UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007.

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From                      to                     .

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland		86-1062192
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)
14185 Dallas Parkway, Suite 1100		75254
		(Zip code)
Dallas, Texas
(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 490-9600

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at November 6, 2007:
Common Stock, $0.01 par value per share			122,746,852

 

 

ASHFORD HOSPITALITY TRUST, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006			3
Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006			4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2007 and 2006			5
Consolidated Statement of Owners’ Equity for the nine months ended September 30, 2007			6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006			7
Notes to Consolidated Financial Statements			8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			37
ITEM 4. Controls and Procedures			38
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			39
ITEM 1A. Risk Factors			39
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
ITEM 3. Defaults Upon Senior Securities			39
ITEM 4. Submission of Matters to a Vote of Security Holders			39
ITEM 5. Other Information			39
ITEM 6. Exhibits			40
SIGNATURES			41
Certification of the Chief Executive Officer Required by Rule 13a-14(a)
Certification of the Chief Financial Officer Required by Rule 13a-14(a)
Certification of the Chief Accounting Officer Required by Rule 13a-14(a)
Certification of the Chief Executive Officer Required by Rule 13a-14(b)
Certification of the Chief Financial Officer Required by Rule 13a-14(b)
Certification of the Chief Accounting Officer Required by Rule 13a-14(b)

ASHFORD HOSPITALITY TRUST, INC.

		September 30,				December 31,
		2007				2006
ASSETS
Investment in hotel properties, net		$	4,186,590			$	1,632,946
Cash and cash equivalents			143,678				73,343
Restricted cash			49,135				9,413
Accounts receivable, net of allowance of $1,227 and $384, respectively			76,504				22,081
Inventories			4,435				2,110
Assets held for sale			110,608				119,342
Notes receivable			72,827				102,833
Deferred costs, net			31,405				14,143
Prepaid expenses			17,827				11,154
Other assets			9,187				7,826
Due from third-party hotel managers			48,422				15,964
Due from related parties			2,030				757
Total assets		$	4,752,648			$	2,011,912
LIABILITIES AND OWNERS’ EQUITY
Indebtedness		$	2,919,737			$	1,091,150
Capital leases payable			811				177
Accounts payable			50,917				16,371
Accrued expenses			84,922				32,591
Dividends payable			34,733				19,975
Deferred income			264				294
Deferred incentive management fees			3,615				3,744
Unfavorable management contract liabilities			24,149				15,281
Other liabilities			1,115				—
Due to third-party hotel managers			7,497				1,604
Due to related parties			3,368				4,152
Total liabilities			3,131,128				1,185,339
Commitments and contingencies (see Note 13)
Minority interest in consolidated joint ventures			105,785				—
Minority interest related to limited partnership interests in the operating partnership			105,595				109,864
Preferred stock, $0.01 par value:
Series B Cumulative Convertible Redeemable Preferred Stock, 7,447,865 issued and outstanding at September 30, 2007 and December 31, 2006, respectively			75,000				75,000
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
Series A Cumulative Preferred Stock, 2,300,000 issued and outstanding at September 30, 2007 and December 31, 2006, respectively			23				23
Series D Cumulative Preferred Stock, 8,000,000 issued and outstanding at September 30, 2007			80				—
Common stock, $0.01 par value, 200,000,000 shares authorized, 122,632,274 shares issued and 122,608,938 shares outstanding at September 30, 2007 and 72,942,841 shares issued and outstanding at December 31, 2006			1,226				729
Additional paid-in capital			1,452,611				708,420
Accumulated other comprehensive income (loss)			(81	)			111
Accumulated deficit			(118,444	)			(67,574	)
Treasury stock, at cost (23,336 shares)			(275	)			—
Total owners’ equity			1,335,140				641,709
Total liabilities and owners’ equity		$	4,752,648			$	2,011,912

     See notes to consolidated financial statements.

ASHFORD HOSPITALITY TRUST, INC.

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
REVENUE
Rooms		$	249,633			$	88,598			$	609,484			$	255,615
Food and beverage			67,173				17,472				177,066				50,012
Rental income from operating leases			1,449				—				2,633				—
Other			15,862				4,247				36,779				11,958
Total hotel revenue			334,117				110,317				825,962				317,585
Interest income from notes receivable			2,373				3,652				8,594				11,518
Asset management fees from affiliates			334				299				996				934
Total Revenue			336,824				114,268				835,552				330,037
EXPENSES
Hotel operating expenses
Rooms			58,794				20,192				138,285				56,084
Food and beverage			52,717				13,652				130,433				38,267
Other direct			8,321				2,116				18,551				5,545
Indirect			95,807				32,793				226,596				93,443
Management fees — third-party hotel managers			9,951				2,552				23,067				7,506
Management fees — related parties (see Note 12)			2,572				1,596				7,511				4,844
Total hotel expenses			228,162				72,901				544,443				205,689
Property taxes, insurance, and other			17,598				6,593				43,892				17,786
Depreciation and amortization			39,262				12,686				115,269				33,841
Corporate general and administrative			8,069				4,809				19,810				14,958
Total Operating Expenses			293,091				96,989				723,414				272,274
OPERATING INCOME			43,733				17,279				112,138				57,763
Interest income			776				1,005				2,249				2,065
Interest expense			(45,125	)			(10,940	)			(104,410	)			(33,703	)
Amortization of loan costs			(2,524	)			(495	)			(5,447	)			(1,470	)
Write-off of loan costs and exit fees			—				—				(5,966	)			(788	)
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST			(3,140	)			6,849				(1,436	)			23,867
Benefit from income taxes			2,117				833				3,228				605
Minority interest in consolidated joint ventures benefit (expense)			(106	)			—				417				—
Minority interest related to limited partners in the operating partnership benefit (expense)			343				(925	)			(413	)			(3,685	)
INCOME (LOSS) FROM CONTINUING OPERATIONS			(786	)			6,757				1,796				20,787
Income from discontinued operations, net (see Note 5)			1,294				1,893				31,287				6,348
NET INCOME			508				8,650				33,083				27,135
Preferred dividends			7,146				2,719				16,972				8,156
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS		$	(6,638	)		$	5,931			$	16,111			$	18,979
Income (Loss) From Continuing Operations Per Share Available To Common Shareholders:
Basic		$	(0.07	)		$	0.06			$	(0.15	)		$	0.22
Diluted		$	(0.07	)		$	0.06			$	(0.15	)		$	0.22
Income From Discontinued Operations Per Share:
Basic		$	0.01			$	0.03			$	0.31			$	0.11
Diluted		$	0.01			$	0.03			$	0.31			$	0.11
Net Income (Loss) Per Share Available To Common Shareholders:
Basic		$	(0.05	)		$	0.09			$	0.16			$	0.33
Diluted		$	(0.05	)		$	0.09			$	0.16			$	0.32
Weighted Average Common Shares Outstanding:
Basic			121,234,832				67,157,286				100,708,105				58,320,142
Diluted			121,234,832				67,301,115				100,708,105				58,681,541

     See notes to consolidated financial statements.

ASHFORD HOSPITALITY TRUST, INC.

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
NET INCOME		$	508			$	8,650			$	33,083			$	27,135
Reclassification to Increase (Decrease) Interest Expense			2				(290	)			(148	)			(1,001	)
Net Unrealized Gains (Losses) on Derivative Instruments			(98	)			(1	)			(95	)			(2	)
Foreign Currency Translation Adjustments			29				—				51				—
Comprehensive Income		$	441			$	8,359			$	32,891			$	26,132

See notes to consolidated financial statements.

     

Ashford Hospitality Trust, Inc.

