Watermark Lodging Trust 8K/A Financial Statements and Exhibits | WRMK 20 Jan 16

Exhibit 99.2

CAREY WATERMARK INVESTORS 2 INCORPORATED

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Our pro forma condensed consolidated balance sheet as of September 30, 2015 has been prepared as if the significant transaction during the fourth quarter of 2015 (noted herein) had occurred as of September 30, 2015. Our pro forma condensed consolidated statements of operations for the nine months ended September 30, 2015 and the year ended December 31, 2014 have been prepared based on our historical financial statements as if the significant transactions and related financings during the nine months ended September 30, 2015 had occurred on January 1, 2014. We were formed as a Maryland corporation on May 22, 2014, therefore, our historical statement of operations represents the results of operations from May 22, 2014 (Inception) to December 31, 2014. Pro forma adjustments are intended to reflect what the effect would have been had we held our ownership interests as of January 1, 2014 on amounts that have been recorded in our historical consolidated statement of operations. In our opinion, all adjustments necessary to reflect the effects of these investments have been made.

The pro forma condensed consolidated financial information for the nine months ended September 30, 2015 should be read in conjunction with our historical consolidated financial statements and notes thereto in our Quarterly Report on Form 10-Q as of and for the nine months ended September 30, 2015. The pro forma condensed consolidated financial information for the year ended December 31, 2014 should be read in conjunction with our historical consolidated financial statements for the period from Inception through December 31, 2014 included in our Registration Statement on Form S-11 (File No. 333-196681) filed on January 16, 2015. The pro forma information is not necessarily indicative of our financial condition had the significant transactions occurred on September 30, 2015, or results of operations had the significant transactions occurred on January 1, 2014, nor are they necessarily indicative of our financial position, cash flows or results of operations of future periods. In addition, the provisional accounting is preliminary and therefore subject to change. Any such changes could have a material effect on the pro forma condensed consolidated financial information.



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CAREY WATERMARK INVESTORS 2 INCORPORATED

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 2015
(in thousands)

			CWI 2 Historical			Embassy Suites Denver Downtown				Pro Forma
Assets
Investments in real estate:
	Hotels, at cost		$	193,293		$	169,884		A	$	363,177
	Accumulated depreciation		(3,489		)	—				(3,489		)
		Net investments in hotels	189,804			169,884				359,688
Equity investments in real estate			38,672			—				38,672
Cash			60,038			(168,809		)	A	62,045
						100,000			A
						(3,335		)	A
						(4,856		)	A
						(328		)	A
						79,335			B
Restricted cash			7,551			3,335			A	10,886
Accounts receivable			4,152			76			A	4,228
Other assets			18,970			565			A	19,863
						328			A
	Total assets		$	319,187		$	176,195			$	495,382

Liabilities and Equity
Liabilities:
Non-recourse debt			$	108,700		$	100,000		A	$	208,700
Due to related parties and affiliates			79,773			—				79,773
Accounts payable, accrued expenses and other liabilities			15,800			1,716			A	17,516
Distributions payable			577			—				577
	Total liabilities		204,850			101,716				306,566
Commitments and contingencies

Equity:
CWI 2 stockholders’ equity:
Preferred stock			—			—				—
Class A common stock			4			8			B	12
Class T common stock			6			—				6
Additional paid-in capital			86,775			79,327			B	166,102
Distributions and accumulated losses			(7,450		)	(4,856		)	A	(12,306		)
Accumulated other comprehensive loss			(87		)	—				(87		)
	Total CWI 2 stockholders’ equity		79,248			74,479				153,727
Noncontrolling interests			35,089			—				35,089
	Total equity		114,337			74,479				188,816
	Total liabilities and equity		$	319,187		$	176,195			$	495,382

The accompanying notes are an integral part of these pro forma condensed consolidated financial statements.



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CAREY WATERMARK INVESTORS 2 INCORPORATED

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 30, 2015
(in thousands, except share and per share amounts)

