Ashford Hospitality Trust (AHT) 10-Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

OR

o 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: 001-31775

(Exact name of registrant as specified in its charter)

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

(972) 490-9600
(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.þ Yeso No

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

Large accelerated filerþ  Accelerated filero  Non-accelerated filer  o
(Do not check if a smaller reporting company) Smaller reporting companyo 

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

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

Common Stock, $0.01 par value per share	119,739,972
(Class)	Outstanding at August 5, 2008

ASHFORD HOSPITALITY TRUST, INC
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)	3
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007	4
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2008 and 2007	5
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2008 and 2007	6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	7
Notes to Consolidated Financial Statements	8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 4. CONTROLS AND PROCEDURES	34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	34
ITEM 1A. RISK FACTORS	34
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	35
ITEM 6. EXHIBITS	35
SIGNATURES	36
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Certification of Chief Accounting Officer Pursuant to Rule 13a-14(a)
Certification of Chief Executive Officer Pursuant to Section 1350
Certification of Chief Financial Officer Pursuant to Section 1350
Certification of Chief Accounting Officer Pursuant to Section 1350

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	June 30,			December 31,
	2008			2007
	(Unaudited)
Assets
Investments in hotel properties, net	$	3,688,913		$	3,885,737
Cash and cash equivalents		112,524			92,271
Restricted cash		50,733			52,872
Accounts receivable, net of allowance of $745 and $1,458, respectively		62,475			51,314
Inventories		3,943			4,100
Notes receivable		113,030			94,225
Investment in unconsolidated joint venture		24,917			—
Assets held for sale		11,908			75,739
Deferred costs, net		22,507			25,714
Prepaid expenses		16,601			20,223
Other assets		8,692			6,027
Intangible assets, net		3,122			13,889
Due from third-party hotel managers		51,030			58,300
Total assets	$	4,170,395		$	4,380,411
Liabilities and Stockholders’ Equity
Liabilities:
Indebtedness — continued operations	$	2,540,906		$	2,639,546
Indebtedness — discontinued operations		11,134			61,229
Capital leases payable		291			498
Accounts payable and accrued expenses		106,354			124,696
Dividends payable		35,178			35,031
Unfavorable management contract liabilities		22,267			23,396
Due to related parties		793			2,732
Due to third-party hotel managers		8,324			4,699
Interest rate derivatives		47,299			—
Other liabilities		8,287			8,514
Total liabilities		2,780,833			2,900,341
Commitments and contingencies (Note 13)
Minority interests in consolidated joint ventures		21,809			19,036
Minority interests in operating partnership		93,985			101,031
Preferred stock, $0.01 par value, Series B Cumulative Convertible Redeemable Preferred Stock, 7,447,865 shares issued and outstanding		75,000			75,000
Shareholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized —
Series A Cumulative Preferred Stock, 2,300,000 issued and outstanding		23			23
Series D Cumulative Preferred Stock, 8,000,000 issued and outstanding		80			80
Common stock, $0.01 par value, 200,000,000 shares authorized, 122,754,192 shares issued and 119,739,972 shares outstanding at June 30, 2008 and 122,765,691 shares issued and 120,376,055 shares outstanding at December 31, 2007		1,228			1,228
Additional paid-in capital		1,458,262			1,455,917
Accumulated other comprehensive loss		(149	)		(115	)
Accumulated deficit		(238,307	)		(153,664	)
Treasury stock, at cost, 3,014,220 and 2,389,636 shares, respectively		(22,369	)		(18,466	)
Total shareholders’ equity		1,198,768			1,285,003
Total liabilities and shareholders’ equity	$	4,170,395		$	4,380,411

See Notes to Consolidated Financial Statements.

3

ASHFORD HOSPITALITY TRUST, INC. AND SUBSDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
	(Unaudited)
Revenue
Rooms	$	231,296		$	213,034		$	448,165		$	321,818
Food and beverage		67,305			63,585			131,706			93,111
Rental income from operating leases		1,526			1,184			2,872			1,184
Other		14,094			13,324			27,440			18,213
Total hotel revenue		314,221			291,127			610,183			434,326
Interest income from notes receivable		3,216			2,866			6,472			6,221
Asset management fees and other		921			331			1,442			663
Total revenue		318,358			294,324			618,097			441,210
Expenses
Hotel operating expenses:
Rooms		49,901			46,304			97,510			70,297
Food and beverage		45,872			44,007			90,907			65,356
Other expenses		89,882			82,499			178,753			125,815
Management fees		12,142			10,950			23,783			16,217
Total hotel expenses		197,797			183,760			390,953			277,685
Property taxes, insurance and other		16,802			15,184			32,047			22,972
Depreciation and amortization		40,077			50,075			84,121			66,055
Corporate general and administrative		8,365			7,148			16,069			11,741
Total expenses		263,041			256,167			523,190			378,453
Operating Income		55,317			38,157			94,907			62,757
Equity earnings in unconsolidated joint venture		1,287			—			1,813			—
Interest income		351			975			897			1,473
Other income		2,569			—			2,865			—
Interest expense and amortization of loan costs		(38,090	)		(39,122	)		(77,055	)		(54,869	)
Write-off of loan costs and exit fees		—			(3,585	)		—			(4,075	)
Unrealized (losses)/gains on derivatives		(55,438	)		66			(51,389	)		31
(Loss)/Income before Income Taxes, Minority Interests and Discontinued Operations		(34,004	)		(3,509	)		(27,962	)		5,317
Income tax (expense)/benefit		(319	)		162			(729	)		1,156
Minority interests in (earnings)/losses of consolidated joint ventures		(2,718	)		523			(2,784	)		523
Minority interests in (earnings)/losses of operating partnership		2,891			137			2,351			(1,298	)
(Loss)/Income from Continuing Operations		(34,150	)		(2,687	)		(29,124	)		5,698
Income from discontinued operations		7,646			23,771			8,805			26,877
Net (Loss)/Income		(26,504	)		21,084			(20,319	)		32,575
Preferred dividends		(7,018	)		(7,033	)		(14,036	)		(9,826	)
Net (Loss)/Income Available to Common Shareholders	$	(33,522	)	$	14,051		$	(34,355	)	$	22,749
(Loss)/Income Available to Common Shareholders Per Share:
Basic —
Loss from continuing operations	$	(0.34	)	$	(0.09	)	$	(0.36	)	$	(0.05	)
Income from discontinued operations		0.06			0.22			0.07			0.30
Net (loss)/income	$	(0.28	)	$	0.13		$	(0.29	)	$	0.25
Diluted —
Loss from continuing operations	$	(0.34	)	$	(0.09	)	$	(0.36	)	$	(0.05	)
Income from discontinued operations		0.06			0.22			0.07			0.30
Net (loss)/income	$	(0.28	)	$	0.13		$	(0.29	)	$	0.25
Weighted average common shares outstanding —
Basic		118,911			108,138			118,870			90,275
Diluted		118,911			108,138			118,870			90,275
Dividends Declared Per Common Share	$	0.21		$	0.21		$	0.42		$	0.42

See Notes to Consolidated Financial Statements.

4

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

	Six Months Ended June 30,
	2008						2007
	Shares			Amounts			Shares			Amounts
	(Unaudited)
Preferred Stocks
Series A, $0.01 par value
Balance at end of period		2,300		$	23			2,300		$	23
Series C, $0.01 par value
Balance at beginning of period		—			—			—			—
Issuance		—			—			8,000			80
Balance at end of period		—			—			8,000			80
Series D, $0.01 par value
Balance at end of period		8,000			80			—			—
Common Stock
Balance at beginning of year		122,766			1,228			72,943			729
Shares issued in follow-on public offering		—			—			48,875			489
Issuance of restricted shares under stock-based compensation plan		81			—			855			8
Restricted shares issued from treasury shares		(81	)		—			(37	)		—
Forfeitures of restricted shares under stock-based compensation plan		(12	)		—			(2	)		—
Balance at end of period		122,754			1,228			122,634			1,226
Additional Paid-in Capital
Balance at beginning of year					1,455,917						708,420
Shares issued in follow-on public offering					—						547,760
Issuance of Series C preferred stock					—						193,239
Dividends declared on Series C preferred stock					—						705
Issuance of restricted shares under stock-based compensation plan					(627	)					(268	)
Stock-based compensation					2,972						2,773
Balance at end of period					1,458,262						1,452,629
Accumulated Deficit
Balance at beginning of year					(153,664	)					(67,574	)
Net (loss)/income					(20,319	)					32,575
Dividends declared — common shares					(50,288	)					(41,233	)
Dividends declared — Series A preferred stock					(2,458	)					(2,458	)
Dividends declared — Series B preferred stock					(3,128	)					(3,128	)
Dividends declared — Series C preferred stock					—						(4,240	)
Dividends declared — Series D preferred stock					(8,450	)					—
Balance at end of period					(238,307	)					(86,058	)
Accumulated Other Comprehensive Income/(Loss)
Balance at beginning of year					(115	)					111
Reclassified to interest expense					21						(150	)
Change in unrealized loss on derivative instruments					14						3
Foreign currency translation adjustment					(126	)					22
Reclassification resulting from sale of property					57						—
Balance at end of period					(149	)					(14	)
Treasury Stock
Balance at beginning of year		2,390			(18,466	)		—			—
Purchases of treasury shares		705			(4,622	)		58			(700	)
Reissuance of treasury shares		(81	)		719			(37	)		453
Balance at end of period		3,014			(22,369	)		21			(247	)
Total Shareholders’ Equity				$	1,198,768					$	1,367,639

See Notes to Consolidated Financial Statements.

5

ASHFORD HOSPITALITY TRUST, INC. AND SUBSDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007
	(Unaudited)
Net (Loss)/Income	$	(26,504	)	$	21,084	$	(20,319	)	$	32,575
Other Comprehensive Income/(Loss)
Reclassification to interest expense		15			1		21			(150	)
Net unrealized gains/(losses) on derivative instruments		21			83		14			3
Foreign currency translation adjustment		10			22		(126	)		22
Other comprehensive income/(loss)		46			106		(91	)		(125	)
Total Comprehensive (Loss)/Income	$	(26,458	)	$	21,190	$	(20,410	)	$	32,450

See Notes to Consolidated Financial Statements.