																																						Accumulated
		Preferred Stock - Series A								Preferred Stock - Series C								Preferred Stock - Series D								Common Stock								Additional				Other
		Number of				$0.01				Number of				$0.01				Number of				$0.01				Number of				$0.01				Paid-In				Comprehensive				Accumulated				Treasury Stock
		Shares				Par Value				Shares				Par Value				Shares				Par Value				Shares				Par Value				Capital				Income (Loss)				Deficit				Shares				Cost				Total
Balance at December 31, 2006			2,300			$	23				—			$	—				—			$	—				72,943			$	729			$	708,420			$	111			$	(67,574	)			—			$	—			$	641,709
Stock-based Compensation			—				—				—				—				—				—				—				—				4,476				—				—				—				—				4,476
Issuance of Common Shares in Follow-On Public Offering on April 24, 2007			—				—				—				—				—				—				48,875				489				547,760				—				—				—				—				548,249
Issuance of Preferred Shares — Series C			—				—				8,000				80				—				—				—				—				193,239				—				—				—				—				193,319
Issuance of Preferred Shares — Series D			—				—				—				—				8,000				80				—				—				193,759				—				—				—				—				193,839
Redemption of Preferred Shares — Series C			—				—				(8,000	)			(80	)			—				—				—				—				(195,620	)			—				—				—				—				(195,700	)
Forfeitures of Restricted Common Shares			—				—				—				—				—				—				(3	)			—				—				—				—				—				—				—
Issuance of Restricted Common Shares to Employees			—				—				—				—				—				—				817				8				(268	)			—				—				—				—				(260	)
Purchases of Treasury Shares			—				—				—				—				—				—				—				—				—				—				—				(60	)			(728	)			(728	)
Reissuances of Treasury Shares			—				—				—				—				—				—				—				—				—				—				—				37				453				453
Dividends Declared — Common Shares			—				—				—				—				—				—				—				—				—				—				(66,981	)			—				—				(66,981	)
Dividends Declared — Preferred Shares — Series A			—				—				—				—				—				—				—				—				—				—				(3,687	)			—				—				(3,687	)
Dividends Declared — Preferred Shares — Series B			—				—				—				—				—				—				—				—				—				—				(4,692	)			—				—				(4,692	)
Dividends Declared — Preferred Shares — Series C			—				—				—				—				—				—				—				—				845				—				(5,166	)			—				—				(4,321	)
Dividends Declared — Preferred Shares — Series D			—				—				—				—				—				—				—				—				—				—				(3,427	)			—				—				(3,427	)
Net Unrealized Loss on Derivative Instruments			—				—				—				—				—				—				—				—				—				(95	)			—				—				—				(95	)
Reclassification to Reduce Interest Expense			—				—				—				—				—				—				—				—				—				(148	)			—				—				—				(148	)
Foreign Operations Translation Adjustments			—				—				—				—				—				—				—				—				—				51				—				—				—				51
Net Income			—				—				—				—				—				—				—				—				—				—				33,083				—				—				33,083
Balance at September 30, 2007			2,300			$	23				—			$	—				8,000			$	80				122,632			$	1,226			$	1,452,611			$	(81	)		$	(118,444	)			(23	)		$	(275	)		$	1,335,140

See notes to consolidated financial statements.

ASHFORD HOSPITALITY TRUST, INC.

		Nine Months				Nine Months
		Ended				Ended
		September 30, 2007				September 30, 2006
Cash flows from operating activities:
Net income		$	33,083			$	27,135
Adjustments to reconcile net income to net cash flow provided by operations:
Depreciation and amortization			117,644				37,120
Gains on sales of properties			(35,237	)			—
Loss on reclassification from discontinued to continuing			—				863
Amortization of loan costs			5,447				1,470
Write-off of loan costs and exit fees			5,966				788
Amortization to reduce interest expense from comprehensive income			(148	)			(1,001	)
Stock-based compensation			4,669				4,120
Minority interest in consolidated joint ventures			(417	)			—
Minority interest related to limited partnership interests			4,026				4,860
Changes in assets and liabilities:
Accounts receivable and inventories			(12,562	)			932
Other miscellaneous assets			(27,832	)			(862	)
Restricted cash			(26,935	)			15,690
Other miscellaneous liabilities			34,605				8,007
Net cash flow provided by operating activities			102,309				99,122
Cash flows from investing activities:
Acquisitions or originations of notes receivable			—				(26,308	)
Proceeds from payments of notes receivable			30,046				37,163
Acquisitions of hotel properties			(2,050,886	)			(142,415	)
Deposits for future acquisitions of hotel properties			—				(27,000	)
Proceeds from sales of discontinued operations			153,456				17,445
Improvements and additions to hotel properties			(76,858	)			(29,746	)
Net cash flow used in investing activities			(1,944,242	)			(170,861	)
Cash flows from financing activities:
Payments of dividends			(76,642	)			(46,213	)
Borrowings on indebtedness and capital leases			1,903,587				153,915
Payments on indebtedness and capital leases			(639,924	)			(270,853	)
Payments of deferred financing costs			(13,783	)			(1,453	)
Proceeds received from follow-on public offerings			548,249				290,092
Proceeds received from Series C preferred stock sale			193,319				—
Proceeds received from Series D preferred stock sale			193,839				—
Payments for redemption of Series C preferred stock			(195,700	)			—
Payments for purchases of treasury stock			(728	)			—
Payments to convert partnership units into common stock			—				(54	)
Net cash flow provided by financing activities			1,912,217				125,434
Effect of exchange rate on cash			51				—
Net change in cash and cash equivalents			70,284				53,695
Cash and cash equivalents, beginning balance			73,343				57,995
Cash and cash equivalents, ending balance		$	143,678			$	111,690

     See notes to consolidated financial statements.

ASHFORD HOSPITALITY TRUST, INC.

1. Organization and Description of Business

Ashford Hospitality Trust, Inc. and subsidiaries (the “Company”) is a self-advised real estate investment trust (“REIT”), which commenced operations on August 29, 2003 when it completed its initial public offering (“IPO”) and concurrently consummated certain other formation transactions, including the acquisition of six hotels (“initial properties”). The Company owns its lodging investments and conducts its business through Ashford Hospitality Limited Partnership, its operating partnership. Ashford OP General Partner LLC, its wholly-owned subsidiary, serves as the sole general partner of the Company’s operating partnership.

As of September 30, 2007, the Company owned 102 hotel properties directly and 17 hotel properties through equity investments with joint venture partners, which represents 28,670 total rooms or 27,205 net rooms excluding those attributable to joint venture partners. Of the total 119 hotel properties, 118 are located in the United States and one is located in Canada. As of September 30, 2007, the Company also owned approximately $72.9 million of mezzanine or first-mortgage loans receivable.

For federal income tax purposes, the Company elected to be treated as a REIT, which imposes limitations related to operating hotels. As of September 30, 2007, 118 of the Company’s hotel properties were leased or owned by wholly-owned subsidiaries of the Company that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, such subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated results of operations. As of September 30, 2007, the remaining hotel property was leased on a triple-net lease basis to a third-party tenant who operates the hotel. Rental income from this operating lease is included in the consolidated results of operations.

Remington Lodging & Hospitality, L.P. and Remington Management, L.P. (collectively, “Remington Lodging”), both primary property managers for the Company, are beneficially wholly owned by Mr. Archie Bennett, Jr., the Company’s Chairman, and Mr. Montgomery J. Bennett, the Company’s President and Chief Executive Officer. As of September 30, 2007, Remington Lodging managed 43 of the Company’s 119 hotel properties while third-party management companies managed the remaining 76 hotel properties.

As of September 30, 2007, 122,608,938 shares of common stock, 2,300,000 shares of Series A preferred stock, 7,447,865 shares of Series B preferred stock, 8,000,000 shares of Series D preferred stock, and 13,512,425 units of limited partnership interest held by entities other than the Company were outstanding and 23,336 shares of common stock were held as treasury stock. During the nine months ended September 30, 2007, the Company completed the following transactions:

	•		On March 27, 2007, the Company issued 838,500 shares of restricted common stock to its executive officers and certain employees.
	•		On April 11, 2007, the Company issued 8,000,000 shares of Series C cumulative redeemable preferred stock to a financial institution.
	•		On April 24, 2007, the Company issued 48,875,000 shares of common stock in a follow-on public offering.
	•		On May 15, 2007, the Company issued 16,000 shares of common stock to its directors as compensation for serving on the Board of Directors through May 2008.
	•		On July 18, 2007, the Company publicly issued 8,000,000 million shares of Series D cumulative preferred stock.
	•		On July 18, 2007, the Company redeemed 8,000,000 shares of Series C cumulative redeemable preferred stock.
	•		During the nine months ended September 30, 2007, the Company acquired 60,177 shares of treasury stock, of which 36,841 shares were reissued in connection with the aforementioned common stock grants.
	•		During the nine months ended September 30, 2007, 3,226 unvested shares of restricted common stock were forfeited.

2. Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include certain information and disclosures required by GAAP for complete financial statements. However, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, considered necessary for a fair presentation have been included.

In addition, the following items affect the Company’s reporting comparability related to its consolidated financial statements:

	•		The operations of the Company’s hotels have historically been seasonal. This seasonality pattern causes fluctuations in the Company’s operating results. Consequently, operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
	•		Marriott International, Inc. (“Marriott”) manages 46 of the Company’s properties. For these 46 Marriott-managed hotels, the fiscal year reflects twelve weeks of operations for each of the first three quarters of the year and sixteen weeks for the fourth quarter of the year. Therefore, in any given quarterly period, period-over-period results will have different ending dates. For Marriott-managed hotels, the third quarters of 2007 and 2006 ended September 7th and September 8th, respectively.

•

Certain previously reported amounts have been reclassified to conform to the current presentation.

These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes for the year ended December 31, 2006, included in the Company’s Form 10-K, as filed with the Securities and Exchange Commission on March 9, 2007. The accounting policies used in preparing these consolidated financial statements are consistent with those described in such Form 10-K.

3. Significant Accounting Policies Summary

Principles of Consolidation — The Company’s consolidated financial statements include the Company and its majority-owned subsidiaries and its majority-owned joint ventures in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements.

Revenue Recognition — Hotel revenues include room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, and space rentals. Rental income from operating leases represents rental income recognized on a straight-line basis associated with the hotel property leased to a third-party tenant on a triple-net lease basis. Interest income from notes receivable represents interest earned on the Company’s mezzanine and first-mortgage loans receivable portfolio. Asset management fees relate to asset management services performed on behalf of a related party, including risk management and insurance procurement, assistance with taxes, negotiating franchise agreements and equipment leases, monitoring compliance with loan covenants, preparation of capital and operating budgets, and property litigation management. Hotel revenues and asset management fees are recognized as the related services are delivered.

Foreign Currency Translations — Financial information related to the Company’s hotel property located in Montreal, Canada, is maintained in the local currency. Results of operations are translated to U.S. dollars using the average exchange rates during the period while assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Translation adjustments are reflected in the consolidated statements of owners’ equity as a component of accumulated other comprehensive income. Gains or losses from foreign currency transactions, however, are reflected in the consolidated statements of operations.

Use of Estimates — The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Management Agreements — In connection with the Company’s acquisitions of Marriott Crystal Gateway hotel in Arlington, Virginia, on July 13, 2006 and the 51-hotel CNL portfolio on April 11, 2007, the Company assumed certain existing management agreements. Based on the Company’s review of these management agreements, the Company concluded that the terms of certain management agreements are more favorable to the respective managers than typical current market management agreements. As a result, the Company recorded unfavorable contract liabilities related to these management agreements as of the respective acquisition dates based on the present value of expected cash outflows over the initial terms of the related agreements. Such unfavorable contract liabilities are amortized as reductions to incentive management fees on a straight-line basis over the initial terms of the related agreements. In evaluating unfavorable contract liabilities, the Company’s analysis involves considerable management judgment and assumptions.

Investment in Hotel Properties — Hotel properties are generally stated at cost. However, the initial properties contributed upon the Company’s formation are stated at the predecessor’s historical cost, net of any impairment charges, plus a minority interest partial step-up related to the acquisition of minority interest from third parties associated with four of the initial properties. In addition, included in the 51-hotel CNL portfolio acquired on April 11, 2007, the Company acquired between 70%-89% ownership interest in 17 hotel properties owned by joint ventures. For these hotel properties, the carrying basis attributable to the joint venture partners’ minority ownership is recorded at the predecessor’s historical cost, net of any impairment charges, while the carrying basis attributable to the Company’s majority ownership is recorded based on the allocated purchase price of the Company’s ownership interest in the joint ventures. All improvements and additions which extend the useful life of hotel properties are capitalized.

Impairment of Investment in Hotel Properties — Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values of such hotel properties may not be recoverable. The Company tests 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 property will be sold before its previously estimated useful life expires, and when events or changes in circumstances indicate that a hotel property’s net book value may not be recoverable. In evaluating the impairment of hotel properties, the Company makes many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures, and fair values, which considers capitalization rates, discount rates, and comparable selling prices. If an asset was deemed to be impaired, the Company would record an impairment charge for the amount that the property’s net book value exceeds its fair value. To date, no such impairment charges have been recognized.

Depreciation and Amortization Expense — Depreciation expense is based on the estimated useful life of the Company’s 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. Presently, hotel properties are depreciated using the straight-line method over lives which range from 15 to 39 years for buildings and improvements and 3 to 5 years for furniture, fixtures, and equipment. While the Company believes its estimates are reasonable, a change in estimated lives could affect depreciation expense and net income (loss) as well as resulting gains or losses on potential hotel sales.

Restricted Cash — Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow

deposits and reserves for furniture, fixtures, and equipment replacements of approximately 4% to 6% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions.

Assets Held For Sale and Discontinued Operations — The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and expected within one year. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from the ongoing operations of the Company, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) the Company will not have any significant continuing involvement subsequent to the disposal.

Notes Receivable — The Company provides mezzanine and first-mortgage financing in the form of loans receivable, which are recorded at cost, adjusted for net origination fees and costs. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method. Loans receivable are reviewed for potential impairment at each balance sheet date. A loan receivable is considered impaired when it becomes probable, based on current information, that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected future cash flows or the fair value of the collateral. If a loan was deemed to be impaired, the Company would record a reserve for loan losses through a charge to income for any shortfall. To date, no such impairment charges have been recognized.

In accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” as revised (“FIN No. 46”), variable interest entities, as defined, are required to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. The Company’s mezzanine and first-mortgage loans receivable are each secured by various hotel properties or partnership interests in hotel properties and are subordinate to primary loans related to the secured hotels. All such loans receivable are considered to be variable interests in the entities that own the related hotels, which are variable interest entities. However, the Company is not considered to be the primary beneficiary of these hotel properties as a result of holding these loans. Therefore, the Company does not consolidate such hotels for which it has provided financing. Interests in entities acquired or created in the future will be evaluated based on FIN No. 46 criteria, and such entities will be consolidated, if required. In evaluating FIN No. 46 criteria, the Company’s analysis involves considerable management judgment and assumptions.

Guarantees — Upon acquisition of the 51-hotel CNL portfolio on April 11, 2007, the Company assumed certain guarantees, which represent funds provided by third-party hotel managers to guarantee minimum returns for certain hotel properties. As the Company is obligated to repay such amounts through increased incentive management fees over the remaining terms of the related management agreements or through cash reimbursements, such guarantees are recorded as other liabilities. As of September 30, 2007, these liabilities totaled approximately $1.1 million.

Due From Third-Party Hotel Managers — Due from third-party hotel managers primarily consists of amounts due from Marriott related to cash reserves held at the Marriott corporate level related to capital, insurance, real estate taxes, and other items.

Derivative Instruments and Hedging Activities — Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (“SFAS No. 133”), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. Accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in the fair value are recognized in earnings.

The Company’s objective in using derivatives is to increase stability related to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and caps within its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges provide the Company with interest rate protection above the strike rate on the cap and result in the Company receiving interest payments when actual rates exceed the cap strike.

Income Taxes — As a REIT, the Company generally will not be subject to federal corporate income tax on the portion of its net income (loss) that does not relate to taxable REIT subsidiaries. However, Ashford TRS is treated as a taxable REIT subsidiary for federal income tax purposes. In accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” the Company accounts for income taxes related to Ashford TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. For the three and nine months ended September 30, 2007 and 2006, the (provision for) benefit from income taxes relates to the net income (loss) associated with Ashford TRS.

Segments — The Company presently operates in two business segments within the hotel lodging industry: direct hotel investments and hotel financing. Direct hotel investments refers to owning hotels through either acquisition or new development. Hotel financing refers to owning subordinate hotel-related mortgage receivables through acquisition or origination.