							Pro Forma Adjustments (Including Pre-Acquisition Historical Amounts)
				CWI 2 Historical			Other 2015 Acquisitions				Embassy Suites Denver Downtown				Weighted Average Shares		Pro Forma
Hotel Revenues
		Rooms		$	17,262		$	8,934		C	$	16,749		C			$	42,945
		Food and beverage		10,165			6,458			C	4,542			C			21,165
		Other hotel income		4,084			1,799			C	1,500			C			7,383
			Total Revenues	31,511			17,191				22,791						71,493
Operating Expenses
	Hotel Expenses
		Rooms		3,550			1,858			D	3,010			D			8,418
		Food and beverage		6,801			3,804			D	2,215			D			12,820
		Other hotel operating expenses		2,000			877			D	519			D			3,396
		Sales and marketing		2,610			1,396			D	2,713			D			6,719
		General and administrative		2,446			1,416			D	1,361			D			5,223
		Repairs and maintenance		1,357			731			D	488			D			2,576
		Utilities		1,418			693			D	581			D			2,692
		Management fees		1,320			653			D	495			D			2,468
		Property taxes, insurance, rent and other		1,637			860			D	957			D			3,454
		Depreciation and amortization		3,489			1,740			D	3,316			D			8,545
			Total Hotel Expenses	26,628			14,028				15,655						56,311
	Other Operating Expenses
		Acquisition-related expenses		8,184			(7,853		)	E	(122		)	E			209
		Corporate general and administrative expenses		1,541			—				—						1,541
		Asset management fees to affiliate and other		681			526			F	719			F			1,926
			Total Other Operating Expenses	10,406			(7,327		)		597						3,676
Operating (Loss) Income				(5,523		)	10,490				6,539						11,506
Other Income and (Expenses)
		Interest expense		(2,518		)	(1,168		)	G	(2,993		)	G			(6,679		)
		Equity in earnings of equity method investment in real estate		1,112			926			H	—						2,038
		Other income and (expenses)		(25		)	—				—						(25		)
				(1,431		)	(242		)		(2,993		)				(4,666		)
(Loss) Income from Operations Before Income Taxes				(6,954		)	10,248				3,546						6,840
	Benefit from (provision for) income taxes			1,450			(223		)	I	(303		)	I			924
Net (Loss) Income				(5,504		)	10,025				3,243						7,764
	Income attributable to noncontrolling interest			(1,216		)	(703		)	J	—						(1,919		)
Net (Loss) Income Attributable to CWI 2 Stockholders				$	(6,720	)	$	9,322			$	3,243					$	5,845

Class A Common Stock
	Net (loss) income attributable to CWI 2 Stockholders			$	(2,989	)											$	5,275
	Basic and diluted weighted-average shares outstanding			879,525											7,976,480	K	8,856,005
	Basic and Diluted Net (Loss) Income Per Share			$	(3.40	)											$	0.60

Class T Common Stock
	Net (loss) income attributable to CWI 2 Stockholders			$	(3,731	)											$	570
	Basic and diluted weighted-average shares outstanding			1,076,930											—		1,076,930
	Basic and Diluted Net (Loss) Income Per Share			$	(3.46	)											$	0.53

The accompanying notes are an integral part of these pro forma condensed consolidated financial statements.



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CAREY WATERMARK INVESTORS 2 INCORPORATED

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Year Ended December 31, 2014
(in thousands, except share and per share amounts)

							Pro Forma Adjustments (Including Pre-Acquisition Historical Amounts)
				CWI 2 Historical May 22, 2014 (Inception) through December 31, 2014			Other 2015 Acquisitions				Embassy Suites Denver Downtown				Weighted Average Shares		Pro Forma
Hotel Revenues
		Rooms		$	—		$	31,983		C	$	21,247		C			$	53,230
		Food and beverage		—			20,929			C	5,538			C			26,467
		Other hotel income		—			6,060			C	1,658			C			7,718
			Total Revenues	—			58,972				28,443						87,415
Operating Expenses
	Hotel Expenses
		Rooms		—			6,791			D	4,251			D			11,042
		Food and beverage		—			12,738			D	2,911			D			15,649
		Other hotel operating expenses		—			3,348			D	674			D			4,022
		Sales and marketing		—			4,441			D	3,533			D			7,974
		General and administrative		—			5,478			D	1,805			D			7,283
		Repairs and maintenance		—			2,675			D	568			D			3,243
		Utilities		—			2,597			D	799			D			3,396
		Management fees		—			2,309			D	611			D			2,920
		Property taxes, insurance, rent and other		—			3,333			D	1,697			D			5,030
		Depreciation and amortization		—			6,255			D	4,422			D			10,677
			Total Hotel Expenses	—			49,965				21,271						71,236
	Other Operating Expenses
		Corporate general and administrative expenses		108			—				—						108
		Asset management fees to affiliate and other		—			1,197			F	962			F			2,159
			Total Other Operating Expenses	108			1,197				962						2,267
Operating (Loss) Income				(108		)	7,810				6,210						13,912
Other Income and (Expenses)
		Interest expense		—			(5,263		)	G	(4,001		)	G			(9,264		)
		Equity in earnings of equity method investment in real estate		—			3,359			H	—						3,359
				—			(1,904		)		(4,001		)				(5,905		)
(Loss) Income from Operations Before Income Taxes				(108		)	5,906				2,209						8,007
	Provision for income taxes			—			(763		)	I	(378		)	I			(1,141		)
Net (Loss) Income				(108		)	5,143				1,831						6,866
	Income attributable to noncontrolling interest			—			(511		)	J	—						(511		)
Net (Loss) Income Attributable to CWI 2 Stockholders				$	(108	)	$	4,632			$	1,831					$	6,355

