UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2009

OR

Commission File Number 1-11527

HOSPITALITY PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

617-964-8389

(Registrant’s Telephone Number, Including Area Code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

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

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 6, 2009: 114,127,635

HOSPITALITY PROPERTIES TRUST

FORM 10-Q

June 30, 2009

INDEX

References in this Form 10-Q to “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

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except share data)

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

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

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

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HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

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

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries, or HPT, have been prepared without audit. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, 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 condensed consolidated 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, 2008, as amended.  In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.  These condensed consolidated financial statements include the accounts of HPT and its subsidiaries, all of which are 100% owned directly or indirectly by HPT.  All intercompany transactions and balances 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. Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. In preparing these condensed consolidated financial statements, we evaluated events that occurred through August 6, 2009, the date of issuance of these condensed consolidated financial statements, for potential recognition or disclosure.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

We have determined that each of our taxable REIT subsidiaries, or TRSs, is a variable interest entity as defined under Financial Accounting Standards Board, or FASB, Interpretation No. 46 (R), “Consolidation of Variable Interest Entities”, or FIN 46.  Under FIN 46, the entity that receives the majority of the potential variability in gains and losses of the variable interest entity, with the primary focus on losses, is the variable interest entity’s primary beneficiary, and is required to consolidate the variable interest entity.  When one of our TRSs enters a new operating agreement or materially modifies an existing operating agreement with a third party hotel manager we are required to assess if our TRS or the hotel manager is or continues to be the primary beneficiary.  This assessment requires us to make estimates of the future cash flows of our TRS.  Incorrect assumptions or estimates of, among other things, future occupancy, average daily room rate and operating expenses of our hotels may result in an inaccurate determination of the primary beneficiary.  We have concluded that we must consolidate each of our TRSs because we are the primary beneficiary.

Note 2.  Revenue Recognition

We report hotel operating revenues for managed hotels in our condensed consolidated statements of income. We generally recognize hotel operating revenues, consisting primarily of room, food and beverage sales, when services are provided. Our share of the net operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. We recognize additional returns due to us under our management agreements at year end when all contingencies are met and the income is earned. We had no deferred additional returns for the three or six months ended June 30, 2009, compared with $8,317 and $11,777 for the three and six months ended June 30, 2008, respectively.

We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. We recognized straight line rental income of $3,787 for the three months ended March 31, 2008 relating to our lease with TravelCenters of America LLC, or TA, for 145 travel centers.  Beginning in the 2008 second quarter, we ceased recognition of straight line revenue for this lease and recorded a $19,613 charge to fully reserve the existing straight line rent receivable.  See Note 10 for further information relating to TA.

We determine percentage rent due to us under our leases annually and recognize it at year end when all contingencies are met and the rent is earned. We had deferred percentage rent of $308 and $983 for the three and six months ended June 30, 2009, respectively and $1,550 and $3,102 for the three and six months ended June 30, 2008, respectively.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

We own all the capital expenditure reserves, or FF&E reserve escrows, for hotels leased to our TRSs and leased to third parties. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.  We report deposits by our third party tenants into the escrow accounts as FF&E reserve income.

Note 3.  Per Common Share Amounts

We compute per common share amounts using the weighted average number of common shares outstanding during the period. We had no dilutive common share equivalents at June 30, 2009 or 2008.

Note 4.  Shareholders’ Equity

On January 15, 2009 and April 15, 2009, we paid a $0.5546875 per share distribution to our Series B preferred shareholders with respect to the periods ended January 14, 2009 and April 14, 2009, respectively.  On June 1, 2009, we declared a $0.5546875 per share distribution to our Series B preferred shareholders of record on June 30, 2009, with respect to the period ended July 14, 2009. We paid this amount on July 15, 2009.

On February 17, 2009 and May 15, 2009, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended February 14, 2009 and May 14, 2009, respectively.  On July 1, 2009, we declared a distribution of $0.4375 per Series C preferred shares to shareholders of record August 3, 2009, with respect to the period ending August 14, 2009. We expect to pay this amount on or about August 17, 2009.

