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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 1-11527

HOSPITALITY PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

617-964-8389

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

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 definition of “large accelerated filer, accelerated filer” and “smaller reporting company” in Rule 12b—2 of the Exchange Act.

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

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of May 6, 2009: 93,992,635

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HOSPITALITY PROPERTIES TRUST

FORM 10-Q

March 31, 2009

INDEX

References in this Form 10-Q to “HPT”, “we”, “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

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PART I                               Financial Information

Item 1.  Financial Statements

HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except share data)

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

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HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

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

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HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

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

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HOSPITALITY PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

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

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Hospitality Properties Trust and its subsidiaries have been prepared without audit. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended.  In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.  These condensed consolidated financial statements include the accounts of HPT and its subsidiaries, all of which are 100% owned directly or indirectly by HPT.  All intercompany transactions and balances have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets and impairment.

We have determined that each of our taxable REIT subsidiaries, or TRSs, is a variable interest entity as defined under Financial Accounting Standards Board, or FASB, Interpretation No. 46 (R), “Consolidation of Variable Interest Entities”, or FIN 46.  Under FIN 46, the entity that receives the majority of the potential variability in gains and losses of the variable interest entity, with the primary focus on losses, is the variable interest entity’s primary beneficiary, and is required to consolidate the variable interest entity.  When one of our TRSs enters a new operating agreement or materially modifies an existing operating agreement with a third party hotel manager we are required to assess if our TRS or the hotel manager is or continues to be the primary beneficiary.  This assessment requires us to make estimates of the future cash flows of our TRS.  Incorrect assumptions or estimates of, among other things, occupancy, average daily room rate and operating expenses of our hotels may result in an inaccurate determination of the primary beneficiary.  We have concluded that we must consolidate each of our TRSs because we are the primary beneficiary.

Note 2.  Revenue Recognition

We report hotel operating revenues for managed hotels in our condensed consolidated statements of income. We generally recognize hotel operating revenues, consisting primarily of room, food and beverage sales, when services are provided. Our share of the net operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. We recognize additional returns due to us under our management agreements at year end when all contingencies are met and the income is earned. We had deferred additional returns of $0 and $3,460 for the three months ended March 31, 2009 and 2008, respectively.

We recognize rental income from operating leases on a straight line basis over the life of the lease agreements. Rental income includes $0 and $3,794 for the three months ended March 31, 2009 and 2008, respectively, of adjustments necessary to record rent on the straight line basis.  In the 2008 second quarter, we ceased recognition of straight line revenue relating to our lease with TravelCenters of America LLC, or TA,  for 145 travel centers and recorded a $19,613 charge to fully reserve the existing straight line rent receivable.  See Note 10 for further information relating to TA.

We determine percentage rent due to us under our leases annually and recognize it at year end when all contingencies are met and the rent is earned. We had deferred percentage rent of $675 and $1,552 for the three months ended March 31, 2009 and 2008, respectively.

We own all the capital expenditure reserves, or FF&E reserve escrows, for hotels leased to our TRSs and leased to third parties. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.  We report deposits by our third party tenants into the escrow accounts as FF&E reserve income.

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 3.  Per Common Share Amounts

We compute per common share amounts using the weighted average number of common shares outstanding during the period. We had no dilutive common share equivalents at March 31, 2009 or 2008.

Note 4.  Shareholders’ Equity

On January 15, 2009, we paid a $0.5546875 per share distribution to our Series B preferred shareholders with respect to the periods ended January 14, 2009.  On March 2, 2009, we declared a $0.5546875 per share distribution to Series B preferred shareholders of record on March 31, 2009, with respect to the period ended April 14, 2009. We paid this amount on April 15, 2009.

On February 17, 2009, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended February 16, 2009.  On April 8, 2009, we declared a distribution of $0.4375 per Series C preferred shares to shareholders of record May 1, 2009, with respect to the period ending May 14, 2009. We expect to pay this amount on or about May 15, 2009.

On February 25, 2009, we paid a $0.77 per share distribution to our common shareholders for the quarter ended December 31, 2008.

On February 26, 2009, we issued 1,000 common shares, at a price of $11.65, the closing price of our common shares on the New York Stock Exchange on that day, to our new trustee as part of his annual compensation.

On April 8, 2009, we announced the suspension of our regular quarterly common share distribution for the remainder of 2009.  During the fourth quarter of 2009, we expect to re-evaluate capital market conditions and our own earnings in order to determine what amount of common share distributions will be paid in 2009.