6

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
Cash Flows from Operating Activities
Net (loss)/income	$	(20,319	)	$	32,575
Adjustments to reconcile net (loss)/income to net cash flow provided by operating activities:
Depreciation and amortization		87,529			77,409
Equity in earnings of unconsolidated joint venture		(1,813	)		—
Gains on sales of properties		(6,903	)		(34,706	)
Amortization of loan costs		3,509			2,923
Write-off of loan costs, premiums and exit fees		(1,347	)		5,966
Unrealized losses/(gains) on derivatives		51,389			(31	)
Stock-based compensation		3,469			2,966
Minority interests in consolidated joint ventures and operating partnership		1,190			3,283
Changes in operating assets and liabilities —
Restricted cash		2,139			(26,041	)
Accounts receivable and inventories		(9,962	)		(17,423	)
Prepaid expenses and other assets		582			(22,331	)
Accounts payable and accrued expenses		(22,397	)		30,638
Other liabilities		(4,853	)		(8,874	)
Net cash provided by operating activities		82,213			46,354
Cash Flows from Investing Activities
Acquisitions/originations of notes receivable		(39,530	)		—
Proceeds from sale of notes receivable		16,165			30,046
Investment in unconsolidated joint venture		(17,769	)		—
Acquisitions of hotel properties		—			(2,043,067	)
Improvements and additions to hotel properties		(76,989	)		(44,923	)
Proceeds from sales of discontinued operations		282,605			143,907
Net cash provided by/(used in) investing activities		164,482			(1,914,037	)
Cash Flows from Financing Activities
Borrowings on indebtedness and capital leases		185,900			1,903,587
Repayments of indebtedness and capital leases		(332,509	)		(637,572	)
Payments of deferred loan costs		(856	)		(14,376	)
Payments of dividends		(70,087	)		(41,014	)
Repurchases of treasury stock		(4,594	)		(700	)
Payments for derivatives		(4,576	)		—
Proceeds received from follow-on public offerings		—			548,249
Proceeds received from issuance of Series C preferred stock		—			193,319
Other		280			—
Net cash (used in)/provided by financing activities		(226,442	)		1,951,493
Effect of foreign currency exchange rate on cash		—			22
Net increase in cash and cash equivalents		20,253			83,810
Cash and cash equivalents at beginning of year		92,271			73,343
Cash and cash equivalents at end of period	$	112,524		$	157,175
Supplemental Cash Flow Information
Interest paid	$	83,032		$	52,029
Income taxes paid	$	574		$	1,818
Supplemental Disclosure of Investing and Financing Activities
Note receivable contributed to unconsolidated joint venture	$	5,230		$	—
Hotel properties and capital leases acquired	$	—		$	2,706,925
Net other liabilities acquired (net of other assets acquired and cash received)	$	—		$	101,803
Debt assumed in acquisition	$	—		$	562,055
Non-cash dividends on Series C preferred stock	$	—		$	705

See Notes to Consolidated Financial Statements.

7

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

     Ashford Hospitality Trust, Inc. (“Ashford”) is a self-advised real estate investment trust (“REIT”) which commenced operations on August 29, 2003 when it completed its initial public offering (“IPO”) and concurrently consummated certain other formation transactions, including the acquisition of six hotels (“initial properties”). Ashford owns its lodging investments and conducts its business through Ashford Hospitality Limited Partnership, the operating partnership. Ashford OP General Partner LLC, our wholly-owned subsidiary, serves as the sole general partner of our operating partnership. In this report, the terms “the Company,” “we,” “us” or “our” mean Ashford Hospitality Trust, Inc. and all entities included in its consolidated financial statements.

     In April 2007, we acquired a 51-property hotel portfolio (“CNL Portfolio”) from CNL Hotels and Resorts, Inc. (“CNL”). Pursuant to the purchase agreement, we acquired 100% of 33 properties and interests ranging from 70% to 89% in 18 properties through existing joint ventures. In conjunction with the CNL transaction, we acquired the 15% remaining joint venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007 two other hotel properties previously owned by CNL (collectively, the “CNL Acquisition”). In December 2007, we completed an asset swap with Hilton Hotels Corporation (“Hilton”), whereby we surrendered our majority ownership interest in two hotel properties in exchange for Hilton’s minority ownership interest in nine hotel properties. Net of subsequent sales and asset swap, 43 of these hotels were included in our hotel property portfolio at June 30, 2008.

     As of June 30, 2008, we owned 101 hotel properties directly and six hotel properties through equity investments with joint venture partners, which represents 24,402 total rooms, or 24,060 net rooms excluding those attributable to joint venture partners. All of these hotel properties are located in the United States. As of June 30, 2008, we also wholly owned $113.0 million of mezzanine or first-mortgage loans receivable. In addition, at June 30, 2008, we had a 25% ownership in $94.1 million of mezzanine loans held in a joint venture. See Notes 3 and 6.

     For federal income tax purposes, we elected to be treated as a real estate investment trust (“REIT”), which imposes limitations related to operating hotels. As of June 30, 2008, 106 of our hotel properties were leased or owned by our wholly-owned subsidiaries that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated results of operations. As of June 30, 2008, one hotel property was leased on a triple-net lease basis to a third-party tenant who operates the hotel. Rental income from this operating lease is included in the consolidated results of operations.

     Remington Lodging & Hospitality, L.P. and Remington Management, L.P. (collectively, “Remington Lodging”), our primary property managers, are beneficially wholly owned by Mr. Archie Bennett, Jr., our Chairman, and Mr. Montgomery J. Bennett, our Chief Executive Officer. As of June 30, 2008, Remington Lodging managed 43 of our 107 hotel properties while third-party management companies managed the remaining 64 hotel properties.

2. Significant Accounting Policies

     Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of Ashford, its majority-owned subsidiaries and its majority-owned joint ventures in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements.

     These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our 2007 Annual Report on Form 10-K to Shareholders.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Certain amounts in the consolidated financial statements for the three and six months ended June 30, 2007 have been reclassified to conform to the presentation format adopted in 2008. These reclassifications have no effect on the net income or financial position previously reported.

     The following items affect our reporting comparability related to our consolidated financial statements:

• The operations of our hotels have historically been seasonal. This seasonality pattern causes fluctuations in the operating results. Consequently, operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

• Marriott International, Inc. (“Marriott”) manages 41 of our properties. For these 41 Marriott-managed hotels, the fiscal year reflects twelve weeks of operations for the first three quarters of the year and sixteen weeks for the fourth quarter of the year. Therefore, in any given quarterly period, period-over-period results will have different ending dates. For Marriott-managed hotels, the second quarters of 2008 and 2007 ended June 13 and June 15, respectively.

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

     Revenue Recognition — Hotel revenues, including room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, and space rentals, are recognized when services have been rendered. Rental income, representing income from leasing hotel properties to third-party tenants on triple-net operating leases, is recognized on a straight-line basis over the lease terms. Interest income, representing interest on the mezzanine and first mortgage loan portfolio, is recognized when earned. Asset management fees, representing primarily asset management services performed on behalf of a related party (including services such as risk management and insurance procurement, tax assistance, franchise agreements and equipment leases negotiations, monitoring loan covenants compliance, capital and operating budgets preparation, and property litigation management), are recognized when services are rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.

     Investments in Hotel Properties — Hotel properties are generally stated at cost. However, the initial properties contributed upon the Ashford’s formation are stated at the predecessor’s historical cost, net of any impairment charges, if any, plus a minority interest partial step-up related to the acquisition of minority interest from third parties associated with four of the initial properties. In addition, in connection with the acquisition of the 51-hotel property portfolio from CNL Hotels and Resorts, Inc. (the “CNL Portfolio”) on April 11, 2007, and subsequent asset swap completed on December 15, 2007, we own between 75% to 89% ownership interests in certain hotel properties owned by joint ventures. For these hotel properties, the carrying basis attributable to the joint venture partners’ minority ownership is recorded at the predecessor’s historical cost, net of any impairment charges, while the carrying basis attributable to our majority ownership is recorded based on the allocated purchase price of our ownership interests in the joint ventures. All improvements and additions which extend the useful life of the hotel properties are capitalized.

     Investment in Unconsolidated Joint Venture — Investment in a joint venture in which we have a 25% ownership is accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the joint venture’s net income. The equity accounting method is employed due to the fact that we do not control the joint venture pursuant to the guidance provided by Emerging Issue Task Force (“EITF”) Abstract No. 04-5.

     Notes Receivable — We provide mezzanine and first-mortgage financing in the form of notes receivable, which are recorded at cost, adjusted for net origination fees and costs. Loans acquired are recorded at cost, net of any impairment charges, if any. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method over the life of the loan. Loans receivable are reviewed for potential impairment at each balance sheet date. A loan receivable is considered impaired when it becomes probable, based on current information, that we will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the

9

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expected future cash flows or the fair value of the collateral. If a loan was deemed to be impaired, we would record a reserve for loan losses through a charge to income for any shortfall. To date, no such impairment charges have been recognized.

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

     Derivative Financial Instruments and Hedges — We enter into interest rate swap, floor and cap agreements to increase stability related to interest expense and to manage our exposure to interest rate movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps and caps within our cash flow hedging strategy. We also uses non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room) and to enhance dividend coverage. Interest rate swaps designated as fair value hedges involve the exchange of fixed-rate payments for variable-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when actual rates exceed the cap strike. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in the fair value are recognized in earnings. We record all derivatives on the balance sheet at fair value.

     Recently Adopted Accounting Standards- In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157,“Fair Value Measurements,”which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 establishes a common definition of fair value, provides a framework for measuring fair value under accounting principles generally accepted in the United States and expands disclosure requirements about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 to delay the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

     In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities.”This standard permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 must be applied prospectively, and the effect of the first remeasurement to fair value, if any, should be reported as a cumulative - effect adjustment to the opening balance of retained earnings.

     We adopted these statements as of January 1, 2008 and the adoption did not have a material impact on our financial position and results of operations. Additional disclosures in accordance with SFAS No. 157 have been included in Note 15. We did not elect to measure additional items at fair value under SFAS No. 159.

     Recently Issued Accounting Standards — In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”),“Business Combinations.”SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combinations. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing accounting principles until January 1,

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2009. We expect SFAS 141R will affect our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquisitions, if any, we consummate after the effective date.

     In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements,”effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS No. 160 states that accounting and reporting for minority interests will be re-characterized as non-controlling interests and classified as a component of equity. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, and will impact the recording of minority interest. We are currently evaluating the effects the adoption of SFAS No. 160 will have on our financial position and results of operations.

     In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities,”effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

     In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles,”effective 60 days following the Securities and Exchange Commission’s (the “SEC”) approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. SFAS No. 162 identifies sources of accounting principles and a framework for selecting the principles to be used in preparation of financial statements that are prepared in conformity with generally accepted accounting principles in the United States (the GAAP Hierarchy). We do not expect this statement will result in a change in current practice.