Stock-based Compensation — The Company accounts for stock-based compensation using the fair-value method. In connection with the Company’s formation, the Company established an employee Incentive Stock Plan (the “Stock Plan”). Under the Stock Plan, the Company periodically issues shares of restricted and non-restricted common stock. All such shares are charged to compensation expense on a straight-line basis over the vesting period based on the Company’s stock price on the date of issuance. Under the Stock Plan, the Company may issue a variety of additional performance-based stock awards, including nonqualified stock options. As of September 30, 2007, no performance-based stock awards aside from the aforementioned stock grants have been issued.

Earnings (Loss) Per Share — Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower earnings per share. The following table reconciles the amounts used in calculating basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2007 and 2006 (in thousands, except share and per share amounts):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
Income (loss) from continuing operations less preferred dividends — basic		$	(7,932	)		$	4,038			$	(15,176	)		$	12,631
Weighted average common shares outstanding — basic			121,234,832				67,157,286				100,708,105				58,320,142
Incremental diluted shares related to unvested restricted shares			—				143,829				—				361,399
Weighted average common shares outstanding — diluted			121,234,832				67,301,115				100,708,105				58,681,541
Income (loss) per share from continuing operations — basic		$	(0.07	)		$	0.06			$	(0.15	)		$	0.22
Income (loss) per share from continuing operations — diluted		$	(0.07	)		$	0.06			$	(0.15	)		$	0.22

For the three and nine months ended September 30, 2007, incremental diluted shares related to unvested restricted stock of approximately 54,000 and 484,000, respectively, are excluded from the diluted earnings per share calculation as such shares are anti-dilutive. For the three and nine months ended September 30, 2007, dividends related to convertible preferred shares of approximately $1.6 million and $4.7 million, respectively, and weighted average convertible preferred shares outstanding of approximately 7.4 million and 7.4 million, respectively, are excluded from the diluted earnings per share calculation as such shares are anti-dilutive. For the three and nine months ended September 30, 2007, minority interest income (expense) related to limited partners of approximately $343,000 and ($413,000), respectively, and weighted average units of limited partnership interest of approximately 13.5 million and 13.5 million, respectively, are excluded from the diluted earnings per share calculation as such units are anti-dilutive.

For the three and nine months ended September 30, 2006, dividends related to convertible preferred shares of approximately $1.5 million and $4.5 million, respectively, and weighted average convertible preferred shares outstanding of approximately 7.4 million and 7.4 million, respectively, are excluded from the diluted earnings per share calculation as such shares are anti-dilutive. For the three and nine months ended September 30, 2006, minority interest expense related to limited partners of approximately $925,000 million and $3.7 million, respectively, and weighted average units of limited partnership interest of approximately 13.6 million and 11.8 million, respectively, are excluded from the diluted earnings per share calculation as such units are anti-dilutive.

Recent Accounting Pronouncements — In June 2006, the Emerging Issues Task Force (“EITF”) ratified EITF No. 06-3, “How Taxes Collected from Customers and Remitted to Government Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF No. 06-3 is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. EITF No. 06-3 relates to taxes assessed by a governmental authority imposed on revenue-producing transactions, such as sales taxes. EITF No. 06-3 states that gross versus net income statement presentation of such taxes is an accounting policy decision requiring disclosure. EITF No. 06-3 further requires disclosure of the amount of such taxes reflected at gross, if any. The Company records all sales net of such taxes.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN No. 48”), effective January 1, 2007. FIN No. 48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken in a tax return. FIN No. 48 requires that a determination be made as to whether it is “more likely than not” that a tax position taken, based on its technical merits, will be sustained upon examination, including resolution of any appeals and litigation processes. If the more-likely-than-not threshold is met, the related tax position must be measured to determine the amount of provision or benefit, if any, to recognize in the financial statements. FIN No. 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes,” but does not apply to tax positions related to FASB Statement No. 5, “Accounting for Contingencies.” The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. Tax years 2003 through 2006 and 2002 through 2006 remain subject to potential examination by certain federal and state taxing authorities, respectively. No income tax examinations are currently in process. As the Company determined no material unrecognized tax benefits or liabilities exist, the adoption of FIN No. 48, effective January 1, 2007, did not impact the Company’s financial condition or results of operations. The Company classifies interest and penalties related to underpayment of income taxes as income tax expense.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 157 provides guidance

for using fair value to measure assets and liabilities. SFAS No. 157 also requires expanded information regarding the extent to which assets and liabilities are measured at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. The Company is currently evaluating the effects the adoption of SFAS No. 157 will have on its financial condition or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently evaluating the effects the adoption of SFAS No. 159 will have on its financial condition or results of operations.

4. Investment in Hotel Properties

Investment in Hotel Properties consists of the following as of September 30, 2007 and December 31, 2006 (in thousands):

		September 30,				December 31,
		2007				2006
Land		$	573,053			$	217,930
Buildings and improvements			3,514,959				1,379,946
Furniture, fixtures, and equipment			275,706				125,514
Construction in progress			41,361				15,482
Total cost			4,405,079				1,738,872
Accumulated depreciation			(218,489	)			(105,926	)
Investment in hotel properties, net		$	4,186,590			$	1,632,946

On April 11, 2007, the Company acquired a 51-property hotel portfolio from CNL Hotels and Resorts, Inc. for approximately $2.4 billion. Pursuant to this agreement, the Company acquired 100% of 33 properties and 70%-89% of 18 properties through existing joint ventures. In addition, on April 11, 2007, the Company acquired the remaining 15% joint venture interest in the Hyatt Regency Dearborn in Detroit, Michigan, for approximately $7.5 million. Considering closing costs and unfavorable contract liabilities assumed, these acquisitions generated an increase in Investment in Hotel Properties of approximately $2.7 billion, which includes the historical cost basis related to the joint venture partners’ minority ownership.

On May 21, 2007, the Company acquired a Marriott Residence Inn and a Hampton Inn, both in Jacksonville, Florida, for approximately $35.8 million. The acquisition of these hotel properties, which were previously owned by CNL, related to the Company’s acquisition of the CNL Portfolio on April 11, 2007. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $35.7 million with the remainder of the purchase price related to working capital.

5. Assets Held for Sale and Discontinued Operations

As of December 31, 2006, the Company classified 17 assets, including 15 hotel properties and two office buildings, as assets held for sale and discontinued operations. Subsequent to December 31, 2006, the Company entered into a definitive agreement to sell its Embassy Suites hotel in Phoenix, Arizona. As a result, the Company classified assets and operating results related to this hotel as held for sale as of March 31, 2007 and income from discontinued operations for all periods reported, respectively. Subsequent to June 30, 2007, the Company entered into definitive agreements to sell four hotels acquired on April 11, 2007. As a result, the Company classified assets and operating results related to these hotels as held for sale as of September 30, 2007 and income from discontinued operations for all periods reported, respectively.

During the nine months ended September 30, 2007, the Company completed the following transactions related to assets classified as held for sale and discontinued operations:

COMPLETED SALES:

On February 6, 2007, the Company sold its Marriott located in Trumbull, Connecticut, for approximately $28.3 million. As the Company acquired this property on December 7, 2006, no gain or loss was recognized on the sale.

On February 8, 2007, the Company sold its Fairfield Inn in Princeton, Indiana, for approximately $3.2 million. In connection with this sale, the Company recognized a gain of approximately $1.4 million, of which related income tax gains were deferred through a 1031 like-kind exchange.

On April 24, 2007, the Company sold its Radisson Hotel in Indianapolis, Indiana, for approximately $5.4 million. In connection with this sale, the Company recognized a gain of approximately $2.7 million, of which related income tax gains were deferred through a 1031 like-kind exchange.

On April 26, 2007, the Company sold its Fairfield Inn in Evansville, Indiana, for approximately $5.5 million. In connection with this sale, the Company recognized a gain of approximately $531,000, of which related income tax gains were deferred through a 1031 like-kind exchange.

On April 27, 2007, the Company sold its Embassy Suites in Phoenix, Arizona, for approximately $25.0 million. In connection with this sale, the Company recognized a gain of approximately $8.5 million, of which related income tax gains were deferred through a 1031 like-kind exchange.