Note 5.  Indebtedness

During the three months ended March 31, 2009, we repurchased $121,330 of our 3.8% convertible senior notes at a total cost of $87,517, excluding accrued interest, and recognized a gain on extinguishment of debt of $26,555, net of unamortized discount and issuance costs.

We have a $750,000 interest only, unsecured revolving credit facility. Our credit facility matures in October 2010 and may be extended at our option to October 2011 upon payment of a fee. The interest rate on drawings under the credit facility is LIBOR plus a spread (1.08% per annum at March 31, 2009). As of March 31, 2009, we had $546,000 outstanding under our revolving credit facility and $204,000 available to be drawn for general business purposes, including acquisitions.

In April and May of 2009, we repurchased an aggregate of $57,171 original principal amount of various issues of our senior notes for approximately $45,239, excluding accrued interest.  We expect to record a gain of approximately $11,653, net of unamortized discount and issue costs, on the early extinguishment of this debt in the second quarter of 2009.

Note 6.  Real Estate Properties

At March 31, 2009, we owned 474 properties, 289 hotels and 185 travel centers.  All of these properties are operated under 13 management agreements or leases.

During the three months ended March 31, 2009, we funded $49,406 of improvements to certain of our properties, which resulted in a $4,040 increase in our annual minimum returns and rents.

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 7. Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements.  We are subject to income tax in Canada, Puerto Rico and certain states despite our REIT status.  Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes.  Our consolidated income tax provision (or benefit) includes the income tax provision (or benefit) related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our REIT status.  During the three months ended March 31, 2009, we recognized current tax expense of $373, which includes $34 of foreign taxes and $368 of federal alternative minimum tax and certain state taxes that are payable without regard to our TRS tax loss carry forwards. In addition, during the three months ended March 31, 2009 we recognized a deferred tax benefit of $29 related to a tax versus book basis difference at our Puerto Rico hotel.

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 8.  Segment Information

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 9.  New Accounting Pronouncements

Effective January 1, 2009, we adopted Statement of Financial Accounting Standard No. 141 (revised 2007), “Business Combinations”, or SFAS 141(R).  SFAS 141(R) establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination.  We expect the adoption of SFAS 141(R) will affect our consolidated financial statements if we engage in a transaction that falls within the scope of this standard.

Effective January 1, 2009, we adopted FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)”, or FSP 14-1.  FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate at the time of issuance.  Our 3.8% convertible senior notes are within the scope of FSP 14-1 and therefore, we measured the fair value of the debt components of the notes at issuance based on an estimated effective interest rate of 6.06% and are amortizing the resulting discount as an increase to interest expense over the expected life of the debt (March 15, 2012).  The conversion option was valued at $43,770 at the time of issuance, which resulted in an increase to additional paid-in capital.  All periods presented in our financial statements have been adjusted to reflect the application of this standard retrospectively.  The implementation of FSP 14-1 resulted in a decrease to net income and earnings per share for all periods presented; however there is no effect on our cash interest payments.  The implementation of this standard resulted in the following:

·                  At December 31, 2008, shareholders equity increased by $25,560.

·                  Interest expense for the three months ended March 31, 2009 and 2008 was increased by non-cash amortization of $2,348, or $0.02 per share, and $2,357, or $0.03 per share, respectively.

·                  During the first quarter of 2009, the equity component attributable to the conversion feature of the notes was reduced by $148 as a result of our repurchase of $121,330 of the notes.  The equity component of the notes as of March 31, 2009 is $43,622.

·                  The unamortized discount on the notes was $21,396 and $29,228 as of March 31, 2009 and December 31, 2008, respectively. The unamortized discount is being amortized through March 15, 2012, the first date on which the holders of our convertible notes may require that we redeem them.

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HOSPITALITY PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 10. Significant Tenant

TA is the lessee of 40% of our investments, at cost, as of March 31, 2009.  The following table presents summary financial information for TA for its quarter ended March 31, 2009, as reported in its Quarterly Report on Form 10-Q:

The summary financial information of TA is presented to comply with applicable accounting regulations of the Securities and Exchange Commission, or the SEC.  References in these financial statements to the Quarterly Report on Form 10-Q for TA are included as textual references only, and the information in TA’s Quarterly Report is not incorporated by reference into these financial statements.

