** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

# **FORM 10-K**

# ** **

**ý****Annual report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For The Fiscal Year Ended December 31, 2005**

 

**or**

 

**o********Transition report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**Commission File Number 1-11527**

 

**HospitalityProperties Trust**

 

| **Maryland**            | ** ** | **04-3262075**                    |
|-------------------------|------------|-----------------------------------|
| (State Of organization) |       | (IRS Employer Identification No.) |

 

**400 Centre Street, Newton, Massachusetts 02458**

**617-964-8389**

 

Securities registered pursuant to Section 12(b) of the Act:

 
| **Title Of Each Class**                                  | ** ** | **Name Of Each Exchange On Which Registered** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Shares of Beneficial Interest                                    |       | New York Stock Exchange                                                     |
| Series B Cumulative Redeemable Preferred Shares of  Beneficial Interest |       | New York Stock Exchange                                                     |

 

Securities to be registeredpursuant to Section 12(g) of the Act: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yes ý  No o

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act. Yes o  No ý

 

Indicate bycheck mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ýNo o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “largeaccelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large accelerated filer ý Accelerated filer o  Non-accelerated filer o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No ý

 

Theaggregate market value of the voting shares of the registrant held bynon-affiliates was $2,973 million based on the $44.07 closing price per commonshare on the New York Stock Exchange on June 30, 2005. For purposes of thiscalculation, 4,000,000 common shares of beneficial interest, $0.01 par value,held by HRPT Properties Trust, and an aggregate of 448,434 common shares heldby the trustees and officers of the registrant have been included in the numberof shares held by affiliates.

 

Number of theregistrant’s Common Shares outstanding as of March 10, 2006: 71,920,578

 

 

----

 

References inthis Annual Report on Form 10-K to the “Company”, “HPT”, “we”, “us” or “our”include Hospitality Properties Trust and its consolidated subsidiaries unlessotherwise expressly stated or the context indicates otherwise.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

Certaininformation required in Items 10, 11, 12, 13 and 14 of Part III of this AnnualReport on Form 10-K is to be incorporated herein by reference from ourdefinitive Proxy Statement for the annual meeting of shareholders scheduled forMay 23, 2006, or our definitive Proxy Statement.

 

**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

** **

THIS ANNUALREPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKINGSTATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACTOF 1995 AND OTHER FEDERAL SECURITIES LAWS. THESE FORWARD LOOKING STATEMENTSAPPEAR IN A NUMBER OF PLACES IN THIS FORM 10-K AND INCLUDE STATEMENTS REGARDINGOUR INTENT, BELIEF OR EXPECTATION, OR THE INTENT, BELIEF OR EXPECTATION OF OURTRUSTEES AND OFFICERS WITH RESPECT TO OUR OPERATORS’ OR TENANTS’ ABILITY TO PAYRETURNS OR RENT TO US, OUR ABILITY TO PURCHASE ADDITIONAL PROPERTIES, OURINTENT TO IMPROVE AND MODERNIZE OUR PROPERTIES, OUR ABILITY TO PAY INTEREST ANDDEBT PRINCIPAL AND MAKE DISTRIBUTIONS, OUR POLICIES AND PLANS REGARDINGINVESTMENTS AND FINANCINGS, OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST,OUR ABILITY TO APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO RAISECAPITAL AND OTHER MATTERS. HOWEVER, ACTUAL RESULTS MAY DIFFER MATERIALLY FROMTHOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OFVARIOUS FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION, THE IMPACT OFCHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING PREVAILING INTERESTRATES) ON US AND OUR OPERATORS AND TENANTS, COMPLIANCE WITH AND CHANGES TO LAWSAND REGULATIONS AFFECTING THE REAL ESTATE AND HOTEL INDUSTRIES, CHANGES INFINANCING TERMS AND COMPETITION WITHIN THE REAL ESTATE AND HOTEL INDUSTRIES.FOR EXAMPLE: IF HOTEL ROOM DEMAND BECOMES DEPRESSED, THE OPERATING RESULTS OFOUR HOTELS MAY DECLINE; THE FINANCIAL RESULTS OF OUR OPERATORS AND TENANTS MAYDECLINE; AND OUR OPERATORS AND TENANTS MAY BE UNABLE TO PAY OUR RETURNS ORRENTS. ALSO, WE MAY BE UNABLE TO IDENTIFY PROPERTIES WHICH WE WANT TO BUY OR TONEGOTIATE ACCEPTABLE PURCHASE PRICES OR MANAGEMENT AGREEMENT OR LEASE TERMS FORNEW PROPERTIES. THESE UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENTREASONS, SOME OF WHICH, SUCH AS NATURAL DISASTERS OR CHANGES IN OUR OPERATORS’OR TENANTS’ COSTS OR REVENUES OR CHANGES IN CAPITAL MARKETS OR THE ECONOMYGENERALLY, ARE BEYOND OUR CONTROL. IN ADDITION, THIS ANNUAL REPORT ONFORM 10-K STATES THAT OUR PURCHASE OF THE HOLIDAY INN SUNSPREE RESORT®IN JAMAICA WAS DELAYED PENDING THIRD PARTY APPROVALS. IN FACT, CIRCUMSTANCESMAY DELAY THIS PURCHASE FOR AN EXTENDED PERIOD OR PREVENT IT OCCURRING. OTHERRISKS MAY ADVERSELY IMPACT US, AS DESCRIBED MORE FULLY UNDER “ITEM 1A. RISKFACTORS.” FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAYNOT OCCUR. YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THERESULT OF ANY REVISION TO THESE FORWARD LOOKING STATEMENTS THAT MAY BE MADE TOREFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THEOCCURANCE OF UNANTICIPATED EVENTS.

 

**STATEMENT CONCERNING LIMITED LIABILITY**

** **

OUR AMENDEDAND RESTATED DECLARATION OF TRUST, DATED AUGUST 21, 1995, A COPY OF WHICH,TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THEOFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND,PROVIDES THAT THE NAME “HOSPITALITY PROPERTIES TRUST” REFERS TO THE TRUSTEESUNDER THE DECLARATION OF TRUST AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY,AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF

 

----

 

HOSPITALITY PROPERTIES TRUSTSHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANYOBLIGATION OF, OR CLAIM AGAINST, HOSPITALITY PROPERTIES TRUST. ALL PERSONSDEALING WITH HOSPITALITY PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THEASSETS OF HOSPITALITY PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THEPERFORMANCE OF ANY OBLIGATION.

 

----

 

**HOSPITALITYPROPERTIES TRUST**

**2005FORM 10-K ANNUAL REPORT**

 

Table of Contents

 
|      | Part I                                                                                                          | **Page** |
|-----------|-----------------------------------------------------------------------------------------------------------------|----------|
|      |                                                                                                            | 1        |
| Item 1.   | Business                                                                                                        |     |
|      |                                                                                                            |     |
| Item 1A.  | Risk Factors                                                                                                    | 27       |
|      |                                                                                                            |     |
| Item  1B. | Unresolved Staff Comments                                                                                       | 31       |
|      |                                                                                                            |     |
| Item  2.  | Properties                                                                                                      | 32       |
|      |                                                                                                            |     |
| Item  3.  | Legal Proceedings                                                                                               | 33       |
|      |                                                                                                            |     |
| Item  4.  | Submission of Matters to a Vote of Security  Holders                                                            | 33       |
|      |                                                                                                            |     |
|      | Part  II                                                                                                        |     |
|      |                                                                                                            |     |
| Item  5.  | Market for the Registrant’s Common Equity,  Related Shareholder Matters and Issuer Purchases of Securities | 34       |
|      |                                                                                                            |     |
| Item  6.  | Selected Financial Data                                                                                         | 35       |
|      |                                                                                                            |     |
| Item  7.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                     | 36       |
|      |                                                                                                            |     |
| Item  7A. | Quantitative and Qualitative Disclosures  About Market Risk                                                     | 51       |
|      |                                                                                                            |     |
| Item  8.  | Financial Statements and Supplementary Data                                                                     | 52       |
|      |                                                                                                            |     |
| Item  9.  | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                           | 52       |
|      |                                                                                                            |     |
| Item  9A. | Controls and Procedures                                                                                         | 52       |
|      |                                                                                                            |     |
| Item  9B. | Other Information                                                                                               | 53       |
|      |                                                                                                            |     |
|      | Part  III                                                                                                       |     |
|      |                                                                                                            |     |
| Item  10. | Directors and Executive Officers of the  Registrant                                                             | 54       |
|      |                                                                                                            |     |
| Item  11. | Executive Compensation                                                                                          | *        |
|      |                                                                                                            |     |
| Item  12. | Security Ownership of Certain Beneficial  Owners and Management and Related Shareholder Matters                 | 54       |
|      |                                                                                                            |     |
| Item  13. | Certain Relationships and Related  Transactions                                                                 | *        |
|      |                                                                                                            |     |
| Item  14. | Principal Accountant Fees and Services                                                                          | *        |
|      |                                                                                                            |     |
|      | Part  IV                                                                                                        |     |
|      |                                                                                                            |     |
| Item  15. | Exhibits and Financial Statement Schedules                                                                      | 56       |

 

----

*      Incorporated by reference from our ProxyStatement for the annual meeting of shareholders scheduled to be held on May23, 2006, to be filed pursuant to Regulation 14A.

 

----

 

**PART I**

 

**Item 1.Business**

** **

**TheCompany.** We are a real estate investment trust, orREIT, formed in 1995 under the laws of the State of Maryland to buy and ownhotels. As of December 31, 2005, we owned 298 hotels with 42,376 rooms orsuites located in 38 states in the United States, Canada and Puerto Rico. Ourprincipal place of business is 400 Centre Street, Newton, Massachusetts 02458,and our telephone number is (617) 964-8389.

 

Our principalexternal growth strategy is to expand our investments in high quality hotelswhich generate returns to us that exceed our operating and capital costs. Ourprincipal internal growth strategy is to participate through percentage returnsand rents in increases in total sales (including gross revenues from roomrentals, food and beverage sales and other services) at our hotels, and, undersome of our operating agreements, increases in the operating income of ourhotels.

 

Ourinvestment, financing and disposition policies and business strategies areestablished by our board of trustees and may be changed by our board oftrustees at any time without shareholder approval.

 

As of December31, 2005, our hotels are operated as Courtyard by Marriott®,Candlewood Suites®, Staybridge Suites®, Residence Inn byMarriott®, AmeriSuites®, InterContinental Hotels &Resorts®, Homestead Studio Suites®, CrownePlaza Hotels & Resorts®,Marriott Hotels and Resorts®, Radisson® Hotels &Resorts, TownePlace Suites by Marriott®, Country Inns & Suitesby Carlson®, Holiday Inn Hotels & Resorts®, Park Plaza®Hotels & Resorts, or SpringHill Suites by Marriott®. The averageage of our hotels was approximately 10.8 years at December 31, 2005.

 

**Courtyardby Marriott®** hotels are designed to attractboth business and leisure travelers. A typical Courtyard by Marriott®hotel has 145 guest rooms. Most Courtyard by Marriott® hotels aresituated on well landscaped grounds and typically are built with a courtyardcontaining a patio, pool and socializing area that may be enclosed dependingupon location. Many of these hotels have lounges, meeting rooms, an exerciseroom, a guest laundry and a restaurant. Generally, the guest rooms are similarin size and furnishings to guest rooms in full service Marriott®hotels. In addition, many of the same amenities as would be available in fullservice Marriott® hotels are available in Courtyard by Marriott®hotels, except that restaurants may be open only for breakfast or serve limitedmenus, room service may not be available and meeting and function rooms arelimited in size and number. According to Marriott International, Inc., orMarriott, as of December 2005, 692 Courtyard by Marriott® hotelswere open and operating in the United States and internationally. We believethat the Courtyard by Marriott® brand is a leading brand in theupscale, limited service segment of the United States hotel industry. We haveinvested a total of $818 million in 71 Courtyard by Marriott® hotelswith a total of 10,280 rooms.

 

**CandlewoodSuites®** hotels are mid-priced extended stayhotels which offer studio and one-bedroom suites designed for businesstravelers expecting to stay five or more nights. Candlewood Suites®hotels compete in the mid-priced extended stay segment of the lodging industry.Each Candlewood Suites® suite contains a fully equipped kitchenarea, a combination living and work area and a sleeping area. The kitchenincludes a full size microwave, full size refrigerator, stove, dishwasher andcoffee maker. The living area contains a convertible sofa or recliner, 25 inchtelevision, videocassette and/or DVD player and compact disc player. The workarea includes a large desk and executive chair, free high speed internetaccess, two phone lines, voice mail and a speaker phone. Each Candlewood Suites®suite contains a king size bed. Other amenities offered at each CandlewoodSuites® hotel include a fitness center, free guest laundryfacilities and a Candlewood Cupboard® area where guests can purchaselight meals, snacks and other refreshments. According to InterContinentalHotels Group plc, or InterContintental, the owner of the Candlewood Suites®brand, there were 112 Candlewood Suites® hotels open and operatingacross the United States as of December 2005. We have invested $590 million in76 Candlewood Suites® hotels with a total of 9,220 suites.

 

**StaybridgeSuites®** hotels offer residential stylestudio, one-bedroom and two bedroom suites for business, governmental andfamily travelers. Each suite offers a fully equipped kitchen and a work areawith an oversized desk, two line phones, an ergonomically designed chair andhigh speed internet access. Other amenities include free breakfast buffet, onsite convenience store, fitness center, 24 hour business center and conveniencestore. According

 

1

----

 

to InterContinental, the ownerof the Staybridge Suites® brand, there were 87 Staybridge Suites®hotels open and operating in the United States and internationally as ofDecember 2005. We have invested a total of $443 million in 32 Staybridge Suites®hotels with a total of 3,957 suites.

 

**ResidenceInn by Marriott®** hotels are designed toattract business, governmental and family travelers who stay severalconsecutive nights. Residence Inn by Marriott® hotels generally havebetween 80 and 130 studio, one bedroom and two bedroom suites. Most ResidenceInn by Marriott® hotels are designed as residential style buildingswith landscaped walkways, courtyards and recreational areas. Residence Inn byMarriott® hotels do not have restaurants. All offer complimentary continentalbreakfast and a complimentary evening hospitality hour. In addition, each suitecontains a fully equipped kitchen and many have fireplaces. Most Residence Innby Marriott® hotels also have swimming pools, exercise rooms, sportscourts and guest laundries. According to Marriott, as of December 2005, 490Residence Inn by Marriott® hotels were open and operating in theUnited States, Mexico and Canada. We believe that the Residence Inn by Marriott®brand is a leading brand in the extended stay segment of the United Stateshotel industry. We have invested a total of $431 million in 37 Residence Inn byMarriott® hotels with a total of 4,695 suites.

 

**AmeriSuites®**hotels are all suite hotels designed to attract value oriented businesstravelers. AmeriSuites® hotels compete in the all suite segment ofthe lodging industry. Global Hyatt Corporation, or Hyatt, acquired theAmeriSuites® brand in January 2005. In August 2005, Hyatt announceda plan for all qualifying AmeriSuites® hotels to be rebranded under thenew upscale Hyatt PlaceTM brand. In connection with the rebranding,our AmeriSuites® will be renovated to incorporate the new interiorand exterior design of the Hyatt PlaceTM brand. Each renovated HyattPlaceTM hotel room will include upgraded bedding, a wet bar, granitecounters, a sectional sofa and a media center with a 42 inch high definitionplasma television. We expect the renovation of our AmeriSuites®hotels to begin during April 2006. According to Hyatt, there were 145 AmeriSuites® hotels open andoperating across the United States as of December 2005. We have invested $243million in 24 AmeriSuites® hotels with a total of 2,929 suites.

 

**InterContinentalHotels & Resorts®** hotels blend consistent globalstandards with the distinctive cultural features of their locations in aneffort to deliver a truly memorable guest experience. Our InterContinentalHotels& Resorts® contain between 189 and 485 rooms.InterContinental Hotels & Resorts® offer an exceptional servicefor business and leisure guests seeking a luxury hotel experience. Amenitiesinclude a wide range of personal and business services in addition torestaurants, cocktail lounges, pools, saunas and health/fitness centers.According to InterContinental, there were 137 InterContinental Hotels &Resorts® hotels open worldwide as of December 2005. We have investeda total of $226 million in four InterContinental Hotels & Resorts®with a total of 1,286 rooms.

 

**HomesteadStudio Suites®**hotels are extended stay hotels designed for value oriented business travelers.Each Homestead Studio Suites® room features a kitchen with a fullsize refrigerator, stovetop, microwave, coffee maker, utensils and dishes. Awork area is provided with a well lit desktop and a computer data port.Complimentary local phone calls, fax service, copy service, personalizedvoicemail and wireless high speed internet access are also available to guests.On site laundry and other personal care items are available. According to BRE /Homestead Village LLC, or Homestead, there were 132 Homestead Studio Suites®hotels open in the United States as of December 2005. We have invested $145million in 18 Homestead Studio Suites® hotels with a total of 2,399suites.

 

**CrownePlaza Hotels & Resorts®** is InterContinental’s upscale brand targetedat the business guest seeking upscale accommodations at a good value. CrownePlaza Hotels & Resorts® have a particular focus on meetingaccommodations and related services. Our Crowne Plaza Hotels & Resorts®contain between 340 and 613 rooms. With its wide variety of premiumservices and amenities, including fully-appointed guest rooms with ample workspace, full complement of business services, excellent dining choices, qualityfitness facilities and comprehensive meeting capabilities, Crowne Plaza Hotels& Resorts® are designed to exceed guest expectations byproviding “the right room, the right technology and the right service”.According to InterContinental, there were 235 Crowne Plaza Hotels & Resorts®open and operating worldwide as of December 2005. We have invested a total of$138 million in four Crowne Plaza Hotels & Resorts® with a totalof 1,700 rooms.

