
statements for the year ending December 31, 2018, less preferred dividends and excluding gains (or losses) from sales of property
and impairment losses, plus depreciation and amortization (including amortization of deferred financing costs and amortization
of franchise fees), as further adjusted to exclude hotel transaction and pursuit costs, equity-based compensation, debt transaction
costs, gain (or loss) on derivative instruments and such other items, including non-cash or nonrecurring expenses, as the Compensation
Committee determines is appropriate and consistent with the purpose and intent of the incentive awards. For purposes of the RevPAR
Component, same-store RevPAR growth will be calculated as a year over year comparison of RevPAR growth for the Company’s
hotels owned for the entire year ended December 31, 2017 and the entire year ending December 31, 2018. For purposes of the Individual
Performance Component, the performance goals have been established with respect to each executive officer’s individual performance
and contribution to the Company in 2018.
If any unknown or unanticipated transactions
occur on or prior to December 31, 2018, the effect of those transactions on actual 2018 AFFO per share will be evaluated by the
Compensation Committee, and the Compensation Committee, at its discretion, may make an appropriate adjustment to the threshold,
target and maximum levels of budgeted AFFO per share to give effect to those transactions.
No amount will be paid under the AFFO Component,
the RevPAR Component or the Individual Performance Component if the threshold level of performance is not achieved. No additional
amounts will be paid under the AFFO Component, the RevPAR Component or the Individual Performance Component if actual performance
exceeds the maximum level of performance established by the Compensation Committee. Linear interpolation will be applied for performance
between the threshold and target levels and for performance between the target and maximum levels.
The following table sets forth the
potential payout under the 2018 annual incentive program that each executive may earn at the threshold, target and maximum level
of performance. Linear interpolation will be applied for performance between the threshold and target levels and for performance
between the target and maximum levels.
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Threshold
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Target
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Maximum
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% of Base
Salary
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Potential
Payout
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% of Base
Salary
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Potential
Payout
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% of Base
Salary
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Potential
Payout
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Daniel P. Hansen
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75%
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$525,000
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150%
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$1,050,000
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300%
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$2,100,000
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Craig J. Aniszewski
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50%
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$225,000
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100%
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$450,000
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200%
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$900,000
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Jonathan P. Stanner
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50%
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$212,500
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100%
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$425,000
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200%
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$850,000
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Christopher R. Eng
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50%
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$175,000
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100%
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$350,000
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200%
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$700,000
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Paul Ruiz
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35%
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$105,000
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70%
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$210,000
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140%
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$420,000
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In determining whether the Individual
Performance Component has been earned, the Compensation Committee will not rely on any one particular objective or formula but
rather on what the Compensation Committee considers to be value-added quantitative and qualitative goals in furtherance of the
Company’s compensation principles. No executive officer is guaranteed an award under the Individual Performance Component
and, if performance is unsatisfactory, no amounts will be paid under the Individual Performance Component.
Except as discussed below, in order
to receive payment under the AFFO Component, the RevPAR Component or the Individual Performance Component, an executive officer
must be employed by the Company on December 31, 2018. The executive officers will be entitled to receive (i) the pro rata amount
of the AFFO Component or the RevPAR Component, if any, and (ii) the amount, if any, of the Individual Performance Component the
Compensation Committee may determine is earned if the executive’s employment with the Company terminates or is terminated
before December 31, 2018 on account of death or disability or on account of a termination without cause or a voluntary termination
for good reason.
In addition, no payment will be made
under any component of an incentive award until the Compensation Committee determines the amount that has been earned. Any amount
determined by the Compensation Committee to be payable under an incentive award will be paid as soon as practicable after the Compensation
Committee’s determination of the amount to be paid. The Compensation Committee will make the determination, and the payment,
if any, will be made, on or before March 15, 2019. Any amount payable under the incentive awards will be paid in a single cash
payment, which will be reduced by applicable income and employment tax withholdings.
2018 Equity Incentives: Time-Based
Stock Awards.
The Compensation Committee approved time-based stock awards under the Company’s 2011 Equity Incentive Plan
As Amended and Restated Effective June 15, 2015 (the “2011 Plan”) as follows:
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Mr. Hansen, 80,357 shares;
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Mr. Aniszewski, 32,738 shares;
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Mr. Stanner, 26,786 shares;
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Mr. Eng, 13,393 shares; and
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Mr. Ruiz, 8,928 shares.
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The time-based shares were issued on
March 7, 2018. The number of time-based shares awarded to each executive officer was determined by dividing the fixed dollar amount
of each stock award by the volume weighted average price (“VWAP”) of the Company’s common stock for the ten trading
days ending on, and including, March 6, 2018, or $13.44. The Company has entered into stock award agreements with the executive
officers, effective as of March 7, 2018, setting forth the terms and conditions of the time-based stock awards. The stock award
agreements provide for vesting over a three-year period as follows: 25% of shares will vest on March 9, 2019; 25% of the shares
will vest on March 9, 2020; and 50% of the shares will vest on March 9, 2021.
Except as described below, no time-based
shares will vest unless the executive remains in the continuous employ of the Company from the date of grant until the applicable
vesting date. If a “change in control”, as defined in the 2011 Plan, occurs prior to vesting and if the successor entity
does not assume or replace the time-based shares, they will vest on a “control change date”, as defined in the Equity
Incentive Plan, if the executive remains in the continuous employ of the Company from the date of grant until the control change
date. In addition, all of the time-based shares (if not sooner vested), will vest on the date that the executive’s employment
with the Company ends on account of the executive’s death or disability, or if the executive’s employment is terminated
without cause, or if the executive resigns for good reason.