During the three months ended March 31, 2009, TA deferred $15,000 of rent under the terms of the rent deferral agreement dated August 11, 2008.  We did not recognize the deferred rent as revenue due to uncertainties regarding its payment by TA.

Note 11. Comprehensive Income

Other comprehensive income consists of unrealized losses on shares of TA common stock we own.  The following is a reconciliation of net income to comprehensive income for the three months ended March 31, 2009 and 2008:

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HOSPITALITY PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 12. Related Person Transaction

In February 2009, we invested $25 in an insurance company with Reit Management & Research LLC, or RMR, our manager, and other companies to which RMR provides management services; and in April 2009 we invested another $5,049.  We currently own approximately 16.67% of this insurance company.

Note 13. Hotel Management Agreements and Leases

During the quarter ended March 31, 2009, all payments due under our hotel leases and management contracts were paid when due or within cure periods permitted under these contracts, except the payment due on March 27, 2009 from Marriott International, Inc., or Marriott, for the contract that concerns Marriott’s management of 34 hotels (which we have historically referred to as our Marriott No. 3 contract) and requires minimum payment to us of approximately $44,200/year. Marriott’s payment to us for this management agreement was deficient in the amount of approximately $838. We sent Marriott a notice regarding this deficiency and Marriott failed to pay the deficiency amount within the applicable cure period.  On April 9, 2009, we applied $838 of the $36,203 security deposit we had for this contract to cover the deficiency. 

On April 24, 2009, we did not receive payments due under the Marriott No. 3 contract or under our lease for 19 hotels with Barcelo Crestline Corporation, or Crestline (which we have historically referred to as our Marriott No. 4 contract).  The hotels leased to Crestline are managed by Marriott and the minimum payments due us are approximately $28,508/year.  At March 31, 2009, we held a $28,508 security deposit for this contract.  We sent Marriott and Crestline default notices under these contracts and both Marriott and Crestline failed to pay their deficiency amounts within the applicable cure periods.  On May 7, 2009, we applied $3,409 and $2,193 against the security deposits we hold for the Marriott and Crestline contracts, respectively, to cover the deficiencies.  We are currently involved in discussions with Marriott concerning these defaults.  At this time, we expect that Marriott will pay us the net cash flows from operations of the hotels included in the defaulted contracts and that these payments may constitute a large majority of the minimum payments due us under the defaulted contracts during 2009.  Moreover, we believe the security deposits we hold from Marriott and from Crestline for these contracts are in amounts which exceed the 2009 shortfall of the payments we expect to receive compared to the minimum payments due to us under these contracts. Other than applying the security deposits to pay the differences between the net cash flows received from operations of these hotels and the contractual minimum payments, we have not yet determined what additional action, if any, we may take as a result of these defaults. 

When we reduce the amounts of the security deposits we hold for these agreements or any other operating agreements for future payment deficiencies, the applications of the security deposits will cause us to record income equal to the full amounts of the minimum return due to us, but it will not result in cash flow to us of the deficiency amounts.

As of May 11, 2009, all other payments due us from our hotel managers and tenants under our operating agreements are current.

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Hospitality Properties Trust

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

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included in this Quarterly Report and with our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, or 2008 Annual Report.

Overview (dollar amounts in thousands, except per share amounts)

2009 Developments

U.S. Hotel Industry- The U.S. economy has been in a recession since December 2007.  As a result of the impact of a recessionary economy, in 2008 the U.S. hotel industry experienced declines versus 2007 in occupancy, revenues and profitability.  During the first quarter of 2009, each of our hotel operators reported further declines in the operating performance of our hotels versus the prior year.  We believe these declines reflect reduced business and leisure travel resulting from reduced business and consumer spending.  As of March 31, 2009, all returns and rent payments due to us under our hotel operating agreements were current except for the Marriott No. 3 agreement discussed below.  Our hotel operating agreements contain security features, such as guarantees and security deposits, which are intended to protect minimum returns and rents to us in accordance with our operating agreements regardless of hotel performance.  However, the effectiveness of various security features to provide uninterrupted receipt by us of minimum rents and returns is not assured, particularly if the U.S. economy continues to function at recessionary levels.  If our tenants, managers or guarantors default in their payment obligations to us, our cash flows will decline.