On February 25, 2009, we paid a $0.77 per share quarterly distribution to our common shareholders.

On February 26, 2009, we issued 1,000 common shares, valued at $11.65 per share, the closing price of our common shares on the New York Stock Exchange on that day, to our new trustee as part of his annual compensation.

On April 8, 2009, we announced the suspension of our regular quarterly common share distributions.  During the fourth quarter of 2009, we expect to re-evaluate capital market conditions and our own earnings in order to determine what amount of common share distributions to pay in 2009.

On May 15, 2009, we issued 2,000 common shares, valued at $12.68 per share, the closing price of our common shares on the New York Stock Exchange on that day, to each of our five trustees as part of their annual compensation.

On June 24, 2009, we sold 17,500,000 of our common shares at a price of $11.50 per share in a public offering. We used the net proceeds from this sale (approximately $192,398 after underwriting and other offering expenses) to repay a portion of the borrowings outstanding under our revolving credit facility.

On July 1, 2009, we sold 2,625,000 of our common shares at a price of $11.50 per share pursuant to an over allotment option granted to the underwriters of our June 24, 2009 common share offering. We used the net proceeds from this sale (approximately $28,905 after underwriting and other offering expenses) to repay a portion of the borrowings outstanding under our revolving credit facility.

Note 5.  Indebtedness

During the first quarter of 2009, we repurchased $121,330 of our 3.8% convertible senior notes at a total cost of $87,517, excluding accrued interest, and recognized a $26,555 gain on extinguishment of debt, net of unamortized discount and issuance costs.

During the second quarter of 2009, we repurchased $13,500 of our 3.8% convertible senior notes at a total cost of $11,053, excluding accrued interest, and recognized a $1,680 gain on extinguishment of debt, net of unamortized discount and issuance costs.

During the second quarter of 2009, we repurchased an aggregate of $57,171 original principal amount of various issues of our senior notes at a total cost of $45,239, excluding accrued interest, and recognized an $11,653 gain on extinguishment of debt, net of unamortized discount and issuance costs.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

We have a $750,000 interest only, unsecured revolving credit facility. Our credit facility matures in October 2010 and may be extended at our option to October 2011 upon payment of a fee, provided certain other conditions are satisfied. The interest rate on drawings under the credit facility is LIBOR plus a spread (0.87% per annum at June 30, 2009). As of June 30, 2009, we had $330,000 outstanding under our revolving credit facility and $420,000 available to be drawn for general business purposes, including acquisitions.

In July 2009, we repurchased $175,420 of our 3.8% convertible senior notes at a total cost of $159,532, excluding accrued interest, and expect to recognize a gain of approximately $11,208, net of unamortized discount and issuance costs, on extinguishment of debt in the third quarter of 2009.

Note 6.  Real Estate Properties

At June 30, 2009, we owned 474 properties, 289 hotels and 185 travel centers.  All of these properties are operated under 13 management agreements or leases.

During the six months ended June 30, 2009, we funded $61,145 of improvements to certain of our properties, which resulted in a $4,926 increase in our annual minimum returns and rents.

Note 7. Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and, as such, are generally not subject to federal and most state income taxation on our operating income, provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements.  We are subject to income tax in Canada, Puerto Rico and certain states despite our REIT status.  Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our other subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes.  Our consolidated income tax provision (or benefit) includes the income tax provision (or benefit) related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our REIT status.  During the three and six months ended June 30, 2009, we recognized current tax expense of $405 and $807, respectively, which includes $36 and $70, respectively, of foreign taxes and $369 and $738, respectively, of federal alternative minimum tax and certain state taxes that are payable without regard to our REIT status and TRS tax loss carry forwards. In addition, during the three and six months ended June 30, 2009 we recognized a deferred tax benefit of $29 and $58 related to a tax versus book basis difference at our Puerto Rico hotel.

