UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11527

HOSPITALITY PROPERTIES TRUST

Maryland	04-3262075
(State of Organization)	(IRS Employer Identification No.)

 

400 Centre Street, Newton, Massachusetts 02458

617-964-8389

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b—2 of the Exchange Act. (Check one):

Large Accelerated Filer x                     Accelerated Filer o                     Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No x

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of August 2, 2006:  74,258,301

 

 

HOSPITALITY PROPERTIES TRUST

FORM 10-Q

June 30, 2006

INDEX

PART I		Financial Information (Unaudited)		Page
		Item 1. Financial Statements
		Consolidated Balance Sheet — June 30, 2006 and December 31, 2005		3
		Consolidated Statement of Income — Three and Six Months Ended June 30, 2006 and 2005		4
		Consolidated Statement of Cash Flows — Six Months Ended June 30, 2006 and 2005		5
		Notes to Consolidated Financial Statements		6
		Item 2.
		Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
		Item 3.
		Quantitative and Qualitative Disclosures About Market Risk		21
		Item 4.
		Controls and Procedures		22
		Warning Concerning Forward Looking Statements		23
		Statement Concerning Limited Liability		24
PART II		Other Information
		Item 2.
		Unregistered Sales of Equity Securities and Use of Proceeds		25
		Item 4.
		Submission of Matters to a Vote of Security Holders		25
		Item 6.
		Exhibits		25
		Signatures		26

 

References in this Form 10-Q to the “Company”, “HPT”, “we”, “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

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PART I   Financial Information

Item 1.                          Financial Statements

HOSPITALITY PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except share data)

		June 30,			December 31,
		2006			2005
		(Unaudited)
ASSETS
Real estate properties, at cost:
Land		$	584,199		$	537,389
Buildings, improvements and equipment		3,392,018			3,089,304
		3,976,217			3,626,693
Accumulated depreciation		(650,790		)	(613,007		)
		3,325,427			3,013,686
Cash and cash equivalents		16,880			18,568
Restricted cash (FF&E reserve escrow)		30,241			29,063
Other assets, net		50,341			53,290
		$	3,422,889		$	3,114,607
LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility		$	85,000		$	35,000
Senior notes, net of discounts		1,195,834			921,606
Mortgage payable		3,733			3,766
Security deposits		185,364			185,304
Accounts payable and other liabilities		129,089			108,595
Due to affiliate		3,175			2,967
Dividends payable		1,914			1,914
Total liabilities		1,604,109			1,259,152
Commitments and contingencies
Shareholders’ equity:
Preferred shares of beneficial interest, no par value, 100,000,000 shares authorized:
Series B preferred shares; 87¤8% cumulative redeemable; 3,450,000 shares issued and outstanding, aggregate liquidation preference $86,250		83,306			83,306
Common shares of beneficial interest; $0.01 par value; 100,000,000 shares authorized 71,958,301 and 71,920,578 issued and outstanding, respectively		720			719
Additional paid-in capital		2,061,454			2,059,883
Cumulative net income		1,281,682			1,211,072
Cumulative preferred distributions		(63,164		)	(59,336		)
Cumulative common distributions		(1,545,218		)	(1,440,189		)
Total shareholders’ equity		1,818,780			1,855,455
		$	3,422,889		$	3,114,607

 

The accompanying notes are an integral part of these financial statements.

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HOSPITALITY PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)
(in thousands, except per share data)

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Revenues:
Hotel operating revenues		$	233,627		$	181,059		$	435,455		$	326,106
Rental income		32,870			31,890			65,346			62,955
FF&E reserve income		5,273			4,838			10,263			9,237
Interest income		428			294			850			530
Total revenues		272,198			218,081			511,914			398,828
Expenses:
Hotel operating expenses		172,625			132,344			316,814			232,769
Interest (including amortization of deferred financing costs of $635, $945, $1,245 and $1,679, respectively)		21,162			17,591			40,150			33,020
Depreciation and amortization		35,848			31,639			70,800			62,462
General and administrative		7,186			6,796			13,540			12,160
Loss on asset impairment		—			7,300			—			7,300
Total expenses		236,821			195,670			441,304			347,711
Net income		35,377			22,411			70,610			51,117
Preferred distributions		(1,914		)	(1,914		)	(3,828		)	(3,828		)
Net income available for common shareholders		$	33,463		$	20,497		$	66,782		$	47,289
Weighted average common shares outstanding		71,953			68,357			71,937			67,783
Basic and diluted earnings per common share:
Net income available for common shareholders		$	0.47		$	0.30		$	0.93		$	0.70

 

The accompanying notes are an integral part of these financial statements.

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HOSPITALITY PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)
(in thousands)

		Six Months Ended June 30,
		2006			2005
Cash flows from operating activities:
Net income		$	70,610		$	51,117
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		70,800			62,462
Amortization of deferred financing costs as interest		1,245			1,679
Non-cash income		(1,506		)	(1,476		)
FF&E reserve income and deposits		(22,801		)	(15,289		)
Loss on asset impairment		—			7,300
Changes in assets and liabilities:
Increase in other assets		(4,357		)	(3,582		)
Increase in accounts payable and other		18,670			5,860
Increase in due to affiliate		1,627			297
Cash provided by operating activities		134,288			108,368
Cash flows from investing activities:
Real estate acquisitions		(320,762		)	(428,954		)
FF&E reserve fundings		(28,218		)	(14,111		)
Increase in security deposits		—			10,000
Cash used in investing activities		(348,980		)	(433,065		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		—			199,233
Proceeds from issuance of senior notes, net of discount		273,974			299,442
Draws on revolving credit facility		439,000			243,000
Repayments of revolving credit facility		(389,000		)	(315,000		)
Distributions to common shareholders		(105,029		)	(96,771		)
Distributions to preferred shareholders		(3,828		)	(3,828		)
Deferred finance costs paid		(2,113		)	(7,208		)
Cash provided by financing activities		213,004			318,868
Decrease in cash and cash equivalents		(1,688		)	(5,829		)
Cash and cash equivalents at beginning of period		18,568			15,894
Cash and cash equivalents at end of period		$	16,880		$	10,065
Supplemental cash flow information:
Cash paid for interest		$	19,060		$	25,623
Non-cash investing activities:
Property managers’ deposits in FF&E reserve		$	20,111		$	13,377
Purchases of fixed assets with FF&E reserve		(50,147		)	(22,423		)
Non-cash financing activities:
Issuance of common shares		$	1,572		$	63

 

The accompanying notes are an integral part of these financial statements.