 

**MarriottHotels and Resorts®** are renowned for theconsistent quality of their physical appearances and the high quality of theirstaff. Our Marriott Hotels and Resorts® contain between 356 and 601rooms. Our Marriott Hotels and Resorts® have between 17,000 to50,000 square feet of meeting and banquet space. Amenities include a wide

 

2

----

 

range of personal and businessservices in addition to a choice of restaurants, cocktail lounges, conciergefloors, pools, saunas, and health/fitness centers. According to Marriott, therewere 507 Marriott Hotels and Resorts® open worldwide as of December2005. We have invested $113 million in three Marriott Hotels and Resorts®with a total of 1,356 guest rooms.

 

**Radisson®Hotels & Resorts** isa leading full service hotel brand. Our Radisson® Hotels & Resorts hotels containbetween 180 and 381 rooms. Four of our hotels were rebranded as Radisson®Hotels & Resorts during 2005 and are currently undergoing renovations,which are expected to be completed by June 2006. Amenities and services includeSleep Number® beds, large desks, free high speed internet access,room service and access to 24 hour printing, telecopy and mail and packageservices. The meeting facilities at our Radisson® Hotels &Resorts generally can accommodate groups of between 10 and 600 people in aflexible meeting room design with audiovisual equipment. Each of our Radisson®Hotels & Resorts hotels generally also has a lobby lounge, a swimming pool,exercise facilities and one or more restaurants. According to Carlson HotelsWorldwide, or Carlson, the owner of the Radisson® Hotels &Resorts brand, there were 418 Radisson® Hotels & Resorts openand operating worldwide as of December 2005. We have invested a total of $100million in four Radisson® Hotels & Resorts with a total of 975rooms.

 

**TownePlaceSuites by Marriott®**are extended stay hotels offering studio, one bedroom and two bedroom suitesfor business and family travelers. TownePlace Suites by Marriott®compete in the mid-priced extended stay segment of the lodging industry. Eachsuite offers a fully equipped kitchen, a bedroom and separate living and workareas. Other amenities offered include voice mail, free high speed internetaccess, on site business services, guest laundry facilities and a fitnesscenter. According to Marriott, there were 122 TownePlace Suites by Marriott®open worldwide as of December 2005. We have invested $102 million in 12TownePlace Suites by Marriott® with a total of 1,331 suites.

 

**CountryInns & Suites by Carlson®** is a mid-tier lodging chain. Our Country Inns & Suites byCarlson® hotels contain between 84 and 180 rooms. Four of our hotelswere rebranded as Country Inns & Suites by Carlson® during 2005and are currently undergoing renovations which are expected to be completed byJune 2006. Amenities and services at these hotels include large desks, freebreakfast, weekday morning paper and high speed internet access. The meetingfacilities at our Country Inns & Suites by Carlson® hotelsgenerally can accommodate groups of between 10 and 200 people in a flexiblemeeting room design with audiovisual equipment. Most of our Country Inns &Suites by Carlson® hotels also feature a lobby with a fireplace,swimming pool, exercise facilities, fax and copy service and a restaurant andlounge. According to Carlson there were 379 Country Inns & Suites byCarlson® open and operating worldwide as of December 2005. We haveinvested a total of $69 million in five Country Inns & Suites by Carlson®with a total of 753 rooms.

 

**HolidayInn Hotels & Resorts®** combine all the services and amenities of a fullservice hotel in a contemporary style offered at a value price for eitherbusiness or leisure travelers. OurHoliday Inn Hotel® and our two Holiday Inn Select® hotelscontain between 190 and 264 rooms. Amenities and services generally availableat these hotels include a work desk, phone with voicemail, free high speedinternet access, a business center with internet access, copy and fax service,in room coffee or tea service, a refrigerator and designer bath amenities. Themeeting facilities at our Holiday Inn Hotels® generally canaccommodate groups of between 18 and 280 people in a flexible meeting roomdesign with audiovisual equipment and catering options. These hotels also offera swimming pool, exercise facilities, guest self-service laundry, a lobbylounge and restaurant. According to InterContinental, the owner of the HolidayInn Hotels & Resorts® brand, there were 1,435 Holiday Inn Hotels®open and operating worldwide as of December 2005. We have invested a total of$33 million in three Holiday Inn Hotels® with a total of 697 rooms.

 

**Park Plaza®****Hotels & Resorts**is in the mid pricesegment of the full service hotel category. Three of our hotels were rebranded as Park Plaza®Hotels & Resorts during 2005 and are currently undergoing renovations whichare expected to be completed by May 2006. Our Park Plaza® Hotels& Resorts contain between 159 and 209 rooms. Amenities and servicesgenerally available at these hotels include large desks, free high speedinternet access, room service and access to 24 hour telecopy and mail andpackage services. The meeting facilities at our Park Plaza® Hotels& Resorts generally can accommodate groups of between 10 and 400 people ina flexible meeting room design with audiovisual equipment. Our Park Plaza®Hotels & Resorts hotels also feature a lobby lounge, a

 

3

----

 

swimming pool, exercisefacilities and a restaurant. According to Carlson, the owner of the Park Plaza®Hotels & Resorts brand, there were 37 Park Plaza® Hotels &Resorts open and operating as of December 2005. We have invested a total of $27million in three Park Plaza® Hotels & Resorts with a total of534 rooms.

 

**SpringHillSuites by Marriott®**are all suites hotels designed to attract value conscious business and familytravelers. SpringHill Suites by Marriott® compete in the mid-pricedall suite segment of the lodging industry. Each suite offers separate sleeping,living and work areas, a mini-refrigerator, a microwave and coffee service.Other amenities offered include a pull out sofa bed, complimentary breakfastbuffet, weekday newspaper, two line phones, free high speed internet access andvoice mail, on site business services, guest laundry facilities and a fitnesscenter. According to Marriott, there were 137 SpringHill Suites by Marriott®open as of December 2005. We have invested $21 million in two SpringHill Suitesby Marriott® with a total of 264 suites.

 

**PRINCIPAL MANAGEMENT AGREEMENT OR LEASEFEATURES**

** **

As of December31, 2005, all of our hotels are operated by unrelated third parties. Each hotelwe own is operated as part of a combination of hotels under ten agreements, asdescribed below. The principal features of the management agreements and leasesfor our 298 hotels are as follows:

 

•      **Minimum Returns or Minimum Rent**. All of ouragreements require our managers or tenants to pay to us fixed minimum returnsor minimum rent.

 

•      **Additional Returns or Rent**. Most of ouragreements require percentage returns or rent equal to between 5% and 10% ofincreases in gross hotel revenues over threshold amounts. In addition, certainof our agreements provide for additional returns to us based on increases inhotel operating income.

 

•      **Long Terms**. Our management agreements andleases are generally entered for initial terms of 15 years or more. All of themanagement agreements and leases for our hotels expire after 2010. The weightedaverage term remaining for our hotel agreements (weighted by our investment) is16.5 years as of December 31, 2005.

 

•      **Pooled Agreements**. Each of our hotels ispart of a combination of hotels. The manager’s or tenant’s obligations to uswith respect to each hotel in a combination are subject to cross default withthe obligations with respect to all the other hotels in the same combination.The smallest combination includes 12 hotels with 2,262 rooms in which we haveinvested $196 million; the largest combination includes 76 hotels with 9,220rooms in which we have invested $590 million.

 

•      **Geographic Diversification**. Eachcombination of hotels is geographically diversified. In addition, our hotelsare located in the vicinity of major demand generators such as large suburbanoffice parks, airports, medical or educational facilities or major touristattractions.

 

•      **A****ll or None Renewals**.All manager or tenant renewal options for each combination of our hotels mayonly be exercised on an all or none basis and not for separate hotels.

 

•      **FF&E Reserves**. Generally our agreementsrequire the deposit of 5 to 6% of gross hotel revenues into escrows to fundperiodic renovations, or FF&E reserve, in addition to minimum returns orrents. For recently built or renovated hotels, this requirement may be deferredfor the first few years of the agreement.

 

•      **Security Features**. Each managementagreement or lease includes various terms intended to secure the payments tous, including some or all of the following: cash security deposits which wereceive but do not escrow; subordination of management fees payable to thehotel operator to some or all of our return or rent and full or limitedguarantees from the manager’s or tenant’s parent company. As of December 31,2005, six of our ten hotel combination agreements, including 173 hotels, haveminimum return or minimum rent payable to us which are subject to full orlimited guarantees. These hotels represent 58% of our total investments, atcost.

 

4

----

 

## **RECENTACQUISITIONS**

## ** **

On January 6,2006, we purchased the Harbor Court Complex in the Inner Harbor area ofBaltimore, Maryland for $78 million. The Harbor Court Complex is a mixed usedevelopment comprised of the five star, five diamond Harbor Court Hotel, a72,042 square foot office building, and a 530 space seven story parking garage.The hotel has 195 guest rooms, including 22 suites, 8,000 square feet ofmeeting space, and a roof top fitness center that includes a tennis court,squash court, indoor pool, aerobics center and spa therapy rooms.Simultaneously with this purchase, we entered into an agreement withInterContinental to manage the Harbor Court Hotel under its InterContinentalHotels & Resorts® brand. This hotel was added to an existingagreement with InterContinental under which it manages thirteen other hotelsowned by us through 2029. We have also entered into a management agreement withour manager, Reit Management & Research LLC, or RMR, to operate the officebuilding and an agreement with an unaffiliated third party to manage theparking garage. The transaction is more fully described in Item 7.“Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” of this Annual Report on Form 10-K.

 

On January 25,2006, we agreed to purchase nine hotels for $196 million. The hotels includefive full service Crowne Plaza® hotels, one full service Holiday InnSelect® hotel, two Staybridge Suites® hotels and oneHoliday Inn SunSpree Resort® hotel and have a total of 2,712rooms/suites and approximately 68,000 square feet of meeting space. The hotelsare located in three states in the United States and the Holiday Inn SunSpreeResort® hotel is located in Montego Bay, Jamaica. On January 25,2006, we completed the acquisition of eight of the nine hotels with aneffective date of January 20, 2006. Simultaneous with this closing, we enteredinto a long term management agreement with InterContinental for these hotels.The purchase of the 524 room Holiday Inn SunSpree Resort® hotel forapproximately $30 million was delayed pending Jamaican tax and regulatoryapprovals, and is expected to close later in 2006. Circumstances may delay thispurchase for an extended period or prevent its occurring. Simultaneous withthat purchase we will enter into a long term lease with InterContinental forthat hotel. The transaction is more fully described in Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Annual Report on Form 10-K.

 

**INVESTMENT AND OPERATING POLICIES**

** **

We providecapital to hotel owners and operators who wish to divest their properties whileremaining in the hotel business. Many other public hotel REITs seek to controlthe operations of hotels in which they invest and generally design theirmanagement agreements or leases to capture substantially all net operatingrevenues from their hotels. Our agreements with our unaffiliated operators andtenants are designed with the expectation that, over their terms, net operatingrevenues from our hotels will exceed minimum amounts due to us. We believe thatthis difference in operating philosophy may afford us a competitive advantageover other hotel REITs in finding high quality hotel investment opportunitieson attractive terms and increase the dependability of our cash flows used topay distributions.

 

Our investmentobjectives include increasing cash flow from operations from dependable anddiverse sources in order to increase per share distributions. To achieve theseobjectives, we seek to operate as follows: maintain a strong capital base ofshareholders’ equity; invest in high quality properties operated byunaffiliated hotel operating companies; use moderate debt leverage to fundadditional investments which increase cash flow from operations because ofpositive spreads between our cost of investment capital and investment yields;structure investments which generate a minimum return and provide an opportunityto participate in operating growth at our hotels; when market conditionspermit, refinance debt with additional equity or long term debt; and pursuediversification so that our cash flow from operations is received from diverseproperties and operators.

 

In order tobenefit from potential property appreciation, we prefer to own propertiesrather than make mortgage investments. We may invest in real estate jointventures if we conclude that we may benefit from the participation ofco-venturers or that the opportunity to participate in the investment iscontingent on the use of a joint venture structure. We may invest inparticipating, convertible or other types of mortgages if we conclude that wemay benefit from the cash flow or appreciation in the value of the mortgagedproperty. Convertible mortgages are similar to equity participation becausethey permit lenders to either participate in increasing revenues from theproperty or convert some or all of that mortgage into equity ownershipinterests. At December 31, 2005, we owned no convertible mortgages or jointventure interests.

 

5

----

 

We may notachieve some or all of our investment objectives.

 

Because we area REIT, generally, we may not operate hotels. We or our tenants have enteredinto arrangements for operation of our hotels. As described elsewhere in thisAnnual Report on Form 10-K, tax law changes known as the REIT ModernizationAct, or the RMA, were enacted and became effective January 1, 2001. The RMA, amongother things, allows a REIT to lease hotels to a taxable REIT subsidiary if thehotel is managed by an independent third party. As of December 31, 2005, 189 ofour hotels are leased to our taxable REIT subsidiaries and managed byindependent third parties. Any income realized by a taxable REIT subsidiary inexcess of the rent paid to us by the subsidiary will be subject to income taxat customary corporate rates. As, and if, the financial performance of thehotels operated for the account of our taxable REIT subsidiaries improves,these taxes may become material, but the anticipated taxes are not material toour consolidated financial results at this time.

 

**ACQUISITION POLICIES**

** **

We intend topursue growth through the acquisition of additional hotels. Generally, weprefer to purchase multiple hotels in one transaction because we believe asingle agreement, cross default covenants and all or none renewal rights formultiple hotels in diverse locations enhance the credit characteristics and thesecurity of our investments. In implementing our acquisition strategy, weconsider a range of factors relating to proposed hotel purchases including: (i)historical and projected cash flows; (ii) the competitive market environmentand the current or potential market position of each hotel; (iii) theavailability of a qualified operator or lessee; (iv) the financial strength ofthe proposed operator or lessee; (v) the amount and type of financial supportavailable from the proposed operator or lessee; (vi) the hotel’s design,physical condition and age; (vii) the estimated replacement cost and proposedacquisition price of the hotel; (viii) the price segment in which the hotel isoperated; (ix) the reputation of the particular hotel management organization,if any, with which the hotel is or may become affiliated; (x) the level ofservices and amenities offered at the hotel; (xi) the proposed managementagreement or lease terms; and (xii) the hotel brand under which the hoteloperates or is expected to operate. In determining the competitive position ofa hotel, we examine the proximity of the hotel to business, retail, academicand tourist attractions and transportation routes, the number andcharacteristics of competitive hotels within the hotel’s market area and the existenceof barriers to entry within that market, including site availability and zoningrestrictions. While we have historically focused on the acquisition of upscalelimited service, extended stay and full service hotel properties, we consideracquisitions in all segments of the hospitality industry. An important part ofour acquisition strategy is to identify and select qualified, experienced andfinancially stable hotel operators.

 

Whenever wepurchase an individual hotel or a small number of hotels we attempt to arrangefor these hotels to be added to agreements covering and operated in combinationwith hotels we already own.

 

We have nopolicies which specifically limit the percentage of our assets which may beinvested in any individual property, in any one type of property, in propertiesoperated by or leased to any one entity or in properties operated by or leasedto an affiliated group of entities.

 

In the past,we have considered the possibility of entering mergers or strategiccombinations with other companies. No such mergers or strategic combinationsare under active negotiation at this time. However, we may undertake suchnegotiations in the future. A principal goal of any such transaction may be todiversify our revenue sources.

 

**DISPOSITION POLICIES**

** **

In the past wehave occasionally sold a hotel or exchanged hotels which we own for differenthotels. Although we may do so, we have no current intention to dispose of anyof our presently owned hotels. We currently anticipate that disposition decisions,if any, will be based on factors including but not limited to the following:(i) potential opportunities to increase revenues and property values byreinvesting sale proceeds; (ii) the proposed sale price; (iii) the strategicfit of the hotel with the rest of our portfolio; (iv) our operator’s ortenant’s desire to cease operation of the hotel; and (v) the existence ofalternative sources, uses or needs for capital.

 

6

----

 

**FINANCING POLICIES**

** **

Although thereare no limitations in our organizational documents on the amount ofindebtedness we may incur, our $750 million unsecured revolving credit facilityand our senior note indenture and its supplements contain financial covenantswhich, among other things, restrict our ability to incur indebtedness andrequire us to maintain financial ratios and a minimum net worth. We currentlyintend to pursue our growth strategies while maintaining debt that is less than50% of our total capitalization. We may from time to time re-evaluate andmodify our financing policies in light of then current economic conditions,relative availability and costs of debt and equity capital, market values ofproperties, growth and acquisition opportunities and other factors, and we mayincrease or decrease our ratio of debt to total capitalization accordingly.

 

Our board oftrustees may determine to obtain a replacement for our current credit facilityor to seek additional capital through equity offerings, debt financings, orretention of cash flows in excess of distributions to shareholders or acombination of these methods. Only one of our properties is encumbered by amortgage. To the extent that our board of trustees decides to obtain additionaldebt financing, we may do so on an unsecured basis or a secured basis. We mayseek to obtain other lines of credit or to issue securities senior to ourcommon and/or preferred shares, including preferred shares of beneficialinterest and debt securities, either of which may be convertible into commonshares or be accompanied by warrants to purchase common shares, or to engage intransactions which may involve a sale or other conveyance of hotels tosubsidiaries or to unaffiliated entities. We may finance acquisitions throughan exchange of properties or through the issuance of additional common sharesor other securities. The proceeds from any of our financings may be used to paydistributions, to provide working capital, to refinance existing indebtednessor to finance acquisitions and expansions of existing or new properties.