Class A Common Stock
	Net (loss) income attributable to CWI 2 Stockholders			$	(108	)											$	6,355
	Basic and diluted weighted-average shares outstanding			22,222											7,972,905	K	7,995,127
	Basic and Diluted Net (Loss) Income Per Share			$	(4.86	)											$	0.79

Class T Common Stock
	Net income attributable to CWI 2 Stockholders			$	—												$	—
	Basic and diluted weighted-average shares outstanding			—											—		—
	Basic and Diluted Net Income Per Share			$	—												$	—

The accompanying notes are an integral part of these pro forma condensed consolidated financial statements.



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CAREY WATERMARK INVESTORS 2 INCORPORATED

NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

The pro forma condensed consolidated balance sheet as of September 30, 2015 and the pro forma condensed consolidated statement of operations for the nine months ended September 30, 2015 were derived from our historical consolidated financial statements included in our Quarterly Report on Form 10-Q as of and for the nine months ended September 30, 2015. The pro forma condensed consolidated statement of operations for the year ended December 31, 2014 was derived from our historical consolidated financial statements included in our Registration Statement on Form S-11 (File No. 333-196681) filed on January 16, 2015.

Note 2. Historical Acquisitions

Other 2015 Transactions

On April 1, 2015 and May 1, 2015, we acquired controlling interests in two hotels: Marriott Sawgrass Golf Resort & Spa and Courtyard Nashville Downtown, respectively. Additionally, on May 29, 2015, we acquired a noncontrolling interest in a joint venture that owns the Ritz-Carlton Key Biscayne hotel, which we account for under the equity method of accounting (collectively, our "Other 2015 Acquisitions").

All of the transactions noted above are reflected in our historical consolidated balance sheet at September 30, 2015 and, therefore, no pro forma adjustments to our historical consolidated balance sheet as of September 30, 2015 were required. In addition, the transactions noted above are reflected in our historical consolidated statement of operations for the nine months ended September 30, 2015 from their respective dates of acquisition through September 30, 2015. We made pro forma adjustments (Note 3, adjustments C through K) to reflect the impact on our results of operations had these acquisitions been made on January 1, 2014.



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Notes to Pro Forma Condensed Consolidated Financial Statements

Note 3. Pro Forma Adjustments

A. Investment

Embassy Suites Denver Downtown

On November 4, 2015, we acquired the Embassy Suites Denver Downtown hotel from Cornerstone Real Estate Advisors, an unaffiliated third party, and acquired real estate and other hotel assets, net of assumed liabilities totaling $168.8 million, as detailed in the table that follows. The 403-room, all-suite hotel is located in Denver, Colorado. The hotel will continue to be managed by Sage Hospitality, an unaffiliated third party.

We acquired the Embassy Suites Denver Downtown through a wholly-owned subsidiary and obtained a non-recourse mortgage loan of $100.0 million, with a fixed interest rate of 3.9%. The loan is interest-only for 36 months and has a maturity date of December 1, 2022. We capitalized $0.3 million of deferred financing costs related to this loan.

The effect of an increase or decrease in interest rates of 1/8% on pro forma interest expense is $0.1 million for both the nine months ended September 30, 2015 and the year ended December 31, 2014.

In connection with this acquisition, we expensed acquisition costs of $4.9 million, including acquisition fees of $4.5 million paid to our advisor, which are reflected as a charge to Distributions and accumulated losses in the pro forma condensed consolidated balance sheet as of September 30, 2015. We placed $2.7 million into lender-held escrow accounts in connection with general repair and maintenance of the hotel and $0.6 million for property tax.