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HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 1.  Basis of Presentation

The accompanying consolidated financial statements of Hospitality Properties Trust and its subsidiaries have been prepared without audit. Certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2005. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between Hospitality Properties Trust and its subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year.

Note 2.  Revenue Recognition

We report hotel operating revenues for managed hotels in our consolidated statement of income. Hotel operating revenues, consisting primarily of room sales and sales of food, beverages and communication services, are generally recognized when services are provided. Our share of the net operating results of our managed hotels in excess of the minimum returns due to us is generally determined annually. Hotel operating income in excess of the minimum returns due to us under our management agreements is recognized at year end when all contingencies are met and the income is earned. Deferred hotel operating income in excess of minimum returns was $10,993 and $13,343 for the three and six months ended June 30, 2006, respectively, compared with $6,302 and $8,151 for the three and six months ended June 30, 2005, respectively.

We recognize rental income from operating leases on a straight line basis over the life of the lease agreements. Percentage rent due to us under leases is generally determined annually and is recognized at year end when all contingencies are met and the rent is earned. Deferred percentage rent was $1,528 and $3,176 for the three and six months ended June 30, 2006, respectively, compared with $967 and $1,887 for the three and six months ended June 30, 2005, respectively.

We own all the FF&E reserve escrows for hotels leased to our taxable REIT subsidiaries, or TRSs. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income. Most of our third party leases provide that FF&E reserve escrows are owned by us. One third party lease provides that the FF&E reserve escrow is owned by the tenant and we have a security and remainder interest in that escrow account. When we own the escrow account, we report payments by our third party tenants into the escrow as FF&E reserve income. When we have a security and remainder interest in the escrow account, tenant deposits are not included in revenue.

Note 3.  Shareholders’ Equity

On January 17, 2006 and April 17, 2006 we paid a $0.5546875 per share distribution to our Series B preferred shareholders for the quarters ended December 31, 2005 and March 31, 2006, respectively. On June 1, 2006, we declared a $0.5546875 per share distribution to Series B preferred shareholders of record on June 30, 2006, for the quarter then ended. This amount was paid on July 17, 2006.

On February 16, 2006 and May 11, 2006, we paid a $0.73 per share distribution to our common shareholders for the quarters ended December 31, 2005 and March 31, 2006, respectively. On July 5, 2006, we declared a distribution of $0.74 per share to common shareholders of record on July 14, 2006, for the quarter ended June 30, 2006. We expect to pay this amount on or about August 17, 2006.

On April 10, 2006, we issued 33,973 common shares to our manager, Reit Management & Research LLC, or RMR, in payment of an incentive fee of $1,418 for services rendered during 2005 based upon a per common share price of $41.75, the closing price of our common shares on the New York Stock Exchange on that day.

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On May 23, 2006, we issued 3,750 common shares to our trustees as part of their annual compensation based upon a per common share price of $40.74, the closing price of our common shares on the New York Stock Exchange on that day.

Note 4.  Indebtedness

We have a $750,000, interest only, unsecured revolving bank credit facility. Our revolving bank credit facility matures in June 2009 and may be extended at our option to June 2010 upon payment of an extension fee. The interest rate on drawings under the revolving bank credit facility (5.89% per annum at June 30, 2006) is LIBOR plus a spread. As of June 30, 2006, we had $85,000 outstanding on our revolving bank credit facility and $665,000 available to be drawn for acquisitions and general business purposes. We are currently working with the lead agent of our revolving bank credit facility concerning possible amendments to and the extension of our revolving bank credit facility, although there can be no assurance these changes will occur.

On June 15, 2006, we issued $275,000 of 6.3% senior notes due 2016. Net proceeds from this offering of $271,937 after discounts and other expenses were used to reduce borrowings under our revolving bank credit facility.

Note 5.  Real Estate Properties

On January 6, 2006, we purchased the Harbor Court Complex in the Inner Harbor area of Baltimore, Maryland for $78,000. The Harbor Court Complex is a mixed use development comprised of the Harbor Court Hotel, a 72,042 square foot office building and a 530 space seven story parking garage. The hotel has 195 guest rooms, including 22 suites, 8,000 square feet of meeting space and a roof top fitness center that includes a tennis court, squash court, indoor pool, aerobics center and spa therapy rooms. We have agreed to invest $2,300 over the next two years in connection with the rebranding of the Harbor Court Hotel as the InterContinental® Harbor Court Baltimore.

On January 25, 2006, we agreed to purchase nine hotels for $196,200 and completed the acquisition of eight of the nine hotels for $166,200 with an effective date of January 20, 2006. We also agreed to fund $17,135 of capital improvements to these hotels during the three years following closing. The eight acquired hotels include five full service Crowne Plaza® hotels, one full service Holiday Inn Select® hotel and two Staybridge Suites® hotels; they have a total of 2,188 rooms/suites and approximately 63,800 square feet of meeting space and are located in three states. On June 30, 2006, our agreement to purchase the ninth hotel, a 524 room Holiday Inn SunSpree Resort® hotel in Montego Bay, Jamaica, for $30,000 expired as a result of not receiving certain Jamaican tax and regulatory approvals. We no longer expect to acquire this hotel.

On April 6, 2006, we purchased two Crowne Plaza® hotels, one in Miami, Florida and the other in Philadelphia, Pennsylvania, for $63,000 and agreed to fund $7,100 of capital improvements to these hotels during the three years following closing. These hotels have 749 rooms/suites and over 23,000 square feet of meeting space.

On April 13, 2006, we purchased a newly developed 150 room Staybridge Suites® hotel in Parsippany, New Jersey for $21,000.

During the six months ended June 30, 2006, we provided funding of $28,218 for improvements to certain of our hotels, which resulted in a $2,855 increase in our annual minimum returns and rents.