 

**Manager**.Our day to day operations are conducted by RMR. RMR originates and presentsinvestment opportunities to our board of trustees and provides administrativeservices to us. RMR is a Delaware limited liability company, whose majorityowner is Barry Portnoy, one of our managing trustees. The remainder of RMRis owned by Adam Portnoy, Barry Portnoy’s son, who is also anexecutive officer of RMR and Executive Vice President of HRPT PropertiesTrust, or HRPT. RMR has a principal place of business at 400 Centre Street,Newton, Massachusetts 02458; and its telephone number is (617) 928-1300. RMRacts as manager to HRPT, a New York Stock Exchange, or NYSE, listed real estatecompany which owns office buildings and is the holder of 4,000,000 of ourcommon shares. The directors of RMR are Gerard M. Martin, another of ourmanaging trustees, Barry M. Portnoy and David J. Hegarty. The executiveofficers of RMR are David J. Hegarty, President and Secretary; John G. Murray,Executive Vice President; Evrett W. Benton, Vice President; Ethan S. Bornstein,Vice President; Jennifer B. Clark, Vice President; John R. Hoadley, VicePresident; Mark L. Kleifges, Vice President; David M. Lepore, Vice President;Bruce J. Mackey Jr., Vice President; John A. Mannix, Vice President; Thomas M.O’Brien, Vice President; John C. Popeo, Vice President and Treasurer; and AdamD. Portnoy, Vice President. Messrs. Murray, Kleifges and Bornstein are also ourofficers. Other officers of RMR also serve as officers of other companies towhich RMR provides management services, including HRPT.

 

**Employees**.We have no employees. Services which would otherwise be provided by employeesare provided by RMR and by our managing trustees and officers. As of March 10,2006, RMR had approximately 400 full time employees.

 

**Competition**.The hotel industry is highly competitive. Generally our hotels are located inareas that include other hotels. Increases in the number of hotels in aparticular area could have a material adverse effect on the occupancy and dailyroom rates at our hotels located in that area. Agreements with the operators ofour hotels sometimes restrict the right of each operator and its affiliates forlimited periods of time to own, build, operate, franchise or manage otherhotels of the same brand within various specified areas around our hotels.Under these agreements neither the operators nor their affiliates arerestricted from operating other brands of hotels in the market areas of any ofour hotels, and after such limited period of time, the operators and theiraffiliates may also compete with our hotels by opening, managing or franchisingadditional hotels under the same brand name in direct competition with ourhotels.

 

We expect tocompete for hotel acquisition and financing opportunities with entities whichmay have substantially greater financial resources than us, including, withoutlimitation, other REITs, hotel operating companies, banks, insurance companies,pension plans and public and private partnerships. These entities may be ableto accept more risk than we can prudently manage, including risks with respectto the creditworthiness of hotel

 

7

----

 

operators. Such competition mayreduce the number of suitable hotel acquisition or financing opportunitiesavailable to us or increase the bargaining power of hotel owners seeking tosell or finance their properties.

 

**EnvironmentalMatters**. Under various laws, owners of real estate maybe required to investigate and clean up hazardous substances present at theirproperties, and may be held liable for property damage or personal injuriesthat result from such hazardous substances. These laws also expose us to thepossibility that we become liable to reimburse the government for damages andcosts it incurs in connection with the hazardous substances. We reviewedenvironmental surveys of the hotels we own prior to their purchase. Based uponthose surveys we do not believe that any of our properties are subject to materialenvironmental contamination. However, no assurances can be given thatenvironmental conditions for which we would be liable are not present in ourproperties or that costs we incur to remediate contamination will not have amaterial adverse effect on our business or financial condition.

 

**InternetWebsite**. Our internet website address iswww.hptreit.com. Copies of ourgovernance guidelines, code of ethics and the charters of our audit,compensation and nominating and governance committees may be obtained free ofcharge by writing to our Secretary, Hospitality Properties Trust, 400 CentreStreet, Newton, MA 02458 or at our website. We make available, free ofcharge, on our website, our Annual Reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to these reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934, or the Exchange Act, as soon as reasonably practicable after these formsare filed with, or furnished to, the Securities and Exchange Commission, or theSEC. Any shareholder or otherinterested party who desires to communicate with our non-management trustees,individually or as a group, may do so by filling out a report on our website.Our board also provides a process for security holders to send communicationsto the entire board. Information about the process for sending communicationsto our board can be found on our website. Our website address is includedseveral times in this Annual Report on Form 10-K as a textual reference onlyand the information in the website is not incorporated by reference into thisAnnual Report on Form 10-K.

 

**SegmentInformation**. We have one operating segment, hotelinvestments.

 

**FEDERAL INCOME TAX CONSIDERATIONS**

** **

The following summary of federal income taxconsiderations is based on existing law, and is limited to investors who ownour shares as investment assets rather than as inventory or as property used ina trade or business. The summary does not discuss the particular tax consequencesthat might be relevant to you if you are subject to special rules under federalincome tax law, for example if you are:

 

•      a bank, life insurance company, regulatedinvestment company, or other financial institution;

 

•      a broker or dealer in securities or foreigncurrency;

 

•      a person who has a functional currency otherthan the U.S. dollar;

 

•      a person who acquires our shares inconnection with employment or other performance of services;

 

•      a person subject to alternative minimum tax;

 

•      a person who owns our shares as part of astraddle, hedging transaction, constructive sale transaction, constructiveownership transaction, or conversion transaction; or

 

•      except as specifically described in thefollowing summary, a tax-exempt entity or a foreign person.

 

TheInternal Revenue Code sections that govern federal income tax qualification andtreatment of a REIT and its shareholders are complex. This presentation is asummary of applicable Internal Revenue Code provisions, related rules andregulations and administrative and judicial interpretations, all of which aresubject to change, possibly with retroactive effect. The American Jobs CreationAct of 2004, or the 2004 Act, which subsequently received technical correctionsas part of the Gulf Opportunity Zone Act of 2005, made a number of significantchanges to these provisions,

 

8

----

 

some of which have retroactiveeffect; we have summarized these changes in more detail below. Futurelegislative, judicial, or administrative actions or decisions could also affectthe accuracy of statements made in this summary. We have not received a rulingfrom the IRS with respect to any matter described in this summary,****and we cannot assure you that the IRS or a court will agreewith the statements made in this summary. In addition, this summary is notexhaustive of all possible tax consequences, and does not discuss any estate,gift, state, local, or foreign tax consequences. For all these reasons, we urgeyou and any prospective acquiror of our shares to consult with a tax advisorabout the federal income tax and other tax consequences of the acquisition,ownership and disposition of our shares. Our intentions and beliefs describedin this summary are based upon our understanding of applicable laws andregulations that are in effect as of the date of this Annual Report on Form10-K. If new laws or regulations are enacted which impact us directly orindirectly, we may change our intentions or beliefs.

 

Your federal income tax consequences may differdepending on whether or not you are a “U.S. shareholder.” For purposes of thissummary, a “U.S. shareholder” for federal income tax purposes is:

 

•      a citizen or resident of the United States,including an alien individual who is a lawful permanent resident of the UnitedStates or meets the substantial presence residency test under the federalincome tax laws;

 

•      an entity treated as a corporation orpartnership for federal income tax purposes, that is created or organized in orunder the laws of the United States, any state thereof or the District ofColumbia, unless otherwise provided by Treasury regulations;

 

•      an estate the income of which is subject tofederal income taxation regardless of its source; or

 

•      a trust if a court within the United Statesis able to exercise primary supervision over the administration of the trustand one or more United States persons have the authority to control allsubstantial decisions of the trust, or electing trusts in existence on August20, 1996, to the extent provided in Treasury regulations;

 

whosestatus as a U.S. shareholder is not overridden by an applicable tax treaty.Conversely, a “non-U.S. shareholder” is a beneficial owner of our shares who isnot a U.S. shareholder.

 

**Taxation as a REIT**

 

We have elected to be taxed as a REIT under Sections856 through 860 of the Internal Revenue Code, commencing with our taxable yearending December 31, 1995. Our REIT election, assuming continuing compliancewith the then applicable qualification tests, continues in effect forsubsequent taxable years. Although no assurance can be given, we believe thatwe are organized, have operated, and will continue to operate in a manner thatqualifies us to be taxed under the Internal Revenue Code as a REIT.

 

As a REIT, we generally are not subject to federalincome tax on our net income distributed as dividends to our shareholders.Distributions to our shareholders generally are included in their income asdividends to the extent of our current or accumulated earnings and profits. Ourdividends are not generally entitled to the favorable 15% rate on qualifieddividend income, but a portion of our dividends may be treated as capital gaindividends, all as explained below. No portion of any of our dividends iseligible for the dividends received deduction for corporate shareholders.Distributions in excess of current or accumulated earnings and profitsgenerally are treated for federal income tax purposes as return of capital tothe extent of a recipient shareholder’s basis in our shares, and will reducethis basis. Our current or accumulated earnings and profits are generallyallocated first to distributions made on our preferred shares, and thereafterto distributions made on our common shares.

 

Our counsel, Sullivan & Worcester LLP, hasopined that we have been organized and have qualified as a REIT under theInternal Revenue Code for our 1995 through 2005 taxable years, and that ourcurrent investments and plan of operation enable us to continue to meet therequirements for qualification and taxation as a REIT under the InternalRevenue Code. Our continued qualification and taxation as a REIT will dependupon our compliance with various qualification tests imposed under the InternalRevenue Code and summarized below. While we believe that we will satisfy thesetests, our counsel has not reviewed and will not review compliance with thesetests on a continuing basis. If we fail to qualify as a REIT, we will besubject to federal income taxation as if we were a C corporation and our

 

9

----

 

shareholders will be taxed likeshareholders of C corporations. In this event, we could be subject tosignificant tax liabilities, and the amount of cash available for distributionto our shareholders may be reduced or eliminated.

 

If we qualify as a REIT and meet the tests describedbelow, we generally will not pay federal income tax on amounts we distribute toour shareholders. However, even if we qualify as a REIT, we may be subject tofederal tax in the following circumstances:

 

•      We will be taxed at regular corporate rateson any undistributed “real estate investment trust taxable income,” includingour undistributed net capital gains.

 

•      If our alternative minimum taxable incomeexceeds our taxable income, we may be subject to the corporate alternativeminimum tax on our items of tax preference.

 

•      If we have net income from the disposition of“foreclosure property” that is held primarily for sale to customers in theordinary course of business or from other nonqualifying income from foreclosureproperty, we will be subject to tax on this income at the highest regularcorporate rate, currently 35%.

 

•      If we have net income from prohibitedtransactions, including dispositions of inventory or property held primarilyfor sale to customers in the ordinary course of business other than foreclosureproperty, we will be subject to tax on this income at a 100% rate.

 

•      If we fail to satisfy the 75% gross incometest or the 95% gross income test discussed below, but nonetheless maintain ourqualification as a REIT, we will be subject to tax at a 100% rate on thegreater of the amount by which we fail the 75% or the 95% test, withadjustments, multiplied by a fraction intended to reflect our profitability.

 

•      If we fail to distribute for any calendaryear at least the sum of 85% of our REIT ordinary income for that year, 95% ofour REIT capital gain net income for that year, and any undistributed taxableincome from prior periods, we will be subject to a 4% excise tax on the excessof the required distribution over the amounts actually distributed.

 

•      If we acquire an asset from a corporation ina transaction in which our basis in the asset is determined by reference to thebasis of the asset in the hands of a present or former C corporation, andif we subsequently recognize gain on the disposition of this asset during theten year period beginning on the date on which the asset ceased to be owned bythe C corporation, then we will pay tax at the highest regular corporatetax rate, which is currently 35%, on the lesser of the excess of the fairmarket value of the asset over the C corporation’s basis in the asset onthe date the asset ceased to be owned by the C corporation, or the gain werecognize in the disposition.

 

•      If we acquire a corporation, to preserve ourstatus as a REIT we must generally distribute all of the C corporation earningsand profits inherited in that acquisition, if any, not later than the end ofthe taxable year of the acquisition. However, if we fail to do so, reliefprovisions would allow us to maintain our status as a REIT provided wedistribute any subsequently discovered C corporation earnings and profits andpay an interest charge in respect of the period of delayed distribution.

 

•      As summarized below, REITs are permittedwithin limits to own stock and securities of a “taxable REIT subsidiary.” Ataxable REIT subsidiary is separately taxed on its net income as a Ccorporation, and is subject to limitations on the deductibility of interestexpense paid to its REIT parent. In addition, its REIT parent is subject to a100% tax on the difference between amounts charged and redetermined rents anddeductions, including excess interest.

 

•      If and to the extent we invest in propertiesin foreign jurisdictions, our income from those properties will generally besubject to tax in those jurisdictions. In 2005, we acquired hotels in Canadaand Puerto Rico, and we are currently under contract to acquire a hotel inJamaica. Our profits from properties outside of the United States willgenerally be subject to tax in the local jurisdictions. Through structuring andobtaining

 

10

----

 

available tax exemptions, we expect to minimize theCanadian, Puerto Rican and Jamaican income taxes we have to pay, but there canbe no assurance that these existing structures and exemptions will be availableto us in the future to minimize taxes. If we continue to operate as we do, thenwe will distribute our taxable income to our shareholders each year and we willgenerally not pay federal income tax. As a result, we cannot recover the costof foreign income taxes imposed on our foreign investments by claiming foreigntax credits against our federal income tax liability. Also, we cannot passthrough to our shareholders any foreign tax credits.

 

Ifwe fail to qualify or elect not to qualify as a REIT, we will be subject tofederal income tax in the same manner as a C corporation. Distributions to ourshareholders if we do not qualify as a REIT will not be deductible by us norwill distributions be required under the Internal Revenue Code. In that event,distributions to our shareholders will generally be taxable as ordinarydividends potentially eligible for the 15% income tax rate discussed below in“Taxation of U.S. Shareholders” and, subject to limitations in the InternalRevenue Code, will be eligible for the dividends received deduction forcorporate shareholders. Also, we will generally be disqualified fromqualification as a REIT for the four taxable years following disqualification.If we do not qualify as a REIT for even one year, this could result inreduction or elimination of distributions to our shareholders, or in ourincurring substantial indebtedness or liquidating substantial investments inorder to pay the resulting corporate-level taxes. For our 2005 taxable year andbeyond, the 2004 Act provides certain relief provision under which we mightavoid automatically ceasing to be a REIT for failure to meet certain REITrequirements, all as discussed in more detail below.

 

**REIT Qualification Requirements**

 

*General Requirements.*Section 856(a) of the Internal Revenue Code defines a REIT as acorporation, trust or association:

 

(1)           that is managed by one or more trustees ordirectors;

 

(2)           the beneficial ownership of which isevidenced by transferable shares or by transferable certificates of beneficialinterest;

 

(3)           that would be taxable, but for Sections 856through 859 of the Internal Revenue Code, as a C corporation;

 

(4)           that is not a financial institution or aninsurance company subject to special provisions of the Internal Revenue Code;

 

(5)           the beneficial ownership of which is held by100 or more persons;

 

(6)           that is not “closely held” as defined underthe personal holding company stock ownership test, as described below; and

 

(7)           that meets other tests regarding income,assets and distributions, all as described below.

 

Section 856(b)of the Internal Revenue Code provides that conditions (1) through (4) must bemet during the entire taxable year and that condition (5) must be metduring at least 335 days of a taxable year of 12 months, or during a pro ratapart of a taxable year of less than 12 months. Section 856(h)(2) of theInternal Revenue Code provides that neither condition (5) nor (6) need bemet for our first taxable year as a REIT. We believe that we have metconditions (1) through (7) during each of the requisite periods ending onor before December 31, 2005, and that we can continue to meet these conditionsin future taxable years. There can, however, be no assurance in this regard.

 

By reason of condition (6), we will fail to qualifyas a REIT for a taxable year if at any time during the last half of a year morethan 50% in value of our outstanding shares is owned directly or indirectly byfive or fewer individuals. To help comply with condition (6), our declarationof trust restricts transfers of our shares. In addition, if we comply withapplicable Treasury regulations to ascertain the ownership of our shares and donot know, or by exercising reasonable diligence would not have known, that wefailed condition (6), then we will be treated as having met condition

 

11

----

 

(6). However, our failure tocomply with these regulations for ascertaining ownership may result in apenalty of $25,000, or $50,000 for intentional violations. Accordingly, weintend to comply with these regulations, and to request annually from recordholders of significant percentages of our shares information regarding theownership of our shares. Under our declaration of trust, our shareholders arerequired to respond to these requests for information.

 

For purposes of condition (6), REIT shares held by apension trust are treated as held directly by the pension trust’s beneficiariesin proportion to their actuarial interests in the pension trust. Consequently,five or fewer pension trusts could own more than 50% of the interests in anentity without jeopardizing that entity’s federal income tax qualification as aREIT. However, as discussed below, if a REIT is a “pension-held REIT,” eachpension trust owning more than 10% of the REIT’s shares by value generally maybe taxed on a portion of the dividends it receives from the REIT.

 

The2004 Act provides that we will not automatically fail to be a REIT if we do notmeet conditions (1) through (6), provided we can establish reasonable cause forany such failure. Each such excused failure will result in the imposition of a$50,000 penalty instead of REIT disqualification. It is impossible to statewhether in all circumstances we would be entitled to the benefit of this reliefprovision. This relief provision applies to any failure of the applicableconditions, even if the failure first occurred in a prior taxable year, as longas each of the requirements of the relief provision is satisfied after October22, 2004.

 

*Our Wholly-Owned**Subsidiaries and Our Investments throughPartnerships.* Except in respect of taxable REIT subsidiaries asdiscussed below, Section 856(i) of the Internal Revenue Code provides thatany corporation, 100% of whose stock is held by a REIT, is a qualified REITsubsidiary and shall not be treated as a separate corporation. The assets,liabilities and items of income, deduction and credit of a qualified REITsubsidiary are treated as the REIT’s. We believe that each of our direct andindirect wholly-owned subsidiaries, other than the taxable REIT subsidiariesdiscussed below, will either be a qualified REIT subsidiary within the meaningof Section 856(i) of the Internal Revenue Code, or a noncorporateentity that for federal income tax purposes is not treated as separate from itsowner under regulations issued under Section 7701 of the Internal RevenueCode. Thus, except for the taxable REIT subsidiaries discussed below, inapplying all the federal income tax REIT qualification requirements describedin this summary, all assets, liabilities and items of income, deduction andcredit of our direct and indirect wholly-owned subsidiaries are treated asours.

 

We have invested and may invest in real estatethrough one or more limited or general partnerships or limited liabilitycompanies that are treated as partnerships for federal income tax purposes. Inthe case of a REIT that is a partner in a partnership, regulations under theInternal Revenue Code provide that, for purposes of the REIT qualificationrequirements regarding income and assets discussed below, the REIT is deemed toown its proportionate share of the assets of the partnership corresponding tothe REIT’s proportionate capital interest in the partnership and is deemed tobe entitled to the income of the partnership attributable to this proportionateshare. In addition, for these purposes, the character of the assets and gross incomeof the partnership generally retain the same character in the hands of theREIT. Accordingly, our proportionate share of the assets, liabilities, anditems of income of each partnership in which we are a partner is treated asours for purposes of the income tests and asset tests discussed below. Incontrast, for purposes of the distribution requirement discussed below, we musttake into account as a partner our share of the partnership’s income asdetermined under the general federal income tax rules governing partnersand partnerships under Sections 701 through 777 of the Internal Revenue Code.

 

*Taxable REIT Subsidiaries.* We are permitted to own any or all of the securities of a “taxableREIT subsidiary” as defined in Section 856(l) of the Internal Revenue Code,provided that no more than 20% of our assets, at the close of each quarter, iscomprised of our investments in the stock or securities of our taxable REITsubsidiaries. Among other requirements, a taxable REIT subsidiary must:

 

(1) be a non-REIT corporation for federal income taxpurposes in which we directly or indirectly own shares;

 

(2) join with us in making a taxable REIT subsidiaryelection;

 

(3) not directly or indirectly operate or manage alodging facility or a health care facility; and

 

12

----

 

(4) not directly or indirectly provide to anyperson, under a franchise, license, or otherwise, rights to any brand nameunder which any lodging facility or health care facility is operated, exceptthat in limited circumstances a subfranchise, sublicense or similar right canbe granted to an independent contractor to operate or manage a lodgingfacility.

 

In addition, a corporation other than a REIT inwhich a taxable REIT subsidiary directly or indirectly owns more than 35% ofthe voting power or value will automatically be treated as a taxable REITsubsidiary. Subject to the discussion below, we believe that we and each of ourtaxable REIT subsidiaries have complied with, and will continue to comply with,the requirements for taxable REIT subsidiary status during all times eachsubsidiary’s taxable REIT subsidiary election remains in effect, and we believethat the same will be true for any taxable REIT subsidiary that we later formor acquire.

 

Our ownership of stock and securities in taxableREIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussedbelow. Also, as discussed below, taxable REIT subsidiaries can perform servicesfor our tenants without disqualifying the rents we receive from those tenantsunder the 75% or 95% gross income tests discussed below. Moreover, becausetaxable REIT subsidiaries are taxed as C corporations that are separate fromus, their assets, liabilities and items of income, deduction and credit are notgenerally imputed to us for purposes of the REIT qualification requirementsdescribed in this summary. Therefore, taxable REIT subsidiaries can generallyundertake third-party management and development activities and activities notrelated to real estate. Finally, while a REIT is generally limited in itsability to earn qualifying rental income from a taxable REIT subsidiary, a REITcan earn qualifying rental income from the lease of a qualified lodgingfacility to a taxable REIT subsidiary if an eligible independent contractoroperates the facility, as discussed more fully below.

 

Restrictions are imposed on taxable REITsubsidiaries to ensure that they will be subject to an appropriate level offederal income taxation. For example, a taxable REIT subsidiary may not deductinterest paid in any year to an affiliated REIT to the extent that the interestpayments exceed, generally, 50% of the taxable REIT subsidiary’s adjustedtaxable income for that year. However, the taxable REIT subsidiary may carryforward the disallowed interest expense to a succeeding year, and deduct theinterest in that later year subject to that year’s 50% adjusted taxable incomelimitation. In addition, if a taxable REIT subsidiary pays interest, rent, orother amounts to its affiliated REIT in an amount that exceeds what anunrelated third party would have paid in an arm’s length transaction, then theREIT generally will be subject to an excise tax equal to 100% of the excessiveportion of the payment. Finally, if in comparison to an arm’s lengthtransaction, a tenant has overpaid rent to the REIT in exchange for underpayingthe taxable REIT subsidiary for services rendered, then the REIT may be subjectto an excise tax equal to 100% of the overpayment. There can be no assurancethat arrangements involving our taxable REIT subsidiaries will not result inthe imposition of one or more of these deduction limitations or excise taxes,but we do not believe that we are or will be subject to these impositions.

 

*Income Tests.*There are two gross income requirements for qualification as a REIT under theInternal Revenue Code:

 

•      At least 75% of our gross income, excludinggross income from sales or other dispositions of property held primarily forsale, must be derived from investments relating to real property, including“rents from real property” as defined under Section 856 of the InternalRevenue Code, mortgages on real property, or shares in other REITs. When wereceive new capital in exchange for our shares or in a public offering offive-year or longer debt instruments, income attributable to the temporaryinvestment of this new capital in stock or a debt instrument, if received oraccrued within one year of our receipt of the new capital, is generally alsoqualifying income under the 75% gross income test.

 

•      At least 95% of our gross income, excludinggross income from sales or other dispositions of property held primarily forsale, must be derived from a combination of items of real property income thatsatisfy the 75% gross income test described above, dividends, interest, gainsfrom the sale or disposition of stock, securities, or real property or, forfinancial instruments entered into during our 2004 or earlier taxable years,certain payments under interest rate swap or cap agreements, options, futurescontracts, forward rate agreements or similar financial instruments. But forfinancial instruments entered into during our 2005 or later taxable years, the95% gross income test has been modified as follows: except as may be providedin Treasury regulations,

 

13

----

 

gross income for these purposes no longer includesincome from a “hedging transaction” as defined under clauses (ii) and (iii) ofSection 1221(b)(2)(A) of the Internal Revenue Code, but only to the extent that(A) the transaction hedges indebtedness we incur to acquire or carry realestate assets, and (B) the hedging transaction was “clearly identified,”meaning that the transaction must be identified as a hedging transaction beforethe end of the day on which it is entered and the risks being hedged must beidentified generally within 35 days after the date the transaction is entered.

 

Forpurposes of the 75% and 95% gross income tests outlined above, income derivedfrom a “shared appreciation provision” in a mortgage loan is generally treatedas gain recognized on the sale of the property to which it relates. Although wewill use our best efforts to ensure that the income generated by ourinvestments will be of a type that satisfies both the 75% and 95% gross incometests, there can be no assurance in this regard.

 

In order to qualify as “rents from real property”under Section 856 of the Internal Revenue Code, several requirements must bemet:

 

•      The amount of rent received generally mustnot be based on the income or profits of any person, but may be based onreceipts or sales.

 

•      Rents do not qualify if the REIT owns 10% ormore by vote or value of the tenant, whether directly or after application ofattribution rules. While we intend not to lease property to any party if rentsfrom that property would not qualify as rents from real property, applicationof the 10% ownership rule is dependent upon complex attributionrules and circumstances that may be beyond our control. For example, anunaffiliated third party’s ownership directly or by attribution of 10% or moreby value of our shares, as well as 10% or more by vote or value of the stock ofone of our tenants, would result in that tenant’s rents not qualifying as rentsfrom real property. Our declaration of trust disallows transfers or purportedacquisitions, directly or by attribution, of our shares to the extent necessaryto maintain our REIT status under the Internal Revenue Code. Nevertheless,there can be no assurance that these provisions in our declaration of trustwill be effective to prevent our REIT status from being jeopardized under the10% affiliated tenant rule. Furthermore, there can be no assurance that we willbe able to monitor and enforce these restrictions, nor will our shareholdersnecessarily be aware of ownership of shares attributed to them under theInternal Revenue Code’s attribution rules.

 

•      There is a limited exception to the aboveprohibition on earning “rents from real property” from a 10% affiliated tenant,if the tenant is a taxable REIT subsidiary. If at least 90% of the leased spaceof a property is leased to tenants other than taxable REIT subsidiaries and 10%affiliated tenants, and if the taxable REIT subsidiary’s rent for space at thatproperty is substantially comparable to the rents paid by nonaffiliated tenantsfor comparable space at the property, then otherwise qualifying rents paid bythe taxable REIT subsidiary to the REIT will not be disqualified on account ofthe rule prohibiting 10% affiliated tenants.

 

•      There is a second exception to the aboveprohibition on earning “rents from real property” from a 10% affiliated tenant.For this second exception to apply, a real property interest in a “qualifiedlodging facility” must be leased by the REIT to its taxable REIT subsidiary,and the facility must be operated on behalf of the taxable REIT subsidiary by aperson who is an “eligible independent contractor,” all as described in Section856(d)(8)-(9) of the Internal Revenue Code. As described below, we believe ourleases with our taxable REIT subsidiaries have satisfied and will satisfy theserequirements.

 

•      In order for rents to qualify, we generallymust not manage the property or furnish or render services to the tenants ofthe property, except through an independent contractor from whom we derive noincome or, for our 2001 taxable year and thereafter, through one of our taxableREIT subsidiaries. There is an exception to this rule permitting a REIT toperform customary tenant services of the sort that a tax-exempt organizationcould perform without being considered in receipt of “unrelated businesstaxable income” as defined in Section 512(b)(3) of the Internal RevenueCode. In addition, a *de minimis*amount of noncustomary services will not disqualify income as “rents from realproperty” so long as the value of the impermissible services does not exceed 1%of the gross income from the property.

 

14

----

 

•      If rent attributable to personal propertyleased in connection with a lease of real property is 15% or less of the totalrent received under the lease, then the rent attributable to personal propertywill qualify as “rents from real property”; if this 15% threshold is exceeded,the rent attributable to personal property will not so qualify. For our taxableyears through December 31, 2000, the portion of rental income treated asattributable to personal property was determined according to the ratio of thetax basis of the personal property to the total tax basis of the real andpersonal property that is rented. For our 2001 taxable year and thereafter, theratio is determined by reference to fair market values rather than tax bases.

 

Webelieve that all or substantially all our rents have qualified and will qualifyas rents from real property for purposes of Section 856 of the Internal RevenueCode.

 

In order to qualify as mortgage interest on realproperty for purposes of the 75% test, interest must derive from a mortgageloan secured by real property with a fair market value, at the time the loan ismade, at least equal to the amount of the loan. If the amount of the loanexceeds the fair market value of the real property, the interest will betreated as interest on a mortgage loan in a ratio equal to the ratio of thefair market value of the real property to the total amount of the mortgageloan.

 

Certain amounts payable to us under agreementsrelating to the Canadian hotels we acquired in 2005 may be determined byreference to revenue and expenditure items denominated in Canadian dollars.Currency translation or exchange gains or losses might not count favorablytoward the 75% and 95% gross income tests summarized above, and thus, insufficient amounts, such currency gains could threaten compliance with the REITincome tests. However, because any amounts paid to us, as opposed to ourtaxable REIT subsidiary, under these Canadian hotel agreements will bedenominated in U.S. dollars only, we do not expect to have material amounts ofcurrency gains in respect of our Canadian investments. We expect to employ asimilar currency and tax strategy with regard to the Jamaican hotel that we areunder contract to acquire.

 

Other than sales offoreclosure property, any gainwe realize on the sale of property held as inventory or other property heldprimarily for sale to customers in the ordinary course of business will betreated as income from a prohibited transaction that is subject to a penaltytax at a 100% rate. This prohibited transaction income also may adversely affectour ability to satisfy the 75% and 95% gross income tests for federal incometax qualification as a REIT. We cannot provide assurances as to whether or notthe IRS might successfully assert that one or more of our dispositions issubject to the 100% penalty tax. However, we believe that dispositions ofassets that we have made or that we might make in the future will not besubject to the 100% penalty tax, because we intend to:

 

•      own our assets for investment with a view tolong-term income production and capital appreciation;

 

•      engage in the business of developing, owningand operating our existing properties and acquiring, developing, owning andoperating new properties; and

 

•      make occasional dispositions of our assetsconsistent with our long-term investment objectives.

 

Pursuantto the 2004 Act, if we fail to satisfy one or both of the 75% or the 95% grossincome tests in any taxable year, we may nevertheless qualify as a REIT forthat year if we satisfy the following requirements after October 22, 2004:

 

•      our failure to meet the test is due to reasonable cause and not due towillful neglect, and

 

•      after we identify the failure, we file a schedule describing each itemof our gross income included in the 75% or 95% gross income tests for thattaxable year.

 

It is impossible to statewhether in all circumstances we would be entitled to the benefit of this reliefprovision for the 75% and 95% gross income tests. Even if this relief provisiondoes apply, a 100% tax is imposed upon the greater of the amount by which wefailed the 75% test or the 95% test, with adjustments, multiplied by a fractionintended to reflect our profitability. This relief provision applies to anyfailure of the applicable income tests, even if the failure first

 

15

----

 

occurred in a prior taxableyear, as long as each of the requirements of the relief provision is satisfiedafter October 22, 2004.

 

Underprior law, if we failed to satisfy one or both of the 75% or 95% gross incometests, we nevertheless would have qualified as a REIT for that year if:  our failure to meet the test was due toreasonable cause and not due to willful neglect; we reported the nature andamount of each item of our income included in the 75% or 95% gross income testsfor that taxable year on a schedule attached to our tax return; and anyincorrect information on the schedule was not due to fraud with intent to evadetax. For our 2004 and prior taxable years, we attached a schedule of grossincome to our federal income tax returns, but it is impossible to state whetherin all circumstances we would be entitled to the benefit of this prior reliefprovision for the 75% and 95% gross income tests. Even if this relief provisiondid apply, a 100% tax is imposed upon the greater of the amount by which wefailed the 75% test or the 95% test, with adjustments, multiplied by a fractionintended to reflect our profitability.

 

*Asset Tests.*At the close of each quarter of each taxable year, we must also satisfy thefollowing asset percentage tests in order to qualify as a REIT for federalincome tax purposes:

 

•      At least 75% of our total assets must consistof real estate assets, cash and cash items, shares in other REITs, governmentsecurities, and temporary investments of new capital (that is, stock or debtinstruments purchased with proceeds of a stock offering or a public offering ofour debt with a term of at least five years, but only for the one-year periodcommencing with our receipt of the offering proceeds).

 

•      Not more than 25% of our total assets may berepresented by securities other than those securities that count favorablytoward the preceding 75% asset test.

 

•      Of the investments included in the preceding25% asset class, the value of any one non-REIT issuer’s securities that we ownmay not exceed 5% of the value of our total assets, and we may not own morethan 10% of any one non-REIT issuer’s outstanding voting securities. For our2001 taxable year and thereafter, we may not own more than 10% of the vote orvalue of any one non-REIT issuer’s outstanding securities, unless that issueris our taxable REIT subsidiary or the securities are “straight debt” securitiesor otherwise excepted as discussed below.

 

•      For our 2001 taxable year and thereafter, ourstock and securities in a taxable REIT subsidiary are exempted from thepreceding 10% and 5% asset tests. However, no more than 20% of our total assetsmay be represented by stock or securities of taxable REIT subsidiaries.

 

When a failure to satisfy the above asset testsresults from an acquisition of securities or other property during a quarter,the failure can be cured by disposition of sufficient nonqualifying assetswithin 30 days after the close of that quarter.

 

In addition, for our 2005 taxable year and thereafter,the 2004 Act provides that if we fail the 5% value test or the 10% vote orvalue tests at the close of any quarter and do not cure such failure within 30days after the close of that quarter, that failure will nevertheless be excusedif (a) the failure is de minimis and (b) within 6 months after the last day ofthe quarter in which we identify the failure, we either dispose of the assetscausing the failure or otherwise satisfy the 5% value and 10% vote and valueasset tests. For purposes of this relief provision, the failure will be “deminimis” if the value of the assets causing the failure does not exceed thelesser of (a) 1% of the total value of our assets at the end of the relevantquarter or (b) $10,000,000. If our failure is not de minimis, or if any of theother REIT asset tests have been violated, we may nevertheless qualify as aREIT if (a) we provide the IRS with a description of each asset causing thefailure, (b) the failure was due to reasonable cause and not willful neglect,(c) we pay a tax equal to the greater of (i) $50,000 or (ii) the highest rateof corporate tax imposed (currently 35%) on the net income generated by theassets causing the failure during the period of the failure, and (d) within 6months after the last day of the quarter in which we identify the failure, weeither dispose of the assets causing the failure or otherwise satisfy all ofthe REIT asset tests. These relief provisions apply to any failure of theapplicable asset tests, even if the failure first occurred in a prior taxableyear, as long as each of the requirements of the relief provision is satisfiedafter October 22, 2004.

 

16

----

 

The 2004 Act also clarifies and expands, on aretroactive basis so as to be effective for our 2001 taxable year forward, anexcepted securities safe harbor to the 10% value test that includes among otheritems (a) “straight debt” securities, (b) certain rental agreements in whichpayment is to be made in subsequent years, (c) any obligation to pay rents fromreal property, (d) securities issued by governmental entities that are notdependent in whole or in part on the profits of or payments from anongovernmental entity, and (e) any security issued by another REIT.

 

We intend to maintain records of the value of ourassets to document our compliance with the above asset tests, and to takeactions as may be required to cure any failure to satisfy the tests within 30days after the close of any quarter.

 

*OurRelationship with Our Taxable REIT Subsidiaries*.We currently own hotels that we purchased to be leased to our taxable REITsubsidiaries or which are being leased to our taxable REIT subsidiaries as aresult of modifications to a prior lease that were agreed to among us, theformer tenant and the manager. We may from time to time in the future leaseadditional hotels that we acquire in this manner.

 

In connection withlease defaults, we terminated occupancy of some of our hotels by defaultingtenants and immediately leased these hotels to our taxable REIT subsidiariesand entered into new third party management agreements for these hotels. We mayin the future employ similar arrangements if we ever again face lease oroccupancy terminations.

 

In transactionsinvolving our taxable REIT subsidiaries, our intent is that the rents paid tous by the taxable REIT subsidiary qualify as “rents from real property” underthe REIT gross income tests summarized above. In order for this to be the case,the manager engaged by the applicable taxable REIT subsidiary must be an“eligible independent contractor” within the meaning of Section 856(d)(9)(A) ofthe Internal Revenue Code, and the hotels leased to the taxable REIT subsidiarymust be “qualified lodging facilities” within the meaning of Section 856(d)(9)(D)of the Internal Revenue Code. Qualified lodging facilities are defined ashotels, motels, or other establishments where more than half of the dwellingunits are used on a transient basis, provided that legally authorized wageringor gambling activities are not conducted at or in connection with suchfacilities. Also included in the definition are the qualified lodgingfacility’s customary amenities and facilities.

