Overview

We own primarily luxury, upper upscale and upscale hotels in the United States operated under leading brand names, such as Marriott, Hilton, Hyatt, Fairmont, Starwood, and Wyndham.

Operations

REIT structure. For us to qualify as a REIT, our income cannot be derived from our operation of hotels. Therefore, consistent with the provisions of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder (the "Code"), our Operating Partnership and its subsidiaries lease our hotel properties to our TRS Lessee, which in turn contracts with third-party operators to manage our hotels. All of our third-party managers qualify as "eligible independent contractors", which under the Code means they are actively engaged in the trade or business of operating "qualified lodging facilities" for any person unrelated to us and the TRS Lessee. The Operating Partnership and the TRS Lessee are consolidated into our financial statements for accounting purposes. Because we control both the Operating Partnership and our TRS Lessee, revenues generated by our underlying portfolio of hotels remain our principal source of operating income on a consolidated basis. The earnings of the TRS Lessee are subject to taxation like other C corporations, which may reduce our operating results, funds from operations and the cash otherwise available for distribution to our stockholders.

Factors Affecting Our Results of Operations

Acquisitions. In January 2007, we acquired the 499-room LAX Renaissance hotel located in Los Angeles, California for approximately $65.2 million and retained Marriott as manager. The acquisition was initially funded through a draw on our credit facility, which we ultimately repaid with a portion of the proceeds we received in June 2007 from the sale of six hotel properties.

In March 2007, we acquired the 402-room Marriott Long Wharf hotel located in Boston, Massachusetts for approximately $228.5 million and retained Marriott as manager. In connection with this acquisition we obtained a $176.0 million mortgage loan with a maturity date of March 2017 and a fixed interest rate of 5.58%. The balance of the purchase price was funded with a draw on our credit facility, which we ultimately repaid with a portion of the proceeds we received in June 2007 from the sale of six hotel properties.

In May 2007, we acquired the 464-room Marriott Boston Quincy hotel located in Quincy, Massachusetts for approximately $117.0 million and retained Marriott as manager. The acquisition was funded primarily through the settlement of our Forward Sale Agreement, with the balance funded with a draw on our credit facility, which we ultimately repaid with a portion of the proceeds we received in June 2007 from the sale of six hotel properties.

The following table sets forth the hotels that we have acquired since January 1, 2006:

      Hotels                                          Rooms   Acquisition Date
      Marriott Boston Quincy, Quincy, Massachusetts     464        May 1, 2007
      Marriott Long Wharf, Boston, Massachusetts        402     March 23, 2007
      LAX Renaissance, Los Angeles, California          499    January 4, 2007
      W Hotel, San Diego, California                    259      June 26, 2006
      Embassy Suites, La Jolla, California              335       May 17, 2006
      Hilton Times Square, New York City, New York      444     March 17, 2006
      Del Mar Marriott, San Diego, California           284   January 10, 2006

Investment in unconsolidated joint venture. In December 2006, we entered into a joint venture agreement with Whitehall Street Global Real Estate Limited Partnership 2005 and Highgate Holdings to acquire the 460-room Doubletree Guest Suites Hotel located in New York City, New York. Our total initial investment in the joint venture was approximately $68.5 million. Our total initial investment was funded entirely from cash on hand and was comprised of two parts: (i) a $28.5 million mezzanine loan, which bore an interest rate of 8.5% on a face value of $30.0 million and (ii) a $40.0 million equity investment representing a 38% ownership interest in the joint venture. In April 2007, we sold the $28.5 million mezzanine loan for net proceeds of $29.0 million. The total debt of the joint venture is $300.0 million, including the $30.0 million mezzanine loan.