On May 2, 2007, the Company sold its Radisson Hotel in Covington, Kentucky, and an office building for approximately $22.4 million. In connection with this sale, the Company recognized a gain of approximately $3.4 million, of which related income tax gains were deferred through a 1031 like-kind exchange.

On May 18, 2007, the Company sold its portfolio of seven TownePlace Suites hotels for approximately $57.5 million. In connection with this sale, the Company recognized a gain of approximately $18.2 million, of which related income tax gains were deferred through a 1031 like-kind exchange.

On July 2, 2007, the Company sold its Hampton Inn in Horse Cave, Kentucky, for approximately $3.5 million. In connection with this sale, the Company recognized a gain of approximately $363,000.

On September 27, 2007, the Company sold its Doubletree Guest Suites in Dayton, Ohio, for approximately $6.5 million. In connection with this sale, the Company recognized a gain of approximately $168,000.

DEFINITIVE SALES AGREEMENTS REACHED:

On August 24, 2007, the Company reached a definitive agreement to sell its Hilton in Birmingham, Alabama, for approximately $25.0 million. As the Company acquired this property on April 11, 2007, no gain or loss will be recognized on this sale.

On August 27, 2007, the Company reached a definitive agreement to sell two Residence Inns in Torrance, California, and Atlanta, Georgia, for approximately $61.5 million. As the Company acquired these properties on April 11, 2007, no gain or loss will be recognized on this sale.

On September 3, 2007, the Company reached a definitive agreement to sell its Residence Inn in Kansas City, Missouri, for approximately $7.0 million. As the Company acquired this property on April 11, 2007, no gain or loss will be recognized on this sale.

For the three and nine months ended September 30, 2007 and 2006, financial information related to the Company’s assets included in income from discontinued operations was as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Total revenues		$	10,455			$	12,056			$	40,200			$	43,262
Operating expenses			7,349				8,874				29,851				31,685
Depreciation and amortization			973				1,126				2,374				3,279
Loss on reclassification from discontinued to continuing			—				—				—				863
Gains on sales of properties			(531	)			—				(35,237	)			—
Operating income			2,664				2,056				43,212				7,435
Benefit from (provision for) income taxes			(808	)			96				(8,313	)			87
Minority interest related to limited partners			(562	)			(259	)			(3,612	)			(1,174	)
Income, net		$	1,294			$	1,893			$	31,287			$	6,348

6. Notes Receivable

Notes receivable consists of the following as of September 30, 2007 and December 31, 2006 (in thousands):

		September 30,				December 31,
		2007				2006
$11.0 million mezzanine loan secured by one hotel property, matures September 2011, at an interest rate of 14% (12% pay rate with deferred interest through the first two years), with interest only payments through maturity		$	11,000			$	11,000
$8.0 million mezzanine loan secured by one hotel property, matures February 2007, at an interest rate of LIBOR plus 9.13%, with interest-only payments through maturity			—				8,000
$8.0 million mezzanine loan secured by one hotel property, matures May 2010, at an interest rate of 14% which increases 1% annually until reaching an 18% maximum, with interest-only payments through maturity			—				8,000
$8.5 million mezzanine loan secured by one hotel property, matures June 2007, at an interest rate of LIBOR plus 9.75%, with interest-only payments through maturity			—				8,500
$4.0 million mezzanine loan secured by one hotel property, matures July 2010, at an interest rate of 14%, with interest-only payments through maturity			4,000				4,000
$5.6 million mezzanine loan secured by one hotel property, matures July 2008, at an interest rate of LIBOR plus 9.5%, with interest-only payments through February 2007 plus principal payments thereafter based on a twenty-five-year amortization schedule			—				5,583
$3.0 million mezzanine loan secured by one hotel property, matures September 2008, at an interest rate of LIBOR plus 11.15%, with interest-only payments through maturity			3,000				3,000
$18.2 million first-mortgage loan secured by one hotel property, matures October 2008, at an interest rate of LIBOR plus 9%, with interest-only payments through maturity			18,200				18,200
$25.7 million mezzanine loan secured by 105 hotel properties, matures April 2008, at an interest rate of LIBOR plus 5%, with interest-only payments through maturity			25,694				25,694
$7.0 million mezzanine loan secured by one hotel property, matures December 2009, at an interest rate of LIBOR plus 6.5%, with interest-only payments through maturity			7,000				7,000
$4.0 million mezzanine loan secured by one hotel property, matures December 2009, at an interest rate of LIBOR plus 5.75%, with interest-only payments through maturity			4,000				4,000
Gross notes receivable		$	72,894			$	102,977
Deferred income, net			(67	)			(144	)
Net notes receivable		$	72,827			$	102,833

On February 6, 2007, the Company received approximately $8.1 million related to all principal and interest due under its $8.0 million note receivable, due February 2007.

On May 8, 2007, the Company received approximately $8.6 million related to all principal and interest due under its $8.5 million note receivable, due June 2007.

On June 11, 2007, the Company received approximately $8.1 million related to all principal and interest due under its $8.0 million note receivable, due May 2010.

On June 18, 2007, the Company received approximately $5.7 million related to all principal and interest due under its $5.6 million note receivable, due July 2008.

In general, the Company’s notes receivable have extension options, prohibit prepayment through certain periods, and require decreasing prepayment penalties through maturity. As of September 30, 2007, all notes receivable balances were current and no reserve for loan losses had been recorded.

7. Indebtedness

Indebtedness, all of which is considered non-recourse, consists of the following as of September 30, 2007 and December 31, 2006 (in thousands):

		September 30,				December 31,
		2007				2006
$455.1 million mortgage note payable secured by 25 hotel properties, of which $160.5 million matures July 1, 2015 and $294.6 million matures February 1, 2016, at a weighted average fixed interest rate locked at 5.42%, with interest-only payments due monthly plus principal payments based on a twenty-five-year amortization schedule beginning July 10, 2010		$	455,115			$	487,110
$211.5 million term loan secured by 16 hotel properties divided equally into two pools. The first pool for $110.9 million matures December 11, 2014, at a fixed interest rate of 5.75%, with interest-only payments due monthly plus principal payments based on a twenty-five-year amortization schedule beginning December 11, 2009. The second pool for $100.6 million matures December 11, 2015, at a fixed interest rate of 5.7%, with interest-only payments due monthly plus principal payments based on a twenty-five-year amortization schedule beginning December 11, 2010			211,475				211,475
$928.5 million mortgage loan secured by 28 hotel properties, matures April 11, 2017, at a weighted average fixed interest rate locked at 5.95%, with interest-only payments due monthly plus principal payments based on a thirty-year amortization schedule beginning April 11, 2012			928,465				—
$375.0 million loan secured by 18 hotel properties and mezzanine notes receivable, matures May 9, 2009, at an interest rate of LIBOR plus 1.65%, with interest-only payments due monthly, with three one-year extension options			375,035				—
$300.0 million secured credit facility, matures April 9, 2010, at an interest rate of LIBOR plus a range of 1.55% to 1.95% depending on the loan-to-value ratio, with interest-only payments due monthly, with a commitment fee of 0.125% to 0.20% on the unused portion of the line payable quarterly, with two one-year extension options			50,000				—
$150.0 million secured credit facility secured by nine hotel properties, matures August 16, 2008, at an interest rate of LIBOR plus a range of 1.6% to 1.85% depending on the loan-to-value ratio, with interest-only payments due monthly, with a commitment fee of 0.2% to 0.35% on the unused portion of the line payable quarterly, with two one-year extension options			—				25,000
$47.5 million secured credit facility secured by 1 hotel property, revolving period through October 11, 2007, matures October 10, 2008, at an interest rate of LIBOR plus 1.0% to 1.5% depending on the outstanding balance through the revolving period and LIBOR plus 2% thereafter, with interest-only payments due monthly, with three one-year extension options			—				—
Mortgage note payable secured by one hotel property, matures December 1, 2017, at an interest rate of 7.24% through December 31, 2007 and 7.39% thereafter, with principal and interest payments due monthly of approximately $462,000 through December 31, 2007 and $598,000 thereafter, and including a remaining premium of approximately $1.7 million			53,008				54,565
Mortgage note payable secured by one hotel property, matures December 8, 2016, at an interest rate of 5.81%, with interest-only payments due monthly plus principal payments based on a thirty-year amortization schedule beginning December 8, 2011			101,000				101,000
Mortgage note payable secured by six hotel properties, matures December 11, 2009, at an interest rate of LIBOR plus 1.72%, with interest-only payments due monthly, with two one-year extension options			184,000				212,000
Mortgage loans assumed with acquisition of CNL Portfolio, secured by 18 hotel properties, maturing between 2008 and 2027, with an average blended interest rate of 6.01%, with total principal and interest payments due monthly of approximately $3.3 million, and including a total remaining premium of approximately $2.3 million (approximately $124.6 million of principal is attributable to joint venture partners)			561,639				—
Total		$	2,919,737			$	1,091,150

At September 30, 2007 and December 31, 2006, LIBOR was 5.12% and 5.32%, respectively.

On January 30, 2007, the Company completed a $20.0 million draw on its $150.0 million credit facility, due August 16, 2008.

On February 6, 2007, in connection with the Company’s sale of its Marriott located in Trumbull, Connecticut, for approximately $28.3 million, the Company paid down its $212.0 million mortgage note payable, due December 11, 2009, by approximately $28.0 million. Consequently, the $212.0 million mortgage loan secured by seven hotels outstanding at December 31, 2006 became the $184.0 million mortgage loan secured by six hotels outstanding at September 30, 2007. In connection with this pay-down, the Company wrote-off unamortized loan costs of approximately $212,000.

On March 8, 2007, the Company terminated its $100.0 million credit facility, due December 23, 2008. This credit facility never had an outstanding balance. In connection with this termination, the Company wrote-off unamortized loan costs of approximately $490,000.

On April 9, 2007, the Company drew $45.0 million on its $47.5 million credit facility, due October 10, 2008.

On April 10, 2007, the Company repaid its $45.0 million outstanding balance on its $150.0 million credit facility, due August 16, 2008, and terminated the facility. In connection with this termination, the Company wrote-off unamortized loan costs of approximately $1.2 million. This transaction was completed in connection with the Company’s acquisition of a 51-property hotel portfolio on April 11, 2007 discussed below.

On April 11, 2007, in connection with its acquisition of a 51-property hotel portfolio from CNL Hotels and Resorts, Inc. for approximately $2.4 billion plus closing costs of approximately $96.0 million, the Company executed a $928.5 million, ten-year, fixed- rate loan at an average blended interest rate of 5.95%, a $555.1 million, two-year, variable-rate loan with three one-year extension options at an interest rate of LIBOR plus 1.65%, and a $325.0 million, one-year, variable-rate loan with two one-year extension options at an interest rate of LIBOR plus 1.5%, and assumed fixed-rate debt of approximately $562.1 million (or approximately $432.3 million net of debt attributable to joint venture partners) representing eleven fixed-rate loans with an average blended interest rate of 6.01% and expiration dates ranging from 2008 to 2027. In addition, the Company executed a $200.0 million credit facility with an interest rate of LIBOR plus a range of 1.55% to 1.95% depending on the loan-to-value ratio, which matures April 9, 2010 with two one-year extension options, requires interest-only payments through maturity, and requires quarterly commitment fees ranging from 0.125% to 0.20% of the average undrawn balance during the quarter. To fund this acquisition, the Company drew approximately $50.0 million on this credit facility. Regarding the assumed debt of approximately $562.1 million, the Company recorded these loans at premiums totaling approximately $2.7 million as the fixed interest rates on many of these loans exceeds current interest rates the Company would otherwise incur on similar financial instruments. The debt premiums are amortized as an adjustment to interest expense over the terms of the related loans using the effective interest method.

On April 11, 2007, in connection with its acquisition of the remaining 15% joint venture interest in the Hyatt Regency Dearborn in Detroit, Michigan, for approximately $7.5 million, the Company assumed debt attributable to the joint venture partner of approximately $4.6 million. The Company acquired the other 85% interest pursuant to its acquisition of the 51-property hotel portfolio on April 11, 2007, as discussed above.

On April 16, 2007, the Company drew $25.0 million on its $200.0 million credit facility, due April 9, 2010.

On April 24 and 25, 2007, with proceeds received from its follow-on public offering completed April 24, 2007, the Company paid down the $45.0 million outstanding balance on its $47.5 million credit facility, due October 10, 2008, paid off the $325.0 million variable-rate loan, due April 9, 2008, and paid down its $555.1 million variable-rate loan, due May 9, 2009, by approximately $180.1 million. These three debt payments were made on April 25, 2007, April 24, 2007, and April 25, 2007, respectively. In connection with these repayments, the Company wrote-off unamortized loan costs of approximately $1.9 million related to the repayment of the $325.0 million loan and incurred prepayment penalties of approximately $559,000 related to the $180.1 million repayment.

On May 3, 2007, the Company repaid $25.0 million on its $200.0 million credit facility, due April 9, 2010.

On May 18, 2007, in connection with the Company’s sale of its portfolio of seven TownePlace Suites hotels for approximately $57.5 million, the Company paid down approximately $32.0 million related to its mortgage loan due July 1, 2015. Consequently, the $487.1 million mortgage loan secured by 32 hotels outstanding at December 31, 2006 became the $455.1 million mortgage loan secured by 25 hotels outstanding at September 30, 2007. In connection with this pay-down, the Company wrote-off unamortized loan costs of approximately $205,000 and incurred prepayment penalties of approximately $1.5 million.

On May 22, 2007, the Company modified its $200.0 million credit facility, due April 9, 2010, to increase its capacity to $300.0 million.

8. Derivative Instruments and Hedging Activities

Derivatives owned by the Company as of September 30, 2007 and December 31, 2006 as well as derivative-related transactions completed by the Company during the nine months ended September 30, 2007 are described below:

On October 28, 2005, the Company purchased a 7.0% LIBOR interest rate cap with a $45.0 million notional amount, which matures October 15, 2007, to limit its exposure to rising interest rates on $45.0 million of its variable-rate debt. The Company designated the $45.0 million cap as a cash flow hedge of its exposure to changes in interest rates on a corresponding amount of variable-rate debt.

On February 9, 2006, the Company paid down the related hedged $45.0 million revolving mortgage loan, due October 10, 2008, to $100 and discontinued hedge accounting related to this derivative as it no longer qualified as a cash flow hedge.

On December 6, 2006, the Company purchased a 6.25% LIBOR interest rate cap with a $212.0 million notional amount, which matures December 11, 2009, to limit its exposure to rising interest rates on $212.0 million of its variable-rate debt. The Company designated the $212.0 million cap as a cash flow hedge of its exposure to changes in interest rates on a corresponding amount of variable-rate debt. On February 6, 2007, the Company paid down the related hedged $212.0 million mortgage loan, due December 11, 2009, by approximately $28.0 million and discontinued hedge accounting related to $28.0 million of this derivative. Consequently, the Company recognized hedge ineffectiveness related to this $28.0 million as decreases to other income increase of approximately $15,000 and $15,000, respectively, for the three and nine months ended September 30, 2007.

On December 6, 2006, the Company purchased a 6.25% LIBOR interest rate cap with a $35.0 million notional amount, which matures December 11, 2009, to limit its exposure to rising interest rates on future variable-rate debt that the Company intends to draw over the next two years as capital expenditures are incurred. As this cap did not meet applicable hedge accounting criteria, it is not designated as a cash flow hedge.

On April 11, 2007, the Company purchased four 6.0% LIBOR interest rate caps with a total notional amount of approximately $555.1 million, which mature May 9, 2009, to limit its exposure to rising interest rates on $555.1 million of its variable-rate debt. On April 25, 2007, the Company paid down the related hedged $555.1 million mortgage loan, due May 9, 2009, by approximately $180.1 million and terminated a corresponding amount of these caps. As the remaining $375.0 million of these caps did not meet applicable hedge accounting criteria, such derivatives are not designated as cash flow hedges.

Regarding derivatives not qualifying as cash flow hedges, changes in fair value are recognized in earnings. For the three and nine months ended September 30, 2007, approximately $160,000 and $129,000, respectively, was recognized as decreases in other income related to these derivatives. For the three and nine months ended September 30, 2006, fair value changes related to such derivatives was nominal.

As of September 30, 2007 and December 31, 2006, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes.

As of September 30, 2007 and December 31, 2006, derivatives with a fair value of approximately $140,000 and $222,000 were included in other assets, respectively. For the three and nine months ended September 30, 2007, the change in accumulated other comprehensive income (loss) of approximately ($96,000) and ($243,000), respectively, for all derivatives is separately disclosed in the consolidated statements of comprehensive income (loss). For the three and nine months ended September 30, 2006, the change in accumulated other comprehensive income (loss) of approximately ($291,000) and ($1.0 million), respectively, for all derivatives is separately disclosed in the consolidated statements of comprehensive income (loss).

Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that approximately $37,000 will be reclassified from accumulated other comprehensive income (loss) existing at September 30, 2007 to increase interest expense.

9. Employee Stock Grants

All shares issued under the Company’s Stock Plan are charged to compensation expense on a straight-line basis over the vesting period based on the Company’s stock price on the date of each issuance. For the three and nine months ended September 30, 2007, the Company recognized compensation expense of approximately $1.7 million and $4.7 million, respectively, related to these shares. For the three and nine months ended September 30, 2006, the Company recognized compensation expense of approximately $1.4 million and $4.1 million, respectively, related to these shares. As of September 30, 2007, the unamortized value of the Company’s unvested shares of restricted stock was approximately $13.7 million, with an average remaining vesting period of approximately 1.5 years.

For the nine months ended September 30, 2007, the Company completed the following transactions related to its Stock Plan:

	•		On March 27, 2007, the Company issued 712,500 shares of restricted common stock to its executive officers. Such shares vest over four years.
	•		On March 27, 2007, the Company issued 126,000 shares of restricted common stock to certain employees. Such shares vest over three years.
	•		On May 15, 2007, the Company issued 16,000 shares of common stock to its directors as compensation for serving on the Board of Directors through May 2008. Such shares vested immediately.
	•		During the nine months ended September 30, 2007, 3,226 unvested shares of restricted common stock were forfeited and became available for re-issuance.
	•		During the nine months ended September 30, 2007, 60,177 vested shares were acquired by the Company to cover employees individual federal income taxes withheld on such shares. Such shares became available for re-issuance.

For the nine months ended September 30, 2007, the following table summarizes information related to the Company’s Stock Plan:

						Weighted Average
		Share Count				Grant Price
Unvested shares at December 31, 2006			939,623			$	11.74
Shares granted on March 27, 2007			838,500				12.39
Shares granted on May 15, 2007			16,000				12.06
Shares forfeited during the nine months ended September 30, 2007			(3,226	)			12.40
Shares vested during the nine months ended September 30, 2007			(390,193	)			11.51
Unvested shares at September 30, 2007			1,400,704			$	12.19

10. Capital Stock

Common Stock — During the nine months ended September 30, 2007, the Company acquired 60,177 shares of treasury stock for approximately $728,000 in connection with the Company’s Stock Plan, which allows employees to tender vested shares of restricted common stock to the Company at current market prices to cover individual federal income taxes withheld on such shares as such shares vest. During the nine months ended September 30, 2007, the Company reissued 36,841 treasury shares under its Stock Plan as common stock granted to its executives, certain employees, and directors.

On April 13, 2007, the Company filed a Form S-3 related to the registration of an indeterminate value of securities for potential future issuance, including common stock, preferred stock, debt, and warrants.

On April 24, 2007, in a follow-on public offering, the Company issued 48,875,000 shares of its common stock at $11.75 per share, which generated gross proceeds of approximately $574.3 million. However, aggregate proceeds to the Company, net of underwriters’ discount and offering costs, was approximately $548.2 million. The 48,875,000 shares issued include 6,375,000 shares sold pursuant to an over-allotment option granted to the underwriters. These net proceeds along with cash on hand were used to pay-down the $45.0 million outstanding balance on its $47.5 million credit facility, due October 10, 2008, payoff the $325.0 million variable-rate loan, due April 9, 2008, and pay-down its $555.1 million variable-rate loan, due May 9, 2009, by approximately $180.1 million. These three debt payments were made on April 25, 2007, April 24, 2007, and April 25, 2007, respectively.

Preferred Stock — In accordance with the Company’s charter, the Company is authorized to issue 50 million shares of preferred stock, which, as of September 30, 2007, includes Series A cumulative preferred stock, Series B cumulative convertible redeemable preferred stock, and Series D cumulative preferred stock.

On April 11, 2007, the Company issued 8.0 million shares of Series C cumulative redeemable preferred stock at $25 per share for approximately $200.0 million less a commitment fee of approximately $6.3 million. On July 18, 2007, with proceeds received from the issuance of Series D preferred stock discussed below, the Company redeemed its 8.0 million shares of Series C preferred stock for approximately $200.0 million and received a refund of related commitment fees of approximately $4.3 million. Dividends were payable quarterly, when and as declared, at a rate of three-month LIBOR plus 2.5% through the first 18 months and three-month LIBOR plus a range of 4.25% to 8.0% depending on the net debt to total assets ratio thereafter.

On July 18, 2007, the Company issued 8.0 million shares of 8.45% Series D cumulative preferred stock at $25 per share for approximately $200.0 million less underwriting discounts and commissions of approximately $6.3 million. Series D preferred stock has no maturity date, and the Company is not required to redeem the shares at any time. Prior to July 18, 2012, Series D preferred stock is not redeemable, except in certain limited circumstances, as described in the Company’s charter. However, on and after July 18, 2012, Series D preferred stock will be redeemable at the Company’s option for cash, in whole or from time to time in part, at a redemption price of $25 per share plus accrued and unpaid dividends, if any, at the redemption date. Series D preferred stock dividends are payable quarterly, when and as declared, at the rate of 8.45% per annum of the $25 liquidation preference (equivalent to an annual dividend rate of $2.11 per diluted share). The dividend rate increases to 9.45% per annum if these shares are no longer traded on a major stock exchange. In general, the holders of Series D preferred stock have no voting rights.

Common Stock and Units Dividends — During the nine months ended September 30, 2007, the Company declared cash dividends of approximately $73.1 million, or $0.21 per diluted share per quarter, related to both common stockholders and common unit holders, of which approximately $67.0 million and $6.1 million related to each, respectively. During the nine months ended September 30, 2007, the Company declared cash dividends of approximately $2.2 million, or $0.19 per diluted share per quarter, related to Class B unit holders.

Series A Preferred Stock Dividends — During the nine months ended September 30, 2007, the Company declared cash dividends of approximately $3.7 million, or $0.5344 per diluted share per quarter, related to Series A preferred stockholders.

Series B Preferred Stock Dividends — During the nine months ended September 30, 2007, the Company declared cash dividends of approximately $4.7 million, or $0.21 per diluted share per quarter, related to Series B preferred stockholders.

Series C Preferred Stock Dividends — During the nine months ended September 30, 2007, the Company declared cash dividends of approximately $4.3 million, based on LIBOR plus 2.5% for the period outstanding, related to Series C preferred stockholders. In addition, the Company recognized non-cash preferred dividends of approximately $845,000 related to the amortization of the discount attributable to the increasing-rate preferred dividend clause effective 18 months after issuance.

Series D Preferred Stock Dividends — During the nine months ended September 30, 2007, the Company declared cash dividends of approximately $3.4 million, or $0.5275 per diluted share per quarter prorated for the period outstanding, related to Series D preferred stockholders.

11. Minority Interest

Minority Interest In Consolidated Joint Ventures — Minority interest in consolidated joint ventures represents net income (loss) attributable to joint venture partners that own 11%-30% of 17 hotel properties acquired on April 11, 2007.

Minority Interest Related To Limited Partners in the Operating Partnership — Minority interest related to limited partners represents the limited partners’ proportionate share of the equity in the operating partnership. Minority interest related to limited partners represents dividends to Class B common unit holders plus an allocation of net income (loss) available to common shareholders after deducting dividends to Class B common unit holders based on the common unit holders’ weighted average limited partnership percentage ownership throughout the period. As of September 30, 2007 and December 31, 2006, all units of limited partnership interest represent 9.93% and 15.63% minority interest ownership, respectively.

