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As filed with the Securities and Exchange Commission on April 7, 2004
Registration No. 333-                    


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-11

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its governing instruments)

14185 Dallas Parkway, Suite 1100

Dallas, Texas 75254
(972) 490-9600
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Montgomery J. Bennett

David A. Brooks
14185 Dallas Parkway, Suite 1100
Dallas, Texas 75254
(972) 490-9600
(Name, address, including zip code, and
telephone number, including area code, of agent for service)

Copies to:

     
David Barbour
Muriel C. McFarling
Andrews Kurth LLP
1717 Main Street, Suite 3700
Dallas, Texas 75201
(214) 659-4400
  Brad S. Markoff
Jeffrey M. Sullivan
Alston & Bird LLP
3201 Beechleaf Court, Suite 600
Raleigh, North Carolina 27604-1062
(919) 862-2200

     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.    o

     If the Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o

CALCULATION OF REGISTRATION FEE

                 


Proposed Maximum Proposed Maximum
Amount Being Offering Price Aggregate Amount of
Title of Securities Being Registered Registered(1) per Unit(2) Offering Price(2) Registration Fee

Common Stock, $0.01 par value per share
  8,625,000 shares   $10.00   $86,250,000   $10,928


(1)  Includes 1,125,000 shares that may be purchased pursuant to an over-allotment option granted to the underwriters.
 
(2)  Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(a).

     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




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The information in this prospectus is not complete and may be changed or supplemented. We cannot sell any of the securities described in this prospectus until the registration statement that we have filed to cover the securities has become effective under the rules of the Securities and Exchange Commission. This prospectus is not an offer to sell the securities, nor is it a solicitation of an offer to buy the securities, in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED APRIL      , 2004

PROSPECTUS

7,500,000 Shares of Common Stock

(ASHFORD HOSPITALITY TRUST LOGO)

     Ashford Hospitality Trust, Inc. is a real estate investment trust, or REIT, that focuses on investments in the lodging industry at all levels of the capital structure and across all segments where pricing, yield and capital appreciation advantages may exist. We are self-advised and own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. Since the completion of our initial public offering in August 2003, when we acquired six hotel properties from affiliated parties, we have acquired $203.8 million in lodging-related assets from unaffiliated parties, including 11 hotels and five loans, also known as mezzanine loans, secured by junior mortgages on hotels or pledges of equity interests in entities owning hotels. We also have two additional properties under firm purchase contracts for a total consideration of $32.6 million that we intend to acquire with cash on hand. In addition, on March 15, 2004, we declared our first dividend of $0.06 per share.

     We are offering 7,500,000 shares of our common stock. We have granted the underwriters an option to purchase up to 1,125,000 additional shares of common stock to cover over-allotments.

     Our common stock is listed on the New York Stock Exchange under the symbol “AHT.” The last reported sale price of our common stock on the New York Stock Exchange on April 6, 2004 was $10.00 per share.

     To assist us in complying with certain federal income tax requirements applicable to REITs, our charter contains certain restrictions relating to the ownership and transfer of our stock, including an ownership limit of 9.8% on our common stock.

      Investing in our common stock involves risks. See “Risk Factors” beginning on page 12 of this prospectus to read about risks you should consider before buying our common stock. These risks include:

  •  We may fail to integrate recent and additional investments into our operations or otherwise manage our planned growth, which may adversely affect our operating results. We cannot assure you that we will be able to complete any of the acquisitions that we have under contract.
 
  •  Mr. Archie Bennett, our Chairman, and Mr. Montgomery Bennett, our President and Chief Executive Officer, have conflicts of interest with us, including ownership of our primary property manager.
 
  •  We may have to pay substantial fees to our primary hotel manager, which is owned by the Bennetts, upon early termination of our hotel management agreement.
 
  •  Our mortgage loan assets are generally non-recourse, and in the case of a defaulted non-recourse loan, our recovery will be limited to the value of the underlying property, which may be less than the loan amount.
 
  •  Increases in the interest rates on our borrowings may reduce our net income by reducing the spread between the interest rate on our borrowings to fund an investment and the investment’s return.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

                 
Per Share Total


Public offering price
  $       $    
Underwriting discount
  $       $    
     
     
 
Proceeds, before expenses, to us
  $       $    

     The underwriters have an option to purchase up to 1,125,000 additional shares of our common stock to cover over-allotments.

     We expect to deliver the common stock on or about                    , 2004.

FRIEDMAN BILLINGS RAMSEY

The date of this prospectus is                    , 2004.


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 Second Amended and Restated Agreement of LP
 List of Subsidiaries
 Consent of Ernst & Young LLP


      No dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those contained in this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us or the underwriters. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.

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PROSPECTUS SUMMARY

      This summary highlights information relating to Ashford Hospitality Trust, Inc. and our common stock that is being offered by this prospectus. More detailed discussions of this information are contained in this prospectus. To better understand the offering and our business, you should carefully review this entire prospectus, including “Risk Factors.” Unless indicated otherwise, the information included in this prospectus assumes no exercise of the underwriters’ over-allotment option, and, unless otherwise mentioned or unless the context requires, all references in this prospectus to “we,” “us,” “our” or similar references mean Ashford Hospitality Trust, Inc., Ashford Hospitality Limited Partnership, our operating partnership, and our other subsidiaries. In addition, unless otherwise mentioned or unless the context requires, all reference in the Prospectus to “Remington Hotel Corporation” or “Remington Hotel” means Remington Hotel Corporation, Remington Lodging & Hospitality, L.P. and their respective subsidiaries.

      In this prospectus, we often refer to units of limited partnership in Ashford Hospitality Limited Partnership, our operating partnership. These units were issued in connection with the formation of our company and the acquisition of our initial properties and assets and the acquisition of one other property we have acquired since our initial public offering. These units are redeemable for cash equal to the then-current market value of one share of common stock or, at our option, one share of our common stock, commencing one year following the issuance of the units being redeemed.

Overview

      We are a Maryland corporation that was formed in May 2003 to take advantage of the existing and developing investment opportunities in the lodging industry. These diverse lodging investment opportunities may result from inefficiencies related to market illiquidity, supply/demand imbalances and general business cycles. We target specific opportunities created by the current recovering lodging market while retaining the flexibility to invest in the most attractive risk-reward opportunities as they develop in the lodging business cycle. To our knowledge, we are one of the few publicly traded REITs exclusively focused on investing in the hospitality industry at all levels of the capital structure and across all segments where pricing, yield and capital appreciation advantages may exist.

      We completed an initial public offering, or IPO, of our common stock in August 2003. In connection with the IPO, we acquired six hotels and eight asset management and consulting agreements for a total cash and equity consideration of $137.6 million, including $65.7 million to repay mortgage indebtedness related to our initial assets. Upon completion of the initial public offering and related formation transactions, we had approximately $131.1 million in cash to invest in lodging-related assets and for general corporate purposes.

      Since then, we have acquired 11 additional hotel properties for a total consideration of $132.2 million. For the 12 months ended December 31, 2003, the aggregate EBITDA for these 11 properties was approximately $13.9 million, and the weighted average EBITDA acquisition multiple for the 12 months ended December 31, 2003, based on the aggregate acquisition price for these 11 properties, was approximately 9.5x. For a reconciliation of EBITDA to net income, see “— Summary Selected Historical and Pro Forma Financial Information” in this prospectus summary. Additionally, we currently have two hotel properties under firm purchase contracts, and we intend to acquire these properties for a total purchase price of approximately $32.6 million. We also have acquired or originated five mezzanine loans for a total consideration of $71.6 million since the completion of our IPO.


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      Presented in the table below is certain descriptive information regarding our existing portfolio as of, and for the year ending, December 31, 2003 and information regarding the two properties that we have acquired since December 31, 2003.

                                         
Revenue
per
Year Built/ Average Average Available
Hotel Property Location Renovated Rooms Occupancy(1) Daily Rate(2) Room(3)







Properties Acquired upon Completion of our IPO:                                
Embassy Suites
  Austin, TX   1998     150       70.3 %   $ 114.58     $ 80.55  
Embassy Suites
  Dallas, TX   1998     150       65.2       108.10       70.48  
Embassy Suites
  Herndon, VA   1998     150       80.9       135.71       109.79  
Embassy Suites
  Las Vegas, NV   1999     220       84.8       107.37       91.05  
Radisson Hotel
  Covington, KY   1972/2000     236       59.3       67.25       39.88  
Radisson Hotel
  Holtsville, NY   1989/2001     188       66.0       96.24       63.52  
Properties Acquired since Completion of our IPO:                                
Doubletree Guest Suites
  Columbus, OH   1985     194       70.8 %   $ 97.43     $ 68.98  
Doubletree Guest Suites
  Dayton, OH   1987     137       67.8       83.02       56.29  
Embassy Suites
  Flagstaff, AZ   1988     119       68.7       92.10       63.27  
Embassy Suites
  Phoenix, AZ   1981     229       68.6       96.47       66.18  
Embassy Suites
  Syracuse, NY   1990     215       71.3       106.34       75.82  
Hampton Inn
  Lawrenceville, GA   1997     86       67.1       69.54       46.66  
Hilton Garden Inn
  Jacksonville, FL   1999     119       76.3       91.38       69.72  
Homewood Suites
  Mobile, AL   1998     86       82.1       87.00       71.43  
Marriott Residence Inn(4)
  Lake Buena Vista, FL   2001     210       71.5       101.67       72.69  
Sea Turtle Inn(4)
  Atlantic Beach, FL   1972/2000     193       75.2       111.86       84.12  
SpringHill Suites by Marriott
  Jacksonville, FL   2000     102       84.3       76.37       64.38  
             
     
     
     
 
Total/ Weighted Average     2,784       71.8 %   $ 98.65     $ 70.80  
     
     
     
     
 


(1)  Average occupancy represents the number of occupied rooms during the period divided by the total number of rooms available during that period.
 
(2)  Average daily rate or ADR represents the total room revenue for the applicable period divided by the number of occupied rooms.
 
(3)  Revenue per available room or RevPAR represents the total room revenue per total available rooms for the applicable period and is calculated by multiplying average occupancy by the average daily rate.
 
(4)  The financial information for these properties, which we acquired after December 31, 2003, is derived from historical financial statements as of, and for the year ended, December 31, 2003.

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     As of December 31, 2003, we owned one $10.0 million mezzanine loan, secured by the Hilton Times Square in New York City. Since then, we have acquired four additional mezzanine loans totaling $61.6 million secured by first or subordinate liens on 20 hotels located in 15 states.

      Presented in the table below is certain descriptive information regarding our existing loan portfolio as of March 31, 2004

                         
Origination or Loan
Property Location Acquisition Date Amount Interest Rate Maturity Date






Hilton Times Square
  New York, NY   November 26, 2003   $ 10,000,000     LIBOR + 900 bps
2% LIBOR floor
  August 2006, with two
one-year extension
options(1)
 
Adam’s Mark
  Denver, CO   January 23, 2004     15,000,000     LIBOR + 900 bps   February 2006, with
three one-year extension
options(2)
 
17 Wyndham-owned hotels (3)
  12 states   March 4, 2004     25,000,000     LIBOR + 870 bps
2.5% LIBOR floor
  July 2005, with three
one-year extension
options(4)
 
Embassy Suites
  Boston, MA   March 19, 2004     15,000,000     LIBOR + 1025 bps
1.75% LIBOR floor
  April 2007, with two
one-year extension
options(5)
 
Northland Inn & Conference Center
  Brooklyn Park, MN   March 24, 2004     6,600,000     greater of 12% or
LIBOR + 1000 bps
2% LIBOR floor
  January 2006(6)
             
         
Total   $ 71,600,000          
     
         


(1)  Interest only payments until August 2004, with amortization thereafter based on a 25-year repayment schedule. The terms of the loan prohibit prepayment through August 2004, and thereafter the loan may be prepaid subject to decreasing prepayment premiums until February 2006, when no prepayment premium is payable.
 
(2)  Interest only payments for the first two years, with amortization during the extension period based on a 25-year repayment schedule. The terms of the loan prohibit prepayment before December 2004, and thereafter the loan may be prepaid subject to decreasing prepayment premiums until September 2005, when no prepayment premium is payable.
 
(3)  Includes nine Wyndham hotels, three Hilton hotels, three Doubletree hotels, one Crowne Plaza hotel and one Radisson hotel.
 
(4)  Payment terms are based on a 25-year repayment schedule, and the terms of the loan prohibit prepayment until July 2005, subject to certain release provisions.
 
(5)  Interest only payments through maturity. The terms of the loan prohibit prepayment through September 2005.
 
(6)  Interest only payments through maturity. At maturity, an additional interest payment will be due to reflect an accrual rate that is the greater of 15% or LIBOR plus 1300 basis points.

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     We currently have two additional hotel properties under firm purchase contracts, and we intend to acquire these properties for total consideration of approximately $32.6 million. We refer to these properties in this prospectus as the acquisition properties. We will use cash on hand to pay the $25.8 million cash component of the purchase price for these properties. In addition, we intend to assume approximately $6.8 million of debt secured by the SpringHill Suites by Marriott in Baltimore, Maryland. Completion of these acquisitions is subject to customary conditions, and we cannot assure you that we will be able to complete any of the acquisitions that we have under contract or that the terms we have negotiated will not change. Presented in the table below is certain descriptive information regarding the acquisition properties as of, and for the year ending, December 31, 2003.

                                                             
Year Built Average Revenue per
or Average Daily Available EBITDA
Hotel Property(1) Location Renovated Rooms Occupancy(2) Rate(3) Room(4) EBITDA(5) Multiple(6)









Sheraton Bucks County (unaudited)
  Langhorne, PA     1986       187       68.2 %   $ 109.82     $ 74.90     $ 2,216,377       7.5 x
SpringHill Suites by Marriott
  Baltimore, MD     2001       133       74.9       104.32       78.14       1,471,758       10.8 x
                 
     
     
     
     
     
 
Total/ Weighted Average
                320       71.0 %   $ 107.41     $ 76.24     $ 3,688,135       8.8 x
                 
     
     
     
     
     
 


(1)  The financial information for these properties is derived from historical financial statements as of, and for the year ended, December 31, 2003.
 
(2)  Average occupancy represents the number of occupied rooms during the period divided by the total number of rooms available during that period.
 
(3)  Average daily rate represents the total room revenue for the applicable period divided by the number of occupied rooms.
 
(4)  Revenue per available room represents the total room revenue per total available rooms for the applicable period and is calculated by multiplying average occupancy by the average daily rate.
 
(5)  Represents earnings before interest, taxes, depreciation and amortization for the 12 months ended December 31, 2003. For a reconciliation of total EBITDA of our owned properties and these two acquisition properties to proforma net income, see “— Summary Selected Historical and Pro Forma Financial Information” in this prospectus summary.
 
(6)  EBITDA acquisition multiple represents the total acquisition price for the acquisition properties as a multiple of the EBITDA for the 12 months ended December 31, 2003.

     As of April 1, 2004, we had total debt outstanding of approximately $115.7 million, comprised of $16.0 million of mortgage debt secured by the Embassy Suites Las Vegas, $6.4 million of mortgage debt secured by the Hilton Garden Inn in Jacksonville, Florida, $15.7 million of mortgage debt secured by the Sea Turtle Inn, Atlantic Beach, Florida, a $36.0 million non-recourse loan, with a current outstanding balance of $27.8 million, secured by three Embassy Suites and two Doubletrees, and a $60.0 million secured revolving credit facility, with a current outstanding balance of $49.8 million, which matures in February 2007 and is collateralized by seven hotels. We anticipate repaying the outstanding indebtedness on our secured revolving credit facility and a portion of our $36.0 million non-recourse loan with the net proceeds from this offering. After these repayments, we expect to have the full amount of our secured revolving credit facility available for re-borrowing, subject to certain restrictions.

      We are self-advised and own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. We currently own an 81.7% interest in our operating partnership. The remaining 18.3% is owned by limited partners who received units in exchange for the contribution of certain of our assets. The substantial majority of these limited partnership units are owned by certain of our executives, employees and employees of our affiliates. Following completion of this offering, we expect to own 85.2% and have a 14.8% minority interest (of which less than 0.3% will be held by persons other than certain of our directors, executives, employees and employees of our affiliates). We are the sole general partner of our operating partnership.

      We have elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes. Because of limitations imposed on REITs in operating hotel properties, third-party managers manage each of our hotel properties. Remington Lodging & Hospitality, L.P., or Remington Lodging, is our primary property manager, managing 13 of our 17 hotel properties. Remington Lodging is wholly

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owned by Mr. Archie Bennett, our Chairman, and Mr. Montgomery J. Bennett, our President and Chief Executive Officer. Messrs. Archie and Montgomery Bennett also own 100% of Remington Hotel Corporation, which is one of the largest privately-owned independent hotel management companies in the country and has managed over $1 billion of hotels in 28 states. Our remaining four hotel properties are managed by Noble Management Group, a management company unaffiliated with us. Additionally, if we acquire both of the acquisition properties we currently have under firm purchase contracts, one will be managed by Remington Lodging and one will be managed by PM Hospitality Strategies, a management company unaffiliated with us.

      Our principal executive offices are located at 14185 Dallas Parkway, Suite 1100, Dallas, Texas 75254. Our telephone number is (972) 490-9600. Our website is http://www.ahtreit.com. The contents of our website are not a part of this prospectus.

Our Competitive Strengths

      We believe we distinguish ourselves from other owners, operators, acquirers and developers of hotel properties in a number of ways and enjoy significant competitive strengths, including:

  •  Our senior management has significant experience in sourcing, underwriting, operating, repositioning, developing, selling and financing lodging-related assets. Our roots in the hotel industry trace back to 1968 when our Chairman, Archie Bennett, Jr., built his first hotel. Prior to our IPO, Mr. Bennett and certain members of our senior management team were involved in the investment in, or management of, 190 hotels or mortgage loans secured by hotels, totaling approximately 31,119 rooms in 33 states and in the development of 35 hotels, totaling approximately 9,201 rooms in 11 states.
 
  •  Historically, our management team has successfully implemented a business strategy of identifying attractive investment opportunities in the lodging industry, matching these opportunities with appropriate institutional investors, and managing these investments, including providing development, management and construction services, for the institutional owners.
 
  •  Our flexible asset allocation strategy, described below, allows us to reallocate our investments to take advantage of changing opportunities in the lodging market and the capital markets.

Our Business Strategy

      Our primary business objective is to maximize stockholder value by achieving attractive risk-adjusted returns throughout the business cycles of the lodging industry. Our strategy is to selectively invest capital in a variety of lodging-related assets based on our evaluation of diverse market conditions. By investing in diversified lodging assets, at different levels of a given hotel’s capital structure, we plan to take advantage of changes in the capital markets.

      Our business strategy of combining lodging-related equity and debt investments seeks, among other things, to:

  •  maximize economic benefits from an industry that has suffered significant reductions in value and operating performance and appears to be at the beginning stages of a recovery;
 
  •  capitalize on both current yield and price appreciation, while simultaneously offering diversification of types of assets within the hospitality industry;
 
  •  vary investments across an array of hospitality assets to take advantage of market cycles for each asset class; and
 
  •  offer an attractive liquidity alternative to asset sales (through structure and tax deferral) and traditional financing (due to rate, structure, loan-to-value and asset class).

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      Our investment strategy primarily targets limited and full service hotels in primary, secondary and resort markets throughout the United States. To take full advantage of current and future investment opportunities in the lodging industry, we will invest according to the asset allocation strategies described below. Due to ongoing changes in market conditions we will continually evaluate the appropriateness of our investment strategies, and our board of directors may change any or all of these strategies at any time. In addition to our investment activities, we will also perform certain asset management and consulting services for other management companies affiliated with Remington Hotel.

      We evaluate our portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs and subject to the relative illiquidity of real estate assets, we may sell investments opportunistically. Our decision to sell a hotel often will be predicated upon, among other things: projected cash flow; size of the hotel; strength of the franchise; property condition and related costs to renovate the property; strength of market demand; projected supply of hotel rooms in the market; probability of increased valuation; and geographic profile of the hotel. Our decision to sell other lodging-related assets will depend upon, among other things: management’s forecast and review of the performance of our overall portfolio and management’s assessment of changing conditions in the investment and capital markets.

Direct Hotel Investments

      In connection with our initial public offering, we acquired six hotel properties. Since then, we have acquired 11 additional hotel properties and contracted to acquire an additional two hotel properties. In selecting the hotels that we have acquired since our initial public offering, we have targeted hotels that either offer a high current return or have the opportunity to increase in value through brand repositioning, capital investments, market based recovery or improved management practices. We intend to continue acquiring existing hotels and, under appropriate market conditions, to develop new hotels. Our direct hotel acquisition strategy will follow similar investment criteria and will seek to achieve both current income and income from appreciation. We believe that values for, and operating performances of, lodging properties remain below historical levels, making this an attractive time for acquisitions. Our direct hotel investments represent approximately 77.3% of our total investments made to date.

Mezzanine Financing

      Since the date of our initial public offering, we have acquired or originated five subordinated loans, also known as mezzanine loans, secured by junior mortgages on hotels or pledges of equity interests in entities owning hotels and, in one instance, by a junior participation in a first mortgage. We expect the current yield, on a risk-adjusted basis, on each of these mezzanine loans to provide attractive returns. The loans we have acquired or originated relate to upscale or first class hotels that we believe require no significant near-term capital expenditures, have reputable managers and are located in good or emerging sub-markets.

      We intend to continue to acquire or originate mezzanine loans. Mezzanine loans that we may acquire in the future may be secured by individual assets as well as cross-collateralized portfolios of assets. Although these types of loans generally have greater repayment risks than first mortgages due to the subordinated nature of the loans, we believe that a strong need for lodging mezzanine loans currently exists on behalf of hotel owners. We believe that the recent slowdown in the travel industry has caused the value of hotel properties to decline below the values at which they were acquired or last refinanced. This decline in market value, coupled with more stringent underwriting criteria by senior hotel lenders, has caused a gap to develop in the loan-to-value ratio of these properties, making it increasingly difficult for owners to refinance their properties. We believe that mezzanine capital provides a solution for these owners by providing loans to cover the loan-to-value shortfalls. We expect this asset class to provide us with attractive yields and potentially allow us to participate in the improving economics of the underlying hotel. In addition, subject to restrictions applicable to REITs, we may acquire or originate corporate-level mezzanine loans on an unsecured basis. Our mezzanine loans represent approximately 22.7% of our total investments made to date.

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First Mortgage Financing

      To date, we have not originated or purchased any first mortgages other than one junior participation in a first mortgage, which we refer to as a mezzanine loan throughout this prospectus. However, as interest rates increase and the dynamics in the hotel industry make first mortgage investments more attractive, we intend to acquire, potentially at a discount to par, or originate loans secured by first priority mortgages on hotels. We may be subject to certain state-imposed licensing regulations related to commercial mortgage lenders, with which we intend to comply. However, because we are not a bank or a federally chartered lending institution, we are not subject to the state and federal regulatory constraints imposed on such entities. Also, because we do not intend to securitize our assets, we expect to be able to offer more flexible terms than commercial lenders who contribute loans to securitized mortgage pools. We anticipate that this asset class will provide us with stable, attractive current yields.

Sale-Leaseback Transactions

      To date, we have not participated in any sale-leaseback transactions. However, if the lodging industry fundamentals shift such that sale-leaseback transactions become more attractive investments, we intend to purchase hotels and lease them back to their existing hotel owners. Our sale-leaseback strategy will target, among other things, hotel owners that want the ability to realize the value of their investments while maintaining operating control of their hotels. We will seek to structure the transactions as net leases with participation features, terms ranging up to 20 years plus extension options, and with the operating responsibility for the property assumed by the lessee. We believe these transactions will provide us current income and growth through contractual rental increases or cash flow participations.

Asset Management and Consulting Services

      To comply with the REIT rules, our property managers perform the day-to-day management activities related to the operations of our properties. However, in exchange for a fee, we provide or supervise certain asset management services to property managers. These services include risk management; assistance with tax returns; negotiation of hotel franchise agreements and monitoring compliance with franchise requirements; negotiation of property financings and monitoring compliance with loan covenants; negotiation and closing of equipment leases; property litigation management; assistance with preparation of hotel budgets; and monitoring compliance with management agreements. We also occasionally provide additional services to these property managers such as market and feasibility analysis, capital improvement assistance and financial planning. To the extent permitted by REIT rules, we perform similar functions with respect to our own properties. We must monitor and limit the amount of income derived from our asset management and consulting services as fees for these services are not qualifying income for REIT purposes. We do not intend to actively pursue additional asset management and consulting contracts in the future.

Summary Risk Factors

      An investment in our common stock involves various risks. You should carefully consider these and other matters discussed under “Risk Factors” prior to making an investment in us. Some of these risks include:

  •  Our business strategy depends on our continued rapid growth. We may fail to integrate recent and additional investments into our operations or otherwise manage our planned growth, which may adversely affect our operating results. We cannot assure you that we will be able to complete any of the acquisitions that we have under contract or that the terms we have negotiated will not change.
 
  •  Our Chairman’s and Chief Executive Officer’s conflicts of interest arising from their ownership interests in Remington Lodging, which manages 13 of our 17 hotel properties and receives substantial fees from us, and in other lodging business entities and their and our other officers’ tax

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  positions and tax indemnification rights may result in management decisions not in the stockholders’ best interest and may make sales or refinancings of some of our properties less likely.
 
  •  We may have to pay substantial fees to Remington Lodging, our primary hotel manager, which is owned by our Chairman and our Chief Executive Officer, upon early termination of our hotel management agreement.
 
  •  Our mortgage loan assets are, and generally will be, non-recourse, uninsured by the government and below investment grade. In the case of a defaulted non-recourse loan, our recovery will be limited to the value of the underlying property, which may be less than the loan amount. Our mezzanine mortgage loans, even if secured, are generally subordinated to a senior lender with a first mortgage and may become unsecured upon foreclosure.
 
  •  Interest rate mismatches between our borrowings and our investments as well as changes in prepayment rates on our mortgage loan assets may reduce our income.
 
  •  While our current policy is to limit total consolidated indebtedness to no more than 60% of the aggregate investment in the hotels and debt instruments which we own, our board of directors may change this and our other operating policies and strategies at any time without stockholder approval. Our debt service obligations may reduce our cash available for distribution.
 
  •  We have agreed for a period of up to 10 years from the date of our initial public offering to pay to certain affiliated entities that contributed assets to us in connection with our formation the amount of their income tax liability, plus a gross-up amount, if we dispose of any of their contributed properties in a taxable transaction. The partners in the contributing partnerships that could benefit from our payment of an indemnity include our Chairman, our Chief Executive Officer and other executive officers and family members of Mr. Edelman, one of our directors.
 
  •  We may enter into interest rate hedging transactions, which may reduce our net income because they may be unsuccessful or the counterparties to hedging transactions may not perform their obligations.
 
  •  Hotel operations are sensitive to economic and political conditions.
 
  •  We depend on the business relationships and experience of our key personnel, the loss of whom could threaten our ability to execute our strategies.
 
  •  If we fail to maintain our REIT status, we will be subject to greater federal income tax.
 
  •  We may not be able to maintain or renew our hotel franchises, and maintaining our hotels and complying with hotel franchise standards may require us to make significant capital expenditures.
 
  •  Our assets, especially our hotel properties, are illiquid, and sales of hotel properties and other assets could result in unfavorable tax consequences to us because of the Internal Revenue Code rules governing REITs.
 
  •  The costs of compliance with environmental and other regulations by us and the operators of the hotels underlying our loans may harm our operating results.

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The Offering

 
Common stock offered by us 7,500,000 shares
 
Common stock outstanding after this offering 33,300,447 shares(1)
 
Use of proceeds We estimate that the net proceeds of this offering will be approximately $70.3 million, after deducting the underwriting discount and estimated offering expenses payable by us. We will contribute the net proceeds of this offering to our operating partnership. Our operating partnership will subsequently use the proceeds to repay the outstanding indebtedness on our existing revolving credit facility and to repay a portion of our $36.0 million non-recourse loan.


(1)  The number of shares of common stock outstanding after this offering is based on 25,800,447 shares of common stock outstanding as of March 15, 2004, and does not include: (a) 5,764,592 shares issuable upon the conversion of units of partnership interest in our operating partnership or (b) 746,964 shares reserved for issuance under our stock plan.

Distributions

      To maintain our qualification as a REIT, we intend to make annual distributions to our stockholders of at least 90% of our taxable income (which for these purposes excludes our net capital gain and does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). Distributions will be authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our dividend policy will not change in the future. Our ability to pay distributions to our stockholders will depend, in part, upon our receipt of distributions from our operating partnership, Ashford Hospitality Limited Partnership, which may depend upon receipt of lease payments with respect to our properties from the indirect, wholly-owned subsidiary of our operating partnership, Ashford TRS, and, in turn, upon the management of our properties by our property managers. On March 15, 2004, we declared a dividend to common stockholders of record of $.06 per fully-diluted share. The dividend will be paid April 15, 2004 to all stockholders of record as of March 31, 2004.

      Our charter allows us to issue preferred stock with a preference on distributions, and the partnership agreement of our operating partnership allows it to issue preferred units with a preference on distributions. We currently have no intention to issue any preferred stock. We may issue preferred units in connection with the acquisition of additional properties. The dividend preference on any preferred units, or on any preferred stock we later choose to issue, could limit our ability to make a dividend distribution to our common stockholders.

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Summary Selected Historical and Pro Forma Financial Information

      The following table sets forth summary selected historical and pro forma financial data for Ashford Hospitality Trust, Inc. To the extent that this information is presented for time periods or dates preceding our initial public offering, the information represents the historical financial condition and results of operations of entities that owned the assets we acquired in connection with our initial public offering.

      The following summary selected historical consolidated and combined financial information as of December 31, 2003 and 2002 and for each of the two years in the period ended December 31, 2003 was derived from audited consolidated financial statements of Ashford Hospitality Trust, Inc. and its predecessor contained elsewhere in this prospectus.

      With respect to the statement of operations information below, the pro forma adjustments give effect to the completion of the following transactions as if they occurred on January 1, 2003: our IPO, the issuance of restricted shares to employees, the acquisition of nine hotel properties from FelCor Lodging Limited Partnership and Noble Investment Group, the acquisition or origination of five mezzanine loans receivable, the acquisition of four hotel properties since December 31, 2003, including two properties not acquired but currently under firm purchase contracts, this offering and the related increase in weighted average shares outstanding and the reduction of interest expense associated with the pro forma changes in indebtedness.

      With respect to the balance sheet information below, the pro forma adjustments give effect to the completion of the following transactions as of December 31, 2003: this offering and related reduction of debt with the proceeds, the acquisition and origination of four mezzanine loans receivable which occurred subsequent to December 31, 2003, the acquisition of four hotel properties since December 31, 2003, including two properties not acquired but currently under firm purchase contracts and the borrowing of $49.8 million under the $60.0 million revolving credit facility.

      You should read the information below along with all other financial information and analysis presented in this prospectus, including the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ashford Hospitality Trust, Inc.’s combined financial statements and related notes included elsewhere in this prospectus.

                                     
Historical Historical Pro Forma
December 31, December 31, Pro Forma December 31,
2002 2003 Adjustments 2003




Operating Information:
                               
Revenue
                               
 
Total revenue
  $ 35,357,781     $ 42,278,601     $ 64,503,904     $ 106,782,505  
Expenses
                               
 
Operating expenses, excluding depreciation and amortization
  $ 27,134,438     $ 36,770,818     $ 47,273,155     $ 84,043,973  
 
Depreciation & amortization
    4,833,551       4,932,676       5,413,667       10,346,343  
 
Interest expense (net of non-operating interest income)
    6,482,710       4,711,073       (1,172,178 )     3,538,895  
     
     
     
     
 
   
Total expenses
    38,450,699       46,414,567       51,514,644       97,929,211  
     
     
     
     
 
Net income (loss) before provision for income taxes and minority interest
  $ (3,092,918 )   $ (4,135,966 )   $ 12,989,260     $ 8,853,294  
     
     
     
     
 
 
Provision for income taxes
          (142,178 )     (365,352 )     (507,530 )
 
Minority interest
          357,943       (1,589,778 )     (1,231,835 )
     
     
     
     
 
Net income (loss)
  $ (3,092,918 )   $ (3,920,201 )   $ 11,034,130     $ 7,113,929  
     
     
     
     
 

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Historical Historical Pro Forma
December 31, December 31, Pro Forma December 31,
2002 2003 Adjustments 2003




Balance Sheet Information:
                               
 
Investment in hotel properties, net
  $ 85,246,801     $ 173,723,998     $ 83,100,000     $ 256,823,998  
 
Cash and cash equivalents
    2,968,814       76,254,052       (71,747,640 )     4,506,412  
 
Notes receivable
          10,000,000       61,600,000       71,600,000  
 
Total assets
    95,416,446       267,882,417       73,589,360       341,471,777  
 
Mortgage notes payable
    82,126,150       50,201,779       2,050,000       52,251,779  
 
Capital leases payable
    621,351       456,869             456,869  
 
Total liabilities and owners’ equity
  $ 95,416,446     $ 267,882,417     $ 73,589,360     $ 341,471,777  
Other Information (unaudited):
                               
 
Total number of rooms
    1,094       2,381       856       3,237  
 
Total number of hotels
    6       15       4       19  
 
EBITDA(1)
  $ 8,223,343     $ 5,449,268     $ 13,933,057     $ 19,382,325  


(1)  EBITDA is defined as income (loss) before net gain on sale of properties, interest expense, interest income (excluding interest income from mezzanine loans), income taxes, depreciation and amortization. We believe EBITDA is useful to investors as an indicator of our ability to service debt and pay cash distributions. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. EBITDA does not represent cash generated from operating activities determined in accordance with accounting principles generally accepted in the United States (GAAP), and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.
                                     