Note 6.  Management Agreements and Leases

On January 6, 2006, simultaneously with the purchase of the Harbor Court Complex described above, we entered into an agreement with InterContinental Hotels Group, plc, or InterContintental, to manage the Harbor Court Hotel under its InterContinental Hotels & Resorts® brand. We added this hotel to the combination management agreement for 13 hotels we acquired from InterContinental in 2005. As a result, the annual minimum return from this expanded combination of hotels was increased by $4,800 in 2006, $5,200 in 2007 and $5,300 per year thereafter. In addition to the returns generated by the hotel component of the complex, we receive the net cash flow from the office and parking parts of the property; and we have entered into a management agreement with RMR to operate the office building and an agreement with an unaffiliated third party to manage the parking garage.

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On January 25, 2006, simultaneous with our purchase of eight hotels described above, we entered a long term combination management agreement with InterContinental. On April 6, 2006, simultaneous with our purchase of the two Crowne Plaza® hotels described above, we amended that combination management agreement with InterContinental. The annual amount payable to us for all ten hotels as a minimum return under the management contract is $18,336 in 2006, and will be $20,306 in 2007, $21,130 in 2008 and approximately $21,541 thereafter, after the full $24,235 of planned hotel improvements have been funded by us. In addition, we are entitled to receive additional return payments, a percentage of gross revenue over threshold amounts at these hotels starting in 2008 and the cash flow remaining after the payment of base and incentive management fees. The management agreement extends through 2030, and InterContinental has two, all or none, renewal options for 15 years each. The obligation to pay the minimum return under the management agreement is supported by a limited guaranty from InterContinental until the operations at these hotels reach negotiated levels. The agreement requires a reserve for capital expenditures starting in 2008.

On April 13, 2006, simultaneous with our purchase of the Staybridge Suites® hotel in Parsippany, New Jersey described above, we added this hotel to our combination management agreement with a subsidiary of InterContinental which includes 30 other Staybridge Suites®. The initial term of this contract was extended to 2031 and the annual minimum return from this expanded combination of hotels increased by $1,700 until April 2007 at which time it will increase by $1,800. We may also receive a percentage of gross revenue increases at this hotel starting in 2009 and the net cash flow after payment of management fees to InterContinental.

Note 7.  Subsequent Event

On July 26, 2006, we sold 2,000,000 of our common shares of beneficial interest at a price of $43.66 per share in a public offering. Net proceeds from this sale of approximately $83,250 after discounts and other expenses were used to repay borrowings outstanding under our revolving bank credit facility and for general business purposes. On July 28, 2006, the underwriters exercised an option to purchase an additional 300,000 common shares of beneficial interest at a price of $43.66 to cover over allotments.

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Item 2.                          Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview (dollar amounts in thousands, except per share amounts)

The following information should be read in conjunction with financial statements and accompanying notes thereto included in this quarterly report and with our Annual Report on Form 10-K for the year ended December 31, 2005.

Hotel Industry Conditions

During the six months ended June 30, 2006, the U.S. hotel industry has continued to benefit from an expanding economy and limited new hotel supply. For the six months ended June 30, 2006, all of our combinations of hotels reported increases in revenue per available room, or RevPAR, and ten of eleven combinations reported increases in cash flow available to pay minimum returns and rents due to us. All of our management agreements and leases contain security features, such as security deposits or guarantees, which are intended to protect payments of owner’s minimum returns and minimum rents to us. However, the effectiveness of these various security features to provide uninterrupted payments to us is not assured. If any of our hotel operators, tenants or guarantors default in their payment obligations to us, our revenues and cash flows may decline and our ability to continue to pay dividends may be jeopardized.

Second Quarter Developments

On April 6, 2006, we purchased two Crowne Plaza® hotels, one in Miami, Florida and the other in Philadelphia, Pennsylvania, for $63,000. These hotels have 749 rooms/suites and over 23,000 square feet of meeting space. We added these hotels to the combination management agreement with InterContinental for the eight hotels we acquired in January 2006. Our annual minimum return from this expanded combination of hotels increased by $5,040 in 2006, and will increase by $5,600 in 2007, $5,800 in 2008 and $6,000 thereafter. We may also receive additional non-guaranteed additional returns, a percentage of gross revenue increases at these hotels starting in 2008 and the net cash flows after payment of management fees to InterContinental.

On April 13, 2006, we purchased a newly developed 150 room Staybridge Suites® hotel in Parsippany, New Jersey for $21,000. This hotel was added to our combination management agreement with a subsidiary of InterContinental which includes 30 other Staybridge Suites®.  The initial term of this contract was extended to 2031 and the annual minimum return from this expanded combination of hotels increased by $1,700 until April 2007 at which time it will increase by $1,800. We may also receive a percentage of gross revenue increases at this hotel starting in 2009 and the net cash flow after payment of management fees to InterContinental.

On June 30, 2006, our previously announced agreement to purchase the 524 room Holiday Inn SunSpree Resort® hotel in Montego Bay, Jamaica for approximately $30,000 expired as a result of not receiving certain Jamaican tax and regulatory approvals. We no longer expect to acquire this hotel.

Management Agreements and Leases

At June, 30, 2006, each of our 310 hotels was included in one of eleven combinations of hotels of which 201 are leased to our TRSs and managed by independent hotel operating companies and 109 are leased to third parties. Our consolidated statement of income includes hotel operating revenues and expenses of managed hotels and rental income from our leased hotels. Additional information regarding the terms of our management agreements and leases is included in the table on pages 18 and 19.

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Results of Operations (dollar amounts in thousands, except per share amounts)

Three Months Ended June 30, 2006 versus 2005

		For the three months ended June 30,
		2006			2005			Increase (Decrease)			% Increase (Decrease)
		(amounts in dollars, except number of shares)
Revenues:
Hotel operating revenues		$	233,627		$	181,059		$	52,568		29.0	%
Rental income		32,870			31,890			980			3.1	%
FF&E reserve income		5,273			4,838			435			9.0	%
Interest income		428			294			134			45.6	%
Expenses:
Hotel operating expenses		172,625			132,344			40,281			30.4	%
Interest expense		21,162			17,591			3,571			20.3	%
Depreciation and amortization		35,848			31,639			4,209			13.3	%
General and administrative		7,186			6,796			390			5.7	%
Loss on asset impairment		—			7,300			(7,300		)	—
Net income		35,377			22,411			12,966			57.9	%
Net income available for common shareholders		33,463			20,497			12,966			63.3	%
Weighted average shares outstanding		71,953			68,357			3,596			5.3	%
Net income available for common shareholders per common share		$	0.47		$	0.30		$	0.17		56.7	%

 

The increases in hotel operating revenues and expenses resulted from the increase in the number of managed hotels since April 1, 2005, including our May 2005 acquisition of a hotel and our January and April 2006 acquisition of twelve hotels, the initiation of a management agreements for these hotels and the general increase in revenues at most of our managed hotels due to the continued improvement in lodging industry conditions.