 

For these purposes, acontractor qualifies as an “eligible independent contractor” if it is less than35% affiliated with the REIT and, at the time the contractor enters into theagreement with the taxable REIT subsidiary to operate the qualified lodgingfacility, that contractor or any person related to that contractor is activelyengaged in the trade or business of operating qualified lodging facilities forpersons unrelated to the taxable REIT subsidiary or its affiliated REIT. Forthese purposes, an otherwise eligible independent contractor is notdisqualified from that status on account of the taxable REIT subsidiary bearingthe expenses for the operation of the qualified lodging facility, the taxableREIT subsidiary receiving the revenues from the operation of the qualifiedlodging facility, net of expenses for that operation and fees payable to theeligible independent contractor, or the REIT receiving income from the eligibleindependent contractor pursuant to a preexisting or otherwise grandfatheredlease of another property.

 

Inone case involving a former manager whose hotel management activities forparties unrelated to us was not as extensive as those of our other managers, wereceived an opinion of counsel that the particular manager should qualify as an“eligible independent contractor” within the meaning of Section 856(d)(9)(A) ofthe Internal Revenue Code, and that, although the matter is not free fromdoubt, it is reasonable for us to rely on such opinion for purposes of therelief provisions under the REIT gross income tests summarized above.Accordingly, although there can be no assurance in this regard, we expect thatthe rental income we receive from our taxable REIT subsidiaries will qualify as“rents from real property” under the REIT gross income tests. We also tooksteps to qualify for the 75% and 95% gross income tests’ relief provision,including for example attaching an applicable schedule of gross income to ourfederal income tax returns as previously required by Section 856(c)(6) of theInternal Revenue Code. Thus, even if the IRS or a court ultimately determinesthat one or more of our managers failed to operate “qualified lodgingfacilities” for others sufficient to qualify as an eligible independentcontractor, and that this failure thereby implicated our compliance with theREIT gross income tests, we expect we would qualify for the gross income tests’relief provision and thereby preserve our qualification as a REIT.

 

17

----

 

As explained above, we will be subject to a 100% tax if the IRSsuccessfully asserts that the rents paid by our taxable REIT subsidiary to usexceed an arm’s length rental rate. Although there is no clear precedent todistinguish for federal income tax purposes among leases, management contracts,partnerships, financings, and other contractual arrangements, we believe thatour leases and our taxable REIT subsidiaries’ management agreements will berespected for purposes of the requirements of the Internal Revenue Codediscussed above. Accordingly, we expect that the rental income from our currentand future taxable REIT subsidiaries will qualify favorably as “rents from realproperty,” and that the 100% tax on excessive rents from a taxable REITsubsidiary will not apply.

 

*Annual Distribution Requirements.* In order to qualify for taxation as a REITunder the Internal Revenue Code, we are required to make annual distributionsother than capital gain dividends to our shareholders in an amount at leastequal to the excess of:

 

(A)            the sum of 90% of our “real estate investmenttrust taxable income,” as defined in Section 857 of the Internal Revenue Code,computed by excluding any net capital gain and before taking into account anydividends paid deduction for which we are eligible, and 90% of our net incomeafter tax, if any, from property received in foreclosure, over

 

(B)             the sum of our qualifying noncash income, *e.g*., imputed rental income or income from transactionsinadvertently failing to qualify as like-kind exchanges.

 

Thedistributions must be paid in the taxable year to which they relate, or in thefollowing taxable year if declared before we timely file our tax return for theearlier taxable year and if paid on or before the first regular distributionpayment after that declaration. If a dividend is declared in October, November,or December to shareholders of record during one of those months, and is paidduring the following January, then for federal income tax purposes the dividendwill be treated as having been both paid and received on December 31 ofthe prior taxable year. A distribution which is not pro rata within a class ofour beneficial interests entitled to a distribution, or which is not consistentwith the rights to distributions among our classes of beneficial interests, isa preferential distribution that is not taken into consideration for purposesof the distribution requirements, and accordingly the payment of a preferentialdistribution could affect our ability to meet the distribution requirements.Taking into account our distribution policies, including the dividendreinvestment plan we have adopted, we expect that we will not make anypreferential distributions. The distribution requirements may be waived by theIRS if a REIT establishes that it failed to meet them by reason ofdistributions previously made to meet the requirements of the 4% excise taxdiscussed below. To the extent that we do not distribute all of our net capitalgain and all of our real estate investment trust taxable income, as adjusted,we will be subject to tax on undistributed amounts.

 

In addition, we will be subject to a 4% excise taxto the extent we fail within a calendar year to make required distributions toour shareholders of 85% of our ordinary income and 95% of our capital gain netincome plus the excess, if any, of the “grossed up required distribution” forthe preceding calendar year over the amount treated as distributed for thatpreceding calendar year. For this purpose, the term “grossed up requireddistribution” for any calendar year is the sum of our taxable income for thecalendar year without regard to the deduction for dividends paid and allamounts from earlier years that are not treated as having been distributedunder the provision. We will be treated as having sufficient earnings andprofits to treat as a dividend any distribution by us up to the amount requiredto be distributed in order to avoid imposition of the 4% excise tax.

 

If we do not have enough cash or other liquid assetsto meet the 90% distribution requirements, we may find it necessary anddesirable to arrange for new debt or equity financing to provide funds forrequired distributions in order to maintain our REIT status. We can provide noassurance that financing would be available for these purposes on favorableterms.

 

Wemay be able to rectify a failure to pay sufficient dividends for any year bypaying “deficiency dividends” to shareholders in a later year. These deficiencydividends may be included in our deduction for dividends paid for the earlieryear, but an interest charge would be imposed upon us for the delay in distribution.Although we may be able to avoid being taxed on amounts distributed asdeficiency dividends, we will remain liable for the 4% excise tax discussedabove.

 

18

----

 

Inaddition to the other distribution requirements above, to preserve our statusas a REIT we are required to timely distribute corporation earnings and profitsthat we inherit from acquired corporations.

 

**Acquisitionof Hotels and C Corporation**

 

In2005 we purchased a hotel in Puerto Rico. In order to acquire the Puerto Ricanhotel, we acquired all of the outstanding stock of a C corporation that ownedthat hotel as its primary asset. Upon our acquisition, the acquired Ccorporation became our qualified REIT subsidiary under Section 856(i) of theInternal Revenue Code. Thus, after the acquisition, all assets, liabilities anditems of income, deduction and credit of the acquired corporation are treatedas ours for purposes of the various REIT qualification tests described above.In a stock acquisition such as this, we are generally treated as the successorto the acquired corporation’s federal income tax attributes, such as itsadjusted tax bases in its assets and its C corporation earnings and profits.However, because we made an election under Section 338(g) of the InternalRevenue Code in respect of this acquired corporation, we did not succeed to itsearnings and profits, nor do we have any built-in gain in the former Ccorporation’s assets. We expect to use a similar tax and acquisition structureto acquire the Jamaican hotel that we are under contract to acquire.

 

**Depreciationand Federal Income Tax Treatment of Leases**

 

Our initial tax bases in our assets will generallybe our acquisition cost. We will generally depreciate our real property on astraight-line basis over 40 years and our personal property over 9 years. Thesedepreciation schedules may vary for properties that we acquire through tax-freeor carryover basis acquisitions.

 

We are entitled to depreciation deductions from ourfacilities only if we are treated for federal income tax purposes as the ownerof the facilities. This means that the leases of the facilities must beclassified for federal income tax purposes as true leases, rather than as salesor financing arrangements, and we believe this to be the case. In the case ofsale-leaseback arrangements, the IRS could assert that we realized prepaidrental income in the year of purchase to the extent that the value of a leasedproperty, at the time of purchase, exceeded the purchase price for thatproperty. While we believe that the value of leased property at the time ofpurchase did not exceed purchase prices, because of the lack of clear precedentwe cannot provide assurances as to whether the IRS might successfully assertthe existence of prepaid rental income in any of our sale-leasebacktransactions.

 

**Taxation of U.S. Shareholders**

 

The Jobs and Growth Tax Relief Reconciliation Act of2003 reduced the maximum individual federal income tax rate for long-termcapital gains generally to 15% (for gains properly taken into account duringthe period beginning May 6, 2003, and ending for taxable years that beginafter December 31, 2008) and for most corporate dividends generally to 15%(for taxable years that begin in the years 2003 through 2008). However, becausewe are not generally subject to federal income tax on the portion of our REITtaxable income or capital gains distributed to our shareholders, dividends onour shares generally are not eligible for the new 15% tax rate on dividends. Asa result, our ordinary dividends continue to be taxed at the higher federalincome tax rates applicable to ordinary income. However, the 15% federal incometax rate for long-term capital gains and dividends generally applies to:

 

(1)           your long-term capital gains, if any,recognized on the disposition of our shares;

 

(2)           our distributions designated as long-termcapital gain dividends (except to the extent attributable to real estatedepreciation recapture, in which case the distributions are subject to a 25%federal income tax rate);

 

(3)           our dividends attributable to dividends, ifany, received by us from non-REIT corporations such as taxable REITsubsidiaries; and

 

(4)           our dividends to the extent attributable toincome upon which we have paid federal corporate income tax.

 

19

----

 

As long as we qualify as a REIT for federal incometax purposes, a distribution to our U.S. shareholders that we do not designateas a capital gain dividend will be treated as an ordinary income dividend tothe extent of our current or accumulated earnings and profits. Distributionsmade out of our current or accumulated earnings and profits that we properlydesignate as capital gain dividends will be taxed as long-term capital gains,as discussed below, to the extent they do not exceed our actual net capitalgain for the taxable year. However, corporate shareholders may be required totreat up to 20% of any capital gain dividend as ordinary income under Section291 of the Internal Revenue Code.

 

In addition, we may elect to retain net capital gainincome and treat it as constructively distributed. In that case:

 

(1)           we will be taxed at regular corporate capitalgains tax rates on retained amounts;

 

(2)           each U.S. shareholder will be taxed on itsdesignated proportionate share of our retained net capital gains as though thatamount were distributed and designated a capital gain dividend;

 

(3)           each U.S. shareholder will receive a creditfor its designated proportionate share of the tax that we pay;

 

(4)           each U.S. shareholder will increase itsadjusted basis in our shares by the excess of the amount of its proportionateshare of these retained net capital gains over its proportionate share of thistax that we pay; and

 

(5)           both we and our corporate shareholders willmake commensurate adjustments in our respective earnings and profits forfederal income tax purposes.

 

Ifwe elect to retain our net capital gains in this fashion, we will notify ourU.S. shareholders of the relevant tax information within 60 days after theclose of the affected taxable year.

 

As discussed above, for noncorporate U.S.shareholders, long-term capital gains are generally taxed at maximum rates of15% or 25%, depending upon the type of property disposed of and the previouslyclaimed depreciation with respect to this property. If for any taxable year wedesignate capital gain dividends for U.S. shareholders, then the portion of thecapital gain dividends we designate will be allocated to the holders of aparticular class of shares on a percentage basis equal to the ratio of theamount of the total dividends paid or made available for the year to theholders of that class of shares to the total dividends paid or made availablefor the year to holders of all classes of our shares. We will similarlydesignate the portion of any capital gain dividend that is to be taxed tononcorporate U.S. shareholders at the maximum rates of 15% or 25% so that thedesignations will be proportionate among all classes of our shares.

 

Distributions in excess of current or accumulatedearnings and profits will not be taxable to a U.S. shareholder to the extentthat they do not exceed the shareholder’s adjusted tax basis in theshareholder’s shares, but will reduce the shareholder’s basis in those shares.To the extent that these excess distributions exceed the adjusted basis of aU.S. shareholder’s shares, they will be included in income as capital gain,with long-term gain generally taxed to noncorporate U.S. shareholders at amaximum rate of 15%. No U.S. shareholder may include on his federal income taxreturn any of our net operating losses or any of our capital losses.

 

Dividends that we declare in October, November orDecember of a taxable year to U.S. shareholders of record on a date in thosemonths will be deemed to have been received by shareholders on December 31of that taxable year, provided we actually pay these dividends during thefollowing January. Also, items that are treated differently for regular andalternative minimum tax purposes are to be allocated between a REIT and itsshareholders under Treasury regulations which are to be prescribed. It ispossible that these Treasury regulations will require tax preference items tobe allocated to our shareholders with respect to any accelerated depreciationor other tax preference items that we claim.

 

A U.S. shareholder will recognize gain or loss equalto the difference between the amount realized and the shareholder’s adjustedbasis in our shares that are sold or exchanged. This gain or loss will becapital gain or loss, and will be long-term capital gain or loss if theshareholder’s holding period in the shares exceeds one year. In addition, anyloss upon a sale or exchange of our shares held for six months or less willgenerally be treated as a long-term capital loss to the extent of our long-termcapital gain dividends during the holding period.

 

20

----

 

The 2004 Act imposes apenalty, effective for federal tax returns with due dates after October 22,2004, for the failure to properly disclose a “reportable transaction.” Areportable transaction currently includes, among other things, a sale orexchange of our shares resulting in a tax loss in excess of (i) $10 million inany single year or $20 million in any combination of years in the case of ourshares held by a C corporation or by a partnership with only C corporationpartners or (ii) $2 million in any single year or $4 million in any combinationof years in the case of our shares held by any other partnership or an Scorporation, trust or individual, including losses that flow through passthrough entities to individuals. A taxpayer discloses a reportable transactionby filing IRS Form 8886 with its federal income tax return and, in the firstyear of filing, a copy of Form 8886 must be sent to the IRS’s Office of TaxShelter Analysis. The penalty for failing to disclose a reportable transactionis generally $10,000 in the case of a natural person and $50,000 in any othercase.

 

Noncorporate U.S. shareholders who borrow funds tofinance their acquisition of our shares could be limited in the amount ofdeductions allowed for the interest paid on the indebtedness incurred. UnderSection 163(d) of the Internal Revenue Code, interest paid or accrued onindebtedness incurred or continued to purchase or carry property held forinvestment is generally deductible only to the extent of the investor’s netinvestment income. A U.S. shareholder’s net investment income will includeordinary income dividend distributions received from us and, if an appropriateelection is made by the shareholder, capital gain dividend distributionsreceived from us; however, distributions treated as a nontaxable return of theshareholder’s basis will not enter into the computation of net investmentincome.

 

**Taxation of Tax-Exempt Shareholders**

 

In Revenue Ruling 66-106, the IRS ruled that amountsdistributed by a REIT to a tax-exempt employees’ pension trust did notconstitute “unrelated business taxable income,” even though the REIT may havefinanced some of its activities with acquisition indebtedness. Although revenuerulings are interpretive in nature and subject to revocation or modification bythe IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, ourdistributions made to shareholders that are tax-exempt pension plans,individual retirement accounts, or other qualifying tax-exempt entities shouldnot constitute unrelated business taxable income, unless the shareholder hasfinanced its acquisition of our shares with “acquisition indebtedness” withinthe meaning of the Internal Revenue Code.

 

Tax-exempt pension trusts, including so-called401(k) plans but excluding individual retirement accounts or government pensionplans, that own more than 10% by value of a “pension-held REIT” at any timeduring a taxable year may be required to treat a percentage of all dividendsreceived from the pension-held REIT during the year as unrelated businesstaxable income. This percentage is equal to the ratio of:

 

(1)           the pension-held REIT’s gross income derivedfrom the conduct of unrelated trades or businesses, determined as if thepension-held REIT were a tax-exempt pension fund, less direct expenses relatedto that income, to

 

(2)           the pension-held REIT’s gross income from allsources, less direct expenses related to that income,

 

exceptthat this percentage shall be deemed to be zero unless it would otherwise equalor exceed 5%. A REIT is a pension-held REIT if:

 

•      the REIT is “predominantly held” bytax-exempt pension trusts; and

 

•      the REIT would fail to satisfy the “closelyheld” ownership requirement discussed above if the stock or beneficialinterests in the REIT held by tax-exempt pension trusts were viewed as held bytax-exempt pension trusts rather than by their respective beneficiaries.

 

AREIT is predominantly held by tax-exempt pension trusts if at least onetax-exempt pension trust owns more than 25% by value of the REIT’s stock orbeneficial interests, or if one or more tax-exempt pension trusts, each owningmore than 10% by value of the REIT’s stock or beneficial interests, own in theaggregate more than 50% by value of the REIT’s stock or beneficial interests.Because of the share ownership concentration restrictions in our declaration oftrust, we believe that we are not and will not be a pension-held REIT. However,because our shares are publicly traded, we cannot completely control whether ornot we are or will become a pension-held REIT.

 

21

----

 

Social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code, respectively, are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions from a REIT as unrelated business taxable income. In addition, these prospective investors should consult their own tax advisors concerning any “set aside” or reserve requirements applicable to them.

 

**Taxation of Non-U.S. Shareholders**

 

The rules governing the United States federalincome taxation of non-U.S. shareholders are complex, and the followingdiscussion is intended only as a summary of these rules. If you are a non-U.S.shareholder, we urge you to consult with your own tax advisor to determine theimpact of United States federal, state, local, and foreign tax laws, includingany tax return filing and other reporting requirements, with respect to yourinvestment in our shares.

 

In general, a non-U.S. shareholder will be subjectto regular United States federal income tax in the same manner as a U.S.shareholder with respect to its investment in our shares if that investment iseffectively connected with the non-U.S. shareholder’s conduct of a trade orbusiness in the United States. In addition, a corporate non-U.S. shareholderthat receives income that is or is deemed effectively connected with a trade orbusiness in the United States may also be subject to the 30% branch profits taxunder Section 884 of the Internal Revenue Code, which is payable in addition toregular United States federal corporate income tax. The balance of thisdiscussion of the United States federal income taxation of non-U.S.shareholders addresses only those non-U.S. shareholders whose investment in ourshares is not effectively connected with the conduct of a trade or business inthe United States.