Distributions to common shareholders- On April 8, 2009, we announced that as a result of current conditions in the capital markets, we had suspended our regular quarterly distributions to common shareholders for the remainder of 2009.  We currently expect that we will realize substantial net income for financial reporting purposes in 2009, and we expect that the distributions to our common shareholders in 2009 will be at least equal to the minimum amounts required in order for us to remain a real estate investment trust, or REIT, for federal tax purposes.  During the fourth quarter of 2009, we expect to re-evaluate capital market conditions and our own earnings in order to determine what amount of common share distributions will be paid in 2009.  At that time we will also determine if our common distribution will be paid in cash or a combination of cash and common shares.

Our tenants and managers- During the quarter ended March 31, 2009, all payments due under our hotel leases and management contracts were paid when due or within cure periods permitted under these contracts, except the payment due on March 27, 2009 from Marriott International, Inc., or Marriott, for the contract that concerns Marriott’s management of 34 hotels (which we have historically referred to as our Marriott No. 3 contract) and requires minimum payment to us of approximately $44,200/year. Marriott’s payment to us for this management agreement was deficient in the amount of approximately $838. We sent Marriott a notice regarding this deficiency and Marriott failed to pay the deficiency amount within the applicable cure period.  On April 9, 2009, we applied $838 of the $36,203 security deposit we had for this contract to cover the deficiency. 

On April 24, 2009, we did not receive payments due under the Marriott No. 3 contract or under our lease for 19 hotels with Barcelo Crestline Corporation, or Crestline (which we have historically referred to as our Marriott No. 4 contract).  The hotels leased to Crestline are managed by Marriott and the minimum payments due us are approximately $28,508/year.  At March 31, 2009, we held a $28,508 security deposit for this contract.  We sent Marriott and Crestline default notices under these contracts and both Marriott and Crestline failed to pay their deficiency amounts within the applicable cure periods.  On May 7, 2009, we applied $3,409 and $2,193 against the security deposits we hold for the Marriott and Crestline contracts, respectively, to cover the deficiencies.  We are currently involved in discussions with Marriott concerning these defaults.  At this time, we expect that Marriott will pay us the net cash flows from operations of the hotels included in the defaulted contracts and that these payments may constitute a large majority of the minimum payments due us under the defaulted contracts during 2009.  Moreover, we believe the security deposits we hold from Marriott and from Crestline for these contracts are in amounts which exceed the 2009 shortfall of the payments we expect to receive compared to the minimum payments due to us under these contracts. Other than applying the security deposits to pay the differences between the net cash flows received from operations of these hotels and the contractual minimum payments, we have not yet determined what additional action, if any, we may take as a result of these defaults. 

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When we reduce the amounts of the security deposits we hold for these agreements or any other operating agreements for future payment deficiencies, the applications of the security deposits will cause us to record income equal to the full amounts of the minimum return due to us, but it will not result in cash flow to us of the deficiency amounts.

As of May 11, 2009, all other payments due us by our hotel managers and tenants under our operating agreements are current.

TA rent deferral- During the first quarter 2009, TA deferred $15,000 of rent under the provisions of the rent deferral agreement entered into by us and TA in August of 2008.  Due to the uncertainties regarding TA’s ability to perform its obligations under the leases, we have reserved previously accrued straight line rent and deferred recognition of future straight line and deferred rents until circumstances change or these amounts are collected.

Related Person Transaction

In February 2009, we invested $25 in an insurance company with Reit Management & Research LLC, or RMR,, our manager, and other companies to which RMR provides management services, and in April 2009 we invested another $5,049.  We currently own approximately 16.67% of this insurance company.  More information concerning our relationship with RMR is contained in our 2008 Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Related Person Transactions”.

Management Agreements and Leases

At March 31, 2009, our 289 hotels were included in one of eleven operating agreements, of which 197 are leased to one of our wholly owned TRSs and managed by an independent hotel operating company and 92 are leased to third parties. We lease our 185 travel centers to TA under two agreements. Our consolidated statement of income includes operating revenues and expenses of our managed hotels and rental income for leased hotels and travel centers. Additional information regarding the terms of our management agreements and leases is included in the table on pages 22 and 23.

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Results of Operations (dollar amounts in thousands, except per share amounts)

Three Months Ended March 31, 2009 versus 2008

The decrease in hotel operating revenues at our managed hotels in the first quarter of 2009 versus the first quarter of 2008 was caused primarily by the continued weakness in the hotel industry discussed above.  Additional operating statistics of our hotels are included in the table on page 24.

