Lasalle Hotel Properties (LHO) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

OR

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

FOR THE TRANSITION PERIOD FROM            TO            

Commission file number 1-14045

LASALLE HOTEL PROPERTIES

(Exact name of registrant as specified in its charter)

Maryland	36-4219376
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
3 Bethesda Metro Center, Suite 1200, Bethesda, MD	20814
(Address of principal executive offices)	(Zip Code)

(301) 941-1500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act rule 12b-2).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act).     Yes  ¨    No  x

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

Class	Outstanding at October 19, 2005
Common Shares of Beneficial Interest ($0.01 par value)	32,603,844
10 1/4 % Series A Cumulative Redeemable Preferred Shares ($0.01 par value)	3,991,900
8 3/8 % Series B Cumulative Redeemable Preferred Shares ($0.01 par value)	1,100,000
7 1/2 % Series D Cumulative Redeemable Preferred Shares ($0.01 par value)	3,170,000

TABLE OF CONTENTS

		Page
PART I	Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42
PART II	Other Information
Item 1.	Legal Proceedings	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Submission of Matters to a Vote of Security Holders	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
	Signatures	45

2

PART I.Financial Information

Item 1. Financial Statements.

LASALLE HOTEL PROPERTIES

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	September 30, 2005			December 31, 2004
	(unaudited)
Assets:
Investment in hotel properties, net	$	1,236,565		$	739,733
Property under development		5,614			32,508
Investment in joint venture (Note 2)		1,165			1,341
Cash and cash equivalents		1,420			32,102
Restricted cash reserves (Note 7)		21,334			7,430
Rent receivable		5,161			1,527
Hotel receivables (net of allowance for doubtful accounts of approximately $462 and $255, respectively)		23,449			8,227
Deferred financing costs, net		4,964			4,283
Deferred tax asset		15,822			14,500
Prepaid expenses and other assets		27,981			17,945
Total assets	$	1,343,475		$	859,596
Liabilities and Shareholders’ Equity:
Borrowings under credit facilities (Note 6)	$	64,241		$	—
Bonds payable (Note 6)		42,500			42,500
Mortgage loans (Note 6)		478,974			211,810
Accounts payable and accrued expenses		51,099			35,338
Advance deposits		5,988			4,423
Accrued interest		941			1,181
Distributions payable		6,790			5,554
Liabilities of assets sold (Note 4)		—			162
Total liabilities		650,533			300,968
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P		2,624			4,554
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P		59,030			—
Shareholders’ Equity:
Preferred shares, $.01 par value, 20,000,000 shares authorized, 10 1/4% Series A - 3,991,900 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively (Note 8)		40			40
8 3/8% Series B - 1,100,000 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively (Note 8)		11			11
7 1/2 % Series D - 3,170,000 and 0 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively (Note 8)		32			—
Common shares of beneficial interest, $.01 par value, 100,000,000 shares authorized and 30,318,726 and 29,880,047 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively (Note 8)		303			299
Additional paid-in capital, including offering costs of $34,219 and $31,853 at September 30, 2005 and December 31, 2004, respectively		709,758			617,742
Deferred compensation		(2,688	)		(2,332	)
Accumulated other comprehensive income (Note 14)		1,425			965
Distributions in excess of retained earnings		(77,593	)		(62,651	)
Total shareholders’ equity		631,288			554,074
Total liabilities and shareholders’ equity	$	1,343,475		$	859,596

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

3

LASALLE HOTEL PROPERTIES

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(Unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
	2005			2004			2005			2004
Revenues:
Hotel operating revenues:
Room revenue	$	63,683		$	44,590		$	163,242		$	115,463
Food and beverage revenue		29,125			23,323			80,246			63,101
Other operating department revenue		9,375			6,918			21,963			17,436
Total hotel operating revenues		102,183			74,831			265,451			196,000
Participating lease revenue		8,097			7,135			17,511			15,562
Other income		191			18			807			110
Total revenues		110,471			81,984			283,769			211,672
Expenses:
Hotel operating expenses:
Room		14,538			10,750			38,770			28,755
Food and beverage		20,069			15,954			55,177			43,618
Other direct		4,872			3,762			12,781			10,193
Other indirect (Note 11)		28,582			20,003			74,925			54,765
Total hotel operating expenses		68,061			50,469			181,653			137,331
Depreciation and other amortization		12,430			9,977			33,699			28,700
Real estate taxes, personal property taxes and insurance		4,137			2,980			11,088			8,723
Ground rent (Note 7)		1,255			1,111			3,024			2,713
General and administrative		2,911			2,238			8,171			6,351
Lease termination expenses		—			850			1,000			850
Other expenses		17			7			188			590
Total operating expenses		88,811			67,632			238,823			185,258
Operating income		21,660			14,352			44,946			26,414
Interest income		224			64			429			223
Interest expense		(6,569	)		(3,928	)		(16,405	)		(11,566	)
Income before income tax benefit (expense), minority interest, equity in earnings of unconsolidated entities and discontinued operations		15,315			10,488			28,970			15,071
Income tax benefit (expense) (Note 12)		27			(558	)		(18	)		807
Income before minority interest, equity in earnings of unconsolidated entities and discontinued operations		15,342			9,930			28,952			15,878
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P		(120	)		(158	)		(284	)		(256	)
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P		(355	)		—			(355	)		—
Income before equity in earnings of unconsolidated entities and discontinued operations		14,867			9,772			28,313			15,622
Equity in earnings of unconsolidated entities (Note 2)		275			221			461			235
Income before discontinued operations		15,142			9,993			28,774			15,857
Discontinued operations (Note 4):
Income (loss) from operations of property disposed of, including gain on disposal of assets		—			3,286			(45	)		4,745
Minority interest, net of tax		—			(51	)		—			(72	)
Income tax benefit (expense) (Note 12)		—			(56	)		19			(180	)
Net income (loss) from discontinued operations		—			3,179			(26	)		4,493
Net income		15,142			13,172			28,748			20,350
Distributions to preferred shareholders		(3,744	)		(3,133	)		(10,010	)		(9,399	)
Net income applicable to common shareholders	$	11,398		$	10,039		$	18,738		$	10,951

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

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LASALLE HOTEL PROPERTIES

Consolidated Statements of Operations - Continued

(Dollars in thousands, except per share data)

	For the three months ended September 30,				For the nine months ended September 30,
	2005		2004		2005		2004
Earnings per Common Share - Basic:
Income applicable to common shareholders before discontinued operations and after dividends paid on unvested restricted shares	$	0.38	$	0.25	$	0.62	$	0.24
Discontinued operations		—		0.11		—		0.17
Net income applicable to common shareholders after dividends paid on unvested restricted shares	$	0.38	$	0.36	$	0.62	$	0.41
Earnings per Common Share - Diluted:
Income applicable to common shareholders before discontinued operations	$	0.37	$	0.24	$	0.62	$	0.24
Discontinued operations		—		0.11		—		0.17
Net income applicable to common shareholders	$	0.37	$	0.35	$	0.62	$	0.41
Weighted average number of common shares outstanding:
Basic		30,022,302		27,805,183		29,853,499		26,087,859
Diluted		30,492,289		28,351,296		30,329,567		26,714,754

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

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LASALLE HOTEL PROPERTIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

	For the nine months ended Sept 30,
	2005			2004
Cash flows from operating activities:
Net income	$	28,748		$	20,350
Adjustments to reconcile net income to net cash flow provided by operating activities:
Depreciation and other amortization		33,699			28,813
Amortization of deferred financing costs		1,876			1,657
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P.		284			328
Gain on sale of property disposed of		—			(2,643	)
Gain on extinguishment of debt		—			(70	)
Gain on disposition of minority interest in other partnerships		—			(10	)
Income tax expense (benefit)		(1	)		(627	)
Deferred compensation		899			936
Equity in earnings of unconsolidated entities		(461	)		(235	)
Changes in assets and liabilities:
Rent receivable		(3,634	)		(1,115	)
Hotel receivables		(9,938	)		(4,654	)
Deferred tax asset		(1,321	)		(468	)
Prepaid expenses and other assets		(7,438	)		(10,778	)
Accounts payable and accrued expenses		9,818			4,643
Advance deposits		703			553
Accrued interest		(240	)		(195	)
Net cash flow provided by operating activities		52,994			36,485
Cash flows from investing activities:
Improvements and additions to hotel properties		(35,759	)		(22,578	)
Acquisition of hotel properties		(199,439	)		(163,767	)
Distributions from joint venture		638			2,454
Purchase of office furniture and equipment		(68	)		(84	)
Funding of restricted cash reserves		(16,130	)		(7,211	)
Proceeds from restricted cash reserves		2,226			21,545
Proceeds from sale of investment in hotel property		—			28,596
Net cash flow used in investing activities		(248,532	)		(141,045	)
Cash flows from financing activities:
Borrowings under credit facilities		277,156			240,153
Repayments under credit facilities		(212,915	)		(236,783	)
Proceeds from mortgage loans		59,600			91,400
Repayments of mortgage loans		(2,436	)		(63,977	)
Mortgage loan premium		—			(1,945	)
Payment of deferred financing costs		(2,557	)		(1,561	)
Proceeds from exercise of stock options		2,736			11,999
Proceeds from issuance of common shares		—			62,400
Proceeds from issuance of preferred shares		79,250			—
Payment of common offering costs		(167	)		(978	)
Payment of preferred offering costs		(2,314	)		—
Purchase of treasury shares		(1,046	)		—
Distributions-preferred shares		(9,399	)		(9,399	)
Distributions-common shares		(23,052	)		(17,260	)
Net cash flow provided by financing activities		164,856			74,049
Net change in cash and cash equivalents		(30,682	)		(30,511	)
Cash and cash equivalents, beginning of period		32,102			34,761
Cash and cash equivalents, end of period	$	1,420		$	4,250

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

6

LASALLE HOTEL PROPERTIES

Notes to Consolidated Financial Statements

(Dollars in thousands, expect per share data)

(Unaudited)

1. Organization

LaSalle Hotel Properties (the “Company”), a Maryland real estate investment trust (“REIT”), buys, owns and leases primarily upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed REIT as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is not subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders.

As of September 30, 2005, the Company owned interests in 23 hotels with approximately 7,600 suites/rooms located in 10 states and the District of Columbia. The Company owns 100% equity interests in 22 of the hotels and a non-controlling 9.9% equity interest in a joint venture that owns one hotel. Each hotel is leased under a participating lease that provides for rental payments equal to the greater of (i) base rent or (ii) participating rent based on hotel revenues. An independent hotel operator manages each hotel. Two of the hotels are leased to unaffiliated lessees (affiliates of whom also operate these hotels) and 20 of the hotels are leased to the Company’s taxable REIT subsidiary, LaSalle Hotel Lessee, Inc. (“LHL”), or a wholly owned subsidiary of LHL (see Note 11). Lease revenue from LHL and its wholly owned subsidiaries is eliminated in consolidation. The hotel that is owned by the joint venture that owns the Chicago Marriott Downtown is leased to Chicago 540 Lessee, Inc. in which the Company has a non-controlling 9.9% equity interest (see Note 2).

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned approximately 99.5% of the common units of the Operating Partnership at September 30, 2005. At September 30, 2005, the remaining 0.5% was held by other limited partners who held 143,090 common limited partnership units. Limited partnership units are redeemable for cash, or at the option of the Company, for a like number of common shares of beneficial interest of the Company.

2. Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations, and consolidated statements of cash flows for the periods presented. Operating results for the three months and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 due to seasonal and other factors. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain prior period amounts have been reclassified to conform to the current period presentation.

Basis of Presentation

The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and its subsidiaries and partnerships in which it has a controlling interest. All significant intercompany balances and transactions have been eliminated.

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Use of Estimates

Preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Substantially all of the Company’s revenues and expenses come from the operations of the individual hotels. The Company uses revenues and expenses that are estimated and projected by the hotel operators to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its quarterly reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company uses actual revenue and expense amounts for the first two months of each quarter and revenue and expense estimates for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically these differences have not been material. The Company believes the aggregate estimate of quarterly revenues and expenses recorded on the Company’s consolidated statements of operations are materially correct.

Investment in Joint Venture

Investment in joint venture represents the Company’s non-controlling 9.9% equity interest in each of (i) the joint venture that owns the Chicago Marriott Downtown and (ii) Chicago 540 Lessee, Inc., both of which are associated with the Chicago Marriott Downtown.

On November 2, 2004, the Chicago 540 Hotel Venture, in which the Company has a non-controlling 9.9% ownership interest, obtained a three and a half year commitment for a $5,750 credit facility to be used for partial funding of costs related to upgrading the hotel’s furniture, fixtures and equipment (“FF&E”). The Chicago 540 Hotel Venture purchased a cap on London InterBank Offered Rate capping the London InterBank Offered Rate at 7.5%. Interest expense for the three and nine months ended September 30, 2005 was $83 and $222, respectively. Consistent with our ownership interest, the Company is guaranteeing 9.9% of the credit facility. As of September 30, 2005, the Company’s maximum exposure under the FF&E facility is $509, and the guarantee will expire at the maturity of the credit facility. In the event of default, any outstanding principal and accrued interest will be due and payable. As of September 30, 2005 and December 31, 2004, there was $5,138 and no outstanding borrowings under the FF&E credit facility, respectively.