Reconciliation of EBITDA
                               
(unaudited):
                               
 
Net loss
  $ (3,092,918 )   $ (3,920,201 )           $ 7,113,929  
 
Plus depreciation and amortization
    4,833,551       4,932,676               10,346,343  
 
Plus interest expense
    6,536,195       5,000,206               3,828,028  
 
Less non-operating interest income
    (53,485 )     (289,133 )             (289,133 )
 
Plus provision for income taxes
          142,178               507,530  
 
Minority interest
          (357,943 )             1,231,835  
     
     
             
 
   
Gross EBITDA
  $ 8,223,343     $ 5,507,783               22,738,532  
 
EBITDA related to minority interest
          (58,515 )             (3,356,207 )
     
     
             
 
   
EBITDA
  $ 8,223,343     $ 5,449,268             $ 19,382,325  
     
     
             
 

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RISK FACTORS

      An investment in our common stock involves various risks. You should carefully consider the following risk factors in conjunction with the other information contained in this prospectus before purchasing our common stock. The risks discussed in this prospectus can adversely affect our business, liquidity, operating results, prospects and financial condition. This could cause the market price of our common stock to decline and could cause you to lose all or part of your investment. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects and financial condition.

Risks Related to Our Business

 
Our business strategy depends on our continued rapid growth. We may fail to integrate recent and additional investments into our operations or otherwise manage our planned growth, which may adversely affect our operating results.

      Our business plan contemplates a period of continued rapid growth in the next several years. We cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to successfully integrate our recent investments into our portfolio and manage any future acquisitions of additional assets without operating disruptions or unanticipated costs. Acquisition of any additional portfolio of properties or mortgages would generate additional operating expenses that we will be required to pay. As we acquire additional assets, we will be subject to the operational risks associated with owning new lodging properties. Our failure to integrate successfully our recent acquisitions as well as any future acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.

 
We may be unable to identify additional real estate investments that meet our investment criteria or to acquire the properties we have under contract.

      We cannot assure you that we will be able to identify real estate investments that meet our investment criteria, that we will be successful in completing any investment we identify or that any investment we complete will produce a return on our investment. Moreover, we will have broad authority to invest in any real estate investments that we may identify in the future. We also cannot assure you that we will acquire the properties we currently have under firm purchase contracts or that the acquisition terms we have negotiated will not change.

 
Conflicts of interest could result in our management acting other than in our stockholders’ best interest.

      Conflicts of interest relating to Remington Hotel Corporation may lead to management decisions that are not in the stockholders’ best interest. The Chairman of our board of directors, Mr. Archie Bennett, Jr., serves as the Chairman of the board of directors of Remington Hotel, and our Chief Executive Officer and President, Mr. Montgomery Bennett serves as the Chief Executive Officer and President of Remington Hotel. Messrs. Archie and Montgomery Bennett own 100% of Remington Hotel. Remington Lodging, which is also 100% owned by Messrs. Archie and Montgomery Bennett, manages 13 of our 17 properties and provides related services and provides property management services, fee development services and occasional property identification services for third parties. Additionally, Messrs. Archie and Montgomery Bennett own minority interests in several lodging properties not transferred to our operating partnership in connection with our initial public offering.

      Messrs. Archie and Montgomery Bennett’s ownership interests in and management obligations to Remington Hotel and Remington Lodging present them with conflicts of interest in making management decisions related to the commercial arrangements between us and Remington Hotel and will reduce the time and effort they each spend managing us. Our board of directors has adopted a policy that requires all

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management decisions relating to the management agreement with Remington Lodging be approved by a majority or, in certain circumstances, all of our independent directors. See “Policies and Objectives with Respect to Certain Activities — Conflict of Interest Policy.”

      Holders of units in our operating partnership, including members of our management team, may suffer adverse tax consequences upon our sale of certain properties. Therefore, holders of units, either directly or indirectly, including Messrs. Archie and Montgomery Bennett, Brooks, Nunneley and Edelman (or his family members), may have different objectives regarding the appropriate pricing and timing of a property’s sale. These officers and directors of ours may influence us not to sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

      In addition, we agreed to indemnify the contributors of the properties contributed to us in exchange for operating partnership units in connection with our initial public offering, including (indirectly) Messrs. Archie and Montgomery Bennett, Brooks and Nunneley and Edelman (or his family members), against the income tax they may incur if we dispose of one of these properties. Because of this indemnification, our indemnified management team members may make decisions about selling one of these properties that is not in our stockholders’ best interest.

      We are a party to a master hotel management agreement and an exclusivity agreement with Remington Lodging. Of our 17 hotels, 13 are currently managed by Remington Lodging. The management agreement describes the terms of Remington Lodging’s management of the 13 hotels, as well as any future hotels we may acquire that will be managed by Remington. If we terminate the management agreement as to any of our hotels that are subject to the management agreement, we will be required to pay Remington Lodging a substantial termination fee. For example, if we were to terminate the management agreement with respect to all 13 of our hotels that are currently being managed by Remington Lodging because we elected to sell those hotels, the fee would be approximately $11.3 million. The exclusivity agreement requires us to engage Remington Lodging, unless our independent directors either (i) unanimously vote to hire a different manager or developer, or (ii) by a majority vote, elect not to engage Remington Lodging because they have determined that special circumstances exist or that, based on Remington Lodging’s prior performance, another manager or developer could perform the duties materially better. As the sole owners of Remington Lodging, which would receive any development, management and management termination fees payable by us under the management agreement, Messrs. Archie and Montgomery Bennett may influence our decisions to sell a hotel or acquire or develop a hotel when it is not in the best interests of our stockholders to do so.

      In addition, Ashford Financial Corporation contributed to us asset management and consulting agreements that relate to management and consulting services that Ashford Financial Corporation agreed to perform for hotel property managers with respect to certain identified hotel properties. Ashford Financial Corporation is 100% owned by Messrs. Archie and Montgomery Bennett. The agreements provide for annual payments to us, as the assignee of Ashford Financial Corporation, in consideration for our performance of certain asset management and consulting services. These services relate to 27 hotel properties managed by eight management companies. The exact amount of the consideration due to us is contingent upon the revenue generated by the hotels underlying the asset management and consulting agreements. Ashford Financial Corporation has guaranteed a minimum payment to us of $1.2 million per year, subject to adjustments based on the consumer price index, for five years beginning on the date of our initial public offering. If any property underlying any asset management and consulting agreement is sold at any time, we will no longer derive any income from such property, and the amount of income we receive under the applicable asset management and consulting agreement will be decreased. Any sale or related decrease in income, however, will not affect the amount guaranteed by Ashford Financial Corporation under its guaranty.

      Each of the eight management companies is either owned 100% by Messrs. Archie and Montgomery Bennett, or is a wholly-owned subsidiary of Remington Hotel Corporation, which is owned 100% by

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Messrs. Archie and Montgomery Bennett. Messrs. Archie and Montgomery Bennett also have a minority ownership interest in the hotel properties benefiting from the services provided pursuant to the asset management and consulting agreements. Although they do not own a controlling interest in such properties, Messrs. Archie and Montgomery Bennett may benefit from a future sale of the properties.
 
Tax indemnification obligations that apply in the event that we sell certain properties could limit our operating flexibility.

      If we dispose of any of the five properties that were contributed to us in exchange for units in our operating partnership in connection with our initial public offering, we may be obligated to indemnify the contributors, in which Messrs. Archie and Monty Bennett have substantial ownership interests, against the tax consequences of the sale. We have agreed to pay a contributor’s tax liability if we dispose of a property contributed by the contributor in a taxable transaction before the earlier of:

  •  10 years after the contribution of such property, and
 
  •  the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of property to our operating partnership.

      This tax indemnity will be equal to the amount of the federal and state income tax liability the contributor incurs with respect to the gain allocated to the contributor. The terms of the contribution agreements also require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment. While the tax indemnities do not contractually limit our ability to conduct our business in the way we desire, we are less likely to sell any of the contributed properties in a taxable transaction during the indemnity period. Instead, we would either hold the property for the entire indemnity period or seek to transfer the property in a tax-deferred like-kind exchange. In addition, a condemnation of one of our properties could trigger our tax indemnification obligations.

      In addition, under the tax indemnification agreements, we have agreed for a period of 10 years to use commercially reasonable efforts to maintain non-recourse mortgage indebtedness in the amount of at least $16.0 million, which will allow the contributors to defer recognition of gain in connection with the contribution of the Las Vegas hotel property as part of our formation.

      Additionally, we are prohibited from selling or transferring the Sea Turtle Inn in Atlantic Beach, Florida until April 1, 2007 if, as a result, the entity from whom we acquired the property would recognize gain for federal tax purposes. If we sell or transfer this property after April 1, 2007, but prior to April 1, 2009, and the sale or transfer results in the entity that sold us the property having to recognize gain for federal tax purposes, we must pay $180,000 to that entity. However, this amount will be reduced by $7,500 for each passing month from April 1, 2007 until April 1, 2009.

 
Hotel franchise requirements could adversely affect distributions to our stockholders.

      We must comply with operating standards and terms and conditions imposed by the franchisors of the hotel brands under which our hotels operate. The franchisors periodically inspect their licensed hotels to confirm adherence to their operating standards. The failure of a hotel to maintain standards could result in the loss or cancellation of a franchise license. With respect to operational standards, we rely on our property managers to conform to such standards. The franchisors may also require us to make certain capital improvements to maintain the hotel in accordance with system standards, the cost of which can be substantial. It is possible that a franchisor could condition the continuation of a franchise on the completion of capital improvements that our management or board of directors determines are too expensive or otherwise not economically feasible in light of general economic conditions or the operating results or prospects of the affected hotel. In that event, our management or board of directors may elect to allow the franchise to lapse or be terminated which could result in a change in brand franchising or operation of the hotel as an independent hotel.

      In addition, when the term of a franchise expires, the franchisor has no obligation to issue a new franchise. The loss of a franchise could have a material adverse effect on the operations or the underlying

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value of the affected hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a franchise could also have a material adverse effect on cash available for distribution to stockholders.
 
Future terrorist attacks similar in nature to the events of September 11, 2001 may negatively affect the performance of our properties and the hotel industry and may negatively affect our future results of operations and financial condition.

      The terrorist attacks of September 11, 2001, their after-effects and the resulting U.S.-led military action in Iraq substantially reduced business and leisure travel throughout the United States and hotel industry revenue per available room, or RevPAR, generally during the period following September 11, 2001. We cannot predict the extent to which additional terrorist attacks, acts of war or similar events may occur in the future or how such events would directly or indirectly impact the hotel industry or our operating results. Future terrorist attacks, acts of war or similar events could have further material adverse effects on the hotel industry at large and our operations in particular.

 
Our investments will be concentrated in particular segments of a single industry.

      Our entire business is hotel related. Our current investment strategy is to acquire or develop mid to upscale hotels, acquire first mortgages on hotel properties, invest in other mortgage-related instruments such as mezzanine loans to hotel owners and operators and participate in hotel sale-leaseback transactions. Adverse conditions in the hotel industry will have a material adverse effect on our operating and investment revenues and cash available for distribution to our stockholders.

 
We rely on third party property managers, especially Remington Lodging, to operate our hotels and for a significant majority of our cash flow.

      For us to continue to qualify as a REIT, third parties must operate our hotels. A REIT may lease its hotels to taxable REIT subsidiaries in which the REIT can own up to a 100% interest. A taxable REIT subsidiary, or TRS, pays corporate level income tax and may retain any after-tax income. A REIT must satisfy certain conditions to use the TRS structure. One of those conditions is that the TRS must hire, to manage the hotels, an “eligible independent contractor” (“EIC”) that is actively engaged in the trade or business of managing hotels for parties other than the REIT. An EIC cannot (i) own more than 35% of the REIT, (ii) be owned more than 35% by persons owning more than 35% of the REIT or (iii) provide any income to the REIT (i.e., the EIC cannot pay fees to the REIT, and the REIT cannot own any debt or equity securities of the EIC).

      Accordingly, while we may lease hotels to a TRS that we own, the TRS must engage a third-party operator to manage the hotels and our ability to direct and control how our hotels are operated is less than if we were able to manage our hotels directly. We have entered into a management agreement with Remington Lodging, which is owned 100% by Messrs. Archie and Montgomery Bennett, to manage 13 of our 17 lodging properties, and we have hired Noble Management Group to manage the remaining four properties we currently own. Additionally, if we acquire the SpringHill Suites by Marriott in Baltimore, Maryland, that property will be managed by PM Hospitality Strategies. We do not supervise any of the property managers or their respective personnel on a day-to-day basis, and we cannot assure you that the property managers will manage our properties in a manner that is consistent with their respective obligations under the applicable management agreement or our obligations under our hotel franchise agreements. We also cannot assure you that our property managers will not be negligent in their performance, will not engage in other criminal or fraudulent activity, or will not otherwise default on their respective management obligations to us. If any of the foregoing occurs, our relationships with the franchisors may be damaged and we may then be in breach of the franchise agreement, and we could incur liabilities resulting from loss or injury to our property or to persons at our properties, any of which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

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If we cannot obtain additional financing, our growth will be limited.

      We are required to distribute to our stockholders at least 90% of our taxable income, excluding net capital gain, each year to continue to qualify as a REIT. As a result, our retained earnings available to fund acquisitions, development or other capital expenditures are nominal. After utilizing the proceeds of this offering, we will rely upon the availability of additional debt or equity capital to fund these activities. Our long-term ability to grow through acquisitions or development of hotel-related assets will be limited if we cannot obtain additional financing. Market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.

 
We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay dividends to our stockholders.

      As a REIT, we are required to distribute at least 90% of our taxable income each year to our stockholders. We intend to distribute to our stockholders all or substantially all of our taxable income each year so as to qualify for the tax benefits accorded to REITs, but our ability to make distributions may be adversely affected by the risk factors described in this prospectus. We cannot assure you that we will be able to make distributions in the future. In the event of continued or future downturns in our operating results and financial performance or unanticipated capital improvements to our hotels or declines in the value of our mortgage portfolio, we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our financial performance, debt service obligations and applicable debt covenants (if any), and capital expenditure requirements.

 
We are subject to various risks related to our use of, and dependence on, debt.

      The amount we have to pay on variable rate debt increases as interest rates increase, which may decrease cash available for distribution to stockholders. We cannot assure you that we will be able to meet our debt service obligations. If we do not meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure. Changes in economic conditions or our financial results or prospects could (i) result in higher interest rates on variable rate debt, (ii) reduce the availability of debt financing generally or debt financing at favorable rates, (iii) reduce cash available for distribution to stockholders and (iv) increase the risk that we could be forced to liquidate assets to repay debt, any of which could have a material adverse affect on us.

      If we violate covenants in any debt agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in our being unable to borrow unused amounts under our line of credit, even if repayment of some or all borrowings is not required.

      In any event, financial covenants under our current or future debt obligations could impair our planned business strategies by limiting our ability to borrow beyond certain amounts or for certain purposes.

      While our policy is to limit the leverage on our investments to 60% of gross assets, our board of directors may change this and our other operating policies and strategies at any time without stockholder approval. Our governing instruments do not contain any limitation on our ability to incur indebtedness.

 
An interest rate mismatch could occur between asset yields and borrowing rates, resulting in decreased yields on our investment portfolio.

      Our operating results will depend in part on differences between the income from our assets (net of credit losses) and our borrowing costs. We intend to fund the origination and acquisition of a portion of our assets with borrowings that have interest rates that reset relatively rapidly, such as monthly or quarterly. We anticipate that, in many cases, the income from our assets will respond more slowly to

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interest rate fluctuations than the cost of our borrowings, creating a mismatch between asset yields and borrowing rates. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Increases in these rates will tend to decrease our net income and market value of our mortgage assets. We will incur operating losses if interest rate fluctuations result in our interest expense exceeding interest income.
 
We compete with other hotels for guests. We will also face competition for acquisitions of lodging properties and of desirable mortgage investments.

      The mid to upscale segments of the hotel business are competitive. Our hotels compete on the basis of location, room rates, quality, service levels, reputation, and reservation systems, among many other factors. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash available for distribution to stockholders.

      We compete for hotel acquisitions with entities that have similar investment objectives as we do. This competition could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms or on the terms contemplated in our business plan.

      We also compete for mortgage asset investments with numerous public and private real estate investment vehicles, such as mortgage banks, pension funds, other REITs, institutional investors and individuals. Mortgages and other investments are often obtained through a competitive bidding process. In addition, competitors may seek to establish relationships with the financial institutions and other firms from which we intend to purchase such assets. Competition may result in higher prices for mortgage assets, lower yields and a narrower spread of yields over our borrowing costs.

      Many of our competitors are larger than us, may have access to greater capital, marketing and other resources, may have personnel with more experience than our officers, may be able to accept higher levels of debt or otherwise may tolerate more risk than us, may have better relations with hotel franchisors, sellers or lenders and may have other advantages over us in conducting certain business and providing certain services.

 
We may engage in hedging transactions, which can limit our gains and increase exposure to losses.

      We may enter into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt and also to protect our portfolio of mortgage assets from interest rate and prepayment rate fluctuations. Our hedging transactions may include entering into interest rate swap agreements or interest rate cap or floor agreements, purchasing or selling futures contracts, purchasing put and call options on securities or securities underlying futures contracts, or entering into forward rate agreements. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition. No hedging activity can completely insulate us from the risks associated with changes in interest rates and prepayment rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

  •  Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought.
 
  •  The duration of the hedge may not match the duration of the related liability.
 
  •  The party owing money in the hedging transaction may default on its obligation to pay.
 
  •  The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction.
 
  •  The value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity.

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      Hedging involves risk and typically involves costs, including transaction costs, that may reduce our overall returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distributions to stockholders. We generally intend to hedge as much of the interest rate risk as management determines is in our best interests given the cost of such hedging transactions. The REIT qualification rules may limit our ability to enter into hedging transactions by requiring us to limit our income from hedges. See “Risks Related to Our Status as a REIT — Complying with REIT requirements may limit our ability to hedge effectively.” If we are unable to hedge effectively because of the REIT rules, we will face greater interest rate exposure than may be commercially prudent.

 
We may not be able to sell our investments on favorable terms.

      We may decide to sell investments for a variety of reasons. We cannot assure you that we will be able to sell any of our investments on favorable terms, or that our investments will not be sold for a loss.

Risks Related to Hotel Investments

 
We are subject to general risks associated with operating hotels.

      Our hotels (and the hotels underlying our mortgage and mezzanine loans) are subject to various operating risks common to the hotel industry, many of which are beyond our control, including the following:

  •  our hotels compete with other hotel properties in their geographic markets and many of our competitors have substantial marketing and financial resources;
 
  •  over-building in our markets, which adversely affects occupancy and revenues at our hotels;
 
  •  dependence on business and commercial travelers and tourism; and
 
  •  adverse effects of general, regional and local economic conditions and increases in energy costs or labor costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists.

      These factors could adversely affect our hotel revenues and expenses, as well as the hotels underlying our mortgage and mezzanine loans, which in turn would adversely affect our ability to make distributions to our stockholders.

 
We may have to make significant capital expenditures to maintain our lodging properties.

      Our hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. The franchisors of our hotels may also require periodic capital improvements as a condition of keeping the franchise licenses. Generally, we are responsible for the costs of these capital improvements, which gives rise to the following risks:

  •  cost overruns and delays;
 
  •  renovations can be disruptive to operations and can displace revenue at the hotels, including revenue lost while rooms under renovation are out of service;
 
  •  the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and
 
  •  the risk that the return on our investment in these capital improvements will not be what we expect.

      If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow to fund future capital improvements.

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The hotel business is seasonal, which will affect our results of operations from quarter to quarter.

      The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can cause quarterly fluctuations in our revenues.

 
Our development activities may be more costly than we have anticipated.

      As part of our growth strategy, we may develop additional hotels. Hotel development involves substantial risks, including that:

  •  actual development costs may exceed our budgeted or contracted amounts;
 
  •  construction delays may prevent us from opening hotels on schedule;
 
  •  we may not be able to obtain all necessary zoning, land use, building, occupancy and construction permits;
 
  •  our developed properties may not achieve our desired revenue or profit goals; and
 
  •  we may incur substantial development costs and then have to abandon a development project before completion.

Risks Relating to Investments in Mortgages and Mezzanine Loans

 
Mortgage investments that are not United States government insured and non-investment grade mortgage assets involve risk of loss.

      As part of our business strategy, we originate and acquire lodging-related uninsured and non-investment grade mortgage loans and mortgage assets, including mezzanine loans. While holding these interests, we are subject to risks of borrower defaults, bankruptcies, fraud and losses and special hazard losses that are not covered by standard hazard insurance. Also, the costs of financing the mortgage loans could exceed the return on the mortgage loans. In the event of any default under mortgage loans held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan. To the extent we suffer such losses with respect to our investments in mortgage loans, our value and the price of our common stock may be adversely affected.

 
We invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.

      Our mortgage loan assets are generally non-recourse. With respect to our non-recourse mortgage loan assets, in the event of a borrower default, the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan, may be less than the amount owed under the mortgage loan. As to those mortgage loan assets that provide for recourse against the borrower and its assets generally, we cannot assure you that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.

 
Interest rate fluctuations affect the value of our mortgage assets, net income and common stock.

      Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations can adversely affect our income and value of our common stock in many ways and present a variety of risks including the risk of variances in the yield curve, a mismatch between asset yields and borrowing rates, and changing prepayment rates.

      Variances in the yield curve may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Short-term interest rates are ordinarily lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-

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term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested in mortgage loans, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.

      The effect of a mismatch between asset yields and borrowing rates is explained above under “Risks Related to our Business — An interest rate mismatch could occur between asset yields and borrowing rates, resulting in decreased yields on our investment portfolio.” The effect of mortgage prepayments are explained in the risk factor immediately below.

 
Prepayment rates on our mortgage loans may adversely affect our yields.

      The value of our mortgage loan assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. To the extent we originate mortgage loans, we expect that such mortgage loans will have a measure of protection from prepayment in the form of prepayment lock-out periods or prepayment penalties. However, this protection may not be available with respect to investments that we acquire but do not originate. Four of the five mortgage loans assets we currently have in our investment portfolio have some combination of prepayment lock-out periods or prepayment penalties; however, we cannot assure you that these lock-out periods or penalties will sufficiently protect us from prepayment risk or that future mortgage loans we acquire will have prepayment protection mechanisms.

      In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to fully recoup our cost of acquisition of certain investments.

      In making any investment, we consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment. These considerations affect our decision whether to originate or purchase an investment and the price offered for that investment. No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions and the quality of management of the underlying property. Our inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may adversely affect the price of our common stock.

 
Volatility of values of mortgaged properties may adversely affect our mortgage loans.

      Lodging property values and net operating income derived from lodging properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described in this prospectus relating to general economic conditions, operating lodging properties and owning real estate investments. In the event its net operating income decreases, a borrower may have difficulty paying our mortgage loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could also cause us to suffer losses.

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Mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

      We make and acquire mezzanine loans. These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.

Risks Related to the Real Estate Industry

 
Mortgage debt obligations expose us to increased risk of property losses, which could harm our financial condition, cash flow and ability to satisfy our other debt obligations and pay dividends.

      Incurring mortgage debt increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders of that income.

      In addition, our default under any one of our mortgage debt obligations may result in a default on our other indebtedness. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay dividends may be harmed.

 
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

      Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties or mortgage loans in our portfolio in response to changing economic, financial and investment conditions is limited. The real estate market is affected by many factors that are beyond our control, including:

  •  adverse changes in national and local economic and market conditions;
 
  •  changes in interest rates and in the availability, cost and terms of debt financing;
 
  •  changes in governmental laws and regulations, fiscal policies and zoning and other ordinances and costs of compliance with laws and regulations;
 
  •  the ongoing need for capital improvements, particularly in older structures;
 
  •  changes in operating expenses; and
 
  •  civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

      We cannot predict whether we will be able to sell any property or loan for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property or loan. Because we intend to offer more flexible terms on our mortgage loans than some providers of commercial mortgage loans, we may have more difficulty selling or participating our loans to secondary purchasers than would these more traditional lenders.

      We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make

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those improvements. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.
 
The costs of compliance with or liabilities under environmental laws may harm our operating results.

      Our properties and the properties underlying our loan assets may be subject to environmental liabilities. An owner of real property, or a lender with respect to a property that exercises control over the property, can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

  •  our knowledge of the contamination;
 
  •  the timing of the contamination;
 
  •  the cause of the contamination; or
 
  •  the party responsible for the contamination of the property.

      There may be environmental problems associated with our properties or properties underlying our loan assets of which we are unaware. Some of our properties or the properties underlying our loan assets use, or may have used in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on a property, we could become subject to strict, joint and several liability for the contamination if we own the property or if we foreclose on the property or otherwise have control over the property.

      The presence of hazardous substances on a property we own or have made a loan with respect to may adversely affect our ability to sell or foreclose on the property, and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties or the properties underlying our loan assets could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.

      We have environmental insurance policies on each of our owned properties, and we intend to obtain environmental insurance for any other properties that we may acquire. However, if environmental liabilities are discovered during the underwriting of the insurance policies for any property that we may acquire in the future, we may be unable to obtain insurance coverage for the liabilities at commercially reasonable rates or at all, and we may experience losses. In addition, we generally do not require our borrowers to obtain environmental insurance on the properties they own that secure their loans from us.

 
Our properties and the properties underlying our mortgage loans may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem or reduce the ability of our borrowers to meet their debt obligations to us or reduce the value of the collateral for our loan assets.

      When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties or the properties underlying our loan assets could require us or our borrowers to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us or our borrowers to liability from guests, employees and others if property damage or health concerns arise.

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Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us or our borrowers to make unintended expenditures that adversely impact our operating results.

      All of our properties and the properties underlying our mortgage loans are required to comply with the Americans with Disabilities Act, or the ADA. The ADA requires that “public accommodations” such as hotels be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. We or our borrowers may be required to expend funds to comply with the provisions of the ADA at our hotels or the hotels underlying our loan assets, which could adversely affect our results of operations and financial condition and our ability to make distributions to stockholders. In addition, we and our borrowers are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We and our borrowers may be required to make substantial capital expenditures to comply with those requirements, and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

 
We may experience uninsured or underinsured losses.

      We have property and casualty insurance with respect to our properties and other insurance, in each case, with loss limits and coverages deemed reasonable by our management (and with the intent to satisfy the requirements of lenders and franchisors). In doing so, we have made decisions with respect to what deductibles, policy limits and terms are reasonable based on management’s experience, our risk profile, the loss history of our property managers and our properties, the nature of our properties and our businesses, our loss prevention efforts and the cost of insurance.

      Various types of catastrophic losses may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed. Accordingly, there can be no assurance (i) that the insurance coverages that we have obtained will fully protect us against insurable losses (i.e., losses may exceed coverage limits); (ii) that we will not incur large deductibles that will adversely affect our earnings; (iii) that we will not incur losses from risks that are not insurable or that are not economically insurable; or (iv) that current coverages will continue to be available at reasonable rates. We do not intend to maintain terrorism insurance on any of our properties. As a result, one or more large uninsured or underinsured losses could have a material adverse affect on us.

      Each of our current lenders requires us to maintain certain insurance coverages, and we anticipate that future lenders will have similar requirements. We believe that we have complied with the insurance maintenance requirements under the current governing loan documents and we intend to comply with any such requirements in any future loan documents. However, a lender may disagree, in which case the lender could obtain additional coverages and seek payment from us, or declare us in default under the loan documents. In the former case, we could spend more for insurance than we otherwise deem reasonable or necessary, or, in the latter case, subject us to a foreclosure on hotels collateralizing one or more loans. In addition, a material casualty to one or more hotels collateralizing loans may result in (i) the insurance company applying to the outstanding loan balance insurance proceeds that otherwise would be available to repair the damage caused by the casualty, which would require us to fund the repairs through other sources, or (ii) the lender foreclosing on the hotels if there is a material loss that is not insured.

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Risks Related to Our Status as a REIT

 
If we do not qualify as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.

      We operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

  •  we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;
 
  •  we would also be subject to federal alternative minimum tax and, possibly, increased state and local taxes;
 
  •  any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and
 
  •  unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and, thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT.

      If we fail to qualify as a REIT, we will not be required to make distributions to stockholders to maintain our tax status. As a result of all of these factors, our failure to qualify as a REIT would impair our ability to raise capital, expand our business and make distributions to our stockholders and would adversely affect the value of our common stock.

 
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

      Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets. For example:

  •  We will be required to pay tax on undistributed REIT taxable income.
 
  •  We may be required to pay the “alternative minimum tax” on our items of tax preference.
 
  •  If we have net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay tax on that income at the highest corporate rate.
 
  •  If we sell a property in a “prohibited transaction,” our gain from the sale would be subject to a 100% penalty tax. A “prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business.
 
  •  Our taxable REIT subsidiary, Ashford TRS, is a fully taxable corporation and will be required to pay federal and state taxes on its income.
 
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

      To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution.

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Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
 
Complying with REIT requirements may limit our ability to hedge effectively.

      The REIT provisions of the Internal Revenue Code may limit our ability to hedge mortgage securities and related borrowings by requiring us to limit our income in each year from qualified hedges, together with any other income not generated from qualified real estate assets, to no more than 25% of our gross income. In addition, we must limit our aggregate income from nonqualified hedging transactions, from our provision of services and from other non-qualifying sources to no more than 5% of our annual gross income. As a result, we may have to limit our use of advantageous hedging techniques. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the amount of income in excess of those limitations, multiplied by a fraction intended to reflect our profitability. If we fail to satisfy the REIT gross income tests, unless our failure was due to reasonable cause and not due to willful neglect, we could lose our REIT status for federal income tax purposes.

 
Complying with REIT requirements may force us to liquidate otherwise attractive investments.

      To qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.

 
Complying with REIT requirements may force us to borrow to make distributions to stockholders.

      As a REIT, we must distribute at least 90% of our annual taxable income (subject to certain adjustments) to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

      From time to time, we may generate taxable income greater than our net income for financial reporting purposes due to, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.

 
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

      At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. On May 28, 2003, the President signed the Jobs and

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Growth Tax Relief Reconciliation Act of 2003, which we refer to as the Jobs and Growth Tax Act. Effective for taxable years beginning after December 31, 2002, the Jobs and Growth Tax Act reduced the maximum rate of tax applicable to individuals on dividend income from regular C corporations from 38.6% to 15.0%. This reduced substantially the so-called “double taxation” (that is, taxation at both the corporate and stockholder levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs will not qualify for the dividend tax reduction. The implementation of the Jobs and Growth Tax Act could cause individual investors to view stocks of non-REIT corporations as more attractive relative to shares of REITs than was the case previously because the dividends paid by non-REIT corporations would be subject to lower tax rates for the individual. We cannot predict whether in fact this will occur or whether, if it occurs, what the impact will be on the value of our common shares.
 
Your investment in our common stock has various federal, state and local income tax risks that could affect the value of your investment.

      Although the provisions of the Internal Revenue Code relevant to your investment in our common stock are generally described in “Federal Income Tax Consequences of Our Status as a REIT,” we strongly urge you to consult your own tax advisor concerning the effects of federal, state and local income tax law on an investment in our common stock, because of the complex nature of the tax rules applicable to REITs and their stockholders.

Risk Factors Related to Our Corporate Structure

 
There are no assurances of our ability to make distributions in the future.

      We intend to continue paying quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. However, our ability to pay dividends may be adversely affected by the risk factors described in this prospectus. All distributions will be made at the discretion of our board of directors and will depend upon our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future. In addition, some of our distributions may include a return of capital.

 
Failure to maintain an exemption from the Investment Company Act would adversely affect our results of operations.

      We believe that we will conduct our business in a manner that allows us to avoid registration as an investment company under the Investment Company Act of 1940, or the 1940 Act. Under Section 3(c)(5)(C) of the 1940 Act, entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate” are not treated as investment companies. The SEC staff’s position generally requires us to maintain at least 55% of our assets directly in qualifying real estate interests to be able to rely on this exemption. To constitute a qualifying real estate interest under this 55% requirement, a real estate interest must meet various criteria. Mortgage securities that do not represent all of the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and, thus, may not qualify for purposes of the 55% requirement. Our ownership of these mortgage securities, therefore, is limited by the provisions of the 1940 Act and SEC staff interpretive positions. There are no assurances that efforts to pursue our intended investment program will not be adversely affected by operation of these rules.

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Our charter does not permit ownership in excess of 9.8% of our capital stock, and attempts to acquire our capital stock in excess of the 9.8% limit without approval from our board of directors are void.

      For the purpose of preserving our REIT qualification, our charter prohibits direct or constructive ownership by any person of more than 9.8% of the lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the lesser of the total number or value of the outstanding shares of our preferred stock. Our charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding stock, and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the board of directors will be void, and could result in the shares being automatically transferred to a charitable trust.

 
Because provisions contained in Maryland law and our charter may have an anti-takeover effect, investors may be prevented from receiving a “control premium” for their shares.

      Provisions contained in our charter and Maryland general corporation law may have effects that delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the following:

  •  Ownership limit: The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock without our permission.
 
  •  Classification of preferred stock: Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.

      Maryland statutory law provides that an act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director. Hence, directors of a Maryland corporation are not required to act in takeover situations under the same standards as apply in Delaware and other corporate jurisdictions.

 
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend distributions, may adversely affect the market price of our common stock.

      In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock or classes of preferred units. Upon liquidation, holders of our debt securities and shares of preferred stock or preferred units and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock or preferred units, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or

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estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.
 
Common stock eligible for future sale may have adverse effects on our share price.

      We cannot predict the effect, if any, of future sales of common stock, or the availability of common stock for future sales, on the market price of our common stock. Sales of substantial amounts of common stock (including up to (i) 5,764,592 shares of common stock issuable upon the conversion of units of our operating partnership, (ii) 759,717 restricted shares, issued to certain of our directors, executive officers and employees of the company and its affiliates, which, in the case of the executive officers and employees, are subject to continued employment by such officer or employee and (iii) restricted shares issuable to executive officers only if specified performance criteria are satisfied), or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.

      We also may issue from time to time additional shares of common stock or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of our common stock or the perception that these sales could occur may adversely affect the prevailing market price for our common stock or may impair our ability to raise capital through a sale of additional equity securities.

 
We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

      Our future success depends, to a significant extent, upon the continued services of our management team. In particular, the lodging industry experience of Messrs. Archie and Montgomery Bennett, Kessler, Brooks, Kimichik and Nunneley and the extent and nature of the relationships they have developed with hotel franchisors, operators and owners and hotel lending and other financial institutions are critically important to the success of our business. We do not maintain key person life insurance on any of our officers. Although these officers currently have employment agreements with us through 2006 (2007 for Mr. Montgomery Bennett), we cannot assure you of the continued employment of all of our officers. The loss of services of one or more members of our corporate management team could harm our business and our prospects.