The following table presents a preliminary summary of assets acquired and liabilities assumed in these business combinations, at the date of acquisition (in thousands):



			Embassy Suites Denver Downtown
Acquisition consideration
	Cash consideration		$	168,809
Assets acquired at fair value:
	Buildings		$	153,358
	Land		13,000
	Furniture, fixtures and equipment		3,526
	Accounts receivable		76
	Other assets		565
Liabilities assumed at fair value:
	Accounts payable, accrued expenses and other		(1,716		)
		Net assets acquired at fair value	$	168,809

B. Fundraising

At September 30, 2015, we did not have sufficient cash on hand to acquire and commence operations of the Embassy Suites Denver Downtown; therefore, for pro forma purposes, we assumed we would have used offering proceeds of $79.3 million through the issuance of 8.0 million Class A shares to complete the transaction and maintain adequate working capital. We have reflected the cash proceeds as pro forma adjustments to our historical condensed consolidated balance sheet at September 30, 2015.



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Notes to Pro Forma Condensed Consolidated Financial Statements

C. Hotel Revenue

Pro forma adjustments for hotel revenue are derived from the historical financial statements of our investments. The following pro forma adjustments for the nine months ended September 30, 2015 and the year ended December 31, 2014 represent the hotel revenues that would have been incurred in addition to those presented in our historical financial statements, when applicable (in thousands):



	Pre-Acquisition Historical
	Nine Months Ended September 30, 2015
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Rooms	$	8,934	$	16,749
Food and beverage	6,458		4,542
Other hotel income	1,799		1,500
	$	17,191	$	22,791



	Pre-Acquisition Historical
	Year Ended December 31, 2014
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Rooms	$	31,983	$	21,247
Food and beverage	20,929		5,538
Other hotel income	6,060		1,658
	$	58,972	$	28,443

D. Hotel Expenses

Pro forma adjustments for hotel expenses are derived from the historical financial statements of our investments except for those related to sales and marketing, management fees and depreciation and amortization, as illustrated below. The following pro forma adjustments for the nine months ended September 30, 2015 and the year ended December 31, 2014 represent the hotel expenses that would have been incurred in addition to those presented in our historical financial statements, when applicable (in thousands):



	Pre-Acquisition Historical
	Nine Months Ended September 30, 2015
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Rooms	$	1,858	$	3,010
Food and beverage	3,804		2,215
Other hotel operating expenses	877		519
General and administrative	1,416		1,361
Repairs and maintenance	731		488
Utilities	693		581
Property taxes, insurance, rent and other	860		957
	$	10,239	$	9,131



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Notes to Pro Forma Condensed Consolidated Financial Statements



	Pre-Acquisition Historical
	Year Ended December 31, 2014
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Rooms	$	6,791	$	4,251
Food and beverage	12,738		2,911
Other hotel operating expenses	3,348		674
General and administrative	5,478		1,805
Repairs and maintenance	2,675		568
Utilities	2,597		799
Property taxes, insurance, rent and other	3,333		1,697
	$	36,960	$	12,705

Adjusted Hotel Expenses

Pro forma adjustments for sales and marketing and management fees reflect expenses resulting from franchise and management agreements, respectively, entered into upon acquisition, when applicable. Pro forma adjustments for depreciation and amortization reflect depreciation and amortization of the acquired assets at fair value on a straight-line basis using the estimated useful lives of the properties (limited to 40 years for buildings and ranging generally from four years up to the remaining life of the building at the time of addition for building improvements), site improvements (generally four to 15 years) and furniture, fixtures and equipment (generally one to 12 years). The following pro forma adjustments for the nine months ended September 30, 2015 and the year ended December 31, 2014 represent the hotel expenses that would have been incurred in addition to those presented in our historical financial statements, when applicable (in thousands):



	Nine Months Ended September 30, 2015
	Other 2015 Acquisitions			Embassy Suites Denver Downtown
Sales and marketing - pre-acquisition historical	$	1,396		$	2,713
Sales and marketing - pro forma adjustments	—			—
Sales and marketing - pro forma results	$	1,396		$	2,713

Management fees - pre-acquisition historical	$	766		$	526
Management fees - pro forma adjustments	(113		)	(31		)
Management fees - pro forma results	$	653		$	495

Depreciation and amortization - pre-acquisition historical	$	853		$	4,036
Depreciation and amortization - pro forma adjustments	887			(720		)
Depreciation and amortization - pro forma results	$	1,740		$	3,316



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Notes to Pro Forma Condensed Consolidated Financial Statements



	Year Ended December 31, 2014
	Other 2015 Acquisitions			Embassy Suites Denver Downtown
Sales and marketing - pre-acquisition historical	$	5,741		$	3,533
Sales and marketing - pro forma adjustments	(1,300		)	—
Sales and marketing - pro forma results	$	4,441		$	3,533

Management fees - pre-acquisition historical	$	3,481		$	636
Management fees - pro forma adjustments	(1,172		)	(25		)
Management fees - pro forma results	$	2,309		$	611

Depreciation and amortization - pre-acquisition historical	$	6,303		$	5,176
Depreciation and amortization - pro forma adjustments	(48		)	(754		)
Depreciation and amortization - pro forma results	$	6,255		$	4,422

E. Acquisition-Related Expenses

Acquisition costs of $7.9 million and $0.1 million related to Other 2015 Acquisitions and Embassy Suites Denver Downtown, respectively, which are non-recurring in nature, are reflected in our historical consolidated statement of operations for the nine months ended September 30, 2015. We have reflected pro forma adjustments to exclude these non-recurring charges from our pro forma condensed consolidated statement of operations.

F. Asset Management Fees

We pay our advisor an annual asset management fee equal to 0.55% of the aggregate average market value of our investments. Pro forma adjustments for such fees are reflected in the accompanying pro forma condensed consolidated statement of operations in order to reflect what the fee would have been had the acquisition of investments occurred on January 1, 2014. The following pro forma adjustments for the nine months ended September 30, 2015 and year ended December 31, 2014 represent incremental asset management fees that would have been incurred in addition to asset management fees presented in our historical financial statements (in thousands):



	Nine Months Ended	Year Ended
	September 30, 2015	December 31, 2014
Other 2015 Acquisitions	526	1,197
Embassy Suites Denver Downtown	719	962

G. Interest Expense

The following pro forma adjustments for the nine months ended September 30, 2015 and year ended December 31, 2014 represent the incremental interest expense that would have been incurred in addition to the amounts presented in our historical financial statements (in thousands):



	Nine Months Ended September 30, 2015
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Interest expense - pre-acquisition historical	$	1,015	$	2,080
Interest expense - pro forma adjustments	153		913
Interest expense - pro forma results	$	1,168	$	2,993



	9

Notes to Pro Forma Condensed Consolidated Financial Statements



	Year Ended December 31, 2014
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Interest expense - pre-acquisition historical	$	1,619	$	2,916
Interest expense - pro forma adjustments	3,644		1,085
Interest expense - pro forma results	$	5,263	$	4,001

H. Equity in Earnings of Equity Method Investment in Real Estate

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate to use if the venture’s capital structure gives different rights and priorities to its investors. We have a priority return on our equity method investment. Therefore, we follow the hypothetical liquidation at book value method in determining our share of the venture’s earnings or losses for the reporting period as this method better reflects our claim on the venture’s book value at the end of each reporting period. Earnings for our equity method investment are recognized in accordance with the investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

Based upon the hypothetical liquidation at book value method, our adjustment to pro forma equity in earnings would have been $0.9 million and $3.4 million for the nine months ended September 30, 2015 the year ended December 31, 2014, respectively.

I. Provision for Income Taxes

We have reflected pro forma adjustments related to our investments based upon an estimated effective tax rate, which takes into account the fact that certain activities are taxable and other activities are pass-through items for income tax purposes. The following pro forma adjustments for the nine months ended September 30, 2015 and year ended December 31, 2014 reflect the incremental income tax provisions that would have been incurred, based on the new entity structure, in addition to the amounts presented in the historical financial statements, if any (in thousands):



	Nine Months Ended September 30, 2015
	Other 2015 Acquisitions		Embassy Suites Denver Downtown
Provision for income taxes - pre-acquisition historical	$	—	$	—
Provision for income taxes - pro forma adjustments	223		303
Provision for income taxes - pro forma results	$	223	$	303



	Year Ended December 31, 2014
	Other 2015 Acquisitions			Embassy Suites Denver Downtown
Benefit for income taxes - pre-acquisition historical	$	(433	)	$	—
Provision for income taxes - pro forma adjustments	1,196			378
Provision for income taxes - pro forma results	$	763		$	378

J. Income Attributable to Noncontrolling Interest

The pro forma adjustment to income attributable to noncontrolling interest related to CWI 1's ownership interest in the Marriott Sawgrass Golf Resort & Spa was $0.7 million and $0.5 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.

K. Weighted Average Shares

The pro forma weighted average shares outstanding were determined as if the number of shares required to raise the funds for the acquisition of Embassy Suites Denver Downtown included in these pro forma condensed consolidated financial statements were issued on January 1, 2014.



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Watermark Lodging Trust (WRMK) 8-K/AFinancial Statements and Exhibits