Stock-Based Compensation

Prior to 2003, the Company applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the 1998 Share Option and Incentive Plan. Accordingly, no compensation costs were recognized for stock options granted to the Company’s employees, as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement No. 123 prospectively. No options were granted during the nine months ended September 30, 2005 or 2004. Options granted under the 1998 Share Option and Incentive Plan vest over three to four years, therefore the costs related to stock-based compensation for 2005 and 2004 are less than that which would have been recognized if the fair value based method had been applied to all grants since the original effective date of Statement No. 123. Had compensation cost for all of the options granted under the Company’s 1998 Share Option and Incentive Plan been determined in accordance with the method required by Statement No. 123, the Company’s net income and net income per common share for the three and nine months ended September 30, 2005 and 2004, respectively would approximate the actual results.

From time to time, the Company awards restricted shares under the 1998 Share Option and Incentive Plan to trustees, executive officers and employees, which vest over three or four years. The Company recognizes compensation expense for restricted shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of grant.

8

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No, 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company in the first annual reporting period beginning after June 15, 2005. Adoption is not expected to have a material effect on the Company.

3. Acquisition of Hotel Properties

On January 6, 2005, the Company acquired a 100% interest in the Hilton San Diego Gaslamp Quarter, a 282-room upscale full-service hotel located in the Gaslamp historic district in downtown San Diego, CA, for $85.0 million. The source of the funding for the acquisition was the Company’s senior unsecured bank facility. The property is leased to LHL, and Davidson Hotel Company was retained to manage the property.

On January 10, 2005, the Company acquired a 100% interest in the Grafton on Sunset, a 108-room, upscale full-service hotel located in West Hollywood, CA, for $25.5 million. The source of the funding for the acquisition was the Company’s senior unsecured bank facility. The property is leased to LHL, and Outrigger Lodging Services was selected to manage the property.

On May 18, 2005, the Company acquired a 100% interest in the Onyx Hotel, a 112-room upscale full-service hotel located in historic downtown Boston, MA, for $28.6 million. The source of the funding for the acquisition was the Company’s senior unsecured bank facility. The property is leased to LHL, and Kimpton Hotel and Restaurant Group, LLC was retained to manage the property.

On August 31, 2005, the Company acquired a 100% interest in the Westin Copley Place, a 803-room, urban, upscale full-service hotel located in downtown Boston, MA’s Back Bay neighborhood, for aggregate consideration of $324 million after expenses. The source of the funding for the acquisition was the assumption of a $210 million first mortgage on the property which does not allow for prepayment without penalty prior to May 31, 2015, $59 million in preferred units of the Operating Partnership and the balance with proceeds from the Company’s senior unsecured bank facility. The property is leased to LHL, and Starwood Hotels and Resorts was retained to manage the property. Pursuant to the acquisition of the Westin Copley Place, the Company entered into a Tax Reporting and Protection Agreement (the “Tax Agreement”) with SCG Copley Square LLC (“SCG”). Under the Tax Agreement, the Company is required, among other things, to indemnify SCG (and its affiliates) for certain income tax liabilities that such entities would incur if the Westin Copley Place was transferred by the Company in a taxable transaction or if the Company fails to maintain a certain level of indebtedness with respect to the Westin Copley Place or its operations. The obligations of the Company under the Tax Protection Agreement (i) do not apply in the case of a foreclosure of the Westin Copley Place, if certain specified requirements are met, (ii) are limited to $20,000,000 (although a limitation of $10,000,000 is applicable to certain specified transactions), and (iii) terminate on the earlier of the tenth anniversary of the Company’s acquisition of the Westin Copley Place or January 1, 2016. The Company believes that the likelihood that the Company will be required to pay under this Tax Agreement are remote, and therefore, a liability has not been recorded.

4. Discontinued Operations

Effective May 9, 2005, the Company entered into an exclusive listing agreement for the sale of the Seaview Resort and Spa. The asset was classified as held for sale at that time because the property was being actively marketed and the sale was expected to occur within one year; accordingly, depreciation was suspended. Based on initial pricing expectations, the Company expected to recognize a gain on the sale; therefore, no impairment had

9

been recognized. In September 2005, the Company changed its intent to sell the Seaview Resort and Spa. Though pricing was above the book value of the asset it was below the Company’s target. The Company evaluated the carrying value of the hotel and determined no impairment exists. The Company reclassified the Seaview Resort and Spa as held and used and adjusted for depreciation expense of $1,040 that would have been recognized had the asset been continuously classified as held and used.

Effective January 16, 2004, the Omaha property was classified as held for sale. The asset was sold on September 15, 2004. Net loss from discontinued operations related to the Omaha property for the three months and nine months ended September 30, 2005 was $0 and $26, respectively and resulted from additional post closing adjustments from the sale. The loss from the Omaha property for the nine months ended September 30, 2005 includes an expense of $45 and is partly offset by the tax benefit of $19. For the three months and nine months ended September 30, 2004, total revenues related to the asset of $2,863 and $9,829, respectively, comprised primarily of hotel operating revenues. For the three months and nine months ended September 30, 2004, the net income before income tax expense related to the asset, excluding the gain on the sale, was $592 and $2,030, respectively.

5. Disposition of Land

On March 15, 2005, the Company sold approximately 8 acres of land located at the Lansdowne Resort for $1,500, resulting in income of approximately $418, net of closing cost, which is included in other income on the consolidated financial statements. At the time the Company purchased the Lansdowne Resort, the seller had entered into a contract with a third party for the sale of the 8 acres. The 8 acre contract was assigned to the Company at closing and the purchase/sale agreement related to the acquisition of the resort required the Company to pay the seller upon completion of the sale $1,080 of net sale proceeds which represented the expected sales price for the land. On March 21, 2005, the Company made the $1,080 payment to the seller resulting in the gain of $418.

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6. Long-Term Debt

Debt at September 30, 2005 and December 31, 2004, consists of the following (in thousands):

Debt	Interest Rate at September 30, 2005		Maturity Date	Balance Outstanding at
				September 30, 2005		December 31, 2004
Credit Facilities
Senior Unsecured Credit Facility	Floating		June 2008	$	52,500	$	—
LHL Unsecured Credit Facility	Floating		June 2008		11,741		—
Massport Bonds
Harborside Hyatt Conference Center & Hotel (b)	Floating	(a)	March 2018		5,400		5,400
Harborside Hyatt Conference Center & Hotel (b)	Floating	(a)	March 2018		37,100		37,100
Total bonds payable					42,500		42,500
Mortgage debt
Indianapolis Marriott Downtown	3.56	%(c)	February 2007		57,000		57,000
Sheraton Bloomington Hotel Minneapolis South and Westin City Center Dallas	8.10	%	July 2009		41,981		42,665
San Diego Paradise Point Resort	6.93	%	February 2009		17,385		17,686
San Diego Paradise Point Resort	4.61	%	February 2009		45,395		46,180
Hilton Alexandria Old Town	4.98	%	September 2009		33,713		34,230
Le Montrose Suite Hotel	8.08	%	July 2010		13,900		14,049
Hilton San Diego Gaslamp Quarter	5.35	%	June 2012		59,600		—
Westin Copley Place	5.28	%	August 2015		210,000		—
Total mortgage debt					478,974		211,810
Total Debt (d)				$	585,715	$	254,310

(a) Variable interest rate based on a weekly floating rate. The interest rate at September 30, 2005 was 3.7% and 2.60% for the $5,400 and $37,100 bonds, respectively. The Company also incurs a 2% annual maintenance fee.

(b) The Massport bonds are secured by letters of credit issued by GE Capital Corporation that expire in 2007. The GE Capital letters of credit are secured by the Harborside Hyatt and a $6.0 million letter of credit from the Company.

(c) Variable interest rate of LIBOR plus 1%. The Company has entered into a three-year fixed interest rate swap that fixes the LIBOR rate at 2.56% and therefore, fixes the mortgage interest rate at 3.56%.

(d) Mortgage debt does not include the Company’s 9.9% share ($13,860) of the $140.0 million debt of the joint venture which is secured by the Chicago Marriott Downtown or the Company’s share ($509) of the Chicago Marriott line of credit facility which had a balance of $5.1 million at September 30, 2005.

The Company incurred interest costs of $6,569 and $16,405 in the three and nine months ending September 30, 2005, respectively and $3,928 and $11,566 in the three and nine months ending September 30, 2004, respectively. Included in interest costs are amortization of deferred financing fees of $649 and $1,876 for the three months and nine months ended September 30, 2005, respectively, and $590 and $1,657 for the three months and nine months ended September 30, 2004, respectively. Interest was capitalized in the amount of $326 and $1,096 for the three and nine months ending September 30, 2005, respectively and $187 and $496 in the three and nine months ending September 30, 2004, respectively. Interest paid was $6,477 and $15,865 in the three and nine months ending September 30, 2005, respectively and $3,503 and $10,104 for the three and nine months ending September 30, 2004, respectively.

Credit Facilities

The Company has a senior unsecured bank facility from a syndicate of banks that provides for a maximum borrowing of up to $300.0 million. On June 9, 2005 the Company amended the credit facility to extend the bank facility’s maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. The senior unsecured bank facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness and contains financial covenants that, assuming no

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continuing defaults, allow the Company to make shareholder distributions which, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) ninety percent of the funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar year basis. As of September 30, 2005, the Company was in compliance with the financial covenants and was not otherwise in default under the credit facility. Borrowings under the senior unsecured bank facility bear interest at floating rates equal to, at the Company’s option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an “Adjusted Base Rate” plus an applicable margin. For the three months and nine months ended September 30, 2005, the weighted average interest rate for borrowings under the senior unsecured bank facility was approximately 5.1% and 5.0%, respectively. The Company did not have any Adjusted Base Rate borrowings outstanding at September 30, 2005. The Company is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the senior unsecured bank facility. The Company incurred an unused commitment fee of approximately $113 and $369 for the three months and nine months ended September 30, 2005, respectively. At September 30, 2005, and December 31, 2004, the Company had $52,500 and zero, respectively, of outstanding borrowings under the senior unsecured bank facility.

LHL has a $25.0 million unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. On June 9, 2005, LHL amended the credit facility to extend the bank facility maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an “Adjusted Base Rate” plus an applicable margin. The weighted average interest rate under the LHL credit facility for the three months and nine months ended September 30, 2005 was 5.1% and 4.8%, respectively. LHL is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the LHL credit facility. LHL incurred an unused commitment fee of approximately $5 and $12 for the three months and nine months ended September 30, 2005, respectively. At September 30, 2005 and December 31, 2004, the Company had $11,741 and zero, respectively, of outstanding borrowings under LHL credit facility.

Mortgage Loans

On June 8, 2005, the Company entered into a $59.6 million seven-year mortgage loan that is secured by the Hilton San Diego Gaslamp Quarter. The mortgage loan matures on June 1, 2012 and does not allow for prepayment without penalty prior to February 1, 2012. The mortgage loan bears interest at a fixed rate of 5.35 percent and requires interest only payments through maturity.

On August 31, 2005, in connection with the acquisition of the Westin Copley Place, the Company assumed a $210.0 million ten-year mortgage secured by the Westin Copley Place. The mortgage loan matures on August 31, 2015, and does not allow for prepayment without penalty prior to May 31, 2015. The mortgage loan bears interest at 5.28% and has monthly interest only payments until maturity. The loan contains cash management and lock-box provisions that allow the lender to direct net income from the hotel to ensure that items such as real estate taxes, insurance and property maintenance are adequately funded.

7. Commitments and Contingencies

Ground and Air Rights Leases

Four of the Company’s hotels, San Diego Paradise Point Resort, Harborside Hyatt Conference Center & Hotel, Sheraton Bloomington Hotel Minneapolis South (the parking lot only) and Indianapolis Marriott Downtown, are subject to ground leases under non-cancelable operating leases expiring from 2016 to June 2099. The Westin Copley Place is subject to a long term air rights lease which expires on December 14, 2077. In addition, one of the two golf courses, the Pines, at Seaview Resort and Spa, is subject to a ground lease, which expires on December 31, 2012. Total ground lease expense for the three and nine months ended September 30, 2005 was $1,255 and $3,024, respectively. Total ground lease expense for the three and nine months ended September 30, 2004 was $1,111 and $2,713, respectively.

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Reserve Funds

The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the operating agreements. The Company’s aggregate obligation under the reserve funds was approximately $17,120 at September 30, 2005. The reserve requirements for four hotels, the hotels operated by Marriott International, Inc., White Lodging Services Corporation and Hyatt Corporation, are contained in certain long-term operating agreements, which require the reserves for the hotels operated by Marriott International, Inc., White Lodging Services Corporation and Hyatt Corporation, to be maintained through furniture, fixtures and equipment restricted cash escrows. These four operating agreements require that the Company reserve restricted cash ranging from 3.0% to 5.5% of the individual hotel’s annual revenues. Pursuant to the Company’s mortgage note on the Westin Copley Place, the Company is also required to reserve restricted cash of 4% of the Westin Copley Place’s gross revenues. As of September 30, 2005, $9,105 was available in restricted cash reserves for future capital expenditures for all hotels which require restricted cash escrows. Seventeen of the operating agreements require that the Company reserve funds of 4.0% of the individual hotel’s annual revenues, but do not require the funds to be set aside in restricted cash. As of September 30, 2005, the total amount obligated for future capital expenditures, but not set aside in restricted cash reserves was $8,015. Amounts will be recorded as incurred. As of September 30, 2005, purchase orders and letters of commitment totaling approximately $15,331 have been issued for renovations at the hotels. Any unexpended amounts will remain the property of the Company upon termination of the operating agreements.