Any time-based shares that have not vested
as described above may not be transferred and will be forfeited on the date the executive’s employment with the Company terminates.
On and after the date of grant and prior to forfeiture of any time-based shares, the executive will have the right to vote the
time-based shares and to receive, free of all restrictions, all dividends declared and paid on the Company’s common stock,
whether or not vested.
2018 Equity Incentives: Performance-Based
Stock Awards.
The Compensation Committee approved performance-based stock awards under the 2011 Plan as follows:
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Mr. Hansen, 120,536 shares;
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Mr. Aniszewski, 49,107 shares;
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Mr. Stanner, 40,178 shares;
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Mr. Eng, 20,089 shares; and
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Mr. Ruiz, 13,393 shares.
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The performance-based shares were issued
at the target level of performance, as discussed below, on March 7, 2018. The number of performance-based shares awarded to each
executive officer was determined by dividing the fixed dollar amount of each stock award by the volume weighted average price (“VWAP”)
of the Company’s common stock for the ten trading days ending on, and including, March 6, 2018, or $13.44. The Company has
entered into stock award agreements with the above-named executive officers, effective as of March 7, 2018, setting forth the terms
and conditions of the performance-based stock awards.
Pursuant to the stock award agreements,
the performance-based shares will be earned based on the Company’s relative total stockholder return (“TSR”)
at various peer group percentiles, which were set at the 30
th
percentile for threshold performance, the 55
th
percentile for target performance and the 80
th
percentile for maximum performance. Additional shares may be earned by
the executive officers if performance exceeds the target level. The performance-based shares (and any additional shares) will be
earned over a three-year performance period that commenced on March 7, 2018 and will end on March 7, 2021 (the “Performance
Period”). In addition, a portion of the performance-based shares will be earned based on the Company’s absolute TSR
as discussed below. The peer group selected by the Compensation Committee consists of the constituent companies of the SNL US Hotel
REIT Index (“Index”) for the entire Performance Period (“Index Company”). A company will be an “Index
Company” only if the company’s market capitalization on the first day of the Performance Period is at least $100 million.
A company will not be an “Index Company” if, during the Performance Period, it makes a public disclosure of its intent
or agreement to enter into a merger or sale with another company. A company will be an “Index Company” only if it is
listed on the Index for the entire Performance Period; provided, however, that a company that would be an Index Company that declares
bankruptcy during the Performance Period will be an Index Company and its TSR for the Performance Period will be negative one hundred
percent (-100%). If earned, the performance-based shares issued on March 7, 2018 will vest on March 7, 2021 and any additional
shares will be issued as soon as practical after the end of the Performance Period, but no later than March 31, 2021 and will be
fully vested as of the date of issuance.
The following table illustrates the percentage
of the target performance-based shares issued on March 7, 2018 that will be earned at various levels of relative TSR performance:
Company 3-Year TSR Percentile Rank
vs. Index Companies
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Percent of Target Shares
Earned
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<30
th
Percentile
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0%
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30
th
Percentile
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25%
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55
th
Percentile
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100%
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≥ 80
th
Percentile
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200%
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The number of shares earned will be linearly
interpolated for performance between the 30
th
and 55
th
percentile and for performance between the 55
th
and 80
th
percentile. In addition, if the Company’s absolute TSR is equal to or greater than 8.5% per year (or
25.5% cumulative over the Performance Period), at least 25% of the performance-based shares will be earned.
Pursuant to the terms of the 2011
Plan if a change in control occurs before March 7, 2021, executives will earn shares as follows. If the executive remains in
the continuous employ of the Company from March 7, 2018 until the control change date, the executive will earn the number of
shares calculated by multiplying the target level of shares by the Company’s applicable percent of Target Shares earned
according to the table above as of the control change date. The number of shares earned shall be vested and
non-forfeitable on March 7, 2021 if the executive remains in the continuous employ of the Company from March 7, 2018 until
such date. Notwithstanding the preceding sentence, the number of shares earned shall be vested and non-forfeitable on the
control change date if the surviving or successor entity in the change in control does not assume or replace the shares with
a comparable grant covering common stock of the surviving or successor entity. Notwithstanding the two preceding sentences,
the number of shares of earned shall be vested and non-forfeitable on the date that an executive’s employment with the
Company ends if the executive remains in the continuous employ of the Company from March 7, 2018 until the date such
employment ends, after the control change date, on account of the executive’s death, disability, termination without
cause or voluntary termination for good reason.
For purposes of the performance-based stock
awards, the Company’s TSR will be calculated in accordance with the methods utilized by SNL Financial to calculate TSR. The
TSR for each Index Company will be calculated in the same manner.
Performance-based shares that have not
been earned on or before March 7, 2021 in accordance with the terms of the stock award agreements will not vest or be issued, and
such shares or the right to receive such shares will be forfeited.
On and after the date of grant and prior
to forfeiture of any of the performance-based shares, the executives will have the right to vote the shares that have been issued.
However, prior to vesting, any cash dividends on the performance-based shares that have not vested will be accumulated but will
not be paid to the executives during the Performance Period. Any accumulated and unpaid cash dividends on the performance-based
shares will be paid to the executives on the date those shares vest in accordance with the terms of the stock award agreements.
If any additional shares are issued for performance that exceeds the target level, the executives will receive a cash payment in
the amount equal to the dividends that would have been paid on the additional shares as if those shares had been issued on March
7, 2018.