3. Summary of Significant Transactions

     Investing in Mezzanine Loans — On January 22, 2008, we formed a joint venture (the “PREI JV”) with Prudential Real Estate Investors (“PREI”) to invest in structured debt and equity hotel investments in the United States. The PREI JV, which will be funded over the next two years, may ultimately be capitalized with up to $300 million from investors in a fund managed by PREI and $100 million from us. We and PREI contribute the capital required for each mezzanine investment on a 25%/75% basis, respectively. We are entitled to annual management and sourcing fees, reimbursement of expenses, and a promoted yield equal to a current 1.3x the venture yield subject to maximum threshold limitations, but further enhanced by an additional promote based upon a total net return to PREI. PREI’s equity is in a senior position on each investment. On February 6, 2008, PREI acquired a 75% interest in our $21.5 million mezzanine loan receivable, which we originated December 5, 2007, and is secured by two hotels maturing January 2018. Simultaneously, we and PREI capitalized the joint venture by contributing this $21.5 million mezzanine loan receivable to the joint venture. We do not control the joint venture, therefore, the PREI JV is not consolidated in our financial statements. See Note 6.

     In addition, during the six months ended June 30, 2008, we completed the following mezzanine loans transactions including the loans acquired through the PREI JV ($ in thousands):

					Original		Discounted		Percentage of			Amount
Source	Interest Rate	Maturity		Collateral	Principal		Price		Ownership			Recorded
Company originated	LIBOR + 9%		2011	1 hotel	$	7,056	$	—		100	%	$	7,056
Company acquired	LIBOR + 9.66%		2017	1 hotel		38,000		32,956		100	%		32,956
PREI JV acquired(1)	LIBOR + 2.75%		2010	29 hotels		84,032		69,904		25	%		17,476

⁽¹⁾ Reported as “Investment in unconsolidated joint venture” in the accompanying financial statements.

     Subsequent to June 30, 2008, we acquired a 100% ownership in a mezzanine loan with a principal amount of $164.0 million and an interest rate of LIBOR plus 2.5% for $98.4 million plus accrued interest.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Sales of Properties — During the six months ended June 30, 2008, we completed the sale of five hotel properties and an office building for an aggregate sales price of $288.9 million. Net proceeds from the sales were $282.6 million and a net gain of $6.9 million was recorded. Based on the portfolio refinancing agreement, we were required to repay a total of $332.5 million in outstanding debt with the sales proceeds and some corporate funds. In connection with the repayments of the debt, we wrote off unamortized loan costs of $739,000 and debt premiums of $2.1 million.

     In July 2008, we completed the sale of two other hotel properties that were classified as held for sale at June 30, 2008.

     Interest Rate Swap Transactions — During the first quarter of 2008, we changed our debt strategy to capitalize on the historical correlation between changes in LIBOR and RevPAR and to enhance dividend coverage. In connection with this strategy, we executed a five-year interest rate swap on $1.8 billion of fixed-rate debt at a weighted average interest rate of 5.84% for a floating interest rate of LIBOR plus 2.64%. In conjunction with the swap execution, we sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the first three years. The upfront cost of the swap, LIBOR cap, and floor transactions was $4.6 million. During the second quarter of 2008, the counter party sold a portion of the interest rate swap and interest rate cap notional amounts of $325.0 million and $180.6 million, respectively, to a third party and refunded $484,000 of the transaction price in July 2008. The net fair value at June 30, 2008 was a liability of $47.2 million. See Note 11.

4. Investments in Hotel Properties

     Investments in hotel properties consisted of the following at June 30, 2008 and December 31, 2007 (in thousands):

	June 30,			December 31,
	2008			2007
Land	$	553,336		$	567,438
Buildings and improvements		3,110,661			3,226,708
Furniture, fixtures and equipment		345,921			278,598
Construction in progress		10,827			68,569
Total cost		4,020,745			4,141,313
Accumulated depreciation		(331,832	)		(255,576	)
Investment in hotel properties, net	$	3,688,913		$	3,885,737

     During the six months ended June 30, 2008, an intangible asset of $10.7 million relating to advance bookings preliminarily recorded in connection with the CNL Acquisition was reclassified to buildings as a result of a third-party valuation. We finalized the allocation of the CNL Acquisition purchase price in the second quarter of 2008 based on the final appraisals performed by a third-party appraiser.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Notes Receivable

     Notes receivable consisted of the following at June 30, 2008 and December 31, 2007 (in thousands):

	June 30,			December 31,
	2008			2007
Mezzanine loan secured by various mortgage-backed securities sponsored by government agencies, matures September 2011, at an interest rate of 14% (12% pay rate with deferred interest through the first two years), with interest-only payments through maturity	$	11,000		$	11,000
Mezzanine loan secured by one hotel property, matures July 2010, at an interest rate of 14%, with interest-only payments through maturity		4,000			4,000
Mezzanine loan secured by one hotel property, matures September 2008, with a one-year extension option, at an interest rate of LIBOR plus 11.15%, with interest-only payments through maturity		3,000			3,000
First mortgage loan secured by one hotel property, matures October 2008, with two one-year extension options, at an interest rate of LIBOR plus 9%, with interest-only payments through maturity		18,200			18,200
Mezzanine loan secured by 105 hotel properties, matures April 2009, at an interest rate of LIBOR plus 5%, with interest-only payments through maturity		25,694			25,694
Mezzanine loan secured by one hotel property, matures December 2009, at an interest rate of LIBOR plus 6.5%, with interest-only payments through maturity		7,000			7,000
Mezzanine loan secured by one hotel property, matures December 2009, at an interest rate of LIBOR plus 5.75%, with interest-only payments through maturity		4,000			4,000
Mezzanine loan secured by two hotel properties, matures January 2018, at an interest rate of 14%, with interest-only payments through maturity(1)		—			21,500
Mezzanine loan secured by one hotel property, matures January 2011, at an interest rate of LIBOR plus 9%, with interest-only payments through maturity		7,056			—
Mezzanine loan secured by one hotel property, matures June 2017, at an interest rate of LIBOR plus 9.66%, with interest-only payments through maturity		33,172			—
Gross notes receivable		113,122			94,394
Deferred income, net		(92	)		(169	)
Net notes receivable	$	113,030		$	94,225
Weighted average interest rate		11.2	%		12.4	%

⁽¹⁾ This note was contributed to the PREI JV at its formation. We own a 25% interest in the joint venture which is reported as “Investment in unconsolidated joint venture” at June 30, 2008.

     In general, our notes receivable have extension options, prohibit prepayment through a certain period, and require decreasing prepayment penalties through maturities. We expect that the $4.0 million note due July 2010, at an interest rate of 14%, will be repaid in August 2008. At June 30, 2008, all notes receivable were current and no reserves for loan losses were recorded.

     In July 2008, we acquired a mezzanine loan with a principal amount of $164.0 million and at an interest rate of LIBOR plus 2.5% for $98.4 million plus accrued interest.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Investment in Unconsolidated Joint Venture

     We have a 25% of ownership in the PREI JV which invests in mezzanine loans (see Note 3). At June 30, 2008, our investment in the PREI JV (see Note 3) consisted of the following (in thousands):

25% of a mezzanine loan at par value secured by two hotel properties, matures January 2018, at an interest rate of 14%, with interest-only payments through maturity	$	5,356
25% of a mezzanine loan acquired at discounted price (face value of $84,032), secured by 29 hotel properties, matures August 2010 with two one-year extension options, at an interest rate of LIBOR plus 2.75%, and with interest-only payments through maturity		18,167
Others, net		(419	)
Equity earnings in joint venture		1,813
Total	$	24,917

7. Assets Held for Sale and Discontinued Operations

     The following table summarizes the operating results of the discontinued operations for the three and six months ended June 30, 2008 and 2007 ($ in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Number of properties:
Properties designated as held for sale at end of period		2			17			2			17
Properties sold during the period		3			12			6			14
Total included in discontinued operations		5			29			8			31
Results of operations:
Operating revenues	$	21,520		$	64,754		$	43,373		$	87,233
Operating expenses		16,316			46,955			35,761			64,421
Operating income		5,204			17,799			7,612			22,812
Depreciation and amortization		(1,125	)		(10,138	)		(3,407	)		(11,354	)
Gain on sales of properties		6,015			33,317			6,903			34,706
Interest expense and amortization of loan costs		(1,058	)		(6,347	)		(2,684	)		(7,338	)
Write-off of loan costs, premiums and exit fees		(515	)		(1,679	)		1,347			(1,891	)
Income before income taxes and minority interest		8,521			32,952			9,771			36,935
Provision for income taxes		(209	)		(7,065	)		(209	)		(7,550	)
Minority interest in earnings of operating partnership		(666	)		(2116	)		(757	)		(2,508	)
Income from discontinued operations	$	7,646		$	23,771		$	8,805		$	26,877

14

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Indebtedness

     Indebtedness consisted of the following at June 30, 2008 and December 31, 2007 (in thousands):

	June 30,			December 31,
	2008			2007
Mortgage loan secured by 25 hotel properties, matures between July 1, 2015 and February 1, 2016, at an average interest rate of 5.42%	$	455,115		$	455,115
Mortgage loan secured by 16 hotel properties, matures between December 11, 2014 and December 11, 2015, at an average interest rate of 5.73%		211,475			211,475
Mortgage loan secured by 28 hotel properties, matures April 11, 2017, at an average fixed interest rate of 5.95%		928,465			928,465
Loan secured by 13 hotel properties, matures May 2009, at an interest rate of LIBOR* plus 1.65%, with three one-year extension options		213,889			213,889
Secured credit facility secured by mezzanine notes receivable, matures April 9, 2010, at an interest rate of LIBOR* plus a range of 1.55% to 1.95% depending on the loan-to-value ratio, with two one-year extension options		65,000			65,000
Term loan secured by one hotel property, matures October 2008, at an interest rate of LIBOR* plus 2.0%, with three one-year extension options(1)		—			47,450
Mortgage loan secured by one hotel property, matures December 1, 2017, at interest rates of 7.39% at June 30, 2008 and 7.24% at December 31, 2007, with a remaining premium of approximately $1.5 million		50,430			52,474
Mortgage loan secured by one hotel property, matures December 8, 2016, at an interest rate of 5.81%		101,000			101,000
Mortgage loan secured by five hotel properties, matures December 11, 2009, at an interest rate of LIBOR* plus 1.72%, with two one-year extension options		185,900			184,000
Mortgage loan secured by one hotel property, matures August 1, 2010, at an interest rate of 8.08%		—			45,752
Mortgage loan secured by one hotel property, matures June 1, 2011, at an interest rate of LIBOR* plus 2%		19,740			42,185
Mortgage loan secured by one hotel property, matures July 1, 2008, at an interest rate of 5.67%		—			31,670
Mortgage loan secured by one hotel property, matures January 1, 2011, at an interest rate of 8.32%		6,034			6,102
Mortgage loan secured by one hotel property, matures January 1, 2023, at an interest rate of 7.78%		8,076			8,187
TIF loan secured by one hotel property, matures June 30, 2018, at an interest rate of 12.85%		7,783			7,783
Mortgage loan secured by one hotel property, matures April 1, 2009, at an interest rate of 5.6%		29,758			30,118
Mortgage loan secured by one hotel property, matures April 5, 2011, at an interest rate of 5.47%		67,175			67,910
Mortgage loan secured by one hotel property, matures March 1, 2010, at an interest rate of 5.95%		75,000			75,000
Mortgage loan secured by two hotel properties, matures January 1, 2009, at an interest rate of 5.5%		127,200			127,200
Total		2,552,040			2,700,775
Indebtedness related to assets held for sale		(11,134	)		(61,229	)
Indebtedness related to continuing operations	$	2,540,906		$	2,639,546

*	LIBOR rates were 2.46% and 4.6% at June 30, 2008 and December 31, 2007, respectively.
(1)	This note was repaid upon the sale of the related hotel property.