The joint venture lease requires that the joint venture reserve restricted cash of 5.0% of the Chicago Marriott Downtown’s annual revenues; however, the joint venture is not consolidated in the Company’s financial statements and the amount of restricted cash reserves relating to the joint venture is not recorded on the Company’s books and records.

Restricted Cash Reserves

At September 30, 2005, the Company held $21,334 in restricted cash reserves. Included in such amounts are (i) $9,105 of reserve funds relating to the hotels with leases or operating agreements requiring the Company to maintain restricted cash to fund future capital expenditures, (ii) $8,692 as security for a surety bond in furtherance of the Company’s appeal from the June 9, 2005 Court judgment with respect to the New Orleans hotel, (iii) $500 for future renovations and conversion costs expected to be incurred related to the Bloomington, Minnesota property re-branding under the Sheraton brand affiliation and (iv) $3,037 deposited in mortgage escrow accounts pursuant to mortgage obligations to reserve for real estate taxes, insurance and debt service.

Litigation

The Company has engaged Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its Dallas hotel under the Westin brand affiliation. Meridien Hotels, Inc. (“Meridien”) affiliates had been operating the Dallas property as a wrongful holdover tenant, until the Westin brand conversion occurred on July 14, 2003 under court order.

On December 20, 2002, affiliates of Meridien abandoned the Company’s New Orleans hotel. The Company entered into a lease with a wholly-owned subsidiary of LHL and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property thereafter was sold on April 21, 2003 for $92,500.

In connection with the termination of the Meridien affiliates at these hotels, the Company is currently in litigation with Meridien and related affiliates. The Company believes its sole potential obligation in connection with the termination of the leases is to pay fair market value of the leases, if any. With respect to the Dallas hotel, the Company has obtained a judgment from the court that Meridien defaulted and that Meridien is not entitled to the payment of fair market value. The Company’s damage claims against Meridien went to trial in March 2005, and a final judgment was entered for the Company in July 2005 in the amount of $3,099, plus post-judgment interest. Meridien has filed a post-trial motion, challenging certain aspects of the judgment, and a decision is pending. With respect to the New Orleans hotel, arbitration of the fair market value of the New Orleans lease commenced in October 2002. On December 19, 2002, the arbitration

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panel determined that Meridien was entitled to an award of approximately $5,700, subject to adjustment (reduction) by the courts to account for Meridien’s holdover. In order to dispute the arbitration decision, the Company was required to post a $7,800 surety bond, which was secured by $5,900 of restricted cash. The Company successfully challenged the award on appeal, and the dispute was remanded to the trial court. Meridien’s request for rehearing was denied on March 31, 2004, and Meridien did not petition to the Louisiana Supreme Court. In June 2004, the $7,800 surety bond was released and the $5,900 restricted cash securing it was returned to the Company. The issue of default by the lessee and the Company’s wrongful holdover claim, as well as Meridien’s damage claims arising from the termination of its leasehold, among other claims, went to trial in February 2005. On June 9, 2005, the trial court issued its judgment denying the Company’s default claim as well as Meridien’s fraud claim, and “re-determined” fair market value to be $8,572, plus interest. The Company believes that the determination of fair market value was not properly before the trial court, and the trial court failed to address the issue of adjustments to account for Meridien’s holdover, contrary to the direction given by the appellate court. The Company has noticed an appeal from the trial court’s judgment. On July 18, 2005, the Company posted a $8,633 surety bond, which was secured by $8,692 of restricted cash.

On April 22, 2005, the Company filed suit against Meridien in Delaware state court alleging certain defaults, including non-payment of rent and other breaches in connection with the transition at the New Orleans hotel. Preliminary motions are set to be heard in October 2005. That matter has not yet been set for trial.

In 2002, the Company recognized a net $2,520 contingent lease termination expense and reversed previously deferred assets and liabilities related to the termination of both the New Orleans property and Dallas property leases and recorded a corresponding contingent liability included in accounts payable and accrued expenses in the accompanying consolidated financial statements. The Company believes, however, it is owed holdover rent per the lease terms due to Meridien’s failure to vacate the properties as required under the leases. The contingent lease termination expense was, therefore, net of the holdover rent the Company believes it is entitled to for both properties. In 2003, the Company adjusted this liability by additional holdover rent of $827 that it believes it is entitled to for the Dallas property. These amounts were recorded as other income in the Company’s December 31, 2003 consolidated financial statements. The contingent lease termination expense recognized cumulatively since 2002 is comprised of (dollars in thousands):

	Expense Recognized Quarter Ended			Expense Recognized Year Ended			Expense Recognized Quarter Ended		Cumulative Expense Recognized as of
	December 31, 2002			December 31, 2004			June 30, 2005		September 30, 2005
Estimated arbitration “award”	$	5,749		$	—		$	—	$	5,749
Legal fees related to litigation		2,610			1,350			1,000		4,960
Holdover rent		(4,844	)		—			—		(4,844	)
Expected reimbursement of legal fees		(995	)		(500	)		—		(1,495	)
Net contingent lease termination expense	$	2,520		$	850		$	1,000	$	4,370

In September 2004, after evaluating the ongoing Meridien litigation, the Company accrued additional net legal fees of $850 due to litigation timeline changes in order to conclude this matter. In June 2005, after further evaluation of the ongoing Meridien litigation, the Company accrued an additional $1,000 in legal fees. As a result, the net contingent lease termination liability has a balance of approximately $1,962 as of September 30, 2005, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. Based on the claims the Company has against Meridien, the Company is and will continue to challenge Meridien’s claim that it is entitled to the payment of fair market value, and will continue to seek reimbursement of legal fees and damages. These amounts may exceed or otherwise may be used to offset any amounts potentially owed to Meridien, and therefore, ultimately may offset or otherwise reduce any contingent lease termination expense. Additionally, the Company cannot provide any assurances that the holdover rents or any damages will be collectible from Meridien or that the amounts due will not be greater than the recorded contingent lease termination expense.

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The Company maintained a lien on Meridien’s security deposit on both disputed properties with an aggregate value of approximately $3,300, in accordance with the lease agreements. The security deposits were liquidated in May 2003 with the proceeds used to partially satisfy Meridien’s outstanding obligations. The judgment entered by the Dallas Court already incorporates a set-off in the amount of $989 attributable to the security deposit for the Dallas property.

Meridien also has sued the Company and one of the Company’s officers alleging that certain actions taken in anticipation of re-branding the Dallas and New Orleans hotels under the Westin brand affiliation constituted unfair trade practices, false advertising, trademark infringement, trademark dilution and tortious interference. The Company intends to vigorously challenge Meridien’s claims, which are not expected to go to trial before Spring 2006.

The Company does not believe that the amount of any fees or damages it may be required to pay on any of the litigation related to Meridien will have a material adverse effect on the Company’s financial condition or results of operations, taken as a whole. The Company’s management has discussed this contingency and the related accounting treatment with the audit committee of its Board of Trustees.

The Company initiated a lawsuit against Marriott Hotel Services, Inc. in the Supreme Court of the State of New York, County of New York, in connection with Marriott’s implementation of certain expenditures without the Company’s approval at the LaGuardia Airport Marriott. The Company alleged breach of contract and breach of fiduciary duty by Marriott Hotel Services, Inc., among other claims. The trial court recently dismissed the Company’s claims before receiving any evidence, and the Company has appealed from the court’s decision.

The Company is not presently subject to any other material litigation nor, to the Company’s knowledge, is any other litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.

8. Shareholders’ Equity and Minority Interest

Common Shares of Beneficial Interest

On January 1, 2005, the Company repurchased 32,867 common shares of beneficial interest related to executives and employees surrendering shares to pay taxes at the time restricted shares vested. The Company reissued these 32,867 treasury shares in connection with (i) compensation to the Board of Trustees and (ii) issuance of restricted common shares of beneficial interest to the Company’s executive officers.

On January 1, 2005, the Company issued an aggregate of 1,071 common shares of beneficial interest, including 865 deferred shares, to the independent members of its Board of Trustees for their fourth quarter 2004 compensation. The common shares were issued in lieu of cash at the trustee’s election. These common shares were issued under the 1998 Share Option and Incentive Plan.

On January 14, 2005, the Company declared monthly cash distributions to shareholders of the Company and partners of the Operating Partnership, in the amount of $0.08 per common share of beneficial interest/unit for each of the months of January, February and March 2005.

On January 14, 2005, the Company paid its December 2004 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of December 31, 2004.

On January 25, 2005, the Company granted 40,917 restricted common shares of beneficial interest to the Company’s executive officers. The restricted shares granted vest over three years, starting January 1, 2007. These common shares were issued under the 1998 Share Option and Incentive Plan.

On February 15, 2005, the Company paid its January 2005 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of January 31, 2005.

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On March 15, 2005, the Company paid its February 2005 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of February 28, 2005.

During the three months ended March 31, 2005, trustees, executives and employees of the Company exercised 76,134 options to purchase common shares of beneficial interest. These common shares were issued under the 1998 Share Option and Incentive Plan.

On April 15, 2005, the Company declared monthly distributions to shareholders of the Company and partners of the Operating Partnership, in the amount of $0.08 per common share of beneficial interest/unit of limited partnership interest for each of the months of April, May and June 2005.

On April 15, 2005, the Company paid its March 2005 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of March 31, 2005.

On April 19, 2005, the Company granted 2,785 restricted common shares of beneficial interest to the Company’s employees. The restricted shares granted vest over three years, starting January 1, 2006. These common shares of beneficial interest were issued under the 1998 Share Option and Incentive Plan.

On May 13, 2005, the Company paid its April 2005 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of April 29, 2005.

On June 15, 2005, the Company paid its May 2005 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of May 31, 2005.

During the three months ended June 30, 2005, trustees, executives and employees of the Company exercised 19,333 options to purchase common shares of beneficial interest. These common shares were issued under the 1998 Share Option and Incentive Plan.

On July 15, 2005, the Company declared monthly distributions to shareholders of the Company and on common units of the Operating Partnership, in the amount of $0.10 per common shares of beneficial interest/unit for each of the months of July, August and September 2005.

On July 15, 2005, the Company paid its June 2005 monthly distribution of $0.08 per share/unit on its common shares of beneficial interest and common units of limited partnership interest to shareholders and unit holders of record as of June 30, 2005.

On August 15, the Company paid its July 2005 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and common units of limited partnership interest to shareholders and unit holders of record as of July 31, 2005.

On September 15, the Company paid its August 2005 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and common units of limited partnership interest to shareholders and unit holders of record as of August 31, 2005.

During the three months ended September 30, 2005, trustees, executives and employees of the Company exercised 95,333 options to purchase common shares of beneficial interest. These common shares were issued under the 1998 Share Option and Incentive Plan.

Treasury Shares

Treasury shares are accounted for under the cost method. During the quarter ended March 31, 2005, the Company repurchased 32,867 common shares of beneficial interest related to executives and employees surrendering shares to

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pay taxes at the time restricted shares vested and acquired 1,082 common shares of beneficial interest related to the forfeiture of restricted shares by employees leaving the Company. The Company reissued 33,949 treasury shares in connection with (i) restricted shares granted to executives in January 2005 and (ii) executives and employees exercising stock options.

During the quarter ended June 30, 2005, the Company received 1,915 common shares of beneficial interest related to the forfeiture of restricted shares by employees leaving the Company. The Company reissued 1,915 treasury shares in connection with executives and employees exercising stock options.

At September 30, 2005, there were no common shares of beneficial interest in treasury.

Preferred Shares

The Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares (collectively, the Preferred Shares) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions; the Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for the current and all past dividend periods. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. There is no difference between the carrying value and the redemption amount of the Preferred Shares. In addition, the Company is not required to set aside funds to redeem the Preferred Shares. Also, the Company may not optionally redeem the Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares or Series D Preferred Shares prior to March 6, 2007, September 30, 2008, January 1, 2021, and August 24, 2010, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT and the Company may redeem the Series C Preferred Units during the period from January 1, 2016 to and including December 31, 2016 upon giving notice as specified. After those dates, the Company may, at its option, redeem the Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. Accordingly, the Preferred Shares will remain outstanding indefinitely unless the Company decides to redeem them.

On January 14, 2005, the Company paid its preferred distribution of $0.64 per Series A Preferred Share for the quarter ended December 31, 2004 to preferred shareholders of record at the close of business on January 1, 2005.

On January 14, 2005, the Company paid its preferred distribution of $0.52 per Series B Preferred Share for the quarter ended December 31, 2004 to preferred shareholders of record at the close of business on January 1, 2005.

On April 15, 2005, the Company paid its preferred distribution of $0.64 per Series A Preferred Share for the quarter ended March 31, 2005 to preferred shareholders of record at the close of business on April 1, 2005.

On April 15, 2005, the Company paid its preferred distribution of $0.52 per Series B Preferred Share for the quarter ended March 31, 2005 to preferred shareholders of record at the close of business on April 1, 2005.

On July 15, 2005, the Company paid its preferred distribution of $0.64 per Series A Preferred Share for the quarter ended June 30, 2005 to preferred shareholders of record at the close of business on July 1, 2005.

On July 15, 2005, the Company paid its preferred distribution of $0.52 per Series B Preferred Share for the quarter ended June 30, 2005 to preferred shareholders of record at the close of business on July 1, 2005.