 

A distribution by us to a non-U.S. shareholder thatis not attributable to gain from the sale or exchange of a United States realproperty interest and that is not designated as a capital gain dividend will betreated as an ordinary income dividend to the extent that it is made out ofcurrent or accumulated earnings and profits. A distribution of this type willgenerally be subject to United States federal income tax and withholding at therate of 30%, or at a lower rate if the non-U.S. shareholder has in the mannerprescribed by the IRS demonstrated its entitlement to benefits under a taxtreaty. Because we cannot determine our current and accumulated earnings andprofits until the end of the taxable year, withholding at the rate of 30% orapplicable lower treaty rate will generally be imposed on the gross amount ofany distribution to a non-U.S. shareholder that we make and do not designate acapital gain dividend. Notwithstanding this withholding on distributions inexcess of our current and accumulated earnings and profits, these distributionsare a nontaxable return of capital to the extent that they do not exceed thenon-U.S. shareholder’s adjusted basis in our shares, and the nontaxable returnof capital will reduce the adjusted basis in these shares. To the extent thatdistributions in excess of current and accumulated earnings and profits exceedthe non-U.S. shareholder’s adjusted basis in our shares, the distributions willgive rise to tax liability if the non-U.S. shareholder would otherwise besubject to tax on any gain from the sale or exchange of these shares, asdiscussed below. A non-U.S. shareholder may seek a refund from the IRS ofamounts withheld on distributions to him in excess of our current andaccumulated earnings and profits.

 

Capital gain dividends that are received by anon-U.S. shareholder, including dividends attributable to our sales of UnitedStates real property interests, and that are deductible by us in respect of our2005 taxable year and thereafter will be subject to the taxation andwithholding regime applicable to ordinary income dividends and the branchprofits tax will not apply, provided that (1) the capital gain dividends arereceived with respect to a class of shares that is “regularly traded” on adomestic “established securities market” like the NYSE, both as defined byapplicable Treasury regulations, and (2) the foreign shareholder does not ownmore than 5% of that class of shares at any time during the one-year periodending on the date of distribution of the capital gain dividends. If both ofthese provisions are satisfied, qualifying non-U.S. shareholders will not besubject to withholding on capital gain dividends as though those amounts wereeffectively connected with a United States trade or business, and qualifyingnon-U.S. shareholders will not be required to file United States federal incometax returns or pay branch profits tax in respect of these capital gaindividends. Instead, these dividends will be subject to United States federalincome tax and withholding as ordinary dividends, currently at a 30% tax rateunless reduced by applicable treaty, as discussed below. We believe that ourshares are and will be “regularly traded” on an “established securities market”within the definition of each term provided in applicable Treasury regulations;however, we can provide no assurance that our shares will continue to be“regularly traded” on an “established securities market” in future taxableyears.

 

22

----

 

Except as discussed above, for any year in which wequalify as a REIT, distributions that are attributable to gain from the sale orexchange of a United States real property interest are taxed to a non-U.S.shareholder as if these distributions were gains effectively connected with atrade or business in the United States conducted by the non-U.S. shareholder.Accordingly, a non-U.S. shareholder that does not qualify for the provisionabove or that received dividends for taxable years before 2005 will be taxed onthese amounts at the normal capital gain rates applicable to a U.S.shareholder, subject to any applicable alternative minimum tax and to a specialalternative minimum tax in the case of nonresident alien individuals; such anon-U.S. shareholder will be required to file a United States federal incometax return reporting these amounts, even if applicable withholding is imposedas described below; and such a non-U.S. shareholder that is also a corporationmay owe the 30% branch profits tax under Section 884 of the Internal RevenueCode in respect of these amounts. We will be required to withhold fromdistributions to such non-U.S. shareholders, and remit to the IRS, 35% of themaximum amount of any distribution that could be designated as a capital gaindividend. In addition, for purposes of this withholding rule, if we designateprior distributions as capital gain dividends, then subsequent distributions upto the amount of the designated prior distributions will be treated as capitalgain dividends. The amount of any tax withheld is creditable against the non-U.S.shareholder’s United States federal income tax liability, and the non-U.S.shareholder may file for a refund from the IRS of any amount of withheld tax inexcess of that tax liability.

 

If for any taxable year we designate capital gaindividends for our shareholders, then the portion of the capital gain dividendswe designate will be allocated to the holders of a particular class of shareson a percentage basis equal to the ratio of the amount of the total dividendspaid or made available for the year to the holders of that class of shares tothe total dividends paid or made available for the year to holders of allclasses of our shares.

 

Tax treaties may reduce the withholding obligationson our distributions. Under some treaties, however, rates below 30% that areapplicable to ordinary income dividends from United States corporations may notapply to ordinary income dividends from a REIT or may apply only if the REITmeets certain additional conditions. You must generally use an applicable IRSForm W-8, or substantially similar form, to claim tax treaty benefits. If theamount of tax withheld by us with respect to a distribution to a non-U.S.shareholder exceeds the shareholder’s United States federal income taxliability with respect to the distribution, the non-U.S. shareholder may filefor a refund of the excess from the IRS. The 35% withholding tax rate discussedabove on some capital gain dividends corresponds to the maximum income tax rateapplicable to corporate non-U.S. shareholders but is higher than the 15% and25% maximum rates on capital gains generally applicable to noncorporatenon-U.S. shareholders. Treasury regulations also provide special rules todetermine whether, for purposes of determining the applicability of a taxtreaty, our distributions to a non-U.S. shareholder that is an entity should betreated as paid to the entity or to those owning an interest in that entity,and whether the entity or its owners are entitled to benefits under the taxtreaty.

 

If our shares are not “United States real propertyinterests” within the meaning of Section 897 of the Internal Revenue Code, anon-U.S. shareholder’s gain on sale of these shares generally will not besubject to United States federal income taxation, except that a nonresidentalien individual who was in the United States for 183 days or more during thetaxable year will be subject to a 30% tax on this gain. Our shares will notconstitute a United States real property interest if we are a “domesticallycontrolled REIT.” A domestically controlled REIT is a REIT in which at alltimes during the preceding five-year period less than 50% in value of itsshares is held directly or indirectly by foreign persons. We believe that weare and will be a domestically controlled REIT and thus a non-U.S. shareholder’sgain on sale of our shares will not be subject to United States federal incometaxation. However, because our shares are publicly traded, we can provide noassurance that we will be a domestically controlled REIT. If we are not adomestically controlled REIT, a non-U.S. shareholder’s gain on sale of ourshares will not be subject to United States federal income taxation as a saleof a United States real property interest, if that class of shares is“regularly traded,” as defined by applicable Treasury regulations, on anestablished securities market like the New York Stock Exchange, and thenon-U.S. shareholder has at all times during the preceding five years owned 5%or less by value of that class of shares. If the gain on the sale of our shareswere subject to United States federal income taxation, the non-U.S. shareholderwill generally be subject to the same treatment as a U.S. shareholder withrespect to its gain, will be required to file a United States federal incometax return reporting that gain, and a corporate non-U.S. shareholder might owebranch profits tax under Section 884 of the Internal Revenue Code. A purchaserof our shares from a non-U.S. shareholder will not be required to withhold onthe purchase price if the purchased shares are regularly traded on anestablished securities market or if we are a domestically controlled REIT.Otherwise, a purchaser of our shares from a non-U.S. shareholder

 

23

----

 

may be required to withhold 10%of the purchase price paid to the non-U.S. shareholder and to remit thewithheld amount to the IRS.

 

**Backup Withholding and Information Reporting**

 

Informationreporting and backup withholding may apply to distributions or proceeds paid toour shareholders under the circumstances discussed below. The backupwithholding rate is currently 28%. Amounts withheld under backup withholdingare generally not an additional tax and may be refunded by the IRS or creditedagainst the REIT shareholder’s federal income tax liability.

 

A U.S. shareholder will be subject to backupwithholding when it receives distributions on our shares or proceeds upon thesale, exchange, redemption, retirement or other disposition of our shares,unless the U.S. shareholder properly executes, or has previously properlyexecuted, under penalties of perjury an IRS Form W-9 or substantially similarform that:

 

•      provides the U.S. shareholder’s correcttaxpayer identification number; and

 

•      certifies that the U.S. shareholder is exemptfrom backup withholding because it is a corporation or comes within anotherexempt category, it has not been notified by the IRS that it is subject tobackup withholding, or it has been notified by the IRS that it is no longersubject to backup withholding.

 

Ifthe U.S. shareholder has not and does not provide its correct taxpayeridentification number on the IRS Form W-9 or substantially similar form, it maybe subject to penalties imposed by the IRS, and the REIT or other withholdingagent may have to withhold a portion of any capital gain distributions paid toit. Unless the U.S. shareholder has established on a properly executed IRS FormW-9 or substantially similar form that it is a corporation or comes withinanother exempt category, distributions on our shares paid to it during thecalendar year, and the amount of tax withheld, if any, will be reported to itand to the IRS.

 

Distributions on our shares to a non-U.S.shareholder during each calendar year and the amount of tax withheld, if any,will generally be reported to the non-U.S. shareholder and to the IRS. Thisinformation reporting requirement applies regardless of whether the non-U.S.shareholder is subject to withholding on distributions on our shares or whetherthe withholding was reduced or eliminated by an applicable tax treaty. Also,distributions paid to a non-U.S. shareholder on our shares may be subject tobackup withholding, unless the non-U.S. shareholder properly certifies itsnon-U.S. shareholder status on an IRS Form W-8 or substantially similar form inthe manner described above. Similarly, information reporting and backupwithholding will not apply to proceeds a non-U.S. shareholder receives upon thesale, exchange, redemption, retirement or other disposition of our shares, ifthe non-U.S. shareholder properly certifies its non-U.S. shareholder status onan IRS Form W-8 or substantially similar form. Even without having executed anIRS Form W-8 or substantially similar form, however, in some cases informationreporting and backup withholding will not apply to proceeds that a non-U.S.shareholder receives upon the sale, exchange, redemption, retirement or otherdisposition of our shares if the non-U.S. shareholder receives those proceedsthrough a broker’s foreign office.

 

**Other Tax Consequences**

 

Our tax treatment and that of our shareholders maybe modified by legislative, judicial, or administrative actions at any time,which actions may be retroactive in effect. The rules dealing with federalincome taxation are constantly under review by the Congress, the IRS and theTreasury Department, and statutory changes, new regulations, revisions toexisting regulations, and revised interpretations of established concepts areissued frequently. Likewise, the rules regarding taxes other than federal incometaxes may also be modified. No prediction can be made as to the likelihood ofpassage of new tax legislation or other provisions or the direct or indirecteffect on us and our shareholders. Revisions to tax laws and interpretations ofthese laws could adversely affect the tax or other consequences of aninvestment in our shares. We and our shareholders may also be subject totaxation by state, local or other jurisdictions, including those in which we orour shareholders transact business or reside. These tax consequences may not becomparable to the federal income tax consequences discussed above.

 

24

----

 

**ERISA PLANS, KEOGH PLANS ANDINDIVIDUAL RETIREMENT ACCOUNTS**

 

**General Fiduciary Obligations**

 

Fiduciaries of a pension, profit-sharing or otheremployee benefit plan subject to Title I of the Employee Retirement IncomeSecurity Act of 1974, ERISA, must consider whether:

 

•                  theirinvestment in our shares satisfies the diversification requirements of ERISA;

 

•                  theinvestment is prudent in light of possible limitations on the marketability ofour shares;

 

•                  theyhave authority to acquire our shares under the applicable governing instrumentand Title I of ERISA; and

 

•                  theinvestment is otherwise consistent with their fiduciary responsibilities.

 

Trustees and other fiduciaries of an ERISA plan mayincur personal liability for any loss suffered by the plan on account of aviolation of their fiduciary responsibilities. In addition, these fiduciariesmay be subject to a civil penalty of up to 20% of any amount recovered by theplan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan orother qualified retirement plan not subject to Title I of ERISA, referred to as“non-ERISA plans,” should consider that a plan may only make investments thatare authorized by the appropriate governing instrument. Fiduciary shareholdersshould consult their own legal advisors if they have any concern as to whetherthe investment is consistent with the foregoing criteria.

 

**Prohibited Transactions**

 

Fiduciaries of ERISA plans and persons making theinvestment decision for an IRA or other non-ERISA plan should consider theapplication of the prohibited transaction provisions of ERISA and the InternalRevenue Code in making their investment decision. Sales and other transactionsbetween an ERISA or non-ERISA plan, and persons related to it, are prohibitedtransactions. The particular facts concerning the sponsorship, operations andother investments of an ERISA plan or non-ERISA plan may cause a wide range ofother persons to be treated as disqualified persons or parties in interest withrespect to it. A prohibited transaction, in addition to imposing potentialpersonal liability upon fiduciaries of ERISA plans, may also result in theimposition of an excise tax under the Internal Revenue Code or a penalty underERISA upon the disqualified person or party in interest with respect to theplan. If the disqualified person who engages in the transaction is theindividual on behalf of whom an IRA or Roth IRA is maintained or hisbeneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assetsmay be deemed to have been distributed to the individual in a taxabledistribution on account of the prohibited transaction, but no excise tax willbe imposed. Fiduciary shareholders should consult their own legal advisors asto whether the ownership of our shares involves a prohibited transaction.

 

**“Plan Assets” Considerations**

 

The Department of Labor, which has administrativeresponsibility over ERISA plans as well as non-ERISA plans, has issued aregulation defining “plan assets.” The regulation generally provides that whenan ERISA or non-ERISA plan acquires a security that is an equity interest in anentity and that security is neither a “publicly offered security” nor asecurity issued by an investment company registered under the InvestmentCompany Act of 1940, the ERISA plan’s or non-ERISA plan’s assets include boththe equity interest and an undivided interest in each of the underlying assetsof the entity, unless it is established either that the entity is an operatingcompany or that equity participation in the entity by benefit plan investors isnot significant.

 

Each class of our shares (that is, our common sharesand any class of preferred shares that we have issued or may issue) must beanalyzed separately to ascertain whether it is a publicly offered security. Theregulation defines a publicly offered security as a security that is “widelyheld,” “freely transferable” and either part of a class of securitiesregistered under the Exchange Act, or sold under an effective registrationstatement under the Securities Act of 1933, as amended, provided the securitiesare registered under the Exchange Act within 120 days after the end of thefiscal year

 

25

----

 

of the issuer during which theoffering occurred. Each class of our outstanding shares has been registeredunder the Exchange Act.

 

The regulation provides that a security is “widelyheld” only if it is part of a class of securities that is owned by 100 or moreinvestors independent of the issuer and of one another. However, a securitywill not fail to be “widely held” because the number of independent investorsfalls below 100 subsequent to the initial public offering as a result of eventsbeyond the issuer’s control. Our common shares and our preferred shares havebeen widely held and we expect our common shares and our preferred shares tocontinue to be widely held. We expect the same to be true of any additionalclass of preferred stock that we may issue, but we can give no assurance inthat regard.

 

The regulation provides that whether a security is“freely transferable” is a factual question to be determined on the basis ofall relevant facts and circumstances. The regulation further provides that,where a security is part of an offering in which the minimum investment is$10,000 or less, some restrictions on transfer ordinarily will not, alone or incombination, affect a finding that these securities are freely transferable.The restrictions on transfer enumerated in the regulation as not affecting thatfinding include:

 

•                  anyrestriction on or prohibition against any transfer or assignment which wouldresult in a termination or reclassification for federal or state tax purposes,or would otherwise violate any state or federal law or court order;

 

•                  anyrequirement that advance notice of a transfer or assignment be given to theissuer and any requirement that either the transferor or transferee, or both,execute documentation setting forth representations as to compliance with anyrestrictions on transfer which are among those enumerated in the regulation asnot affecting free transferability, including those described in the precedingclause of this sentence;

 

•                  anyadministrative procedure which establishes an effective date, or an event priorto which a transfer or assignment will not be effective; and

 

•                  anylimitation or restriction on transfer or assignment that is not imposed by theissuer or a person acting on behalf of the issuer.

 

We believe that the restrictions imposed under ourdeclaration of trust on the transfer of shares do not result in the failure ofour shares to be “freely transferable.” Furthermore, we believe that thereexist no other facts or circumstances limiting the transferability of ourshares which are not included among those enumerated as not affecting theirfree transferability under the regulation, and we do not expect or intend toimpose in the future, or to permit any person to impose on our behalf, anylimitations or restrictions on transfer which would not be among the enumeratedpermissible limitations or restrictions.

 

Assuming that each class of our shares will be“widely held” and that no other facts and circumstances exist which restricttransferability of these shares, we have received an opinion of our counsel,Sullivan & Worcester LLP, that our shares will not fail to be “freelytransferable” for purposes of the regulation due to the restrictions ontransfer of the shares under our declaration of trust and that under theregulation each class of our currently outstanding shares is publicly offeredand our assets will not be deemed to be “plan assets” of any ERISA plan ornon-ERISA plan that invests in our shares.

 

26

----

** **

**Item 1A. RiskFactors**

** **

Ourbusiness faces many risks. The risks described below may not be the only riskswe face. Additional risks that we do not yet know of, or that we currentlythink are immaterial, may also impair our business operations or financialresults. If any of the events or circumstances described in the following risksactually occurs, our business, financial condition or results of operationscould suffer and the trading price of our debt or equity securities coulddecline. Investors and prospective investors should consider the followingrisks and the information contained under the heading “Warning ConcerningForward-Looking Statements” before deciding whether to invest in oursecurities.

 

**Some of our returns and rents are guaranteed by parententities or affiliates of our tenants or hotel operators, but these guaranteesmay be limited or the guarantors may be unable to honor their commitments.Other security features in our leases may not be sufficient to cover allobligations due to us.**

** **

Each management agreement or lease that we have entered into includesvarious terms intended to secure the payments due to us, including some or allof the following: security deposits which we received but do not escrow,subordination or management fees payable to the hotel operator to some or allof our return or rent and full or limited guarantees from the manager’s ortenant’s parent company. However, the effectiveness of these various securityfeatures to provide uninterrupted payments to us is not assured, particularlyif the profitability of our hotels is at a depressed level for an extendedperiod. Also, these security features may not be sufficient to cover allobligations due to us. We may not receive payments under certain of ourguarantees because the guaranty amount is exhausted, because the guarantor’sfinancial condition deteriorates and it is unable to meet its obligations orfor some other reason. Under the terms of some of our guarantees, theguarantors may be released if cash flows from the affected hotels exceedcertain threshold amounts, and such releases would be effective even if cashflows subsequently decline.