Dispositions. The following table sets forth the hotels we have sold since January 1, 2006:

   Hotels                                              Rooms    Disposition Date
   Courtyard by Marriott, Oxnard, California             166        June 29, 2007
   Courtyard by Marriott, Riverside, California          163        June 29, 2007
   Hawthorn Suites, Sacramento, California               272        June 29, 2007
   Hilton Garden Inn, Lake Oswego, Oregon                179        June 29, 2007
   Residence Inn by Marriott, Oxnard, California         251        June 29, 2007
   Residence Inn by Marriott, Sacramento, California     126        June 29, 2007
   Holiday Inn, Rochester, Minnesota                     170    December 21, 2006
   Courtyard by Marriott, Fresno, California             116   September 13, 2006
   Courtyard by Marriott, Lynnwood, Washington           164   September 13, 2006
   Courtyard by Marriott, Santa Fe, New Mexico           213   September 13, 2006
   Crowne Plaza, Englewood, New Jersey                   194   September 13, 2006
   Crowne Plaza, Williamsburg, Virginia                  303   September 13, 2006
   Hawthorn Suites, Kent, Washington                     152   September 13, 2006
   Holiday Inn, Boise, Idaho                             265   September 13, 2006
   Holiday Inn, Craig, Colorado                          152   September 13, 2006
   Holiday Inn, Price, Utah                              151   September 13, 2006
   Holiday Inn, Renton, Washington                       226   September 13, 2006
   Holiday Inn, San Diego (Stadium), California          175   September 13, 2006
   Marriott, Ogden, Utah                                 292   September 13, 2006
   Marriott, Pueblo, Colorado                            164   September 13, 2006
   Holiday Inn, Hollywood, California                    160       March 15, 2006

Renovations. During the third quarter of 2007 the Company invested $27.2 million in capital improvements. This included $9.1 million for repositioning projects that were completed during the second quarter.

During the third quarter, design for the renovation of Marriott Boston Long Wharf was finalized. The $14 million Long Wharf renovation is expected to commence during the fourth quarter of 2007 and be completed during the first quarter of 2008.

Indebtedness. During the first quarter of 2007, we drew down $138.0 million of our $200.0 million credit facility to fund our purchases of the Renaissance LAX and the Marriott Long Wharf, and to fund other working capital requirements. During the second quarter of 2007, we drew down an additional $27.0 million of the credit facility to fund our purchase of the Marriott Boston Quincy, and to fund other working capital requirements. We repaid $24.0 million of the credit facility in April 2007, and repaid the remaining balance in June 2007, using proceeds we received from the sale of six hotel properties. As of September 30, 2007, we had no outstanding indebtedness under our credit facility, and had $11.3 million outstanding irrevocable letters of credit backed by the credit facility, leaving, as of that date, $188.7 million available under the credit facility.

In March 2007, we obtained a $176.0 million mortgage loan with a maturity date of April 2017 and a fixed interest rate of 5.58% in connection with the acquisition of the Marriott Long Wharf. In addition, in April 2007, we amended one of our mortgage loans to eliminate amortization and to provide for partial collateral releases, provided we continue to meet certain loan covenants, from May 2007 until the maturity date of May 2011, at which time the outstanding loan balance of $248.2 million will be due and payable. We also repaid a $175.0 million mortgage loan in June 2007, which had a maturity date of December 2014. In connection with this repayment, we incurred prepayment penalties of $0.4 million.

In June 2007, the Operating Partnership issued an aggregate $250.0 million of exchangeable senior notes with a maturity date of July 2027 and an interest rate of 4.60%. Interest on the notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning January 15, 2008. The notes, subject to specified events and other conditions, are exchangeable into, at our option, cash, our common stock, or a combination of cash and our common stock. The initial exchange rate for each $1,000 principal amount of notes is 28.9855 shares of our common stock, representing an exchange price of approximately $34.50 per common share. The initial exchange rate is subject to adjustment under certain circumstances. The Operating Partnership does not have the right to redeem the notes, except to preserve our REIT status, before January 20, 2013, and may redeem the notes, in whole or in part, thereafter at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest. Upon specified change in control events as well as specified dates, holders of the notes may require the Operating Partnership to repurchase their notes, in whole or in part, for cash equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are the senior unsecured obligations of the Operating Partnership. We and all of our subsidiaries that are guarantors under our credit facility have guaranteed the Operating Partnership's obligations under the notes.