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 8.  Segment Information

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 8.  Segment Information (continued)

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 9.  New Accounting Pronouncements

Effective January 1, 2009, we adopted Statement of Financial Accounting Standard No. 141 (revised 2007), “Business Combinations”, or SFAS 141(R).  SFAS 141(R) establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination.  We expect the adoption of SFAS 141(R) will affect our consolidated financial statements if we engage in a transaction that falls within the scope of this standard.

Effective January 1, 2009, we adopted FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)”, or FSP 14-1.  FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate at the time of issuance.  Our 3.8% convertible senior notes are within the scope of FSP 14-1 and therefore, we measured the fair value of the debt components of the notes at issuance based on an estimated effective interest rate of 6.06% and are amortizing the resulting discount as an increase to interest expense over the expected life of the debt (March 15, 2012).  The conversion option was valued at $43,770 at the time of issuance, which resulted in an increase to additional paid-in capital.  All periods presented in our financial statements have been adjusted to reflect the application of this standard retrospectively.  The implementation of FSP 14-1 resulted in a decrease to net income and earnings per share for all periods presented; however there is no effect on our cash interest payments.  The implementation of this standard resulted in the following:

·                  At December 31, 2008, shareholders equity increased by $25,560.

·                  Interest expense for the three months ended June 30, 2009 and 2008 was increased by non-cash amortization of $2,030, or $0.02 per share, and $2,395, or $0.03 per share, respectively.  For the six months ended June 30, 2009 and 2008 interest expense was increased by non-cash amortization of $4,411, or $0.05 per share, and $4,752, or $0.05 per share.

·                  During the six months ended June 30, 2009, the equity component attributable to the conversion feature of the notes was reduced by $148 as a result of our repurchase of $134,830 of the notes.  The equity component of the notes as of June 30, 2009 is $43,622.

·                  The unamortized discount on the notes was $19,119 and $29,228 as of June 30, 2009 and December 31, 2008, respectively. The unamortized discount is being amortized through March 15, 2012, the first date on which the holders of our convertible notes may require that we redeem them.

Effective June 30, 2009, we adopted Statement of Financial Accounting Standards No. 165, “Subsequent Events”, or SFAS 165.  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See Footnote No. 1, “Basis of Presentation” for the required disclosure.

In June 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)”, or SFAS 167.  SFAS 167 amends Interpretation 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Interpretation 46(R) required reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity only when specific events occurred.  SFAS 167 also amends Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009.  We are currently evaluating the effect that the adoption of SFAS 167 may have on our consolidated financial statements.

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”, or SFAS 168.  SFAS 168

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles in the United States.  SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We do not expect this standard will result in any change to our current accounting practices.

Effective June 30, 2009, we adopted FASB Staff Position No. 107-1 and APB Opinion No. 28-1, or FSP 107-1, that requires disclosures about the fair value of our financial instruments.  Please see Note No. 14, “Fair Value of Financial Instruments” for the relevant disclosures.

Note 10. Significant Tenant

TA is the lessee of 40% of our investments, at cost, as of June 30, 2009.  The following table presents summary financial information for TA for its quarter ended June 30, 2009, as reported in its Quarterly Report on Form 10-Q:

The summary financial information of TA is presented to comply with applicable accounting regulations of the Securities and Exchange Commission, or the SEC.  References in these financial statements to the Quarterly Report on Form 10-Q for TA are included as textual references only, and the information in TA’s Quarterly Report is not incorporated by reference into these financial statements.

During the three and six months ended June 30, 2009, TA deferred $15,000 and $30,000 of rent under the terms of the rent deferral agreement dated August 11, 2008.  We did not recognize the deferred rent as revenue due to uncertainties regarding its payment by TA.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 11. Comprehensive Income (Loss)

Other comprehensive income (loss) consists of unrealized losses on shares of TA common stock we own.  The following is a reconciliation of net income to comprehensive income (loss) for the three and six months ended June 30, 2009 and 2008:

Note 12. Related Person Transaction

In February 2009, we invested $25 in an insurance company, Affiliates Insurance Company, or AIC, with Reit Management & Research LLC, or RMR, our manager, and other companies to which RMR provides management services; and in April 2009 we invested another $5,049.  We currently own approximately 16.67% of AIC.  Although we own less than 20% of AIC, we use the equity method to account for our investment in AIC because we believe that we have significant influence over AIC since each of our trustees is a director of AIC and since we expect to purchase some of our insurance from AIC.