The decrease in hotel operating expenses was primarily caused by the decline in occupancy at our managed hotels, manager initiatives to lower expenses and the funding by certain of our managers of minimum return deficiencies discussed below.

Our share of the operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. We recognize additional returns due to us under our management agreements as income at year end when all contingencies are met and the income is earned. Deferred additional returns were $0 and $3,460 for the three months ended March 31, 2009 and 2008, respectively.

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $20,391 less than the minimum returns due to us in the three months ended March 31, 2009.  We reflect these amounts in our consolidated statement of income as a reduction to hotel operating expense because the minimum returns were funded by the managers of these hotels.  All of our managed hotels generated net operating results in excess of the minimum returns due us in the 2008 first quarter.

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The increase in rental income - hotels is a result of our funding of improvements at certain of our leased hotels in 2008 and 2009 that resulted in increases in the minimum rents due to us.

The decrease in rental income - travel centers is a result of our deferral agreement with TA.  During the first quarter of 2009, TA deferred $15,000 under this agreement, partially offset by contractual rent increases.  Rental income - travel centers includes $3,800 of adjustments necessary to record rent on the straight line basis for the three months ended March 31, 2008.  For the reasons described under “TA rent deferral” above, we ceased recognizing straight line rent under our lease with TA for 145 travel centers in the second quarter of 2008.

FF&E reserve income represents amounts paid by certain of our hotel tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total sales at our hotels. The decrease in FF&E reserve income is primarily due to decreased levels of hotel sales in 2009 versus 2008 at our leased hotels. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.

The decrease in interest income is due to lower average cash balances and lower average interest rates during 2009.

The decrease in interest expense is primarily due to lower weighted average interest rate partially offset by higher average borrowings during 2009 than in 2008.

The increase in depreciation and amortization - hotels is primarily due to the depreciation and amortization of assets acquired with funds from FF&E reserve accounts owned by us in 2008 and 2009.

The increase in depreciation and amortization - travel centers is primarily due to the depreciation and amortization of improvements made to our travel centers during 2008 and 2009.

The decrease in general and administrative expense is due primarily to lower incentive management fees recognized in 2009 than in 2008.

The gain on extinguishment of debt in the first quarter of 2009 reflects the repurchase of $121,330 face amount of our 3.8% convertible senior notes for $87,517 on March 31, 2009, net of unamortized issuance costs and discounts.

The gain on sale of real estate in the first quarter of 2008 reflects the sale of our Park Plaza hotel in North Phoenix, Arizona for a gain of $645.

The decrease in income tax expense is primarily due to lower federal alternative minimum tax for our TRSs and lower foreign taxes relating to our hotel in Puerto Rico in 2009.

The increase in net income, net income available for common shareholders and net income available for common shareholders per common share are primarily due to the investment and operating activities discussed above.

Liquidity and Capital Resources (dollar amounts in thousands, except per share amounts)

Our Managers and Tenants

As of March 31, 2009, all 474 of our properties were operated under 13 management agreements or leases.  All costs of operating and maintaining our properties are paid by the hotel managers as agent for us or by tenants for their own account. These hotel managers and tenants derive their funding for property operating expenses, FF&E reserves, and returns and rents due us generally from property operating revenues and, to the extent that these parties fund our minimum returns and minimum rents, from their separate resources.

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We define coverage for each of our hotel management agreements or leases as total property sales minus all property level expenses which are not subordinated to the minimum returns and minimum rents due to us and the required FF&E reserve contributions, divided by the minimum returns or minimum rent payments due to us. More detail regarding coverage, guarantees and other security features of our operating agreements is presented in the table on pages 22 and 23.  During the twelve months ended March 31, 2009, eight of our eleven hotel operating agreements agreements, representing 256 properties, generated coverage of at least 1.0x. The remaining three agreements, representing 33 hotels, generated coverage of 0.23x to 0.98x.

During the twelve months ended March 31, 2009 our two travel center leases, representing 185 properties generated coverage of 1.48x and 1.57x, respectively.  Effective July 1, 2008, we entered into a rent deferral agreement with TA, the tenant under our two travel center leases.  However, we calculated the rent coverage ratios for the twelve months ended March 31, 2009 using the contractual rent amounts without consideration of the rent deferral.