Pro forma hotel operating revenues of our 199 managed hotels open during the 2006 and 2005 periods, which include revenues for periods prior to our ownership of some of these hotels, were $232,589 for the three months ended June 30, 2006, an increase of 9.9% from pro forma hotel operating revenues of $211,546 for the three months ended June 30, 2005. The increase in revenues is attributable primarily to the strengthening lodging market that has resulted in improved occupancy and average daily room rate at most of our hotels. Additional information regarding the operating statistics of our hotels is included in the table on page 20.

Pro forma hotel operating expenses of our 199 managed hotels open during the 2006 and 2005 periods, which include expenses for periods prior to our ownership of some of these hotels, were $150,372 for the three months ended June 30, 2006, an increase of 7.1% from pro forma hotel operating expenses of $140,344 for the three months ended June 30, 2005. This increase is primarily a result of higher hotel occupancies and increases in the cost of labor and utilities.

In the second quarters of 2006 and 2005, all our managed hotel combinations had net operating results that were more than the minimum returns due to us.

The increase in rental income is primarily a result of the initiation of a new lease for our hotel in San Juan, Puerto Rico in February 2005, and increased rental income resulting from our funding of improvements at certain of our leased hotels in 2006 and 2005.

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FF&E reserve income represents amounts paid by our tenants into restricted accounts owned by us, which are used to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of sales at our hotels. The increase in FF&E reserve income is primarily due to increased levels of hotel sales in the second quarter of 2006 versus the same period in 2005 for our leased hotels. The amounts which are escrowed as FF&E reserves for our managed hotels and for leased hotels where the FF&E reserve is owned by our tenants are not reported as FF&E reserve income in our consolidated statement of income.

The increase in interest income is due to higher average balances and interest rates during the three months ended June 30, 2006 versus the same period in 2005.

The increase in interest expense is a result of higher average debt balances due to our 2006 and 2005 hotel acquisitions and a higher weighted average interest rate during the three months ended June 30, 2006, versus the same period in 2005.

The increase in depreciation and amortization is due principally to the depreciation of hotels acquired in May 2005, January 2006 and April 2006 and the impact of the purchases in 2006 and 2005 of depreciable assets with funds from FF&E reserve accounts owned by us. This increase was offset to some extent by the sale of one hotel in September 2005 and certain assets becoming fully depreciated in 2006 and 2005.

The increase to general and administrative expense is due principally to the impact of additional hotel investments during 2006 and 2005.

We recorded a $7,300 loss on asset impairment to reduce the carrying value of our Prime HotelSM in Atlanta, Georgia to its realizable value less cost to sell in the 2005 second quarter. We sold this hotel on September 30, 2005, for $3,227.

The increases in net income, net income available for common shareholders and net income available for common shareholders per common share are primarily due to the investment and operating activity discussed above. On a per share basis, the increase in net income available for common shareholders was lower due to our issuance and sale of 4.7 million common shares in June 2005.

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Six Months Ended June 30, 2006 versus 2005

		For the six months ended June 30,
		2006			2005			Increase  (Decrease)			% Increase (Decrease)
		(amounts in dollars, except number of shares)
Revenues:
Hotel operating revenues		$	435,455		$	326,106		$	109,349		33.5	%
Rental income		65,346			62,955			2,391			3.8	%
FF&E reserve income		10,263			9,237			1,026			11.1	%
Interest income		850			530			320			60.4	%
Expenses:
Hotel operating expenses		316,814			232,769			84,045			36.1	%
Interest expense		40,150			33,020			7,130			21.6	%
Depreciation and amortization		70,800			62,462			8,338			13.3	%
General and administrative		13,540			12,160			1,380			11.3	%
Loss on asset impairment		—			7,300			(7,300		)	—
Net income		70,610			51,117			19,493			38.1	%
Net income available for common shareholders		66,782			47,289			19,493			41.2	%
Weighted average shares outstanding		71,937			67,783			4,154			6.1	%
Net income available for common shareholders per common share		$	0.93		$	0.70		$	0.23		32.9	%

 

The increases in hotel operating revenues and expenses resulted from the increase in the number of managed hotels since January 1, 2005, including our February and May 2005 acquisitions of 12 hotels and our January and April 2006 acquisition of twelve hotels, the initiation of a management agreements for these hotels and the general increase in revenues at most of our managed hotels due to the continued improvement in lodging industry conditions.

Pro forma hotel operating revenues of our 199 managed hotels open during the 2006 and 2005 periods, which include revenues for periods prior to our ownership of some of these hotels, were $444,478 for the six months ended June 30, 2006, an increase of 11.5% from pro forma hotel operating revenues of $398,590 for the six months ended June 30, 2005. The increase in revenues is attributable primarily to the strengthening lodging market that has resulted in improved occupancy and average daily room rate at most of our hotels. Additional information regarding the operating statistics of our hotels is included in the table on page 20.

Pro forma hotel operating expenses of our 199 managed hotels open during the 2006 and 2005 periods, which include expenses for periods prior to our ownership of some of these hotels, were $294,682 for the six months ended June 30, 2006, an increase of 7.6% from pro forma hotel operating expenses of $273,782 for the six months ended June 30, 2005. This increase is primarily a result of higher hotel occupancies and increases in the cost of labor and utilities.

Certain of our managed hotels had net operating results that were $267 less than the minimum returns due to us in the six months ended June 30, 2005. This amount is reflected in our consolidated statement of income as a net reduction to hotel operating expenses in the 2005 period because the minimum returns were funded by our managers. All our managed hotel combinations had net operating results that were more than the minimum returns due to us during the six months ended June 30, 2006.