On August 19, 2005, the Company completed an underwritten public offering of 3,000,000 shares of 7 ¹/2 % Series D Cumulative Redeemable Preferred Shares (the Series D Preferred Shares), par value $0.01 per share (liquidation preference of $25.00 per share). After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $73,016. The net proceeds were used to repay existing indebtness under the Company’s senior unsecured credit facility. On August 30, 2005, the Company issued an additional 170,000 Series D Preferred Shares pursuant to an overallotment option for approximately $4,138 after deducting underwriting discounts and commissions.

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In connection with the Westin Copley Place acquisition, on August 24, 2005, the Company designated 2,450,000 shares of the authorized but unissued preferred shares as 7.25% Series C Cumulative Redeemable Preferred Shares (the Series C Preferred Shares), par value $0.01 per share (liquidation preference of $25.00 per share). As of September 30, 2005, there were no Series C Preferred Shares outstanding.

Operating Partnership Units

On May 10, 2005, 80,000 units of limited partnership interest were converted to common shares.

On both July 8, 2005 and July 29, 2005, 80,000 (for a total of 160,000 units) common units of limited partnership interests in the Operating Partnership were converted to common shares of beneficial interest.

As of September 30, 2005 and December 31, 2004, the Operating Partnership had 143,090 and 383,090 units outstanding, respectively, representing a 0.5% and 1.3% partnership interest held by the limited partners, respectively.

Preferred Operating Partnership Units

On August 31, 2005, 2,348,888 7.25% Series C Preferred Units (the Preferred Units) were issued in connection with the acquisition of the Westin Copley Place. The Preferred Units have no stated maturity date or mandatory redemption. The Preferred Units pay a cumulative, quarterly dividend at a fixed rate and are redeemable for 7.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (liquidation preference $25 per share), $.01 par value per share, of the Company or cash at the Company’s election. The Company is not required to set aside funds to redeem the Preferred Units and the Company may not optionally redeem the Preferred Units prior to January 1, 2021, except the Company may redeem the Series C Preferred Units during the period from January 1, 2016 to and including December 31, 2016 upon giving notice as specified. At September 30, 2005, the face value of the Preferred Units was $58,722 and is recorded on the accompanying balance sheet net of original issuance costs of $47.

9. Share Option and Incentive Plan

On April 21, 2005, the Shareholders approved an amendment to the Company’s 1998 Share Option and Incentive Plan to increase the available shares under the plan by 900,000 shares. See Note 8 for information regarding the grants of restricted common shares of beneficial interest under the 1998 Share Option and Incentive Plan. At September 30, 2005 and December 31, 2004, there were 1,124,015 and 272,306 common shares, respectively, available for future grant under the 1998 Share Option and Incentive Plan.

10. Financial Instruments: Derivatives and Hedging

The Company uses interest rate swaps to hedge against interest rate fluctuations. Unrealized gains and losses are reported in other comprehensive income with no effect recognized in earnings as long as the characteristics of the swap and the hedged item are closely matched. On February 27, 2004, the Company entered into a three-year fixed interest rate swap that fixes the London InterBank Offered Rate at 2.56% for the $57,000 balance outstanding on the Company’s mortgage loan secured by the Indianapolis hotel, and therefore, fixes the mortgage interest rate at 3.56%. As of September 30, 2005, there was $1,425 in unrealized gains included in accumulated other comprehensive income, a component of shareholders’ equity. The hedge is effective in offsetting the variable cash flows; therefore, no gain or loss was realized in earnings during the three and nine months ended September 30, 2005.

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The following table summarizes the notional value and fair value of the Company’s derivative financial instrument. The notional value at September 30, 2005 provides an indication of the extent of the Company’s involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.

At September 30, 2005:

Hedge Type	Notional Value		Interest Rate		Maturity	Fair Value September 30, 2005
Swap-Cash Flow	$	57,000	2.555	%	2/9/07	$	1,425

At September 30, 2005, the derivative instrument was reported at its fair value of $1,425 and is included in prepaid expenses and other assets in the accompanying consolidated financial statements.

11. LHL

A significant portion of the Company’s revenue is derived from operating revenues generated by the hotels leased by LHL.

Included in other indirect hotel operating expenses, including indirect operating expenses related to discontinued operations, are the following expenses incurred by the hotels leased by LHL (in thousands):

	For the three months ended September 30,					For the nine months ended September 30,
	2005		2004			2005			2004
General and administrative	$	8,558	$	6,423		$	22,681		$	18,084
Sales and marketing		6,281		4,624			17,090			13,710
Repairs and maintenance		3,847		3,006			10,940			8,380
Utilities and insurance		4,080		2,936			10,327			7,815
Management and incentive fees		4,267		2,844			9,328			7,078
Franchise fees		1,014		703			3,099			1,840
Other expenses		535		398			1,505			1,105
Total other indirect expenses		28,582		20,934			74,970			58,012
Other indirect hotel operating expenses related to discontinued operations		—		(931	)		(45	)		(3,247	)
Total other indirect expenses related to continuing operations	$	28,582	$	20,003		$	74,925		$	54,765

As of September 30, 2005, LHL leases the following 20 hotels owned by the Company:

•      Seaview Resort and Spa	•      Lansdowne Resort
•      LaGuardia Airport Marriott	•      Westin City Center Dallas
•      Harborside Hyatt Conference Center & Hotel	•      Hotel George
•      Hotel Viking	•      Indianapolis Marriott Downtown
•      Topaz Hotel	•      Hilton Alexandria Old Town
•      Hotel Rouge	•      Chaminade Resort and Conference Center
•      Hotel Madera	•      Hilton San Diego Gaslamp Quarter
•      Hotel Helix	•      Grafton on Sunset
•      Holiday Inn on the Hill	•      Onyx Hotel
•      Sheraton Bloomington Hotel Minneapolis South	•      Westin Copley Place

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The two remaining hotels, in which the Company owns an interest, excluding the joint venture that owns the Chicago Marriott Downtown, are leased directly to affiliates of the current third-party hotel operators of those respective hotels.

On March 11, 2005, the Company notified Marriott International (“Marriott”) that it was terminating the management agreement at the Seaview Resort and Spa due to Marriott’s failure to meet certain hotel operating performance thresholds as defined in the management agreement. Pursuant to the management agreement, Marriott had the right to avoid termination by making payment of approximately $2,394 within 60 days of notification. On April 28, 2005, Marriott International made a payment of approximately $2,394 to avoid termination. Marriott may recoup this amount in the event certain future operating performance thresholds are attained. This amount was recorded as a deferred liability and is included in accounts payable and accrued expenses on the accompanying consolidated balance sheet.

12. Income Taxes

For the nine months ended September 30, 2005, income tax benefit of $1 is comprised of a state and local tax expense of $1,354 on the Operating Partnership’s income, and federal, state and local tax benefit of $1,355 on LHL’s loss of $3,187 before income tax benefit.

The components of the LHL income tax expense (benefit) were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
	2005			2004		2005			2004
Federal:
Current	$	—		$	—	$	—		$	—
Deferred		(235	)		434		(1,100	)		(910	)
State and local:
Current		(48	)		36		(32	)		85
Deferred		25			88		(223	)		(185	)
Total income tax expense (benefit)	$	(258	)	$	558	$	(1,355	)	$	(1,010	)

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:

	For the three months ended September 30,					For the nine months ended September 30,
	2005			2004		2005			2004
Computed “Expected” federal tax (benefit) expense (at 34.5%)	$	(235	)	$	420	$	(1,100	)	$	(969	)
State income taxes (benefit) expense, net of federal income tax effect		(23	)		121		(255	)		(112	)
Other, net		—			17		—			71
Income tax expense (benefit)	$	(258	)	$	558	$	(1,355	)	$	(1,010	)

For the three and nine months ended September 30, 2005, LHL recorded an income tax benefit of $258 and $1,355, respectively, that is included in the accompanying consolidated financial statements. The Company has estimated its income tax benefit using a combined federal and state rate of 41.5%. As of September 30, 2005, the Company had a

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deferred tax asset of $15,822 primarily due to past and current year’s tax net operating losses. These loss carryforwards will expire in 2021 through 2024 if not utilized by then. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required. Reversal of deferred tax asset in the subsequent year cannot be reasonably estimated.

13. Earnings Per Common Share

The computation of basic and diluted earnings per common share is presented in the table below. Outstanding common limited partnership units in the Operating Partnership held by third-party limited partners (which units are redeemable for cash or, at the Company’s election, common shares in the Company) have been excluded from the diluted earnings per share calculation. Including these units would not affect the per share amounts in the table because the limited partners’ share of net income (minority interest) has been subtracted from the net income amounts used below and would then need to be added back to net income.

	For the three months ended September 30,						For the nine months ended September 30,
	2005			2004			2005			2004
Numerator:
Net income applicable to common shareholders before discontinued operations and dividends paid on unvested restricted shares	$	11,398		$	6,860		$	18,764		$	6,458
Discontinued operations		—			3,179			(26	)		4,493
Net income applicable to common shareholders before dividends paid on unvested restricted shares		11,398			10,039			18,738			10,951
Dividends paid on unvested restricted shares		(59	)		(61	)		(155	)		(169	)
Net income applicable to common shareholders, after dividends paid on unvested restricted shares	$	11,339		$	9,978		$	18,583		$	10,782
Denominator:
Weighted average number of common shares - basic		30,022,302			27,805,183			29,853,499			26,087,859
Effect of dilutive securities:
Unvested restricted shares		197,943			255,473			195,031			258,230
Common stock options		272,044			290,640			281,037			368,665
Weighted average number of common shares - diluted		30,492,289			28,351,296			30,329,567			26,714,754
Basic Earnings Per Common Share:
Net income applicable to common shareholders before discontinued operations and after dividends paid on unvested restricted shares	$	0.38		$	0.25		$	0.62		$	0.24
Discontinued operations		—			0.11			—			0.17
Net income applicable to common shareholders after dividends paid on unvested restricted shares	$	0.38		$	0.36		$	0.62		$	0.41
Diluted Earnings Per Common Share:
Net income applicable to common shareholders before discontinued operations	$	0.37		$	0.24		$	0.62		$	0.24
Discontinued operations		—			0.11			—			0.17
Net income applicable to common shareholders	$	0.37		$	0.35		$	0.62		$	0.41

14. Comprehensive Income

For the nine months ended September 30, 2005, the change in accumulated other comprehensive income was $460. As of September 30, 2005 and December 31, 2004, the Company’s accumulated other comprehensive income was $1,425 and $965, respectively. The change in accumulated other comprehensive income was entirely due to the Company’s unrealized gains on its interest rate derivative. For the three and nine months ended September 30, 2005, the Company reclassified $141 and $218 of accumulated other comprehensive income to earnings as an offset to interest expense. Within the next twelve months the Company expects to reclassify $1,023 of the amount held in accumulated other comprehensive income to earnings as an offset to interest expense.

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15. Supplemental Information to Statements of Cash Flows

		For the nine months ended September 30,
		2005			2004
Interest paid		$	15,865		$	10,104
Interest capitalized			1,096			496
Income taxes paid, net of refunds			964			404
Distributions payable (common shares)			3,046			2,280
Distributions payable (preferred shares)			3,744			3,133
Issuance of common shares for board of trustees compensation			7			37
Repurchase of common shares (treasury)			(1,121	)		(10,641	)
Issuance of common shares from treasury	��		1,121			10,641
In conjunction with the hotel acquisitions, the Company assumed the following assets and liabilities:
Purchase of real estate		$	467,811		$	165,268
Assumption of mortgage			(210,000	)		—
Issuance of preferred units			(58,722	)		—
Other assets			7,422			822
Liabilities			(7,072	)		(2,323	)
Acquisition of hotel properties		$	199,439		$	163,767

16. Pro Forma Financial Information

The following condensed pro forma financial information is presented as if the Indianapolis Marriott Downtown, Hilton Alexandria Old Town, Chaminade Resort and Conference Center, Hilton San Diego Gaslamp Quarter, Grafton on Sunset, Onyx Hotel, and Westin Copley Place acquisitions had been consummated and leased as of January 1, 2004.

The following condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated and the hotels had been leased at the beginning of the respective periods presented, nor does it purport to represent the results of operations for future periods.

	For the three months ended September 30,				For the nine months ended September 30,
	2005		2004		2005		2004
Total revenues	$	123,553	$	116,288	$	339,334	$	314,549
Net income applicable to common shareholders of beneficial interest	$	9,938	$	10,272	$	12,089	$	7,576
Net income applicable to common shareholders of beneficial interest per weighted average common share
basic (after dividends paid on unvested restricted shares)	$	0.33	$	0.37	$	0.40	$	0.29
diluted (after dividends paid on unvested restricted shares)	$	0.33	$	0.36	$	0.40	$	0.28
Weighted average number of common shares outstanding
basic		30,022,302		27,805,183		29,853,499		26,087,859
diluted		30,492,289		28,351,296		30,329,567		26,714,754

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17. Subsequent Events

On October 7, 2005, the Company completed an underwritten public offering of 2,200,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $74,316. The net proceeds were used to repay existing indebtedness under the Company’s senior credit facility.

On October 14, 2005, the Company declared monthly distributions to shareholders of the Company and on common units of the Operating Partnership, in the amount of $0.10 per common shares of beneficial interest/unit for each of the months of October, November and December 2005.

On October 14, 2005, the Company paid its September 2005 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and common units of limited partnership interest to shareholders and unit holders of record as of September 30, 2005.