Three hundred fifty (350) of our properties, representing 77% of our total investments at cost as of March 31, 2009, are operated under nine management arrangements or leases which are subject to full or limited guarantees. These guarantees may provide us with continued payments if the total sales less total expenses and required FF&E reserve payments fail to equal or exceed guaranteed amounts due to us. Some of our managers and tenants or their affiliates may also supplement cash flow from our properties in order to make payments to us and preserve their rights to continue operating our properties even if they are not required to do so by guarantees. Guarantee or supplemental payments to us, if any, made under any of our management agreements or leases, do not subject us to repayment obligations but, under some of our agreements, these guarantee or supplemental payments may be recovered by the manager or tenant from the future cash flows from our properties after our future minimum returns and minimum rents are paid.

As described above, Marriott and Crestline have failed to pay the full minimum return or rent amounts due to us under the Marriott No. 3 and Marriott No. 4 agreements, respectively.  As of May 11, 2009, all other payments due from our managers and tenants are current.  However, the effectiveness of our various security features to provide uninterrupted payments to us is not assured, particularly if the current economic downturn continues for a prolonged period.  If any of our property operators, tenants or guarantors default in their payment obligations to us, our cash flows will decline.

Our Operating Liquidity and Capital Resources

Our principal source of funds for current expenses and distributions to shareholders are minimum returns from our managed hotels and minimum rents from our leased hotels and travel centers. We receive minimum returns and minimum rents from our managers and tenants monthly. We receive additional returns, percentage returns and rents and our share of the operating profits of our managed hotels after payment of management fees and other deductions either monthly or quarterly. This flow of funds has historically been sufficient for us to pay our operating expenses, interest and distributions to shareholders. We believe that our operating cash flow will be sufficient to meet our operating expenses, interest and other obligations for the foreseeable future.

We maintain our status as a REIT under the Internal Revenue Code by meeting certain requirements. As a REIT, we do not expect to pay federal income taxes on the majority of our income. Federal legislation, known as the REIT Modernization Act, or the RMA, among other things, allows a REIT to lease hotels to a TRS if the hotel is managed by an independent third party. The income realized by our TRSs in excess of the rent it pays to us is subject to income tax at corporate tax rates.  The income we receive from our hotels in Canada and Puerto Rico is subject to taxes in those jurisdictions and we are subject to taxes in certain states where we have properties.

Our Investment and Financing Liquidity and Capital Resources

Various percentages of total sales at most of our hotels are escrowed as FF&E reserves to fund future capital improvements. During the three months ended March 31, 2009, our hotel managers and hotel tenants contributed $11,675 to these accounts and $28,555 was spent from the FF&E reserve escrow accounts and from our payments to

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renovate and refurbish our hotels. As of March 31, 2009, there was $25,014 on deposit in these escrow accounts, which was held directly by us and reflected on our balance sheet as restricted cash.

Our hotel operating agreements generally provide that, if necessary, we will provide our managers and tenants with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves. To the extent we make such additional fundings, our annual minimum returns or minimum rents generally increase by a percentage of the amount we fund. During the three months ended March 31, 2009, we funded $46,568 for capital improvements to our hotels in excess of FF&E reserve fundings available from hotel operations, as follows:

·                  During the three months ended March 31, 2009, we funded $5,022 for improvements to hotels included in our four Marriott portfolio agreements using cash on hand and borrowings under our revolving credit facility. We currently expect to fund between $10,000 to $15,000 for improvements to these Marriott hotels during the remainder of 2009 with funds from our existing cash balances or borrowings under our revolving credit facility. As we fund these improvements, the minimum rents and returns payable to us increase.

·                  Pursuant to a January 2008 lease agreement we entered with a subsidiary of Marriott for our Kauai hotel, we agreed to fund certain planned improvements to the hotel.  We funded $36,700 for improvements under this agreement during the three months ended March 31, 2009, and we expect to fund an additional approximately $6,300 during the remainder of 2009, using funds from our existing cash balances or borrowings under our revolving credit facility.  As we funded these improvements, the annual rent payable to us under the lease increases.

·                  Pursuant to an April 2005 agreement we entered with a subsidiary of Global Hyatt Corporation, or Hyatt, for management of 22 AmeriSuites® hotels, we agreed to provide funding to Hyatt for rebranding of these hotels to the Hyatt PlaceTM brand and for other improvements. To the extent our fundings exceed $8,000, the minimum return payable by Hyatt to us increases as these funds are advanced. As of March 31, 2009, we have funded $74,600.  We made no fundings during the three months ended March 31, 2009, but we expect to fund an additional approximately $2,800 during the remainder of 2009, using funds from our existing cash balances or borrowings under our revolving credit facility.