 

**We are not permitted to operate our hotels and we aredependent on the managers and tenants of our hotels.**

** **

Because federal income tax laws restrict REITs and their subsidiariesfrom operating hotels, we do not manage our hotels. Instead, we or oursubsidiaries that qualify as “taxable REIT subsidiaries” under applicable REITlaws either retain third party managers to manage our hotels pursuant tomanagement agreements or lease our hotels to hotel operating companies. Ourincome from the hotels may be adversely affected if our managers or tenantsfail to provide quality services and amenities to hotel guests or if they failto maintain a quality brand name. While we or our taxable REIT subsidiaries monitorour hotel managers’ and tenants’ performance, we have limited recourse underour management agreements and leases if we believe that the hotel managers ortenants are not performing adequately. Failure by our hotel managers or tenantsto fully perform the duties agreed to in our management agreements and leasescould adversely affect our results of operations. In addition, our hotelmanagers or tenants manage, and in some cases own or have invested in, hotelsthat compete with our hotels, which may result in conflicts of interest. As aresult, our hotel managers or tenants have in the past made and may in thefuture make decisions regarding competing lodging facilities that are not orwould not be in our best interests.

 

**In the recent past, events beyond our control,including an economic slowdown, the war with Iraq and terrorism, harmed theoperating performance of the hotel industry generally and the performance ofour hotels. If these or similar events occur again, our operating and financialresults may be harmed by declines in average daily room rates or occupancy.**

** **

The terrorist attacks of September 11, 2001 had a dramatic adverseeffect on business and leisure travel and on our occupancy and average dailyrate, or ADR. Future terrorist activities could have a similarly harmful effecton both the hotel industry and us. As a result of terrorism concerns, the warwith Iraq and the impact of a recessionary economy, the U.S. hotel industrygenerally and our hotels specifically experienced significant declines inoccupancy, revenues and profitability in 2001, 2002 and 2003. While theperformance of our hotels have improved, the uncertainty associated with thecontinuing war on terrorism and the possibility of future attacks may adverselyimpact business and leisure travel patterns and, accordingly, our business.

 

 

27

----

 

**We are dependant on a limited number of operators forour hotels and we have a high concentration of our hotels with a limited numberof operators and their hotel brands.**

** **

Two of our unaffiliated hotel operators operate approximately 80% ofour hotels by investment. If we were to have a dispute with one of these twooperators, or if one of these operators were to fail to provide qualityservices and amenities or to maintain quality brand names, our income fromthese hotels may be adversely affected. Additionally, should we be required toreplace any of our hotel operators, this could result in significantdisruptions at the affected hotels and declines in our profitability and cashflows.

 

**We may be unable to access the capital necessary torepay debt or grow.**

** **

To retain our status as a REIT, we are required to distribute 90% ofour taxable income to shareholders and we generally cannot use income fromoperations to repay debt or fund our growth. Accordingly, our business and growthstrategy depends, in part, upon our ability to raise additional capital atreasonable costs to fund new investments. We believe we will be able to raiseadditional debt and equity capital at reasonable costs to refinance our debtsat or prior to their maturities and to invest at yields that exceed our cost ofcapital. However, our ability to raise reasonably priced capital is notguaranteed; we may be unable to raise reasonably priced capital because ofreasons related to our business or for reasons beyond our control, such asmarket conditions. Our growth strategy is not assured and may fail.

 

**Acquisitions that we make may not be successful.**

** **

Our business strategy contemplates additional acquisitions. We cannotassure our investors that acquisitions we make will prove to be successful. Wemight encounter unanticipated difficulties and expenditures relating to anyacquired properties. Newly acquired properties might require significantmanagement attention that would otherwise be devoted to our ongoing business.Also, future acquisitions of hotels may not yield the returns we expect and, iffinanced using high cost debt or equity, may result in shareholder dilution.

 

**We face competition for the acquisition of hotels.**

** **

We compete with institutional pension funds, private equity investors,other REITs, owner operators of hotels and others who are engaged in theacquisition of hotels. Some of our competitors have greater financial resourcesand more experienced personnel than we have. These competitors may affect thesupply/demand dynamics and, accordingly, increase the price we must pay forhotels we seek to acquire. Furthermore, owners of hotels who offer them forsale may find our competitors to be more attractive buyers because they mayhave greater financial resources, may be willing to pay more, or may have amore compatible operating philosophy.

 

**The loss of our tax status as a REIT would havesignificant adverse consequences to us and reduce the value of your commonshares.**

** **

As a REIT, we generally do not pay federal and state income taxes.However, our continued qualification as a REIT is dependent upon our compliancewith complex provisions of the Internal Revenue Code for which there areavailable only limited judicial or administrative interpretations. We believewe have operated; and are operating, as a REIT in compliance with the InternalRevenue Code. However, we cannot assure our shareholders that, upon review oraudit, the IRS will agree with this conclusion. If we cease to be a REIT, wewould violate a covenant in our bank credit facilities, our ability to raisecapital could be adversely affected, we may be subject to material amounts offederal and state income taxes and the value of our shares would likelydecline.

 

**There is no assurance that we will make distributionsin the future.**

** **

We intend to continue to pay quarterly distributions to ourshareholders consistent with our historical practice. However, our ability topay distributions will be adversely affected if any of the risks describedherein occur. Our payment of distributions is subject to compliance withrestrictions contained in our revolving bank credit facility and our noteindenture. All our distributions are made at the discretion of our board oftrustees and our future distributions will depend upon our earnings, our cashflows, our anticipated cash flows, our financial condition, maintenance of ourREIT tax status and such other factors as our board of trustees may deemrelevant from time to time. There are no 

 

28

----

 

assurances of our ability topay distributions in the future. In addition, our distributions in the pasthave included, and may in the future include, a return of capital.

 

**We may be unable to provide the funding required byour managers and tenants for the refurbishment of our hotels.**

** **

Some of our management agreements and lease arrangements require us toinvest money for refurbishments and capital improvements to our hotels in somecircumstances. We may have to invest more than expected in order to achieve andmaintain the competitive position and future financial performance of ourhotels. We may not have the necessary funds to invest, and such expenditures,if made, may not be sufficient to maintain the successful financial performanceof our hotels. Our management agreements and lease arrangements require us tomaintain the hotels in a certain required condition. If we fail to maintain theserequired standards, then the manager or tenant may terminate the management orlease agreement and hold us liable for damages we may have caused.

 

**Our business dealings with our managing trustees andaffiliated entities may create conflicts of interest.**

** **

We have no employees. Personnel and other services which we require areprovided to us under contract by our manager, RMR. RMR is majority beneficiallyowned by one of our trustees, Barry Portnoy. The remainder of RMR is beneficiallyowned by Adam Portnoy, Barry Portnoy’s son, who is also an executiveofficer of RMR. In addition, John Murray, our President, Chief OperatingOfficer and Secretary, Mark Kleifges, our Treasurer and Chief FinancialOfficer, and Ethan Bornstein, our Vice President are executive officers of RMR,and Gerard Martin, another of our trustees, is a director of RMR. We pay RMR afee based in large part upon the amount of our investments. Our agreement withRMR also provides for payment to RMR of incentive fees under certain circumstances.Any incentive fees are payable through the issuance of restricted common sharesby us to RMR. Our fee arrangement with RMR could encourage RMR to advocateacquisitions and discourage sales by us. RMR also acts as the manager for twoother publicly owned REITs: HRPT, which primarily owns office buildings; andSenior Housing Properties Trust, or SNH, which owns senior housing properties.We were formerly a 100% owned subsidiary of HRPT, and HRPT continues to own 4million of our common shares or about 6% of our total common shares outstandingas of December 31, 2005. RMR also provides services to Five Star Quality Care,Inc., or Five Star, under a shared services agreement, and RMR has otherbusiness interests. Messrs. Barry Portnoy and Martin also serve as managingtrustees of HRPT and SNH and as managing directors of Five Star. Mr. AdamPortnoy is Executive Vice President of HRPT. These multipleresponsibilities to public companies and other businesses could createcompetition among these companies for the time and efforts of RMR andMessrs. Barry and Adam Portnoy and Martin. All of the contractualarrangements between us and RMR have been approved by our trustees other thanMessrs. Barry Portnoy and Martin. Each of our trustees other than Messrs. BarryPortnoy and Martin serve as a trustee or director of one or more othercompanies with which RMR has contractual arrangements similar to its contractswith us, including HRPT and SNH. We believe that the quality and depth ofmanagement available to us by contracting with RMR could not be duplicated byour being a self-advised company or by our contracting with unrelated thirdparties without considerable cost increases. A termination of our contract withRMR is a default under our revolving bank credit facility unless approved by amajority of the lenders. The fact that we believe that our relationships withRMR and our managing trustees have been beneficial to us in the past does notguarantee that these related party transactions may not be detrimental to us inthe future.

 

**Ownership limitations and anti-takeover provisions inour declaration of trust and under Maryland law may prevent our shareholdersfrom receiving a takeover premium.**

** **

Our declaration of trust prohibits any shareholder other than HRPT, RMRand their affiliates from owning more than 9.8% of our outstanding shares. Thisprovision of the declaration of trust may help us comply with REIT taxrequirements. However, this provision will also inhibit a change of control.Our declaration of trust and bylaws contain other provisions that may increasethe difficulty of acquiring control of us by means of a tender offer, openmarket purchases, a proxy fight or otherwise, if the acquisition is notapproved by our board of trustees. These other anti-takeover provisions includethe following:

 

•                  a staggeredboard of trustees with three separate classes;

 

•                  the two-thirdsmajority shareholder vote required for removal of trustees;

 

29

----

 

•                  the ability ofour board of trustees to increase, without shareholder approval, the amount ofshares (including common shares) that we are authorized to issue under ourdeclaration of trust and bylaws, and to issue additional shares on terms thatit determines;

 

•                  advance notice procedureswith respect to nominations of trustees and shareholder proposals; and

 

•                  the fact thatonly the board of trustees may call shareholder meetings and that shareholdersare not entitled to act without a meeting.

 

We maintain a rights agreement whereby, in the event a person or groupof persons acquires or attempts to acquire 10% or more of our outstandingcommon shares, our shareholders, other than such person or group, will beentitled to purchase additional shares or other securities or property at adiscount. In addition, certain provisions of Maryland law may have ananti-takeover effect. For all of these reasons, our shareholders may be unableto realize a change of control premium for shares they own.

 

**Some of our management agreements and leases limit ourability to sell or finance some of our hotels.**

** **

Under the terms of some of our management agreements and leases, wegenerally may not sell, lease or otherwise transfer the hotels unless thetransferee is not a competitor of the manager and the transferee assumes therelated management agreements and meets specified other conditions. Our abilityto finance or sell our properties, depending upon the structure of suchtransactions, may require the manager’s consent or the tenant’s consent under ourmanagement agreements and leases. If, in these circumstances, the manager orthe tenant does not consent, we may be prevented from taking actions whichmight be beneficial to our shareholders.

 

**Real estate ownership creates risks and liabilities.**

** **

Our business is subject to risks associated with real estateacquisitions and ownership, including:

 

•                  new hotel supplyin our markets;

 

•                  catastrophicproperty and casualty losses, such as losses due to wars, terrorist attacks ornatural disasters, some of which may be uninsured;

 

•                  defaults andbankruptcies by our managers or tenants;

 

•                  the illiquidnature of real estate markets which impairs our ability to purchase or sell ourassets rapidly to respond to changing economic conditions;

 

•                  managementagreements or leases which are not renewed at expiration and may be replacedwith management agreements with less favorable terms or relet at lower rents;

 

•                  costs that maybe incurred relating to maintenance and repair, and the need to make capitalexpenditures to maintain our properties’ values or due to contractualobligations or changes in governmental regulations, including the Americanswith Disabilities Act; and

 

•                  environmentalhazards at our properties for which we may be liable, including those createdby prior owners or occupants, existing tenants, abutters or other persons.

 

**We have substantial debt obligations and may incuradditional debt.**

** **

AtDecember 31, 2005, we had $960 million in debt outstanding, which was 34% ofour total book capitalization. Our note indenture and revolving bank creditfacility permit us and our subsidiaries to incur additional debt, includingsecured debt. If we default in paying any of our debts or honoring our debtcovenants, these debts may be accelerated and we could be forced to liquidateour assets for less than the values we would receive in a more orderly process.

 

30

----

 

**If we issue secured debt or subsidiary debt, such debt willhave priority claims on certain of our assets which are senior to our existingdebts.**

 

Weconduct substantially all of our business through, and substantially all of ourproperties are owned by, subsidiaries. Consequently, our ability to pay debtservice on our outstanding notes and any notes we issue in the future will bedependent upon the cash flow of our subsidiaries and payments by thosesubsidiaries to us as dividends or otherwise. Our subsidiaries are separatelegal entities and have their own liabilities. Payments due on our outstandingnotes, and any notes we may issue are, or will be, effectively subordinated toliabilities of our subsidiaries, including guaranty liabilities. Substantiallyall of our subsidiaries have guaranteed our revolving bank credit facility;none of our subsidiaries guaranty our outstanding notes. In addition, atDecember 31, 2005, one of our subsidiaries has $4 million of secured debt. Ouroutstanding notes are, and any notes we may issue will be, also effectivelysubordinated to our secured debt with regard to our assets pledged to secureour debt.

 

**Our notes may permit redemption before maturity, and ournoteholders may be unable to reinvest proceeds at the same or a higher rate.**

 

Theterms of our notes may permit us to redeem all or a portion of our outstandingnotes after a certain amount of time, or up to a certain percentage of thenotes prior to certain dates. Generally, the redemption price will equal theprincipal amount being redeemed, plus accrued interest to the redemption date,plus any applicable premium. If a redemption occurs, our noteholders may beunable to reinvest the money they receive in the redemption at a rate that isequal to or higher than the rate of return on the applicable notes.

 

**There may be no public market for notes we may issue and onemay not develop.**

 

Generally,any notes we may issue will be a new issue for which no trading marketcurrently exists. We may not list our notes on any securities exchange or seekapproval for price quotations to be made available through any automatedquotation system. There is no assurance that an active trading market for anyof our notes will exist in the future. Even if a market does develop, theliquidity of the trading market for any of our notes and the market pricequoted for any such notes may be adversely affected by changes in the overallmarket for fixed income securities, by changes in our financial performance orprospects, or by changes in the prospects for REITs or for the hotel industrygenerally.

 

**An increase in interest rates would increaseour interest costs on variable rate debt and could adversely impact our abilityto refinance existing debt or sell assets. Also, interest rate changes oftenaffect the value of dividend paying securities.**

 

Ourrevolving credit facility requires interest at variable rates and matures inJune 2009. At December 31, 2005, we had $35 million outstanding and $715million available for drawing under our revolving credit facility. If interestrates increase, so will our interest costs, which could adversely affect our cashflow and our ability to pay principal and interest on our debt and our abilityto make distributions to our shareholders. Further, rising interest rates couldlimit our ability to refinance existing debt when it matures. We may from timeto time enter into agreements such as interest rate swaps, caps, floors andother interest rate hedging contracts with respect to a portion of our variablerate debt. While these agreements may lessen the impact of rising interestrates on us, they also expose us to the risk that other parties to theagreements will not perform or that the agreements will be unenforceable. Inaddition, an increase in interest rates could decrease the amount third partiesare willing to pay for our assets, thereby limiting our ability to change ourportfolio promptly in response to changes in economic or other conditions.Increases in interest rates generally often reduce the value of dividend payingsecurities; accordingly, if interest rates rise the market value of our commonand preferred shares may decline.