In August 2007, we repaid a $13.1 million mortgage loan with a maturity date of September 2007.

Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:

• occupancy;

• average daily rate, or ADR;

• revenue per available room, or RevPAR, which is the product of occupancy and ADR, but does not include food and beverage revenue, or other operating revenue;

• comparable RevPAR growth, which we define as the change in RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that experienced material and prolonged business interruption due to renovations, re-branding or property damage during either the current or preceding calendar year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR growth as our "Comparable Portfolio";

• operating margin, which is the quotient of total operating income divided by total revenues; and

• operating flow through, which is the quotient of incremental operating income divided by incremental revenues.

Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:

• Room revenue, which is the product of the number of rooms sold and the ADR;

• Food and beverage revenue, which is comprised of revenues realized in the hotel food and beverage outlets as well as banquet and catering events; and

• Other operating revenue, which includes ancillary hotel revenue such as performance guaranties and other items primarily driven by occupancy such as telephone, transportation, parking, spa, entertainment and other guest services. Additionally, this category includes operating revenue from our two commercial laundry facilities located in Rochester, Minnesota and Salt Lake City, Utah and our electronic purchasing platform, Buy Efficient, L.L.C.

Expenses. Our expenses consist of the following:

• Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue;

• Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue;

• Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise fees;

• Property general and administrative expense, which includes our property-level general and administrative expenses, such as payroll and related costs, professional fees, travel expenses and management fees;

• Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense;

• Corporate overhead expense, which includes our corporate-level expenses such as payroll and related costs, amortization of deferred stock compensation, professional fees, travel expenses and office rent; and

• Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment.

Other Revenue and Expense. Other revenue and expense consists of the following:

• Equity in losses of joint venture, which includes our portion of losses from our joint venture;

• Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts; and

• Interest expense, which includes interest expense incurred on our outstanding debt.

Most categories of variable operating expenses, such as utilities and certain labor costs such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to improvements in occupancy are accompanied by increases in corresponding categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically result in more limited increases in operating costs and expenses, primarily credit card commissions, management fees and franchise fees. Thus, changes in ADR generally have a more significant effect on our operating margins than changes in occupancy.

We continually work with our operators to improve our operating flow through, which generally refers to our ability to retain incremental revenue as profit by minimizing incremental operating expenses. There are, however, limits to how much our operators can accomplish in this regard without affecting the competitiveness of our hotels and our guests' experiences at our hotels. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels that our operators cannot necessarily control. For example, we have experienced increases in hourly wages, employee benefits (especially health insurance), and utility costs, which negatively affected our operating margin. Our historical performance may not be indicative of future results, and our future results may be worse than our historical performance.

Operating Results

The following tables present our unaudited operating results for our total portfolio for the three and nine months ended September 30, 2007 and 2006, including the amount and percentage change in the results between the periods. Our total portfolio represents the results of operations included in the consolidated statements of operations, and includes 46 hotels (15,987 rooms) as of September 30, 2007 and 43 hotels (14,606 rooms) as of September 30, 2006. The results of operations for six hotels that were sold in 2007 and 15 hotels that were sold in 2006 are included in discontinued operations for the three and nine months ended September 30, 2006.

                                                            Three Months Ended September 30,
                                                     2007          2006        $ Change      % Change
REVENUES
Room                                               $ 181,214     $ 146,172     $  35,042         24.0 %
Food and beverage                                     64,471        49,155        15,316         31.2 %
Other operating                                       21,353        21,462          (109 )       (0.5 )%

Total revenues                                       267,038       216,789        50,249         23.2 %

OPERATING EXPENSES
Hotel operating                                      159,316       134,514        24,802         18.4 %
Property general and administrative                   29,897        23,318         6,579         28.2 %
Corporate overhead                                     6,092         3,111         2,981         95.8 %
Depreciation and amortization                         30,266        24,902         5,364         21.5 %

Total operating expenses                             225,571       185,845        39,726         21.4 %