15

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     On August 6, 2008, we refinanced the $127.2 million mortgage loan maturing in 2009 secured by two hotel properties with a new $160.0 million loan. The new loan has an interest rate of LIBOR plus 2.75% and is for a three year term with two one-year extension options.

9. Minority Interests

     Minority Interest in Consolidated Joint Ventures — Minority joint venture partners had ownership ranging from 11% to 25% of six hotel properties at June 30, 2008.

     Minority Interest in Operating Partnership — During the six months ended June 30, 2008, we issued 1,056,000 operating partnership units in the form of long term incentive partnership units (“LTIP”) for $0.05 per unit to our executives. These units are vesting at specified rates between 2008 and 2012. Upon vesting, each LTIP unit can be redeemed for one unit of the operating partnership which then can be settled in Ashford’s common share or cash at Ashford’s discretion. These units had an aggregate value of $6.6 million at the date of grant and which is being amortized over the vesting period. We recognized compensation expense of $362,000 and $405,000 for the three and six months ended June 30, 2008, respectively, related to the units granted. The unamortized value of the LTIP units was $6.2 million at June 30, 2008 with a weighted average remaining vesting period of approximately 3.1 years.

     During the six months ended June 30, 2008, we declared cash dividends of $444,000, or $0.21 per unit per quarter, related to the LTIP units that were recorded as a reduction of the minority interest in operating partnership.

     At June 30, 2008 and December 31, 2007, operating partnership unit holders represented minority ownership of 10.74% and 9.98% in the operating partnership, respectively.

10. Income/(Loss) Per Share

     Basic income/(loss) per common share is calculated by dividing net income/(loss) available to common shareholders by the weighted average common shares outstanding during the period. Diluted income/(loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower income per share. The following table reconciles the amounts used in calculating basic and diluted income/(loss) per share for the three and six months ended June 30, 2008 and 2007 (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
(Loss)/income from continuing operations	$	(34,150	)	$	(2,687	)	$	(29,124	)	$	5,698
Less: Preferred dividends		(7,018	)		(7,033	)		(14,036	)		(9,826	)
(Loss) from continuing operations available to common shareholders		(41,168	)		(9,720	)		(43,160	)		(4,128	)
Income from discontinued operations		7,646			23,771			8,805			26,877
Net (loss)/income available to common shareholders	$	(33,522	)	$	14,051		$	(34,355	)	$	22,749
Total weighted average basic and diluted shares		118,911			108,138			118,870			90,275
(Loss)/income per share:
Basic —
(Loss) from continuing operations	$	(0.34	)	$	(0.09	)	$	(0.36	)	$	(0.05	)
Income from discontinued operations		0.06			0.22			0.07			0.30
Net (loss)/income	$	(0.28	)	$	0.13		$	(0.29	)	$	0.25
Diluted —
(Loss) from continuing operations	$	(0.34	)	$	(0.09	)	$	(0.36	)	$	(0.05	)
Income from discontinued operations		0.06			0.22			0.07			0.30
Net (loss)/income	$	(0.28	)	$	0.13		$	(0.29	)	$	0.25

16

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Due to their anti-dilutive effect, the computation of diluted income/(loss) per share does not reflect the adjustments for the following items for the three and six months ended June 30, 2008 and 2007 (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
(Loss)/income from continuing operations available to common shareholders:
Minority interest in (loss)/income of operating partnership	$	(2,891	)	$	(137	)	$	(2,351	)	$	1,298
Dividends to Preferred B shares		1,564			1,564			3,128			3,128
Total	$	(1,327	)	$	1,427		$	777		$	4,426
Diluted shares:
Number of shares from assumed conversion of Preferred B shares		7,448			7,448			7,448			7,448
Assumed conversion of weighted outstanding operating partnership units		14,394			13,512			13,928			13,512
Incremental dilutive shares from restricted stock awards		6			66			5			464
Total		21,848			21,026			21,381			21,424

11. Derivatives and Hedging Activities

     We enter into interest rate swaps to manage the impact of interest rate fluctuations on our results of operations and cash flows. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR and RevPAR and to enhance dividend coverage. In March 2008, we executed a five-year interest swap on $1.8 billion of our existing fixed-rate debt at a weighted average interest rate of 5.84% for floating-rate of LIBOR plus 2.64%. In conjunction with the swap execution, we sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the first three years. We paid $4.1 million to enter into these transactions (after a $484,000 refund in July 2008, from the counter party for selling notional amounts of $325.0 million of the interest rate swap and $180.6 million of the interest rate cap to another third party.) These derivatives are reported net in our consolidated balance sheets in accordance with FASB Interpretation No. 39 (“FIN 39”),“Offsetting Amounts Related to Certain Contract.”At June 30, 2008, the net fair value of these derivatives was a liability of $47.3 million. Because these derivatives were not designated and did not qualify as hedges, the gains or losses from changes in fair value are recognized in earnings. For the three and six months ended June 30, 2008, unrealized losses of $55.4 million and $51.4 million were recognized for the fair value changes.

     In addition to the above, we had seven interest rate caps with a notional amount totaling $669.5 million and interest rates ranging from 6.0% to 7.0%. Of these interest rate caps, $212.0 million was designated as cash flow hedges and the remaining $457.5 million did not meet the applicable hedge accounting criteria. At June 30, 2008, these derivatives had a fair value of $37,000, which is included in “Other assets” on the consolidated balance sheet. For the three and six months ended June 30, 2008, unrealized gains of $8,000 and $2,000, respectively, were recognized for the fair value changes. For the three and six months ended June 30, 2007, unrealized gains of $66,000 and $31,000, respectively, were recognized for the fair value changes. During the next twelve months, we expect $105,000 of accumulated other comprehensive loss will be reclassified to interest expense.

12. Capital Stock and Stock-Based Compensation

     Common Stock Repurchases — Pursuant to our stock repurchase plan, we repurchased 700,800 shares of our common stock for approximately $4.6 million during the six months ended June 30, 2008. In addition, we acquired 4,854 shares of our common stock as partial tax payments for shares issued under our stock-based compensation plan.

     Stock Related Grants and Stock-Based Compensation — During the six months ended June 30, 2008, we granted 81,070 shares of our common stock to our directors, executive officers and certain employees under our restricted stock-based compensation plan. These shares had a weighted average grant date value of $6.16 per share.

17

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     During the three and six months ended June 30, 2008, we recognized compensation expense of $1.9 million and $3.5 million, respectively, related to our stock-based compensation plan. During the three and six months ended June 30, 2007, we recognized such expense of $1.9 million and $3.0 million, respectively. As of June 30, 2008, the unamortized value of the unvested shares of restricted stock was $9.0 million with an average remaining vesting period of approximately 2.2 years.

     Dividends —Common stock and unit dividends. During the six months ended June 30, 2008, we declared cash dividends of $54.4 million, or $0.21 per share per quarter, to both common shareholders and common unit holders.

     Series A Cumulative Preferred dividends. During the six months ended June 30, 2008, we declared cash dividends of $2.5 million, or $0.5344 per share per quarter, to Series A preferred stockholders.

     Series B Preferred dividends. During the six months ended June 30, 2008, we declared cash dividends of $3.1 million, or $0.21 per share per quarter, to Series B preferred stockholders. We also declared cash dividends of $1.4 million to Series B unit holders.

     Series D Cumulative Preferred dividends. During the six months ended June 30, 2008, we declared cash dividends of $8.5 million, or $0.528125 per share per quarter, to Series D preferred stockholders.

13. Commitments and Contingencies

     Restricted Cash — Under certain management and debt agreements existing at June 30, 2008, we escrow payments required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt agreement, we escrow 4% to 6% of gross revenue for capital improvements.

     Franchise Fees — Under franchise agreements existing at June 30, 2008, we pays franchisors royalty fees between 2.5% and 6% of gross room revenue as well as fees for marketing, reservations, and other related activities aggregating between 1% and 3.75% of gross room revenue. These franchise agreements expire from 2011 through 2027. When a franchise term expires, the franchisor has no obligation to renew the franchise. A franchise termination could have a material adverse effect on the operations or the underlying value of the affected hotel due to loss of associated name recognition, marketing support, and centralized reservation systems provided by the franchisor. A franchise termination could also have a material adverse effect on cash available for distribution to stockholders. In addition, if we terminate a franchise prior to its expiration date, we may be liable for up to three times the average annual franchise fees incurred for that property.

     Management Fees — Under management agreements existing at June 30, 2008, we pay a) monthly property management fees equal to the greater of $10,000 (CPI adjusted) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by our independent directors, if required. These management agreements expire from 2008 through 2027, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.

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

14. Segment Reporting

     We presently operate in two business segments within the hotel lodging industry: direct hotel investing and hotel financing. Direct hotel investing refers to owning hotels through either acquisition or new development. Management reports operating results of direct hotel investments on an aggregate basis as substantially all of our hotel investments have similar economic characteristics and exhibit similar long-term financial performance. Hotel financing refers to

18

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

owning subordinate hotel-related mortgages through acquisition or origination. We do not allocate corporate-level accounts to our operating segments, including corporate general and administrative expenses, non-operating interest income, interest expense, income taxes, and minority interest.