·                  Pursuant to January and April 2006 agreements we entered with InterContinental Hotels Group plc, or InterContinental for the management of ten hotels, we agreed to fund $24,228 for capital improvements to these hotels during the three years following closing. We made our final funding under this agreement of $4,846 in January 2009 using funds from our existing cash balances and borrowings under our revolving credit facility.  As we funded these improvements, the minimum returns payable to us increase.

FF&E escrow deposits are not required under our travel center leases with TA. However, TA is required to maintain the leased travel centers, including structural and non-structural components. On May 12, 2008, we entered into an amendment to our lease with TA for 145 travel centers.  The historical lease provided for our purchase from TA of an aggregate of $125,000 of specified capital improvements to the leased travel centers during the first five years of the lease term, and that these purchases were limited to $25,000 per year.  The amendment provided that TA may accelerate our purchase of the specified capital improvements.  In the event that TA sells us capital improvements before the time contractually required by the original lease terms, our purchase commitment amount is discounted to reflect the accelerated disbursement of funds by us according to a present value formula established in the amended lease.  During the three months ended March 31, 2009, we purchased $2,838 of additional improvements, and, as of March 31, 2009, we have funded $105,232 and our remaining purchase commitment under this lease is $13,526.  Under both our leases with TA, TA may request that we fund additional amounts for capital improvements to the leased facilities in return for annual minimum rent increases; we made no fundings under these lease provisions during the three months ended March 31, 2009.

On January 15, 2009, we paid $0.5546875 per share distributions to our Series B preferred shareholders with respect to the period ended January 14, 2009. On March 2, 2009, we declared a $0.5546875 per share distribution to Series B preferred shareholders of record on March 31, 2009, with respect to the period ended April 14, 2009. We paid this

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amount on April 15, 2009.  We funded these distributions using cash on hand and borrowings under our revolving credit facility.

On February 17, 2009, we paid $0.4375 per share distributions to our Series C preferred shareholders with respect to the period ended February 14, 2009.  We funded this distribution using cash on hand and borrowings under our revolving credit facility.  On April 8, 2009, we declared a distribution of $0.4375 per Series C preferred shares to shareholders of record on May 1, 2009, with respect to the period ending May 14, 2009. We expect to pay this amount on or about May 15, 2009, using cash on hand and borrowings under our revolving credit facility.

On February 25, 2009, we paid $0.77 per share distributions to our common shareholders for the quarter ended December 31, 2008.  We funded this distribution using cash on hand and borrowings under our revolving credit facility.  As discussed above, on April 8, 2009, we announced the suspension of our regular quarterly common share distributions for the remainder of 2009.

During the three months ended March 31, 2009, we repurchased $121,330 of our 3.8% convertible senior notes at a total cost of $87,517, excluding accrued interest, and recognized a gain on extinguishment of debt of $26,555, net of unamortized discount and issuance costs.  We made these purchases using borrowings under our revolving credit facility.

In April and May of 2009, we repurchased an aggregate of $57,171 original principal amount of various issues of our senior notes for approximately $45,239, excluding accrued interest.  We expect to record a gain of approximately $11,653, net of unamortized discount and issue costs, on the early extinguishment of this debt in the second quarter of 2009.  We funded these purchases using borrowings under our revolving credit facility.

In order to fund capital improvements to our properties and acquisitions and to meet cash needs that may result from timing differences between our receipt of returns and rents and our desire or need to make distributions or pay operating expenses, we maintain a revolving credit facility with a group of institutional lenders. The maturity date of our revolving credit facility is October 24, 2010, and we have the option to extend the facility for one additional year upon payment of a fee. The annual interest rate payable for drawn amounts under the facility is LIBOR plus a premium (totaling 1.08% per annum at March 31, 2009). Borrowings under the revolving credit facility can be up to $750,000.  Borrowings under our revolving credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. As of March 31, 2009, we had a balance of $546,000 outstanding under our revolving credit facility.

At March 31, 2009, we had $11,796 of cash and cash equivalents and $204,000 available from our revolving credit facility. We expect to use existing cash balances, the cash flow from our operations, borrowings under our revolving credit facility and net proceeds of offerings of equity or debt securities to fund future property acquisitions and other general business purposes.