Operating income                                      41,467        30,944        10,523         34.0 %
Equity in losses of unconsolidated joint venture        (766 )          -           (766 )     (100.0 )%
Interest and other income                                860           616           244         39.6 %
Interest expense                                     (24,994 )     (22,889 )      (2,105 )       (9.2 )%

Income from continuing operations                     16,567         8,671         7,896         91.1 %
Income (loss) from discontinued operations                -         (7,135 )       7,135        100.0 %

Net income                                         $  16,567     $   1,536     $  15,031        978.6 %

                                                            Nine Months Ended September 30,
                                                     2007          2006        $ Change      % Change
REVENUES
Room                                               $ 507,134     $ 407,659     $  99,475         24.4 %
Food and beverage                                    204,007       164,129        39,878         24.3 %
Other operating                                       58,388        55,956         2,432          4.3 %

Total revenues                                       769,529       627,744       141,785         22.6 %

OPERATING EXPENSES
Hotel operating                                      461,183       381,035        80,148         21.0 %
Property general and administrative                   86,787        71,095        15,692         22.1 %
Corporate overhead                                    22,898        13,486         9,412         69.8 %
Depreciation and amortization                         86,015        67,544        18,471         27.3 %

Total operating expenses                             656,883       533,160       123,723         23.2 %

Operating income                                     112,646        94,584        18,062         19.1 %
Equity in losses of unconsolidated joint venture      (2,227 )          -         (2,227 )     (100.0 )%
Interest and other income                              2,335         2,227           108          4.8 %
Interest expense                                     (74,743 )     (70,462 )      (4,281 )       (6.1 )%

Income from continuing operations                     38,011        26,349        11,662         44.3 %
Income from discontinued operations                   57,856        15,064        42,792        284.1 %

Net income                                         $  95,867     $  41,413     $  54,454        131.5 %

2007 Compared to 2006

Revenues. Total revenue for the three months ended September 30, 2007 was $267.0 million as compared to $216.8 million for the same period in 2006. Total revenue for the three months ended September 30, 2007 included room revenue of $181.2 million, food and beverage revenue of $64.5 million, and other revenue of $21.4 million. Total revenue for the three months ended September 30, 2006 included room revenue of $146.2 million, food and beverage revenue of $49.2 million, and other revenue of $21.5 million.

Total revenue for the nine months ended September 30, 2007 was $769.5 million as compared to $627.7 million for the same period in 2006. Total revenue for the nine months ended September 30, 2007 included room revenue of $507.1 million, food and beverage revenue of $204.0 million, and other revenue of $58.4 million. Total revenue for the nine months ended September 30, 2006 included room revenue of $407.7 million, food and beverage revenue of $164.1 million, and other revenue of $56.0 million.

Included in the following tables are comparisons of the key operating metrics for our hotel portfolio for the three and nine months ended September 30, 2007 and 2006. The comparisons do not include the results of operations for the six hotels sold in 2007 and the 15 hotels sold during 2006. Because seven of our hotels owned as of September 30, 2007 were acquired during 2006 and 2007, the key operating metrics for the total hotel portfolio and the Comparable Portfolio reflect the results of operations of those seven hotels under previous ownership for either a portion of or the entire three and nine months ended September 30, 2007 and 2006.

                                                                 Three Months Ended September 30,
                                                   2007                           2006                       Change
                                       Occ%       ADR       RevPAR    Occ%       ADR       RevPAR    Occ%     ADR     RevPAR
Total Hotel Portfolio (46 hotels)      80.9 %   $ 157.40   $ 127.34   76.6 %   $ 148.99   $ 114.13    4.3 %   5.6 %     11.6 %
Comparable Portfolio (42 hotels) (1)   81.1 %   $ 153.91   $ 124.82   78.5 %   $ 147.02   $ 115.41    2.6 %   4.7 %      8.2 %