     For the three and six months ended June 30, 2008 and 2007, financial information related to our reportable segments was as follows (in thousands):

	Direct Hotel		Hotel
	Investing		Financing		Corporate			Consolidated
Three Months Ended June 30, 2008:
Total revenues	$	315,142	$	3,216	$	—		$	318,358
Total hotel expenses		197,797		—		—			197,797
Property taxes, insurance and other		16,802		—		—			16,802
Depreciation and amortization		40,077		—		—			40,077
Corporate general and administrative		—		—		8,365			8,365
Total expenses		254,676		—		8,365			263,041
Operating income/(loss)		60,466		3,216		(8,365	)		55,317
Equity earnings of unconsolidated joint venture		—		1,287		—			1,287
Interest income		—		—		351			351
Other income		—		—		2,569			2,569
Interest expense and amortization of loan costs		—		—		(38,090	)		(38,090	)
Unrealized losses on derivatives		—		—		(55,438	)		(55,438	)
Income/(loss) before income taxes, minority interests and discontinued operations		60,466		4,503		(98,973	)		(34,004	)
Income tax expense		—		—		(319	)		(319	)
Minority interests in earnings of consolidated joint ventures		—		—		(2,718	)		(2,718	)
Minority interests in losses of operating partnership		—		—		2,891			2,891
Income/(loss) from continuing operations	$	60,466	$	4,503	$	(99,119	)	$	(34,150	)
Three Months Ended June 30, 2007:
Total revenues	$	291,458	$	2,866	$	—		$	294,324
Total hotel expenses		183,760		—		—			183,760
Property taxes, insurance and other		15,184		—		—			15,184
Depreciation and amortization		50,075		—		—			50,075
Corporate general and administrative		—		—		7,148			7,148
Total expenses		249,019		—		7,148			256,167
Operating income/(loss)		42,439		2,866		(7,148	)		38,157
Interest income		—		—		975			975
Interest expense and amortization of loan costs		—		—		(39,122	)		(39,122	)
Write-off of loan costs		—		—		(3,585	)		(3,585	)
Unrealized gains on derivatives		—		—		66			66
Income/(loss) before income taxes, minority interests and discontinued operations		42,439		2,866		(48,814	)		(3,509	)
Income tax benefit		—		—		162			162
Minority interests in losses of consolidated joint ventures		—		—		523			523
Minority interests in losses of operating partnership		—		—		137			137
Income/(loss) from continuing operations	$	42,439	$	2,866	$	(47,992	)	$	(2,687	)

19

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Direct Hotel		Hotel
	Investing		Financing		Corporate			Consolidated
Six Months Ended June 30, 2008:
Total revenues	$	611,625	$	6,472	$	—		$	618,097
Total hotel expenses		390,953		—		—			390,953
Property taxes, insurance and other		32,047		—		—			32,047
Depreciation and amortization		84,121		—		—			84,121
Corporate general and administrative		—		—		16,069			16,069
Total expenses		507,121		—		16,069			523,190
Operating income/(loss)		104,504		6,472		(16,069	)		94,907
Equity earnings in unconsolidated joint venture		—		1,813		—			1,813
Interest income		—		—		897			897
Other income		—		—		2,865			2,865
Interest expense and amortization of loan costs		—		—		(77,055	)		(77,055	)
Unrealized losses on derivatives		—		—		(51,389	)		(51,389	)
Income/(loss) before income taxes, minority interests and discontinued operations		104,504		8,285		(140,751	)		(27,962	)
Income tax expense		—		—		(729	)		(729	)
Minority interests in earnings of consolidated joint ventures		—		—		(2,784	)		(2,784	)
Minority interests in losses of operating partnership		—		—		2,351			2,351
Income/(loss) from continuing operations	$	104,504	$	8,285	$	(141,913	)	$	(29,124	)
Six Months Ended June 30, 2007:
Total revenues	$	434,989	$	6,221	$	—		$	441,210
Total hotel expenses		277,685		—		—			277,685
Property taxes, insurance and other		22,972		—		—			22,972
Depreciation and amortization		66,055		—		—			66,055
Corporate general and administrative		—		—		11,741			11,741
Total expenses		366,712		—		11,741			378,453
Operating income/(loss)		68,277		6,221		(11,741	)		62,757
Interest income		—		—		1,473			1,473
Interest expense and amortization of loan costs		—		—		(54,869	)		(54,869	)
Write-off of loan costs		—		—		(4,075	)		(4,075	)
Unrealized gains on derivatives		—		—		31			31
Income/(loss) before income taxes, minority interests and discontinued operations		68,277		6,221		(69,181	)		5,317
Income tax benefit		—		—		1,156			1,156
Minority interests in losses of consolidated joint ventures		—		—		523			523
Minority interests in earnings of operating partnership		—		—		(1,298	)		(1,298	)
Income/(loss) from continuing operations	$	68,277	$	6,221	$	(68,800	)	$	5,698

15. Fair Value Measurements

     On January 1, 2008, we adopted SFAS No. 157,“Fair Value Measurements.”SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

20

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

     Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset and liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

     Currently, we use interest rate swaps, interest rate floors and interest rate caps (collectively, the “interest rate derivatives”) to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. The variable cash payments/receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rate of the floors or rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of SFAS No. 157, we incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

     We have determined that when majority of the inputs used to value our derivatives fall within Level 2 of their value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counter-parties, are significant to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. For the interest rate swap valuation, the Level 3 input relating to the credit spreads represented approximately 14.8% of the fair value at June 30, 2008, which we consider is significant to the overall valuation of the swap, therefore, the valuation of the interest rate swap of a $57.9 million liability in its entirety is reported as a Level 3 valuation.

21

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The following table presents our assets and liabilities measured at fair value on a recurring basis as of June 30, 2008, aggregated by the level in the fair value hierarchy within which measurements fall (in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Price
	In Active		Significant
	Market for		Other			Significant
	Identical		Observable			Unobservable
	Assets		Inputs			Inputs			June 30,
	(Level 1)		(Level 2)			(Level 3)			2008
Assets
Non-hedge derivatives:
Interest rate cap	$	—	$	14,706		$	—		$	14,706
Other interest rate derivatives		—		37			—			37
	$	—	$	14,743		$	—		$	14,743
Liabilities
Interest rate swap	$	—	$	—		$	(57,893	)	$	(57,893	)
Interest rate floor		—		(4,112	)		—			(4,112	)
	$	—	$	(4,112	)	$	(57,893	)	$	(62,005	)

     The reconciliation of the beginning and ending balances of the derivatives that were measured using significant unobservable inputs is as follows (in thousands):

	Fair Value Measurements using Significant
	Unobservable Inputs
	Three Months Ended			Six Months Ended
	2008			2008
Interest Rate Swap
Balance at beginning of period	$	11,921		$	—
Purchase/(refund)		(484	)		4,192
Total losses included in income from continuing operations		(69,330	)		(62,085	)
Balance at end of period	$	(57,893	)	$	(57,893	)

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

     The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere herein. This report contains forward-looking statements within the meaning of the federal securities laws. Ashford Hospitality Trust, Inc. (the “Company” or “we” or “our” or “us”) cautions investors that any forward-looking statements presented herein, or which management may express orally or in writing from time to time, are based on management’s beliefs and assumptions at that time. Throughout this report, words such as “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result,” and other similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution investors that while forward-looking statements reflect our good-faith beliefs at the time such statements are made, said statements are not guarantees of future performance and are affected by actual events that occur after such statements are made. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time those statements were made, to anticipate future results or trends.

     Some risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, those discussed in our Form 10-K as filed with the Securities and Exchange Commission on February 29, 2008. These risks and uncertainties continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment where new risk factors emerge from time to time. It is not possible for management to predict all such risk factors, nor can management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as indicators of actual results.

EXECUTIVE OVERVIEW

     We are a real estate investment trust (“REIT”) that commenced operations upon completion of our initial public offering and related formation transactions on August 29, 2003. At June 30, 2008, we owned interests in 107 hotel properties, which included direct ownership in 101 hotel properties and between 75-89% interests in six hotel properties through equity investments with joint venture partners. Of these hotels, 43 were acquired in 2007. As of June 30, 2008, 105 of the 107 hotels were classified in continuing operations. In addition, at June 30, 2008, we owned $113.0 million of mezzanine or first-mortgage loans receivable and a 25% interest in a joint venture with Prudential Real Estate Investors (“PREI”) formed in January 2008 (the “PREI JV”). The joint venture owned $94.1 million of mezzanine loans at June 30, 2008. See Notes 3 and 6 of Notes to Consolidated Financial Statements.

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

• acquiring hotels with a favorable current yield with an opportunity for appreciation,

• implementing selective capital improvements designed to increase profitability,

• directing our hotel managers to minimize operating costs and increase revenues,

• originating or acquiring mezzanine loans, and

• other investing activities that our Board of Directors deems appropriate.

     During the first quarter of 2008, we changed our debt strategy to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue Per Available Room) and to enhance

23

dividend coverage. In connection with this strategy, we executed a five-year interest rate swap on $1.8 billion of fixed-rate debt at a weighted average interest rate of 5.84% for a floating interest rate of LIBOR plus 2.64%. In conjunction with the swap execution, we sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the first three years. In connection with these transactions, we recorded other income of $2.6 million and $2.9 million for interest savings for the three and six months ended June 30, 2008, respectively, and recorded net unrealized losses of $55.4 million and $51.4 million for the three and six months ended June 30, 2008, respectively, for the change in the market value of these derivatives.

CRITICAL ACCOUNTING POLICIES

     We formed the PREI joint venture and entered into interest rate swap, cap and floor transactions during the six months ended June 30, 2008. The accounting policies related to these transactions are as follows. There have been no other significant accounting policies employed during the six months ended June 30, 2008.

Investment in Unconsolidated Joint Venture — Investment in a joint venture in which we have a 25% ownership is accounted for under the equity method of accounting by recording our initial investment and our percentage of interest in the joint venture’s net income. The equity accounting method is employed due to the fact that we do not control the joint venture pursuant to the guidance provided by Emerging Issue Task Force (“EITF”) Abstract No. 04-5.

Derivative Financial Instruments and Hedges-We enter into interest rate swap agreements to increase stability related to interest expense and to manage our exposure to interest rate movements or other identified risks. To accomplish this objective, we primarily uses interest rate swaps and caps within our cash flow hedging strategy. We also uses non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room) and to enhance dividend coverage. Interest rate swaps designated as fair value hedges involve the exchange of fixed-rate payments for variable-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when actual rates exceed the cap strike. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in the fair value are recognized in earnings. We record all derivatives on the balance sheet at fair value.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”),“Business Combinations.”SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combinations. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing accounting principles until January 1, 2009. We expect SFAS 141R will affect our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquisitions, if any, we consummate after the effective date.

     In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements", effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, and will impact the recording of minority interest. We are currently evaluating the effects the adoption of SFAS No. 160 will have on our financial position and results of operations.

24

     In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities", effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

     In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles,”effective 60 days following the Securities and Exchange Commission’s (the “SEC”) approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. SFAS No. 162 identifies sources of accounting principles and framework for selecting the principles to be used in preparation of financial statements that are prepared in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP Hierarchy). We do not expect this statement will result in a change in current practice.