On October 14, 2005, the Company paid its preferred distribution of $0.64 per Series A Preferred Share for the quarter ended September 30, 2005 to preferred shareholders of record at the close of business on October 1, 2005.

On October 14, 2005, the Company paid its preferred distribution of $0.52 per Series B Preferred Share for the quarter ended September 30, 2005 to preferred shareholders of record at the close of business on October 1, 2005.

On October 14, 2005, the Company paid its prorated preferred distribution of $0.15 per Series C Preferred Unit for the quarter ended September 30, 2005 to preferred unitholders of record at the close of business on October 1, 2005.

On October 14, 2005, the Company paid its prorated preferred distribution of $0.19 per Series D Preferred Shares for the quarter ended September 30, 2005 to preferred shareholders of record at the close of business on October 1, 2005.

On October 11, 2005, holders of rights to purchase common shares of beneficial interest exercised 105,000 of those rights. The Company issued 105,000 common shares of beneficial interest; the holders of rights to purchase common shares surrendered some shares in order to pay the exercise price at the time of exercising, and the transaction resulted in 55,457 treasury shares to the Company.

On October 18, 2005, the Company granted 35,575 restricted common shares of beneficial interest to non-executive employees. The restricted shares granted vest over three and four years, starting January 1, 2007. These common shares of beneficial interest were issued under the 1998 Share Option and Incentive Plan.

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

The following should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 1 of this report.

Forward-Looking Statements

This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Forward-looking statements in this report include, among others, statements about the Company’s business strategy, including its acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets, expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital), and anticipated outcomes and consequences of pending litigation. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results,

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performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, (i) the Company’s dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly, (ii) risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs, actual or threatened terrorist attacks and downturns in general and local economic conditions, (iii) the availability and terms of financing and capital and the general volatility of securities markets, (iv) risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act and similar laws, (v) interest rate increases, (vi) the possible failure of the Company to qualify as a REIT and the risk of changes in laws affecting REITs, (vii) the possibility of uninsured losses, and (viii) the risk factors discussed in the Company’s Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

The Company intends to acquire upscale, full-service hotels in convention, resort and major urban business markets where the Company perceives strong demand growth or significant barriers to entry. The Company measures hotels performance by evaluating financial metrics such as unleveraged internal rates of return, room revenue per available room (“RevPAR”), funds from operations (“FFO”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”) and average cash-on-cash returns.

The Company continuously evaluates the hotels in its portfolio and potential acquisitions using the measures discussed above to evaluate each hotel’s contribution toward reaching its goal of maintaining a reliable stream of income and moderate growth to shareholders. The Company invests in capital improvements throughout its portfolio to continue to positively impact the competitiveness of its hotels and positively impact their financial performance. The Company actively seeks to acquire new hotel properties that meet its investment criteria. However, because of the high level of competitive capital resources and a relatively limited number of hotels on the market, there continues to be relatively few hotels that meet our criteria priced to provide the Company the returns it requires.

The third quarter of 2005 was a very good quarter for the economy, the travel industry, the lodging business, and LaSalle Hotel Properties. The lodging business continues to recover from the depths of the last recession and pre- and post-war impacts. Demand from business travelers continues to be robust, driven by particular strength in business transient travel. Positive trends in group business also continued in the third quarter, showing healthy, yet modest growth in group business activity. In addition to the strength coming from business travelers, leisure travel has also remained healthy.

For the third quarter of 2005, we had net income of $11.4 million, or $0.37 per diluted share. FFO was $24.1 million, or $0.79 per diluted share/unit and EBITDA was $35.0 million. RevPAR was $138.48. We consider RevPAR and EBITDA to be key measures of the individual hotels’ performance. RevPAR for the total portfolio increased 9.5% for the third quarter of 2005. The RevPAR increase is attributable to an Average Daily Rate (“ADR”) increase of 5.0% to $175.11, while occupancy improved by 4.3% to 79.1%. EBITDA at the corporate level increased 23.7% due to an increase in revenues from the purchases of several hotels in 2004 and 2005 and the performance of its other hotels. At the hotel level, EBITDA increased 11.3% due to higher ADR and occupancy. Additionally, third quarter hotel EBITDA margin across the Company’s portfolio was 31.4% representing a 91 basis point improvement over the same period in 2004.

Please refer to “Non-GAAP Financial Measures” for a detailed discussion of the Company’s use of FFO and EBITDA and a reconciliation of FFO and EBITDA to net income, a GAAP measurement.

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Critical Accounting Estimates

Estimate of Hotel Revenues and Expenses

A significant portion of the Company’s revenues and expenses comes from the operations of the individual hotels. The Company uses revenues and expenses that are estimated and projected by the hotel operators to produce quarterly financial statements since the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its quarterly reports on Form 10-Q for filing with the SEC by the filing deadline prescribed by the SEC. Generally, the Company uses actual revenue and expense amounts for the first two months of each quarter and revenue and expense estimates for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically these differences have not been material. The Company believes the aggregate estimate of quarterly revenues and expenses recorded on the Company’s consolidated statements of operations are materially correct.

An estimated contingent lease liability related to the Company’s litigation with Meridien Hotels, Inc. is reported in accounts payable and accrued expenses in the accompanying consolidated financial statements.

The Company’s management has discussed the policy of using estimated hotel operating revenues and expenses with its audit committee of its Board of Trustees. The audit committee has reviewed the Company’s disclosure relating to the estimates in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations section.

Comparison of the Three Months Ended September 30, 2005 to the Three Months Ended September 30, 2004

Hotel operating revenues

Hotel operating revenues from the hotels leased to LHL (20 hotels as of September 30, 2005), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking and other ancillary revenues) increased approximately $27.4 million, from $74.8 million in 2004 to $102.2 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $7.7 million increase from the Westin Copley Place, which was purchased in August 2005;

• $4.8 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $4.7 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004;

• $1.6 million increase from the Onyx Hotel, which was purchased in May 2005; and

• $1.5 million increase from the Grafton on Sunset, which was purchased in January 2005.

The remaining change is an increase of $7.1 million, or 9.5%, and is attributable to increases in RevPAR, and associated food & beverage and other revenue for our other properties leased to LHL. The increase in RevPAR was primarily attributable an increase in ADR of 5.0%.

Industry travel levels improved in the third quarter from continued relatively healthy leisure demand and significant increases in demand from business travelers. On a year-over-year basis, overall industry demand for hotel rooms significantly outpaced supply growth this quarter, with respect to the Company’s hotels occupancies were up an average of 4.3% in the quarter. With demand improving during 2005, the industry is experiencing an opportunity to raise prices. The Company’s hotels experienced ADR increases during the third quarter, especially at its urban and convention hotels.

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Participating lease revenue

Participating lease revenue from hotels leased to third party lessees (two hotels) increased $1.0 million from $7.1 million in 2004 to $8.1 million in 2005. Participating lease revenue includes (i) base rent and (ii) participating rent based on fixed percentages of hotel revenues pursuant to the respective participating lease. This increase is a result of a $1.0 million increase from the San Diego Paradise Point due to a 10.5% increase in RevPar in 2005.

Hotel operating expenses

Hotel operating expenses increased approximately $17.6 million from $50.5 million in 2004 to $68.1 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $4.7 million increase from Westin Copley Place, which was purchased in August 2005;

• $3.6 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004;

• $2.6 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $1.0 million increase from the Onyx Hotel, which was purchased in May 2005; and

• $0.8 million increase from the Grafton on Sunset, which was purchased in January 2005.

The remaining change is an increase of $4.9 million, or 9.7%, and is a result of higher occupancies at the hotels as well as above inflation increases in payroll and related employee costs and benefits, sales and marketing, insurance, energy costs, and operator incentive fees.

Depreciation and other amortization

Depreciation and other amortization expense increased by approximately $2.4 million from $10.0 million in 2004 to $12.4 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $1.1 million increase from the Westin Copley Place, which was purchased in August 2005;

• $0.6 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $0.2 million increase from the Grafton on Sunset, which was purchased in January 2005;

• $0.1 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004; and

• $0.1 million increase from the Onyx Hotel; which was purchased in May 2005.

The remaining increase of $0.3 million is a result of the commencement of depreciation on the development costs at Lansdowne and $0.4 million in additional depreciation related to Seaview being reclassified as held and used, offset by the net of the decrease as a result of asset retirements and the increase as a result of asset purchases.

Real estate taxes, personal property taxes, insurance and ground rent

Real estate taxes, personal property taxes, insurance and ground rent expenses increased approximately $1.3 million from $4.1 million in 2004 to $5.4 million in 2005. This increase includes amounts that are not comparable year- over-year as follows:

• $0.4 million increase from the Westin Copley Place, which was purchased in August 2005;

• $0.3 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $0.1 million increase from the Onyx Hotel, which was purchased in May 2005;

• $0.1 million increase from the Grafton on Sunset, which was purchased in 2005; and

• $0.1 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004.

The remaining increase of $0.3 million is a result of increases in real estate taxes and ground rent.

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General and administrative expenses

General and administrative expense increased approximately $0.7 million from $2.2 million in 2004 to $2.9 million in 2005 primarily as a result of increases in payroll related expenses, director fees, office rent, and legal fees.

Interest expense

Interest expense increased by approximately $2.7 million from $3.9 million in 2004 to $6.6 million in 2005 due to an increase in the Company’s weighted average debt and an increase in the weighted average interest rate partly offset by an increase in capitalized interest. The Company’s weighted average debt outstanding related to continuing operations increased from $290.0 million in 2004 to $470.1 million in 2005, which includes increases from:

• a secured loan financing on the Hilton Alexandria Old Town in August 2004;

• additional borrowings to purchase the Chaminade Resort and Conference Center in November 2004;

• additional borrowings to purchase the Hilton San Diego Gaslamp Quarter in January 2005;

• additional borrowings to purchase the Grafton on Sunset in January 2005;

• additional borrowing to purchase the Westin Copley Place;

• assumption of the mortgage on the Westin Copley Place; and

• additional borrowings under the Company’s bank facility to finance other capital improvements during 2005.

The above borrowings are offset by paydowns of the line of credit from proceeds from the:

• sale of Omaha Marriott on September 15, 2004;

• November 2004 common stock offering;

• August 24, 2005 Preferred Stock offering; and

• pay downs on the Company’s bank facility with operating cash flows.

The Company’s weighted average interest rate related to continuing operations increased from 4.5% in 2004 to 4.9% in 2005. Capitalized interest increased by approximately $0.1 million from $0.2 million in 2004 to $0.3 million in 2005, primarily due to 2005 capital expenditures related to the Lansdowne Resort development project.

Income taxes

Income tax expense decreased approximately $641 from $614 in 2004 to $27 income tax benefit for the three months ended September 30, 2005. For the three months ended September 30, 2005, the REIT incurred state and local income tax expense of approximately $231. LHL’s net income before income tax expense decreased by approximately $1,940 from $1,258 in 2004 to $682 net loss in 2005. Accordingly, for the three months ended September 30, 2005, LHL recorded federal income tax benefit of approximately $235 (using an estimated tax rate of 34.5%) and a state and local tax benefit of approximately $23 (using an estimated tax rate of 7.0%, net of the federal income tax effect). The portion of LHL’s income tax expense relating to Omaha has been reclassified to discontinued operations. The following table summarizes the income tax expense (dollars in thousands):

	For the three months ended September 30,
	2005			2004
REIT state and local tax expense	$	231		$	56
LHL federal, state and local tax (benefit) expense		(258	)		558
Total tax (benefit) expense		(27	)		614
Less: LHL federal, state and local tax expense related to discontinued operations		0			(56	)
Total tax (benefit) expense from continuing operations	$	(27	)	$	558

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As of September 30, 2005, the Company had a deferred tax asset of $15,822 primarily due to past and current year’s tax net operating losses. These loss carryforwards will expire in 2021 through 2024 if not utilized by then. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

Minority interest

Minority interest of common units in the operating partnership represents the limited partners’ proportionate share of the equity in the Operating Partnership. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. At September 30, 2005, the aggregate weighted average partnership interest held by the limited partners in the Operating Partnership was approximately 0.57%.

Minority interest of preferred units in the Operating Partnership represents distributions to Series C Preferred Unit holders. The increase in minority interest of preferred units in the Operating Partnership from zero in 2004 to $0.4 million in 2005 was due to the units being issued in August of 2005.

Discontinued operations

The following table summarizes net income from discontinued operations from 2005 and 2004 (dollars in thousands):

	For the three months ended September 30,
	2005		2004
Net lease income from Omaha property		—		508
Net operating income from Omaha property		—		135
Gain on sale of Omaha property		—		2,643
Minority interest related to Omaha property		—		(51	)
Income tax expense related to Omaha property		—		(56	)
Net income from discontinued operations	$	—	$	3,179

Distributions to preferred shareholders

Distributions to preferred shareholders increased $0.6 million, from $3.1 million in 2004 to $3.7 million in 2005 due to distributions on the Series D Preferred Shares, which were issued on August 24, 2005.

Comparison of the Nine Months Ended September 30, 2005 to the Nine Months Ended September 30, 2004

Hotel operating revenues

Hotel operating revenues from the hotels leased to LHL (20 hotels as of September 30, 2005), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking and other ancillary revenues) increased approximately $69.5 million, from $196.0 million in 2004 to $265.5 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $14.5 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $12.3 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004;

• $7.7 million increase from the Westin Copley Place, which was purchased in August 2005;

• $6.6 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004;

• $5.0 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004;

• $4.2 million increase from the Grafton on Sunset, which was purchased in January 2005; and

• $2.4 million increase from the Onyx Hotel, which was purchased in May 2005.