                                                                  Nine Months Ended September 30,
                                                   2007                           2006                       Change
                                       Occ%       ADR       RevPAR    Occ%       ADR       RevPAR    Occ%     ADR     RevPAR
Total Hotel Portfolio (46 hotels)      77.9 %   $ 156.85   $ 122.19   74.7 %   $ 149.81   $ 111.91    3.2 %   4.7 %      9.2 %
Comparable Portfolio (42 hotels) (1)   78.4 %   $ 152.08   $ 119.23   76.4 %   $ 145.33   $ 111.03    2.0 %   4.6 %      7.4 %

For the three months ended September 30, 2007, RevPAR for our total portfolio increased 11.6% to $127.34 from the same period in 2006. Occupancy increased 4.3 percentage points to 80.9%, while ADR increased 5.6% to $157.40. For our Comparable Portfolio, RevPAR increased 8.2% to $124.82 from the same period in 2006. Occupancy increased 2.6 percentage points to 81.1%, while ADR increased 4.7% to $153.91.

For the nine months ended September 30, 2007, RevPAR for our total portfolio increased 9.2% to $122.19 from the same period in 2006. Occupancy increased 3.2 percentage points to 77.9%, while ADR increased 4.7% to $156.85. For our Comparable Portfolio, RevPAR increased 7.4% to $119.23 from the same period in 2006. Occupancy increased 2.0 percentage points to 78.4%, while ADR increased 4.6% to $152.08.

Room revenue. Room revenue increased $35.0 million, or 24.0%, for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. A substantial portion of this increase was due to room revenue generated from newly acquired hotels. We acquired three hotels subsequent to our second quarter 2006: Renaissance LAX, Marriott Long Wharf, and Marriott Boston Quincy (which we refer to as the "three hotels"). The three hotels contributed $17.4 million to room revenue during our third quarter 2007. In addition, growth in the hotels we acquired prior to June 30, 2006 (which we refer to as our "third quarter existing portfolio") contributed $17.6 million to the increase in room revenue during our third quarter 2007, due to increases in both occupancy ($6.0 million) and ADR ($11.6 million).

Room revenue increased $99.5 million, or 24.4%, for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The increase was primarily due to room revenue generated from newly acquired hotels. We acquired seven hotels subsequent to our fourth quarter 2005: Del Mar Marriott, Hilton Times Square, Embassy Suites La Jolla, W Hotel San Diego, LAX Renaissance, Marriott Long Wharf, and Marriott Boston Quincy (which we refer to as the "seven hotels"). The seven hotels contributed $61.0 million to room revenue during the first nine months of 2007. In

addition, growth in the hotels we acquired prior to December 31, 2005 (which we refer to as our "2007 existing portfolio") contributed $38.5 million to the increase in room revenue during the first nine months of 2007, due to increases in both occupancy ($16.3 million) and ADR ($22.2 million).

Food and beverage revenue. Food and beverage revenue increased $15.3 million, or 31.2%, for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. The three hotels contributed $6.2 million of food and beverage revenue during our third quarter 2007. Food and beverage revenue generated from our third quarter existing portfolio increased $9.1 million during our third quarter 2007 as compared to the same period in 2006, due to higher occupancy levels at the hotels, and due to renovation disruption in 2006.

Food and beverage revenue increased $39.9 million, or 24.3%, for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The seven hotels contributed $18.5 million of food and beverage revenue during the first nine months of 2007. Food and beverage revenue generated from our 2007 existing portfolio increased $21.4 million during the first nine months of 2007 as compared to the same period in 2006 primarily due to the same reasons described above in the discussion regarding the third quarter.

Other operating revenue. Other operating revenue decreased $0.1 million, or 0.5%, for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. The three hotels contributed $1.5 million to other operating revenue during our third quarter 2007. Other operating revenue generated from our third quarter existing portfolio decreased $1.6 million during our third quarter 2007 as compared to the same period in 2006 primarily due to decreased revenue recognized from a performance guaranty provided by the manager of the Hyatt Regency Century Plaza. We recognized $0.8 million in other revenue from this performance guaranty during the third quarter 2007 as compared . . .