The increase in rental income is primarily a result of the initiation of a new lease for our hotel in San Juan, Puerto Rico in February 2005, and increased rental income resulting from our funding of improvements at certain of our leased hotels in 2006 and 2005.

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The increase in FF&E reserve income is primarily due to increased levels of hotel sales in the 2006 period versus the same period in 2005 for our leased hotels.

The increase in interest income is due to higher average balances and interest rates during the six months ended June 30, 2006 versus the same period in 2005.

The increase in interest expense is a result of higher average debt balances during the six months ended June 30, 2006, versus the same period in 2005, due to our 2006 and 2005 hotel acquisitions.

The increase in depreciation and amortization is due principally to the depreciation of hotels acquired in February 2005, May 2005, January 2006 and April 2006 and the impact of the purchases in 2006 and 2005 of depreciable assets with funds from FF&E reserve accounts owned by us. This increase was offset to some extent by the sale of one hotel in September 2005 and certain assets becoming fully depreciated in 2006 and 2005.

The increase to general and administrative expense is due principally to the impact of additional hotel investments during 2006 and 2005.

We recorded a $7,300 loss on asset impairment to reduce the carrying value of our Prime HotelSM in Atlanta, Georgia to its realizable value less cost to sell in the 2005 second quarter. We sold this hotel on September 30, 2005, for $3,227.

The increases in net income, net income available for common shareholders and net income available for common shareholders per common share are primarily due to the investment and operating activity discussed above. On a per share basis, the increase in net income available for common shareholders was lower due to our issuance and sale of 4.7 million common shares in June 2005.

Liquidity and Capital Resources (dollar amounts in thousands, except per share amounts)

Our Managers and Tenants

As of June 30, 2006, all 310 of our hotels are operated under management agreements or leases with unrelated third party hotel operating companies. All costs of operating and maintaining our hotels are paid by the third party hotel managers as agent for us or by third party hotel tenants for their own account. These third parties derive their funding for hotel operating expenses, FF&E reserves, and returns and rents due us generally from hotel operating revenues and, to the extent that these parties fund our minimum returns and minimum rents, from their separate resources.

We define coverage for each of our combination hotel management agreements or leases as total hotel sales minus all expenses which are not subordinated to the minimum returns and minimum rents due to us and the required FF&E reserve contributions, divided by the aggregate minimum payments due to us. More detail regarding coverage, guarantees and other security features of our operating agreements is presented in the table on pages 18 and 19. Assuming our operating agreements as of June 30, 2006, had been in place during the twelve months ended June 30, 2006, nine hotel combinations, representing 267 hotels, generated coverage using historical operating results of at least 1.0x. The remaining two combinations, representing 43 hotels, generated coverages using historical operating results of 0.98x and 0.99x.

One hundred eighty-five (185) hotels, 61% of our total investments at cost, in seven combinations are operated under management agreements or leases which are subject to full or limited guarantees. These guarantees may provide us with continued payments if the total hotel sales less total hotel expenses and required FF&E reserve payments fail to equal or exceed guaranteed amounts due to us. Our managers and tenants or their affiliates may also supplement cash flow from our hotels in order to make payments to us and preserve their rights to continue operating our hotels. Guarantee or supplemental payments to us, if any, made under any of our management agreements or leases, do not subject us to repayment obligations but, under some of our agreements, these guarantee or supplemental payments may be recovered by the manager or tenant from the future cash flows from our hotels after our future minimum returns and minimum rents are paid.

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As of June 30, 2006, all payments due to us, including those payments due under management agreements or leases whose hotels have generated less than 1.0x coverage during the last twelve months, are current. However, the effectiveness of our various security features to provide uninterrupted payments to us is not assured. If any of our hotel operators, tenants or guarantors default in their payment obligations to us, our revenues and cash flows will decline.

Our Operating Liquidity and Capital Resources

Our principal source of funds for current expenses and distributions to shareholders are minimum returns from our managed hotels and minimum rents from our leased properties. We receive minimum returns and minimum rents from our managers and tenants monthly. We receive additional returns, percentage returns and rents and our share of the operating profits of our managed hotels after payment of management fees and other deductions either monthly or quarterly. This flow of funds has historically been sufficient for us to pay our operating expenses, interest and distributions to shareholders. We believe that our operating cash flow will be sufficient to meet our operating expenses, interest and distribution payments for the foreseeable future.

We maintain our status as a real estate investment trust, or REIT, under the Internal Revenue Code by meeting certain requirements. As a REIT, we do not expect to pay federal income taxes on the majority of our income. Federal legislation, known as the REIT Modernization Act, or the RMA, among other things, allows a REIT to lease hotels to a TRS if the hotel is managed by an independent third party. The income realized by our TRS in excess of the rent it pays to us is subject to income tax at corporate tax rates. As, and if, the financial performance of the hotels operated for the account of our TRS improves, these taxes may become material, but these anticipated taxes are not currently material to our consolidated financial results. Also, the income we receive from our hotels in Canada and Puerto Rico is subject to taxes in those jurisdictions.

Our Investment and Financing Liquidity and Capital Resources

Various percentages of total sales at most of our hotels are escrowed as FF&E reserves to fund future capital improvements at our hotels. During the six months ended June 30, 2006, $22,165 was contributed to these accounts by our managers and tenants. Our operating agreements generally provide that, if necessary, we will provide our managers and tenants FF&E funding in excess of escrowed reserves. To the extent we make such additional fundings, our annual minimum returns or minimum rent generally increases by a percentage of the amount we fund. During the six months ended June 30, 2006, we made $28,218 of additional FF&E reserve fundings. As of June 30, 2006, there was approximately $30,244 on deposit in these escrow accounts, of which $30,241 was held directly by us and reflected on our balance sheet as restricted cash. The remaining $3 is held in an account owned by one of our tenants and is not reflected on our balance sheet, but we have security and remainder interests in the account owned by this tenant. During the six months ended June 30, 2006, $56,518 was spent from the FF&E reserve escrow accounts to renovate and refurbish our hotels.