 
An increase in market interest rates may have an adverse effect on the market price of our securities.

      One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our common stock likely will be based primarily on the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to stockholders, and not from the market value or underlying appraised value of the properties or investments themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common stock. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common stock could decrease because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

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Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification and distributions, are determined by our board of directors. Although we have no present intention to do so, our board of directors may amend or revise these and other policies from time to time without a vote of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and the changes could harm our business, results of operations and share price.

      Although we have adopted a policy pursuant to which we maintain the amount of indebtedness that we incur at no more than 60% of the aggregate investment in the hotels and debt instruments which we own, our board may amend or waive this debt policy and our other operating policies at any time without stockholder approval and without notice to stockholders. Changes in our strategy or investment or leverage policy could expose us to greater credit risk and interest rate risk or could result in a more leveraged balance sheet. We cannot predict the effect any changes to our current operating policies and strategies may have on our business, operating results and stock price. However, the effects may be adverse.

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

      We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects are forward-looking by their nature:

  •  our business and investment strategy;
 
  •  our projected operating results;
 
  •  completion of any pending transactions;
 
  •  our ability to obtain future financing arrangements;
 
  •  our understanding of our competition;
 
  •  market trends;
 
  •  projected capital expenditures;
 
  •  the impact of technology on our operations and business; and
 
  •  use of the proceeds of this offering.

      The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our common stock. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

  •  the factors discussed in this prospectus, including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Business and Properties;”
 
  •  general volatility of the capital markets and the market price of our common stock;
 
  •  changes in our business or investment strategy;
 
  •  availability, terms and deployment of capital;
 
  •  availability of qualified personnel;
 
  •  changes in our industry and the market in which we operate, interest rates or the general economy; and
 
  •  the degree and nature of our competition.

      When we use the words “will likely result,” “may,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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USE OF PROCEEDS

      We estimate that the net proceeds of this offering will be approximately $70.3 million, after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, our net proceeds will be approximately $80.9 million. We will contribute the net proceeds of this offering to our operating partnership. Our operating partnership will subsequently use the net proceeds received from us as follows:

  •  approximately $49.8 million to repay the outstanding principal balance of our $60.0 revolving credit facility, which is secured by seven of our hotel properties, bears interest at the annual rate of LIBOR plus 3.25% and has a term ending February 5, 2007; and
 
  •  approximately $20.5 million to pay down a portion of the $27.8 million outstanding principal balance of our $36.0 million non-recourse loan, which is secured by five of our hotel properties, bears interest at the annual rate LIBOR plus 3.25% and has a term ending December 31, 2007.

      The proceeds from our revolving credit facility were used to fund (i) the origination of a mezzanine loan receivable secured by a junior lien on the Northland Inn and Conference Center in Brooklyn Park, Minnesota and (ii) the acquisition of the Marriott Residence Inn in Lake Buena Vista, Florida and the Sea Turtle Inn in Atlantic Beach, Florida. The proceeds from our $36.0 million non-recourse loan were used to fund the acquisition of two of our mezzanine loans.

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CAPITALIZATION

      The following table sets forth our capitalization (i) as of December 31, 2003 on an historical basis; (ii) as adjusted to give effect to the sale of 7,500,000 shares of common stock at an assumed offering price of $10.00 per share, the acquisition of the two hotel properties we have completed since December 31, 2003 and the acquisition or origination of the four mezzanine loans we have completed since December 31, 2003, in each case, as of December 31, 2003; and (iii) as further adjusted to give effect to the completion of the acquisition of the two properties we currently have under firm purchase contracts. You should read this table in conjunction with the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical and unaudited pro forma financial information and related notes included elsewhere in this prospectus.

                           
Historical Pro Forma
December 31, Pro Forma December 31,
2003 Adjustments(1) 2003



Debt:
                       
Mortgage notes payable
  $ 50,201,779     $ 2,050,000     $ 52,251,779  
Capital leases payable
    456,869             456,869  
     
     
     
 
 
Total debt
  $ 50,658,648     $ 2,050,000     $ 52,708,648  
     
     
     
 
Stockholders’ equity:
                       
Common Stock, $.01 par value per share, 200,000,000 shares authorized, 25,730,047 at December 31, 2003 issued and outstanding, as adjusted
  $ 257,300     $ 75,000     $ 332,300  
Additional paid-in capital
    179,226,668       70,175,000       249,401,668  
Unearned compensation and accumulated deficit
    (7,191,720 )           (7,191,720 )
     
     
     
 
 
Total stockholders’ equity
  $ 172,292,248     $ 70,250,000     $ 242,542,248  
     
     
     
 
 
Total capitalization
  $ 222,950,896     $ 72,300,000     $ 295,250,896  
     
     
     
 


(1)  For detail regarding these pro forma adjustments, see the footnotes to the consolidated pro forma balance sheet as of December 31, 2003 under “Unaudited Pro Forma Financial Information” in this prospectus.

PRICE RANGE OF COMMON STOCK AND DISTRIBUTION POLICY

      Our common stock trades on the New York Stock Exchange under the symbol “AHT.” The following table sets forth, for the periods indicated, the high, low and last sale prices in dollars on the NYSE for our common stock.

                                   
Price Range

Cash Dividend
High Low Last Per Share




Year ending December 31, 2004
                               
 
First quarter
  $ 10.52     $ 9.10     $ 10.19     $ 0.06  
Year ending December 31, 2003
                               
 
Fourth quarter
  $ 9.80     $ 8.97     $ 9.39        
 
Third quarter (from August 29, 2004, date of initial public offering)
  $ 9.50     $ 8.85     $ 8.97        

      As of April 6, 2004, the closing sale price for our common stock, as reported on the NYSE, was $10.00. As of March 26, 2004, there were 25,800,447 shares of common stock outstanding held by approximately 2,600 holders of record. The number of shares outstanding does not include outstanding units of limited partnership interest in our operating partnership, and the number of holders of record does not reflect the beneficial ownership of shares held in nominee names.

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      We intend to make regular quarterly distributions to our stockholders. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

        (i) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which for those purposes excludes our net capital gain and does not necessarily equal net income as calculated in accordance with generally accepted accounting principles); plus
 
        (ii) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code; less
 
        (iii) any excess non-cash income (as determined under the Internal Revenue Code). See “Federal Income Tax Consequences of Our Status as a REIT.”

      On March 15, 2004, we declared a dividend to common stockholders of record of $.06 per fully-diluted share. The dividend will be paid April 15, 2004 to all stockholders of record as of March 31, 2004. We have not declared any other dividends since our inception.

      Future distributions will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, the timing of the investment of the net proceeds of this offering, the amount of funds from operations, our financial condition, debt service requirements, capital expenditure requirements for our properties, our taxable income, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, our operating expenses and other factors our directors deem relevant. Our ability to pay dividends to our stockholders will depend upon our receipt of distributions from our operating partnership, Ashford Hospitality Limited Partnership, which may depend, in part, upon receipt of lease payments with respect to our properties from Ashford TRS, and, in turn, upon the management of our properties by our property managers. Distributions to stockholders will generally be taxable to our stockholders as ordinary income; however, because a portion of our investments are equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status, we may accumulate earnings of Ashford TRS in that entity. We cannot assure you that we will be able to generate sufficient revenue from operations to pay dividends to our stockholders or that our directors will not change our dividend policy in the future. See “Risk Factors.”

      Our charter allows us to issue preferred stock with a preference on distributions, and the partnership agreement of our operating partnership allows us to issue preferred units with a preference on distributions. We currently have no intention to issue any preferred stock. We may issue preferred units in connection with the acquisition of additional properties. The dividend preference on any preferred units, or any preferred stock we may later choose to issue, could limit our ability to make a dividend distribution to our common stockholders.

      We anticipate adopting, in the future, a dividend reinvestment plan that will allow our stockholders that have enrolled in the plan to reinvest their distributions automatically in additional shares of common stock.

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SELECTED FINANCIAL INFORMATION

      The following table sets forth selected consolidated historical operating and financial data for Ashford Hospitality Trust, Inc. To the extent that this information is presented for time periods or dates preceding our initial public offering on August 29, 2003, the information represents the combined historical financial condition and results of operations of the predecessor entities that owned the assets we acquired in connection with our initial public offering.

      The following selected historical consolidated and combined balance sheet information as of December 31, 2003, 2002 and 2001 and statement of operations information for each of the four years in the period ended December 31, 2003 was derived from audited financial statements. The following selected combined historical financial information as of December 31, 2000 and 1999 and for the year ending December 31, 1999 was derived from unaudited financial statements. The unaudited historical combined financial statements include all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such dates and for such periods under accounting principles generally accepted in the United States.

      You should read the information below along with all other financial information and analysis presented in this prospectus, including the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ashford Hospitality Trust, Inc.’s consolidated and combined financial statements and related notes included elsewhere in this prospectus.

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Year Ended December 31,

2003(1) 2002 2001 2000 1999





Operating Data:
                                       
Revenue:
                                       
Hotel revenues
                                       
 
Rooms
  $ 34,682,916     $ 28,529,640     $ 29,165,515     $ 24,654,910     $ 17,420,118  
 
Food and beverage
    6,158,916       5,698,029       5,691,902       3,178,314       1,911,786  
 
Interest income from mezzanine loans
    110,000                          
 
Other
    1,326,769       1,130,112       1,358,229       1,470,000       800,664  
     
     
     
     
     
 
 
Total Operating Revenue
  $ 42,278,601     $ 35,357,781     $ 36,215,646     $ 29,303,224     $ 20,132,568  
Expenses:
                                       
 
Rooms
  $ 8,113,097     $ 6,461,721     $ 6,260,660     $ 5,763,985     $ 4,729,894  
 
Food and beverage
    4,702,780       4,183,371       4,477,315       2,473,295       1,725,270  
 
Other direct
    900,621       621,693       608,350       661,351       508,164  
 
Indirect
    14,823,432       12,370,304       12,373,861       8,721,893       6,896,658  
 
Management fees, including related parties
    1,369,888       1,059,867       1,463,900       1,308,966       907,612  
 
Property taxes, insurance and other
    2,858,050       2,437,482       2,197,404       1,558,545       1,096,857  
 
Depreciation and amortization
    4,932,676       4,833,551       4,446,486       3,249,308       2,738,428  
 
Corporate general and administrative
    4,002,950                          
     
     
     
     
     
 
 
Total Operating Expenses
  $ 41,703,494     $ 31,967,989     $ 31,827,976     $ 23,737,343     $ 18,602,883  
     
     
     
     
     
 
 
Operating income (loss)
    575,107       3,389,792       4,387,670       5,565,881       1,529,685  
     
     
     
     
     
 
 
Interest income
    289,133       53,485       226,531       161,004       9,075  
 
Interest expense
    (5,000,206 )     (6,536,195 )     (7,520,694 )     (5,014,163 )     (3,417,233 )
     
     
     
     
     
 
 
Net income (loss) before provision for income taxes and minority interest
  $ (4,135,966 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722     $ (1,878,473 )
     
     
     
     
     
 
 
Provision for income taxes
    (142,178 )                        
 
Minority interest
    357,943                          
     
     
     
     
     
 
Net income (loss)
  $ (3,920,201 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722     $ (1,878,473 )
     
     
     
     
     
 
Basic and diluted loss per share from inception through December 31, 2003
  $ (0.07 )                                
     
                                 
Weighted average basic and diluted shares outstanding from inception through December 31, 2003
    24,627,298                                  
     
                                 

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Year Ended December 31,

2003(1) 2002 2001 2000 1999





Dividends were not declared during the five years presented.
                                       
Balance Sheet Information:
                                       
 
Investments in hotel properties, net
  $ 173,723,998     $ 85,246,801     $ 88,874,078     $ 68,292,242     $ 58,710,746  
 
Cash, cash equivalents and restricted cash
    77,627,643       6,322,368       8,329,486       5,991,418       5,381,569  
 
Notes receivable
    10,000,000                          
 
Total assets
    267,882,417       95,416,446       100,001,305       77,046,232       66,843,976  
 
Mortgage notes payable
    50,201,779       82,126,150       80,410,792       49,355,734       39,653,655  
 
Capital leases payable
    456,869       621,351       277,810       92,370        
 
Total liabilities
    57,943,496       86,105,492       84,684,368       53,836,084       43,438,808  
 
Total liabilities and owners’ equity
    267,882,417     $ 95,416,446     $ 100,001,305     $ 77,046,232     $ 66,843,976  
Other Information:
                                       
 
Cash Flow:
                                       
 
Provided by (used in) operating activities
  $ 5,734,806     $ 622,734     $ 1,108,150     $ 4,870,739     $ (628,153 )
 
Used in investing activities
  $ (89,188,930 )   $ (1,079,824 )   $ (24,899,286 )   $ (12,778,381 )   $ (23,744,316 )
 
Provided by (used in) financing activities
  $ 161,718,791     $ (1,726,457 )   $ 24,921,233     $ 8,315,129     $ 26,303,213  
Unaudited:
                                       
 
Total number of rooms
    2,381       1,094       1,094       906       670  
 
Total number of hotels
    15       6       6       5       4  
 
EBITDA(2)
  $ 5,449,268     $ 8,223,343     $ 8,834,156     $ 8,815,188     $ 4,268,113  
 
FFO(3)
  $ 647,287     $ 1,740,633     $ 1,539,993     $ 3,962,030     $ 859,954  


(1)  Financial information for the year ended December 31, 2003 includes our results from commencement of operations on August 29, 2003 through December 31, 2003 aggregated with the operations of our predecessor from January 1, 2003 through August 28, 2003.
 
(2)  EBITDA is defined as income (loss) before net gain on sale of properties, interest expense, interest income (excluding interest income from mezzanine loans), income taxes, depreciation and amortization. We believe EBITDA is useful to investors as an indicator of our ability to service debt and pay cash distributions. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.
                                             
Reconciliation of EBITDA (unaudited):                                        
 
Net (loss) income
  $ (3,920,201 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,721     $ (1,878,473 )
 
Plus depreciation and amortization
    4,932,676       4,833,551       4,446,486       3,249,308       2,738,428  
 
Plus interest expense
    5,000,206       6,536,195       7,520,694       5,014,163       3,417,233  
 
Less interest income
    (289,133 )     (53,485 )     (226,531 )     (161,004 )     (9,075 )
 
Plus provision for income taxes
    142,178                          
 
Less minority interest
    (357,943 )                        
     
     
     
     
     
 
   
Gross EBITDA
    5,507,783       8,223,343       8,834,156       8,815,188       4,268,113  
 
EBITDA related to minority interest
    (58,515 )                        
     
     
     
     
     
 
   
EBITDA
  $ 5,449,268     $ 8,223,343     $ 8,834,156     $ 8,815,188     $ 4,268,113  
     
     
     
     
     
 

(3)  The White Paper on Funds From Operations (“FFO”) approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002 defines FFO as net income (loss) computed in accordance with GAAP, excluding gains (or losses) from sales or properties and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets, and net of adjustments for the portion of these items related to unconsolidated entities and joint ventures. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered an alternative to (a) GAAP net income (loss) as an indication of our financial performance or (b) GAAP cash flows from operating activities as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our

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ability to make cash distributions. We believe that to facilitate a clear understanding of our historical operating results, FFO should be considered along with our net income (loss) and cash flows reported in the consolidated financial statements.
                                             
FFO Reconciliation (unaudited):                                        
 
Net income (loss)
  $ (3,920,201 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722     $ (1,878,473 )
 
Plus real estate and property level FF&E depreciation and amortization
    4,930,796       4,833,551       4,446,486       3,249,308       2,738,428  
 
Less minority interest
    (357,943 )                        
     
     
     
     
     
 
 
Gross FFO
    652,652       1,740,633       1,539,993       3,962,030       859,954  
 
Less FFO related to minority interests
    (5,365 )                        
     
     
     
     
     
 
   
FFO
  $ 647,287     $ 1,740,633     $ 1,539,993     $ 3,962,030     $ 859,954  
     
     
     
     
     
 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

      The tables below set forth unaudited pro forma financial data for Ashford Hospitality Trust, Inc.

      With respect to the balance sheet information below, the pro forma adjustments give effect to the completion of the following transactions as of December 31, 2003: this offering and related reduction of debt with the proceeds, the acquisition and origination of four mezzanine loans receivable which occurred subsequent to December 31, 2003, the acquisition of four hotel properties since December 31, 2003, including two properties not acquired but currently under firm purchase contracts and the borrowing of $49.8 million under the $60.0 million revolving credit facility.

      With respect to the statement of operations information below, the pro forma adjustments give effect to the completion of the following transactions as if they occurred on January 1, 2003: our IPO, the issuance of restricted shares to employees, the acquisition of nine hotel properties from FelCor Lodging Limited Partnership and Noble Investment Group, the acquisition or origination of five mezzanine loans receivable, the acquisition of four hotel properties since December 31, 2003, including two properties not acquired but currently under firm purchase contracts, this offering and the related increase in weighted average shares outstanding and the reduction of interest expense associated with the pro forma changes in indebtedness.

      You should read the information below along with all other financial information and analysis presented in this prospectus, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our and our predecessors’ historical consolidated and combined financial statements and related notes included elsewhere in this prospectus. The unaudited pro forma combined financial information is presented for information purposes only, and we do not expect that this information will reflect our future results of operations or our financial position. The unaudited pro forma adjustments and eliminations are based upon assumptions that we believe are reasonable. The unaudited pro forma financial information assumes that this offering and the transactions described above were completed as of the balance sheet date for purposes of the unaudited pro forma consolidated balance sheet, and as of January 1st of the period for purposes of the unaudited pro forma consolidated statements of operation.

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ASHFORD HOSPITALITY TRUST, INC.

CONSOLIDATED PRO FORMA BALANCE SHEET

As of December 31, 2003
(Unaudited)
                                                   
(a) (b) (c) (d)
Historical Acquisitions Loans Receivable Credit Facility Offering Pro Pro Forma
December 31, Pro Forma Pro Forma Pro Forma Forma December 31,
2003 Adjustments Adjustments Adjustments Adjustments 2003






Assets
                                               
Investment in hotel properties, net
  $ 173,723,998       83,100,000 (1)                     $ 256,823,998  
Cash and cash equivalents
    76,254,052       (59,526,640 )(2)     (61,509,000 )     49,288,000             4,506,412  
Restricted cash
    1,373,591                               1,373,591  
Accounts receivable, net of allowance
    1,534,843                               1,534,843  
Inventories
    262,619                               262,619  
Notes receivable
    10,000,000             61,600,000                   71,600,000  
Deferred costs, net
    2,386,937             125,000       512,000             3,023,937  
Prepaid expenses
    1,577,628                               1,577,628  
Other assets
    550,636                               550,636  
Due from affiliates
    218,113                               218,113  
     
     
     
     
     
     
 
 
Total assets
  $ 267,882,417       23,573,360       216,000       49,800,000           $ 341,471,777  
     
     
     
     
     
     
 
Liabilities and Owners’ Equity                                        
Indebtedness
  $ 50,201,779       22,500,000 (3)           49,800,000       (70,250,000 )   $ 52,251,779  
Capital leases payable
    456,869                               456,869  
Accounts payable
    2,127,611                               2,127,611  
Accrued expenses
    4,572,594                               4,572,594  
Deferred notes receivable income
                216,000                   216,000  
Due to affiliates
    584,643                               584,643  
     
     
     
     
     
     
 
 
Total liabilities
  $ 57,943,496       22,500,000       216,000       49,800,000       (70,250,000 )   $ 60,209,496  
Commitments & contingencies
  $                             $  
Minority interest
  $ 37,646,673       1,073,360 (4)                     $ 38,720,033  
Common stock
  $ 257,300                         75,000     $ 332,300  
Additional paid-in capital
    179,226,668                         70,175,000       249,401,668  
Unearned compensation
    (5,564,401 )                             (5,564,401 )
Accumulated deficit
    (1,627,319 )                             (1,627,319 )
     
     
     
     
     
     
 
 
Total owners’ equity
  $ 172,292,248                         70,250,000     $ 242,542,248  
     
     
     
     
     
     
 
Total liabilities and owners’ equity
  $ 267,882,417     $ 23,573,360     $ 216,000     $ 49,800,000     $     $ 341,471,777  
     
     
     
     
     
     
 

     The accompanying notes and management’s assumptions are an integral part of this consolidated pro forma balance sheet.

     Explanation of pro forma adjustments:

     (a) Represents pro forma adjustments to reflect the acquisition of four properties since December 31, 2003 including two properties currently under firm purchase contracts on various dates in 2004, excluding an acquired office complex which the Company intends to sell and has minimal operations.

     (b) Represents pro forma adjustments to reflect mezzanine loans receivable acquired or originated subsequent to December 31, 2003.

     (c) Represents pro forma adjustments to reflect a $60 million secured credit facility entered into on February 5, 2004, of which $49.8 million has been funded, and the related deferred loan costs.

     (d) Represents pro forma adjustments to reflect the issuance of 7,500,000 shares at $10.00 per share, net of underwriters’ fees of $3,750,000 and estimated offering costs of $1,000,000, the proceeds from which reduced indebtedness.

     Footnotes to pro forma adjustments:

       (1) Represents management’s estimate of the allocation of the purchase price and closing costs.
 
       (2) Represents payment of the purchase price, closing costs, and related costs of acquiring the properties.
 
       (3) Represents notes payable assumed in the acquisitions of four properties since December 31, 2003 including two properties currently under firm purchase contracts.
 
       (4) Represents 106,675 limited partnership units of the Company’s operating partnership issued in connection with the acquisition of four properties since December 31, 2003 including two properties currently under firm purchase contracts.

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ASHFORD HOSPITALITY TRUST, INC.

CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS

For the Year Ended December 31, 2003
(Unaudited)
                                                                     
Adjusted
Historical (a) (b) (c) (d) (e) (f) Pro Forma
December 31, Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma December 31,
2003 Adjustments Adjustments Adjustments Adjustments Adjustments Adjustments 2003








Revenue
                                                               
 
Rooms
  $ 34,682,916             16,903,815 (10)     8,481,820 (10)     20,274,283 (10)               $ 80,342,834  
 
Food and beverage
    6,158,916             2,000,382 (10)     193,408 (10)     6,214,127 (10)                 14,566,833  
 
Other
    1,189,450             902,865 (10)     169,248 (10)     1,329,955 (10)                 3,591,518  
     
     
     
     
     
     
     
     
 
   
Total hotel revenue
    42,031,282               19,807,062       8,844,476       27,818,365                   98,501,185  
 
Interest income from mezzanine loans
    110,000                               8,034,001             8,144,001  
 
Asset management fees
    137,319                                           137,319  
     
     
     
     
     
     
     
     
 
 
Total Revenue
    42,278,601             19,807,062       8,844,476       27,818,365       8,034,001             106,782,505  
Expenses
                                                               
 
Rooms
    8,113,097               4,009,914 (10)     1,906,659 (10)     4,306,535 (10)                 18,336,205  
 
Food and beverage
    4,702,780               1,863,416 (10)     160,677 (10)     4,400,336 (10)                 11,127,209  
 
Other direct
    900,621               803,714 (10)     93,203 (10)     680,186 (10)                 2,477,724  
 
Indirect
    14,823,432               7,182,638 (12)     2,626,606 (10)     8,150,486 (10)                 32,783,162  
 
Management fees
    1,369,888               447,156 (10)     356,151 (10)     887,694 (10)                 3,060,889  
 
Property taxes, insurance, and other
    2,858,050               1,186,956 (10)     480,617 (10)     1,214,622 (10)                 5,740,245  
 
Depreciation & amortization
    4,932,676       140,284 (6)     1,383,821 (11)     950,548 (11)     2,939,014 (11)                 10,346,343  
 
Corporate general and administrative
    4,002,950       4,823,917 (5)                                   10,518,539  
              1,622,922 (4)                                                
              68,750 (8)                                                
     
     
     
     
     
     
     
     
 
 
Total Operating Expenses
    41,703,494       6,655,873       16,877,615       6,574,461       22,578,873                   94,390,316  
     
     
     
     
     
     
     
     
 
 
Operating Income (Loss)
    575,107       (6,655,873 )     2,929,447       2,270,015       5,239,492       8,034,001             12,392,189  
     
     
     
     
     
     
     
     
 
 
Interest income
    289,133                                                   289,133  
 
Interest expense
    (5,000,206 )     3,173,010 (1)             (419,222 )(13)     (1,445,610 )(13)           (420,000 )     (3,828,028 )
              284,000 (2)                                                
     
     
     
     
     
     
     
     
 
 
Net Income (Loss) before Minority Interest and Income Taxes
    (4,135,966 )     (3,198,863 )     2,929,447       1,850,793       3,793,882       8,034,001       (420,000 )     8,853,294  
     
     
     
     
     
     
     
     
 
 
Income tax expense
    (142,178 )     (3)     (110,004 )(3)     (74,024 )(3)     (181,324 )(3)      (3)     (3)     (507,530 )
 
Minority interest
    357,943       745,663 (9)     (416,150 )(9)     (262,251 )(9)     (533,214 )(9)     (1,185,818 )(9)     61,992 (9)     (1,231,835 )
     
     
     
     
     
     
     
     
 
 
Net Income (Loss)
  $ (3,920,201 )     (2,453,200 )     2,403,293       1,514,518       3,079,344       6,848,183       (358,008 )   $ 7,113,929  
     
     
     
     
     
     
     
     
 
Earnings (Loss) Per Share:
                                                               
 
Basic
                                                          $ 0.22  
                                                             
 
 
Diluted
                                                          $ 0.22  
                                                             
 
Weighted Average Shares Outstanding:
                                                               
 
Basic
                                                            32,793,969 (7)
                                                             
 
 
Diluted
                                                            38,566,712 (7)
                                                             
 

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    The accompanying notes and management’s assumptions are an integral part of this consolidated pro forma statement of operations.

    Explanation of pro forma adjustments:

      (a) Represents pro forma adjustments to reflect the Company’s formation transactions and its initial public offering on August 29, 2003, as well as the issuance of 70,400 shares of restricted stock to employees on March 15, 2004.
 
      (b) Represents pro forma adjustments to reflect the acquisition of FelCor properties on October 8, 2003.
 
      (c) Represents pro forma adjustments to reflect the acquisition of Noble properties on November 24, 2003.
 
      (d) Represents pro forma adjustments to reflect the acquisition of four properties since December 31, 2003, including two properties currently under firm purchase contracts, on various dates in 2004.
 
      (e) Represents pro forma adjustments to reflect interest income related to mezzanine loans receivable acquired or originated during 2003 or subsequent to December 31, 2003.
 
      (f) Represents pro forma adjustments to reflect additional interest expense related to the pro-forma increase in indebtedness.

    Footnotes to pro forma adjustments:

      (1) Represents the interest expense reduction due to payoff of mortgage notes.
 
      (2) Represents elimination of deferred loan costs amortization due to payoff of mortgage notes.
 
      (3) Represents income tax expense related to these transactions.
 
      (4) Represents restricted shares issued to officers, employees, and employees of affiliates vesting one-third annually. Pro forma compensation expense is calculated as follows: 689,317 shares valued at $9.00 per share offering price for total compensation cost of $6,203,853, of which one third vests annually to generate an eight-month cost of $1,378,634 for the period preceding the Company’s formation plus 70,400 shares valued at $10.41 per share at the date of grant for a total compensation cost of $732,864, of which one third vests annually to generate an annual cost of $244,288.
 
      (5) Represents additional general and administrative expenses associated with the operations of the Company, which includes projected compensation and benefit expenses, along with related overhead and administration expense calculated on an historical basis, as well as property-level general and administrative expenses.
 
      (6) Represents additional depreciation expense resulting from step-up of net carrying value due to acquisition of minority interests.
 
      (7) Common shares issuable include:
           
Shares issued in the initial public offering
    22,500,000  
Shares issued upon exercise of underwriters’ over-allotment
    1,734,072  
Shares sold to Archie and Montgomery Bennett
    500,000  
Shares conveyed to a limited partnership owned by Archie and Montgomery Bennett
    216,634  
Restricted shares issuable to Company directors assumed to be fully vested
    25,000  
Shares issued to Company underwriters
    65,024  
Restricted shares issued to executives and employees (759,717 shares issued, of which one-third are assumed to be fully-vested)
    253,239  
Shares issued in this offering
    7,500,000  
     
 
 
Total basic shares
    32,793,969  
     
 
Shares issuable upon conversion of limited partnership units issued upon formation
    5,657,917  
Shares issuable upon conversion of limited partnership units issued upon acquisition of Acquired Properties
    106,675  
Incremental diluted shares issuable for unvested restricted shares
    8,151  
     
 
 
Total diluted shares
    38,566,712  
     
 

      (8) Represents restricted shares issued to directors that vest after three months. Pro forma compensation expense is calculated as follows: 25,000 shares valued at $9.00 per share offering price for total compensation cost of $225,000.
 
      (9) Minority interest represents 14.76% of the net income (loss) before minority interest after considering the impact of this offering.
 
      (10) Represents FelCor, Noble, and four properties since December 31, 2003, including two properties currently under firm purchase contracts, estimated unaudited statements of operations for the periods preceding their acquisitions.
 
      (11) Represents estimated depreciation expense associated with the acquired FelCor, Noble, and four properties since December 31, 2003, including two properties currently under firm purchase contracts, based on preliminary purchase price allocations.
 
      (12) Represents FelCor, Noble, and four properties since December 31, 2003, including two properties currently under firm purchase contracts, estimated unaudited statements of operations for the periods preceding their acquisitions plus additional franchise fees of $313,500 related to FelCor.
 
      (13) Represents estimated interest expense associated with the mortgage debt assumed from Noble and four properties since December 31, 2003, including two properties currently under firm purchase contracts.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      You should read the following discussion and analysis of financial condition, results of operations, liquidity and capital resources in conjunction with the consolidated historical financial statements and the combined financial statements of the predecessor and the related notes. The notes to the consolidated and combined financial statements provide information about us and the basis of presentation used in this prospectus.

Overview

      We are a real estate investment trust for federal income tax purposes that commenced operations upon completion of our initial public offering and related formation transactions on August 29, 2003. As of December 31, 2003, we owned 15 hotels, eight asset management and consulting contracts and one mezzanine loan. Five of these hotels were acquired October 8, 2003, and four of these hotels were acquired November 24, 2003. These nine acquired properties contributed approximately $6.1 million and $559,000 to our total revenue and net income (loss), respectively, for our year ended December 31, 2003.

      Based on our primary business objectives and forecasted operating conditions, our key priorities or financial strategies include, among other things:

  •  acquiring hotels in unique locations where further large-scale development is limited for prospective competitors, including hotels located in urban and resort/ convention locations;
 
  •  acquiring hotels with good current yield with an opportunity for appreciation;
 
  •  implementing selective capital improvements designed to increase profitability and directing our managers to minimize operating costs and increase revenues;
 
  •  originating or acquiring mezzanine loans; and
 
  •  making other investments that our board deems appropriate.

      RevPAR is a commonly used measure within the hotel industry to evaluate hotel operations. RevPAR is defined as the product of the average daily room rate, or ADR, charged and the average daily occupancy achieved. RevPAR does not include revenues from food and beverage or parking, telephone or other guest services generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels. Increases in RevPAR attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. Increases in RevPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

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      The following table illustrates the key performance indicators for the years ended December 31, 2003, 2002, and 2001, for our initial properties, which represents the six hotels we have owned throughout the three years presented. For purposes of our discussion of results of operations, these six properties are referred to collectively as the comparable hotels.

                           
Year Ended December 31,

2003 2002 2001



Consolidated (initial properties)
                       
 
Hotel revenues
  $ 35,914,158     $ 35,357,781     $ 36,215,646  
 
RevPAR
  $ 73.61     $ 71.45     $ 73.78  
 
Occupancy
    70.87 %     65.98 %     61.51 %
 
ADR
  $ 103.86     $ 108.29     $ 119.94  
Embassy Suites (initial properties)
                       
 
Hotel revenues
  $ 24,743,446     $ 24,824,677     $ 25,028,323  
 
RevPAR
  $ 88.31     $ 87.52     $ 88.13  
 
Occupancy
    76.31 %     73.55 %     70.31 %
 
ADR
  $ 115.73     $ 119.00     $ 125.35  
Radisson Hotels (initial properties)
                       
 
Hotel revenues
  $ 11,170,712     $ 10,533,104     $ 11,187,323  
 
RevPAR
  $ 50.37     $ 46.04     $ 50.48  
 
Occupancy
    62.28 %     54.01 %     47.23 %
 
ADR
  $ 80.87     $ 85.24     $ 106.88  

Results of Operations

      We believe the lodging industry was negatively affected in 2003 by low levels of business travel resulting from a weak economy (predominantly in the first half of the year), the war in Iraq, continued changes in terrorist threat levels, and travel reductions and restrictions related to severe acute respiratory syndrome, or SARS. Strong economic growth in the United States economy in the second half of 2003 helped improve lodging demand, but generally not enough to offset the weak lodging demand in the first half.

      Our industry outlook for 2004 is more optimistic. Historically, we have seen that lodging demand in the United States correlates to U.S. Gross Domestic Product (GDP) growth, with typically a one to two quarter lag period. Therefore, given the relatively strong U.S. GDP growth in the second half of 2003 and the forecasts for 2004, we are optimistic about improvement in lodging demand in 2004. In addition, based on these GDP forecasts, as well as the anticipated strengthening of corporate profits and capital investment, we expect an increase in business-related travel and improvement in the pace of group bookings.

      The consolidated financial information presented in this prospectus includes all of our accounts beginning with our commencement of operations on August 29, 2003. Prior to that time, these financial statements include the combined financial information of certain affiliates of Remington Hotel Corporation that owned our initial assets prior to August 29, 2003. We will collectively refer to these entities throughout this discussion as our predecessor. When we discuss operations and cash flows for the year ended December 31, 2003 we are referring to our results since commencement of operations on August 29, 2003 aggregated with the results of our predecessor from January 1, 2003 to August 28, 2003.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002

      Revenue. Total revenue for the year ended December 31, 2003 increased approximately $6.9 million or 19.6% from total revenue for the year ended December 31, 2002, primarily due to approximately

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$6.1 million in revenues attributable to the acquisitions of five hotel properties on October 8, 2003 and four hotel properties on November 24, 2003, as well as approximately $110,000 of interest earned on our $10 million mezzanine loan receivable, which was acquired November 26, 2003. In addition, revenues for comparable hotels increased due to increased room revenues, partially offset by decreased food and beverage revenues and decreased other revenues. Room revenues at comparable hotels increased 3.0% due to an increase in RevPAR to $73.61 for the year ended December 31, 2003 compared to $71.45 for 2002, which consisted of a 7.4% increase in occupancy and a 4.1% decrease in ADR.

      Room revenues at comparable hotels for the year ended December 31, 2003 increased approximately $862,000 or 3.0% compared to 2002, primarily due to the aforementioned increase in occupancy offset somewhat by a decrease in ADR. Both the Covington Radisson and Las Vegas Embassy Suites experienced increases in occupancy due to an enhanced focus on weekend group sales. In addition, occupancy increased at the Dulles Embassy Suites due to a recovery in that marketplace, which had suffered a downturn following the September 11, 2001 terrorist events. The Holtsville Radisson also experienced an increase in occupancy, somewhat offset by a decrease in ADR, as a result of significant military business utilizing discounted rates in the latter half of the year. These occupancy increases were offset by a decrease in occupancy and ADR at both the Dallas and Austin Embassy Suites due to a downturn in the Texas economy, which is heavily dependent on business in the high-tech and telecom sectors.

      Food and beverage revenues at comparable hotels for the year ended December 31, 2003 decreased approximately $130,000 or 2.3% compared to 2002. Food and beverage revenues decreased at both the Dulles Embassy Suites and Dallas Embassy Suites due to higher than usual banquet revenues experienced in 2002 that did not recur in 2003. In addition, food and beverage revenues were down at both the Dallas and Austin Embassy Suites due to the aforementioned decreases in occupancy. Food and beverage revenues also decreased at the Covington Radisson due to a shift in customer mix toward airline crews, who utilize food and beverage facilities to a lesser extent than other business travelers.

      Other revenues at comparable hotels for the year ended December 31, 2003 decreased approximately $175,000 or 15.5% compared to 2002, primarily due to a decrease in telephone revenues as customers shifted from in-room phones to cellular phones.

      Asset management fees increased to approximately $137,000 for the year ended December 31, 2003, compared to zero for 2002 due to the eight asset management and consulting contracts acquired from an affiliate upon our formation on August 29, 2003. On October 16, 2003, we exercised our option to reassign our rights under our eight asset management and consulting contracts back to the affiliate until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003. As a result, we did not collect related asset management fee income in 2003 of approximately $250,000. However, the related guarantee of payment associated with these fees was extended for a like period.

      Hotel Operating Expenses. Hotel operating expenses, which consist of room expense, food and beverage expense, other direct expenses, indirect expenses (such as property level general and administrative, marketing, energy, repairs and maintenance expenses), and management fees, increased approximately $5.2 million or 21.1% for the year ended December 31, 2003 compared to 2002, primarily due to approximately $4.5 million of expenses associated with the nine hotel properties acquired in the fourth quarter of 2003. In addition, hotel operating expenses at comparable hotels experienced increases in room expense, food and beverage expense, other direct expenses, and indirect expenses for the year ended December 31, 2003 compared to 2002.

      Room expense at comparable hotels increased approximately 4.8% for the year ended December 31, 2003 compared to 2002 primarily due to variable costs associated with the aforementioned overall increase in occupancy as well as increased payroll costs. Over the same comparative period, food and beverage expense at comparable hotels increased approximately 1.0% due to rising food and payroll costs. Other direct expenses at comparable hotels increased approximately 25.8% for the year ended December 31, 2003 compared to 2002 primarily due to increased payroll and the rates we are charged for telephone usage.

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Indirect expenses at comparable hotels increased approximately $155,000 or 1.3% for the year ended December 31, 2003 compared to 2002. Indirect expenses increased due to:

  •  increased repairs and maintenance expense at the Dallas Embassy Suites and Austin Embassy Suites due to improvements in 2003 that did not occur in 2002, offset by decreased repairs and maintenance expense at the Las Vegas Embassy Suites, Covington Radisson, and Holtsville Radisson due to improvement programs in effect in 2002 that did not recur in 2003;
 
  •  increased energy costs due to the air conditioning system running inefficiently during a portion of 2003 at the Austin Embassy Suites, increased usage at the Covington Radisson due to increased occupancy, and a colder 2003 winter at the Holtsville Radisson;
 
  •  increased general and administrative fees due to increased payroll in 2003; and
 
  •  increased franchise fees due to increased room revenues at the Dulles Embassy Suites, Las Vegas Embassy Suites, Covington Radisson, and Holtsville Radisson, as well as increased rates at certain hotels.

      Property taxes, insurance, and other. Property taxes, insurance, and other increased approximately $421,000 or 17.3% for the year ended December 31, 2003 compared to 2002, due to approximately $461,000 of expenses associated with the nine hotel properties acquired in the fourth quarter of 2003. Aside from the additional hotels acquired, property taxes, insurance, and other incurred in 2003 was consistent with 2002.

      Depreciation and amortization. Depreciation and amortization increased approximately $99,000 or 2.1% for the year ended December 31, 2003 compared to 2002, due to approximately $593,000 of depreciation associated with the nine hotel properties acquired in the fourth quarter of 2003. Aside from the additional hotels acquired, depreciation and amortization decreased in 2003 compared to 2002 as a result of certain assets becoming fully depreciated.

      Corporate general and administrative. Corporate general and administrative expense increased to approximately $4.0 million for the year ended December 31, 2003 compared to zero for 2002 as a result of expenses associated with being a newly-formed, publicly-traded company, including salaries, payroll taxes, benefits, insurance, stock-based compensation related to employee stock grants, audit fees, and directors fees. For 2003, the total includes approximately $864,000 of non-cash expenses associated with the amortization of employee stock grants.

      Operating Income. Operating income decreased approximately $2.8 million from $3.4 million for the year ended December 31, 2002 to approximately $575,000 for the year ended December 31, 2003 as a result of the operating results discussed above.

      Interest Income. Interest income increased approximately $236,000 from approximately $53,000 for the year ended December 31, 2002 to approximately $289,000 for the year ended December 31, 2003, primarily due to interest earned on funds received from our initial public offering.

      Interest Expense. Interest expense decreased approximately $1.5 million from approximately $6.5 million for the year ended December 31, 2002 to approximately $5.0 million for the year ended December 31, 2003. Upon completion of our initial public offering and related formation transactions on August 29, 2003, we repaid the majority of our mortgage notes payable. The decrease in interest expense is associated with the lower debt balance.

      Provision for Income Taxes. As a REIT, we generally will not be subject to federal corporate income tax on that portion of our net income that does not relate to taxable REIT subsidiaries. However, we lease each of our hotel properties to Ashford TRS, which is treated as a taxable REIT subsidiary for federal income tax purposes. For the period from inception through December 31, 2003, we recognized a provision for income taxes of approximately $142,000 related to Ashford TRS.

      Minority Interest. Minority interest increased to approximately $358,000 for the year ended December 31, 2003 compared to zero for 2002. Upon our formation on August 29, 2003, minority interest

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in the operating partnership was established to represent the limited partners’ actual proportionate share of the equity in the operating partnership. Net income (loss) is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period.

      Net Loss. Net loss was approximately $3.9 million for the year ended December 31, 2003 and approximately $3.1 million for the year ended December 31, 2002, which represents a net loss increase of approximately $827,000 or 26.7% as a result of the operating results discussed above.

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

      Revenue. Room revenues decreased $635,875, or 2.2% from 2001 to 2002. In spite of the 5.2% decline in market RevPAR for all the properties combined, the Embassy Suites hotels in Dallas, Austin, Dulles, and Las Vegas and the Radisson hotel in Covington all continued to experience positive market yield penetration with the Embassy Suites hotel in Las Vegas experiencing the largest market yield increase of over 11.4%. Market yield penetration is a percentage of a property’s RevPAR (average daily rate or ADR multiplied by occupancy rate) to the RevPAR of a particular competitive set. A competitive set consists of properties that compete for business directly with a particular property. The competitive set properties have similar physical facilities, locations, and room rates and compete for the same customers. Overall our occupancy increased by 7.3% from 61.5% for the year ended December 31, 2001 to 66.0% for the same period in 2002. The Radisson hotel in Covington experienced the largest gain, increasing occupancy 41.0% from 2001 to 2002. The only occupancy decline occurred at the Radisson hotel in Holtsville, declining over 8.0% mainly due to construction activity during 2002. Our average daily rate declined by 9.7% from $119.94 for the year ended December 31, 2001 to $108.29 for the same period in 2002. All the hotels except Las Vegas experienced declines in average daily rates. Food and beverage revenue stayed almost constant, growing $6,127 from 2001 to 2002. Total revenues decreased $857,865, or 2.4%, from 2001 to 2002. Almost $300,000 of the revenue decline was due to energy surcharges that were eliminated due to franchise limitations. The decreasing hotel revenues at the Austin Embassy Suites, Dallas Embassy Suites, Dulles Embassy Suites, and the Holtsville Radisson can be attributed to the general softening in the economy and the continued impact on the travel industry from the aftermath of the September 11, 2001 terrorist attacks.

      Expenses. Hotel operating expenses declined by $487,130 or 1.9% from 2001 to 2002 due to effective cost controls in the food and beverage area as well as a reduction in the management fee in the Embassy Suites properties from 4.5% to 3.0%. Included in the hotel operating expenses were sales and marketing expenses, which increased 12.2% from 2001 to 2002 as a result of additional staffing at the Radisson properties in Holtsville and Covington in order to drive revenues.

      Total operating expenses increased by $140,013 or 0.4% from the year ended December 31, 2001 to December 31, 2002. The majority of this increase was due to an increase in depreciation of $387,065 from 2001 to 2002 resulting from the purchases of the Radisson Holtsville property in November 2000 and the Radisson Covington property in January 2001; an increase of $363,724 or 60.3% for insurance costs over the same periods due to the increasing costs of insurance; and the write-off of an insurance claim that occurred at the Las Vegas Embassy Suites hotel in August 2000. Property taxes actually declined by $123,646 or 7.8% for the same period mainly due to the successful property tax appeal for the Austin Embassy Suites hotel where the valuation declined by approximately $5.5 million.

      Operating Income. Operating income declined by $997,878 from $4.4 million in 2001 to $3.4 million in 2002.

      Interest Expense. Interest expense declined by $984,499 from 2001 to 2002 due to a reduction in interest rates.

      Net Loss. Net loss increased from $2.9 million to $3.1 million from 2001 to 2002.

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Liquidity and Capital Resources

      Our principal source of funds to meet our cash requirements, including distributions to stockholders, is our share of the operating partnership’s cash flow. The operating partnership’s principal sources of revenue will include (i) cash flow from hotel operations, (ii) interest income from mortgages we own, and (iii) to the extent that we may engage in sale-leaseback transactions in the future, rental income from third parties in those asset transactions. To date, however, cash flow has been generated primarily from hotel operations and management fees related to the eight asset management and consulting contracts with an affiliate.

      Cash flow from hotel operations is subject to all operating risks common to the hotel industry, including:

  •  Competition for guests from other hotels;
 
  •  Adverse effects of general and local economic conditions;
 
  •  Dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;
 
  •  Increases in energy costs, airline fares, and other expenses related to travel, which may deter traveling;
 
  •  Increases in operating costs related to inflation and other factors, including wages, benefits, insurance, and energy;
 
  •  Overbuilding in the hotel industry, especially in particular markets; and
 
  •  Actual or threatened acts of terrorism and actions taken against terrorists, which often cause public concern about travel safety.

      Upon completion of the initial public offering and related formation transactions, we had approximately $116.6 million in cash to invest in lodging-related assets and for general corporate purposes. We also had $16.0 million of outstanding mortgage debt related to one of the hotels. Shortly thereafter, we received additional net proceeds of approximately $14.5 million related to the underwriters’ exercise of their over-allotment option.

      On October 8, 2003, we acquired five hotel properties from FelCor Lodging Limited Partnership for approximately $50.0 million in cash. We used a portion of the proceeds from our initial public offering as the source of funds for the acquisition of these properties. We have earmarked an additional $8.2 million in capital improvements for these properties, which will be funded through the $36.0 million non-recourse loan discussed below.

      On October 16, 2003, we exercised our option to reassign our rights under the eight asset management and consulting contracts back to an affiliate until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003. As a result, we did not collect related asset management fees income over this period of approximately $250,000. However, the related guarantee of payment associated with these fees was extended for a like period.

      On November 24, 2003, we acquired four hotel properties from Noble Investment Group for approximately $33.9 million, which included approximately $27.5 million in cash and approximately $6.4 million in assumed mortgage debt. We have earmarked an additional $1.0 million in capital improvements for these properties.

      On November 26, 2003, we acquired a $10.0 million mezzanine loan receivable related to a hotel property in New York, New York. The mezzanine loan bears interest at LIBOR plus 9% with a 2% LIBOR floor, matures in August 2006, and provides for two one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through August 2004, with principal and interest paid thereafter through maturity based on a twenty-five-year amortization schedule. Prepayments of the loan are prohibited through August 13, 2004, require decreasing prepayment premiums through February 13, 2006, and require no prepayment premiums thereafter.

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      On December 24, 2003, we closed on a $36.0 million non-recourse loan secured by the five hotel properties acquired from FelCor Lodging Limited Partnership. The loan, which includes a holdback provision for the previously earmarked $8.2 million in targeted capital expenditures related to these properties, bears interest at a rate of LIBOR plus 3.25% with a 4.75% total floor, matures in four years, requires interest-only payments for the first two years, and contains a one-year extension option upon maturity, subject to an extension fee of 0.5% of the outstanding principal balance of the loan as of the extension date.

      On January 23, 2004, we acquired a $15.0 million subordinated first mortgage loan receivable related to a hotel property in Denver, Colorado. The loan bears interest at LIBOR plus 9%, matures in February 2006, and provides for three one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through maturity, with principal and interest paid through the extension periods based on a twenty-five year amortization schedule. Prepayments of the loan are prohibited through December 8, 2004, require decreasing prepayment premiums through August 31, 2005, and require no prepayment premiums thereafter.

      On February 5, 2004, we completed a $60.0 million secured credit facility, at an interest rate of the prime rate plus 2.0% or LIBOR plus 3.25%, at our election, of which approximately $49.8 million of the proceeds were funded March 24, 2004. The credit facility matures in three years, is collateralized by seven hotel properties, is subject to certain financial and other covenants, requires an annual commitment fee of 0.45% to 0.55% on the unused portion of the line, which is payable quarterly, and allows for an increase to $75.0 million subject to certain conditions.

      On March 4, 2004, we acquired a $25.0 million mezzanine loan receivable secured by 17 hotel properties. The mezzanine loan bears interest at LIBOR plus 8.7% with a 2.5% LIBOR floor, matures in July 2005, and provides for three one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive principal and interest payments through the extension periods based on a twenty-five-year amortization schedule. Prepayments of the loan are prohibited through maturity subject to certain provisions.

      On March 15, 2004, we declared a cash dividend of approximately $0.06 per fully-diluted share, for stockholders of record on March 31, 2004, to be paid on April 15, 2004.

      On March 19, 2004, we originated a $15.0 million mezzanine loan receivable related to a hotel property in Boston, Massachusetts. The mezzanine loan bears interest at LIBOR plus 10.25% with a 1.75% LIBOR floor, matures in April 2007, and provides for two one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through maturity. Prepayments of the loan are prohibited through September 2005.

      On March 24, 2004, we acquired a $6.6 million mezzanine loan receivable related to a hotel property in Brooklyn Park, Minnesota. The mezzanine loan bears interest at LIBOR plus 10% with a 2% LIBOR floor and matures in January 2006. In accordance with the loan agreement, we will receive interest-only payments through maturity. At maturity, an additional interest payment will be due to reflect an accrual rate that is the greater of 15% or LIBOR plus 1300 basis points.

      On March 24, 2004, we acquired a hotel property in Lake Buena Vista, Florida from JHM Ruby Lake Hotel, Ltd. for approximately $25.3 million in cash.

      On April 1, 2004, we acquired a hotel property in Atlantic Beach, Florida from Huron Jacksonville Limited Partnership for approximately $23.1 million, which consisted of approximately $6.3 million in cash, approximately $15.7 million in assumed mortgage debt, and approximately $1.1 million in limited partnership units, based on the market price of our common stock.

      Following the completion of this offering, we expect to acquire the following two additional hotel properties:

  •  the Sheraton Bucks County hotel and adjacent office building complex in Langhorne, Pennsylvania, for an acquisition price of approximately $16.7 million in cash; and

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  •  the SpringHill Suites by Marriott in Baltimore, Maryland, for an acquisition price of approximately $15.9 million, which will include approximately $9.1 million in cash and approximately $6.8 million in assumed mortgage debt.

      We are focused exclusively on investing in the hospitality industry across all segments, including direct hotel investments, first mortgages, mezzanine loans, and sale-leaseback transactions. We intend to acquire and, in the appropriate market conditions, develop additional hotels and provide structured financings to owners of lodging properties. We may incur indebtedness to fund any such acquisitions, developments, or financings. We may also incur indebtedness to meet distribution requirements imposed on REITs under the Internal Revenue Code to the extent that working capital and cash flow from our investments are insufficient to make the required distributions.

      We are currently in negotiations with certain financial institutions to obtain a mezzanine loan warehouse facility. However, no assurances can be given that we will obtain such financings or, if we do, what the amount and terms will be. Our failure to obtain future financing under favorable terms could adversely impact our ability to execute on our business strategy.

      We will acquire or develop additional hotels and invest in structured financings only as suitable opportunities arise, and we will not undertake such investments unless adequate sources of financing are available. Funds for future hotel-related investments are expected to be derived, in whole or in part, from future borrowings under a credit facility or other borrowings or from the proceeds of additional issuances of common stock or other securities. However, we have no formal commitment or understanding to invest in additional assets, and there can be no assurance that we will successfully make additional investments.

      Our existing hotels and hotels underlying our mezzanine loan receivables are located in developed areas that contain competing hotel properties. The future occupancy, ADR, and RevPAR of any individual hotel could be materially and adversely affected by an increase in the number or quality of the competitive hotel properties in its market area. Competition could also affect the quality and quantity of future investment opportunities. In addition, the downturn in the national economy, the aftermath of the terrorist attacks against the United States, and the impact of the war in Iraq have had a negative impact on our operating cash flows.

Inflation

      We rely entirely on the performance of our properties and the ability of the properties’ managers to increase revenues to keep pace with inflation. Hotel operators can generally increase room rates rather quickly, but competitive pressures may limit their ability to raise rates faster than inflation. Our general and administrative costs, such as real estate and personal property taxes, property and casualty insurance, and utilities, are subject to inflation as well.

Seasonality

      Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. We anticipate that our cash flow from the operation of our properties will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize other cash on hand or borrowings to make required distributions. However, we cannot make any assurances that we will make distributions in the future.

Interest Rate Risk

      The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

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      As of March 31, 2004, we had approximately $109.3 million of outstanding variable-rate debt. The impact to our annual results of operations of a 100 basis point change in interest rate on the outstanding balance of variable-rate debt as of March 31, 2004, would be approximately $1.1 million. We also had approximately $6.4 million of 7.08% fixed-rate debt outstanding at March 31, 2004. We had no other outstanding debt as of March 31, 2004.

      As of March 31, 2004, we owned $71.6 million of mezzanine variable-rate loans receivable. The impact to our annual results of operations of a 100 basis point change in interest rate on the outstanding balance of variable-rate loans receivable as of March 31, 2004, would be approximately $716,000. We had no other outstanding loans receivable as of March 31, 2004.

      The above amounts were determined based on the impact of hypothetical interest rates on our borrowing cost, and assume no changes in our capital structure. As the information presented above includes only those exposures that exist as of March 31, 2004, it does not consider those exposures or positions which could arise after that date. Thus, the information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

Critical Accounting Policies

      Our accounting policies are more fully described in note 3 to our consolidated financial statements. As disclosed in note 3, the preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

      Investment in Hotel Properties. Our initial six hotel properties are stated at our predecessor’s historical cost, net of any impairment charges, plus an approximate $8.1 million minority interest partial step-up recorded upon our formation on August 29, 2003, related to the acquisition of minority interest from unaffiliated parties related to four of the initial properties. Hotel properties acquired subsequent to our formation are stated at cost. Improvements and additions which extend the life of the property are capitalized.

      Impairment of Investment in Hotel Properties. Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable (i.e., the future undiscounted cash flows for the hotel are projected to be less than the net book value of the hotel). We test for impairment in several situations, including when current or projected cash flows are less than historical cash flows, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, and when events or changes in circumstances indicate that a hotel’s net book value may not be recoverable. In the evaluation of the impairment of our hotels, we make many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures and fair values, including consideration of capitalization rates, discount rates and comparable selling prices. To date, no such impairment charges have been recognized. If an asset were deemed to be impaired, we would record an impairment charge for the amount the property’s net book value exceeds its fair value.

      Depreciation and Amortization Expense. Depreciation expense is based on the estimated useful life of our assets, while amortization expense for leasehold improvements is based on the shorter of the lease term or the estimated useful life of the related assets. The lives of the assets are based on a number of assumptions, including cost and timing of capital expenditures to maintain and refurbish the assets, as well as specific market and economic conditions. Presently, hotel properties are depreciated using the straight-line method over lives which range from 15 to 39 years for buildings and improvements and three to five

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years for furniture, fixtures and equipment. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income (loss) or the gain or loss on the potential sale of any of our hotels.

      Recent Accounting Pronouncements. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. The adoption of SFAS No. 146 in the first quarter of 2003 did not have any immediate effect on our results of operations, financial position, or cash flows.

      In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”). FIN No. 45 requires that a guarantor recognize a liability for certain guarantees and enhance disclosures for such guarantees. The recognition provisions of FIN No. 45 are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for financial statements for periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on our results of operations, financial position, or cash flows.

      In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (as revised, “FIN No. 46”). FIN No. 46 requires existing unconsolidated variable interest entities, as defined, to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN No. 46 applies to financial statements for periods ending after March 15, 2004, related to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. On November 26, 2003, we acquired a $10.0 million mezzanine loan receivable secured by a hotel property in New York, New York, which is subordinate to a primary loan related to this hotel. The mezzanine loan is considered to be a variable interest in the entity that owns the hotel, which is a variable interest entity. However, we are not considered to be the primary beneficiary. Therefore, we will not consolidate the hotel for which we have provided financing. Hence, the adoption of FIN No. 46 did not have a material impact on our results of operations, financial position, or cash flows. However, interests in entities acquired or created after December 31, 2003 will be evaluated based on FIN No. 46 criteria and such entities will be consolidated, if required.

      In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our results of operations, financial position, or cash flows.

      In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of these financial instruments were classified as equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31,

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2003 and is otherwise effective at the beginning of the first interim period after June 15, 2003. However, in November 2003, the Financial Accounting Standards Board elected to indefinitely defer implementation of certain standards of SFAS No. 150 relating to limited-life subsidiaries. The adoption of SFAS No. 150 is not expected to have a material impact on our results of operations, financial position, or cash flows.

Contractual Obligations and Commitments

      As of December 31, 2003, our contractual obligations and commitments are as follows:

                                           
Payments Due by Period

<1 Year 2-3 Years 4-5 Years >5 Years Total





Mortgage notes payable
  $ 96,335     $ 22,989,444     $ 27,116,000     $     $ 50,201,779  
Capital leases payable
    136,605       282,303       37,961             456,869  
Operating leases
    545,713       956,853       851,420       13,889,712       16,243,698  
Interest payments
    2,504,879       4,922,165       1,377,088             8,804,132  
     
     
     
     
     
 
 
Total contractual obligations
  $ 3,283,532     $ 29,150,765     $ 29,382,469     $ 13,889,712     $ 75,706,478  
     
     
     
     
     
 

      In addition, at December 31, 2003, our capital commitments were approximately $355,000, which relate to general capital improvements.

      Also, in August 2003, we entered into employment agreements with our Chief Executive Officer and certain other executive officers, all of which expire on December 31, 2006 except the employment agreement with our Chief Executive Officer which expires on December 31, 2007. Each of these agreements has an automatic one-year renewal option unless either party provides at least six months’ notice of non-renewal.

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OUR COMPANY

Overview

      We are a Maryland corporation that was formed in May 2003 to take advantage of the existing and developing investment opportunities in the lodging industry. These diverse lodging investment opportunities may result from inefficiencies related to market illiquidity, supply/demand imbalances and general business cycles. We target specific opportunities created by the current recovering lodging market while retaining the flexibility to invest in the most attractive risk-reward opportunities as they develop in the lodging business cycle. To our knowledge, we are one of the few publicly traded REITs exclusively focused on investing in the hospitality industry at all levels of the capital structure and across all segments where pricing, yield and capital appreciation advantages may exist.

      We completed an initial public offering, or IPO, of our common stock in August 2003. In connection with our IPO, we acquired six hotels and eight asset management and consulting agreements for a total cash and equity consideration of $137.6 million, including $65.7 million to repay mortgage indebtedness related to our initial assets. Upon completion of the initial public offering and related formation transaction, we had approximately $131.1 million in cash to invest in lodging-related assets and for general corporate purposes.

      Since then, we have acquired $203.8 million in lodging-related assets, including 11 additional hotel properties and five mezzanine loans. Additionally, we currently have two properties under firm purchase contracts, and we intend to acquire these properties for a total purchase price of approximately $32.6 million.

      Our current investment strategy is intended to take advantage of strengthening lodging fundamentals. We believe that the U.S. economy is beginning a recovery in the current business cycle and that the underlying cash flows of hotels will improve as the recently distressed lodging industry rebounds from its cyclical low point. We believe that our current investment policies will allow us to participate in future improvements in performance within the lodging industry. However, we also believe that as supply, demand and capital market cycles change, we will be able to quickly shift our investment strategies to take advantage of newly-created lodging investment opportunities as they develop. Currently, we do not focus our acquisitions on any specific geographical market. While our current investment strategies are well defined, our board of directors may change our investment policies at any time without stockholder approval.

      Our management team has substantial experience in sourcing, underwriting, operating, repositioning, developing, selling and financing a wide variety of lodging investments. We are self-advised and own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. We currently own an 81.7% interest in our operating partnership. The remaining 18.3% is owned by limited partners who received units in exchange for the contribution of certain of our assets. The substantial majority of these limited partnership units are owned by certain of our executives, employees and employees of our affiliates. Following completion of this offering, we expect to own 85.2% and have a 14.8% minority interest (of which less than 0.3% will be held by persons other than certain of our directors, executives, employees and employees of our affiliates. We are the sole general partner of our operating partnership.

      We have elected to be treated as a REIT for federal income tax purposes. Because of limitations imposed on REITs in operating hotel properties, third-party managers manage each of our hotel properties. Remington Lodging is our primary property manager, managing 13 of our 17 hotel properties. Remington Lodging is wholly owned by Mr. Archie Bennett, our Chairman, and Mr. Montgomery J. Bennett, our President and Chief Executive Officer. Messrs. Archie and Montgomery Bennett also own 100% of Remington Hotel Corporation, which is one of the largest privately-owned independent hotel management companies in the country and has managed over $1 billion of hotels in 28 states. Our remaining four hotel properties are managed by Noble Management Group, a management company unaffiliated with us.

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Additionally, if we acquire both of the acquisition properties we currently have under firm purchase contracts, one will be managed by Remington Lodging and one will be managed by PM Hospitality Strategies, a management company unaffiliated with us.

Our Team

      We believe that we will continue to capitalize on the experience of our senior management in sourcing, underwriting, operating, repositioning, developing, selling and financing lodging-related assets. Our roots in the hotel industry trace back to 1968 when our Chairman, Archie Bennett, Jr., built his first hotel. Prior to our IPO, Mr. Bennett and certain members of our senior management team have been involved in the investment in, or management of, 190 hotels or mortgage loans secured by hotels, totaling approximately 31,119 rooms in 33 states and in the development of 35 hotels, totaling approximately 9,201 rooms in 11 states.

      Historically, our management team’s business strategy has been threefold: first, to identify attractive investment opportunities in the lodging industry; second, to match such opportunities with appropriate institutional investors; and third, to manage such investments, including providing development, management and construction services, for the institutional owners.

      We believe our management’s historical background in the hotel industry will allow us to continue to successfully execute our business strategy. Together with our Chairman, the members of our senior management team have an average of 19 years experience in the hotel industry. With the exception of Mr. Douglas Kessler, our Chief Operating Officer, all members of our senior management team worked together at Remington Hotel Corporation and affiliated entities since 1992. Our management’s experience prior to our IPO includes:

  •  purchasing over $1 billion in hotels and mortgages secured by hotels;
 
  •  building seven hotels at a cost of $125 million;
 
  •  managing $1 billion of hotels, ranging from economy to upper up-scale, in 28 states;
 
  •  effectively asset managing over 145 predominantly non-performing hospitality loans (with a book value of approximately $500 million) acquired from third parties, substantially all of which were either recovered at par or foreclosed upon, with the assets sold for an amount in excess of the initial investment (approximately two-thirds of which we also operated as managers); and
 
  •  co-investing with major institutional investors, including, among others, G. Soros Realty Inc., Gordon Getty Trust, The Fisher Brothers, Olympus Real Estate Partners and Goldman Sachs’ Whitehall Real Estate Funds.

      In addition, before Mr. Kessler, our Chief Operating Officer, joined Remington Hotel Corporation in July 2002, he assisted in overseeing the investment management, acquisition, sale and financing of more than $11 billion in real estate assets for Goldman Sachs’ Whitehall Real Estate Funds, including over $6 billion of lodging-related assets. During his nine years at Whitehall, Mr. Kessler served on the boards or executive committees of several lodging companies, including Westin Hotels and Resorts and Strategic Hotel Capital.

      The Chairman of our board of directors, Archie Bennett, Jr., also serves as the Chairman of the board of directors of Remington Hotel Corporation, and our President and Chief Executive Officer, Montgomery Bennett, also serves as President and Chief Executive Officer of Remington Hotel Corporation. Remington Lodging, which is an affiliate of Remington Hotel and which is owned 100% by Messrs. Archie and Montgomery Bennett, provides management and other related services for some of our hotel properties.

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Our Business Strategy

      We intend to continue to invest in a variety of lodging-related assets based upon our evaluation of diverse market conditions. These investments may include: (i) direct hotel investments; (ii) mezzanine financing through origination or through acquisition in secondary markets; (iii) first lien mortgage financing through origination or through acquisition in secondary markets; and (iv) sale-leaseback transactions.

      Our strategy is designed to take advantage of current lodging industry conditions and adjust to changes in market conditions over time. In the current market, we believe we can continue to purchase assets at discounts to previous trading ranges or replacement costs and acquire or originate debt positions with yields at higher than recent historical interest rate ranges. Over time, our assessment of market conditions will determine asset reallocation strategies. While we seek to capitalize on the following favorable market fundamentals, conditions beyond our control may have an impact on overall profitability and on the investment returns.

      As the current lodging market begins its recovery, new debt origination and acquisition opportunities continue to be available as hotel owners are faced with refinancing issues, defaults and opportunities to capitalize on historically low interest rates. As pools of commercial mortgage-backed security loans mature, hotel owners are faced with refinancing based on lower asset values than those values used in the prior financings, which provides us an opportunity to offer mezzanine financing to these borrowers at loan-to-value levels previously held by the first mortgage holders.

      Our investment policies, which we utilize to implement our business strategies, may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Any change to any of these policies by our board of directors, however, would be made only after a review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, our board of directors believes that it is advisable to do so in our best interests. We cannot assure you that our investment objectives will be attained.

      Our primary business objective is to maximize stockholder value by achieving attractive risk-adjusted returns throughout the business cycles of the lodging industry. Our strategy is to selectively invest capital in a variety of lodging-related assets based on our evaluation of diverse market conditions. By investing in diversified lodging assets, at different levels of a given hotel’s capital structure, we plan to take advantage of changes in the capital markets.

      Our business strategy of combining lodging-related equity and debt investments seeks, among other things, to:

  •  maximize economic benefits from an industry that has suffered significant reductions in value and operating performance and appears to be at the beginning stages of a recovery;
 
  •  capitalize on both current yield and price appreciation, while simultaneously offering diversification of types of assets within the hospitality industry;
 
  •  vary investments across an array of hospitality assets to take advantage of market cycles for each asset class; and
 
  •  offer an attractive liquidity alternative to asset sales (through structure and tax deferral) and traditional financing (due to rate, structure, loan-to-value and asset class).

      Our investment strategy primarily targets limited and full service hotels in primary, secondary and resort markets throughout the United States. To take full advantage of current and future investment opportunities in the lodging industry, we will invest according to the asset allocation strategies described below. Due to ongoing changes in market conditions we will continually evaluate the appropriateness of our investment strategies, and our board of directors may change any or all of these strategies at any time. In addition to our investment activities, we will also perform certain asset management and consulting services for other management companies affiliated with Remington Hotel.

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      We evaluate our portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs and subject to the relative illiquidity of real estate assets, we may sell investments opportunistically. Our decision to sell a hotel often will be predicated upon, among other things: projected cash flow; size of the hotel; strength of the franchise; property condition and related costs to renovate the property; strength of market demand; projected supply of hotel rooms in the market; probability of increased valuation; and geographic profile of the hotel. Our decision to sell other lodging-related assets will depend upon, among other things: management’s forecast and review of the performance of our overall portfolio and management’s assessment of changing conditions in the investment and capital markets.

Investments in Real Estate or Interests in Real Estate

      Direct Hotel Investments. In connection with our initial public offering, we acquired six hotel properties. Since then, we have acquired 11 additional hotel properties and contracted to acquire an additional two hotel properties. In selecting the hotels that we have acquired since our initial public offering, we have targeted hotels that either offer a high current return or have the opportunity to increase in value through brand repositioning, capital investments, market based recovery or improved management practices. We intend to continue acquiring existing hotels and, under appropriate market conditions, to develop new hotels. Our direct hotel acquisition strategy will follow similar investment criteria and will seek to achieve both current income and income from appreciation. We believe that values for, and operating performances of, lodging properties are currently below historical levels, making this an attractive time for acquisitions. Our direct hotel investments represent approximately 77.3% of our total investments made to date.

      Sale-Leaseback Transactions. To date, we have not participated in any sale-leaseback transactions. However, if the lodging industry fundamentals shift such that sale-leaseback transactions become more attractive investments, we intend to purchase hotels and lease them back to their existing hotel owners. Our sale-leaseback strategy will target, among other things, hotel owners that want the ability to realize the value of their investments while maintaining operating control of their hotels. We will seek to structure the transactions as net leases with participation features, terms ranging up to 20 years plus extension options, and with the operating responsibility for the property assumed by the lessee. We believe these transactions will provide us current income and growth through contractual rental increases or cash flow participations.

      As with our direct hotel investments, we will seek opportunities on limited and full service hotels in primary, secondary and resort markets throughout the United States. We will consider both major franchises and select independents. All terms of our sale-leaseback transactions will be subject to the acceptable creditworthiness of the prospective lessee. We expect to receive a base lease payment that provides an adequate risk-adjusted return, with growth based on contractual rent growth or cash flow participations.

Investments in Financial Assets

      Mezzanine Financing. Since the date of our initial public offering, we have acquired or originated five subordinated loans, also known as mezzanine loans, secured by junior mortgages on hotels or pledges of equity interests in entities owning hotels and, in one instance, by a junior participation in a first mortgage. We expect the current yield, on a risk-adjusted basis, on each of these mezzanine loans to provide attractive returns. The loans we have acquired or originated relate to upscale or first class hotels that we believe require no significant near-term capital expenditures, have reputable managers and are located in good or emerging sub-markets.

      We intend to continue to acquire or originate mezzanine loans. Mezzanine loans that we may acquire in the future may be secured by individual assets as well as cross-collateralized portfolios of assets. Although these types of loans generally have greater repayment risks than first mortgages due to the subordinated nature of the loans, we believe that a strong need for lodging mezzanine loans currently exists

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on behalf of hotel managers. We believe that the recent slowdown in the travel industry has caused the value of hotel properties to decline below the values at which they were acquired or last refinanced. This decline in market value, coupled with more stringent underwriting criteria by senior hotel lenders, has caused a gap to develop in the loan-to-value ratio of these properties, making it increasingly difficult for owners to refinance their properties. We believe that mezzanine capital provides a solution for these owners by providing loans to cover the loan-to-value shortfalls. We expect this asset class to provide us with attractive yields and potentially allow us to participate in the improving economics of the underlying hotel. In addition, subject to restrictions applicable to REITs, we may acquire or originate corporate-level mezzanine loans on an unsecured basis. Our mezzanine loans currently represent approximately 22.7% of our total investments made to date.

      These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. If a property that secures a mezzanine financing is foreclosed by the senior lender, we may not recover some or all of our investment in these loans.

      First Mortgage Financing. To date, we have not originated or purchased any first mortgages other than one junior participation in a first mortgage, which we refer to as a mezzanine loan throughout this prospectus. However, as interest rates increase and the dynamics in the hotel industry make first mortgage investments more attractive, we intend to acquire, potentially at a discount to par, or originate loans secured by first priority mortgages on hotels. We may be subject to certain state-imposed licensing regulations related to commercial mortgage lenders, with which we intend to comply. However, because we are not a bank or a federally chartered lending institution, we are not subject to the state and federal regulatory constraints imposed on such entities. Also, because we do not currently intend to securitize our assets, we expect to be able to offer more flexible terms than commercial lenders who contribute loans to securitized mortgage pools. We anticipate that this asset class will provide us with stable, attractive current yields.

Operating Procedures

      In implementing our business strategy through investments that satisfy the applicable investment policies described above, we consider each of the following:

      Asset Review. In making future hotel investment decisions, we will consider several criteria, including:

  •  Number of Rooms — We anticipate acquiring or investing in hotels with at least 75 rooms.
 
  •  Ownership Structure — We prefer properties with a fee simple title.
 
  •  Management — We prefer that the property is unencumbered by long-term management contracts.
 
  •  Franchise Affiliations — We will consider both major franchises as well as independents.
 
  •  Competition — We intend to seek properties in areas that lack a substantial new supply of hotel rooms, appear resilient to down markets and either have an existing broad demand or a growing demand base.
 
  •  Physical Condition — The condition of the property that is acceptable to us will depend on the pricing structure. Major product improvement plans or renovations are acceptable if the pricing adequately reflects such renovations.
 
  •  Available Financing — To the extent we utilize financing in our investments, we will seek non-recourse financing.
 
  •  Amenities — We prefer properties that have amenities (food and beverage, meeting space, fitness equipment, parking, etc.) consistent with the needs of its targeted customer.

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  •  Operating Performance — We intend to seek hotels that have shown a solid operating performance or alternatively seek assets where strategic changes in operations or its market positioning will generate improved revenue and operating margins.
 
  •  New Supply — We invest in markets where the effects of future growth in new rooms are understood and factored in value considerations.
 
  •  Room Demand Generators — We will seek hotels that have a diversified base of room demand generators or alternatively seek to reposition hotels to capitalize on shifting the hotel’s guest mix in ways to improve operating performance.

      However, none of these criteria alone is considered determinative.

      Underwriting Review. After we identify a potential investment, a due diligence team, consisting of in-house and third parties, will conduct detailed due diligence to assess the potential investment. This due diligence team will follow underwriting guidelines and review a list of property-level issues, including, but not limited to:

  •  property financials;
 
  •  property condition;
 
  •  environmental issues;
 
  •  ADA compliance;
 
  •  title surveys;
 
  •  competitive position;
 
  •  brand;
 
  •  market assessment;
 
  •  advance booking reports; and
 
  •  marketing plans.

      Market Assessments. Our market assessment analysis will entail in-depth evaluation of macro and micro market forces affecting the lodging industry in a given market and the specific sub-market. We usually process data obtained from numerous industry sources that focus on new supply, changes in demand patterns, brand expansion plans, performance of key corporations, government initiatives and essential hotel performance data (e.g., average daily rate, or ADR, occupancy and RevPAR). We will analyze this information to make near-term and long-term investment and sales decisions within each market and further within specific sub-markets.

      Capital Markets Evaluation. We monitor the capital markets to determine trends in lodging investment patterns and debt-to-equity pricing. We typically maintain a debt and equity transaction database encompassing recently closed transactions and suggested pricing for new transactions. This information will assist us in the formulation of competitive pricing trends and may serve as a good indicator of when liquidity gaps or pricing inefficiencies may exist in the market. We intend to use this pricing knowledge to optimally allocate our assets across our four targeted lodging-related investment classes to maximize our risk-adjusted returns.

      Value Optimization Strategies. We intend to regularly evaluate the incremental performance and resulting investment actions for each asset in our portfolio as part of our budget review process. Because of our fluid asset allocation strategy, it will be imperative that the relative merits of holding a particular property or investment demonstrate benefits in terms of accretion and portfolio diversification. Our objective in such an evaluation is to confirm that an existing asset adds to stockholder value. The methodology consists of a “re-buy” analysis that determines if continuing to hold a particular investment, using forward-looking market growth assumptions, is a valid strategy. By consistently applying this policy

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across all investments, we seek to maximize our investment returns by reallocating funds into more productive asset classes.

Asset Management and Consulting Services

      To comply with the REIT rules, various property managers perform the day-to-day management activities related to the operations of our properties. However, we provide certain asset management services to other entities affiliated with Remington Hotel. Specifically, our assets include eight asset management and consulting agreements under which we provide various services to eight property managers affiliated with Remington Hotel in exchange for a fee. In performing these services, we either provide or supervise specific asset management services, including risk management and insurance procurement; assistance with preparation of tax returns and monitoring of the payment of taxes; negotiation of hotel franchise agreements and monitoring compliance with franchise requirements; negotiation of property financings and monitoring compliance with loan covenants; negotiation and closing of equipment leases; property litigation management; assistance with preparation of annual operating and capital budgets for the hotels; and monitoring compliance with the management agreements. We also provide additional services to these property managers such as market and feasibility analysis, capital improvement assistance, financial planning and franchise support. To the extent permitted by REIT rules, we perform similar functions with respect to our own properties.

      Further, we have the option to reassign our rights under these eight asset management and consulting contracts back to Ashford Financial Corporation to meet REIT eligible-income thresholds. On October 16, 2003, we exercised this option and reassigned our rights under these asset management and consulting contracts back to Ashford Financial Corporation until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003. As a result, we did not collect related asset management fee income in 2003 of approximately $250,000. However, the related guarantee of payment associated with these fees was extended for a like period. We may have to make a similar reassignment in the future to satisfy REIT eligible-income thresholds and, as a result, forego future asset management fee income.

      We do not intend to actively pursue additional asset management and consulting contracts in the future.

Financing

      At December 31, 2003, we had approximately $50.2 million of outstanding mortgage notes payable which includes a $16.0 million mortgage note secured by the Embassy Suites in Las Vegas, Nevada and a $6.4 million mortgage note assumed in connection with our acquisition of the Hilton Garden Inn in Jacksonville, Florida. In addition, on December 24, 2003, we closed on a $36.0 million non-recourse loan, of which approximately $27.8 million was outstanding at December 31, 2003, secured by the five hotel properties we acquired from FelCor Lodging Limited Partnership. The loan bears interest at a rate of LIBOR plus 3.25% with a 4.75% total floor, matures in four years, requires interest-only payments for the first two years, and contains a one-year extension option upon maturity, subject to an extension fee of 0.5% of the outstanding principal balance of the loan as of the extension date. On February 5, 2004, we completed a $60.0 million secured credit facility, at an interest rate equal to the prime rate plus 2.0% or LIBOR plus 3.25%, at our election, of which $49.8 million of the proceeds were funded on March 24, 2004. The credit facility matures in three years, is collateralized by seven hotel properties, is subject to certain financial and other covenants, requires an annual commitment fee of 0.45% to 0.55% on the unused portion of the facility, which is payable quarterly, and allows for an increase to $75.0 million subject to certain conditions. In addition, on April 1, 2004 we assumed a $15.7 million mortgage note in connection with our acquisition of the Sea Turtle Inn located in Jacksonville, Florida. We may continue to selectively pursue mortgage financing on individual properties and our mortgage investments. Our current policy is to limit consolidated indebtedness to no more than 60% of the aggregate investment in the hotels and debt instruments which we own. However, our board of directors may change the financing policy at any time without the approval of our stockholders.

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Legal Proceedings

      We are currently subject to litigation arising in the normal course of its business. In the opinion of management, none of these lawsuits or claims against us, either individually or in the aggregate, is likely to have a material adverse effect on our business, results of operations, or financial condition. In addition, we believe we have adequate insurance in place to cover such litigation.

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BUSINESS AND PROPERTIES

Our Existing Properties

      As of December 31, 2003, we owned fifteen properties, consisting of seven Embassy Suites, two Radisson Hotels, two Doubletree Guest Suites, one Hilton Garden Inn, one SpringHill Suites by Marriott, one Homewood Suites and one Hampton Inn. Additionally, we acquired the Marriott Residence Inn in Lake Buena Vista, Florida on March 24, 2004 and the Sea Turtle Inn in Jacksonville, Florida on April 1, 2004. We own each of these hotels in fee simple, except for the Radisson Hotel Cincinnati Riverfront, which we own part in fee simple and part pursuant to a ground lease which expires in 2070 (including all extensions) and the Doubletree Guest Suites in Columbus, Ohio, which has been built on an air rights lease above the parking garage with 42 years remaining. These properties are held for investment purposes and operated by property managers. We believe that each of these properties is adequately covered by insurance. For the 12 months ended December 31, 2003, the aggregate EBIDTA for the 11 hotels we have acquired since the completion of our initial public offering was approximately $13.9 million, and the weighted average EBITDA acquisition multiple for the 12 months ended December 31, 2003, based on the aggregate acquisition price for the 11 properties, was approximately 9.5x. For a reconciliation of EBITDA to net income, see “Selected Financial Information” in this prospectus.

      Presented in the table below is certain descriptive information regarding our existing portfolio as of, and for the year ending, December 31, 2003 and information regarding the two properties that we have acquired since December 31, 2003.

                                         
Revenue
per
Year Built/ Average Average Available
Hotel Property Location Renovated Rooms Occupancy(1) Daily Rate(2) Room(3)







Properties Acquired upon Completion of our IPO:
Embassy Suites
  Austin, TX   1998     150       70.3 %   $ 114.58     $ 80.55  
Embassy Suites
  Dallas, TX   1998     150       65.2       108.10       70.48  
Embassy Suites
  Herndon, VA   1998     150       80.9       135.71       109.79  
Embassy Suites
  Las Vegas, NV   1999     220       84.8       107.37       91.05  
Radisson Hotel
  Covington, KY   1972/2000     236       59.3       67.25       39.88  
Radisson Hotel
  Holtsville, NY   1989/2001     188       66.0       96.24       63.52  
Properties Acquired since Completion of our IPO:
Doubletree Guest Suites
  Columbus, OH   1985     194       70.8 %   $ 97.43     $ 68.98  
Doubletree Guest Suites
  Dayton, OH   1987     137       67.8       83.02       56.29  
Embassy Suites
  Flagstaff, AZ   1988     119       68.7       92.10       63.27  
Embassy Suites
  Phoenix, AZ   1981     229       68.6       96.47       66.18  
Embassy Suites
  Syracuse, NY   1990     215       71.3       106.34       75.82  
Hampton Inn
  Lawrenceville, GA   1997     86       67.1       69.54       46.66  
Hilton Garden Inn
  Jacksonville, FL   1999     119       76.3       91.38       69.72  
Homewood Suites
  Mobile, AL   1998     86       82.1       87.00       71.43  
Marriott Residence Inn(4)
  Lake Buena Vista, FL   2001     210       71.5       101.67       72.69  
Sea Turtle Inn(4)
  Atlantic Beach, FL   1972/2000     193       75.2       111.86       84.12  
SpringHill Suites by Marriott
  Jacksonville, FL   2000     102       84.3       76.37       64.38  
             
     
     
     
 
Total/ Weighted Average     2,784       71.8 %   $ 98.65     $ 70.80  
     
     
     
     
 


(1)  Average occupancy represents the number of occupied rooms during the period divided by the total number of rooms available during that period.
 
(2)  Average daily rate represents the total room revenue for the applicable period divided by the number of occupied rooms.
 
(3)  Revenue per available room represents the total room revenue per total available rooms for the applicable period and is calculated by multiplying average occupancy by the average daily rate.
 
(4)  The financial information for these properties, which we acquired after December 31, 2003, is derived from historical financial statements as of, and for the year ended, December 31, 2003.

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Properties Acquired upon Completion of our IPO

      Embassy Suites, Austin, Texas. The Embassy Suites Hotel Austin, Texas features 150 all-suite guestrooms, one restaurant and lounge, 2,800 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 169 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      The majority of demand for the hotel is commercial in nature as the hotel is located in the Arboretum Shopping and Business District, an area with varied commercial uses. The hotel is located between two major highways (the MoPac Expressway and Capital of Texas Highway) in the Northwest portion of the city of Austin. Competitors include the Renaissance Hotel, Courtyard by Marriott Northwest, Embassy Suites Northwest, Residence Inn by Marriott Northwest and Holiday Inn Northwest. Major demand generators in the area are Apple, IBM, Applied Materials, Motorola, Emerson Electric and Dell Computers.

      Embassy Suites, Dallas, Texas. The Embassy Suites Hotel Dallas features 150 all-suite guestrooms, one restaurant and lounge, 2,800 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 174 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      Most demand for the hotel is commercial in nature as the hotel is located in an area with varied commercial uses and high-end retail outlets known as the Dallas Galleria. The hotel is located near two major highways (I-635/LBJ Freeway and the North Dallas Tollway) in the northern section of the city of Dallas. Competitors include the Westin Galleria Hotel, the Marriott Quorum Hotel, the Hotel Intercontinental, the Hilton Inn & Suites, and the Wyndham Hotel. Major demand generators in the area are Accenture, AT&T, Cap Gemini, JP Morgan, Tenet Healthcare and Kinko’s.

      Embassy Suites-Dulles Airport, Herndon, Virginia. The Embassy Suites Hotel Dulles Airport features 150 all-suite guestrooms, one restaurant and lounge, 2,800 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 167 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      The hotel is located in the Dulles/ Herndon Corridor, twenty-one miles from downtown Washington, D.C., three miles from Dulles International Airport and near numerous business parks and retail centers. The hotel is located near the Dulles Tollroad (Rte. 267). Competitors include Hilton Hotel, Marriott Suites, Homewood Suites, Hyatt and Summerfield Suites. Major demand generators in the area are the Dulles International Airport, Northrop Grumman, Sprint Telecommunications, Computer Associates, Cisco Systems and AOL Time Warner.

      Embassy Suites, Las Vegas, Nevada. The Embassy Suites Hotel, Las Vegas features 220 all-suite guestrooms, one restaurant and lounge, 6,000 square feet of meeting space, one heated outdoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 180 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      The majority of demand for the hotel is both commercial and leisure in nature as the hotel is located in a varied commercial and entertainment area and is centrally located between the McCarran Airport, the University of Las Vegas (UNLV) and the Las Vegas Convention Center. The hotel is located on Swenson Street near Paradise Road. Competitors include Courtyard by Marriott Convention Center, Marriott Suites, Residence Inn Convention Center and Crowne Plaza. Major demand generators in the area are

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Bechtel, Sprint Telecommunications, Boeing, Citigroup, KPMG, Ford Motor Company, UNLV and PricewaterhouseCoopers.

      The Embassy Suites Las Vegas is subject to a mortgage loan having an outstanding balance as of March 31, 2004, of approximately $16.0 million, monthly interest-only payments of $73,333, effective interest rate of the greater of LIBOR plus 3.5%, or 5.5%, and monthly installments of principal of $20,000 commencing January 1, 2005. Prepayment of the loan following January 1, 2003 is subject to an exit fee of $160,000. The loan matures on December 31, 2006 unless the one-year extension option is exercised by the payment of an extension fee of $80,000 and certain conditions are met.

      Radisson Hotel Cincinnati Riverfront, Covington, Kentucky. The Radisson Hotel Cincinnati Riverfront features 236 guestrooms, a revolving river view restaurant on the 18th floor, a casual first-floor dining area and lobby bar, over 10,000 square feet of meeting space, one indoor pool with a retractable roof, a fitness center and a tanning salon. The hotel is 18 stories high, has four elevators, fire safety sprinklers and 120 parking spaces in a two-level underground parking garage. The hotel is currently managed by Remington Lodging under a management agreement and is operated as a Radisson hotel under a franchise license agreement with Radisson Hotels International, Inc.

      The majority of demand for the hotel is both commercial and group in nature as the hotel is located in the heart of the riverfront area in Covington, Kentucky, which houses a diversified business and residential community. Competitors include the Marriott Rivercenter Hotel, Courtyard by Marriott, Embassy Suites, Hampton Inn and Holiday Inn. Major demand generators in the area are Procter and Gamble, Fidelity Investments, Net Jets, Givaudan (a Switzerland-based global fragrance and flavor manufacturer), Sara Lee and Accenture.

      Radisson Hotel MacArthur Airport, Holtsville, New York. The Radisson Hotel MacArthur Airport features 188 guestrooms, one restaurant and lounge, 5,000 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is three stories high, has three elevators, fire safety sprinklers and approximately 200 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as a Radisson hotel under a franchise license agreement with Radisson Hotels International, Inc.

      The majority of demand for the hotel is both commercial and group in nature as the hotel is located in an area with varied commercial uses and residential neighborhoods within five miles of the Long Island MacArthur Airport (LIMA), a major regional hub servicing major commercial flights for the greater New York metropolitan area and Long Island. The hotel is located on the South Service Road of the Long Island Expressway (Route 495) at Exit 63. Competitors include the Marriott Hotel, the Wyndham Windwatch, the Holiday Inn and the Holiday Inn Express. Major demand generators in the area are LIMA, Computer Associates, Forest Laboratories, Symbol Technologies, Brookhaven National Laboratory and Stony Brook University.

Properties Acquired since Completion of our IPO

      Doubletree Guest Suites, Columbus, Ohio. The Doubletree Guest Suites features 194 suites, 2,600 square feet of meeting space, one restaurant, and an exercise facility. The property has the largest room product in the market, is 10 stories high, and has five elevators, fire safety sprinklers and 100 dedicated parking spaces within a parking garage. The hotel is on an air rights lease above the parking garage with 42 years remaining. The hotel is currently managed by Remington Lodging under a management agreement and is operated as a Doubletree Guest Suites under a franchise license agreement with Doubletree Hotel Systems, Inc.

      The property is located in Downtown Columbus in an excellent location on Front Street, directly across from the Scioto River. Competitors include: Hyatt, Courtyard, Crowne Plaza, Westin, Holiday Inn, and Adams Mark. Demand generators include: Accenture, AEP, Deloitte & Touche, Huntington Bank, IBM, NCR, and SBC Communications.

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      This hotel is located in an urban center and provides an attractive initial yield with a potential for increased returns through improved operating margins. We acquired this hotel at below estimated replacement cost.

      Doubletree Guest Suites, Dayton, Ohio. The Doubletree Guest Suites features 137 suites, 2,639 square feet of meeting space, one swimming pool, exercise facilities, and a restaurant. The hotel is three stories high, has two elevators, fire safety sprinklers and 151 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as a Doubletree Guest Suites under a franchise license agreement with Doubletree Hotel Systems, Inc.

      The majority of demand for this property is corporate in nature, as the hotel is located approximately nine miles south of downtown Dayton in a business park. The hotel is located adjacent to the 160-store Dayton mall and is the only full-service hotel in the trade area. Competitors include: Holiday Inn, Courtyard, Residence Inn, and Homewood Suites. Demand generators include: NCR, Motoman, Lexis Nexis, General Motors, and Standard Register.

      We acquired this well-located hotel at below estimated replacement cost and at a price providing an attractive initial yield. Furthermore, we expect to improve our return on this investment through planned capital improvements and improved operating margins.

      Embassy Suites, Flagstaff, Arizona. The Embassy Suites Hotel, Flagstaff features 119 all-suite guestrooms, one restaurant, 1,376 square feet of meeting space, a swimming pool, and an exercise facility. The hotel is three stories high, has three elevators, fire safety sprinklers, and 131 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      The demand for the hotel is both commercial and leisure in nature. The Flagstaff market enjoys demand from leisure guests utilizing the surrounding landscape including the Grand Canyon, university demand from University of Northern Arizona, and corporate demand. The Embassy Suites is currently the only hotel in Flagstaff offering spacious two-room suites. Major demand generators in the market include: Perot Systems, HASTC, ITEP, Northern Arizona University, and Flagstaff Medical Hospital. Competitors include: Little America, Radisson, Hilton Garden, Amerisuites, Residence Inn, and Hampton Inn & Suites.

      We acquired this hotel at a discount to estimated replacement cost, and we believe the hotel has the best location in its market. We expect that this hotel will penetrate its competitive set after planned renovations and maintain its competitive advantage as the only product in the market with two room suites.

      Embassy Suites, Phoenix, Arizona. The Embassy Suites Hotel, Phoenix features 229 all-suite guestrooms, one restaurant, 9,209 square feet of meeting space, one swimming pool, and exercise facilities. The hotel is four stories high, has five elevators, and has 240 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      The majority of demand for the hotel is both commercial and leisure in nature as the hotel is located 1.5 miles north of the Phoenix Airport at the corner of 44th Street and McDowell Road. Competitors include Marriott, Doubletree, Holiday Inn Select, Wyndham, and Residence Inn. Major demand generators in the market include: Honeywell, Raytheon, Boeing, and IBM.

      This hotel is located near the airport and was acquired at a per key cost equal to a significant discount to estimated replacement cost. We expect to improve operating results through additional capital improvements and improved operating margins.

      Embassy Suites, Syracuse, New York. The Embassy Suites, Syracuse, New York features 215 suites, 3,252 square feet of meeting space, one restaurant, an indoor swimming pool, and an exercise facility. The hotel is five stories high on 4.3 acres, has three elevators, fire safety sprinklers and 211 surface parking

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spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as an Embassy Suites under a franchise license agreement with Promus Hotels, Inc.

      The majority of demand for the hotel is commercial in nature as the hotel is located in Carrier Circle, a primary business destination in Syracuse. The hotel is only minutes away from downtown Syracuse, Syracuse University, the Carrier Dome, Carousal Center Mall, and the Empire State Expo Center. Demand generators in the market area include: Carrier Corporation, Daimler Chrysler, Lockheed Martin, and Verizon. Competitors include: Sheraton University, Holiday Inn, Residence Inn, Wyndham, and Courtyard.

      This hotel is located in a strategic site near the airport and was acquired at a per key cost well below estimated replacement cost. We believe that the relatively stable performance of this hotel prior to our acquisition reflects the opportunity for significant upside with room renovations, because the market in which this hotel is located has a significant drive-to component. We also expect to improve operating margins at this property.

      Hampton Inn, Lawrenceville, Georgia. The Hampton Inn, Lawrenceville has 86 rooms, 600 square feet of meeting space, a swimming pool, and an exercise facility. The property is three stories high, has one elevator, fire safety sprinklers and 96 surface parking spaces. The hotel is currently managed by Noble Management Group under a management agreement and is operated as a Hampton Inn under a franchise license agreement with Promus Hotels, Inc.

      The hotel sits adjacent to an office park in fast growing Gwinnett County in Northeast Atlanta. Demand for the hotel is both corporate and leisure, as area business and weekend social business take advantage of the asset. Competitors include: Comfort Suites, Holiday Inn Express & Suites, Hampton Inn & Suites, Microtel Inn & Suites, and Country Inn & Suites. Demand Generators include: Motorola, Wika Industries, Orbis, Publix-Distribution Center, and William Byrd.

      The Hampton Inn is a quality branded, well-located asset that we acquired at an attractive yield. We believe operating results at this hotel can be improved through a planned renovation of the property.

      Hilton Garden Inn, Jacksonville, Florida. The Hilton Garden Inn, Jacksonville features 119 guest rooms, 1,885 square feet of meeting space, on restaurant, an exercise facility, and a swimming pool. The hotel is five stories, has two elevators, fire safety sprinklers and 124 surface parking spaces. The hotel is currently managed by Noble Management Group under a management agreement and operated as a Hilton Garden Inn under a franchise license agreement with Hilton Inns, Inc.

      Demand for the hotel is both corporate and leisure, as the hotel sits in the heart of Deerwood Business Park off I-95 and J.T. Butler Boulevard. Competitors include: Marriott, Embassy Suites, Courtyard, Holiday Inn Express & Suites, Southpoint Hotel, Best Western, and La Quinta Inn & Suites. Demand generators include: Merrill Lynch, Blue Cross Blue Shield, Vistakon/ Johnson & Johnson, International Paper, and JP Morganchase.

      The Hilton Garden Inn is a well-located asset that we acquired at an attractive per-key cost and initial yield. We expect to increase our yield through continued market strength, renovation and continued penetration of its competitive set.

      Homewood Suites, Mobile, Alabama. The Homewood Suites, Mobile features 86 suites each equipped with a full kitchen, 500 square feet of meeting space, a swimming pool, and exercise facility. The property is three stories high, two elevators, fire safety sprinklers and 100 surface parking spaces. The hotel is currently managed by Noble Management Group under a management agreement and is operated as a Homewood Suites under a franchise license agreement with Promus Hotels, Inc.

      Demand for the hotel comes from area businesses and the adjacent Providence Hospital. The hotel is 12 miles from Downtown Mobile, and six miles from I-65 and is the only extended stay hotel near the hospital, which caters primarily to long term stays of seven days or longer. Competitors include: Residence Inn, Marriott, Hampton Inn, Courtyard, and Ramada. Demand generators include: CPSI, Providence

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Hospital, Day Trading Training Office, University of South Alabama, and Integrity Music. The hotel is currently managed by Noble Management Group under a license agreement with Hilton Hotels, Inc.

      The Homewood Suites is a quality branded asset that we acquired at below estimated replacement cost. It has an attractive initial yield and additional upside potential through continued market growth.

      Marriott Residence Inn, Lake Buena Vista, Florida. The Residence Inn, Lake Buena Vista features 210 suites with full kitchens, 3,400 square feet of meeting space, one swimming pool, and an exercise facility. The five story hotel sits on 4.5 acres, has three elevators, fire safety sprinklers, and 185 surface parking spaces. The hotel is currently managed by Remington Lodging under a management agreement and is operated as a Marriott Residence Inn under a franchise license agreement with Marriott International, Inc.

      Demand for the hotel is primarily leisure, as the asset sits one mile from the entrance to Disney World. The hotel has excellent highway visibility, and its large suites are attractive to families visiting Disney World. Competitors include: Staybridge Suites, Sierra Suites, Embassy Suites, Homewood Suites, and Hawthorn Suites. Demand Generators include Tour & Travel Groups, Employees relocating to the Orlando Area, and Disney World visitors.

      The Residence Inn is located in a premiere leisure destination with all suite rooms. We believe this hotel can improve its operating performance through operating efficiencies and increased penetration of its competitive set.

      Sea Turtle Inn, Atlantic Beach, Florida. The Sea Turtle Inn features 193 guest rooms, 8,500 square feet of meeting space, one restaurant, one swimming pool, a gift shop, and an exercise facility. The hotel sits on three acres of beach front property in Atlantic Beach, has eight stories, two elevators, fire safety sprinklers and 212 surface parking spaces. The hotel is currently managed by Remington Lodging.

      Demand for the hotel is corporate, group, and leisure. The hotel is the only full-service hotel in the immediate trade area, and benefits from its beach location and area amenities. Competitors include: Days Inn, Comfort Inn, Best Western, Quality Suites, Holiday Inn Sunspree, and Marriott Sawgrass. Demand generators include: Norfolk Navy Group, U.S. Bureau of Immigration and Customs, AHL, CSXT/ AREMA, and Venus Swimwear.

      The Sea Turtle Inn is a quality asset that we purchased at an attractive per key cost less than estimated replacement cost. Through management efficiencies, we expect to increase our return on investment.

      SpringHill Suites by Marriott, Jacksonville, Florida. The SpringHill Suites, Jacksonville has 102 suites, 450 square feet of meeting space, a swimming pool, and exercise facility. The property is five stories high, has two elevators, fire safety sprinklers and 104 surface parking spaces. The hotel is currently managed by Noble Management Group under a management agreement and is operated as a SpringHill Suites under a franchise license agreement with Marriott International, Inc.

      Demand for the hotel is both corporate and leisure, as the hotel sits in the heart of Deerwood Business Park off I-95 and J.T. Butler Boulevard. Competitors Include: Candlewood Suites, Holiday Inn Express, Courtyard, La Quinta Inn & Suites, Wellesley Inn & Suites, and Hampton Inn. Demand generators include: IPTM-Police Training, Caterpillar, Kemper/ Unitrin, Seastar Lines, and Mayo Clinic.

      The SpringHill Suites is a quality branded asset located in a business park. We acquired this property at an attractive per key cost, and we believe that the strong sub-market of this hotel will improve.

Mortgage Debt

      We have a $36.0 million non-recourse loan, with a current outstanding balance of $27.8 million, which is secured by mortgages on the Doubletree Columbus, Doubletree Dayton, Embassy Suites Flagstaff, Embassy Suites Syracuse and Embassy Suites Phoenix. The loan bears interest at LIBOR plus

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3.25%, but no less than 4.75%. The loan matures December 31, 2007 with one 12-month extension for a fee of 0.5% of the outstanding principal balance of the loan as of the date of the extension notice.

      We also have a $60.0 million secured revolving credit facility, with a current outstanding balance of $49.8 million, which is secured by mortgages on the Embassy Suites Austin, Embassy Suites Dallas, Embassy Suites Dulles, Radisson Hotel MacArthur Airport Holtsville, Hampton Inn Lawrenceville, Homewood Suites Mobile and SpringHill Suites by Marriott in Jacksonville.

      The Hilton Garden, Jacksonville is subject to a mortgage loan having an outstanding balance as of January 2004 of approximately $6.4 million, monthly principal and interest payments of $46,273, and an effective interest rate of 7.08%. The loan matures January 1, 2006, with no prepayment permitted prior to July 1, 2005 and with a 4% prepayment penalty for involuntary prepayment due to borrower default. On or after July 1, 2005, but prior to October 1, 2005, there is a 0.05% prepayment penalty.

      The Sea Turtle Inn, Atlantic Beach is subject to a mortgage loan having an outstanding balance as of April 1, 2004 of $15.7 million and an effective interest rate of 7.25%. The loan matures December 1, 2005, with prepayment prohibited prior to December 1, 2004, with a 0.5% prepayment penalty from December 1, 2004 to May 31, 2005, and with no prepayment penalty after June 1, 2005.

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Our Existing Loan Assets

      As of December 31, 2003, we owned one $10.0 million mezzanine loan, secured by the Hilton Times Square in New York City. Since then, we have acquired four additional mezzanine loans totaling $61.6 million secured by first or subordinate liens on 20 hotels located in 15 states.

      Presented in the table below is certain descriptive information regarding our existing loan portfolio as of March 31, 2004.

                       
Origination or Loan
Property Location Acquisition Date Amount Interest Rate Maturity Date






Hilton Times Square
  New York, NY   November 26, 2003   $10,000,000   LIBOR + 900 bps
2% LIBOR floor
  August 2006, with two one-year extension options (1)
Adam’s Mark
  Denver, CO   January 23, 2004   15,000,000   LIBOR + 900 bps   February 2006, with three one-year extension options(2)
17 Wyndham-owned hotels(3)
  12 states   March 4, 2004   25,000,000   LIBOR + 870 bps
2.5% LIBOR floor
  July 2005, with three one-year extension options (4)
Embassy Suites
  Boston, MA   March 19, 2004   15,000,000   LIBOR + 1025 bps
1.75% LIBOR floor
  April 2007, with two one-year extension options (5)
Northland Inn & Conference Center
  Brooklyn Park, MN   March 24, 2004   6,600,000   greater of 12% or LIBOR + 1000 bps
2% LIBOR floor
  January 2006(6)
           
       
 
Total
          $71,600,000        
           
       


(1)  Interest only payments until August 2004, with amortization thereafter based on a 25-year repayment schedule. The terms of the loan prohibit prepayment through August 2004, and thereafter the loan may be prepaid subject to decreasing prepayment premiums until February 2006, when no prepayment premium is payable.
 
(2)  Interest only payments for the first two years, with amortization during the extension period based on a 25-year repayment schedule. The terms of the loan prohibit prepayment before December 2004, and thereafter the loan may be prepaid subject to decreasing prepayment premiums until September 2005, when no prepayment premium is payable.
 
(3)  Includes nine Wyndham hotels, three Hilton hotels, three Doubletree hotels, one Crowne Plaza hotel and one Radisson hotel.
 
(4)  Payment terms are based on a 25-year repayment schedule, and the terms of the loan prohibit prepayment until July 2005, subject to certain release provisions.
 
(5)  Interest only payments through maturity. The terms of the loan prohibit prepayment through September 2005.
 
(6)  Interest only payments through maturity. At maturity, an additional interest payment will be due to reflect an accrual rate that is the greater of 15% or LIBOR plus 1300 basis points.

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     Presented below is certain descriptive information regarding the properties securing our existing loan portfolio as of, and for the year ended, December 31, 2003.

      Hilton Times Square, New York, New York. The Hilton Times Square is a 21-story, 444 room hotel located between 41st and 42nd Streets and Seventh and Eighth Avenues in New York City. It is built entirely on air rights over the existing retail structures along 42nd Street. The registration lobby is 225 feet above street level and elevator service to this lobby is provided by high speed elevators from an elevator bank on the ground floor. Entrances are on both 41st Street and 42nd Street.

      The registration desk, reception area, Above Restaurant, and Pinnacle Bar are located on the 21st floor. There is 6,000 square feet of meeting space, capable of accommodating 600 attendees, located on the 22nd floor. Rooms average 350 to 400 square feet in size. The remainder of the floors (24th through 44th floors) are guest rooms only. In room amenities include: AM/FM clock radio with CD player, 27 inch TV, high speed internet access, two dual-line phones with dataports, laptop safe, coffee maker, mini bar, iron and ironing board, terrycloth robe, and hair dryer. The hotel is operated by FC 42 LLC and DT Management Inc., an affiliate of Promus Hotel under a license agreement from Promus.

      Demand for the hotel is both corporate and leisure, as the hotel sits in the premiere entertainment destination in the United States, as well as having more than 21 million square feet of office space in the defined trade area. Competitors include: Marriott Marquis, Crowne Plaza, Renaissance, Doubletree Guest Suites, Millenium Broadway, W Times Square, Westin, Sheraton New York, and Sheraton Manhattan. Demand Generators for the hotel include: IBM, Reuters, Ernst & Young, Verizon, and Saks Incorporated.

      We hold a mezzanine loan secured by this asset in the amount of $10.0 million. Interest rate for the note is LIBOR plus 900 bps with a 2.0% LIBOR floor. The loan matures in August 2006 and has two one-year extensions.

      Adams Mark Hotel, Denver, Colorado. The Adams Mark Hotel is a 39 and 46-year old (1964 and 1957), 1,225 guestroom, full service hotel complex located within the Central Business District of Denver, Colorado. The site is a combination of almost two square city blocks and is approximately 4.36 acres in size, with frontage on the 16th Street Mall. The hotel consists of a 21-story tower with an attached four story office building and an eight story plaza with numerous one and two story attachments. The property is approximately four blocks from the Colorado Convention Center. The property sits adjacent to the popular 16th Street Mall, a pedestrian friendly city street that is lined with shopping, hotels, restaurants and office buildings. The business is primarily dependent upon group demand generated by its in-house meeting space and to a lesser extent the presence of the convention center (approximately 30% of the groups utilize the convention center).

      The property is managed by Adam’s Mark Hotel, a subsidiary of HBE Corp. and operates under the Adam’s Mark name without a franchise agreement. The entire complex is interconnected with a pedestrian bridge and a three-level below grade parking garage containing 1,120 parking spaces. The hotel has 1,225 guestrooms including 92 suites, 133,000 square feet of meeting space, which includes three ballrooms and 48 individual meeting rooms, and a 40,000 square foot office building. The Tower Building is reported to be 46-years old (constructed in 1957 and renovated in 1996) and the Plaza Building is a 39-year old remodeled department store with many new components as of 1996. The two buildings underwent extensive renovations in 1996 with a majority of building systems replaced and new square footage added to each structure. The Tower Building is schedule to undergo cosmetic guestroom renovations.

      The hotel has six restaurants including Bravo!, an Italian fine dining restaurant fronting the 16th street pedestrian mall. Other restaurants include: Supreme Court Café, Players Sorts Bar, Trattoria Colorado, Tiffany Rose lobby lounge, and Capitol Bar. Competitors include: Marriott City Center, Hyatt Regency, Westin Tabor Center, Holiday Inn, and Brown Palace Hotel.

      We hold a mezzanine loan secured by this asset in the amount of $15.0 million. Interest rate for the note is LIBOR plus 900 basis points. The loan matures in February 2006 with three one-year extensions.

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      Wyndham-Owned Hotels. We hold a $25.0 million mezzanine loan secured by 17 hotels owned or managed by Wyndham International. Interest rate for the note is LIBOR plus 870 basis points with a 2.5% LIBOR floor. The loan matures in July 2005 with three one-year extension options, and is secured by the following properties:

                             
Meeting Built/
Property Location Rooms Space (sf) Renovated





Wyndham Franklin Plaza
  Philadelphia, PA     757       51,367       1980  
Hilton Parsippany
  Parsippany, NJ     510       24,003       1981  
Crowne Plaza Ravinia
  Atlanta, GA     495       32,000       1985  
Wyndham Emerald Plaza
  San Diego, CA     436       19,335       1991  
Wyndham Buttes Resort
  Tempe, AZ     353       23,500       1986  
Wyndham Burlington
  Burlington, VT     256       16,886       1976/1986  
Wyndham NW Chicago
  Itasca, IL     408       47,783       1980  
Doubletree Hotel
  Tallahassee, FL     244       5,898       1972  
Hilton Gateway Plaza
  Newark, NJ     253       9,500       1971  
Hilton Hotel Cleveland South
  Independence, OH     191       9,433       1980  
Wyndham Bel Age
  West Hollywood, CA     200       10,886       1985  
Wyndham Hotel
  Lisle, IL     242       18,185       1987  
Wyndham Garden Las Colinas
  Irving, TX     168       2,800       1985  
Doubletree Guest Suites
  Glenview, IL     252       7,794       1988  
Radisson Hotel Towne & Country
  Houston, TX     173       3,968       1970  
Wyndham Hotel
  Indianapolis, IN     171       2,160       1990  
Doubletree Club Hotel
  Des Plaines, IL     245       2,784       1969  

      Northland Inn & Conference Center, Brooklyn Park, Minnesota. The Northland Inn & Conference Center features 231 suites, 33,000 square feet of dedicated conference and meeting space, an indoor pool and whirlpool, car rental desk, a gift shop, and an exercise room. All guest rooms are suites, averaging 535 square feet. The seven-story hotel sits on 10 acres and has two restaurants, an atrium lounge, indoor swimming pool, library/lounge, game-room, and exercise facility. The hotel has been managed by Benchmark Hospitality Group since opening.

      Demand for the asset is from local Minneapolis companies, as well as marketed to national companies on both coasts looking for a central location. The hotel has excellent visibility on I-694 in Northwest Minneapolis, a fast growing quadrant of the city. Competitors include Radisson Hotel South-Bloomington, Marriott, Radisson Hotel & Conference Center, Hilton Minneapolis North, Hotel Sofitel, and Doubletree Park Place.

      We hold a mezzanine loan secured by the asset in the original principal amount of $6.6 million. Interest rate for the note is the greater of 12% or LIBOR plus 1,000 basis points with a 2.0% LIBOR floor, and the note has an accrual feature providing for payment at maturity of interest equal to the greater of 15% or LIBOR plus 1300 basis points. The loan has a two-year term maturing on January 1, 2006.

      Embassy Suites, Boston, Massachusetts. The Embassy Suites-Boston Logan Airport features 273 suites, 9,010 square feet of meeting space, one restaurant, one lobby lounge, an indoor heated swimming pool, and an exercise facility. The asset has 10 stories and 180 parking spaces, fire safety sprinklers, and four elevators. The asset is managed by PM Hospitality Strategies, a subsidiary of Buccini/ Pollin Group under a license agreement from Hilton.

      Demand for the hotel is corporate, group, and leisure. As one of three hotels in Massport and adjacent to Boston-Logan airport, it is the only all-suite hotel in the trade area. The asset is strategically located to receive commercial demand that is both close to the airport and downtown Boston. Competitors include: Hyatt, Hilton, Holiday Inn, Wyndham, Hampton Inn, Courtyard, and Four Points. Boston

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Scientific, Computer Associates, Ernst & Young, Lockheed Martin and Merck all have offices located near this property and thus are considered demand generators for this property.

      We hold a mezzanine loan secured by the asset in the amount of $15.0 million. Interest rate for the note is LIBOR plus 1,025 basis points with a 1.75% LIBOR floor. The loan has a three-year term with two one-year extensions.

Our Acquisition Properties

      We currently have two additional hotel properties under firm purchase contracts, and we intend to acquire these properties for total consideration of approximately $32.6 million. We refer to these properties in this prospectus as the acquisition properties. We will use cash on hand to pay the $25.8 million cash component of the purchase price for these properties. In addition, we will assume approximately $6.8 million of debt secured by the SpringHill Suites by Marriott in Baltimore, Maryland. Completion of these acquisitions is subject to customary conditions, and we cannot assure you that we will be able to complete any of the acquisitions that we have under contract or that the terms we have negotiated will not change. Presented in the table below is certain descriptive information regarding our acquisition properties as of, and for the year ending, December 31, 2003.

                                                             
Revenue
Year Built per
or Average Average Available EBITDA
Hotel Property(1) Location Renovated Rooms Occupancy(2) Daily Rate(3) Room(4) EBITDA(5) Multiple(6)









Sheraton Bucks County (unaudited)
  Langhorne, PA     1986       187       68.2 %   $ 109.82     $ 74.90     $ 2,216,377       7.5x  
SpringHill Suites by Marriott
  Baltimore, MD     2001       133       74.9       104.32       78.14       1,471,758       10.8x  
                 
     
     
     
     
     
 
Total/ Weighted
                                                           
Average     320       71.0 %   $ 107.41     $ 76.24     $ 3,688,135       8.8x  
     
     
     
     
     
     
 


(1)  The financial information for these properties is derived from historical financial statements as of, and for the year ended, December 31, 2003.
 
(2)  Average occupancy represents the number of occupied rooms during the period divided by the total number of rooms available during that period.
 
(3)  Average daily rate represents the total room revenue for the applicable period divided by the number of occupied rooms.
 
(4)  Revenue per available room represents the total room revenue per total available rooms for the applicable period and is calculated by multiplying average occupancy by the average daily rate.
 
(5)  Represents earnings before interest, taxes, depreciation and amortization for the 12 months ended December 31, 2003. For a reconciliation of total EBITDA of our owned properties and these two acquisition properties to pro forma net income see “Selected Financial Information” in this prospectus.
 
(6)  EBITDA acquisition multiple represents the total acquisition price paid for the acquisition properties as a multiple of the EBITDA for the 12 months ended December 31, 2003.

     Sheraton Bucks County, Langhorne, Pennsylvania. The Sheraton Bucks County features 187 guest rooms, 12,000 square feet of meeting space, an indoor swimming pool, expanded exercise facility, one restaurant, and one lobby bar. The 15 story hotel has 470 parking spaces, fire safety sprinklers and an empty adjacent office building. We intend to use Remington Lodging to manage this hotel, under a license agreement with Starwood Hotels and Resorts.

      Demand for the hotel is group, corporate, and leisure. The asset is located in city of Langhorne approximately 1.2 miles east of the intersection of I-95 and U.S. Route One. Across the street is Sesame Place, a seasonal tourist destination, and Bucks County Business Park. Competitors include: Courtyard Langhorne, Courtyard Bensalem, Hampton Inn & Suites, Holiday Inn, Radisson, and Marriott Trenton, NJ. Demand generators for the hotel include: Rohm & Haas, Ronson, Waste Management, American Express, Lockheed Martin, and GE.

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      We expect to acquire this property at an attractive yield with opportunities for enhancement through cost controls, a planned $5.6 million renovation and the sale of the attached 52,000 square foot office building.

      SpringHill Suites by Marriott, Baltimore, Maryland. The SpringHill Suites, BWI Airport has 133 suites, 1,100 square feet of meeting space, an indoor swimming pool, and exercise facility. The property is four stories high, has two elevators and 150 surface parking spaces. The asset is managed by PM Hospitality Strategies, a subsidiary of Buccini/ Pollin Group under a license agreement from Marriott International.

      Demand for the hotel is primarily corporate and government contractors, as the hotel is located in a business park adjacent to BWI Airport. Competitors include: Candlewood Suites, Holiday Inn, Courtyard, Comfort Suites, Wingate Inn, Hilton Garden Inn, Amerisuites, Holiday Inn Express and Hampton Inn. Demand generators include: Northrop Grumman, DSS, Cadman, Southwest Airlines, UPM Pharmaceuticals, and Amerigroup. NSA and Fort Meade are approximately eight miles south of the hotel.

      The SpringHill Suites BWI Airport is subject to a mortgage loan having an outstanding balance as of March 31, 2004 of approximately $6.8 million, at an effective interest rate of 350 basis points plus the average weekly yield for 30 day commercial paper. The term of the loan is 10 years, with no prepayment permitted prior to February 27, 2006. Principal and interest are payable monthly, and the loan matures on April 1, 2011.

      This property is a quality branded asset in a strong airport market with debt assumable on favorable terms and no required Marriott product improvement plan. The BWI airport is one of the fastest growing airports in the country. We expect to purchase this asset at an attractive initial yield, and the property has the potential for future growth following the current expansion of BWI Airport.

Asset Management and Consulting Agreements

      In connection with our initial public offering, we acquired eight asset management and consulting agreements between Ashford Financial and eight hotel management companies in consideration of 1,025,000 units of limited partnership interest of our operating partnership. Under these eight agreements, Ashford Financial provided asset management and consulting services to 27 hotels managed under contract with the eight management companies. We now hold Ashford Financial’s interest under the contributed agreements and perform the services instead of Ashford Financial. Each of the eight management companies is either a wholly owned subsidiary of Remington Hotel, which is owned 100% by Messrs. Archie and Montgomery Bennett, or is 100% owned by one or both of the Bennetts. Messrs. Archie and Montgomery Bennett also have a minority ownership interest in the underlying 27 hotels for which the asset management and consulting services are provided and own 100% of Ashford Financial Corporation.

Services

      For two of the hotels subject to the asset management and consulting agreements, we directly provide specific asset management services, including the following:

  •  risk management and insurance procurement;
 
  •  assistance with preparation of tax returns and monitoring of the payment of taxes;
 
  •  negotiation of hotel franchise agreements and monitoring compliance with franchise requirements;
 
  •  negotiation of property financings and monitoring compliance with loan covenants;
 
  •  negotiation and closing of equipment leases;
 
  •  property litigation management;

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  •  assistance with preparation of annual operating and capital budgets for the hotels; and
 
  •  monitoring compliance with the management agreements.

      For the remaining 25 properties, we supervise the performance of these same services, which are provided directly by third parties or hotel employees. For all of the properties, we provide additional services such as market and feasibility analysis, capital improvement assistance, financial planning and franchise support.

Term

      The eight management companies provide services to the hotels pursuant to a separate management agreement with each of the 27 hotels. The term of each of the eight asset management and consulting agreements being contributed to our operating partnership will expire when all of the underlying management agreements expire (including all extension periods) or are terminated, unless such asset management and consulting agreement is earlier terminated pursuant to an uncured event of default. One of the management agreements expires in 2007, seven expire in 2008, seven expire in 2009, one expires in 2010, two expire in 2011, and the balance expire in 2020 or later, exercisable at the discretion of the manager. The management agreements generally have at least two renewal terms of five years each. Each of the management companies has agreed to exercise its renewal rights if it is commercially reasonable to do so.

Consulting Fee

      In exchange for performing the asset management and consulting services, we are entitled, as the assignee of Ashford Financial Corporation, to annual payments equal to 25.8% of the total amount of base and incentive fees payable to the management companies pursuant to the underlying management agreements. The remaining 74.2% of the property management fee will be payable to the actual property managers as compensation for managing the day-to-day operations of the related hotel, which services will not be provided by our company. These payments depend on revenue generated by the underlying hotels for which the asset management and consulting services will be provided, and, as a result, we cannot make any assurance that any particular amount of revenue, if any, will be generated pursuant to the contributed agreements, except the guaranteed portion of the fee described below We estimate that the fees for 2004 payable under these agreements will be approximately $1.3 million.

      If any covered property is sold at any time or upon expiration of the underlying management agreement, we will no longer derive any income from such property, thereby reducing the income we receive under the applicable asset management and consulting agreement. Any such sale or expiration of a management agreement will have no effect on the guaranteed minimum fee described below.

      Pursuant to a written guaranty agreement executed by Ashford Financial Corporation for our benefit, Ashford Financial Corporation has guaranteed that we will be paid a minimum of $1.2 million per year for each of the first five years, in consulting fees under all of the asset management and consulting agreements, for a total guarantee of $6.0 million. We will be entitled to this guaranteed minimum amount even if, during the five-year period, any of the 27 hotel properties is sold or if the hotels fail to generate sufficient revenue to result in at least $1.2 million in fees to us per year. The minimum guaranteed amount will be subject to annual adjustments based on the consumer price index. This guaranty is secured by 1,025,000 units of limited partnership interest in Ashford Hospitality Limited Partnership held by Ashford Financial Corporation. A pro rata portion of the units will be released from the pledge each year over the five-year term of the guaranty, provided the guaranteed minimum fee has been paid.

      On October 16, 2003, we exercised our option to reassign our rights under these eight asset management and consulting contracts back to Ashford Financial until January 1, 2004 to meet REIT eligible-income thresholds in 2003. As a result, we did not collect related asset management fee income in 2003 of approximately $250,000. However, the related guarantee of payment associated with these fees was extended for a like period.

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Substitution of Management Agreement

      During the five year period ending August 29, 2008, if any of the covered hotel properties is sold, the management company has the right, in its sole election, to substitute a new management agreement.

Events of Default

      Each of the following is an event of default under the asset management and consulting agreements:

  •  Our operating partnership or the management company experiences certain bankruptcy-related events.
 
  •  The management company fails to make any payment due under an asset management and consulting agreement, subject to a 10-day grace period.
 
  •  Our operating partnership or the management company does not observe or perform any other term of the asset management and consulting agreement, subject to a 30-day grace period that can be extended to a maximum of 120 days.

      If an event of default occurs and continues beyond any grace period, the non-defaulting party will have the option of terminating the applicable asset management and consulting agreement. If an asset management and consulting agreement is terminated as a result of an event of default, we will be entitled to receive any consulting fees earned and accrued through the date of termination. We will still be entitled under the guaranty agreement to a guaranty of the minimum annual $1.2 million consulting fees if an asset management and consulting agreement is terminated because of our default or the default of the management company.

Leases

      Each of our hotels is owned by our operating partnership and leased to Ashford TRS (or another taxable REIT subsidiary of ours), pursuant to a percentage lease. Additionally, we intend to lease all hotels we acquire in the future, other than pursuant to sale-leaseback transactions with unrelated third parties, to Ashford TRS, pursuant to the terms of percentage leases that are generally similar to the terms of the existing percentage leases. Our management team will negotiate the terms and provisions of each future lease, considering such things as the purchase price paid for the hotel, then current economic conditions and any other factors deemed relevant at the time.

Term

      Each of our hotel leases has a non-cancelable term of five years. The leases may be terminated earlier than the stated term if certain events occur, including specified damages to the related hotel, a condemnation of the related hotel or the sale of the related hotel, or an event of default which is not cured within any applicable cure or grace periods.

Amounts Payable Under Leases

      The leases generally provide for Ashford TRS to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any. The percentage rent for each hotel equals the sum of (i) a percentage of gross revenues up to a specified threshold, (ii) a percentage of gross revenues in excess of the specified threshold but less than a second incentive threshold, and (iii) a percentage of gross revenues in excess of the second incentive threshold. During the period from our initial public offering through December 31, 2003, we received lease payments totaling $5.3 million.

Maintenance and Modifications

      The operating partnership is required to establish and fund, in respect of each fiscal year during the terms of the leases, a reserve account, in the amount of at least 4% of gross revenues per quarter for the

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replacement and refurbishment of furniture, fixtures and equipment and other capital improvements to be made as required under the applicable hotel management agreement. To the extent that amount is not used in a particular quarter, the unused amount will be carried forward, cumulatively, to future quarters. As of December 31, 2003, our operating partnership had funded approximately $0.7 million, with $0.6 million still available for use in future quarters. Ashford TRS is responsible for all routine repair and maintenance of the hotels, and the operating partnership is responsible for non-routine capital expenditures. Any capital improvements to the hotels will be made pursuant to the capital improvement budget as approved by us.

      Ashford TRS, at its own expense, may make routine additions, modifications or improvements to the hotels, so long as any such additions, modifications or improvements do not significantly alter the character or purposes of the hotels or significantly detract from the value or operating efficiencies of the hotels. Any such additions, modifications or improvements will be subject to the terms and provisions of the leases and will become our property upon the termination of the related lease. We own substantially all personal property (other than inventory, linens and other nondepreciable personal property) not affixed to, or deemed a part of, the real estate or improvements on our hotels, unless ownership of such personal property would cause the rent under a lease not to qualify as “rents from real property” for REIT income test purposes. See “Federal Income Tax Consequences of Our Status as a REIT — Income Tests.”

Assignment and Subleasing

      Ashford TRS is not permitted to sublet any part of the hotels or assign its interest under any of the leases without our prior written consent. No assignment or subletting will release Ashford TRS from any of its obligations under the leases.

Events of Default

      Events of Default under the leases include:

  •  Ashford TRS fails to pay rent or other amounts due under the lease, provided that Ashford TRS has a 10-day grace period after receiving a written notice from us that such amounts are due and payable before an event of default would occur.
 
  •  Ashford TRS does not observe or perform any other term of a lease, provided that Ashford TRS has a 30 day grace period after receiving a written notice from us that a term of the lease has been violated before an event of default of default would occur. There are certain instances in which the 30-day grace period can be extended to a maximum of 120 days.
 
  •  Ashford TRS is the subject of a bankruptcy or reorganization event that is not discharged within 60 days.
 
  •  Ashford TRS voluntarily ceases operations of the hotels for a period of more than 30 days except as a result of damage, destruction, condemnation, or certain specified unavoidable delays.
 
  •  Ashford TRS is liquidated or dissolved or begins proceedings towards such liquidation or dissolution, or in any manner permits the sale or divestiture of substantially all of its assets.
 
  •  An event of default is declared by the franchisor under the franchise license for the related hotel because of any action or failure to act by Ashford TRS, and Ashford TRS has failed to cure the underlying default under the franchise license within 30 days thereafter.

      If an event of default occurs and continues beyond any grace period, we have all remedies available at law or in equity, including the option of terminating the related lease. If we decide to terminate a lease, we must give Ashford TRS 10 days’ written notice. Unless the event of default is cured before the termination date we specify in the termination notice, the lease will terminate on the specified termination notice. In that event, Ashford TRS will be required to surrender possession of the related hotel.

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Termination of Leases

      Our operating partnership has the right to terminate any lease with 30 days notice to Ashford TRS. If we elect to terminate a lease, we must either:

  •  pay Ashford TRS the fair market value of its leasehold interest in the remaining term of the lease; or
 
  •  offer to lease to Ashford TRS one or more substitute hotels on terms that will create a leasehold interest in such hotels with a fair market value equal to or greater than the fair market value of their remaining leasehold interest under the terminated lease.

Management Agreements

      Pursuant to the terms of a management agreement, we have engaged Remington Lodging, which is owned by Messrs. Archie and Montgomery Bennett and is an affiliate of Remington Hotel Corporation, as the property manager for 13 of our 17 hotels. Remington Lodging may also be the property manager for any future hotels that we may acquire. Our remaining four hotel properties are managed by Noble Management Group, a management company unaffiliated with us. Additionally, if we acquire the SpringHill Suites by Marriott in Baltimore, Maryland, that property will be managed by PM Hospitality Strategies, a management company unaffiliated with us.

Remington Lodging Management Agreement

      Term. The management agreement with Remington Lodging provides, as to each of our hotels, for an initial term of 10 years. The term may be renewed by Remington Lodging, at its option, subject to certain performance tests, for three successive periods of seven years each and, thereafter, a final term of four years, provided that at the time the option to renew is exercised, Remington Lodging is not then in default under the management agreement. If at the time of the exercise of any renewal period, Remington Lodging is in default, then the exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then Ashford TRS may terminate the management agreement. If Remington Lodging desires to exercise any option to renew, it must give Ashford TRS written notice of its election to renew the management agreement no less than 90 days before the expiration of the then current term of the management agreement.

      Amounts Payable. Remington Lodging receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee for each hotel is due monthly and is equal to the greater of:

  •  $10,000 (increased annually based on consumer price index adjustments); and
 
  •  3.0% of the gross revenues associated with that hotel for the related month.

      The incentive management fee, if any, for each hotel is due annually in arrears within 90 days of the end of the fiscal year and is equal to the lesser of (i) 1% of gross revenues and (ii) the amount by which the actual gross operating profit exceeds the target gross operating profit as set forth in the annual operating budget approved for the applicable fiscal year. If, however, based on actual operations and revised forecasts from time to time, it is reasonably anticipated that the incentive fee will be earned, Ashford TRS will consider payment of the incentive fee pro-rata on a quarterly basis.

      The incentive fee is designed to encourage Remington Lodging to generate higher gross operating profit at each hotel by increasing the fee due to Remington Lodging when the hotels generate gross operating profit above certain threshold levels. Any increased revenues will generate increased lease payments under the percentage leases and should thereby benefit our stockholders. From the period beginning with our initial public offering and ending on December 31, 2003, we paid $0.7 million in management fees under our management agreement.

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      Early Termination. The management agreement with Remington Lodging may be terminated as to one or more of the hotels earlier than the stated term if certain events occur, including:

  •  a sale of a hotel or a substitution of the hotel;
 
  •  the failure of Remington Lodging to satisfy certain performance standards with respect to any of the future hotels or, after the initial 10-year term, the six initial hotels;
 
  •  for the convenience of Ashford TRS;
 
  •  in the event of a casualty to, condemnation of, or force majeure involving a hotel; or
 
  •  upon a default by Remington Lodging or us that is not cured prior to the expiration of any applicable cure periods.

      Termination Fees. In certain cases of early termination of the management agreement with Remington Lodging with respect to one or more of the hotels, we must pay Remington Lodging termination fees, plus any amounts otherwise due to Remington Lodging pursuant to the terms of the management agreement. If any of the properties that we acquired in connection with our initial public offering is sold prior to August 29, 2013 we will owe termination fees not to exceed the estimated management fee that would have otherwise been due with respect to the sold property from the time of sale through August 29, 2013. If any other property that is managed by Remington Lodging is sold within 12 months of becoming subject to the Remington Lodging management agreement, we will owe termination fees equal to the estimated management fee that would have been due from the time of sale through the end of the first year of the term of the management agreement. If we were to terminate the management agreement with respect to all 13 of our hotels that are currently being managed by Remington Lodging because we elected to sell those hotels, the fee would be approximately $11.3 million. If we elect to terminate the management agreement with respect to a particular hotel, at any time, for our convenience, we must pay a termination fee to Remington Lodging equal to the product obtained by multiplying 65% of the annual management fees and nine. If any hotel being managed by Remington Lodging is the subject of a casualty and we elect not to rebuild the damaged hotel, we will owe termination fees to Remington Lodging equal to those applicable if we had sold such hotel (except that for a hotel subject to casualty after the first management year and not acquired in connection with our initial public offering, the termination fees would be the fees payable as if we terminated for convenience, if we have funds to rebuild the hotel and do not). Finally, if any hotel being managed by Remington Lodging fails to satisfy applicable performance tests, as described below, we may terminate the management agreement with respect to that hotel and pay a termination fee equal to 60% of the termination fees due if we want to terminate for convenience. The termination fees due to Remington Lodging are payable only if Remington Lodging is not then in default under its management agreement, subject to certain cure and grace periods.

      Failure to Satisfy Performance Test. The hotels we acquired in connection with our initial public offering are not subject to the performance test until after the initial 10-year term of the management agreement. If any of the other hotels managed by Remington Lodging fail to satisfy the performance test, Ashford TRS may terminate the management agreement with respect to such hotel, and we must pay to Remington Lodging a termination fee as described above. Remington Lodging will have failed the performance test with respect to a particular hotel if during any fiscal year during the term (i) such hotel’s gross operating profit margin for that fiscal year is less than 75% of the average gross operating profit margins of comparable hotels in similar markets and geographical locations, as reasonably determined by Remington Lodging and us and (ii) such hotel’s RevPAR yield penetration is less than 80% of the RevPAR yield penetration of a pre-identified competitive set (subject to adjustment from time to time) of hotels (which includes the hotel). Upon a performance test failure, Ashford TRS must give Remington Lodging two years to cure. If, within the first year, the performance test failure has not been cured, then we may, in order not to waive the failure, require Remington Lodging to engage a nationally-recognized consultant with significant hotel lodging experience reasonably acceptable to both of us, to make a determination as to whether or not another management company could have managed the hotel in a

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materially more efficient manner. If the consultant’s determination is in the affirmative, then Remington Lodging must engage such consultant to assist with the cure of such performance failure during the second year of the cure period. If the consultant’s determination is in the negative, then Remington Lodging will be deemed not to be in default under the performance test. The cost of such consultant will be shared by Ashford TRS and Remington Lodging equally. If Remington Lodging fails the performance test during the second year of the cure period and the consultant again makes a finding that another manager could manage materially better than Remington Lodging, then Ashford TRS has the right to terminate the management agreement with respect to such hotel and to pay to Remington Lodging the termination fee described above. Further, if any of the future hotels are within a cure period due to a failure of the performance test, an exercise of a renewal option will be conditioned upon timely cure of the performance test failure, and if the performance failure is not timely cured, Ashford TRS may elect to terminate the management agreement without paying any termination fee.

      New Manager; Mutual Exclusivity Agreement. Pursuant to the mutual exclusivity agreement between Remington Hotel, Remington Lodging and us, we have engaged Remington Lodging for the management, development, construction, project management and certain other services in connection with all hotels acquired by us unless our independent directors either (i) unanimously vote to engage another manager or developer, or (ii) based on special circumstances or past performance, by a majority vote elect not to engage Remington Lodging because they have determined that it would be in our best interest not to engage Remington Lodging or that another manager or developer could perform the duties materially better. If the management agreement terminates as to all of the hotels covered in connection with a default under the management agreement, the mutual exclusivity agreement will also terminate. See “Business and Properties — Mutual Exclusivity Agreement.”

      Assignment and Subleasing. Neither Remington Lodging nor Ashford TRS may assign its rights and obligations under the management agreement without the other party’s prior written consent. However, Remington Lodging may assign its rights and obligations to an affiliate of Remington Lodging that satisfies the eligible independent contractor requirements and is “controlled” by Messrs. Archie and Montgomery Bennett or their respective family partnership or trusts, the sole members of which are at all times lineal descendants of Messrs. Archie and Montgomery Bennett (including step children) and spouses. “Control” means (i) the possession of a majority of the capital stock and voting power of such affiliate, directly or indirectly, or (ii) the power to direct or cause the direction of the management and policies of such affiliate in the capacity of chief executive officer, president, chairman, or other similar capacity where they are actively engaged or involved in providing such direction or control and spend a substantial amount of time managing such affiliate. No assignment will release Remington Lodging from any of its obligations under the management agreement.

      Annual Operating Budget. The management agreement provides that not less than 45 days prior to the beginning of each fiscal year during the term of the management agreement, Remington Lodging will submit to Ashford TRS for each of the hotels, an annual operating budget setting forth in detail an estimated profit and loss statement for the next 12 months (or for the balance of the fiscal year in the event of a partial first fiscal year), including a schedule of hotel room rentals and other rentals and a marketing and business plan for each of the hotels. The budget is subject to Ashford TRS approval, which may not be unreasonably withheld. The budget may be revised from time to time, taking into account such circumstances as Ashford TRS deems appropriate or as business and operating conditions shall demand, subject to the reasonable approval of Remington Lodging. In December 2003, Remington Lodging submitted the 2004 operating budget for each of the properties we owned at that time to Ashford TRS, and Ashford TRS has approved each budget.

      Capital Improvement Budget. Remington Lodging must prepare a capital improvement budget of the expenditures necessary for replacement of furniture, fixtures and equipment and building repairs for the hotels during the following fiscal year and provide such budget to Ashford TRS for approval, which approval may not be unreasonably withheld, at the same time Remington Lodging submits the proposed annual operating budget for approval. In February 2004, Remington Lodging submitted the 2004 capital

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improvement budget for each of the properties we owned at that time to Ashford TRS, and Ashford TRS has approved each budget.

      Remington Lodging will, in accordance with the capital improvement budget, make such substitutions and replacements of or renewals to furniture, fixtures and equipment and non-routine repairs and maintenance as it deems necessary to maintain our hotels. Remington Lodging may not make any other expenditures without Ashford TRS approval, except expenditures which are required by reason of (i) any emergency, (ii) applicable legal requirements, (iii) the terms of any franchise agreement or (iv) the need to provide for the continued safe and orderly operation of our hotels. The cost of all such changes, repairs, alterations, improvements, renewals, or replacements will be paid from the capital improvement reserve or other monies advanced by Ashford TRS.

      Service and Project Management Fees. Ashford TRS has agreed to pay Remington Lodging a project management fee equal to 4% of the total project costs associated with the implementation of the approved capital improvement budget or renovation project for a hotel until the capital improvement budget and renovation project costs involve expenditures in excess of 5% of gross revenues of the related hotel, whereupon the project management fee will be 3% of total project costs in excess of the 5% of gross revenue threshold. In addition, Ashford TRS has agreed to pay Remington Lodging additional fees at then-current market rates for other services beyond managing the hotels or implementing the capital improvement budget. These other services include: (i) construction management, (ii) interior design assistance involved in implementing the capital improvement budget, (iii) managing architects and preparing drawings applicable to the implementation of the capital improvement budget and reviewing plans, drawings, shop drawings and other matters necessary for the proper implementation of the capital improvement budget, (iv) purchasing services, (v) managing freight selection and shipping processes, (vi) warehousing of goods delivered at the job site, inspection of materials delivered, and the filing of claims associated with the delivery of defective or damaged goods and (vii) supervising and overseeing of the installation of furniture, fixtures and equipment.

      The fees for the additional services will be consistent with the approved capital improvement budget and will be deemed approved by Ashford TRS unless a majority of our independent directors determine that such fees for the additional services are not in line with market rates for similar services. In the event that the majority of our independent directors determine that the fees for the additional services are not market, Ashford TRS and Remington Lodging will engage a consultant reasonably satisfactory to both parties to provide then current market information with respect to the proposed fees and a written recommendation as to whether such fees are market rates or not. If the consultant determines that such fees as proposed by Remington Lodging are market, then we agree to pay any consultant fees incurred by the consultant in making the determination. If the consultant’s recommendation does not support the fees as proposed by Remington Lodging, then Remington Lodging agrees to pay the consultant’s fees incurred in connection with the determination and may, at its election, perform such service for fees consistent with the market research and recommendation of the consultant.

      Indemnity Provisions. Remington Lodging has indemnified Ashford TRS against all damages not covered by insurance that arise from: (i) the fraud, willful misconduct or gross negligence of Remington Lodging; (ii) employee claims based on a substantial violation by Remington Lodging of employment laws or that are a direct result of the corporate policies of Remington Lodging; (iii) the knowing or reckless placing, discharge, leakage, use or storage of hazardous materials in violation of applicable environmental laws on or in any of our hotels by Remington Lodging; or (iv) the breach by Remington Lodging of the management agreement, including action taken by Remington Lodging beyond the scope of its authority under the management agreement, which is not cured.

      Except to the extent indemnified by Remington Lodging as described in the preceding paragraph, Ashford TRS has agreed to indemnify Remington Lodging against all damages not covered by insurance and that arise from: (i) the performance of Remington Lodging’s services under the management agreement; (ii) the condition or use of our hotels; (iii) certain liabilities to which Remington Lodging is subjected pursuant to the WARN Act in connection with the termination of the management agreement;

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or (iv) any claims made by an employee of Remington Lodging against Remington Lodging or Ashford TRS that are based on a violation or alleged violation of the employment laws.

      Events of Default. Events of default under the Remington Lodging management agreement include:

  •  Ashford TRS or Remington Lodging experiences a bankruptcy-related event that is not discharged within 90 days.
 
  •  Ashford TRS or Remington Lodging fails to make any payment due under the management agreement, subject to a 10-day grace period.
 
  •  Ashford TRS or Remington Lodging fails to observe or perform any other term of the management agreement, subject to a 30-day grace period. There are certain instances in which the 30-day grace period extends to 120 days.
 
  •  Remington Lodging does not qualify as an “eligible independent contractor” as such term is defined in Section 856(d)(9) of the Internal Revenue Code of 1986, as amended.

      If an event of default occurs and continues beyond any grace period, the non-defaulting party will have the option of terminating the management agreement, on 30 days’ notice to the other party. If the event of default relates solely to one or more, but not all, of the hotels, then the management agreement may only be terminated with respect to the hotels to which the event of default relates.

Noble Management Group Management Agreement

      We have a separate management agreement with Noble Management Group for the Hampton Inn in Lawrenceville, Georgia, the Hilton Garden Inn in Jacksonville, Florida, the Homewood Suites in Mobile, Alabama and the SpringHill Suites by Marriott in Jacksonville, Florida. The terms of the four agreements are substantially similar and are described below.

      Term. The management agreements with Noble Management each provide for an initial term of three years, with two successive one year renewable terms.

      Amounts Payable. With respect to each hotel managed by Noble Management, it receives a management fee equal to 3.0% of the gross revenues associated with that hotel for the related month.

      Early Termination. The management agreements with Noble Management may be terminated earlier than the stated term if certain events occur, including:

  •  a sale of a hotel;
 
  •  the failure of Noble Management to satisfy certain performance standards with respect to a hotel;
 
  •  in the event of a casualty to, condemnation of, or force majeure involving a hotel; or
 
  •  upon a default by Noble Management or us that is not cured prior to the expiration of any applicable cure periods.

      Termination Fees. In certain cases of early termination of the management agreements with Noble Management, we must pay Noble Management termination fees, plus any amounts otherwise due to Noble Management pursuant to the terms of the management agreement. Termination fees equal to the estimated management fees for the lesser of 12 months or the remaining term will be due to Noble if the management agreement is terminated for a reason other than (i) a casualty or condemnation of the property, (ii) by mutual written agreement of us and Noble Management, (iii) gross negligence, willful misconduct or fraud by Noble Management, (iv) expiration of the term or (v) sale of the property.

      Assignment and Subleasing. Neither we nor Noble Management may assign our respective rights and obligations under the management agreement without the other party’s prior written consent, except that we may assign our rights in connection with the sale of a hotel.

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      Indemnity Provisions. Noble Management has indemnified us against all damages not covered by insurance that arise from: (i) the fraud, willful misconduct or gross negligence of Noble Management; (ii) any action taken by Noble Management, its employee or agent, which is beyond the scope of the property manager’s authority under the management agreement, (iii) employee claims based on a substantial violation by Noble Management of employment laws or that are a direct result of the corporate policies of Noble Management; (iv) the knowing or reckless placing, discharge, leakage, use or storage of hazardous materials in the related hotels by Noble Management during the terms of the management agreement.

      Except to the extent indemnified by Noble Management as described in the preceding paragraph, we have agreed to indemnify Noble Management against all damages that arise from: (i) the performance of Noble Management services under the management agreement; (ii) any act or omission by us or any third party (except those for which Noble Management or the seller of the property has indemnified us); or (iii) any other occurrence related to the hotel or Noble Management’s duties under the management agreement.

Mutual Exclusivity Agreement

      We and Ashford Hospitality Limited Partnership, our operating partnership, have entered into a mutual exclusivity agreement with Remington Lodging, Remington Hotel and Messrs. Archie and Montgomery Bennett regarding lodging investment opportunities any of us identifies in the future. Messrs. Archie and Montgomery Bennett are the sole owners of Remington Hotel and Remington Lodging.

Term

      The initial term of the mutual exclusivity agreement 10 years, beginning on the date of our initial public offering. This term will automatically extend for three additional renewal periods of seven years each and a final renewal period of four years, for a total of up to 25 additional years. The agreement may be sooner terminated because of:

  •  an event of default (see “— Events of Default”),
 
  •  a party’s early termination rights (see “— Early Termination”), or
 
  •  a termination of the management agreement between Ashford TRS and Remington Lodging because of an event of default under the management agreement with respect to all properties (see “— Relationship with Management Agreement”).

Our Exclusivity Rights

      Remington Lodging, Remington Hotel and Messrs. Archie and Montgomery Bennett have granted us a first right of refusal to pursue all lodging investment opportunities identified by Remington Lodging or Remington Hotel or their affiliates (including the Bennetts), including opportunities to buy hotel properties, to buy land and build hotels, to buy existing loans on hotel properties, to make loans on hotel properties, or to otherwise invest in hotel properties. If investment opportunities are identified, Remington Hotel, Remington Lodging, or the Bennetts, as the case may be, will not pursue those opportunities (except as described below) and will give us a written notice and description of the investment opportunity, and we will have 10 business days to either accept or reject the investment opportunity. If we reject the opportunity, Remington Lodging or Remington Hotel or its respective affiliates may then pursue such investment opportunity on the same terms as offered to us. If the terms of such investment opportunity materially change, then Remington Lodging or Remington Hotel must offer the revised investment opportunity to us, whereupon we will have 10 business days to either accept or reject the opportunity on the revised terms.

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Reimbursement of Costs

      If we accept an investment opportunity from Remington Lodging or Remington Hotel, we will be obligated to reimburse Remington Lodging or Remington Hotel for the actual out-of-pocket and third-party expenses in connection with such investment opportunity, including any earnest money deposits, but excluding any finder’s fees, brokerage fee, development fee, management fee or other compensation to Remington Lodging, Remington Hotel or their affiliates. Remington Lodging or Remington Hotel must submit to us an accounting of the costs in reasonable detail.

Exclusivity Rights of Remington Lodging

      If we elect to pursue an investment opportunity that consists of buying a hotel property or buying land for the purpose of building a hotel property, or constructing hotel improvements, we will hire Remington Lodging to manage the hotel, build the hotel, construct the improvements or provide project management or other services unless our independent directors either (i) unanimously elect not to engage Remington Lodging, or (ii) by a majority vote, elect not to engage Remington Lodging because they have determined (A) special circumstances exist such that it would be in our best interest not to engage Remington Lodging for the particular hotel, or (B) based on the prior performance of Remington Lodging, another manager or developer could perform the duties materially better than Remington Lodging for the particular hotel. In return, Remington Lodging has agreed that it will provide those services to us.

Excluded Investment Opportunities

      The following are excluded from the mutual exclusivity agreement and are not subject to any exclusivity rights or right of first refusal:

  •  With respect to Remington, an investment opportunity where our independent directors have unanimously voted not to engage Remington Lodging as the manager or developer.
 
  •  With respect to Remington, an investment opportunity where our independent directors, by a majority vote, have elected not to engage Remington Lodging as the manager or developer based on their determination that special circumstances exist such that it would be in our best interest not to engage Remington Lodging with respect to the particular hotel.
 
  •  With respect to Remington, an investment opportunity where our independent directors, by a majority vote, have elected not to engage Remington Lodging as the manager or developer because they have determined that another manager or developer could perform the management or development duties materially better than Remington Lodging for the particular hotel, based on Remington Lodging’s prior performance.
 
  •  Existing hotel investments of Remington Lodging, Remington Hotel, or affiliates with any of their existing joint venture partners or property owners.
 
  •  Existing bona fide arm’s length third party management arrangements (or arrangements for other services such as project management) of Remington Lodging, Remington Hotel, or any of their affiliates with third parties other than us and our affiliates.
 
  •  Like-kind exchanges that may be made pursuant to existing contractual obligations by any of the existing joint ventures in which Remington Lodging, Remington Hotel, or their affiliates have an ownership interest.

Management or Development

      If we hire Remington Lodging to manage a hotel or construct hotel improvements, it will be pursuant to the terms of the management agreement between us and Remington Lodging. If we hire Remington Lodging to develop a hotel, the terms of the development will be pursuant to a form of development agreement that has been approved by us.

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Events of Default

      Each of the following is a default under the mutual exclusivity agreement:

  •  we, Remington Lodging or Remington Hotel experience a bankruptcy-related event;
 
  •  we fail to reimburse Remington Lodging or Remington Hotel as described under “— Reimbursement of Costs,” subject to a 30-day cure period;
 
  •  we, Remington Lodging or Remington Hotel does not observe or perform any other term of the agreement, subject to a 30-day cure period (up to a maximum of 120 days in certain instances); and
 
  •  Remington Lodging, Remington Hotel or an affiliate defaults under the terms of any document that evidences the investment opportunity accepted by us, subject to any cure periods provided in such document.

      If a default occurs, the non-defaulting party will have the option of terminating the mutual exclusivity agreement and pursuing its rights and remedies under applicable law.

Early Termination

      Remington Lodging and Remington Hotel have the right to terminate the exclusivity rights granted to us if:

  •  Montgomery Bennett is removed as our Chief Executive Officer without cause, resigns for good reason, or his employment agreement is not renewed or there is a change in control of us and Mr. Bennett resigns within 12 months after the change in control, except, in all such cases, because of his death;
 
  •  Archie Bennett, Jr. is removed as one of our directors without cause, is not renominated to serve as Chairman or resigns for good reason, or there is a change in control of us and Mr. Bennett resigns within 12 months after the change in control, except, in all such cases, because of his death;
 
  •  upon expiration of the non-competition restrictions contained in the employment agreement of Montgomery Bennett, which apply if Montgomery Bennett has resigned without good reason as our Chief Executive Officer, if his employment agreement is not renewed, or if we terminate his employment for cause, if we have not then already terminated the exclusivity rights granted to Remington Lodging and Remington Hotel as a result of his resignation or our termination of his employment for cause;
 
  •  subject to each party’s obligation to act in good faith, Montgomery Bennett is no longer our Chief Executive Officer and is subject to the non-competition restrictions in his employment agreement, and our independent directors, three times in a calendar year, in any combination set forth below:

  —  elect not to pursue an investment opportunity presented to us by Remington Lodging, Remington Hotel or their affiliates;
 
  —  elect not to engage Remington Lodging with respect to a management or development opportunity we have elected to pursue; or
 
  —  fail to close on an investment opportunity presented to us by Remington Lodging, Remington Hotel or their affiliates (and accepted by us), and the failure to close is caused by us and not the third party selling the investment opportunity; or

  •  we terminate the Remington exclusivity rights because (i) Montgomery Bennett resigns as our Chief Executive Officer without good reason or we terminate his employment for cause, (ii) Remington Lodging or Remington Hotel is no longer controlled by Archie Bennett, Jr. or Montgomery Bennett or their respective family partnership or trusts (as described below in the

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  third bullet point describing our termination rights) or (iii) we experience a change in control and terminate the management agreement with Remington Lodging.

      We may terminate the exclusivity rights granted to Remington Lodging if:

  •  Remington Lodging fails to qualify as an “eligible independent contractor” as defined in Section 856(d)(9) of the Internal Revenue Code;
 
  •  Montgomery Bennett resigns as our Chief Executive Officer without good reason or if we terminate his employment for cause;
 
  •  if either Remington Lodging or Remington Hotel is no longer “controlled” by Archie Bennett, Jr. or Montgomery Bennett or their respective family partnership or trusts, the sole members of which are at all times lineal descendants of Archie Bennett, Jr. or Montgomery Bennett (including step children) and spouses. “Control” means (i) the possession, directly or indirectly, of a majority of the capital stock and voting power of Remington Lodging and Remington Hotel, or (ii) the power to direct or cause the direction of the management and policies of Remington Lodging and Remington Hotel by serving as chief executive officer, president, chairman or similar position and spending a substantial amount of time managing Remington Lodging and Remington Hotel;
 
  •  if we experience a change in control and terminate the management agreement between us and Remington Lodging and have paid the termination fee owing to Remington Lodging under the management agreement in the event of our termination for convenience; or
 
  •  if Remington Lodging or Remington Hotel terminates the exclusivity rights granted to us pursuant to an early termination right that they have.

“Cause” and “good reason” for Montgomery Bennett and Archie Bennett, Jr., respectively, are defined in the employment agreement of Montgomery Bennett and the non-competition agreement of Archie Bennett, Jr.

Relationship with Management Agreement

      The rights provided to us and to Remington Lodging and Remington Hotel in the exclusivity agreement may be terminated if the management agreement between us and Remington Lodging terminates in its entirety because of an event of default as to all of the managed properties. A termination of Remington Lodging’s management rights with respect to one or more hotels (but not all hotels) does not terminate the mutual exclusivity agreement. A termination of the mutual exclusivity agreement does not terminate the management agreement either in part or in whole, and the management agreement would continue in accordance with its terms as to the hotels it covers, despite a termination of the mutual exclusivity agreement.

Franchise Licenses

      All of our current hotel properties are operated under franchise licenses. We anticipate that most of the additional hotels we acquire will also be operated under franchise licenses. We believe that the public perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems. Currently, 16 of our 17 hotel properties are operated under the following franchise licenses:

  •  seven Embassy Suites, a registered trademark of Hilton Hospitality, Inc.;
 
  •  two Radissons, a registered trademark of Radisson Hotels International, Inc.;
 
  •  two Doubletrees, a registered trademark of Hilton Hospitality, Inc.;
 
  •  one SpringHill Suites, a registered trademark of Marriott International, Inc.;

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  •  one Residence Inn by Marriott, a registered trademark of Marriott International, Inc.;
 
  •  one Hilton Garden Inn, a registered trademark of Hilton Hospitality, Inc.;
 
  •  one Hampton Inn, a registered trademark of Hilton Hospitality, Inc.; and
 
  •  one Homewood Suites by Hilton, a registered trademark of Hilton Hospitality, Inc.

      Our management companies, including Remington Lodging, must operate each hotel pursuant to the terms of the related franchise agreement, and must use their best efforts to maintain the right to operate each hotel as such. In the event of termination of a particular franchise agreement, our management companies must operate the effected hotels under such other franchise agreement, if any, as we enter into or obtain as franchisee.

      The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses the franchisee must comply with the franchisors’ standards and requirements with respect to:

  •  training of operational personnel;
 
  •  safety;
 
  •  maintaining specified insurance;
 
  •  the types of services and products ancillary to guest room services that may be provided;
 
  •  display of signage; and
 
  •  the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.

Employees

      At December 31, 2003, we had 17 full-time employees. The employees perform directly or through our operating partnership various acquisition, development, redevelopment, and corporate management functions. All persons employed in the day-to-day operation of our hotels are employees of the management companies engaged by our lessees, and are not our employees.

Environmental Matters

      Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal of a hazardous substance or transports a hazardous substance for disposal or treatment from property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell the affected property or to borrow using the affected property as collateral. In connection with the ownership and operation of our properties, we, our operating partnership, or Ashford TRS may be potentially liable for any such costs. In addition, the value of any lodging property loan we make or acquire would be adversely affected if the underlying property contained hazardous or toxic substances.

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      Recent Phase I environmental assessments have been obtained on each of our properties. The Phase I environmental assessments were intended to identify potential environmental contamination for which our properties may be responsible. The Phase I environmental assessments included:

  •  historical reviews of the properties,
 
  •  reviews of certain public records,
 
  •  preliminary investigations of the sites and surrounding properties,
 
  •  screening for the presence of hazardous substances, toxic substances, and underground storage tanks, and
 
  •  the preparation and issuance of a written report.

      The Phase I environmental assessments did not include invasive procedures, such as soil sampling or ground water analysis.

      The Phase I environmental assessments have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations, or liquidity, and we are not aware of any such liability. However, it is possible that these environmental assessments did not reveal all environmental liabilities. There may be material environmental liabilities of which we are unaware, including environmental liabilities that may have arisen since the Phase I assessments were completed or updated. No assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, or (ii) the current environmental condition of our properties will not be affected by the condition of properties in the vicinity of our properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to the us. To the extent that a Phase I environmental assessment reveals facts that require further investigation, we will perform a Phase II environmental assessment.

      We believe that our properties are in compliance in all material respects with all federal, state, and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters. Neither we nor, to our knowledge, any of the former owners of our properties have been notified by any governmental authority of any material noncompliance, liability, or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties.

Insurance

      We maintain comprehensive insurance, including liability, fire, workers’ compensation, extended coverage, rental loss, environmental, terrorism and, when available on reasonable commercial terms, flood and earthquake insurance, with policy specifications, limits, and deductibles customarily carried for similar properties. Certain types of losses (for example, matters of a catastrophic nature such as acts of war, earthquakes, or substantial known environmental liabilities) are either uninsurable or require such substantial premiums that the cost of maintaining such insurance is economically infeasible. Certain types of losses, such as those arising from subsidence activity, are insurable only to the extent that certain standard policy exceptions to insurability are waived by agreement with the insurer. See “Risk Factors — Risks Related to the Real Estate Industry — We may experience uninsured or underinsured losses.” We believe, however, that our properties are adequately insured, consistent with industry standards.

Depreciation

      We use the carryover basis for determining the tax basis for each of our properties contributed in connection with our initial public offering in exchange for units of partnership interests in our operating partnership. For federal income tax purposes, we depreciate all depreciable hotel property over the same remaining useful lives and using the same methods used by the party from whom we acquire the properties. Depreciation with respect to the real property components of our properties (other than land)

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generally will be computed using the straight-line method over a useful life of 15 to 39 years, for a depreciation rate ranging from 2.56% to 6.67% per year.

      Our operating partnership’s tax depreciation deductions will be allocated among the partners in accordance with their respective interests in our operating partnership (except to the extent that the partnership is required under Internal Revenue Code section 704(c) to use a method for allocating depreciation deductions that results in us receiving a disproportionately larger share of the deductions). To the extent the initial basis of our properties contributed in exchange for units in our operating partnership was less than the fair market value of those properties on the date of contribution, our depreciation deductions may be less than they otherwise would have been if our operating partnership had purchased those initial properties for cash or shares of our common stock.

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MANAGEMENT

Directors and Executive Officers

      Our board of directors consists of seven members, five of whom are “independent” directors as described below under “— Corporate Governance — Board of Directors and Committees.” All of the directors serve one year terms, expiring at the first annual meeting of stockholders (2004). The following table sets forth certain information regarding our executive officers and directors:

             
Name Age Position



Archie Bennett, Jr. 
    66     Chairman of the Board of Directors
Montgomery J. Bennett
    38     President, Chief Executive Officer and Director
Douglas A. Kessler
    43     Chief Operating Officer
David A. Brooks
    44     Chief Legal Officer and Secretary
David J. Kimichik
    43     Chief Financial Officer and Treasurer
Mark L. Nunneley
    46     Chief Accounting Officer
Martin L. Edelman
    62     Director
W.D. Minami
    47     Director
W. Michael Murphy
    58     Director
Philip S. Payne
    52     Director
Charles P. Toppino
    44     Director

      Archie Bennett, Jr. serves as the Chairman of our board of directors. Mr. Archie Bennett, Jr. is the father of Mr. Montgomery J. Bennett, who serves as our President and Chief Executive Officer. Mr. Archie Bennett, Jr. has served as the Chairman of the board of directors of Remington Hotel Corporation since its formation in 1992, and he continue to serve in this capacity presently. Mr. Bennett started in the hotel industry in 1968 with the development and management of the Holiday Inn in Galveston, Texas. Since that time, he has been involved with hundreds of hotel properties, the value of which exceeds $1 billion. He is a frequent speaker at industry conferences and is a recognized authority on the subjects of hotel development, acquisitions, sales, and management. He has been featured in national business and industry publications including National Real Estate Investor, Hotel/ Motel Management, Lodging Hospitality and Commercial Real Estate News. Mr. Bennett was a founding member of Industry Real Estate Finance Advisory Council (IREFAC) of the American Hotel & Lodging Association and served as its chairman on two separate occasions.

      Montgomery J. Bennett serves as our President and Chief Executive Officer. Mr. Montgomery Bennett also continues to serve as the President and Chief Executive Officer of Remington Hotel Corporation. Mr. Bennett joined Remington Hotel Corporation in 1992 and has served as its President since 1997. He has served in several key positions at Remington Hotel Corporation such as Executive Vice President, Director of Information Systems, General Manager, and Operations Director. He is extensively involved in the hotel industry, serving on the Urban Land Institute’s Hotel Council, Hilton Hotel Corporation’s Embassy Suites Franchise Advisory Council, Radisson Franchise Advisory Board, and the American Hotel & Lodging Association’s Industry Real Estate Finance Advisory Council (IREFAC). Mr. Bennett earned his Masters degree in Business Administration from the Johnson Graduate School of Management at Cornell University in 1989 and his Bachelor of Science degree with distinction from the School of Hotel Administration in 1988. He is a life member of the Cornell Hotel Society. Mr. Bennett is the son of Mr. Archie Bennett, Jr.

      Douglas A. Kessler serves as our Chief Operating Officer and Head of Acquisitions. From July 2002 through August 2003, Mr. Kessler served as the managing director/chief investment officer of Remington Hotel Corporation, where he was responsible for capital raising, acquisitions, and new business development. Prior to joining Remington Hotel Corporation in 2002, from 1993 to 2002, Mr. Kessler was employed at Goldman Sachs’ Whitehall Real Estate Funds, where he assisted in the management of more than $11 billion of real estate (including $6 billion of hospitality investments) involving over 20 operating

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partner platforms worldwide. During his nine years at Whitehall, Mr. Kessler served on the boards or executive committees of several lodging companies, including Westin Hotels and Resorts and Strategic Hotel Capital. He has been involved in the sale or acquisition of more than $2.5 billion of various real estate assets with public and private companies and has negotiated more than $1 billion of loans and credit facilities. Mr. Kessler co-led the formation of Goldman Sachs’ real estate investment management operations in France. Mr. Kessler has 18 years of experience in real estate acquisitions, development, sales, finance, asset management, operating companies, and fund raising. Mr. Kessler earned his Masters in Business Administration in 1988 and Bachelor of Arts from Stanford University in 1983.

      David A. Brooks serves as our Chief Legal Officer and Head of Transactions. He served as Executive Vice President and General Counsel for Remington Hotel Corporation and Ashford Financial Corporation from January 1992 until August 2003. In that capacity, Mr. Brooks was responsible for the management and oversight of the asset management department, the acquisition group, financing, development and the legal affairs of the companies. Prior to joining Remington Hotel Corporation, Mr. Brooks served as a partner with the law firm of Sheinfeld, Maley & Kay. Mr. Brooks earned his Bachelor of Business Administration in Accounting from the University of North Texas in 1981, his Juris Doctorate from the University of Houston in 1984 and his CPA from the State of Texas in 1984.

      David J. Kimichik serves as our Chief Financial Officer. Mr. Kimichik has been associated with the Remington Hotel Corporation principals for the past 20 years and was President of Ashford Financial Corporation from 1992 until August 2003. Prior to that, Mr. Kimichik served as Executive Vice President of Mariner Hotel Corporation, an affiliate of Remington Hotel Corporation, in which capacity he administered all corporate activities, including business development, financial management and operations. During his tenure with Ashford Financial Corporation, Mr. Kimichik played an integral role in the acquisition of 160 hotel assets and mortgage loans secured by hotel assets with book values in excess of $800 million. Mr. Kimichik earned his Bachelor of Science degree in Hotel Administration from Cornell University in 1982.

      Mark L. Nunneley serves as our Chief Accounting Officer. From 1992 until August 2003, Mr. Nunneley served as Chief Financial Officer of Remington Hotel Corporation. Prior to that, he served as a tax consultant at Arthur Andersen & Company and as a tax manager at Deloitte & Touche. During his career, he has been responsible for the preparation, consultation and review of federal and state income tax, franchise and sales and use tax returns for hundreds of partnerships, corporations and individuals. Mr. Nunneley is a certified public accountant and is a member of the American Institute of Certified Public Accountants, Texas Society of CPAs and Dallas Chapter of AICPAs. He earned his Master of Science in Accounting from the University of Houston in 1981 and his Bachelor of Science in Business Administration from Pepperdine University in 1979.

      Martin L. Edelman has served as a director since completion of our initial public offering in August 2003. Since 2000, Mr Edelman has served as of counsel to Paul, Hastings, Janofsky & Walker LLP, specializing primarily in real estate and corporate transactions. From 1972 to 2000, Mr. Edelman served as a partner at Battle Fowler LLP. The focus of Mr. Edelman’s practice has been complex negotiations involving acquisitions, dispositions and financing. He was involved in the legal development of participating mortgages, institutional joint ventures in real estate and joint ventures between U.S. financial sources and European real estate companies and other financial structures. Mr. Edelman has been a real estate advisor to Quantum Realty Partners/ Soros Real Estate Partners and is one of the managing partners of GSR Hotel Portfolio and Grupo Chartwell de Mexico, privately-owned hotel companies. He is a director of Cendant Incorporated, Arcadia Realty, and Capital Trust. Mr. Edelman earned his B.A. from Princeton University in 1963 and his law degree from Columbia University School of Law in 1966. Mr. Edelman served as an Officer in the United States Army from 1966 through 1969.

      W.D. Minami has served as a director since completion of our initial public offering in August 2003. Mr. Minami is currently President of Billy Casper Golf Management, Inc. From 2001 until 2002, Mr. Minami served as President of Charles E. Smith Residential. In this capacity, Mr. Minami was responsible for the development, construction, acquisition and property management of over 22,000 high-

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rise apartments in five major U.S. markets. He resigned from this position after completing the transition and integration of Charles E. Smith from an independent public company to a division of Archstone-Smith, a NYSE-listed apartment company. From 1997 to 2001, Mr. Minami worked for Charles E. Smith Residential Realty Inc., a NYSE-listed real estate investment trust, initially as Chief Financial Officer, then as Chief Operating Officer, and beginning in 2001, as President. Prior to 1997, Mr. Minami served in various financial service capacities for numerous entities, including Ascent Entertainment Group, Comsat Corporation, Oxford Realty Services Corporation and Satellite Business Systems. Mr. Minami earned his Masters of Business Administration in Finance from the University of Chicago in 1980 and his Bachelor of Arts degree in Economics, with honors, from Grinnell College in 1978.

      W. Michael Murphy has served as a director since completion of our initial public offering in August 2003. Mr. Murphy currently serves as Executive Vice President of the First Fidelity Mortgage Corporation. From 1998 to 2002 Mr. Murphy served as the Senior Vice President and Chief Development Officer of ResortQuest International, Inc., a public, NYSE-listed company and the leading provider of resort rental management services with offerings in over 40 leisure locations. At ResortQuest, Mr. Murphy was responsible for merger and acquisition activity. Prior to joining ResortQuest, from 1995 to 1997, Mr. Murphy was President of Footprints International, a company involved in the planning and development of environmentally friendly hotel properties. From 1994 to 1996, he was a Senior Managing Director of Geller & Co., a Chicago-based hotel advisory and asset management firm. Mr. Murphy earned his Bachelor of Science degree in English and Philosophy in 1967 from Memphis State University and earned a Masters of Science in English in 1969 from University of Iowa. Mr. Murphy has twice been Co-Chairman of the Industry Real Estate Finance Advisory Council (IREFAC) of the American Hotel and Lodging Association.

      Philip S. Payne has served as a director since completion of our initial public offering in August 2003. Mr. Payne is currently Chairman of the Board, Treasurer and Chief Financial Officer of BNP Residential Properties, Inc., an AMEX-listed real estate investment trust. Mr. Payne joined BT Venture Corporation, which was subsequently purchased by BNP Residential Properties, Inc., in 1990 as Vice President of Capital Market Activities and became Executive Vice President and Chief Financial Officer in January 1993. He was named Treasurer in April 1995 and a director in December 1997. From 1987 to 1990 he was a principal in Payne Knowles Investment Group, a financial planning firm. From 1983 to 1987 he was a registered representative with Legg Mason Wood Walker, Incorporated. From 1978 to 1983, Mr. Payne practiced law, and he currently maintains his license to practice law in Virginia. He received a B.S. degree from the College of William and Mary in 1973 and a J.D. degree in 1978 from the same institution. Mr. Payne serves on the board of directors of the National Multi Housing Council, is a member of the Urban Land Institute.

      Charles P. Toppino has served as a director since completion of our initial public offering in August 2003. Since 1992, Mr. Toppino has served as the Executive Vice President, founder and principal of Secured Capital Corp., a real estate investment bank with offices in Los Angeles, New York, Paris and Tokyo since 1992. Secured Capital has two main lines of business: U.S. investment banking and sales and international real estate investment activities. Mr. Toppino’s primary responsibilities include overseeing the firm’s secondary market loan sale business and the day-to-day management of the firm. In the U.S., Secured Capital specializes in the sale and financing of commercial, multi-family and hospitality real estate, and the sale of mortgage assets and the private placement of capital for real estate operating companies.

Corporate Governance — Board of Directors and Committees

      Our business is managed through the oversight and direction of our board of directors. A majority of our board of directors is “independent,” with independence being defined in the manner established by our board of directors and in a manner consistent with listing standards established by the New York Stock Exchange. Nominations for board members must be submitted to and approved by our nominating/

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corporate governance committee, and all nominees must satisfy the standards established by that committee for membership on our board.

      Our board of directors currently consists of seven directors, with two insiders and five “independent” directors. The directors are regularly kept informed about our business at meetings of the board and its committees and through supplemental reports and communications. Our non-management, independent directors meet in executive sessions without the presence of any corporate officers at least twice each year. Our board seeks to maintain high corporate governance standards.

      The board has established three committees whose principal functions are briefly described below.

Audit Committee

      Our board of directors has established an audit committee, composed of three independent directors, Messrs. Payne, Minami and Murphy. Mr. Payne serves as the chairperson of the audit committee. The audit committee assists the board in overseeing (i) our accounting and financial reporting processes; (ii) the integrity and audits of our financial statements; (iii) our compliance with legal and regulatory requirements; (iv) the qualifications and independence of our independent auditors; and (v) the performance of our internal and independent auditors. The audit committee also:

  •  has sole authority to appoint or replace our independent auditors;
 
  •  has sole authority to approve in advance all audit and non-audit engagement fees, scope and terms with our independent auditors;
 
  •  monitors compliance of our employees with our standards of business conduct and conflict of interest policies; and
 
  •  meets at least quarterly with our senior executive officers, internal audit staff and our independent auditors in separate executive sessions.

The specific functions and responsibilities of the audit committee are set forth in the audit committee charter. Our board of directors has determined that both Messrs. Payne and Minami qualify as “audit committee financial experts” under the current Securities and Exchange Commission regulations, and Mr. Murphy satisfies the financial literacy requirements for audit committee members under the New York Stock Exchange rules.

Compensation Committee

      Our board of directors has established a compensation committee, composed of three independent directors, Messrs. Murphy, Payne and Toppino. Mr. Murphy serves as the chairperson of the compensation committee. The principal functions of the compensation committee are to:

  •  evaluate the performance of our senior executives;
 
  •  review and approve the senior executive compensation plans, policies and programs;
 
  •  consider the design and competitiveness of our compensation plans;
 
  •  administer and implement changes to our stock plan under the terms of the plans; and
 
  •  produce an annual report on executive compensation for inclusion in our proxy statement.

      The committee also reviews and approves corporate goals and objectives relevant to chief executive officer compensation, evaluates the chief executive officer’s performance in light of those goals and objectives, and establishes the chief executive officer’s compensation levels based on its evaluation. The committee has the authority to retain and terminate any compensation consultant to be used to assist in the evaluation of chief executive officer or senior executive compensation.

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Nominating/ Corporate Governance Committee

      Our board of directors has established a nominating/corporate governance committee, composed of two independent directors, Messrs. Edelman and Murphy. Mr. Edelman will serve as the chairperson of the nominating/corporate governance committee. The nominating/corporate governance committee is responsible for seeking, considering and recommending to the board qualified candidates for election as directors and recommending a slate of nominees for election as directors at the annual meeting. It also periodically prepares and submits to the board for adoption the committee’s selection criteria for director nominees. It reviews and makes recommendations on matters involving general operation of the board and our corporate governance, and it annually recommends to the board nominees for each committee of the board. In addition, the committee annually facilitates the assessment of the board of directors’ performance as a whole and of the individual directors and reports thereon to the board. The committee has the sole authority to retain and terminate any search firm to be used to identify director candidates. Stockholders wishing to recommend director candidates for consideration by the committee can do so by writing to our secretary at our corporate headquarters in Dallas, Texas, giving the candidate’s name, biographical data and qualifications. The secretary will, in turn, deliver any stockholder recommendations for director candidates prepared in accordance with our bylaws to the nominating/corporate governance committee. Any such recommendation must be accompanied by a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as director.

Compensation Committee Interlocks and Insider Participation

      The members of the compensation committee of the board of directors will be independent directors. None of these directors, or any of our executive officers serves as a member of a board of directors or any compensation committee of any entity that has one or more executive officers serving as a member of our board.

Director Compensation

      Each of our independent directors who does not serve as the chairman of one of our committees is paid a director’s fee of $20,000 per year. Each director who serves as a committee chairman, other than our audit committee chairman, is paid a director’s fee of $25,000. The director who serves as our audit committee chairman is paid a director’s fee of $35,000 per year. Each director will also be paid of fee of $2,000 for each board or committee meeting that he or she attends, except that the chairman of each committee will be paid a fee of $3,000 for each committee meeting that he or she attends. Each director will also be paid a fee of $500 for each telephone board or committee meeting that he or she attends. In addition, we will reimburse all directors for reasonable out-of-pocket expenses incurred in connection with their services on the board of directors.

      On the date of the first meeting of the board of directors following each annual meeting of stockholders at which an independent director is reelected to our board of directors, such independent director will receive restricted stock grants of 2,000 shares of our common stock. These restricted stock grants will be fully vested immediately.

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Executive Compensation

      Set forth below are the annual cash compensation and restricted stock grants paid to our Chairman of the Board and our four other most highly compensated executive officers in 2003 and the amounts we expect such individuals to be paid in 2004:

                                 
Long-Term
Compensation
Annual Compensation

Restricted
Name and Position Year Salary Bonus Stock Granted





Archie Bennett, Jr., Chairman
    2004     $ 200,000 (1)   $ 0     $ 109,305 (4)
      2003       67,692 (2)     0       1,990,602 (5)
 
Montgomery Bennett, President and Chief Executive Officer
    2004       425,000 (1)     318,750 (3)   $ 256,086 (4)
      2003       149,044 (2)     141,667 (2)     1,990,602 (5)
 
Douglas Kessler, Chief Operating Officer
    2004       300,000 (1)     150,000 (3)   $ 124,920 (4)
      2003       106,736 (2)     75,000 (2)     947,079 (5)
 
David Brooks, Chief Legal Officer
    2004       260,000 (1)     78,000 (3)   $ 73,911 (4)
      2003       93,198 (2)     52,000 (2)     343,656 (5)
 
David Kimichik, Chief Financial Officer
    2004       260,000 (1)     78,000 (3)   $ 73,911 (4)
      2003       88,000 (2)     52,000 (2)     645,345 (5)


(1)  Amounts given for 2004 are annualized projections for the year ending December 31, 2004 based on employment agreements which commenced August 29, 2003 and expire December 31, 2006 (except for Mr. Montgomery Bennett’s employment agreement which expires December 31, 2007).
 
(2)  Represents salaries, bonuses or, in the case of Mr. Archie Bennett, director’s fees, for the period August 29, 2003 (the date of our initial public offering) through December 31, 2003.
 
(3)  Represents minimum guaranteed bonus amounts based on employment agreements. Mr. Bennett is eligible for an additional bonus of up to $212,500; Mr. Kessler is eligible for an additional bonus of up to $150,000; Messrs. Brooks and Kimichik are each eligible for an additional bonus of up to $156,000; in each case at the discretion of our board.
 
(4)  Shares of restricted common were granted effective March 15, 2004 and will vest 1/3 annually beginning March 15, 2005. The value of the awards described above is based on the last reported sales price of our common stock on the New York Stock Exchange on March 15, 2004. Dividends will be paid on all shares granted, whether or not such shares are fully vested. This table does not reflect as compensation the dividends to be paid on unvested shares on April 15, 2004.
 
(5)  Shares of restricted common were issued upon the completion of our initial public offering and will vest 1/3 annually beginning with the first anniversary of our initial public offering. Because the awards noted above were issued as of our the date of our initial public offering, the value of the awards described above is based on the initial public offering price of our common stock. Dividends will be paid on all shares granted, whether or not such shares are fully vested.

Employment Agreements

      We have employment agreements with each of Messrs. Montgomery Bennett, Kessler, Brooks and Kimichik. The employment agreements provide for Mr. Bennett to serve as our President and Chief Executive Officer, Mr. Kessler to serve as our Chief Operating Officer, Mr. Brooks to serve as our Chief Legal Officer and Secretary and Mr. Kimichik to serve as our Chief Financial Officer and Treasurer. These employment agreements require Messrs. Kessler, Brooks and Kimichik to devote substantially full-time attention and time to our affairs, but also permit them to devote time to their outside business interests consistent with past practice. Mr. Bennett’s employment agreement allows him to continue to act as Chief Executive Officer and President of Remington Hotel and to act as an executive officer of the general partner of Remington Lodging and other affiliates, provided his duties for Remington Hotel and Remington Lodging and other affiliates do not materially interfere with his duties to us.

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      Each of the employment agreements has an initial term ending December 31, 2006 (December 31, 2007 in the case of Mr. Bennett) and is subject to automatic one-year renewals at the end of the initial term, unless either party provides at least six months’ notice of non-renewal.

      The employment agreements provide for:

  •  an annual base salary of $425,000 for Mr. Bennett, $300,000 for Mr. Kessler, $260,000 for Mr. Brooks and $260,000 for Mr. Kimichik, subject to increase in accordance with our normal executive compensation practices;
 
  •  eligibility for annual cash performance bonuses under our incentive bonus plans;
 
  •  director’s and officer’s liability insurance coverage;
 
  •  participation in other incentive, savings and retirement plans applicable generally to our senior executives; and
 
  •  medical and other group welfare plan coverage and fringe benefits provided to our senior executives.

      Mr. Bennett’s annual bonus ranges from 75% to 125% of his base salary, and will be at least 75% of his base salary for the first four years of his employment term. Mr. Kessler’s annual bonus ranges from 50% to 100% of his base salary, and will be at least 50% of his base salary for the first three years of his employment term. Mr. Brooks’ annual bonus ranges from 30% to 90% of his base salary, and will be at least 30% of his base salary for the first three years of his employment term. Mr. Kimichik’s annual bonus ranges from 30% to 90% of his base salary, and will be at least 30% of his base salary for the first three years of his employment term.

      The employment agreements provide that, if an executive’s employment is terminated by the executive for “good reason” or after a “change of control” (each as defined in the applicable employment agreement), or by us without cause during the initial term of his employment agreement, the executive will be entitled to accrued and unpaid salary to the date of such termination and any unpaid incentive bonus from the prior year plus the following severance payments and benefits, subject to his execution and non-revocation of a general release of claims:

  •  a lump-sum cash payment equal to two times (three times in the case of Mr. Bennett) of the sum of his then-current annual base salary plus average bonus over the prior three years;
 
  •  pro-rated payment of the incentive bonus;
 
  •  all restricted stock held by such executive will become fully vested; and
 
  •  health benefits for one year (18 months in the case of Mr. Bennett) following the executive’s termination of employment at the same cost to the executive as in effect immediately preceding such termination, subject to reduction to the extent that the executive receives comparable benefits from a subsequent employer.

      If the executive is terminated by us without cause after the initial term of his employment agreement or we do not renew his agreement, then the executive will receive all of the benefits above except that his lump sum cash payment will be equal to one times the sum of his then-current annual base salary plus his average bonus over the prior three years.

      In addition, if the severance payment to any executive is deemed to be a “golden parachute payment” under § 280G of the Internal Revenue Code, then such executive would also be entitled to a tax gross-up payment to cover his excise tax liability under § 280G.

      Each employment agreement also provides that the executive or his estate will be entitled to certain severance benefits in the event of his death or disability.

      Mr. Bennett’s employment agreement also contains standard confidentiality, non-compete and non-solicitation provisions. The confidentiality provisions will apply during the term of the employment agreement and for a period of two years thereafter. The non-compete and non-solicitation provisions will

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apply during the term of his employment agreement, and if Mr. Bennett resigns without cause, for a period of one year thereafter, or if Mr. Bennett is removed for “cause” (as defined in his employment agreement), for a period of 18 months thereafter. In the case of Mr. Bennett’s resignation without cause, in consideration for his non-compete, Mr. Bennett will receive a cash payment, to be paid in equal monthly installments during the one-year non-compete period, equal to the sum of his then-current annual base salary plus average bonus over the prior three years. Mr. Bennett’s non-compete period will terminate if Remington Lodging terminates our exclusivity rights under the mutual exclusivity agreement between Remington Lodging and us.

      The other executives’ employment agreements also contain standard confidentiality, non-compete and non-solicitation provisions. The non-compete and non-solicitation provisions apply during the terms of their employment agreement, and if any of them resigns without cause during the initial three-year term of his agreement, for a period of one year thereafter. In the case of such executive’s resignation without cause, in consideration for his non-compete, he will receive a cash payment, to be paid in equal monthly installments during the one-year non-compete period, equal to the sum of his then-current annual base salary, plus average bonus over the prior three years. In the event either Mr. Kessler, Mr. Brooks or Mr. Kimichik’s employment is terminated for “cause” (as defined in the respective employment agreement), or he resigns without cause after the initial three-year term of his employment agreement, he will not be subject to a non-compete and will not be entitled to any cash payment other than accrued and unpaid base salary to the date of his separation from us.

Non-Compete Agreement

      We have entered into a non-compete agreement with Mr. Archie Bennett, Jr. The non-compete agreement provides for Mr. Bennett to serve as our Chairman. The non-compete agreement has an initial term ending December 31, 2006 and is subject to automatic one-year extensions thereafter, in each case, unless either party provides at least six months’ notice of non-renewal. Mr. Bennett’s non-compete agreement allows him to continue to act as Chairman of Remington Hotel and Remington Lodging provided his duties for Remington Hotel do not materially interfere with his duties to us.

      The non-compete agreement provides for:

  •  an annual director’s fee of $200,000, of which $25,000 may be paid in the form of shares of our common stock, at the discretion of our compensation committee;
 
  •  director’s and officer’s liability insurance coverage; and
 
  •  participation in other incentive, savings and retirement plans, in the discretion of our compensation committee.

      The non-compete agreement provides that, if Mr. Bennett is removed as Chairman without cause or is not re-nominated to serve as Chairman during the initial term of the agreement or terminates his directorship for “good reason” or after a “change of control” (defined in the non-compete agreement), Mr. Bennett will be entitled to the following severance payments and benefits, subject to his execution and non-revocation of a general release of claims:

  •  a lump-sum cash payment equal to two times of the sum of his then-current annual director’s fee plus average bonus over the prior three years;
 
  •  all restricted stock held by him will become fully vested; and
 
  •  health benefits for 18 months following his leaving the board at the same cost to him as in effect immediately preceding such termination, subject to reduction to the extent that he receives comparable benefits from a subsequent company.

      If Mr. Bennett is removed as Chairman without cause after the initial term of his non-compete agreement, or if we do not renew his agreement, then Mr. Bennett will receive all of the benefits described

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above except that his lump sum cash payment will be equal to one times the sum of his then-current annual director’s fee plus his average bonus over the prior three years.

      In addition, if the severance payment to Mr. Bennett is deemed to be a “golden parachute payment” under § 280G of the Internal Revenue Code, then Mr. Bennett would also be entitled to a tax gross-up payment to cover his excise tax liability under § 280G.

      The non-compete agreement provides that Mr. Bennett or his estate will be entitled to certain severance benefits in the event of his death or disability.

      The non-compete agreement also contains standard confidentiality provisions and non-compete and non-solicitation provisions. The confidentiality provisions will apply during the term of the non-compete agreement and for a period of two years thereafter. The non-compete and non-solicitation provisions will apply during the term of the non-compete agreement and for a one year period thereafter if Mr. Bennett resigns without cause or is removed for “cause” (as defined in his non-compete agreement). In the case of Mr. Bennett’s resignation without cause, in consideration for his non-compete, he will receive a cash payment equal to the sum of his then-current annual director’s fee plus average bonus over the prior three years. Mr. Bennett’s non-compete period will terminate if Remington Lodging terminates our exclusivity rights under the mutual exclusivity agreement between Remington Lodging and us.

The Stock Plan

      We have established a stock plan for the purpose of encouraging our employees, non-employee directors and other persons who provide advisory or consulting services to us (i) to acquire or increase their equity interests in our company to give an added incentive to work toward its growth and success, and (ii) to allow us to compete for services of the individuals needed for the growth and success of the company. The stock plan authorizes (i) the purchase of common stock for cash at a purchase price to be decided by the compensation committee, but not more than the fair market value per share of such common stock purchased on the date of such purchase, and (ii) the grant of:

  •  nonqualified stock options to purchase common stock;
 
  •  incentive options to purchase common stock;
 
  •  unrestricted stock;
 
  •  restricted stock;
 
  •  phantom stock;
 
  •  stock appreciation rights; and
 
  •  other stock or performance-based awards.

      As of the date of this prospectus, there were approximately 23 officers, directors and employees of ours eligible to participate in the stock plan.

      The aggregate number of shares of common stock that may be issued under the stock plan may not exceed 1,531,681 shares, of which 784,717 have already been issued. No more than 450,000 shares may be granted during any one calendar year to any one participant. In the event that any of the outstanding shares of our common stock are changed into or exchanged for a different number or kind of our shares or securities by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the plan’s share authorization limits and restrictions will be adjusted proportionately, and the compensation committee may adjust awards to preserve the benefits or potential benefits of outstanding awards. If an outstanding award expires or terminates before the end of the period during which awards may be granted, the unissued, underlying shares will be available for other awards under the stock plan.

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      The stock plan is administered by the compensation committee of our board of directors. With respect to any grant or award to any individual covered by Section 162(m) of the U.S. tax code which is intended to be performance-based compensation, the compensation committee will consist solely of two or more “outside directors” as described in such Section 162(m) of the U.S. tax code.

      The compensation committee will select the participants who are granted any award, and employees, non-employee directors and other persons who provide advisory or consulting services to us are eligible, except that only employees are eligible to receive an award of an incentive stock option.

      Under Section 162(m) of the U.S. tax code, a public company may not deduct compensation in excess of $1 million paid to any of its chief executive officer and the four next most highly paid executive officers. The stock plan is designed so that awards may comply with the performance-based compensation exception to Section 162(m). The grant of awards that are conditioned on the performance goals described in the stock plan will be excluded from the calculation of annual compensation for purposes of Section 162(m) and will be fully deductible.

      The compensation committee may condition any award upon the achievement of any one or more performance goals established solely on the basis of one or more of the following business criteria:

  •  operating income;
 
  •  return on net assets;
 
  •  return on assets;
 
  •  return on investment;
 
  •  return on equity;
 
  •  pretax earnings;
 
  •  pretax earnings before interest, depreciation, and amortization;
 
  •  pretax operating earnings after interest expense and before incentives, service fees, and extraordinary or special items;
 
  •  total stockholder return;
 
  •  earnings per share;
 
  •  increase in revenues;
 
  •  increase in cash flow;
 
  •  increase in cash flow return;
 
  •  economic value added;
 
  •  gross margin;
 
  •  net income;
 
  •  debt reduction; or
 
  •  any of the above goals determined on an absolute or relative basis or as compared to the performance of a published or special index.

      After the end of the performance period (which shall not be less than one or more than three years), the compensation committee may not increase any performance award designed to comply with Section 162(m) of the U.S. tax code. If an award is made on such basis, the compensation committee must establish goals not later than 90 days after the beginning of the period for which such performance goal relates. Any payment of an award based upon performance goals will be conditioned on the written certification of the compensation committee in each case that the performance goals and any other material conditions were satisfied.

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      The stock plan provides for the grant of (i) options intended to qualify as incentive stock options under Section 422 of the U.S. tax code and (ii) options that are not intended to so qualify. The principal difference between incentive stock options and other options is that a participant generally will not recognize ordinary income at the time an incentive stock option is granted or exercised, but rather at the time the participant disposes of the shares acquired under the incentive stock option. In contrast, the exercise of an option that is not an incentive stock option generally is a taxable event that requires the participant to recognize ordinary income equal to the difference between the shares’ fair market value and the option price. The employer will not be entitled to a federal income tax deduction with respect to incentive stock options except in the case of certain dispositions of shares acquired under the options. The employer may claim a federal income tax deduction on account of the exercise of an option that is not an incentive stock option equal to the amount of ordinary income recognized by the participant. Options may be exercised in accordance with requirements set by the compensation committee. The maximum period in which an option may be exercised will be fixed by the compensation committee but cannot exceed 10 years. Options generally will be nontransferable except in the event of the participant’s death, but the compensation committee may allow the transfer of options to members of the participant’s immediate family, a family trust or a family partnership.

      Consistent with the terms of the stock plan, the compensation committee will prescribe the terms of each award of any incentive stock option. No participant may be granted incentive stock options that are first exercisable in a calendar year for shares of common stock having a total fair market value (determined as of the option grant), exceeding $100,000. The exercise price for each incentive stock option cannot be less than each such option share’s fair market value on the date the incentive stock option is granted; provided that a grant of an incentive stock option to any employee who is a 10% stockholder shall have an exercise price of not less than 110% of the such incentive stock option share’s fair market value on the date the incentive stock option is granted. No reload stock option (the right to receive a new option to purchase a share upon the exercise and payment of the exercise price for the original option) may be granted with respect to any incentive stock option. Incentive options must be exercised within three months after the optionee ceases to be an employee for any reason other than death or disability and within one year in the event of death or disability.

      Consistent with the terms of the stock plan, the compensation committee will prescribe the terms of each award of a nonqualified option. The option price for each nonqualified option cannot be less than each such option share’s fair market value on the date the nonqualified option is granted. The option price may be paid in cash or, with the compensation committee’s consent, by surrendering common stock, a combination of cash and common stock or in installments.

      Unless the compensation committee provides otherwise, all grants of restricted stock will be subject to vesting, meaning that we will have the right to repurchase the stock for the amount paid, if any, by the participant. Unless the compensation committee provides otherwise, this repurchase right will lapse (i.e., the shares will vest) with respect to one-third of the restricted stock on the first anniversary of the date of grant and on each of the following two anniversaries of the date of grant, provided the participant remains in our service as an employee, director or consultant. Any unvested shares will vest if we terminate the participant’s service without cause, or the participant terminates his or her service with us for good reason. In addition, any unvested shares will vest if the participant’s service is terminated for any reason within one year of a change in control or due to death or disability of the participant.

      A stock appreciation right will be exercisable at such times and subject to such conditions as may be established by the compensation committee. The amount payable upon the exercise of a stock appreciation right may be settled in cash, by the issuance of common stock or a combination of cash and common stock.

      Consistent with the terms of the stock plan, the compensation committee will establish the terms of awards of bonus stock, phantom stock, options, stock appreciation rights and other stock or performance-based awards. These awards may also be subject to vesting requirements as determined by the compensation committee, which may include completion of a period of service or attainment of

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performance objectives. Awards may also vest upon termination without cause or by the participant with good reason, termination in connection with a change in control, death, disability or such other events as the compensation committee shall determine.

      The board of directors may amend or terminate the stock plan at any time, but an amendment will not become effective without the approval of our stockholders if it increases the number of shares of common stock that may be issued under the stock plan (other than changes to reflect certain corporate transactions and changes in capitalization) or otherwise materially revises the terms of the stock plan. No amendment or termination of the stock plan will affect a participant’s rights under outstanding awards without the participant’s consent. If not sooner terminated as described above, the stock plan will terminate on the third anniversary of the date of approval by our shareholders, and no new awards may be granted after the termination date. Awards made before the plan’s termination will continue in accordance with their terms.

POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES

      The following is a discussion of our policies with respect to certain activities, including financing matters and conflicts of interest. These policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Any change to any of these policies by our board of directors, however, would be made only after a review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, our board of directors believes that it is advisable to do so in our and our stockholders’ best interests.

Disposition Policy

      Although we have no current plans to dispose of properties or other assets within our portfolio, we will evaluate our asset portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs, we may sell investments opportunistically and use the proceeds of any such sale for debt reduction or additional acquisitions. We will utilize several criteria to determine the long-term potential of our investments. Investments will be identified for sale based upon management’s forecast of the strength of the related cash flows as well as their value to our overall portfolio. Our decision to sell an investment often will be predicated upon the projected cash flow, size of the hotel, strength of the franchise, property condition and related costs to renovate the property, strength of market demand, projected supply of hotel rooms in the market, probability of increased valuation and geographic profile of the hotel. We may also acquire and sell other lodging-related assets opportunistically based upon management’s forecast and review of the performance of our overall portfolio and management’s assessment of changing conditions in the investment and capital markets. If we sell a property, other than a foreclosure property, held for sale to customers in the ordinary course of business, our gain from the sale will be subject to a 100% penalty tax. See “Federal Income Tax Consequences of Our Status as a REIT — Income Tests — Prohibited Transactions.”

Financing Policies

      We currently have $115.7 million of outstanding mortgage debt, secured by 16 properties, including a $60.0 million revolving credit facility with a current outstanding balance of $49.8 million. We intend to use our borrowing power to leverage future investments; however, we do not intend to exceed 60% leverage on the aggregate investment in the hotels and debt instruments which we own, on a gross assets basis. As of March 31, 2004, our current leverage is 36.4% of total investments. When evaluating our future level of indebtedness and when making decisions regarding the incurrence of indebtedness, our board of directors will consider a number of factors, including:

  •  the purchase price of our investments to be acquired with debt financing;

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  •  the estimated market value of our investments upon refinancing; and
 
  •  the ability of particular investments, and our company as a whole, to generate cash flow to cover expected debt service.

      We may incur additional debt in the form of purchase money obligations to the sellers of properties, or in the form of publicly or privately placed debt instruments or financing from banks, institutional investors, or other lenders. Any such indebtedness may be unsecured or may be secured by mortgages or other interests in our properties or mortgage loans. This indebtedness may be recourse, non-recourse or cross-collateralized and, if recourse, that recourse may include our general assets and, if non-recourse, may be limited to the particular investment to which the indebtedness relates. In addition, we may invest in properties or loans subject to existing loans secured by mortgages or similar liens on the properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings for working capital, to:

  •  purchase additional interests in partnerships or joint ventures in which we participate;
 
  •  refinance existing indebtedness;
 
  •  finance the origination or purchase of mortgage investments; or
 
  •  finance acquisitions, expansion or redevelopment of existing properties or development of new properties.

      We may also incur indebtedness for other purposes when, in the opinion of our board of directors, it is advisable to do so. In addition, we may need to borrow to meet the taxable income distribution requirements under the Internal Revenue Code if we do not have sufficient cash available to meet those distribution requirements.

Equity Capital Policies

      Subject to applicable law and the requirements for listed companies on the New York Stock Exchange, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Existing stockholders will have no preemptive right to additional shares issued in any offering, and any offering might cause a dilution of investment. See “Description of Capital Stock.” We may in the future issue common stock in connection with acquisitions. We also may issue units of partnership interest in our operating partnership in connection with acquisitions of property.

      We may, under certain circumstances, purchase common stock in the open market or in private transactions with our stockholders, if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT, for so long as the board of directors concludes that we should remain a REIT.

      In the future we may institute a dividend reinvestment plan, or DRIP, and a related stock purchase plan which would allow our stockholders to acquire additional common stock by automatically reinvesting their cash dividends. Shares would be acquired pursuant to the plan at a price equal to the then prevailing market price, without payment of brokerage commissions or service charges. Stockholders who do not participate in the plan will continue to receive cash dividends as declared.

Conflict of Interest Policy

      We are subject to certain conflicts of interest resulting from our relationship with Remington Hotel, Remington Lodging and Ashford Financial, all of which are ultimately owned by Archie Bennett, Jr., our

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Chairman, and his son, Montgomery Bennett, our President and Chief Executive Officer. In addition to their ownership interest, Archie Bennett, Jr., will be the chairman of Remington Hotel’s board of directors and Montgomery Bennett will be its President, Chief Executive Officer and director. We have entered into numerous transactions with Remington Hotel, Remington Lodging, and Ashford Financial, including the following:

  •  We have engaged Remington Lodging as the property manager for 13 of our 17 hotel properties. Subject to the right of our independent directors to hire a third-party manager under certain circumstances, we will also engage Remington Lodging as the property manager for any future hotel properties that we may acquire.
 
  •  Subject to certain limited exceptions, we have the right of first refusal to purchase any investments identified by Remington Hotel that satisfy our investment criteria.
 
  •  Subject to the right of our independent directors to hire a third-party manager under certain circumstances, we will hire Remington Hotel, on a fee basis, for any future development of new properties and for providing project management and other services.
 
  •  Remington Hotel Corporation may from time to time provide other services on the hotels it manages for a fee, subject to the determination by a majority of our independent directors that the fees charged by Remington Hotel Corporation are not comparable to then-current market rates for such services.
 
  •  In connection with our initial public offering, Ashford Financial assigned to us eight asset management and consulting agreements, pursuant to which we provide asset management and consulting services to hotels under management contracts with management companies owned by Remington Hotel or Messrs. Archie and Montgomery Bennett. Messrs. Archie and Montgomery Bennett also own minority interests in the hotels receiving the asset management and consulting services.

      Please refer to the more detailed description of our agreements with Remington Hotel, Remington Lodging and Ashford Financial contained in “Business and Properties — Asset Management and Consulting Agreements,” “— Management Agreement” and “— Mutual Exclusivity Agreement.” Please also see “Risk Factors — Risks Related to Our Business.”

      Because we are subject to various conflicts of interest arising from our relationship with Remington Hotel and other parties, to mitigate any potential conflicts of interest, our charter contains a requirement that any transaction or agreement involving us, our wholly-owned subsidiaries or our operating partnership and a director or officer or an affiliate of any director or officer requires the approval of a majority of the disinterested directors. Additionally, our board of directors has adopted a policy that requires all management decisions related to the management agreement with Remington Lodging and all decisions with respect to enforcement of the contribution or sale agreements related to the acquisition of the properties we acquired from entities owned or controlled by Messrs. Archie and Montgomery Bennett in connection with our initial public offering to be approved by a majority of the independent directors, except as specifically provided otherwise in the management agreement.

      The Maryland General Corporate Law, or MGCL, provides that a contract or other transaction between a corporation and any of that corporation’s directors and any other entity in which that director is also a director or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the fact that the director was present at the meeting at which the contract or transaction is approved or the fact that the director’s vote was counted in favor of the contract or transaction, if:

  •  the fact of the common directorship or interest is disclosed to the board or a committee of the board, and the board or that committee authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even if the disinterested directors constitute less than a quorum;

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  •  the fact of the common directorship or interest is disclosed to stockholders entitled to vote on the contract or transaction, and the contract or transaction is approved by a majority of the votes cast by the stockholders entitled to vote on the matter, other than votes of shares owned of record or beneficially by the interested director, corporation, firm or other entity; or
 
  •  the contract or transaction is fair and reasonable to the corporation.

      We cannot assure you that our rights under the mutual exclusivity agreement, our conflicts of interest policies or the MGCL will successfully eliminate conflicts of interest.

Reporting Policies

      Generally speaking, we will make available to our stockholders certified annual financial statements and annual reports. We are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended. Pursuant to these requirements, we will file periodic reports, proxy statements and other information, including audited financial statements, with the Securities and Exchange Commission.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Formation Transactions

      Three of our directors, Messrs. Archie and Montgomery Bennett and Mr. Edelman (or members of his family), and two of our executive officers, Messrs. Brooks and Nunneley, and two employees of Remington Hotel Corporation, Mr. Mark Sharkey and Ms. Mary Villarreal, are parties to contribution or sale agreements with our operating partnership pursuant to which they contributed their indirect interests in the properties and asset management and consulting agreements that we acquired in connection with our initial public offering in exchange for the 5,657,917 units of limited partnership interest in our operating partnership, 216,634 shares of our common stock and $3.0 million in cash. The terms of these agreements and the valuation methods used to determine the value of the assets were determined by our management team. The assets were valued based on several factors, including a multiple of expected future earnings, internal rate of return analysis, review of replacement costs and analysis of sales of similar assets. No single factor was given greater weight than any other in valuing those original assets. The aggregate value of the consideration received by each of the contributors of our initial assets is as follows:

                                 
Aggregate
Number of Shares of Value of
Units Common Stock Cash Consideration
Contributor Received Received Payments Paid





Archie Bennett, Jr. 
    2,486,957       108,317     $ 1,500,000     $ 24,857,466  
Montgomery J. Bennett
    2,486,957       108,317     $ 1,500,000     $ 24,857,466  
Martin L. Edelman
    220,647                     $ 1,985,823  
David A. Brooks
    220,647                     $ 1,985,823  
Mark Nunneley
    88,257                     $ 794,313  
Mark Sharkey
    110,323                     $ 992,907  
Mary Villarreal
    44,129                     $ 397,161  
     
     
     
     
 
      5,657,917       216,634     $ 3,000,000     $ 55,870,959  
     
     
     
     
 

Description of Contribution Agreements and Tax Indemnity

      Each of the contribution and sale agreements contained representations and warranties concerning the ownership and operation of the original assets and other customary matters. Each contributing or selling entity has agreed to indemnify our operating partnership against breaches of the representations and warranties made by that entity in the related contribution agreement. The amount of such indemnification

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claims by us is limited with respect to each entity that owned the assets to the amount of the purchase price paid to that entity in the contribution or sale agreement, and, except with respect to the entity that contributed the asset management and consulting agreements, our operating partnership is not entitled to indemnity until the aggregate of indemnifiable losses exceeds $200,000 per property. In addition, the indemnification obligations of the contributing or selling entities survive the closing of the transactions contemplated by the related agreement for a period of 12 months and, except for the indemnification by the entity that contributed the asset management and consulting agreements, is secured by a pledge of the shares or partnership units we issued in exchange for the original properties.

      Under the terms of the applicable tax indemnification agreements we entered into with our affiliates in connection with our formation, we are required to pay the contributors’ tax liability in the event we reduce the indebtedness related to one of our original hotels or if we dispose of any of the contributed properties in a taxable disposition prior to the earlier of:

  •  10 years after the contribution of the related property, and
 
  •  the date on which the contributor no longer owns, in the aggregate, at least 25% of the units issued to such contributor at the time of their contribution of property to our operating partnership.

      The tax indemnity will be equal to the amount of the federal and state income tax liability incurred by the contributor (using an assumed combined federal and state income tax rate at the then-highest applicable marginal rate for such contributor) with respect to the gain allocated to the contributor under Section 704(c) of the Internal Revenue Code. The terms of the tax indemnification agreements require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment. If we were to sell in a taxable transaction all five of the properties contributed to us in connection with our initial public offering, our estimated total tax indemnification obligation to our indemnified contributors, including a gross-up payment we would make, would be approximately $17.0 million.

      No tax indemnity payment will be due if we dispose of the contributed property in a tax-deferred transaction, such as a like-kind exchange under Section 1031 of the Internal Revenue Code. The tax indemnification agreements also require us for a period of 10 years to use our commercially reasonable efforts to maintain non-recourse indebtedness in the amount of at least $16.0 million, which will allow the contributors to defer recognition of gain in connection with the contribution of the Las Vegas property.

Other Benefits to Related Parties

      We currently lease office space for our headquarters from Remington Hotel Corporation, which is owned 100% by Messrs. Archie and Montgomery Bennett. The annual base rental payment is approximately $150,000, and the lease expires April 1, 2014.

      In connection with the formation transactions consummated in connection with our initial public offering, Messrs. Archie and Montgomery Bennett received material benefits, including the release of certain guarantee and indemnification agreements entered into by entities directly or indirectly owned or controlled by the Bennetts.

      Additionally, our operating partnership entered into a master management agreement with Remington Lodging, subject to certain independent director approvals, pursuant to which Remington Lodging operates and manages most of our hotels. Remington Lodging is an affiliate of Remington Hotel Corporation, both of which are owned 100% by Messrs. Archie and Montgomery Bennett. The fees due to Remington Lodging under the management agreement include management fees, project management fees and other fees. The amount of management fees for the initial six properties for the 12 months ended December 31, 2003, assuming the management agreement had been in place during such 12-month period, would have been equal to $1.1 million. The actual amount of project management fees for the same period, under the same assumptions, would have been $20,771. The actual amount of other fees for the same period, using the same assumption would have been $20,771 for furniture, fixtures and equipment purchasing

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management fees and $335,760 for accounting fees. The total actual amount of management, project development and other fees for the twelve months ended December 31, 2003 paid under the pre-existing management agreements, which were terminated upon the consummation of the initial public offering of our common stock, is the same as the total of such fees assuming the new management agreement was in place during such period. See “Business and Properties — Management Agreements — Remington Lodging Management Agreement.”

      Further, we and our operating partnership entered into a mutual exclusivity agreement with Remington Lodging and Remington Hotel and Messrs. Archie and Montgomery Bennett, pursuant to which we have a first right of refusal to purchase lodging investments identified by them. We also agreed to hire Remington Lodging for the management or construction of any hotel which is part of an investment we elect to pursue, unless either all of our independent directors elect not to do so or a majority of our independent directors elect not to do so based on a determination that special circumstances exist or that another manager or developer could perform materially better than Remington Lodging. See “Business and Properties — Mutual Exclusivity Agreement.”

      In connection with the consummation of our initial public offering, we acquired eight asset management and consulting agreements between Ashford Financial Corporation and eight hotel management companies in consideration of 1,025,000 units of limited partnership interests of our operating partnership. Under these eight agreements, Ashford Financial Corporation provided asset management and consulting services to 27 hotels managed under contract with the eight management companies. We now hold Ashford Financial Corporation’s interest under the contributed agreements and perform the services instead of Ashford Financial Corporation. Each of the eight management companies is either a wholly owned subsidiary of Remington Hotel Corporation, which is owned 100% by Messrs. Archie and Montgomery Bennett, or is 100% owned by one or both of the Bennetts. Messrs. A