Our term debt maturities (other than our revolving credit facility) as of March 31, 2009, as adjusted for our April and May 2009 repurchase of senior notes discussed above, were as follows: $50,000 in 2010, $100,829 in 2012, $287,000 in 2013, $280,000 in 2015, $275,000 in 2016, $300,000 in 2017, $350,000 in 2018, and $453,670 in 2027. Our 3.8% convertible senior notes ($453,670 due in 2027) are convertible if certain conditions are met (including certain changes in control) into cash equal to the principal amount of the notes and, to the extent the market price of our common shares exceeds the exchange price of $50.50 per share, subject to adjustment, either cash or our common shares at our option with a value based on such excess amount. Holders of our convertible senior notes may require us to repurchase all or a portion of the notes on March 20, 2012, March 15, 2017 and March 15, 2022, or upon the occurrence of certain change in control events.

As of March 31, 2009, we had one mortgage note with a current principal balance of $3,537 that we assumed in connection with our acquisition of one hotel. This mortgage note requires monthly payments of principal and interest of $32 and is expected to have a principal balance of $3,326 at maturity in 2011. None of our other debt obligations require principal or sinking fund payments prior to their maturity date.

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When amounts are outstanding under our revolving credit facility and as the maturity dates of our revolving credit facility and term debts approach over the longer term, we will explore alternatives for the repayment of amounts due.  Such alternatives in the short term and long term may include incurring additional debt and issuing new equity securities.  We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities.

Recent capital markets conditions have been challenging.  The availability and cost of credit have been and may continue to be adversely affected by illiquid capital markets and wide credit spreads, and equity markets have been extremely volatile.  While we believe we will have access to various types of financings, including debt or equity, to fund our future acquisitions and to pay our debts and other obligations, there can be no assurance that we will be able to complete any debt or equity offerings or that our cost of any future public or private financings will be reasonable.  If current market conditions continue or worsen, one or more lenders under our revolving credit facility may be unable or unwilling to fund advances which we request or we may be unable or unwilling to renew our credit facility and we may not be able to access additional capital.  Also, the current market conditions have led to materially increased credit spreads which, if they continue, may result in material increased interest costs when we refinance our debts.  These interest cost increases could have a material and adverse impact on our results of operations and financial condition.

Debt Covenants

Our debt obligations at March 31, 2009, consist of our revolving credit facility, our $2,153,670 of unsecured term debt and convertible notes and our $3,537 mortgage note. Our unsecured term debt and convertible notes are governed by an indenture. This indenture and related supplements and our revolving credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain a minimum net worth, restrict our ability to make distributions under certain circumstances and require us to maintain various financial ratios. As of March 31, 2009, we were in compliance with all of our covenants under our indenture and its supplements and our revolving credit facility agreement.

Neither our indenture and its supplements nor our revolving credit facility contains provisions for acceleration which could be triggered by our debt ratings. However, under our revolving credit facility agreement, our senior debt ratings are used to determine the fees and interest rate we pay.  Accordingly, if our credit ratings are downgraded, our interest expense and related costs under our revolving credit facility would increase.

Our public debt indenture and its supplements contain cross default provisions to any other debts of $20,000 or more. Similarly, our revolving credit facility agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $75,000 or more.

Management Agreements, Leases and Operating Statistics (dollar amounts in thousands)

As of March 31, 2009, we owned 289 hotels and 185 travel centers which are grouped into 13 operating agreements. Our hotels are managed by or leased to separate affiliates of hotel operating companies including InterContinental, Marriott, Host Hotels & Resorts Inc., or Host, Crestline, Hyatt, and Carlson Hotels Worldwide, or Carlson, under 11 agreements. Our 185 travel centers are leased to and operated by TA under two agreements.

The tables on the following pages summarize the key terms of our leases and management agreements as of March 31, 2009, and include statistics reported to us or derived from information reported to us by our managers and tenants. These statistics include coverage of our minimum returns or minimum rents and occupancy, average daily rate, or ADR, and revenue per day per available room, or RevPAR, for our hotel properties. We consider these statistics, and the management agreement or lease security features also presented in the tables on the following pages, to be important measures of our managers’ and tenants’ success in operating our properties and their ability to continue to pay us. However, none of this third party reported information is a direct measure of our financial performance and none of it has been independently verified by us.

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