During the six months ended June 30, 2006, we funded $14,663 for improvements to our Marriott branded hotel portfolios using cash on hand and borrowings under our revolving bank credit facility. We expect to fund approximately $26,000 for improvements to four of our Marriott hotel portfolios throughout the remainder of 2006 with funds from our existing cash balances or borrowings under our revolving bank credit facility. Our minimum annual rent for these hotels is increased by approximately 10% of the amounts we fund, which amounts are in addition to recurring FF&E reserve funding from hotel operations.

Pursuant to an April 2005 agreement we entered with a subsidiary of Global Hyatt Corporation, or Hyatt, for management of 24 AmeriSuites® hotels, we agreed to provide funding to Hyatt for rebranding of these hotels to the new Hyatt PlaceTM brand and for other improvements. To the extent our fundings exceed $8,000, the minimum return payable by Hyatt to us will increase as these funds are advanced. As of June 30, 2006, $4,845 has been funded, and we expect to fund an additional approximately $35,000 throughout the remainder of 2006 and $30,000 in 2007 with funds from our existing cash balances or borrowings under our revolving bank credit facility.

Pursuant to an April 2005 agreement we entered with a subsidiary of Carlson Hotels Worldwide, or Carlson, for management of 12 PrimeSM hotels, we agreed to provide funding to Carlson for rebranding these hotels to Carlson

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brands and for other improvements at these hotels. To the extent our payments exceed $12,000, the minimum return payable by Carlson to us increases as these funds are advanced. As of June 30, 2006, $35,219 has been funded. We funded $13,555 of this amount during the six months ended June 30, 2006, and we expect to fund additional improvements totaling approximately $2,000 through September 2006 using funds from our existing cash balances or borrowings under our revolving bank credit facility.

Pursuant to a December 2004 agreement we entered to purchase 13 hotels from InterContinental we agreed to pay $25,000 during the three years following closing to purchase improvements to the hotels. We paid $10,000 of this amount in December 2005 and expect to pay $10,000 in December 2006 and $5,000 in December 2007 using funds from our existing cash balances or borrowings under our revolving bank credit facility.

On January 6, 2006, we acquired the Harbor Court Complex in Baltimore, Maryland for $78,000 using cash on hand and borrowings under our revolving bank credit facility. Pursuant to the agreement we entered with InterContinental for the management of the Harbor Court Hotel, we agreed to fund $2,300 for rebranding and other improvements during the two years following closing. We made no fundings during the six months ended June 30, 2006.

On January 25, 2006, we acquired eight hotels for $166,200 using borrowings under our revolving bank credit facility. Pursuant to the agreement we entered with InterContinental for the management of the hotels, we agreed to fund $17,135 for capital improvements during the three years following closing. We made no fundings during the six months ended June 30, 2006.

On April 6, 2006, we acquired two Crowne Plaza® hotels for $63,000 using borrowings under our revolving bank credit facility. We agreed to fund $7,100 for capital improvements during the three years following closing. We made no fundings during the six months ended June 30, 2006.

On April 13, 2006, we acquired a Staybridge Suites® for $21,000 using borrowings under our revolving bank credit facility.

On January 17, 2006 and April 17, 2006 we paid a $0.5546875 per share distribution to our Series B preferred shareholders for the quarters ended December 31, 2005 and March 31, 2006, respectively. On June 1, 2006, we declared a distribution of $0.5546875 per Series B preferred share with respect to the second quarter of 2006 and paid it to shareholders on July 17, 2006. These distributions were funded using cash on hand and borrowings under our revolving bank credit facility.

On February 16, 2006 and May 11, 2006, we paid a $0.73 per share distribution to our common shareholders for the quarters ended December 31, 2005 and March 31, 2006, respectively. These distributions were funded using cash on hand and borrowings under our revolving bank credit facility. On July 5, 2006, we declared a distribution of $0.74 per common share with respect to the second quarter of 2006. We expect to pay this amount on or about August 17, 2006, using cash on hand and borrowings under our revolving bank credit facility.

On June 15, 2006, we issued $275,000 of 6.3% senior notes due 2016. Net proceeds from this offering of $271,937 after discounts and other expenses were used to reduce borrowings under our revolving bank credit facility.

On July 26, 2006, we sold 2,000,000 of our common shares of beneficial interest at a price of $43.66 per share in a public offering. Net proceeds from this sale of approximately $83,250 after discounts and other expenses were used to repay borrowings outstanding under our revolving bank credit facility and for general business purposes. On July 28, 2006, the underwriters exercised an option to purchase an additional 300,000 common shares of beneficial interest at a price of $43.66 to cover over allotments.

In order to fund acquisitions and to meet cash needs that may result from timing differences between our receipt of returns and rents and our desire or need to make distributions or pay operating expenses, we maintain a revolving bank credit facility with a group of commercial banks. Our revolving bank credit facility matures in June 2009 and may be extended at our option to June 2010 upon our payment of an extension fee. Borrowings under the revolving bank credit facility can be up to $750,000 and the revolving bank credit facility includes a feature under which the maximum

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amount available for borrowing may be expanded to $1,500,000 in certain circumstances. Borrowings under our revolving bank credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the revolving bank credit facility (5.89% per annum at June 30, 2006) is payable at a spread above LIBOR. As of June 30, 2006, we had $85,000 outstanding under our revolving bank credit facility. We are currently working with the lead agent of our revolving bank credit facility concerning the possible amendments to and the extension of our revolving bank credit facility, although there can be no assurance these changes will occur.

At August 2, 2006 we had approximately $34,000 of cash and cash equivalents and $750,000 available from our revolving bank credit facility. We expect to use existing cash balances, borrowings under our revolving bank credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions and to meet our capital improvement funding obligations.

Our term debt maturities (other than our revolving bank credit facility) are as follows: $150,000 in 2008; $50,000 in 2010; $125,000 in 2012, $300,000 in 2013, $300,000 in 2015 and $275,000 in 2016. As of June 30, 2006, we had one mortgage note with a principal balance of $3,733 that we assumed in connection with our acquisition of a hotel. This mortgage note requires monthly payments of principal and interest of $32 and is expected to have a principal balance of $3,326 at maturity in 2011. None of our other debt obligations require principal or sinking fund payments prior to their maturity date.

When amounts are outstanding on our revolving bank credit facility and as the maturity dates of our revolving bank credit facility and term debts approach over the longer term, we will explore alternatives for the repayment of amounts due. Such alternatives in the short term and long term may include incurring additional debt and issuing new equity securities. As of June 30, 2006, we had $1,303,439 available on our shelf registration and after giving effect to the July sale of common shares and the underwriters over allotment option exercise, we had $1,203,021 available on our shelf registration. An effective shelf registration allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for those securities. Although there can be no assurance that we will consummate any debt or equity security offerings or other financings, we believe we will have access to various types of financing, including investment grade debt or equity securities, with which to finance future acquisitions and to pay our debt and other obligations.

As of June 30, 2006, our contractual obligations were as follows:

		Payment due by period
		Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Long-Term Debt Obligations		$	1,288,733		$	33		$	150,148		$	135,176		$	1,003,376
Ground Lease Obligations (1)		73,435			1,077			4,362			4,034			63,962
Capital Improvements (2)		134,778			84,091			50,687			—			—
Total		$	1,496,946		$	85,201		$	205,197		$	139,210		$	1,067,338

(1)            Fifteen of our hotels are on leased land. In each case the ground lessors are unrelated to us. Generally, payments of ground lease obligations are made by our managers or tenants. However, if a manager or tenant fails to perform obligations under a ground lease or elects not to renew any ground lease, we might decide to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected hotel

(2)            Represents amounts we currently expect to fund in addition to recurring FF&E reserve funding from hotel operations.

As of June 30, 2006, we had no off balance sheet arrangements, commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or partnerships. As of June 30, 2006, our secured debt obligations were limited to one mortgage note of $3,733 secured by a single property. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade.

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Debt Covenants

Our debt obligations at June 30, 2006, consist of our revolving bank credit facility, our $1,200,000 of publicly issued term debt and our $3,733 mortgage note. Our public debt is governed by an indenture. This indenture and related supplements and our revolving bank credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties in excess of calculated amounts, require us to maintain a minimum net worth, restrict our ability to make distributions under certain circumstances and require us to maintain other financial ratios. As of June 30, 2006, we were in compliance with all of our covenants under our indenture and its supplements and our revolving bank credit facility agreement.

Neither our indenture and its supplements nor our revolving bank credit facility contain provisions for acceleration which could be triggered by our debt ratings. However, under our revolving bank credit facility agreement, our senior debt rating is used to determine the fees and interest rate applied to borrowings.

Our public debt indenture and its supplements contain cross default provisions to any other debts of $20,000 or more. Similarly, a default on our public debt indenture would be a default on our revolving bank credit facility.

Management Agreements, Leases and Operating Statistics

As of June 30, 2006, we owned 310 hotels which are grouped into eleven combinations and managed by, or leased to, separate affiliates of hotel operating companies including InterContinental, Marriott International, Inc., or Marriott, Host Hotels & Resorts, Inc., or Host, Barcelo Crestline Corporation, or Barcelo Crestline, Hyatt, Carlson and BRE/Homestead Village, LLC, or Homestead.

The tables on the following pages summarize the key terms of our leases and management agreements as of June 30, 2006 and include statistics reported to us or derived from information reported to us by our managers and tenants. These statistics include occupancy, average daily rate, or ADR, RevPAR, and coverage of our owner’s minimum returns or minimum rents. We consider these statistics and the management agreement or lease security features also presented in the tables on the following pages to be important measures of our managers’ and tenants’ success in operating our hotels and their ability to continue to pay us. However, none of this third party reported information is a direct measure of our financial performance and none of it has been independently verified by us.

 

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Hotel Brand:		Courtyard by Marriott®		Residence Inn by Marriott®		Marriott®/ Residence Inn by Marriott®/ Courtyard by Marriott®/ TownePlace Suites by Marriott®/ SpringHill Suites by Marriott®		Residence Inn by Marriott®/ Courtyard by Marriott®/ TownePlace Suites by Marriott®/ SpringHill Suites by Marriott®		Homestead Studio Suites®		Staybridge Suites®
Number of Hotels:		53		18		35		19		18		31
Number of Rooms / Suites:		7,610		2,178		5,382		2,756		2,399		3,844
Number of States:		24		14		15		14		5		16
Tenant:		Subsidiary of Host Subleased to Subsidiary of Barcelo Crestline.		Subsidiary of Host Subleased to Subsidiary of Barcelo Crestline.		Our TRS.		Subsidiary of Barcelo Crestline.		Subsidiary of Homestead.		Our TRS.
Manager:		Subsidiary of Marriott.		Subsidiary of Marriott.		Subsidiaries of Marriott.		Subsidiaries of Marriott.		Subsidiary of Homestead.		Subsidiary of InterContinental.
Investment (000s) (1):		$566,529		$187, 667		$470,670		$274,222		$145,000		$436,708
Security Deposit (000s):		$50,540		$17,220		$36,204		$28,508		$15,960		$36,872 (2)
End of Current Term:		2012		2010		2019		2015		2015		2031
Renewal Options (3):		3 for 12 years each.		1 for 10 years, 2 for 15 years each.		2 for 15 years each.		2 for 10 years each.		2 for 15 years each.		2 for 12.5 years each.
Annual Minimum Return / Minimum Rent (000s) (4):		$56,540		$18,748		$48,853		$28,508		$15,960		$37,777
Additional Return:		—		—		$1,173 (5)		—		—		—
Percentage Return / Rent (6):		5.0% of revenues above 1994/95 revenues.		7.5% of revenues above 1996 revenues.		7.0% of revenues above 2000/01 revenues.		7.0% of revenues above 1999/2000 revenues.		10.0% of revenues above 1999/2000 revenues.		7.5% of revenues above 2004/06/07 revenues.
Return / Rent Coverage (7)(8):
Year ended 12/31/05:		1.41x		1.13x		1.03x		0.99x		1.46x		0.91x
Twelve months ended 6/30/06:		1.49x		1.21x		1.07x		1.17x		1.53x		0.99x
Three months ended 6/30/06:		1.71x		1.43x		1.27x		1.35x		1.69x		1.17x
Other Security Features:		HPT controlled lockbox with minimum balance maintenance requirement; subtenant and subtenant parent minimum net worth requirement.		HPT controlled lockbox with minimum balance maintenance requirement; subtenant and subtenant parent minimum net worth requirement.		—		Tenant minimum net worth requirement.		Homestead parent guarantee and $15,960 letter of credit.		Limited guarantee provided by InterContinental.