Note 13. Hotel Management Agreements and Leases

During the six months ended June 30, 2009, all payments due to us under our hotel leases and management contracts were paid when due except for certain payments from Marriott International, Inc., or Marriott, and Barceló Crestline Corporation, or Crestline.

During the six months ended June 30, 2009, the payments we received under our management contract with Marriott for 34 hotels that requires minimum annual payments to us of approximately $44,200 (which we have historically referred to as our Marriott No. 3 contract) and under our lease with Crestline for 19 hotels managed by Marriott that requires minimum annual rent payments to us of approximately $28,508 (which we have historically referred to as our Marriott No. 4 contract) were less than the minimum amounts contractually required by $1,740 and $2,107, respectively.  We applied available security deposits to cover these deficiencies.  Also, during the period between June 30 and August 6, 2009, the cure periods with respect to minimum payment shortfalls for the Marriott No. 3 and Marriott No. 4 contracts of $1,269 and $2,225, respectively, were not received and we applied the security deposits we hold to cover these amounts.  At August 6, 2009, the remaining balances of the security deposits which we hold for the Marriott No. 3 and Marriott No. 4 contracts were $33,194 and $24,176, respectively.

We are currently having discussions with Marriott concerning these defaults.  At this time, we expect that Marriott will continue to pay us the net cash flows from operations of the hotels included in the defaulted contracts.  We believe the security deposits we hold from Marriott and from Crestline for these contracts are in amounts which will exceed the 2009 shortfall of the payments we expect to receive compared to the minimum payments due to us under these contracts. Other than applying the security deposits to pay the differences between the net cash flows received from operations of these hotels and the contractual minimum payments, we have not yet determined what additional actions, if any, we may take as a result of these defaults.

When we reduce the amounts of the security deposits we hold for these agreements or any other operating agreements for payment deficiencies, the applications of the security deposits causes us to record income equal to the amounts by which these deposits are reduced up to the minimum return or minimum rent due to us. However, reducing security deposits does not result in cash flow to us of the deficiency amounts, but reducing amounts of security deposits does reduce the refunds we must pay to the respective lessees or managers who have provided us with these deposits.  These deposits are not

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

escrowed.  Also, under all of our hotel contracts that include a security deposit, any amounts of the security deposits which are applied to payment deficits may be replenished from future cash flows under the respective contracts.

As of August 6, 2009, all other payments due us from our hotel managers and hotel tenants under our operating agreements are current.

Minimum return and minimum rent payments due to us under some of our management agreements and leases are supported by guarantees. The guarantee provided by Hyatt with respect to the 22 hotels managed by Hyatt is limited to $50,000 ($35,103 remaining at June 30, 2009). The guarantee provided by Carlson with respect to the 11 hotels managed by Carlson is limited to $40,000 ($37,911 remaining at June 30, 2009). The combined guarantee provided by InterContinental for the 131 hotels managed or leased by InterContinental is limited to $125,000 ($95,984 remaining at June 30, 2009) and will expire if and when the hotels achieve stipulated operating results.  The guarantee provided by Marriott with respect to the one hotel leased by Marriott is unlimited and does not expire.  The guarantees provided by TA are not limited and do not expire.

Certain of our managed hotel portfolios had net operating results that were in the aggregate $9,907 and $30,298 less than the minimum returns due to us in the three and six months ended June 30, 2009, respectively.  We reflect these amounts in our condensed consolidated statements of income as a reduction to hotel operating expense when the minimum returns were funded by the manager of these hotels under the terms of our operating agreements, or in the case of our Marriott No. 3 agreement, applied from the security deposit we hold.  All of our managed hotels generated net operating results in excess of the minimum returns due to us in the 2008 periods.

Note 14.  Fair Value of Financial Instruments

The carrying amounts and the estimated fair value of our financial instruments are shown below: