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Article by DailyStocks_admin    (03-01-12 01:55 AM)

Description

Ashford Hosptly. CEO MONTGOMERY J BENNETT bought 28736 shares on 2-28-2012 at $ 8.65

BUSINESS OVERVIEW

GENERAL

Ashford Hospitality Trust, Inc., together with its subsidiaries, is a self-administered real estate investment trust (“REIT”) focused on investing in the hospitality industry across all segments and in all methods including direct real estate, securities, equity and debt. Additional information can be found on our website at www.ahtreit.com . We commenced operations in August 2003 with the acquisition of six hotel properties (the “Initial Properties”) in connection with our initial public offering. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of the Company, serves as the sole general partner of our operating partnership.

During 2004, we acquired 15 hotel properties in seven transactions. In 2005, we closed three purchase transactions, resulting in the acquisition of 43 hotel properties. In 2006, we acquired an additional nine hotel properties in five transactions. 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 connection 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 the asset swap, 39 and 42 of these hotels were included in our hotel property portfolio at December 31, 2010 and 2009, respectively.

Beginning in March 2008, we entered into various derivative transactions with financial institutions to hedge our debt to improve cash flows and to capitalize on the historical correlation between changes in LIBOR and RevPAR (Revenue Per Available Room). Through December 31, 2010, we recorded cash and accrued income of $125.5 million from the derivative transactions.

In response to the recent financial market crisis, we undertook a series of actions to manage the sources and uses of our funds in an effort to navigate through challenging market conditions while still pursuing opportunities that can create long-term shareholder value. In this effort, we proactively addressed value and cash flow deficits among certain of our mortgaged hotels, with a goal of enhancing shareholder value through loan amendments, or in certain instances, consensual transfers of hotel properties to the lenders in satisfaction of the related debt, some of which have resulted in impairment charges. In 2010, we successfully negotiated a consensual transfer of the Westin O’Hare hotel property in Rosemont, Illinois that collateralized a non-recourse mortgage loan of $101.0 million to the lender. In December 2009, after fully cooperating with the servicer for a judicial foreclosure, we agreed to transfer possession and control of the Hyatt Regency Dearborn to a receiver. In each of these instances, the hotel was not generating sufficient cash flow to cover its debt service and was not expected to generate sufficient cash flow to cover its debt service for the foreseeable future.

As of December 31, 2010, we owned 94 hotel properties directly and six hotel properties through majority-owned investments in joint ventures, which represented 21,734 total rooms, or 21,392 net rooms excluding those attributable to joint venture partners. Our hotels are primarily operated under the widely recognized upper upscale brands of Crowne Plaza, Hilton, Hyatt, Marriott and Sheraton. All these hotels are located in the United States. At December 31, 2010, 97 of the 100 hotels are included in our continuing operations. As of December 31, 2010, we also owned mezzanine or first-mortgage loans receivable with a carrying value of $20.9 million. In addition, at December 31, 2010, we had ownership interests in two joint ventures that own mezzanine loans with a carrying value of $15.0 million, net of valuation allowance. See Notes 4 and 5 of Notes to Consolidated Financial Statements included in Item 8.

For federal income tax purposes, we elected to be treated as a REIT, which imposes limitations related to operating hotels. As of December 31, 2010, 99 of our 100 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 statements of operations. As of December 31, 2010, 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.

We do not operate any of our hotels directly; instead we employ hotel management companies to operate them for us under management contracts or operating leases. Remington Lodging & Hospitality, LLC (“Remington Lodging”), our primary property manager, is beneficially wholly owned by Mr. Archie Bennett, Jr., our Chairman, and Mr. Monty J. Bennett, our Chief Executive Officer. As of December 31, 2010, Remington Lodging managed 46 of our 100 hotel properties while third-party management companies managed the remaining 54 hotel properties.

SIGNIFICANT TRANSACTIONS IN 2010 AND RECENT DEVELOPMENTS

Resumption of Common Dividends – In February 2011, the Board of Directors accepted management’s recommendation to resume paying cash dividends on our common shares with an annualized target of $0.40 per share for 2011. The payment of $0.10 for the first quarter of 2011 has been approved and subsequent payments will be reviewed on a quarterly basis.

Reissuance of treasury stock – In December 2010, we reissued 7.5 million shares of our treasury stock at a gross price of $9.65 per share and received net proceeds of approximately $70.4 million. The net proceeds were used to repay a portion of our outstanding borrowings under our senior credit facility. In January 2011, the underwriter purchased an additional 300,000 shares of our common shares through the partial exercise of the underwriter’s 1.125 million share over-allotment option, and we received net proceeds of $2.8 million.

Pending and Completed Sales of Hotel Properties – We have entered into asset sale agreements for the sale of the JW Marriott hotel property in San Francisco, California, the Hilton hotel property in Rye Town, New York, and the Hampton Inn hotel property in Houston, Texas. Based on the selling price, we recorded an impairment charge of $23.6 million on the Hilton Rye Town property in the fourth quarter of 2010, and we expect each of these sales to close in the first quarter of 2011. These hotel properties and related liabilities have been reclassified as assets and liabilities held for sale in the consolidated balance sheet at December 31, 2010, and their operating results, including the impairment charge, for all periods presented have been reported as discontinued operations in the consolidated statements of operations. In February 2011, the sale of the JW Marriott hotel property was completed and we received net cash proceeds of $43.6 million. We used $40.0 million of the net proceeds to reduce the borrowings on our senior credit facility. After the payment, the credit facility has an outstanding balance of $75.0 million.

In June 2010, we entered into an agreement to sell the Hilton Suites in Auburn Hills, Michigan for $5.1 million, and the sale was completed in September 2010. Based on the sales price, we recorded an impairment charge of $12.1 million in June 2010, and an additional loss of $283,000 at closing based on the net proceeds of $4.9 million. The operating results of the hotel property, including the related impairment charge and the additional loss, for all periods presented have been reported as discontinued operations in the consolidated statements of operations.

Impairment of Mezzanine Loans and a Hotel Property – We evaluated the collectability of the mezzanine loan secured by 105 hotel properties maturing in April 2011, and weighted different probabilities of outcome from full payment at maturity to a foreclosure by the senior lender. Based on this analysis, we recorded an impairment charge of $7.8 million on December 31, 2010.

The borrowers of the mezzanine loan tranches 4 and 6 held in our joint venture with PREI related to the JER/Highland Hospitality portfolio stopped making debt service payments in August 2010 and we are currently negotiating a restructuring with their equity holders, senior secured lenders and senior mezzanine lenders. Due to our junior participation status, it is expected the tranche 6 mezzanine loan will be completely extinguished in the restructuring. As a result, we recorded a valuation allowance of $21.6 million for the entire carrying value of our investment in the joint venture on December 31, 2010. We did not record a valuation allowance for the tranche 4 mezzanine loan as the restructuring could result in a conversion of the mezzanine loan into equity with us investing an additional amount.

At December 31, 2010, the Hilton hotel property in Tucson, Arizona had a reasonable probability of being sold in the near future. Based on our assessment of the expected purchase price obtained from potential buyers, we recorded an impairment charge of $39.9 million.

Refinancing of Mortgage Debt – In October 2010, we closed on a $105.0 million refinancing of the Marriott Gateway in Arlington, Virginia. The new loan, which has a 10-year term and fixed interest rate of 6.26%, replaces a $60.8 million loan set to mature in 2012 with an interest rate of LIBOR plus 4.0%. The excess proceeds were used to reduce $40.0 million of the outstanding borrowings on our senior credit facility. In conjunction with the refinance, we incurred prepayment penalties and fees of $3.3 million and wrote off the unamortized loan costs on the refinanced debt of $630,000.

Conversion of Floating Interest Rate Swap into Fixed Rate – In October 2010, we converted our $1.8 billion interest rate swap into a fixed rate of 4.09%, resulting in locked-in annual interest savings of approximately $32 million through March 2013 at no cost to us. Under the previous swap, which we entered into in March 2008 and which expires in March 2013, we received a fixed rate of 5.84% and paid a variable rate of LIBOR plus 2.64%, subject to a LIBOR floor of 1.25%. Under the terms of the new swap transaction, we will continue to receive a fixed rate of 5.84%, but will pay a fixed rate of 4.09%.

Conversion of Series B-1 Preferred Stock – In the fourth quarter of 2010, 200,000 shares of our Series B-1 preferred stock with a carrying value of $2.0 million were converted to common shares, pursuant to the terms of the Series B-1 preferred stock agreement.

Preferred Stock Offering – In September 2010, we completed the offering of 3.3 million shares of our 8.45% Series D Cumulative Preferred Stock at a gross price of $23.178 per share, and we received net proceeds of $72.2 million after underwriting fees and other costs and an accrued dividend of $1.6 million. The proceeds from the offering, together with some corporate funds, were used to pay down $80.0 million of our senior credit facility.

Restructuring of Mezzanine Loans – In July 2010, as a strategic complement to our existing joint venture with Prudential Real Estate Investors (“PREI”) in 2008, we contributed $15 million for an ownership interest in a new joint venture with PREI. The new joint venture acquired a tranche 4 mezzanine loan associated with JER Partner’s 2007 privatization of the JER/Highland Hospitality portfolio. The mezzanine loan is secured by the same 28 hotel properties as our existing joint venture investment in tranche 6 of the mezzanine loan portfolio, which has been fully reserved at December 31, 2010. The borrower of these mezzanine loans stopped making debt service payments in August 2010. We are currently pursuing our remedies under the loan documents, as well as negotiating with the borrowers, their equity holders, senior secured lenders and senior mezzanine lenders and PREI with respect to a possible restructuring of the mezzanine tranches owned by our joint ventures and PREI and of the indebtedness senior to such tranches. As we hold our JER/Highland Hospitality loans in joint ventures, our participation in a possible restructuring, including a conversion of the loans into equity and assumption of senior indebtedness associated with the portfolio, would be through a joint venture with PREI or PREI and a third party.

Settlement of Notes Receivable – In August 2010, we reached an agreement with the borrower of the $7.1 million junior participation note receivable secured by a hotel property in La Jolla, California, to settle the loan which had been in default since March 2009. Pursuant to the settlement agreement, we received total cash payments of $6.2 million in 2010 and recorded a net impairment charge of $836,000.

In May 2010, the senior mortgage lender foreclosed on the loan secured by the Four Seasons hotel property in Nevis in which we had a junior participation interest of $18.2 million. Our entire principal amount was fully reserved in 2009. As a result of the foreclosure, our interest in the senior mortgage was converted to a 14.4% subordinate beneficial interest in the equity of the trust that holds the hotel property. Due to our junior status in the trust, we have not recorded any value for our beneficial interest as of December 31, 2010.

In May 2010, the mezzanine loan secured by the Le Meridien hotel property in Dallas, Texas was settled with a cash payment of $1.1 million. The loan was fully reserved during the second quarter of 2009 as the borrower ceased making debt service payments on the loan. As a result of the settlement, the $1.1 million was recorded as a credit to impairment charges in accordance with authoritative accounting guidance for impaired loans.

In February 2010, the mezzanine loan secured by the Ritz-Carlton hotel property in Key Biscayne, Florida, with a principal amount of $38.0 million and a net carrying value of $23.0 million at December 31, 2009 was restructured. In connection with the restructuring, we received a cash payment of $20.2 million and a $4.0 million note receivable. We recorded a net impairment charge of $10.7 million in 2009 on the original mezzanine loan. The interest payments on the new note are recorded as a reduction of the principal of the note receivable, and the valuation adjustments to the net carrying amount of this note are recorded as a credit to impairment charges.

In February 2010, we and the senior note holder of the participation note receivable formed a joint venture (the “Redus JV”) for the purposes of holding, managing or disposing of the Sheraton hotel property in Dallas, Texas, which collateralized the senior note participation and our $4.0 million junior participating note receivable. The note receivable was fully reserved in 2009. We have an 18% subordinated interest in Redus JV. In March 2010, the foreclosure was completed and the estimated fair value of the property was $14.2 million based on a third-party appraisal. Pursuant to the operating agreement of Redus JV, as a junior lien holder of the original participation note receivable, we are only entitled to receive our share of distributions after the original senior note holder has recovered its original investment of $18.4 million and Redus JV intends to sell the hotel property in the next 12 months. It is unlikely that the senior holder will be able to recover its original investment. Therefore, no cash flows were projected from Redus JV for the projected holding period. Under the applicable authoritative accounting guidance, we recorded a zero value for our 18% subordinated interest in Redus JV.

Debt Modifications, Repayments and Settlement – The $101.0 million non-recourse mortgage loan secured by the Westin O’Hare hotel property in Rosemont, Illinois was settled in September 2010 through a consensual transfer of the underlying hotel property to the lender. We recorded a gain of $56.2 million on the consensual transfer. An impairment charge of $59.3 million was previously recorded on this property in 2009 as we wrote down the hotel property to its estimated fair value. The operating results of the hotel property, including the gain from the disposition, have been reclassified to discontinued operations for all periods presented in the consolidated statements of operations.

With proceeds from the above mentioned equity offerings, sale of hotel properties and debt refinancing we made a net paydown of $135.0 million on our senior credit facility during 2010 to reduce its outstanding balance to $115.0 million at December 31, 2010.

In July 2010, we modified the mortgage loan secured by the JW Marriott hotel property in San Francisco, California, to change the initial maturity date to its fully extended maturity of March 2013 in exchange for a principal payment of $5.0 million. This hotel property was subsequently sold in February 2011 and the related mortgage loan was repaid at closing along with miscellaneous fees of approximately $476,000.

Effective April 1, 2010, we completed the modification of the $156.2 million mortgage loan secured by two hotel properties in Washington D.C. and La Jolla, California. Pursuant to the modified loan agreement, we obtained the full extension of the loan to August 2013 without any extension tests in exchange for a $5.0 million paydown. We paid $2.5 million of the paydown amount at closing, and the remaining $2.5 million is payable quarterly in four consecutive installments of $625,000 each with the last installment due on April 1, 2011. We paid a modification fee of $1.5 million in lieu of the future extension fees. The modification also modifies covenant tests to minimize the likelihood of additional cash being trapped.

In March 2010, we elected to cease making payments on the $5.8 million mortgage note payable maturing in January 2011, secured by a hotel property in Manchester, Connecticut, because the anticipated operating cash flows from the underlying hotel property had been insufficient to cover the principal and interest payments on the note. As of the date of this report, the loan has been transferred to a special servicer. We are currently working with the special servicer for an extension or restructuring of the mortgage note.

Repurchases of Common Shares and Units of Operating Partnership – During 2010, we repurchased 7.2 million shares of our common stock for a total cost of $45.1 million pursuant to a previously announced stock repurchase plan. As of June 2010, we ceased all repurchases under the plan indefinitely. During 2010, 719,000 operating partnership units were redeemed at an average price of $7.39 per unit. We redeemed these operating partnership units for cash rather than electing to satisfy the redemption request through the issuance of common shares and paid a total redemption cost of $5.3 million to the unit holders during 2010. An additional 455,000 operating partnership units presented for redemption in 2010 were converted to common shares at our election.

BUSINESS STRATEGIES

CURRENT STRATEGIES

The U.S. economy experienced a recession beginning around the fourth quarter of 2007, which was caused by the global credit crisis and declining GDP, employment, business investment, corporate profits and consumer spending. As a result of the dramatic downturn in the economy, lodging demand in the U.S. declined significantly throughout 2008 and 2009. However, beginning in 2010, the lodging industry has been experiencing improvement in fundamentals, specifically occupancy. Room rates, measured by the average daily rate, or ADR, which typically lags occupancy growth in the early stage of a recovery, appear to be showing upward growth. We believe recent improvements in the economy will continue to positively affect the lodging industry and hotel operating results for 2011. Our overall current strategy is to take advantage of the cyclical nature of the hotel industry. We believe that hotel values and cash flows, for the most part, peaked in 2007, and we believe we will not achieve similar cash flows and values in the immediate future. Industry experts have suggested that cash flows within our industry may achieve these previous highs again by 2014 through 2016.

In response to the challenging market conditions, we undertook a series of actions to manage the sources and uses of our funds. Based on our primary business objectives and forecasted operating conditions, our current key priorities and financial strategies include, among other things:


• acquisition of hotel properties;

• disposition of hotel properties;

• restructuring and liquidating positions in mezzanine loans;

• pursuing capital market activities to enhance long-term shareholder value;

• enhancing liquidity, and continuing current cost saving measures;

• implementing selective capital improvements designed to increase profitability;

• implementing asset management strategies to minimize operating costs and increase revenues;

• financing or refinancing hotels on competitive terms;

• utilizing hedges and derivatives to mitigate risks; and

• making other investments or divestitures that our Board of Directors deems appropriate.

LONG-TERM STRATEGIES

Our long-term investment strategies continue to focus on the upscale and upper-upscale segments within the lodging industry. We believe that as supply, demand, and capital market cycles change, we will be able to shift our investment strategies to take advantage of new lodging-related investment opportunities as they may develop. Our Board of Directors may change our hotel investment strategies at any time without shareholder approval or notice.

As the business cycle changes and the hotel markets continue to improve, we intend to continue to invest in a variety of lodging-related assets based upon our evaluation of diverse market conditions including our cost of capital and the expected returns from those investments. These investments may include: (i) direct hotel investments; (ii) mezzanine financing through origination or acquisition in secondary markets; (iii) first-lien mortgage financing through origination or acquisition in secondary markets; and (iv) sale-leaseback transactions.

Our strategy is designed to take advantage of lodging industry conditions and adjust to changes in market circumstances over time. Our assessment of market conditions will determine asset reallocation strategies. While we seek to capitalize on favorable market fundamentals, conditions beyond our control may have an impact on overall profitability and our investment returns.

CEO BACKGROUND

ARCHIE BENNETT JR.
Chairman of the Board,
Ashford Hospitality Trust, Inc.

Chairman: Stock/Debt Repurchase Committee

Director since May 2003
Shares of common stock
beneficially owned by Mr. Bennett: 5,149,942* Age 73
Mr. Archie Bennett, Jr. was elected to the board of directors in May 2003 and has served as the Chairman of the board of directors since that time. He served as the chairman of the board of directors of Remington Hotel Corporation since its formation in 1992 and is currently chairman of Remington Holdings, LP, successor to Remington Hotel Corporation. Mr. Bennett started in the hotel industry in 1968. Since that time, he has been involved with hundreds of hotel properties. Mr. Bennett was a founding member of the Industry Real Estate Finance Advisory Council (“IREFAC”) of the American Hotel & Motel Association and served as its chairman for two separate terms.

Director Qualifications: Since the inception of the company, Mr. Bennett has been a vital member of our board and has provided valuable leadership on the board. Mr. Bennett is a hospitality industry leader with more than 40 years of hospitality-related experience. He has extensive knowledge and experience in virtually every aspect of the hotel industry, including development, ownership, operation, asset management and project management. Additionally, he possesses an in-depth familiarity with the day-to-day operations of the company that make him uniquely situated and qualified to serve as the chairman of the board.

MONTY J. BENNETT

Chief Executive Officer,
Ashford Hospitality Trust, Inc.

Member: Stock/Debt Repurchase Committee

Director since May 2003
Shares of common stock
beneficially owned by Mr. Bennett: 5,310,182*
Age 45
Mr. Monty Bennett was elected to the board of directors in May 2003 and has served as the Chief Executive Officer since that time. Prior to January 2009, Mr. Bennett also served as our president. Mr. Bennett also serves as the Chief Executive Officer of Remington Holdings, L.P. Mr. Bennett joined Remington Hotel Corporation (predecessor to Remington Holdings, LP) in 1992 and has served in several key positions, such as President, Executive Vice President, Director of Information Systems, General Manager and Operations Director. Mr. Monty Bennett is the son of Mr. Archie Bennett, Jr.

Director Qualifications: Mr. Monty Bennett holds a Masters degree in Business Administration from the Johnson Graduate School of Management at Cornell University and a Bachelor of Science degree with distinction from the Cornell School of Hotel Administration. He has over 20 years experience in the hotel industry and has experience in virtually all aspects of the hospitality industry, including hotel ownership, finance, operations, development, asset management and project management. He is a frequent speaker at industry conferences and is involved in hotel industry organizations. Mr. Bennett’s extensive industry experience as well as the significant leadership qualities he has displayed in his role as the chief executive officer of the company since its inception are vital skills that enhance the overall composition of the board.

BENJAMIN J. ANSELL, M.D.

Founder, Director, Chairman of the Board, UCLA Executive Health Program

Member: Compensation Committee and
Nominating/Corporate Governance Committee

Director since May 2009
Shares of common stock
beneficially owned by Dr. Ansell: 118,190
Age 43
Dr. Ansell was elected to the board of directors in May 2009. Dr. Ansell is the founder of and currently Director and Chairman of the Board of the UCLA Executive Health Program, where he has been responsible for marketing and selling executive health program services to more than twenty Fortune 500 companies and 1,100 individual customers within the first five years of operations. Dr. Ansell also founded and serves as the Director of UCLA Medical Hospitality, which coordinates health services, concierge and some hospitality functions within the UCLA Health System. Dr. Ansell is also the senior practice physician specializing in cardiovascular disease prevention and early detection strategies. Over the past 13 years, Dr. Ansell has acted as senior advisor to the pharmaceutical industry and financial community with respect to U.S. marketing, sales and branding strategies for cholesterol medication.

Director Qualifications: Dr. Ansell has significant entrepreneurial and management experience including brand development and positioning, sales and marketing, finance and establishing strategic relationships with both corporate and individual clients and customers. Additionally, Dr. Ansell successfully completed the director certification program at the UCLA Anderson Graduate School of Management in 2009.

THOMAS E. CALLAHAN

Co-President and Chief Executive Officer,
PKF Consulting, Inc.

Member: Audit Committee, Compensation Committee and Stock/Debt
Repurchase Committee

Director since December 2008
Shares of common stock
beneficially owned by Mr. Callahan: 16,600
Age 55
Mr. Callahan was elected to the board of directors in December 2008. Mr. Callahan is currently Co-President and Chief Executive Officer of PKF Consulting, Inc., a national real estate advisory firm specializing in the hospitality industry, with responsibility for the overall operations and management of the company. Prior to forming PKF Consulting, Inc., in 1992, Mr. Callahan was Deputy Managing Partner of Pannell Kerr Forster, an international public accounting firm specializing in the hospitality industry.

Director Qualifications: Mr. Callahan has a wealth of knowledge and experience in the hospitality industry, involving economic, financial, operational, management and valuation experiences. In addition, Mr. Callahan has extensive experience in evaluating organizational structures, financial controls and management information systems. Mr. Callahan also has significant relationships and contacts in the hospitality industry that are beneficial in his service on the board.

MARTIN L. EDELMAN

Of Counsel,
Paul, Hastings, Janofsky & Walker LLP

Lead Director Chairman: Nominating/Corporate
Governance
Committee

Director since August 2003
Shares of common stock beneficially
owned by Mr. Edelman: 125,011*
Age 69
Mr. Edelman was elected to the board of directors in August 2003 and has served on our board since that time. Since 2000, Mr. Edelman has served as Of Counsel to Paul, Hastings, Janofsky & Walker LLP. From 1972 to 2000, he served as a partner at Battle Fowler LLP. Mr. Edelman has been a real estate advisor to Grove Investors and is a partner at Fisher Brothers, a real estate partnership. He is a director of Capital Trust, Inc and Avis/Budget Group, Inc.

Director Qualifications: Mr. Edelman brings an extensive legal and financial background to the board of directors. He has over 40 years of experience in the legal profession and has considerable experience in complex negotiations involving acquisitions, dispositions and financing. During his time at Battle Fowler LLP, Mr. Edelman was involved in the legal development of participating mortgages, institutional joint ventures in real estate and joint ventures between U.S. financial sources and European real estate companies and other financial structures.

W. MICHAEL MURPHY

Head of Lodging and
Leisure Capital Markets
First Fidelity Mortgage Corporation

Chairman: Compensation Committee
Member: Audit Committee, Nominating/Corporate
Governance Committee and
Stock/Debt Repurchase Committee

Director since August 2003
Shares of common stock beneficially owned by Mr. Murphy: 49,300
Age 65
Mr. Murphy was elected to the board of directors in August 2003 and has served on our board since that time. Mr. Murphy also serves as Head of Lodging and Leisure Capital Markets of the First Fidelity Mortgage Corporation. From 1998 to 2002 Mr. Murphy served as the Senior Vice President and Chief Development Officer of ResortQuest International, Inc., a public, NYSE-listed company. Prior to joining ResortQuest, from 1995 to 1997, he was President of Footprints International, a company involved in the planning and development of environmentally friendly hotel properties. From 1994 to 1996, Mr. Murphy was a Senior Managing Director of Geller & Co., a Chicago-based hotel advisory and asset management firm. Prior to that Mr. Murphy was a partner in the investment firm of Metric Partners where he was responsible for all hospitality related real estate matters including acquisitions, sales and the company’s investment banking platform. Mr. Murphy served in various development roles at Holiday Inns, Inc. from 1973 to 1980. Mr. Murphy has been Co-Chairman of the Industry Real Estate Finance Advisory Council (IREFAC) three times and currently serves on the board of the Atlanta Hospitality Association.

Director Qualifications: Mr. Murphy has over 35 years of hospitality experience. During his career at Holiday Inns, Inc. and Metric Partners, Mr. Murphy negotiated the acquisition of over fifty hotels, joint ventures and hotel management contracts. At Geller & Co. he served as asset manager for institutional owners of hotels, and at ResortQuest he led the acquisition of the company’s portfolio of rental management operations. He has extensive contacts in the hospitality industry and in the commercial real estate lending community that are beneficial in his services on the board.

PHILIP S. PAYNE

Chief Executive Officer,
Ginkgo Residential, LLC

Chairman: Audit Committee
Member: Compensation Committee

Director since August, 2003
Shares of common stock
beneficially owned by Mr. Payne: 32,300 Age 59
Mr. Payne was elected to the board of directors in August 2003 and has served on our board since that time. Mr. Payne is currently the Chief Executive Officer of Ginkgo Residential LLC. Ginkgo Residential was formed in July 2010 to assume all of the property management activities of Babcock & Brown Residential of which Mr. Payne was the CEO. Prior to joining Babcock & Brown Residential, Mr. Payne was the Chairman of BNP Residential Properties Trust, a publicly traded real estate investment trust that was acquired by Babcock & Brown Ltd, a publicly traded Australian investment bank, in 2007. Mr. Payne joined BNP Residential in 1990 as Vice President Capital Market Activities and became Executive Vice President and Chief Financial Officer in January 1993. He was named Treasurer in April 1995, a director in December 1997, and was elected Chairman in 2004. Mr. Payne maintains a license to practice law in Virginia. Since 2007, Mr. Payne has been a member of the board of directors and chairman of the audit committee for Meruelo Maddux Properties, Inc., a formerly publicly-traded company that focuses on residential, industrial and commercial development in southern California. Mr. Payne is a member of the Urban Land Institute, ULI’s Responsible Property Investing Council and ULI’s Climate, Land Use and Energy Committee. Mr. Payne is a member of National Multi Housing Council and serves as an advisor to the Responsible Property Investing Center, which is a joint project of Harvard University’s Initiative for Responsible Property Investing and the University of Arizona.
Director Qualifications: Mr. Payne has an extensive understanding of finance and the financial reporting process. He has served in the capacity as chief financial officer as well as chief executive officer of various real estate entities and has experience in capital markets, public companies, real estate and the legal fields.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE OVERVIEW

General

The U.S. economy experienced a recession beginning around the fourth quarter of 2007, which was caused by the global credit crisis and declining GDP, employment, business investment, corporate profits and consumer spending. As a result of the dramatic downturn in the economy, lodging demand in the U.S. declined significantly throughout 2008 and 2009. However, beginning in 2010, the lodging industry has been experiencing improvement in fundamentals, specifically occupancy. Room rates, measured by the average daily rate, or ADR, which typically lags occupancy growth in the early stage of a recovery, appear to be showing upward growth. We believe recent improvements in the economy will continue to positively affect the lodging industry and hotel operating results for 2011. Our overall current strategy is to take advantage of the cyclical nature of the hotel industry. We believe that in the current cycle, hotel values and cash flows, for the most part, peaked in 2007, and we believe we will not achieve similar cash flows and values in the immediate future. Industry experts have suggested that cash flows within our industry may achieve these previous highs again 2014 through 2016.

In response to the challenging market conditions, we undertook a series of actions to manage the sources and uses of our funds in an effort to navigate through challenging market conditions while still pursuing opportunities that can create long-term shareholder value. In this effort, we have attempted to proactively address value and cash flow deficits among certain of our mortgaged hotels, with a goal of enhancing shareholder value through loan amendments or in certain instances, consensual transfers of hotel properties to the lenders in satisfaction of the related debt.

As of December 31, 2010, we owned 94 hotel properties directly and six hotel properties through majority-owned investments in joint ventures, which represented 21,734 total rooms, or 21,392 net rooms excluding those attributable to joint venture partners. Our hotels are primarily operated under the widely recognized upper upscale brands of Crown Plaza, Hilton, Hyatt, Marriott and Sheraton. All these hotels are located in the United States. At December 31, 2010, 97 of the 100 hotels are included in our continuing operations. As of December 31, 2010, we also owned mezzanine or first-mortgage loans receivable with a carrying value of $20.9 million. In addition, at December 31, 2010, we had ownership interests in two joint ventures that own mezzanine loans with a carrying value of $15.0 million, net of valuation allowance.

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


• acquisition of hotel properties;

• disposition of hotel properties;

• restructuring and liquidating positions in mezzanine loans;

• pursuing capital market activities to enhance long-term shareholder value;

• enhancing liquidity, and continuing current cost saving measures;

• implementing selective capital improvements designed to increase profitability;

• implementing asset management strategies to minimize operating costs and increase revenues;

• financing or refinancing hotels on competitive terms;

• utilizing hedges and derivatives to mitigate risks; and

• making other investments or divestitures that our Board of Directors deems appropriate.

Our long-term investment strategies continue to focus on the upscale and upper-upscale segments within the lodging industry. We believe that as supply, demand, and capital market cycles change, we will be able to shift our investment strategies to take advantage of new lodging-related investment opportunities as they may develop. Our Board of Directors may change our investment strategies at any time without shareholder approval or notice.

Significant Transactions in 2010 and Recent Developments

Resumption of Common Dividends – In February 2011, the Board of Directors accepted management’s recommendation to resume paying a cash dividend on our common shares with an annualized target of for 2011. The payment of $0.10 for the first quarter of 2011 has been approved and subsequent payments will be reviewed on a quarterly basis.

Reissuance of treasury stock – In December 2010, we reissued 7.5 million shares of our treasury stock at a gross price of $9.65 per share and received net proceeds of approximately $70.4 million. The net proceeds were used to repay a portion of our outstanding borrowings under our senior credit facility. In January 2011, an underwriter purchased an additional 300,000 shares of our common shares through the partial exercise of the underwriter’s 1.125 million share over-allotment option, and we received net proceeds of $2.8 million.

Pending and Completed Sales of Hotel Properties – We have entered into asset sale agreements for the sale of the JW Marriott hotel property in San Francisco, California, the Hilton hotel property in Rye Town, New York, and the Hampton Inn hotel property in Houston, Texas. Based on the selling price, we recorded an impairment charge of $23.6 million on the Hilton Rye Town property in the fourth quarter of 2010, and we expect each of these sales to close in the first quarter of 2011. These hotel properties and related liabilities have been reclassified as assets and liabilities held for sale in the consolidated balance sheet at December 31, 2010, and their operating results, including the impairment charge, for all periods presented have been reported as discontinued operations in the consolidated statements of operations. In February 2011, the sale of the JW Marriott hotel property was completed and we received net cash proceeds of $43.6 million. We used $40.0 million of the net proceeds to reduce the borrowings on our senior credit facility. After the payment, the credit facility has an outstanding balance of $75.0 million.

In June 2010, we entered into an agreement to sell the Hilton Suites in Auburn Hills, Michigan for $5.1 million, and the sale was completed in September 2010. Based on the sales price, we recorded an impairment charge of $12.1 million in June 2010, and an additional loss of $283,000 at closing based on the net proceeds of $4.9 million. The operating results of the hotel property, including the related impairment charge and the additional loss, for all periods presented have been reported as discontinued operations in the consolidated statements of operations. See Note 6.

Impairment of Mezzanine Loans and a Hotel Property – We evaluated the collectability of the mezzanine loan secured by 105 hotel properties maturing in April 2011 at December 31, 2010, and weighted different probabilities of outcome from full payment at maturity to a foreclosure by the senior lender. Based on this analysis, we recorded an impairment charge of $7.8 million on December 31, 2010.

The borrowers of the mezzanine loan tranches 4 and 6 held in our joint venture with PREI related to the JER/Highland Hospitality portfolio stopped making debt service payments in August 2010 and we are currently negotiating a restructuring with their equity holders, senior secured lenders and senior mezzanine lenders. Due to our junior participation status, it is expected the tranche 6 mezzanine loan will be completely extinguished in the restructuring. As a result, we recorded a valuation allowance of $21.6 million for the entire carrying value of our investment in the joint venture on December 31, 2010. We did not record a valuation allowance for the tranche 4 mezzanine loan as the restructuring could result in a conversion of the mezzanine loan into equity with us investing an additional amount.

At December 31, 2010, the Hilton hotel property in Tucson, Arizona had a reasonable probability of being sold in the near future. Based on our assessment of the expected purchase price obtained from potential buyers, we recorded an impairment charge of $39.9 million.

Refinancing of Mortgage Debt – In October 2010, we closed on a $105.0 million refinancing of the Marriott Gateway in Arlington, Virginia. The new loan, which has a 10-year term and fixed interest rate of 6.26%, replaces a $60.8 million loan set to mature in 2012 with an interest rate of LIBOR plus 4.0%. The excess proceeds were used to reduce $40.0 million of the outstanding borrowings on our senior credit facility. In conjunction with the refinance, we incurred prepayment penalties and fees of $3.3 million and wrote off the unamortized loan costs on the refinanced debt of $630,000.

Conversion of Floating Interest Rate Swap into Fixed Rate – In October 2010, we converted our $1.8 billion interest rate swap into a fixed rate of 4.09%, resulting in locked-in annual interest savings of approximately $32 million through March 2013 at no cost to us. Under the previous swap, which we entered into in March 2008 and which expires in March 2013, we received a fixed rate of 5.84% and paid a variable rate of LIBOR plus 2.64%, subject to a LIBOR floor of 1.25%. Under the terms of the new swap transaction, we will continue to receive a fixed rate of 5.84%, but will pay a fixed rate of 4.09%.

Conversion of Series B-1 Preferred Stock – In the fourth quarter of 2010, 200,000 shares of our Series B-1 preferred stock with a carrying value of $2.0 million were converted to common shares, pursuant to the terms of the Series B-1 preferred stock.

Preferred Stock Offering – In September 2010, we completed the offering of 3.3 million shares of our 8.45% Series D Cumulative Preferred Stock at a gross price of $23.178 per share, and received net proceeds of $72.2 million after underwriting fees and other costs and an accrued dividend of $1.6 million. The proceeds from the offering, together with some corporate funds, were used to pay down $80.0 million of our senior credit facility.

Restructuring of Mezzanine Loans – In July 2010, as a strategic complement to our existing joint venture with Prudential Real Estate Investors (“PREI”) in 2008, we contributed $15 million for an ownership interest in a new joint venture with PREI. The new joint venture acquired a tranche 4 mezzanine loan associated with JER Partner’s 2007 privatization of the JER/Highland Hospitality portfolio. The mezzanine loan is secured by the same 28 hotel properties as our existing joint venture investment in tranche 6 of the mezzanine loan portfolio, which has been fully reserved at December 31, 2010. The borrower of these mezzanine loans stopped making debt service payments in August 2010. We are currently pursuing our remedies under the loan documents, as well as negotiating with the borrowers, their equity holders, senior secured lenders and senior mezzanine lenders and PREI with respect to a possible restructuring of the mezzanine tranches owned by our joint ventures and PREI and of the indebtedness senior to such tranches. As we hold our JER/Highland Hospitality loans in joint ventures, our participation in a possible restructuring, including a conversion of the loans into equity and assumption of senior indebtedness associated with the portfolio, would be through a joint venture with PREI or PREI and a third party.

Settlement of Notes Receivable – In August 2010, we reached an agreement with the borrower of the $7.1 million junior participation note receivable secured by a hotel property in La Jolla, California, to settle the loan which had been in default since March 2009. Pursuant to the settlement agreement, we received total cash payments of $6.2 million in 2010 and recorded a net impairment charge of $836,000.

In May 2010, the senior mortgage lender foreclosed on the loan secured by the Four Seasons hotel property in Nevis in which we had a junior participation interest of $18.2 million. Our entire principal amount was fully reserved in 2009. As a result of the foreclosure, our interest in the senior mortgage was converted to a 14.4% subordinate beneficial interest in the equity of the trust that holds the hotel property. Due to our junior status in the trust, we have not recorded any value for our beneficial interest as of December 31, 2010.

In May 2010, the mezzanine loan secured by the Le Meridien hotel property in Dallas, Texas was settled with a cash payment of $1.1 million. The loan was fully reserved during the second quarter of 2009 as the borrower ceased making debt service payments on the loan. As a result of the settlement, the $1.1 million was recorded as a credit to impairment charges in accordance with authoritative accounting guidance for impaired loans.

In February 2010, the mezzanine loan secured by the Ritz-Carlton hotel property in Key Biscayne, Florida, with a principal amount of $38.0 million and a net carrying value of $23.0 million at December 31, 2009 was restructured. In connection with the restructuring, we received a cash payment of $20.2 million and a $4.0 million note receivable. We recorded a net impairment charge of $10.7 million in 2009 on the original mezzanine loan. The interest payments on the new note are recorded as a reduction of the principal of the note receivable, and the valuation adjustments to the net carrying amount of this note are recorded as a credit to impairment charges.

In February 2010, we and the senior note holder of the participation note receivable formed a joint venture (the “Redus JV”) for the purposes of holding, managing or disposing of the Sheraton hotel property in Dallas, Texas, which collateralized the senior note participation and our $4.0 million junior participating note receivable. The note receivable was fully reserved in 2009. We have an 18% subordinated interest in Redus JV. In March 2010, the foreclosure was completed and the estimated fair value of the property was $14.2 million based on a third-party appraisal. Pursuant to the operating agreement of Redus JV, as a junior lien holder of the original participation note receivable, we are only entitled to receive our share of distributions after the original senior note holder has recovered its original investment of $18.4 million and Redus JV intends to sell the hotel property in the next 12 months. It is unlikely that the senior holder will be able to recover its original investment. Therefore, no cash flows were projected from Redus JV for the projected holding period. Under the applicable authoritative accounting guidance, we recorded a zero value for our 18% subordinated interest in Redus JV.

Debt Modifications, Repayments and Settlement – The $101.0 million non-recourse mortgage loan secured by the Westin O’Hare hotel property in Rosemont, Illinois was settled in September 2010 through a consensual transfer of the underlying hotel property to the lender. We recorded a gain of $56.2 million on the consensual transfer. An impairment charge of $59.3 million was previously recorded on this property in 2009 as we wrote down the hotel property to its estimated fair value. The operating results of the hotel property, including the gain from the disposition, have been reclassified to discontinued operations for all periods presented in the consolidated statements of operations.

With proceeds from the above mentioned equity offerings, sale of hotel properties and debt refinancing we made a net paydown of $135.0 million on our senior credit facility during 2010 to reduce its outstanding balance to $115.0 million at December 31, 2010.

In July 2010, we modified the mortgage loan secured by the JW Marriott hotel property in San Francisco, California, to change the initial maturity date to its fully extended maturity of March 2013 in exchange for a principal payment of $5.0 million. This hotel property was subsequently sold in February 2011 and the related mortgage loan was repaid at closing along with miscellaneous fees of approximately $476,000.

Effective April 1, 2010, we completed the modification of the $156.2 million mortgage loan secured by two hotel properties in Washington D.C. and La Jolla, California. Pursuant to the modified loan agreement, we obtained the full extension of the loan to August 2013 without any extension tests in exchange for a $5.0 million paydown. We paid $2.5 million of the paydown amount at closing, and the remaining $2.5 million is payable quarterly in four consecutive installments of $625,000 each with the last installment due on April 1, 2011. We paid a modification fee of $1.5 million in lieu of the future extension fees. The modification also modifies covenant tests to minimize the likelihood of additional cash being trapped.

In March 2010, we elected to cease making payments on the $5.8 million mortgage note payable maturing in January 2011, secured by a hotel property in Manchester, Connecticut, because the anticipated operating cash flows from the underlying hotel property had been insufficient to cover the principal and interest payments on the note. As of the date of this report, the loan has been transferred to a special servicer. We are currently working with the special servicer for an extension or restructuring of the mortgage note.

Repurchases of Common Shares and Units of Operating Partnership – During 2010, we repurchased 7.2 million shares of our common stock for a total cost of $45.1 million pursuant to a previously announced stock repurchase plan. As of June 2010, we ceased all repurchases under the plan indefinitely. During 2010, 719,000 operating partnership units were redeemed at an average price of $7.39 per unit. We redeemed these operating partnership units for cash rather than electing to satisfy the redemption request through the issuance of common shares and paid a total redemption cost of $5.3 million to the unit holders during 2010. Additional 455,000 operating partnership units presented for redemption in 2010 were converted to common shares at our election.

LIQUIDITY AND CAPITAL RESOURCES

Our cash position from operations is affected primarily by macro industry movements in occupancy and rate as well as our ability to control costs. Further, interest rates greatly affect the cost of our debt service as well as the financial hedges we put in place. We monitor very closely the industry fundamentals as well as interest rates. The strategy is that if the economy underperforms (negatively affecting industry fundamentals), some or all of the loss in cash flow should be offset by our financial hedges due to, what we believe to be, the expectation that the Federal Reserve will probably keep interest rates low. Alternatively, if the Federal Reserve raises interest rates because of inflation, our properties should benefit from the ability to rapidly raise room rates in an inflationary environment. Capital expenditures above our reserves will affect cash flow as well.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

EXECUTIVE OVERVIEW
General
Following a recession that lasted over two years, beginning in 2010 the lodging industry started experiencing improvement in fundamentals, specifically occupancy and this improvement has continued into 2011. Room rates, measured by the average daily rate, or ADR, which typically lags occupancy growth in the early stage of a recovery, have shown upward growth. We believe the improvements in the economy will continue to positively impact the lodging industry and hotel operating results for 2011. Our business strategy is to take advantage of the cyclical nature of the hotel industry. We believe that in the current cycle, hotel values and cash flows, for the most part, peaked in 2007, and we believe we will not achieve similar cash flows and values in the immediate future. Industry experts have suggested that cash flows within our industry may achieve these previous highs again in 2014 through 2016.
Based on our primary business objectives and forecasted operating conditions, our current key priorities and financial strategies include, among other things:
• acquisition of hotel properties;

• disposition of hotel properties;

• investing securities;

• pursuing capital market activities to enhance long-term shareholder value;

• repurchasing capital stock subject to regulatory limitations and our Board of Directors’ authorization;

• preserving capital, enhancing liquidity, and continuing current cost saving measures;

• implementing selective capital improvements designed to increase profitability;

• implementing effective asset management strategies to minimize operating costs and increase revenues;

• financing or refinancing hotels on competitive terms;

• utilizing hedges and derivatives to mitigate risks; and

• making other investments or divestitures that our Board of Directors deems appropriate.
Our investment strategies continue to focus on the upscale and upper-upscale segments within the lodging industry. We believe that as supply, demand, and capital market cycles change, we will be able to shift our investment strategies to take advantage of new lodging-related investment opportunities as they may develop. Our Board of Directors may change our investment strategies at any time without shareholder approval or notice.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position from operations is affected primarily by macro industry movements in occupancy and rate as well as our ability to control costs. Further, interest rates greatly affect the cost of our debt service as well as the financial hedges we put in place. We monitor very closely the industry fundamentals as well as interest rates. The strategy is that if the economy underperforms (negatively affecting industry fundamentals), some or all of the loss in cash flow should be offset by our financial hedges due to, what we believe to be, the expectation that the Federal Reserve will probably keep interest rates relatively low. Alternatively, if the Federal Reserve raises interest rates because of inflation, our properties should benefit from the ability to rapidly raise room rates in an inflationary environment. Capital expenditures above our reserves will affect cash flow as well.
In September 2011, we entered into an at-the-market (“ATM”) program with an investment banking firm to authorize the issuance of up to 700,000 shares of our 8.55% Series A Cumulative Preferred Stock and up to 700,000 shares of our 8.45% Series D Cumulative Preferred Stock at market prices up to $30.0 million. No shares were sold as of the date of this report. In September 2010, we entered into an ATM program with an investment banking firm to offer for sale from time to time up to $50.0 million of our common stock at market prices. No shares were sold during the nine months ended September 30, 2011. Proceeds from our ATM programs, to the extent the programs are utilized, are expected to be used for general corporate purposes including investments and reduction of debt.
In February 2010, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Master SPV Ltd. (“YA Global”) that terminates in 2013, and is available to provide us additional liquidity if needed. Pursuant to the SEDA, YA Global has agreed to purchase up to $50.0 million (which may be increased to $65.0 million pursuant to the SEDA) of newly issued shares of our common stock if notified to do so by us in accordance with the SEDA. No shares were sold during the nine months ended September 30, 2011.
Our principal sources of funds to meet our cash requirements include: positive cash flow from operations, capital market activities, property refinancing proceeds, asset sales, and net cash derived from interest rate derivatives. Additionally, our principal uses of funds are expected to include possible operating shortfalls, owner-funded capital expenditures, new investments and debt interest and principal payments. Items that impacted our cash flow and liquidity during the periods indicated 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 $64.4 million and $78.4 million for the nine months ended September 30, 2011 and 2010, respectively. The decrease in cash flows from operating activities was primarily due to the purchase of $20.0 million in trading securities, the timing of collecting receivables from hotel guests, paying vendors and settling with hotel managers and an increase in restricted cash due to additional cash deposits for certain debt services and capital expenditures. The increase was partially offset by a net litigation settlement payment of $23.1 million.
Net Cash Flows Used in Investing Activities. For the nine months ended September 30, 2011, investing activities used net cash flows of $25.9 million. Cash outlays consisted of $145.3 million for the acquisition of the 71.74% interest in PIM Highland JV 28-hotel properties, $12.0 million for the acquisition of investment in hotel condominiums, and $45.9 million for capital improvements made to various hotel properties. Cash inflows consisted of $154.0 million from the sale of four hotel properties and two condominium properties, $22.6 million from repayment of mezzanine loans and $748,000 of insurance proceeds from settlement of insurance claims. For the nine months ended September 30, 2010, investing activities used net cash flows of $36.2 million. Principal payments on notes receivable generated total cash of $23.8 million and the net cash proceeds from disposition of hotel properties was $1.4 million. We received $4.9 million net cash proceeds from the sale of the Hilton Suites in Auburn Hills, Michigan and a cash balance of $3.5 million was removed from our consolidated balance sheet as the Westin O’Hare hotel property was deconsolidated at the completion of the deed-in-lieu of foreclosure. Cash outlays consisted of a $15.0 million cash contribution to a joint venture for an ownership interest in an $80.0 million principal balance mezzanine loan and capital improvements of $46.5 million made to various hotel properties.
Net Cash Flows Used in Financing Activities. For the nine months ended September 30, 2011, net cash flows used in financing activities were $75.3 million. Cash outlays consisted of $73.0 million for the repurchase of our Series B-1 preferred stock, $37.1 million for dividend payments to common and preferred stockholders and unit holders, $3.6 million payment for loan modification and extension fees, $206.0 million for repayments of indebtedness and capital leases, and $3.0 million distribution to a noncontrolling interest joint venture partner. These cash outlays were partially offset by cash inflows of $80.8 million from issuance of Series E preferred stock, $25.0 million borrowings from our senior credit facility, $86.1 million from issuance of 7.3 million shares of common stock, $54.6 million from the counterparties of our interest rate derivatives, and $970,000 from a large shareholder (greater than 10% of a class of equity securities) for short swing profit and buy-in payments from the issuance of operating partnership units. For the nine months ended September 30, 2010, net cash flows used in financing activities were $135.2 million. Cash outlays consisted of $45.1 million for purchases of common stock, $16.7 million for dividend payments to preferred shareholders and unit holders, $3.2 million payment for loan modification and extension fees, $189.0 million for repayments of indebtedness and capital leases, $5.3 million for the redemption of operating partnership units, and $275,000 distribution to a noncontrolling interest joint venture partner. These cash outlays were partially offset by cash inflows of $72.1 million from issuance of 3.3 million shares of Series D preferred stock, $47.1 million from the counterparties of our interest rate derivatives, $4.0 million additional borrowing on a mortgage note, and $1.0 million of contributions from a noncontrolling interest joint venture partner.
We are required to maintain certain financial ratios under various debt and derivative agreements. If we violate covenants in any debt or derivative agreement, 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, maintaining an overall minimum net worth, maintaining a maximum loan to value ratio, and maintaining an overall minimum total assets. As of September 30, 2011, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended with the exception of one loan in the principal amount of $167.2 million that is collateralized by a portfolio of 10 hotels. Under this loan, excess cash flow (in excess of working capital that may be retained under the applicable management agreement) is required to be delivered as additional collateral to the lender for so long as the applicable cash trap under the loan documents is in effect, which is currently the case. As of September 30, 2011, there was approximately $9.4 million in excess that had not yet been remitted to the lender by our hotel managers.
Virtually, our only recourse obligation is our $105 million senior credit facility held by four banks, which expires in September 2014. Currently, there is no outstanding balance on this credit facility. The main covenants in this senior credit facility include (i) the minimum fixed charge coverage ratio, as defined, of 1.35x through expiration (ours was 1.72x at September 30, 2011); and (ii) the maximum leverage ratio, as defined, of 65% (ours was 59.4% at September 30, 2011). In the event we borrow on this credit facility, we may be unable to refinance a portion or all of this senior credit facility before maturity, and if it becomes necessary to pay down the principal balance, if any, at maturity, we believe we will be able to accomplish that with cash on hand, cash flows from operations, equity raises or, to the extent necessary, asset sales.
Based upon the current level of operations, management believes that our cash flow from operations along with our cash balances and the amount available under our senior credit facility ($105.0 million at September 30, 2011) will be adequate to meet upcoming anticipated requirements for interest and principal payments on debt, working capital, and capital expenditures for the next 12 months. With respect to upcoming maturities, we will continue to proactively address our upcoming 2011 and 2012 maturities. 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 debt financing on individual properties.

We are committed to an investment strategy where we will opportunistically pursue hotel-related investments as suitable situations arise. Funds for future hotel-related investments are expected to be derived, in whole or in part, from cash on hand, future borrowings under a credit facility or other loans, or from proceeds from additional issuances of common stock, preferred stock, or other securities, asset sales, and joint ventures. However, we have no formal commitment or understanding to invest in additional assets, and there can be no assurance that we will successfully make additional investments. We may, when conditions are suitable, look at additional capital raising opportunities.
Our existing hotels are mostly 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.
Dividend Policy . In February 2011, the Board of Directors accepted management’s recommendation to resume paying cash dividends on our common stock with an annualized target of $0.40 per share for 2011. The dividend of $0.10 per share per quarter for the first three quarters of 2011 has been paid, and subsequent payments will be reviewed on a quarterly basis. We may 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. Or, we may elect to pay dividends on our common stock in cash or a combination of cash and shares of securities as permitted under federal income tax laws governing REIT distribution requirements. We may pay dividends in excess of our cash flow.

Corporate General and Administrative. Corporate general and administrative expenses increased to $9.1 million for the 2011 quarter compared to $7.7 million for the 2010 quarter. The non-cash equity-based compensation expense increased $1.1 million, primarily due to the higher expense recognized on the restricted equity-based awards granted since September 30, 2010 at higher costs per share. Other corporate general and administrative expenses increased $254,000 during the 2011 quarter primarily attributable to additional compensation and legal costs. The 2011 quarter also included a credit of $846,000 in reimbursements from the PIM Highland JV.
Equity in Earnings (Loss) of Unconsolidated Joint Ventures. We recorded an equity loss in our unconsolidated joint ventures of $6.2 million for the 2011 quarter and an equity income of $3,000 for the 2010 quarter, respectively.
Interest Income. Interest income was $11,000 and $114,000 for the 2011 quarter and the 2010 quarter, respectively.
Other Income. Other income was $17.3 million and $15.9 million for the 2011 quarter and the 2010 quarter, respectively. Income on our interest rate derivatives was $18.2 million and $15.9 million for the 2011 quarter and the 2010 quarter, respectively. For the 2011 quarter, other income also included a net investment loss of $845,000 on investment in securities and credit default swap premium amortization of $8,000.
Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs decreased $709,000 to $34.5 million for the 2011 quarter from $35.2 million for the 2010 quarter. The decrease is primarily attributable to the interest savings from the repayment of our senior credit facility and other mortgage indebtedness since September 30, 2010, which was partially offset by an increase in interest expense resulting from certain mortgage loans refinanced at higher rates.
Write-off of Deferred Loan Costs. In the 2011 quarter, we repaid the outstanding balance on the $250.0 million senior credit facility, terminated the credit facility and wrote off the unamortized deferred loan cost of $729,000.
Unrealized Gain on Investments. We recorded unrealized gain of $1.2 million on investment in securities based on the closing price of securities during the 2011 quarter.
Unrealized Gain (Loss) on Derivatives. Unrealized gain (loss) on derivatives represents primarily the changes in fair value of the interest rate swap, floor, flooridor and cap transactions we entered into since March 2008 which were not designated as cash flow hedges. It also reflects the changes in the credit default swaps we entered into during the 2011 quarter and the investment in security derivatives we executed since June 2011. We recorded a net unrealized loss of $18.3 million for the 2011 quarter, consisting of unrealized losses of $18.2 million on the interest rate derivatives and $1.6 million on investment in security derivatives, and an unrealized gain of $1.5 million from the credit default swaps. For the 2010 quarter, we recognized unrealized gain of $382,000 on the interest rate derivatives. The fair value of interest rate derivatives decreased during the 2011 quarter primarily due to the movements in the LIBOR forward curve used in determining the fair value and the passage of time. The investment in securities decreased in value as a result of the overall security market fluctuations. The increase in value of the credit default swaps is attributable to the change in value of the CMBX indices.
Income Tax Expense. We recorded an income tax expense from continuing operations of $1.1 million for the 2011 quarter and a benefit of $22,000 for the 2010 quarter. The increase in tax expense in the 2011 quarter is primarily due to increased profitability in certain of our TRS subsidiaries. In addition, in 2011, we were unable to continue recording the state tax benefits from losses incurred by one of our joint ventures as realization of a net deferred tax asset became doubtful due to cumulative losses.
Income (Loss) from Discontinued Operations. Discontinued operations reported loss from operations of $351,000 for the 2011 quarter and income of $53.0 million for the 2010 quarter. We recorded an additional loss of $417,000 for the Hampton Inn hotel property in Jacksonville, Florida during the 2011 quarter. Discontinued operations for the 2010 quarter also included the operating results of the Hilton Suites in Auburn Hills, Michigan that was sold in September 2010 and the Westin O’Hare, Illinois that was deconsolidated at the closing of the deed-in-lieu of foreclosure in September 2010. Income from discontinued operations for the 2010 quarter included a loss of $280,000 recorded at the sale of the Auburn Hills hotel property and a gain of $56.2 million recorded on the consensual transfer of the Westin O’Hare hotel property.

(Income) Loss from Consolidated Joint Ventures Attributable to Noncontrolling Interests. The noncontrolling interest partners in consolidated joint ventures were allocated losses of $832,000 and $293,000 for the 2011 quarter and the 2010 quarter, respectively.
Net (Income) Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership. The noncontrolling interests in the operating partnership were allocated a net loss of $2.9 million in the 2011 quarter and net income of $6.7 million in the 2010 quarter. The redeemable noncontrolling interests represented ownership interests of 19.3% and 21.9% in the operating partnership at September 30, 2011 and 2010, respectively. The decrease was primarily due to the net increase in common stock outstanding resulting from the issuance of additional shares of our common stock and the grants of equity-based compensation, net of the effect of the units redeemed and converted since September 30, 2010.
Comparison of the Nine Months Ended September 30, 2011 with Nine Months Ended September 30, 2010
Revenue. Room revenue of comparable hotels for the nine months ended September 30, 2011 (the “2011 period”) increased $31.8 million, or 6.7%, to $506.7 million from $474.9 million for the nine months ended September 30, 2010 (the “2010 period”). The increase in room revenue was primarily due to the continued improvements in occupancy coupled with the increase in average daily rate. During the 2011 period, we experienced a 207 basis points increase in occupancy and a 3.7% increase in room rates as the economy continues to improve. Food and beverage of comparable hotels experienced a similar increase of $4.1 million, or 3.8%, due to improved occupancy. Other revenue of compable hotels experienced an increase of $75,000. Rental income from the triple-net operating lease increased $280,000 primarily due to higher hotel revenues related to that property during the 2011 period resulting from improved ADR and the effect of higher occupancy. The remaining increase in total hotel revenue of $3.0 million is attributable to the acquisition of the WorldQuest condominium properties in March 2011.
No interest income from notes receivable has been recorded for the 2011 period as the remaining two mezzanine loans in our loan portfolio as of December 31, 2010 were impaired in the previous two years. Interest income on notes receivable was $1.0 million for the 2010 period. We recorded a credit to impairment charges of $4.7 million and $1.3 million for the 2011 period and the 2010 period, respectively. In April 2011, we entered into a settlement agreement with the borrower of the mezzanine loan which was secured by a 105-hotel property portfolio and scheduled to mature in April 2011. The borrower repaid the loan for $22.1 million. The mezzanine loan had a carrying value of $17.9 million at March 31, 2011 and December 31, 2010, after an impairment charge of $7.8 million was recorded at December 31, 2010. The difference of $4.2 million between the settlement amount and the carrying value was recorded as a credit to impairment charges in accordance with applicable accounting guidance. During the 2010 period, impairment charges included a credit of $1.1 million on the cash settlement of a mezzanine loan that was previously impaired.
Asset management fees and other were $217,000 and $312,000 for the 2011 period and the 2010 period, respectively.
Hotel Operating Expenses. We experienced increases of $9.4 million in direct expenses and $8.3 million in indirect expenses and management fees in the 2011 period. The increase in direct and indirect expenses from comparable hotels was $8.5 million and $7.0 million, respectively. The increase in these expenses is primarily attributable to higher occupancy and higher management fees resulting from increased hotel revenues, and higher sales and marketing expenses. The WorldQuest condominium properties incurred $2.1 million in total hotel operating expenses during the 2011 period. The direct expenses were 32.4% of total hotel revenue for the 2011 period and 32.9% for the 2010 period.
Property Taxes, Insurance and Other. Property taxes, insurance and other decreased $2.7 million for the 2011 period to $35.0 million. The decrease is primarily due to a $2.2 million reduction in property taxes resulting from our continued successful appeals as we secured significant reductions in the assessed value related to certain of our hotel properties. The decrease in these expenses also reflects a decline of $197,000 of other taxes, a gain of $340,000 recognized on an insurance claim and other activities in the 2011 period.
Depreciation and Amortization. Depreciation and amortization decreased $197,000 for the 2011 period compared to the 2010 period, primarily due to certain assets that had been fully depreciated since September 30, 2010, which is partially offset by an increase in depreciation expense resulting from capital improvements made at certain hotel properties since September 30, 2010.

CONF CALL

Scott Eckstein

Good day, everyone, and welcome to Ashford Hospitality Trust conference call to review the company’s results for the fourth quarter of 2011.

On the call today will be Monty Bennett, Chief Executive Officer; Douglas Kessler, President; and David Kimichik, Chief Financial Officer.

The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in the press release that has been covered by the Financial Media.

At this time, let me remind you that certain statements and assumptions in this conference call contain are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled “Risk Factors” in Ashford’s Registration Statement on Form S-3 and other filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on February 22, 2012, and may also be accessed through the company’s website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release.

I will now turn the call over to Monty Bennett. Please go ahead, sir.

Monty Bennett

Thank you, and good morning. I’m pleased to report on our record setting performance. Our AFFO per share of $0.42 was our strongest fourth quarter in our history and our eighth consecutive quarterly AFFO per share increase.

For the full year, AFFO per share of $1.86 was also our highest ever reported and reflects 24% growth over last year. The 2011 AFFO marks seven out of eight years of record AFFO per share performance and demonstrates that our strategies to maximize returns while mitigating risks continued to create shareholder value.

Given our record performance and forecast, in December we increase Ashford’s 2012 dividend guidance by 10%. We expect to distribute a quarterly cash dividend of $0.11 per common share or $0.44 per common share on an annualized basis. Since our last conference call in November, the U.S. economy has continued to show resiliency despite persisting global market concerns.

U.S. hotel demand continues to increase with RevPAR growth well above historical average growth rates. Meanwhile, new room supply remains extremely low for the foreseeable future. Clearly, the fundamentals exist for continued improvement in the performance of the lodging REIT.

Even in moderate U.S. economic growth should result in higher than average RevPAR growth. The recent forecasts from PTF suggest national RevPAR growth for the next couple of years to be 6.1% to 7.3%. These levels are well above the industry’s 1988 to 2010 average RevPAR growth of 2.5%.

On historical basis real RevPAR still remains far below prior peak cycle levels. Given that with each recent cycle, the new real RevPAR peak exceeded the prior peak and it’s expected that the same could occur in this cycle. Since the hotel industry is still in the early stage of this recovery, it remains very good time to invest in lodging REITs.

In particular, we certainly believe that our combined strategic benefits of financial leverage and solid operational performance should position us to outperform our peers over the long run in terms of total shareholder return.

We are pleased with the EBITDA flows of 55% margin improvement of 143 basis points for our legacy portfolio. While the total U.S. hotel market RevPAR grew at 7.9% in the fourth quarter, our legacy portfolio RevPAR grew at 5.4%. The reason for this discrepancy lay in the fact that our MSAs modestly underperformed the national average with 7.2% growth but these particular MSAs are upper upscale comp sets further underperformed. Our assets RevPAR growth matched that of our comp sets though.

Similarly, in the Highland portfolio, we are very pleased with our EBITDA flows of 97% and margin improvement of 114 basis points. Nationwide airport and urban locations underperformed, which is where the Highland assets are concentrated, and accounts for most of the difference in performance.

We do not see this underperformance as a long-term trend. There was also a modest impact due to innovations.

Lastly, the conversion of the Hilton Boston Back Bay and the Hyatt Wind Watch from brand managed assets to franchises had a temporary impact. While these changes created a short-term revenue disruption during the fourth quarter, this management shift as part of the continuing integration of the Highland portfolio. We expect these nearly franchise hotels to generate long-term value creation to enhance revenue realization and additional cost savings.

We believe there is also the added property value created through lower cap rates by having hotels that are unencumbered by long-term brand management contracts that are also terminable upon sale.

Just closing the Highland portfolio acquisition in March 2011, the portfolio has achieved trailing 12 months increases of 8.7% in EBITDA and 10% in NOI. To-date, we are fine with our original underwriting performance for the investment and anticipate that the operational changes and capital expenditures will continue to drive performance. We expect both the revenue and EBITDA performance of the Highland investment to demonstrate continued improvement, as the hotels and the portfolio benefit from Ashford’s proactive asset management practices. We still have work to do to optimize all the value-added opportunities we see from this portfolio, but we are pleased with our progress so far.

Looking ahead, we expect U.S. economic conditions to improve gradually. However, we may seen a very watchful eye on sovereign financial and other event risks. The markets are still responding to global headlines that appear to be decoupled from the strong U.S. lodging fundamentals. The risk on and risk off market titrations are creating volatility. Assuming the ongoing global uncertainties, we believe it’s prudent for Ashford’s to take a very measured approaches to our capital utilization. We should expect this to pursue strategies, seek to balance risk mitigation, and shareholder return maximization.

With that, I’ll now like to turn to call over David Kimichik to review our financial results.

David Kimichik

Thanks Monty. For the fourth quarter, we reported a net loss to common shareholders of $18,332,000, adjusted EBITDA of $71,010,000, and AFFO of $34,930,000 or $0.42 per diluted share.

At quarter’s end, Ashford had total asset of $3.6 billion in continuing operation, and $4.6 billion overall including the Highland portfolio, which is not consolidated. We had $2.4 billion of mortgage debt in continuing operations and $3.2 billion overall including Highland. Our total combined debt has a blended average interest rate of 3.4%, clearly one of the lowest among our peers, with maturing at some of our swap positions, we currently have 52% fixed rate debt, and 38% floating rate. The weighted average maturity is 4.1 years.

Since the length of the swaps is not matched with term of the underlying fixed rate debt, for GAAP purposes the swap is not considered an effective hedge. The result of this is that the changes in market value of these instruments must run through our P&L each quarter as unrealized gains or losses on derivative. These are non-cash entries that will affect our net income, will be added back for purposes of calculating our AFFO. For the fourth quarter, it was a loss of $17.5 million and for the year it was a loss of $70.3 million.

During the quarter, we converted our 89% interest in a triple-net lease, at the Courtyard in Philadelphia to a 100% ownership position in our long-term management contract. At closed end, our legacy portfolio consists of 96 hotels in continuing operations, containing 20,395 rooms. Additionally we own 71.74% of the 28 Highland hotels, containing 5,800 net rooms in a joint venture. All combined, we currently own a total of 26,195 net rooms.

As of quarter end, we are in a position in just one performing mezzanine loan, the Ritz-Carlton in Key Biscayne, Florida with an outstanding balance of $4 million. Hotel operating profit for all hotels, including Highland, was up by $7.8 million or 9.9% for the quarter.

Our quarter-end adjusted EBITDA fixed charge ratio for our credit facility now stands at 1.70 times versus a required minimum of 1.35 times. Our share count currently stands at 84.3 million fully diluted shares outstanding, which is comprised of 68 million common shares and 16.3 million OP units.

I’d like to turn over the call to Douglas to discuss our capital market strategies.

Douglas Kessler

Thank you, and good morning. We remain cautiously optimistic about the near-term U.S. lodging performance, but there is still risks with the general economy and abroad.

We are closely monitoring trends and drawing comparisons to the outcomes from similar historical events to assist in our strategic decision-making. Therefore, we’re moving forward on parallel paths, taking steps to ensure that we have sufficient capital and liquidity to be prepared for economic uncertainties or simultaneously positioning the company to have the resources to deploy capital strategically for opportunistic investments that arise.

In October, we priced a public offering of 1.3 million shares of our existing 9% Series E cumulative preferred stock at $23.47 per share including accrued dividend. This generated net proceeds of $28.9 million after underwriting fees.

Also, subsequent to the end of the quarter, we upsized our currently undrawn credit facility to $145 million borrowing base for our pre-existing accordion feature. As part of this modification, we also added the option to further expand the facility to an aggregate size of $225 million. There were no other changes to the terms of the loan. In the process, we added Deutsche Bank to our lending group, which already consists of KeyBanc, Credit Suisse, Morgan Stanley, and UBS.

We believe that having this added access to capital is worthwhile, whether for defensive or investment growth purposes. All other Company debt is non-recourse.

Turning to risk mitigation. In December, we successfully restructured our $203.4 million mortgage loan and extended the maturity date from December 2011 to March 2014 with an additional one-year extension option subject to certain conditions. We paid down the loan by $25 million to $178.4 million. Additionally 85% of the excess cash flow after debt service working capital and approved capital expenditures will be used to pay down the debt balance and thereby further deleverage the portfolio.

In 2012, we only have one non-extendable maturity in May, on $167 million dollar loan balance. We are in discussion with lenders to restructure or refinance this loan. We believe that with market conditions improving and the available loan allocations for the start of the year that we will be able to obtain a new or restructured loan on this portfolio.

Well that will rightly require some debt paydown, we believe we have adequate reserves. We will provide updates as available, but typically we would not expect to sharing specific news, until we get closer to the maturity date. Regarding transactions, we’re beginning to see opportunities that meet out investment return criteria. Our financial resources will position us to selectively purse accretive investment opportunities that may arise. Our clear goal of maximizing shareholders returns remains in line with our investors given our high insight of ownership of approximately 19%.

That concludes our prepared remarks and we will now open it up for your questions.

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