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The remaining change is an increase of $16.8 million, or 8.6%, and is attributable to increases in RevPAR, and associated food & beverage and other revenue for our other properties leased to LHL. The increase in RevPAR was primarily attributable an increase in ADR of 10.5%.

Overall, travel levels improved in the first three quarters of 2005, when the industry benefited from continued relatively strong leisure demand and significant increases in demand from business travelers. On a year-over-year basis, overall industry demand for hotel rooms significantly outpaced supply growth, with occupancies up an average of 2.9% for our portfolio. With demand improving during 2005, continuing to reflect an industry recovery, the industry is experiencing an opportunity to raise prices. The Company’s hotels experienced ADR increases during the first three quarters of 2005, especially at its urban and convention hotels.

Participating lease revenue

Participating lease revenue from hotels leased to third party lessees (two hotels) increased $1.9 million from $15.6 million in 2004 to $17.5 million in 2005. Participating lease revenue includes (i) base rent and (ii) participating rent based on fixed percentages of hotel revenues pursuant to the respective participating lease. This increase is due to a $1.9 million increase from the San Diego Paradise Point due to a 12.0% increase in RevPar in 2005.

Hotel operating expenses

Hotel operating expenses increased approximately $44.4 million from $137.3 million in 2004 to $181.7 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $10.0 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004;

• $7.6 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $4.7 million increase from the Westin Copley Place, which was purchased in August 2005;

• $3.8 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004;

• $3.8 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004;

• $2.2 million increase from the Grafton on Sunset, which was purchased in January 2005; and

• $1.6 million increase from the Onyx Hotel, which was purchased in May 2005.

The remaining change is an increase of $10.7 million, or 8.0%, and is a result of higher occupancies at the hotels as well as inflation in payroll and related employee costs and benefits, sales and marketing, insurance, energy costs, and operator incentive management fees.

Depreciation and other amortization

Depreciation and other amortization expense increased by approximately $5.0 million from $28.7 million in 2004 to $33.7 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $1.8 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $1.1 million increase from the Westin Copley Place, which was purchased in August 2005;

• $0.9 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004;

• $0.5 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004;

• $0.5 million increase from the Grafton on Sunset, which was purchased in January 2005;

• $0.4 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004; and

• $0.2 million increase from the Onyx Hotel, which was purchased in May 2005.

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This was offset slightly by the net of the decrease as a result of asset retirements and the increase as a result of assets being placed in service.

Real estate taxes, personal property taxes, insurance and ground rent

Real estate taxes, personal property taxes, insurance and ground rent expenses increased approximately $2.7 million from $11.4 million in 2004 to $14.1 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:

• $0.9 million increase from the Hilton San Diego Gaslamp Quarter, which was purchased in January 2005;

• $0.4 million increase from the Westin Copley Place, which was purchased in August 2005;

• $0.3 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004;

• $0.3 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004;

• $0.3 million increase from the Grafton on Sunset, which was also purchased in January 2005;

• $0.2 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004; and

• $0.1 million increase from the Onyx Hotel, which was purchased in May 2005.

The remaining increase of $0.2 million is a result of increase in ground rent expense.

General and administrative expenses

General and administrative expense increased approximately $1.8 million from $6.4 million in 2004 to $8.2 million in 2005 primarily as a result of increases in payroll related expenses, director fees, and legal fees.

Interest expense

Interest expense increased by approximately $4.8 million from $11.6 million in 2004 to $16.4 million in 2005 due to an increase in the Company’s weighted average debt outstanding and an increase in the weighted average interest rate partly offset by an increase in capitalized interest. The Company’s weighted average debt outstanding related to continuing operations increased from $289.0 million in 2004 to $401.5 million in 2005, which includes increases from:

• a secured loan financing on the Hilton Alexandria Old Town in August 2004;

• additional borrowings to purchase the Chaminade Resort and Conference Center in November 2004;

• additional borrowings to purchase the Hilton San Diego Gaslamp Quarter in January 2005;

• additional borrowings to purchase the Grafton on Sunset in January 2005;

• additional borrowing to purchase the Westin Copley Place;

• assumption of the mortgage on Westin Copley Place; and

• additional borrowings under the Company’s bank facility to finance other capital improvements during 2005.

The above borrowings are offset by paydowns of the line of credit from proceeds from the:

• sale of Omaha Marriott on September 15, 2004;

• November 2004 common stock offering;

• August 24, 2005 Preferred Stock offering; and

• pay downs on the Company’s bank facility with operating cash flows.

The Company’s weighted average interest rate related to continuing operations increased from 4.5% in 2004 to 4.8% in 2005. Capitalized interest increased by approximately $0.6 million from $0.5 million in 2004 to $1.1 million in 2005, primarily due to 2005 capital expenditures related to the Lansdowne Resort development project.

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Income taxes

Income tax benefit decreased approximately $0.6 million from a $0.6 million benefit in 2004 to zero in 2005. For the nine months ended September 30, 2005, the REIT incurred state and local income tax expense of approximately $1.4 million. LHL’s net loss before income tax benefit increased by approximately $0.6 million from $2.6 million in 2004 to $3.2 million in 2005. Accordingly, for the nine months ended September 30, 2005, LHL recorded a federal income tax benefit of approximately $1.1 million (using an estimated tax rate of 34.5%) and a state and local tax benefit of approximately $0.3 million (using an estimated tax rate of 7.0%, net of the federal income tax effect). The portion of LHL’s income tax expense relating to the Omaha has been reclassified to discontinued operations. The following table summarizes the income tax (benefit) expense (dollars in thousands):

	For the nine months ended September 30,
	2005			2004
REIT state and local tax expense	$	1,354		$	383
LHL federal, state and local tax benefit		(1,355	)		(1,010	)
Total tax benefit		(1	)		(627	)
Less: LHL federal, state and local tax benefit (expense) related to discontinued operations		19			(180	)
Total tax expense (benefit) from continuing operations	$	18		$	(807	)

As of September 30, 2005, the Company had a deferred tax asset of $15.8 million primarily due to past and current year’s tax net operating losses. These loss carryforwards will expire in 2021 through 2024 if not utilized by then. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

Minority interest

Minority interest of common units in the Operating Partnership represents the limited partners’ proportionate share of the equity in the Operating Partnership. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. At September 30, 2005, the aggregate weighted average partnership interest held by the limited partners in the operating partnership was approximately 0.98%. The following table summarizes the change in minority interest (dollars in thousands):

	For the nine months ended September 30,
	2005			2004
Net income before minority interest	$	29,032		$	20,678
Weighted average minority interest percentage		0.98	%		1.58	%
Minority interest		284			328
Less: minority interest related to discontinued operations		—			(72	)
Total continuing operations minority interest	$	284		$	256

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Minority interest of preferred units in the Operating Partnership represents distributions to Series C Preferred Unit holders. The increase in minority interest of preferred units in the Operating Partnership from zero in 2004 to $0.4 million in 2005 was due to the units being issued in August of 2005.

Discontinued operations

Net income from discontinued operations is a result of the adjustments from the Omaha property sale, which occurred in September 2004. Net income from discontinued operations decreased by $4.5 million from $4.5 million to zero. The following table summarizes net income from discontinued operations from 2005 and 2004 (dollars in thousands):

	For the nine months ended September 30,
	2005			2004
Net lease income from Omaha property		—			1,668
Net operating income (loss) from Omaha property		(45	)		434
Gain on sale of Omaha property		—			2,643
Minority interest related to Omaha property		—			(72	)
Income tax benefit (expense) related to Omaha property		19			(180	)
Net income from discontinued operations	$	(26	)	$	4,493

Distributions to preferred shareholders

Distributions to preferred shareholders increased $0.6 million, from $9.4 million in 2004 to $10.0 million in 2005 due to distributions on the Series D Preferred Shares which were issued on August 24, 2005.

Non-GAAP Financial Measures

Funds From Operations

The Company considers the non-GAAP measure of FFO to be a key supplemental measure of the Company’s performance and should be considered along with, but not as an alternative to, net income as a measure of the Company’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider supplemental measurements of performance to be helpful in evaluating a real estate company’s operations. The Company believes that excluding the effect of extraordinary items, real estate-related depreciation and amortization, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. However, FFO may not be helpful when comparing the Company to non-REITs.

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The White Paper on FFO approved by NAREIT in April 2002 defines FFO as net income or loss (computed in accordance with GAAP), excluding gains and losses from sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization (excluding amortization of deferred finance costs) and after comparable adjustments for the Company’s portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company.

FFO does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. FFO is not a measure of the Company’s liquidity, nor is it indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. FFO does not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or evaluation of the Company’s operating performance.

The following is a reconciliation between net income applicable to common shareholders and FFO for the three months and nine months ended September 30, 2005 and 2004 (dollars in thousands, except share data):

	For the three months ended September 30,					For the nine months ended September 30,
	2005		2004			2005		2004
Funds From Operations (FFO):
Net income applicable to common shareholders	$	11,398	$	10,039		$	18,738	$	10,951
Depreciation		12,375		9,949			33,539		28,732
Equity in depreciation of joint venture		202		265			613		790
Amortization of deferred lease costs		13		11			36		34
Minority interest:
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P.		120		158			284		256
Minority interest in discontinued operations		—		51			—		72
Net gain on sale of property disposed of		—		(2,643	)		—		(2,643	)
FFO	$	24,108	$	17,830		$	53,210	$	38,192
Weighted average number of common shares and common units outstanding:
Basic		30,195,827		28,223,539			30,150,728		26,510,419
Diluted		30,665,814		28,769,652			30,626,796		27,137,314

EBITDA

The Company considers the non-GAAP measure of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to be a key measure of the Company’s performance and should be considered along with, but not as an alternative to, net income as a measure of the Company’s operating performance. Most real estate industry investors consider EBITDA a measurement of performance that is helpful in evaluating a REIT’s operations. The Company believes that excluding the effect of non-operating expenses and non-cash charges, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and amortization, and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA does not represent an amount that accrues directly to common shareholders.

EBITDA does not represent cash generated from operating activities determined by GAAP and should not be

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considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. EBITDA is not a measure of the Company’s liquidity, nor is it indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. EBITDA does not reflect cash expenditures for long-term assets and other items that have been and will be incurred. EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of the excluded items to the extent they are material to operating decisions or evaluation of the Company’s operating performance.

The following is a reconciliation between net income applicable to common shareholders and EBITDA for the three months and nine months ended September 30, 2005 and 2004 (dollars in thousands, except share data):

	For the three months ended September 30,					For the nine months ended September 30,
	2005			2004		2005			2004
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA):
Net income applicable to common shareholders	$	11,398		$	10,039	$	18,738		$	10,951
Interest		6,569			3,928		16,405			11,566
Equity in interest expense of joint venture		215			130		556			391
Income tax benefit:
Income tax expense (benefit)		(27	)		558		18			(807	)
Income tax expense (benefit) from discontinued operations		—			56		(19	)		180
Depreciation and other amortization		12,430			9,977		33,699			28,813
Equity in depreciation/amortization of joint venture		224			286		680			879
Minority interest:
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P.		120			158		284			256
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P.		355			—		355			—
Minority interest in discontinued operations		—			51		—			72
Distributions to preferred shareholders		3,744			3,133		10,010			9,399
EBITDA	$	35,028		$	28,316	$	80,726		$	61,700

Off-Balance Sheet Arrangements

The Company is a party to a joint venture arrangement with The Carlyle Group (the Joint Venture), an institutional investor that controls the joint venture that owns the 1,192-room Chicago Marriott Downtown in Chicago, Illinois. The Company owns a non-controlling 9.9% equity interest in the joint venture that owns the Chicago Marriott Downtown. The Company receives an annual preferred return in addition to its pro rata share of annual cash flow. The Company also has the opportunity to earn an incentive participation in net sale proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of net sale or refinancing proceeds. The Chicago Marriott Downtown is leased to Chicago 540 Lessee, Inc., in which the Company also owns a non-controlling 9.9% equity interest. The Carlyle Group owns a 90.1% controlling interest in both the joint venture that owns the Chicago Marriott Downtown and Chicago 540 Lessee, Inc. Marriott International, Inc. operates the Chicago Marriott Downtown pursuant to a long-term incentive-based operating agreement. As the controlling owner, The Carlyle Group may elect to dispose of the Chicago Marriott Downtown without the Company’s consent. The Company accounts for its non-controlling 9.9% equity interest in each of the joint venture that owns the Chicago Marriott Downtown and Chicago 540 Lessee, Inc. under the equity method of accounting.

The Joint Venture was subject to two mortgage loans for an aggregate amount of $120.0 million. The mortgage loans had two-year terms, and were due to expire in July 2004. On April 6, 2004, the joint venture refinanced its existing two mortgage loans with a new mortgage loan for an aggregate amount of $140.0 million. Upon refinancing, the Company received approximately $1.8 million in cash representing its prorated share of the proceeds. The new mortgage loan has a two-year term, expires in April 2006, and can be extended at the option of the joint venture for three additional one-year terms. The mortgage bears interest at the London InterBank Offered Rate plus 2.25%. The joint

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venture has purchased a cap on the London InterBank Offered Rate capping the London InterBank Offered Rate at 7.25%, effectively limiting the rate on the mortgage to 9.5%. As of September 30, 2005, the interest rate on this mortgage was 5.9%. Monthly interest-only payments are due in arrears throughout the term. The Chicago Marriott Downtown secures the mortgage. The Company’s pro rata share of the loan is approximately $13.9 million and is included in the Company’s liquidity and capital resources discussion and in calculating debt coverage ratios under the Company’s credit facility. No guarantee exists on behalf of the Company for this mortgage.