12. Related Party Transactions

Under management agreements with related parties owned by the Company’s Chairman and its Chief Executive Officer, the Company pays such related parties a) monthly property management fees equal to the greater of $10,000 (CPI adjusted) or 3% of gross revenues as well as annual incentive management fees if certain operational criteria are met, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, and c) other reimbursements as approved by the Company’s independent directors. As of September 30, 2007, these related parties managed 43 of the Company’s 119 hotels while unaffiliated management companies managed the remaining 76 hotel properties.

Under agreements with both related parties and unaffiliated hotel managers, the Company incurred property management fees, including incentive property management fees, of approximately $16.3 million and $40.9 million for the three and nine months ended September 30, 2007, respectively, and approximately $4.9 million and $16.9 million for the three and nine months ended September 30, 2006, respectively. Incentive property management fees are included in indirect expenses on the consolidated statements of operations.

Regarding the $16.3 million incurred for the three months ended September 30, 2007, approximately $4.4 million and $11.9 million relates to related parties and third parties, respectively. Regarding the $40.9 million incurred for the nine months ended September 30, 2007, approximately $9.6 million and $31.3 million relates to related parties and third parties, respectively.

Regarding the $4.9 million incurred for the three months ended September 30, 2006, approximately $1.9 million and $3.0 million relates to related parties and third parties, respectively. Regarding the $16.9 million incurred for the nine months ended September 30, 2006, approximately $6.4 million and $10.5 million relates to related parties and third parties, respectively.

Under these agreements with related parties, the Company also incurred market service and project management fees related to capital improvement projects of approximately $2.5 million and $5.5 million for the three and nine months ended September 30, 2007, respectively, and approximately $845,000 and $3.6 million for the three and nine months ended September 30, 2006, respectively.

In addition, these related parties fund certain corporate general and administrative expenses on behalf of the Company, including rent, payroll, office supplies, travel, and accounting. The related parties allocate such charges to the Company based on various methodologies, including headcount and actual amounts incurred. For the three and nine months ended September 30, 2007, such costs were approximately $1.2 million and $3.6 million, respectively. For the three and nine months ended September 30, 2006, such costs were approximately $962,000 and $3.0 million, respectively.

Management agreements with related parties include exclusivity clauses that require the Company to engage such related parties, unless the Company’s independent directors either (i) unanimously vote to hire a different manager or developer or (ii) by a majority vote elect not to engage such related party because special circumstances exist or, based on the related party’s prior performance, it is believed that another manager or developer could materially improve the performance of such management duties.

13. Commitments and Contingencies

Restricted Cash — Under certain management and debt agreements existing at September 30, 2007, the Company escrows payments required for insurance, real estate taxes, and debt service. In addition, for certain properties with underlying debt, the Company escrows 4% to 6% of gross revenue for capital improvements.

Franchise Fees — Under franchise agreements existing at September 30, 2007, the Company pays franchisors royalty fees between 2.5% and 6% of gross room revenue as well as fees for marketing, reservations, and other related activities aggregating between 1% and 3.75% of gross room revenue. These franchise agreements expire from 2011 through 2027. When a franchise term expires, the franchisor has no obligation to renew the franchise. A franchise termination could have a material adverse effect on the operations or the underlying value of the affected hotel due to loss of associated name recognition, marketing support, and centralized reservation systems provided by the franchisor. A franchise termination could also have a material adverse effect on cash available for distribution to stockholders. In addition, if the Company terminates a franchise prior to its expiration date, the Company may be liable for up to three times the average annual franchise fees incurred for that property.

Management Fees — Under management agreements existing at September 30, 2007, the Company pays a) monthly property management fees equal to the greater of $10,000 (CPI adjusted) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by the Company’s independent directors. These management agreements expire from 2007 through 2027, with renewal options on agreements with related parties of up to 25 additional years. In addition, if the Company terminates a management agreement related to any of its initial properties prior to its expiration due to sale of the property, it may be liable for all estimated management fees due under the management agreement’s remaining term. However, this termination fee may be avoided in certain circumstances by substitution of a similar property. If the Company terminates a management agreement related to any of its hotels prior to its expiration, it may be liable for estimated management fees through the remaining term of the related contract or, in certain circumstances, substitute a new management agreement related to a different hotel.

Litigation — The Company is currently subject to litigation arising in the normal course of its business. In the opinion of management, none of these lawsuits or claims against the Company, either individually or in the aggregate, is likely to have a material adverse effect on the Company’s business, results of operations, or financial condition. In addition, management believes the Company has adequate insurance in place to cover any such significant litigation.

14. Supplemental Cash Flow Information

During the nine months ended September 30, 2007 and 2006, interest paid was approximately $99.0 million and $34.3 million, respectively.

During the nine months ended September 30, 2007 and 2006, income taxes paid were approximately $2.4 million and $1.3 million, respectively.

During the nine months ended September 30, 2007, the Company recorded the following non-cash transactions: a) on March 27, 2007, the Company issued 838,500 shares of restricted common stock to its executives and certain employees, b) on April 11, 2007, in connection with its acquisition of a 51-property hotel portfolio, the Company assumed eleven mortgage loans totaling approximately $562.1 million (or approximately $432.3 million net of debt attributable to joint venture partners) and recognized debt premiums of approximately $2.7 million, c) on April 11, 2007, the in connection with its acquisition of the remaining 15% joint venture interest in a hotel property, the Company assumed debt attributable to the joint venture partner of approximately $4.6 million, d) on May 15, 2007, the Company issued 16,000 shares of common stock to its directors, and e) during the nine months ended September 30, 2007, the Company recognized non-cash preferred dividends of approximately $845,000 related to the amortization of the discount associated with its Series C preferred stock.

During the nine months ended September 30, 2006, the Company recorded the following non-cash transactions: a) on March 24, 2006, in connection with the sale of eight hotel properties, the buyer assumed approximately $93.7 million of the Company’s mortgage debt, b) on March 28, 2006, the Company issued 642,557 shares of restricted common stock to its executives and certain employees of the Company and its affiliates, c) on May 2, 2006, the Company issued 16,000 shares of common stock to its directors, d) on August 1, 2006, the Company issued 3,000 shares of restricted common stock to certain employees of the Company, e) on July 13, 2006, in connection with its acquisition of a hotel property, the Company assumed a mortgage note payable of approximately $53.3 million and recognized a debt premium of approximately $2.1 million, f) on July 13, 2006, in connection with its acquisition of a hotel property, the Company issued 3,814,842 units of limited partnership interest, and g) during the nine months ended September 30, 2006, the Company issued 773,346 shares of common stock in exchange for 773,346 units of limited partnership interest.

15. Segments Reporting

The Company presently operates in two business segments within the hotel lodging industry: direct hotel investments and hotel financing. Direct hotel investments refers to owning hotels through either acquisition or new development. Hotel financing refers to owning subordinate hotel-related mortgages through acquisition or origination. The Company does not allocate corporate-level accounts to its operating segments, including corporate general and administrative expenses, non-operating interest income, interest expense, income taxes, and minority interest.

For the three months ended September 30, 2007, financial information related to the Company’s reportable segments was as follows (in thousands):

		Direct Hotel				Hotel
		Investments				Financing				Corporate				Consolidated
Total revenues		$	334,451			$	2,373			$	—			$	336,824
Operating expenses			245,760				—				—				245,760
Depreciation and amortization			39,262				—				—				39,262
Corporate general and administrative			—				—				8,069				8,069
Operating income (loss)			49,429				2,373				(8,069	)			43,733
Interest income			—				—				776				776
Interest expense			—				—				(45,125	)			(45,125	)
Amortization of loan costs			—				—				(2,524	)			(2,524	)
Income (loss) before minority interest and benefit from income taxes			49,429				2,373				(54,942	)			(3,140	)
Benefit from income taxes			—				—				2,117				2,117
Minority interest in consolidated joint ventures			—				—				(106	)			(106	)
Minority interest related to limited partners in the operating partnership			—				—				343				343
Net income (loss) from continuing operations		$	49,429			$	2,373			$	(52,588	)		$	(786	)
Income from discontinued operations, net															1,294
Net income														$	508