RESULTS OF OPERATIONS

     The following table summarizes the changes in key line items from our consolidated statements of operations for the three and six months ended June 30, 2008 and 2007 (in thousands):

	Three Months Ended												Six Months Ended
	June 30,						Favorable/(Unfavorable)						June 30,						Favorable/(Unfavorable)
	2008			2007			$ Change			%Change			2008			2007			$ Change			%Change
Total revenue	$	318,358		$	294,324		$	24,034			8.2	%	$	618,097		$	441,210		$	176,887			40.1	%
Total hotel expenses		(197,797	)		(183,760	)		(14,037	)		(7.6	)%		(390,953	)		(277,685	)		(113,268	)		(40.8	)%
Property taxes, insurance and other		(16,802	)		(15,184	)		(1,618	)		(10.7	)%		(32,047	)		(22,972	)		(9,075	)		(39.5	)%
Depreciation and amortization		(40,077	)		(50,075	)		9,998			20.0	%		(84,121	)		(66,055	)		(18,066	)		(27.3	)%
Corporate general and administrative		(8,365	)		(7,148	)		(1,217	)		(17.0	)%		(16,069	)		(11,741	)		(4,328	)		(36.9	)%
Operating income		55,317			38,157			17,160			45.0	%		94,907			62,757			32,150			51.2	%
Equity in earnings of unconsolidated joint venture		1,287			—			1,287			—	*		1,813			—			1,813			—	*
Interest income		351			975			(624	)		(64.0	)%		897			1,473			(576	)		(39.1	)%
Other income		2,569			—			2,569			—	*		2,865			—			2,865			—	*
Interest expense and amortization of loan costs		(38,090	)		(39,122	)		1,032			2.6	%		(77,055	)		(54,869	)		(22,186	)		(40.4	)%
Write-off of loan costs and exit fees		—			(3,585	)		3,585			—	*		—			(4,075	)		4,075			—	*
Unrealized gains (losses) on derivatives		(55,438	)		66			(55,504	)		—	*		(51,389	)		31			(51,420	)		—	*
Income tax (expense)/benefit		(319	)		162			(481	)		—	*		(729	)		1,156			(1,885	)		—	*
Minority interest in (earnings)/losses of consolidated joint ventures		(2,718	)		523			(3,241	)		—	*		(2,784	)		523			(3,307	)		—	*
Minority interest in losses/(earnings) of operating partnership		2,891			137			2,754			—	*		2,351			(1,298	)		3,649			—	*
(Loss)/income from continuing operations		(34,150	)		(2,687	)		(31,463	)		—	*		(29,124	)		5,698			(34,822	)		—	*
Income from discontinued operations, net		7,646			23,771			(16,125	)		(67.8	)%		8,805			26,877			(18,072	)		(67.2	)%
Net (loss)/income		(26,504	)		21,084			(47,588	)		—	*		(20,319	)		32,575			(52,894	)		—	*

* Not meaningful.

     In April 2007, we acquired a 51-property hotel portfolio (“CNL Portfolio”) from CNL Hotels and Resorts, Inc. (“CNL”). Pursuant to the purchase agreement, we acquired 100% of 33 properties and interests ranging from 70% to 89% in 18 properties through existing joint ventures. In conjunction with the CNL transaction, we acquired the 15% remaining joint venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007 two other hotel properties previously owned by CNL (collectively, the “CNL Acquisition”). In December 2007, we completed an asset swap with Hilton Hotels Corporation (“Hilton”), whereby we surrendered our majority ownership interest in two hotel properties in exchange for Hilton’s minority ownership interest in nine hotel properties. Net of subsequent sales and asset swap, 43 of these hotels were included in our hotel property portfolio at June 30, 2008. In the second quarter of 2008, we finalized the allocation of the CNL Acquisition purchase price. These hotels are referred to as non-comparable hotels in the following discussions as we did not own these properties for the entire three and six months ended June 30, 2007.

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     The 43 non-comparable hotels that are included in continuing operations contributed the following for the three and six months ended June 30, 2008 and 2007 (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Total revenue	$	157,425	$	133,455	$	309,673	$	133,452
Total operating income	$	29,219	$	8,934	$	49,533	$	8,747

     Income from continuing operations includes the operating results of 62 hotel properties that we have owned throughout the entire three and six months ended June 30, 2008 and 2007 (the “comparable hotels”). The following table illustrates the key performance indicators of the comparable hotels for the periods indicated:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Total revenue (in thousands)	$	156,796		$	157,672		$	300,510		$	300,874
Total operating income (in thousands)	$	30,342		$	33,174		$	53,545		$	58,867
RevPAR (revenue per available room)	$	107.43		$	107.80		$	102.37		$	103.34
Occupancy		76.1	%		79.1	%		72.30	%		75.8	%
ADR (average daily rate)	$	141.13		$	136.24		$	141.59		$	136.28

Comparison of the Three Months Ended June 30, 2008 with Three Months Ended June 30, 2007

     Revenue.Total revenue for the three months ended June 30, 2008 (the “current quarter”) increased $24.0 million, or 8.2%, to $318.3 million from $294.3 million for the three months ended June 30, 2007 (the “prior year quarter”). The increase was substantially due to the $24.0 million in incremental revenues attributable to the 43 non-comparable hotels, which is offset by an $876,000 decrease in revenues from comparable hotels. Mezzanine loans originated and acquired after June 30, 2007 contributed a $350,000 increase in interest income from notes receivable. Fees received from certain asset management consulting agreements we entered into after June 30, 2007 also contributed $590,000 to the increase.

     Room revenues at comparable hotels for the current quarter decreased $355,000, or 0.3%, compared to the prior year quarter, primarily due to a slight decrease in RevPAR from $107.80 to $107.43 driven by 3.0% decrease in occupancy principally as a result of five hotel properties being under renovation. The effect of decreased occupancy is partially offset by a 3.6% increase in ADR. Excluding the five hotel properties under renovation, the remaining 57 comparable hotel properties’ RevPAR increased from $104.72 in the prior year quarter to $106.24 in the current quarter driven by a 3.2% increase in ADR which effect is partially offset by a 1.3% decrease in occupancy. Due to the uncertain economy, many hotels experienced lower occupancy rate, however, the lower occupancy is mostly offset by moderate increases in ADR which is consistent with industry trends. Certain hotels benefited from increasing or garnering more favorable group room-night contracts, eliminating less favorable contracts, and charging higher rates on transient business. Although occupancy increased at several hotels, renovations at certain hotels reduced room availability, which offset these increases.

     Food and beverage revenues increased $3.7 million in the current quarter compared to the prior year quarter primarily due to a $4.4 million contribution from the non-comparable hotels. This increase is partially offset by a decrease of $676,000 at comparable hotels which is attributable to decline in group bookings, corporate banquet and catered events.

     Rental income from operating leases represents rental income recognized on a straight-line basis associated with a hotel property acquired in April 2007, which is leased to a third-party tenant on a triple-net basis.

     Other revenues for the current quarter increased $770,000 compared to the prior year quarter due primarily to a $615,000 increase attributable to the non-comparable hotels. Other revenues at comparable hotels reported a slight increase of $155,000.

     Interest income from notes receivable increased $350,000 for the current quarter compared to the prior year quarter. The increase is attributable to the acquisition and origination of new mezzanine loans during the first quarter totaling $45.1 million in principal balance which accounted for $1.3 million of the increase. The increase was partially offset by

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the decline in LIBOR rates during the current quarter. Weighted average interest rates of our mezzanine loans at June 30, 2008 and 2007 were 11.2% and 12.5%, respectively.

     Asset management fees and other increased $590,000 during the current quarter. The increase is primarily related to a sourcing fee of $442,000 from PREI JV and a consulting fee of $131,000 from a consulting agreement we entered into in December 2007 in connection with an asset swap transaction.

     Hotel Operating Expenses.Hotel operating expenses, which consists of room expense, food and beverage expense, other direct expenses, indirect expenses, and management fees, increased $14.0 million, or 7.6%, for the current quarter compared to the prior year quarter, primarily due to $14.9 million of expenses associated with the non-comparable hotels. In addition, hotel operating expenses at comparable hotels experienced a decrease of $843,000, or 0.8%, for the current quarter compared to the prior year quarter. Management has instituted better cost controls to mitigate the effects of lower revenue.

     Property Taxes, Insurance and Other.Property taxes, insurance, and other increased $1.6 million, or 10.7%, for the current quarter compared to the prior year quarter due to $1.3 million of expenses associated with the non-comparable hotels. Property taxes, insurance, and other expense experienced a slight increase of $363,000 in the current quarter compared to the prior year quarter. Property taxes increased $609,000 for the comparable hotels due to appraised property values increasing significantly at certain hotels, which is offset by a decline in insurance expense as new insurance policies were negotiated effective June 1, 2007.

     Depreciation and Amortization.Depreciation and amortization decreased $10.0 million, or 20.0%, for the current quarter compared to the prior year quarter. The decrease is primarily attributable to the asset value adjustments related the non-comparable hotels. During the current quarter, we finalized the allocation of the purchase price of the CNL Acquisition which resulted in adjustments to asset values and the reclassification of certain assets into asset groups that have longer useful lives. These adjustments were based on the final appraisals performed by a third-party appraiser and accounted for approximately $8.2 million of the decrease. In addition, assets fully depreciated since June 30, 2007 accounted for $2.5 million of the decrease which is partially offset by depreciation on capital improvements made at several comparable hotels since March 31, 2007.

     Corporate General and Administrative.Corporate general and administrative expense increased to $8.4 million for the current quarter compared to $7.1 million for the prior year quarter. These expenses include non-cash stock-based compensation expense of $1.9 million for both current and the prior year quarters. Excluding the non-cash stock-based compensation, these expenses increased $1.3 million in the current quarter compared to the prior year quarter primarily due to the increase in headcount as a result of the CNL Acquisition.

     Equity in Earnings of Unconsolidated Joint Venture.Equity in earnings of the PREI JV of $1.3 million represents our 25% of the earnings from the PREI JV. The earnings are primarily generated from the interest earned on the mezzanine notes. At June 30, 2008, the PREI JV owned $94.1 million of mezzanine notes.

     Interest Income.Interest income decreased $624,000 for the current quarter compared to the prior year quarter primarily due to the decrease in average cash balances coupled with the decline in short-term interest rates.

     Other Income.Other income of $2.6 million represents the interest income on the non-designated interest rate swap transaction that we entered into in March 2008.

     Interest Expense and Amortization of Loan Costs.Interest expense and amortization of loan costs decreased $1.0 million to $38.1 million for the current quarter from $39.1 million for the prior year quarter. The decrease is primarily attributable to a decrease in interest expense on our variable rate debt as a result of lower LIBOR rates during the current quarter. This decrease is partially offset by the higher average debt balance outstanding during the current quarter.

     Write-off of Loan Cost and Exit Fees.During the prior year quarter, we repaid the balance and terminated a $150 million credit facility. We also paid off our then outstanding loans totaling $505.1 million. In connection with these pay-offs, we wrote-off unamortized loan costs of $3.6 million. No such costs or fees were incurred in the current quarter.

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     Unrealized (Losses)/Gains on Derivatives.In March 2008, we entered into interest rate swap, floor and cap transactions that were not designated as hedges. As a result, the changes in market value of these derivatives are included in the earnings. During the current quarter, we recorded unrealized losses of $55.4 million on these derivatives as a result of the LIBOR future curve used in determining the fair values turning significantly upward during the current quarter. Unrealized gains were $8,000 and $66,000 for the current quarter and prior year quarter, respectively, on other interest rate caps that we entered into previously. See Note 3 and Note 11 of Notes to Consolidated Financial Statements.

     The valuation of these instruments was determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair values of interest rate derivatives are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. The variable cash payments/receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rate of the floors or rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of SFAS No. 157, we incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

     Income Tax/(Expense) Benefit.Income tax expense was $319,000 for the current quarter. For the prior year quarter, we recorded a $162,000 income tax benefit in connection with the TRS loss for the quarter. The 2008 tax expense consisted primarily of certain state taxes assessed on partnership subsidiaries and the new Texas margin tax. No potential future benefit was recorded during the current quarter as the TRS do not have sufficient historical earnings on which to base a potential future benefit.

     Minority Interests in Earnings of Consolidated Joint Ventures.Minority interests represent the joint venture partners who have ownerships between 11% to 25% in six hotel properties owned and operated by our consolidated joint ventures. We acquired these joint ventures in connection with the CNL Acquisition in April 2007. Income from consolidated joint ventures allocated to the minority interests was $2.7 million for the current quarter. For the prior year quarter a loss of $523,000 from these joint ventures was allocated to the minority interests.

     Minority Interest in Losses/(Earnings) of Operating Partnership.Minority interest in operating partnership represents the limited partners’ proportionate share of equity in earnings/losses of the operating partnership which is an allocation of net income/(loss) available to common shareholders based on the weighted average ownership percentage of these limited partners’ common unit holdings throughout the period plus dividends related to these limited partners’ Class B unit holdings. Losses from continuing operations allocated to these limited partners were $2.9 million and $137,000 for the current quarter and the prior year quarter, respectively. Income from discontinued operations allocated to these limited partners was $666,000 and $2.1 million for the current quarter and the prior year quarter, respectively.

     Income from Discontinued Operations.Included in income from discontinued operations were gains of $6.0 million and $33.3 million from hotel sales for the current quarter and the prior year quarter, respectively. Operating results of discontinued operations also reflected interest and related debt expense of $1.1 million and $6.3 million for the current quarter and the prior year quarter, respectively. In addition, unamortized loan costs of $515,000 and $1.7 million in the current quarter and the prior year quarter, respectively, were written off when the related debt was repaid upon the sale of the hotel properties collateralizing that debt.

Comparison of the Six Months Ended June 30, 2008 with Six Months Ended June 30, 2007

     Revenue.Total revenue for the six months ended June 30, 2008 (the “current period”) increased $176.9 million, or 40.1%, to $618.1 million from $441.2 million for the six months ended June 30, 2007 (the “prior year period”). The increase was substantially due to $176.2 million in incremental revenues attributable to the non-comparable hotels. Total revenue from comparable hotels slightly decreased $364,000. Mezzanine loans originated and acquired after June

28

30, 2007 contributed a $251,000 increase in interest income from notes receivable. Fees received from certain asset management consulting agreements we entered into after June 30, 2007 contributed $779,000 of the increase.

     Room revenues at comparable hotels for the current period decreased $1.1 million, or 0.5%, compared to the prior year period, primarily due to a slight decrease in RevPAR from $103.34 to $102.37 driven by a 3.5% decrease in occupancy principally as a result of five hotel properties being under renovation. The effect of decreased occupancy is partially offset by a 3.9% increase in ADR. Excluding the five hotel properties under renovation, the remaining 57 comparable hotels RevPAR increased slightly from $101.74 in the prior year period to $103.08 in the current period driven by a 3.8% increase in ADR which is partially offset by a 1.8% decrease in occupancy rate.

     Food and beverage revenues at comparable hotels for the current period increased $792,000, or 1.3% compared to the prior year period, primarily due to better pricing mix implemented in the first quarter and increased banquets and convention business at certain hotels. This positive impact is partially offset by the effect of decreased occupancy. The remainder of the increase is primarily due to the non-comparable hotels that are included in continuing operations.

     Rental income from operating leases represents rental income recognized on a straight-line basis associated with a hotel property acquired in April 2007, which is leased to a third-party tenant on a triple-net basis.

     Other revenues for the current period increased $9.2 million compared to the prior year period due primarily to the $9.3 million attributable to the non-comparable hotels.

     Interest income from notes receivable increased $251,000 for the current period compared to the prior year period. The increase is attributable to the acquisition and origination of new mezzanine loans during the first quarter totaling $45.1 million in principal balance. The increase was substantially offset by the decline in LIBOR rates during the current period as compared to prior year period.

     Asset management fees and other increased $779,000 during the current period. The increase is primarily related to a sourcing fee of $442,000 from PREI JV and a consulting fee of $261,000 from a consulting agreement we entered into in December 2007 in connection with an asset swap transaction.

     Hotel Operating Expenses.Hotel operating expenses, which consists of room expense, food and beverage expense, other direct expenses, indirect expenses, and management fees, increased $113.3 million, or 40.8%, for the current period compared to the prior year period, primarily due to $83.6 million of expenses associated with the non-comparable hotels. In addition, hotel operating expenses at comparable hotels experienced an increase of $445,000, or 0.2%, for the current period compared to the prior year period primarily due to increased expenses in renovation and repairs, franchise fees and sales and marketing partially offset by a decrease in room and food and beverage expenses.

     Property Taxes, Insurance and Other.Property taxes, insurance, and other increased $9.1 million, or 39.5%, for the current period compared to the prior year period due to $9.4 million of expenses associated with the non-comparable hotels. Property taxes, insurance, and other expense at comparable hotels experienced a slight decreased of $327,000 in the current period compared to the prior year period. Property taxes increased $646,000 at the comparable hotels due to appraised property values increasing significantly at certain hotels, which is offset by a decline in insurance expense as new insurance policies were negotiated effective June 1, 2007.

     Depreciation and Amortization.Depreciation and amortization increased $18.1 million, or 27.3%, for the current period compared to the prior year period primarily due to a net increase of $13.2 million associated with the non-comparable hotels. The increase at the non-comparable hotels is partially offset by a decrease at these hotels as a result of finalizing the allocation of the purchase price related to these non-comparable hotels. During the current period, we finalized the allocation of the purchase price of the CNL Acquisition which resulted in adjustments to asset values and the reclassification of certain assets into asset groups that have longer useful lives. Depreciation and amortization at comparable hotels increased $4.8 million in the current period compared to the prior year period as a result of capital improvements made at several comparable hotels since June 30, 2007.

     Corporate General and Administrative.Corporate general and administrative expense increased to $16.1 million for the current period compared to $11.7 million for the prior year period. These expenses include non-cash stock-based compensation expense of $3.5 million and $3.0 million for the current period and the prior year period, respectively. Excluding the non-cash stock-based compensation, these expenses increased $3.8 million in the current

29

period compared to the prior year period primarily due to the increase in headcount and audit expense as a result of the CNL Acquisition.

     Equity in Earnings of Unconsolidated Joint Venture.Equity in earnings of the PREI JV of $1.8 million represents our 25% of the earnings from the PREI JV.

     Interest Income.Interest income decreased $576,000 for the current period compared to the prior year quarter primarily due to the decrease in average cash balances coupled with the decline in short-term interest rates.

     Other Income.Other income of $2.9 million represents the interest income on the non-designated interest rate swap transaction that we entered into in March 2008.

     Interest Expense and Amortization of Loan Costs.Interest expense and amortization of loan costs increased $22.2 million to $77.1 million for the current period from $54.9 million for the prior year period. The increase is primarily attributable to higher average debt balance outstanding during the current period as a result of the CNL acquisition on April 11, 2007.

     Write-off of Loan Cost and Exit Fees.During the prior year period, we repaid the balance and terminated two credit facilities with total borrowing capacity of $250 million. We also paid off our then outstanding loans totaling $505.1 million. In connection with these terminations and pay-offs, we wrote-off unamortized loan costs of $3.6 million and incurred prepayment penalties of $559,000. No such costs or fees were incurred in the current period.

     Unrealized Gains/(Losses) on Derivatives.In March 2008, we entered into interest rate swap, floor and cap transactions that were not designated as hedges. As a result, the changes in market value of these derivatives are included in the earnings. During the current period, we recorded unrealized losses of $51.4 million on these derivatives as a result of the LIBOR future curve used in determining the fair values turning significantly upward during the second quarter. Unrealized gains were $2,000 and $31,000 for the current period and prior year period, respectively, on other interest rate caps that we entered into previously.

     Income Tax (Expense)/Benefit.Income tax expense was $729,000 for the current period. For the prior year period, we recorded a $1.2 million income tax benefit in connection with the TRS loss for the period. The current period tax expense consisted primarily of certain state taxes assessed on partnership subsidiaries and the new Texas margin tax. No potential future benefit was recorded during the current period as the TRS do not have sufficient historical earnings on which to base a potential future benefit.

     Minority Interests in Earnings of Consolidated Joint Ventures.Income from consolidated joint ventures allocated to the minority interests was $2.7 million for the current period. For the prior year period a loss of $523,000 from these joint ventures was allocated to the minority interests.

     Minority Interest in Earnings/(Losses) of Operating Partnership.Losses from continuing operations allocated to the limited partners were $2.4 million for the current period and earnings of $1.3 million were allocated to the limited partners for the prior year period. Income from discontinued operations allocated to the limited partners was $757,000 and $2.5 million for the current period and the prior year period, respectively.

     Income from Discontinued Operations.Included in income from discontinued operations were gains of $6.9 million and $34.7 million from hotel sales for the current period and the prior year period, respectively. Operating results of discontinued operations also reflected interest and related debt expense of $2.7 million and $7.3 million for the current period and the prior year period, respectively. In addition, unamortized loan costs of $739,000 and $1.9 million in the current period and the prior year period, respectively, and a premium of $2.1 million in the current period were written off when the related debt was repaid upon the sale of the hotel properties collateralizing that debt.

NON-GAAP FINANCIAL MEASURES

     Funds From Operations (“FFO”), as defined by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002, represents net income/(loss) computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses from sales of properties and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets, and net of adjustments for the portion of these items related to minority interests in consolidated joint

30

ventures. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP.

     We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to a) GAAP net income/(loss) as an indication of our financial performance or b) GAAP cash flows from operating activities as a measure of our liquidity, nor is it indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO should be considered along with our net income/(loss) and cash flows reported in the consolidated financial statements.

     The following table reconciles net income/(loss) available to common shareholders to FFO available to common shareholders (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Net (loss)/income available to common shareholders	$	(33,522	)	$	14,051		$	(34,355	)	$	22,749
Depreciation and amortization on real estate		41,443			59,029			86,742			76,145
Minority interest in (losses)/earnings of operating partnership		(2,225	)		1,979			(1,594	)		3,806
Gains on sales of properties, net of related taxes		(6,015	)		(26,450	)		(6,903	)		(27,839	)
FFO available to common shareholders	$	(319	)	$	48,609		$	43,890		$	74,861

LIQUIDITY AND CAPITAL RESOURCES

     Our principal source of funds to meet our cash requirements, including distributions to stockholders and repayments of indebtedness, is our share of the operating partnership’s cash flow. The operating partnership’s principal sources of cash flows include: (i) cash flow from hotel operations, (ii) interest income from and repayments of our notes receivable portfolio, and (iii) proceeds from sales of hotel properties and other assets. We believe we have adequate means to satisfy all of our short-term cash obligations through cash flows from hotel operations, potential sales of hotels, availability on our lines of credit, or potential additional borrowings on our unencumbered assets. Our cash flows of liquidity are summarized as follows:

     Net Cash Flows Provided By Operating Activities.Net cash flows provided by operating activities, pursuant to our Consolidated Statement of Cash Flows which includes the changes in balance sheet items, were $82.2 million and $46.4 million for the current period and the prior year period, respectively. The increase is principally due to the additional properties included in our operations during the current period as a result of the CNL Acquisition.

     Net Cash Flows Used In Investing Activities.For the current period, investing activities provided net cash flows of $164.5 million, which consisted of net proceeds of $282.6 million from sales of five hotel properties and one office building and a payment of $16.2 million for the 75% note receivable acquired by PREI JV. These cash inflows were partially offset by $39.5 million for acquisitions or originations of notes receivable, $17.8 million for the acquisition of 25% interest in a mezzanine loan acquired by PREI JV, and $77.0 million of improvements to various hotel properties. For the prior year period, investing activities used net cash of $1.9 billion, which consisted of $2.0 billion for the CNL Acquisition and $44.9 million for improvements to various hotel properties. These cash outlays were partially offset by $143.9 million from the sales of 13 hotel properties and one office building and $30.0 million cash received from payments of notes receivables.

     Net Cash Flows Provided (Used) In Financing Activities.For the current period, net cash flow used in financing activities was $226.4 million consisting of $332.5 million of payments on indebtedness and capital leases, $70.1 million of payments of dividends, $4.6 million payment for entering into interest rate swap, floor and cap transactions, $4.6 million of payments to acquire treasury shares, and $856,000 of debt refinancing costs. These cash outlays were partially offset by a $185.9 million draws on our $300.0 million credit facility and refinance of existing mortgage loans, a $227,000 cash payment from minority interest in consolidated joint ventures and $53,000 buy-ins of the operating partnership units issued to our executives under the long term incentive partnership units (“LTIP”) plan. For the prior year period, net cash flow provided in financing activities was $2.0 billion consisting of $1.9 billion in debt borrowings, $193.3 million of net proceeds from the issuance of Series C preferred stock, and $548.2 million of net proceeds

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received from the follow-on public offering in April 2007. These cash inflows were partially offset by $637.6 million of payments on indebtedness and capital leases, $41.0 million of dividend payments, $14.4 million of payments of loan costs, and $700,000 of payments to acquire treasury shares.

     On August 6, 2008, we refinanced the $127.2 million mortgage loan maturing in 2009 secured by two hotel properties with a new $160.0 million loan. The new loan has an interest rate of LIBOR plus 2.75% and is for a three year term with two one-year extension options.

     Management believes that the borrowings available under the credit facilities of $235.0 million at June 30, 2008, cash generated from operations and current working capital should be sufficient to meet our anticipated cash requirements for the foreseeable future.

     We are required to maintain certain financial ratios under various debt agreements. If we violate covenants in any debt agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. In any event, financial covenants under our current or future debt obligations could impair our planned business strategies by limiting our ability to borrow (i) beyond certain amounts or (ii) for certain purposes. Presently, our existing financial debt covenants primarily relate to maintaining minimum debt coverage ratios at certain properties, maintaining an overall minimum net worth, maintaining a maximum loan to value, and maintaining an overall minimum total assets. At June 30, 2008, we were in compliance with all covenants or other requirements set forth in our credit agreements as amended.

     During the first quarter of 2008, we changed our debt strategy to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue Per Available Room) and to enhance dividend coverage. In connection with this strategy, we executed a five-year interest rate swap on $1.8 billion of fixed-rate debt at a weighted average interest rate of 5.84% for a floating interest rate of LIBOR plus 2.64%. In conjunction with the swap execution, we sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the first three years. We would save approximately $5.7 million annually in interest expense on our variable rate debt for every 0.25% reduction in LIBOR. Conversely, every 0.25% increase in the LIBOR rate would increase our interest expense by approximately $5.7 million annually on our variable interest rate debt.

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

     However, no assurances can be given that we will obtain additional financings or, if we do, what the amount and terms will be. Our failure to obtain future financing under favorable terms could adversely impact our ability to execute our business strategy. In addition, we may selectively pursue mortgage financing on individual properties and our mortgage investments.

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

     Our existing hotels are located in developed areas that contain competing hotel properties. The future occupancy, ADR, and RevPAR of any individual hotel could be materially and adversely affected by an increase in the number or quality of the competitive hotel properties in its market area. Competition could also affect the quality and quantity of future investment opportunities.

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SEASONALITY

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments and notes receivable that bear interest at variable rates that fluctuate with market interest rates. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

     At June 30, 2008, our $2.6 billion debt portfolio included $484.5 million of variable-rate debt. The impact on the results of operations of a one percentage change in interest rate on the outstanding balance of variable-rate debt at June 30, 2008 would be approximately $1.2 million per quarter. Including the effect of the interest rate swap we entered into in March 2008, our debt portfolio at June 30, 2008 would include $2.3 billion of variable-rate debt. The impact on the results of operations of a one percentage change in interest rate would be $5.7 million per quarter.

     Periodically, we purchase derivatives to increase stability related to interest expense and to manage our exposure to interest rate movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps, caps and floors as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when interest rates exceed the cap strike. In March 2008, we entered into interest rate swap, cap and floor transactions that were not designated as hedges, the changes in the fair market values are recorded in earnings. The following summarizes our interest rate swap, caps and floor at June 30, 2008 and the earnings/(losses) recognized for the six months ended June 30, 2008 ($ in thousands):

					Cash Flow						Unrealized
					Hedge						Gain/(Loss)
Notional		Interest			Designation			Fair			Recognized
Amount	Type	Rates			Yes / No	Maturity		Value			In Earnings
$             212,000	Interest Rate Cap		6.25	%	Yes		2009	$	29		$	—
47,500	Interest Rate Cap		7.00	%	Yes		2008		—			—
35,000	Interest Rate Cap		6.00	%	No		2009		8			2
375,036	Interest Rate Cap		6.00	%	No		2009		—			—
1,800,000	Interest Rate Swap	Pays LIBOR plus 2.64%, receives fixed 5.84%			No		2013		(57,893	)		(62,085	)
1,800,000	Interest Rate Floor	Floor rate 1.25%			No		2013		(4,112	)		4,008
1,000,000	Interest Rate Cap	Cap rate 3.75%			No		2011		14,706			6,686
$             5,269,536								$	(47,262	)	$	(51,389	)

     At June 30, 2008, our $113.0 million notes receivable included $102.1 million of variable-rate notes. The impact on the results of operations of a one percentage change in interest rate on the outstanding balance of variable-rate notes at June 30, 2008 would be $255,000 per quarter.

     The above amounts were determined based on the impact of hypothetical interest rates on our borrowings and lending portfolios, and assume no changes in our capital structure. As the information presented above includes only those exposures that existed at June 30, 2008, it does not consider exposures or positions which could arise after that

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date. Hence, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

ITEM 4. CONTROLS AND PROCEDURES

     Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

     The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the Securities and Exchange Commission, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. At June 30, 2008, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     (c) The following table provides the information with respect to the purchases of shares of our common stock during each of the months in the second quarter of 2008:

	Total				Total Number of		Maximum Dollar
	Number		Average		Shares Purchased as		Value of Shares That
	of Shares		Price Paid		Part of Publicly		May Yet Be Purchased
Period	Purchased		Per Share		Announced Plan(1)		Under the Plan
April 1 to April 30		—	$	—		—	$	27,215,000
May 1 to May 31		—		—		—	$	27,215,000
June 1 to June 30		—		—		—	$	27,215,000
Total		—	$	—		—

⁽¹⁾ In November 2007, we announced that our Board of Directors authorized management to purchase up to a total of $50 million of our common shares from time to time on the open market. The program does not have a pre-determined expiration date.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At our 2008 Annual Stockholders’ Meeting on June 10, 2008 (the “Annual Meeting”), the total number of shares of shares of our voting capital stock entitled to vote was 127,111,621 shares (comprised of 119,663,756 common shares and 7,447,865 Series B-1 Preferred Shares), and a total of 117,523,945 shares (92.46%) of our voting capital stock were present at the Annual Meeting in person or by proxy.

     At the Annual Meeting, our stockholders elected all of the director nominees identified in our Proxy Statement until our 2009 annual stockholders’ meeting. The following table sets forth the number of votes cast for each of the directors elected:

	For		Withheld
Archie Bennett, Jr.		115,036,419		2,487,526
Montgomery J. Bennett		115,187,134		2,336,811
Martin L. Edelman		109,853,792		7,670,153
W.D. Minami		115,059,310		2,464,635
W. Michael Murphy		114,683,732		2,840,213
Phillip S. Payne		114,687,166		2,836,779
Charles P. Toppino		106,760,402		10,763,543

     Second, at the Annual Meeting, our stockholders ratified the selection of Ernst & Young LLP as our independent auditor for the ensuing year. In connection with this election, there were 117,135,700 votes cast for ratification, 261,867 votes against, and 126,378 shares abstained from voting.

     Third, at the Annual Meeting, our stockholders approved the proposed amendments to our Amended and Restated 2003 Stock Incentive Plan (i) to increase the number of shares of common stock reserved for issuance under such plan by 3,750,000 shares, and (ii) to eliminate the limitation on the maximum number of shares of common stock that can be issued under the plan to any one participant in any one calendar year. With respect to this approval, there were 72,533,950 votes for the proposed amendments, 26,017,365 votes against, 568,131 abstentions, and 18,404,499 non-votes.

ITEM 6. EXHIBITS

Exhibit	Description
31.1	Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
31.2	Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
31.3	Certifications of Chief Accounting Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended
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
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3	Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.

Date: August 7, 2008	By: /s/ MONTGOMERY J. BENNETTMontgomery J. Bennett
	Chief Executive Officer
Date: August 7, 2008	By: /s/ DAVID J. KIMICHIKDavid J. Kimichik
	Chief Financial Officer
Date: August 7, 2008	By: /s/ MARK L. NUNNELEYMark L. Nunneley
	Chief Accounting Officer

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