On November 2, 2004, the Joint Venture, obtained a three and a half year commitment for a $5.75 million credit facility to be used for partial funding of costs related to upgrading the hotel’s furniture, fixtures and equipment (“FF&E”). The FF&E credit facility matures on the earlier of i) April 30, 2008, or ii) three years from the date on which the final borrowing is made. The borrower has an option to borrow amounts bearing interest with reference to the base rate or to LIBOR, and portions may be converted from one interest basis to another. Base rate will be the greater of i) the rate established by the lender as a base rate and which is designated by the lender as its U.S. prime rate, or ii) the Federal Funds Rate plus 0.50%. LIBOR rate will be set two business days before the start of an interest period. The Chicago 540 Hotel Venture purchased a cap on London InterBank Offered Rate capping the London InterBank Offered Rate at 7.5%. Interest expense for the three months and nine months ended September 30, 2005 was $0.1 million and $0.2 million, respectively. Consistent with our ownership interest, the Company is guaranteeing 9.9% of the credit facility. The Company’s maximum exposure under the FF&E facility is $0.5 million, and the guarantee will expire at the maturity of the credit facility. In the event of default, any outstanding principal and accrued interest will be due and payable. As of September 30, 2005 and December 31, 2004, there was $5.14 million and no outstanding borrowings under the FF&E credit facility, respectively.

Pursuant to the acquisition of the Westin Copley Place, the Company entered into a Tax Reporting and Protection Agreement (the “Tax Agreement”) with SCG Copley Square LLC (“SCG”). Under the Tax Agreement, the Company is required, among other things, to indemnify SCG (and its affiliates) for certain income tax liabilities that such entities would incur if the Westin Copley Place was transferred by the Company in a taxable transaction or if the Company fails to maintain a certain level of indebtedness with respect to the Westin Copley Place or its operations. The obligations of the Company under the Tax Protection Agreement (i) do not apply in the case of a foreclosure of the Westin Copley Place, if certain specified requirements are met, (ii) are limited to $20.0 million (although a limitation of $10.0 million is applicable to certain specified transactions), and (iii) terminate on the earlier of the tenth anniversary of the Company’s acquisition of the Westin Copley Place or January 1, 2016. The Company believes that the likelihood that the Company will be required to pay under this Tax Agreement are remote, and therefore, a liability has not been recorded.

Reserve Funds

The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the operating agreements. The Company’s aggregate obligation under the reserve funds was approximately $17.1 million at September 30, 2005. The reserve requirement for four hotels, the hotels operated by Marriott International, Inc., White Lodging Services Corporation and Hyatt Corporation, are contained in certain long-term operation agreements, which require the reserves for the hotels operated by Mariott International, Inc., White Lodging Services Corporation and Hyatt Corporation, to be maintained through furniture, fixtures and equipment restricted cash escrows. These four operating agreements require that the Company reserve restricted cash ranging from 3.0% to 5.5% of the individual hotel’s annual revenues. Pursuant to the Company’s mortgage note on the Westin Copley Place, the Company is also required to reserve restricted cash of 4% of the Westin Copley Place’s gross revenues. As of September 30, 2005, $9.1 million was available in restricted cash reserves for future capital expenditures for all hotels which require restricted cash escrows. Seventeen of the operating agreements require that the Company reserve funds of 4.0% of the individual hotel’s annual revenues, but do not require the funds to be set aside in restricted cash. As of September 30, 2005, the total amount obligated for future capital expenditures, but not set aside in restricted cash reserves was $8.0 million. Amounts will be recorded as incurred. As of September 30, 2005, purchase orders and letters of commitment totaling approximately $15.3 million have been issued for renovations at the hotels. Any unexpended amounts will remain the property of the Company upon termination of the operating agreements.

The Company has no other off-balance sheet arrangements.

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Liquidity and Capital Resources

The Company’s principal source of cash to meet its cash requirements, including distributions to shareholders, is its pro rata share of hotel operating cash flow distributed by LHL and the Operating Partnership’s cash flow from the participating leases. The Company’s senior unsecured bank facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness and contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions. There are currently no other contractual or other arrangements limiting payment of distributions by the Operating Partnership. Similarly, LHL is a wholly owned subsidiary of the Operating Partnership. Payments to the Operating Partnership are required pursuant to the terms of the lease agreements between LHL and the Operating Partnership relating to the properties owned by the Operating Partnership and leased by LHL. Except for the security deposits required under the participating leases for the two hotels not leased by LHL, the lessees’ obligations under the participating leases are unsecured and the lessees’ abilities to make rent payments to the Operating Partnership, and the Company’s liquidity, including its ability to make distributions to shareholders, are dependent on the lessees’ abilities to generate sufficient cash flow from the operations of the hotels.

Debt at September 30, 2005 and December 31, 2004, consists of the following (in thousands):

Debt	Interest Rate at September 30, 2005		Maturity Date	Balance Outstanding at
				September 30, 2005		December 31, 2004
Credit Facilities
Senior Unsecured Credit Facility	Floating		June 2008	$	52,500	$	—
LHL Unsecured Credit Facility	Floating		June 2008		11,741		—
Massport Bonds
Harborside Hyatt Conference Center & Hotel (b)	Floating	(a)	March 2018		5,400		5,400
Harborside Hyatt Conference Center & Hotel (b)	Floating	(a)	March 2018		37,100		37,100
Total bonds payable					42,500		42,500
Mortgage debt
Indianapolis Marriott Downtown	3.56	%(c)	February 2007		57,000		57,000
Sheraton Bloomington Hotel Minneapolis South and Westin City Center Dallas	8.10	%	July 2009		41,981		42,665
San Diego Paradise Point Resort	6.93	%	February 2009		17,385		17,686
San Diego Paradise Point Resort	4.61	%	February 2009		45,395		46,180
Hilton Alexandria Old Town	4.98	%	September 2009		33,713		34,230
Le Montrose Suite Hotel	8.08	%	July 2010		13,900		14,049
Hilton San Diego Gaslamp Quarter	5.35	%	June 2012		59,600		—
Westin Copley Place	5.28	%	August 2015		210,000		—
Total mortgage debt					478,974		211,810
Total Debt (d)				$	585,715	$	254,310

(a) Variable interest rate based on a weekly floating rate. The interest rate at September 30, 2005 was 3.7% and 2.6% for the $5,400 and 37,100 bonds, respectively. The Company also incurs a 2% annual maintenance fee.

(b) The Massport bonds are secured by letters of credit issued by GE Capital Corporation that expire in 2007. The GE Capital letters of credit are secured by the Harborside Hyatt and a $6.0 million letter of credit from the Company.

(c) Variable interest rate of LIBOR plus 1%. The Company has entered into a three-year fixed interest rate swap that fixes the LIBOR rate at 2.56% and therefore, fixes the mortgage interest rate at 3.56%.

(d) Mortgage debt does not include the Company’s 9.9% share ($13,860) of the $140.0 million debt of the joint venture which is secured by the Chicago Marriott Downtown or the Company’s share ($509) of the Chicago Marriott line of credit facility which had a balance of $5.1 million at September 30, 2005.

We incurred interest costs of $6.6 million and $16.4 million in the three and nine months ending September 30, 2005, respectively and $3.9 million and $11.6 million in the three and nine months ending September 30, 2004,

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respectively. Included in interest costs are amortization of deferred financing fees of $0.6 million and $1.9 million for the three months and nine months ended September 30, 2005, respectively, and $0.6 million and $1.7 million for the three months and nine months ended September 30, 2004, respectively. Interest was capitalized in the amount of $0.3 million and $1.1 million for the three and nine months ending September 30, 2005, respectively and $0.2 million and $0.5 million in the three and nine months ending September 30, 2004, respectively. Interest paid was $6.5 million and $15.9 million in the three and nine months ending September 30, 2005, respectively and $3.5 million and $10.1 million for the three and nine months ending September 30, 2004, respectively.

Credit Facilities

The Company has a senior unsecured bank facility from a syndicate of banks that provides for a maximum borrowing of up to $300.0 million. On June 9, 2005, the Company amended the credit facility to extend the bank facility’s maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. The senior unsecured bank facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness and contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions which, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) ninety percent of the funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar year basis. Borrowings under the facility bear interest at floating rates equal to, at the Company’s option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an “Adjusted Base Rate” plus an applicable margin. As of September 30, 2005, the Company was in compliance with all debt covenants and was not otherwise in default under the credit facility. For the three months and nine months ended September 30, 2005, the weighted average interest rate for borrowings under the senior unsecured bank facility was approximately 5.1% and 5.0%, respectively. The Company did not have any Adjusted Base Rate borrowings outstanding at September 30, 2005. Additionally, the Company is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the senior unsecured bank facility. The Company incurred an unused commitment fee of approximately $113 and $369 for the three months and nine months, respectively. At September 30, 2005 and December 31, 2004, the Company had $52,500 and zero, respectively, of outstanding borrowings under the senior unsecured bank facility.

LHL has a $25.0 million unsecured revolving credit facility to be used for working capital and general corporate purposes. On June 9, 2005, LHL amended the credit facility to extend the bank facility maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an “Adjusted Base Rate” plus an applicable margin. The weighted average interest rate under the LHL credit facility for the three months and nine months ended September 30, 2005 was 5.1% and 4.8%, respectively. LHL is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the LHL credit facility. LHL incurred an unused commitment fee of approximately $5 and $12 for the three months and nine months ended September 30, 2005, respectively. At September 30, 2005 and December 31, 2004, the Company had $11,741 and zero, respectively, of outstanding borrowings under LHL credit facility.

At September 30, 2005, the Company had approximately $1.4 million of cash and cash equivalents and approximately $21.3 million of restricted cash reserves.

Net cash provided by operating activities was approximately $53.0 million for the nine months ended September 30, 2005, primarily due to the distribution of available hotel operating cash by LHL and participating lease revenues, which were offset by payments for real estate taxes, personal property taxes, insurance and ground rent.

Net cash used in investing activities was approximately $248.5 million for the nine months ended September 30, 2005, primarily due to the purchases of the Hilton San Diego Gaslamp Quarter, the Grafton on Sunset, the Onyx, and the Westin Copley Place, the outflows for improvements and additions at the hotels and funding of restricted cash reserves.

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Net cash provided by financing activities was approximately $164.9 million for the nine months ended September 30, 2005, comprised primarily of net borrowings from the senior unsecured bank facility and proceeds from the Gaslamp mortgage note payable, and proceeds from the issuance of the Series D Preferred Shares, offset by common and preferred dividend payments.

The Company has considered its short-term (one year or less) liquidity needs and the adequacy of its estimated cash flow from operations and other expected liquidity sources to meet these needs. The Company believes that its principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements, distributions on the preferred shares and the minimum distribution required to maintain the Company’s REIT qualification under the Code. The Company anticipates that these needs will be met with cash flows provided by operating activities and using availability under the senior unsecured bank facility. The Company also considers capital improvements and property acquisitions as short-term needs that will be funded either with cash flows provided by operating activities, utilizing availability under the senior unsecured bank facility, the issuance of other indebtedness, or the issuance of additional equity securities.

The Company expects to meet long-term (greater than one year) liquidity requirements such as property acquisitions, scheduled debt maturities, major renovations, expansions and other nonrecurring capital improvements utilizing availability under the senior unsecured bank facility, estimated cash flows from operations, the issuance of long-term unsecured and secured indebtedness and the issuance of additional equity securities. The Company expects to acquire or develop additional hotel properties only as suitable opportunities arise, and the Company will not undertake acquisition or development of properties unless stringent acquisition/development criteria have been achieved.

Reserve Funds

The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the operating agreements. Please refer to “Off-Balance Sheet Arrangements” for a detailed discussion of the Reserve Funds.

The joint venture operating agreement requires that the joint venture reserve restricted cash of 5.0% of the Chicago Marriott Downtown’s annual revenues; however, the joint venture is not consolidated in the Company’s financial statements and, therefore, the amount of restricted cash reserves relating to the joint venture is not recorded on the Company’s books and records.

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The following is a summary of the Company’s obligations and commitments: (in thousands):

	Total Amounts Committed		Amount of Commitment Expiration Per Period
			Less than 1 year		1 to 3 years		4 to 5 years		Over 5 years
Contractual Obligations
Mortgage loans (3)	$	648,541	$	29,077	$	111,991	$	177,972	$	329,501
Ground rent		100,566		2,625		5,250		5,250		87,441
Massport bonds (3)		44,073		1,110		42,963		—		—
Purchase commitments(1)
Purchase orders and letters of commitment		15,331		15,331		—		—		—
Total contractual obligations		808,511		48,143		160,204		183,222		416,942
Commercial Commitments
Borrowings under credit facilities (3)		73,259		3,279		69,980		—		—
Dividends on Preferred Shares/Units
Dividends payable on preferred shares/units(2)		125,625		21,149		34,530		21,554		48,392
Total contractual obligations, commercial commitments and dividends on preferred shares excluding off-balance sheet arrangements	$	1,007,395	$	72,571	$	264,714	$	204,776	$	465,334
Off-Balance Sheet Obligation
Mortgage loans - CIGNA
Chicago Hotel Venture (3)		16,632		832		15,800		—		—
Chicago Hotel Venture -FF&E LOC Guarantee (3)		485		208		277		—		—
Total obligations and commitments	$	1,024,512	$	73,611	$	280,791	$	204,776	$	465,334

(1) As of September 30, 2005, purchase orders and letters of commitment totaling approximately $15.3 million had been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire.