(1)            Amounts exclude expenditures made from FF&E reserves funded from hotel operations, but includes amounts funded by us separately from hotel operations.

(2)            The single $36,872 deposit secures InterContinental’s obligations under the Staybridge Suites® portfolio, the InterContinental® / Crowne Plaza® / Holiday Inn® / Staybridge Suites® portfolio and the Crowne Plaza® / Holiday Inn® / Staybridge Suites® portfolio.

(3)            Renewal options may be exercised by the manager or tenant for all, but not less than all, of the hotels within each combination of hotels.

(4)            Each management agreement or lease provides for payment to us of an annual minimum return or minimum rent, respectively. Management fees are generally subordinated to these minimum payment amounts and certain minimum payments are subject to full or limited guarantees.

(5)            This agreement provides for annual additional return payment to us of $1,173 to the extent of available cash flow after payment of operating costs, funding of the FF&E reserve and payment of our minimum return and percentage return.

(6)            Certain of our management agreements and leases provide for payment to us of a percentage of increases in total hotel sales over base year levels. Percentage returns under our management agreements are payable to us only to the extent of available cash flow, as defined in the agreements. The payment of percentage rent under our leases is not subject to available cash flow.

(7)            We define coverage as total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions (which data is provided to us by our operators or tenants), divided by the minimum returns or minimum rent payments due to us.

(8)            For the hotels managed by Marriott, the data presented is for the comparable fiscal periods ended December 30, 2005, and June 16, 2006.

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Hotel Brand:

Candlewood Suites ®

InterContinental®/ Crowne Plaza®/ Holiday Inn®/ Staybridge Suites®

Crowne Plaza®/ Holiday Inn®/ Staybridge Suites® (1)

AmeriSuites®

Radisson® Hotels & Resorts/ Park Plaza® Hotels & Resorts/ Country Inns & Suites by Carlson®

Total/ Range/ Average (all investments)

Number of Hotels:

76

14

10

24

12

310

Number of Rooms / Suites:

9,220

4,139

2,937

2,929

2,262

45,656

Number of States:

29

7 plus Ontario and Puerto Rico

5

14

7

38 plus Ontario and Puerto Rico

Tenant:

Our TRS.

Our TRS and a subsidiary of InterContinental.

Our TRS.

Our TRS.

Our TRS.

Manager:

Subsidiary of InterContinental.

Subsidiaries of InterContinental.

Subsidiaries of InterContinental.

Subsidiary of Hyatt.

Subsidiary of Carlson.

Investment (000s) (1):

$590,250

$485,000

$229,200

$243,350

$209,414

$3,838,010

Security Deposit (000s):

—

$36,872 (2)

$36,872 (2)

—

—

$185,304

End of Current Term:

2028

2029

2030

2030

2030

2010-2031 (average 16 years)

Renewal Options (3):

2 for 15 years each.

2 for 15 years each.

2 for 15 years each.

2 for 15 years each.

2 for 15 years each.

Annual Minimum Return / Minimum Rent (000s) (4):

$50,000

$42,488

$18,336

$17,000

$11,400

$345,610

Additional Return:

$10,000 (5)

$3,458 (5)

$1,750 (5)

50% of cash flow in excess of minimum return. (6)

50% of cash flow in excess of minimum return. (6)

$16,381

Percentage Return / Rent (7):

7.5% of revenues above 2006 revenues.

7.5% of revenues above 2006/07 revenues.

7.5% of revenues above 2006 revenues.

—

—

Return / Rent Coverage (8):

Year ended 12/31/05:

1.33x

1.29x

1.29x

1.03x

0.90x

0.90x — 1.46x

Twelve months ended 6/30/06:

1.35x

1.44x

1.46x

1.04x

0.98x

0.98x —1.53x

Three months ended 6/30/06:

1.52x

1.72x

1.71x

1.07x

1.29x

1.07x —1.72x

Other Security Features:

Limited guarantee provided by InterContinental.

Limited guarantee provided by InterContinental.

Limited guarantee provided by InterContinental.

Limited guarantee provided by Hyatt.

Limited guarantee provided by Carlson.

(1)            Amounts exclude expenditures made from FF&E reserves funded from hotel operations, but includes amounts funded by us separately from hotel operations.

(2)            The single $36,872 deposit secures InterContinental’s obligations under the Staybridge Suites® portfolio, the InterContinental® / Crowne Plaza® / Holiday Inn® / Staybridge Suites® portfolio and the Crowne Plaza® / Holiday Inn® / Staybridge Suites® portfolio.

(3)            Renewal options may be exercised by the manager or tenant for all, but not less than all, of the hotels within each combination of hotels.

(4)            Each management agreement or lease provides for payment to us of an annual minimum return or minimum rent, respectively. Management fees are generally subordinated to these minimum payment amounts and certain minimum payments are subject to full or limited guarantees.

(5)            These agreements provide for annual additional return payment to us of the amounts stated to the extent of available cash flow after payment of operating costs, funding of the FF&E reserve, payment of our minimum return and payment of certain management fees.

(6)            These agreements provide for payment to us of 50% of available cash flow after payment of operating costs, funding the FF&E reserve, payment of our minimum return and reimbursement to the managers of working capital and guaranty advances, if any.

(7)            Certain of our management agreements and leases provides for payment to us of a percentage of increases in total hotel sales over base year levels. Percentage returns under our management agreements are payable to us only to the extent of available cash flow, as defined in the agreements. The payment of percentage rent under our leases is not subject to available cash flow.

(8)            We define coverage as total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions (which data is provided to us by our operators or tenants), divided by the minimum return or minimum rent payments due to us. The return coverage amounts for certain of our management agreements have been revised for all periods presented to include only the minimum returns. The calculation in prior periods included additional return amounts for certain of our management agreements. For some combinations, amounts have been calculated using data for periods prior to our ownership of certain hotels and prior to commencement of operating agreements.

 

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