(2) The Class A, B, C and D preferred stock/units are redeemable at the option of the company for $25.00 per share after the respective optional redemption date. The future obligations include future dividends on preferred stock/units through the optional redemption date.

(3) Amounts include interest. Interest expense on fixed rate debt is computed on the fixed interest rate of the debt. Interest expense on the variable interest debt is computed based upon the rate at September 30, 2005.

The Hotels

On March 11, 2005, the Company notified Marriott International (“Marriott”) that it was terminating the management agreement at the Seaview Resort and Spa due to Marriott’s failure to meet certain hotel operating performance thresholds as defined in the management agreement. Pursuant to the management agreement, Marriott had the right to avoid termination by making payment of approximately $2,394 within 60 days of notification. On April 28, 2005, Marriott International made a payment of approximately $2,394 to avoid termination. Marriott may recoup that amount in the event certain future operating performance thresholds are attained. This amount was recorded as a deferred liability and is included in accounts payable and accrued expenses on the Company’s consolidated balance sheet.

The following table sets forth historical comparative information with respect to occupancy, average daily rate (“ADR”) and room revenue per available room (“RevPAR”) for the total hotel portfolio for the three months and nine months ended September 30, 2005 and 2004, respectively. ADR is calculated as the quotient of room revenue divided by the number of rooms sold, and RevPAR is calculated as the product of occupancy and ADR.

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	For the three months ended September 30,					For the nine months ended September 30,
	2005		2004		Variance	2005		2004		Variance
Total Portfolio
Occupancy		79.1%		75.8%	4.3%		73.1%		71.0%	2.9%
ADR	$	175.11	$	166.80	5.0%	$	168.13	$	156.58	7.4%
RevPAR	$	138.48	$	126.46	9.5%	$	122.87	$	111.15	10.5%

Inflation

The Company’s revenues come primarily from its pro rata share of the operating partnership’s cash flow from the participating leases and the LHL hotel operating revenues, thus the Company’s revenues will vary based on changes in the underlying hotels’ revenues. Therefore, the Company relies entirely on the performance of the hotels and the lessees’ abilities to increase revenues to keep pace with inflation. The hotel operators can change room rates quickly, but competitive pressures may limit the lessees’ and hotel operators’ abilities to raise rates faster than inflation or even at the same rate.

The Company’s expenses (primarily real estate taxes, property and casualty insurance, administrative expenses and LHL hotel operating expenses) are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation, and except for instances in which the properties are subject to periodic real estate tax reassessments.

Seasonality

The hotels’ operations historically have been seasonal. The hotels maintain higher occupancy rates during the second and third quarters. The Seaview Resort and Spa and Lansdowne Resort generate a portion of their revenues from golf-related business and, as a result, have revenues that fluctuate according to the season and the weather. These seasonality patterns can be expected to cause fluctuations in the Company’s quarterly lease revenue under the participating leases with third-party lessees and hotel operating revenue from LHL.

Litigation

The Company has engaged Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its Dallas hotel under the Westin brand affiliation. Meridien Hotels, Inc. (“Meridien”) affiliates had been operating the Dallas property as a wrongful holdover tenant, until the Westin brand conversion occurred on July 14, 2003 under court order.

On December 20, 2002, affiliates of Meridien abandoned the Company’s New Orleans hotel. The Company entered into a lease with a wholly-owned subsidiary of LHL and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property thereafter was sold on April 21, 2003 for $92.5 million.

In connection with the termination of the Meridien affiliates at these hotels, the Company is currently in litigation with Meridien and related affiliates. The Company believes its sole potential obligation in connection with the termination of the leases is to pay fair market value of the leases, if any. With respect to the Dallas hotel, the Company has obtained a judgment from the court that Meridien defaulted and that Meridien is not entitled to the payment of fair market value. The Company’s damage claims against Meridien went to trial in March 2005, and a final judgment was entered for the Company in July 2005 in the amount of $3.1 million, plus post-judgment interest. Meridien has filed a post-trial motion, challenging certain aspects of the judgment, and a decision is pending. With respect to the New Orleans hotel, arbitration of the fair market value of the New Orleans lease commenced in October 2002. On December 19, 2002, the

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arbitration panel determined that Meridien was entitled to an award of approximately $5.7 million, subject to adjustment (reduction) by the courts to account for Meridien’s holdover. In order to dispute the arbitration decision, the Company was required to post a $7.8 million surety bond, which was secured by $5.9 million of restricted cash. The Company successfully challenged the award on appeal, and the dispute was remanded to the trial court. Meridien’s request for rehearing was denied on March 31, 2004, and Meridien did not petition to the Louisiana Supreme Court. In June 2004, the $7.8 million surety bond was released and the $5.9 million restricted cash securing it was returned to the Company. The issue of default by the lessee and the Company’s wrongful holdover claim, as well as Meridien’s damage claims arising from the termination of its leasehold, among other claims, went to trial in February 2005. On June 9, 2005, the trial court issued its judgment denying the Company’s default claim as well as Meridien’s fraud claim, and “re-determined” fair market value to be $8.6 million, plus interest. The Company believes that the determination of fair market value was not properly before the trial court, and the trial court failed to address the issue of adjustments to account for Meridien’s holdover, contrary to the direction given by the appellate court. The Company has noticed an appeal from the trial court’s judgment. On July 18, 2005, the Company posted a $8.6 million surety bond, which was secured by $8.7 million of restricted cash.

On April 22, 2005, the Company filed suit against Meridien in Delaware state court alleging certain defaults, including non-payment of rent and other breaches in connection with the transition at the New Orleans hotel. Preliminary motions are set to be heard in October 2005. That matter has not yet been set for trial.

In 2002, the Company recognized a net $2.5 million contingent lease termination expense and reversed previously deferred assets and liabilities related to the termination of both the New Orleans property and Dallas property leases and recorded a corresponding contingent liability included in accounts payable and accrued expenses in the accompanying consolidated financial statements. The Company believes, however, it is owed holdover rent per the lease terms due to Meridien’s failure to vacate the properties as required under the leases. The contingent lease termination expense was, therefore, net of the holdover rent the Company believes it is entitled to for both properties. In 2003, the Company adjusted this liability by additional holdover rent of $0.8 million that it believes it is entitled to for the Dallas property. These amounts were recorded as other income in the Company’s December 31, 2003 consolidated financial statements. The contingent lease termination expense recognized cumulatively since 2002 is comprised of (dollars in thousands):

	Expense Recognized Quarter Ended December 31, 2002			Expense Recognized Year Ended December 31, 2004			Expense Recognized Quarter Ended June 30, 2005		Cumulative Expense Recognized as of September 30, 2005
Estimated arbitration “award”	$	5,749		$	—		$	—	$	5,749
Legal fees related to litigation		2,610			1,350			1,000		4,960
Holdover rent		(4,844	)		—			—		(4,844	)
Expected reimbursement of legal fees		(995	)		(500	)		—		(1,495	)
Net contingent lease termination expense	$	2,520		$	850		$	1,000	$	4,370

In September 2004, after evaluating the ongoing Meridien litigation, the Company accrued additional net legal fees of $0.9 million due to litigation timeline changes in order to conclude this matter. In June 2005, after further evaluation of the ongoing Meridien litigation, the Company accrued an additional $1.0 million in legal fees. As a result, the net contingent lease termination liability has a balance of approximately $2.0 million as of September 30, 2005, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. Based on the claims the Company has against Meridien, the Company is and will continue to challenge Meridien’s claim that it is entitled to the payment of fair market value, and will continue to seek reimbursement of legal fees and damages. These amounts may exceed or otherwise may be used to offset any amounts potentially owed to Meridien, and therefore, ultimately may offset or otherwise reduce any contingent lease termination expense. Additionally, the Company cannot provide any assurances that the holdover rents or any damages will be collectible from Meridien or that the amounts due will not be greater than the recorded contingent lease termination expense.

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The Company maintained a lien on Meridien’s security deposit on both disputed properties with an aggregate value of approximately $3.3 million, in accordance with the lease agreements. The security deposits were liquidated in May 2003 with the proceeds used to partially satisfy Meridien’s outstanding obligations. The judgment entered by the Dallas Court already incorporates a set-off in the amount of $989 attributable to the security deposit for the Dallas property.

Meridien also has sued the Company and one of the Company’s officers alleging that certain actions taken in anticipation of re-branding the Dallas and New Orleans hotels under the Westin brand affiliation constituted unfair trade practices, false advertising, trademark infringement, trademark dilution and tortious interference. The Company intends to vigorously challenge Meridien’s claims, which are not expected to go to trial before Spring 2006.

The Company does not believe that the amount of any fees or damages it may be required to pay on any of the litigation related to Meridien will have a material adverse effect on the Company’s financial condition or results of operations, taken as a whole. The Company’s management has discussed this contingency and the related accounting treatment with the audit committee of its Board of Trustees.

The Company initiated a lawsuit against Marriott Hotel Services, Inc. in the Supreme Court of the State of New York, County of New York, in connection with Marriott’s implementation of certain expenditures without the Company’s approval at the LaGuardia Airport Marriott. The Company alleged breach of contract and breach of fiduciary duty, among other claims. The trial court recently dismissed the Company’s claims before receiving any evidence, and the Company has appealed from the court’s decision.

The Company is not presently subject to any other material litigation nor, to the Company’s knowledge, is any other litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. As of September 30, 2005, approximately $121.1 million of the Company’s aggregate indebtedness (20.2% of total indebtedness), including the Company’s $14.4 million pro rata portion of indebtedness relating to the Company’s joint venture investment in the Chicago Marriott Downtown hotel, was subject to variable interest rates.

If market rates of interest on our variable rate long-term debt increase by 0.25%, the increase in interest expense on our variable long-term rate debt would decrease future earnings and cash flows by approximately $0.3 million annually. On the other hand, if market rates of interest on our variable rate long-term debt decrease by 0.25%, the decrease in interest expense on our variable rate long-term debt would increase future earnings and cash flows by approximately $0.3 million annually. This assumes that the amount outstanding under our variable rate debt remains at $121.1 million, the balance at September 30, 2005.

Item 4. Controls and Procedures

Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2005. There were no changes to the Company’s internal controls over financial reporting during the third quarter ended September 30, 2005, that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II.Other Information

Item 1. Legal Proceedings.

The Company and the Operating Partnership, are subject to claims and actions in the ordinary course and, from time to time, to other litigation, including the Meredien litigation described elsewhere in this report. Some of these matters are expected to be covered by insurance. The ultimate resolution of these matters, in the opinion of the Company, is not expected to have a material adverse effect on the financial position, operations or liquidity of the Company and the Operating Partnership.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On August 31, 2005, the Company acquired the Westin Copley Place in Boston, Massachusetts, for approximately $324 million, including expenses. The acquisition occurred pursuant to the contribution and sale agreement entered into on August 12, 2005, among the Company, the Operating Partnership, one of its subsidiaries, LaSalle Hotel Lessee, Inc., and W. Copley Boston Corporation and SCG Copley Square LLC (“SCG”). As part of the consideration for the hotel acquisition, the Operating Partnership issued 2,348,888 partnership units at the closing to SCG. These units are a newly created series of preferred units, designated as the “7.25% Series C Cumulative Redeemable Preferred Units (liquidation preference $25 per unit).” The Series C Preferred Units are redeemable for 7.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (liquidation preference $25 per share), $.01 par value per share, of the Company. The issuance of the Series C Preferred Units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

(a) Exhibits.

Exhibit Number	Description of Exhibit
1	Underwriting Agreement dated as of August 19, 2005 among Raymond James & Associates, Inc., as the representative of the several underwriters, the Company and the Operating Partnership.1
3.1	Articles of Amendment and Restatement of Declaration of Trust (including all amendments or articles supplementary thereto).

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3.2	Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership.1
4	Form of certificate evidencing the 7.5% Series D Cumulative Redeemable Preferred Shares.1
10.1	Contribution and Sale Agreement, dated August 12, 2005, by and among LaSalle Hotel Properties, LaSalle Hotel Operating Partnership, L.P., LaSalle Hotel Lessee, Inc., W. Copley Boston Corporation, and SCG Copley Square LLC.2
10.2	Promissory Note Secured by Leasehold Mortgage in the original principal amount of $210,000,000 made by LHO Backstreets, L.L.C. and dated as of August 30, 2005.3
10.3	Leasehold Mortgage and Absolute Assignment of Rents and Leases and Security Agreement (and Fixture Filing) by LHO Backstreets, L.L.C., as Mortgagor, and Mortgage Electronic Registration Systems, Inc., as Mortgagee and dated August 30, 2005.3
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

¹ Previously filed as an exhibit to the Registrant’s Form 8-K filed with the SEC on August 24, 2005 and incorporated herein by reference.

² Previously filed as an exhibit to the Registrant’s Form 8-K filed with the SEC on August 16, 2005 and incorporated herein by reference.

³ Previously filed as an exhibit to the Registrant’s Form 8-K filed with the SEC on September 7, 2005 and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LASALLE HOTEL PROPERTIES
Dated: October 19, 2005	BY:	/s/ HANS S. WEGER
		Hans S. Weger
		Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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