 

**Item 1B.Unresolved Staff Comments**

** **

**None.**

 

31

----

 

**Item 2.Properties**

 

At December 31, 2005, we owned 298 hotels. The following tablesummarizes certain information about our properties as of December 31, 2005.

 
|                       | ** ** | **Number of**  | ** ** | **Undepreciated**       | ** ** | **Depreciated**         | ** ** |
|----------------------------|------------|----------------|------------|-------------------------|------------|-------------------------|------------|
| **Location of Properties** | ** ** | **Properties** | ** ** | **Carrying Value**      | ** ** | **Carrying Value**      | ** ** |
| ** **                 | ** ** | ** **     | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| United States              | ** ** | ** **     | ** ** | ** **              | ** ** | ** **              | ** ** |
| Alabama                    |       | 4              |       | $                       | 32,551     |                    | $          | 25,990 |   |
| Arizona                    |       | 15             |       | 149,878                 |       | 119,229                 |       |
| California                 |       | 32             |       | 512,016                 |       | 441,610                 |       |
| Colorado                   |       | 4              |       | 36,355                  |       | 29,570                  |       |
| Connecticut                |       | 1              |       | 7,284                   |       | 6,654                   |       |
| Delaware                   |       | 1              |       | 15,180                  |       | 11,987                  |       |
| Florida                    |       | 18             |       | 191,816                 |       | 155,953                 |       |
| Georgia                    |       | 20             |       | 197,494                 |       | 161,038                 |       |
| Hawaii                     |       | 1              |       | 52,737                  |       | 46,004                  |       |
| Illinois                   |       | 14             |       | 152,616                 |       | 125,891                 |       |
| Indiana                    |       | 3              |       | 28,693                  |       | 22,179                  |       |
| Iowa                       |       | 2              |       | 15,554                  |       | 12,026                  |       |
| Kansas                     |       | 4              |       | 26,276                  |       | 21,407                  |       |
| Kentucky                   |       | 1              |       | 4,741                   |       | 3,864                   |       |
| Louisiana                  |       | 1              |       | 28,196                  |       | 23,779                  |       |
| Maryland                   |       | 8              |       | 88,227                  |       | 71,022                  |       |
| Massachusetts              |       | 13             |       | 149,119                 |       | 119,523                 |       |
| Michigan                   |       | 12             |       | 104,083                 |       | 87,548                  |       |
| Minnesota                  |       | 4              |       | 34,808                  |       | 27,895                  |       |
| Missouri                   |       | 6              |       | 87,669                  |       | 62,829                  |       |
| Nebraska                   |       | 1              |       | 6,027                   |       | 4,798                   |       |
| Nevada                     |       | 3              |       | 45,122                  |       | 37,665                  |       |
| New Jersey                 |       | 11             |       | 156,102                 |       | 130,796                 |       |
| New Mexico                 |       | 2              |       | 21,433                  |       | 16,969                  |       |
| New York                   |       | 5              |       | 95,078                  |       | 84,413                  |       |
| North Carolina             |       | 16             |       | 135,384                 |       | 108,665                 |       |
| Ohio                       |       | 5              |       | 38,606                  |       | 31,607                  |       |
| Oklahoma                   |       | 2              |       | 16,591                  |       | 13,817                  |       |
| Pennsylvania               |       | 9              |       | 102,595                 |       | 79,338                  |       |
| Rhode Island               |       | 1              |       | 12,038                  |       | 9,097                   |       |
| South Carolina             |       | 4              |       | 53,949                  |       | 48,204                  |       |
| Tennessee                  |       | 9              |       | 124,787                 |       | 100,087                 |       |
| Texas                      |       | 31             |       | 359,636                 |       | 308,704                 |       |
| Utah                       |       | 3              |       | 59,304                  |       | 47,662                  |       |
| Virginia                   |       | 21             |       | 220,499                 |       | 174,561                 |       |
| Washington                 |       | 6              |       | 82,155                  |       | 67,976                  |       |
| West Virginia              |       | 1              |       | 9,072                   |       | 7,290                   |       |
| Wisconsin                  |       | 1              |       | 10,069                  |       | 7,828                   |       |
|                       |       | 295            |       | 3,463,740               |       | 2,855,475               |       |
| Other                      |       |           |       |                    |       |                    |       |
| Ontario, Canada            |       | 2              |       | 33,754                  |       | 32,633                  |       |
| Puerto Rico                |       | 1              |       | 129,199                 |       | 125,578                 |       |
| Total                      |       | 298            |       | $                       | 3,626,693  |                    | $          | 3,013,686 |   |

 

32

----

 

At December 31, 2005,thirteen of our hotels were on leased land. In each case, the remaining term ofthe ground lease (including renewal options) is in excess of 29 years, and theground lessors are unrelated to us. Ground rent payable under nine of theground leases is generally calculated as a percentage of hotel revenues. Elevenof the thirteen ground leases require minimum annual rents ranging fromapproximately $102,406 to $556,400 per year; future rents under two groundleases have been pre-paid. Generally payments of ground lease obligations aremade by our managers or tenants. However, if a manager or tenant did notperform obligations under a ground lease or elected not to renew any groundlease, we might have to perform obligations under the ground lease or renew theground lease in order to protect our investment in the affected hotel. Anypledge of our interests in a ground lease may require the consent of theapplicable ground lessor and its lenders.

 

As described in “Item 1. Business,” on January 6, 2006, we purchased amixed use complex in Baltimore, Maryland containing a 195 room full servicehotel, a 72,042 square foot commercial office building and a 530 space parkinggarage for $78 million. Also, on January 25, 2006, we purchased eight hotelsfor $166.2 million. The hotels are located in three states in the UnitedStates: California (2), Georgia (2) and Texas (4). One of these hotels islocated in part on leased land, subject to a ground lease requiring annualminimum rent of $87,622.

 

**Item 3. LegalProceedings**

** **

In the ordinary course of business we are involved in litigationincidental to our business; however we are not aware of any material pending orthreatened legal proceeding affecting us or any of our properties for which wemight become liable or the outcome of which we expect to have a material impacton us.

 

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

** **

None.

 

33

----

 

**PART II**

 

**Item 5. Marketfor the Registrant’s Common Equity, Related Shareholder Matters and IssuerPurchases of Securities**

 

Our common shares are traded on the New York Stock Exchange (symbol:HPT). The following table sets forth for the periods indicated the high and lowsale prices for our common shares as reported in the NYSE CompositeTransactions reports:

 
| **2004**        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| First  Quarter  |       | $        | 46.40      |    | $          | 40.40 |   |
| Second  Quarter |       | 46.86    |       | 35.56   |       |
| Third  Quarter  |       | 43.50    |       | 39.06   |       |
| Fourth  Quarter |       | 47.35    |       | 41.87   |       |
|                 |            |          |            |         |            |  |  |

 
| **2005**        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| First  Quarter  |       | $        | 46.28      |    | $          | 38.00 |   |
| Second  Quarter |       | 44.72    |       | 39.67   |       |
| Third  Quarter  |       | 45.04    |       | 40.51   |       |
| Fourth  Quarter |       | 43.30    |       | 38.42   |       |
|                 |            |          |            |         |            |  |  |

 

The closing price of our common shares on the New York Stock Exchangeon March 10, 2006, was $46.34 per share.

 

As of March 10, 2006, there were 1,045 shareholders of record, and weestimate that as of such date there were in excess of 60,000 beneficial ownersof our common shares.

 

Information about distributions paid to common shareholders issummarized in the table below. Common share distributions are generally paid inthe quarter following the quarter to which they relate.

 
| ** **      | ** ** | **Distributions**    | ** ** |
|-----------------|------------|----------------------|------------|
| ** **      | ** ** | **Per Common Share** | ** ** |
| ** **      | ** ** | **2004**             | ** ** | **2005** | ** ** |
| First  Quarter  |       | $                    | 0.72       |   | $ | 0.72 |   |
| Second  Quarter |       | 0.72                 |       | 0.72 |   |
| Third  Quarter  |       | 0.72                 |       | 0.73 |   |
| Fourth  Quarter |       | 0.72                 |       | 0.73 |   |
| Total           |       | $                    | 2.88       |   | $ | 2.90 |   |

 

All common distributions shown in the table above have been paid. Ourdistributions to our shareholders are generally paid in the quarterly periodfollowing the quarter to which the distribution relates. We currently intend tocontinue to declare and pay common share distributions on a quarterly basis.Distributions are made at the discretion of our board of trustees and depend onour earnings, cash available for distribution, financial condition, capitalmarket conditions, growth prospects and other factors which our board oftrustees deems relevant.

 

34

----

 

**Item 6.Selected Financial Data**

** **

The following table sets forth selected financial data for the periodsand dates indicated. This data should be read in conjunction with, and isqualified in its entirety by reference to, management’s discussion and analysisof financial condition and results of operations and the consolidated financialstatements and accompanying notes included in this Annual Report on Form 10-K.

 
| ** **                                                                | ** ** | **Year Ended December 31,**               | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                | ** ** | **(In thousands, except per share data)** | ** ** |
| **Income Statement Data:**                                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Hotel operating revenues                                                  |       | $                                         | 682,541    |   | $ | 498,122 |   | $ | 209,299 |   | $ | 79,328 |   | $ | 37,982 |   |
| Rental income                                                             |       | 130,731                                   |       | 128,472 |   | 217,253 |   | 247,488 |   | 240,290 |   |
| FF&E reserve income                                                   |       | 19,767                                    |       | 18,147 |   | 18,000 |   | 20,830 |   | 23,388 |   |
| Interest income                                                           |       | 1,373                                     |       | 627 |   | 733 |   | 1,060 |   | 2,217 |   |
| Gain on lease terminations                                                |       | —                                    |       | — |   | 107,516 |   | — |   | — |   |
| Total revenues                                                            |       | 834,412                                   |       | 645,368 |   | 552,801 |   | 348,706 |   | 303,877 |   |
| Expenses:                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Hotel operating expenses                                                  |       | 476,858                                   |       | 333,818 |   | 145,863 |   | 50,515 |   | 24,375 |   |
| Interest                                                                  |       | 65,263                                    |       | 50,393 |   | 44,536 |   | 42,424 |   | 41,312 |   |
| Depreciation and amortization                                             |       | 131,792                                   |       | 114,883 |   | 104,807 |   | 96,474 |   | 91,395 |   |
| General and administrative                                                |       | 23,296                                    |       | 19,386 |   | 16,800 |   | 15,491 |   | 14,839 |   |
| Loss on early extinguishment of debt                                      |       | —                                    |       | — |   | 2,582 |   | 1,600 |   | — |   |
| Loss on asset impairment                                                  |       | 7,300                                     |       | — |   | — |   | — |   | — |   |
| Total expenses                                                            |       | 704,509                                   |       | 518,480 |   | 314,588 |   | 206,504 |   | 171,921 |   |
| Income before gain on sale of real estate                                 |       | 129,903                                   |       | 126,888 |   | 238,213 |   | 142,202 |   | 131,956 |   |
| Gain on sale of real estate                                               |       | —                                    |       | 203 |   | — |   | — |   | — |   |
| Net income                                                                |       | 129,903                                   |       | 127,091 |   | 238,213 |   | 142,202 |   | 131,956 |   |
| Preferred distributions                                                   |       | 7,656                                     |       | 9,674 |   | 14,780 |   | 7,572 |   | 7,125 |   |
| Excess of liquidation preference over  carrying value of preferred shares |       | —                                    |       | 2,793 |   | — |   | — |   | — |   |
| Net income available for common  shareholders                             |       | $                                         | 122,247    |   | $ | 114,624 |   | $ | 223,433 |   | $ | 134,630 |   | $ | 124,831 |   |
| Common distributions declared                                             |       | $                                         | 205,162    |   | $ | 193,523 |   | $ | 180,242 |   | $ | 179,504 |   | $ | 168,447 |   |
| Weighted average common shares outstanding                                |       | 69,866                                    |       | 66,503 |   | 62,576 |   | 62,538 |   | 58,986 |   |
|                                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| **Per Common Share Data:**                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income available for common  shareholders                             |       | $                                         | 1.75       |   | $ | 1.72 |   | $ | 3.57 |   | $ | 2.15 |   | $ | 2.12 |   |
| Distributions per common share                                            |       | $                                         | 2.90       |   | $ | 2.88 |   | $ | 2.88 |   | $ | 2.87 |   | $ | 2.83 |   |
|                                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (as of December 31):**                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Real estate properties, at cost                                           |       | $                                         | 3,626,693  |   | $ | 3,180,990 |   | $ | 3,179,507 |   | $ | 2,762,322 |   | $ | 2,629,153 |   |
| Real estate properties, net                                               |       | 3,013,686                                 |       | 2,624,473 |   | 2,685,208 |   | 2,336,412 |   | 2,265,824 |   |
| Total assets                                                              |       | 3,114,607                                 |       | 2,689,425 |   | 2,761,601 |   | 2,403,756 |   | 2,354,964 |   |
| Debt, net of discount                                                     |       | 960,372                                   |       | 697,505 |   | 826,126 |   | 473,965 |   | 464,781 |   |
| Shareholders’ equity                                                 |       | 1,855,455                                 |       | 1,685,873 |   | 1,645,528 |   | 1,645,020 |   | 1,604,519 |   |

 

35

----

** **

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations (dollar amounts in thousands, except per share amounts)**

** **

**Overview**

** **

The following information should be read in conjunction with ourconsolidated financial statements and accompanying notes included in thisAnnual Report on Form 10-K.

 

**Hotel Industry Conditions**

** **

During 2005, the U.S. hotel industrybenefited from an expanding economy and limited new hotel supply. For 2005,nine of our ten combinations of hotels reported increases in revenue peravailable room, or RevPAR; however, our hotels’ profitability generallyremained below 2000 levels. All of our operating agreements and leases containsecurity features, such as security deposits or guarantees, which are intendedto protect payment of minimum returns and rents to us. However, theeffectiveness of these various security features to provide uninterruptedpayments to us is not assured. If any of our hotel operators, tenants orguarantors default in their payment obligations to us, our revenues and cashflows may decline and our ability to continue to pay distributions may bejeopardized.

 

**2005 Developments**

** **

On December 17, 2004, we agreed to purchase 13 hotels fromInterContinental for $450,000. The hotels include four full serviceInterContinental®hotels, four full service Crowne Plaza® hotels, three full service Holiday Inn® hotels and two extended stayStaybridge Suites®hotels; they have a total of 3,946 rooms/suites and approximately 164,000square feet of meeting space. The hotels are located in six states in theUnited States; one InterContinental®hotel and one Staybridge Suites®hotel are located in Ontario, Canada; and one InterContinental® hotel is located in San Juan,Puerto Rico. The $450,000 purchase price includes $25,000 which we have agreedto pay during the three years following the closing in connection with certainimprovements to the hotels. On February 16, 2005, we completed the acquisitionof 12 of the 13 hotels. On May 31, 2005, we completed the purchase of the finalhotel.

 

 Simultaneously with our purchaseof these hotels, we entered a long term combination management agreement for 12of the hotels and a long term lease for one hotel, the InterContinental®hotel in San Juan, Puerto Rico, with subsidiaries of InterContinental. Thecombined annual amount payable to us for all 13 hotels as minimum return underthe management agreement and minimum rent under the lease was $34,713 in 2005,increases to $37,688 in 2006, increases to approximately $38,537 in 2007 andincreases to approximately $38,962 after the full $450,000 purchase price hasbeen paid. In addition, we are entitled to receive additional return payments,a percentage of gross revenue over threshold amounts at these hotels startingin 2008 and the cash flow remaining after base and incentive management feesare paid. The minimum return under the management agreement and the minimumrent under the lease are calculated and payable in U.S. dollars. Other amountsdue under these agreements, with respect to the two hotels located in Canada,may be calculated in Canadian dollars, but will be payable in U.S. dollars. Themanagement agreement and the lease each extend through 2029, andInterContinental has two all or none renewal options for 15 years each. Theobligations to pay the minimum return under the management agreement and the minimumrent under the lease are supported by a limited guaranty from InterContinentaluntil the operations at these hotels reach negotiated levels. Further, theobligation to pay the minimum return under the management agreement is alsosupported by a limited guaranty from the InterContinental subsidiary tenant forthe Puerto Rico hotel. The agreements also require a reserve for capitalexpenditures starting in 2007.

 

In October 2004, Blackstone Group, or Blackstone, acquired PrimeHospitality Corporation, or Prime, and in January 2005, Blackstone sold Prime’sAmeriSuites® brand to Hyatt. As part of its AmeriSuites®acquisition, Hyatt acquired the rights and obligations under our managementagreement covering 36 hotels (24 AmeriSuites® hotels and 12 PrimeHotelsSM) previously managed by Prime. On April 4, 2005, we enteredinto new management agreements with subsidiaries of Hyatt and Carlson withrespect to this portfolio of 36 hotels. The new management agreements split theprevious management agreement we had with Prime into two: one with Hyatt forour 24 AmeriSuites® hotels and one with Carlson for our 12 PrimeHotelsSM. The economic terms of the new management agreements on acombined basis are unchanged from our previous management agreement with Prime,but, because the two

 

36

----

 

management agreements eachinclude a smaller number of hotels and are less diverse, certain securityfeatures, including the guarantees from Hyatt and Carlson, have been changed.

 

During the second quarter of 2005, 11 of our Prime HotelsSMwere rebranded to Carlson hotel brands, including Radisson Hotels & Resorts®,Country Inns & Suites by Carlson® and Park Plaza®Hotels & Resorts. In June 2005, we authorized Carlson to pursue the sale ofthe 12th Prime HotelSM located in Atlanta, Georgia. Inconnection with this decision we recorded a $7,300 loss on asset impairment inthe second quarter of 2005 to reduce the carrying value of the hotel to itsestimated net realizable value less cost to sell. We sold this hotel onSeptember 30, 2005, for $3,227. On November 1, 2005, we acquired a Country Inns& Suites by Carlson® hotel located in Brooklyn Center, Minnesotawith 84 guestrooms from Carlson for $4,100 as a replacement hotel to be addedto this combination. Under the terms of our management agreement with Carlsonour annual minimum return has been increased by a net $78.

 

**Subsequent Events**

** **

On January 6,2006, we purchased the Harbor Court Complex in the Inner Harbor area ofBaltimore, Maryland for $78,000. The Harbor Court Complex is a mixed usedevelopment comprised of the five star, five diamond Harbor Court Hotel, a72,042 square foot office building and a 530 space seven story parking garage.The hotel has 195 guest rooms, including 22 suites, 8,000 square feet ofmeeting space and a roof top fitness center that includes a tennis court,squash court, indoor pool, aerobics center and spa therapy rooms.Simultaneously with this purchase, we entered into an agreement withInterContinental to manage the Harbor Court Hotel under its InterContinentalHotels & Resorts® brand. This hotel has been added to thecombination agreement for 13 hotels we acquired from InterContinental in 2005as described above. Our annual minimum return from this expanded combination ofhotels will increase by $4,800 in 2006, $5,200 in 2007 and $5,300 per yearthereafter. We have agreed to invest up to $2,300 over the next two years inconnection with the rebranding of the Harbor Court Hotel as theInterContinental® Harbor Court Baltimore. In addition to the returnsgenerated by the hotel component of the complex, we will receive the net cashflow from the office and parking parts of the property; and we have enteredinto a management agreement with RMR to operate the office building and anagreement with an unaffiliated third party to manage the parking garage.

 

On January 25, 2006, we agreed to purchase nine hotels for $196,200 andto invest $25,100 in these hotels during the three years following closing tofund capital improvements. The hotels include five full service Crowne Plaza®hotels, one full service Holiday Inn Select® hotel, two StaybridgeSuites® hotels and one Holiday Inn SunSpree Resort®hotel; they have a total of 2,712 rooms/suites and approximately 68,000 squarefeet of meeting space. These hotels are located in three states in the UnitedStates and the Holiday Inn SunSpree Resort® hotel is located inMontego Bay, Jamaica. On January 25, 2006, we completed the acquisition ofeight of the nine hotels with an effective date of January 20, 2006. Thepurchase of the 524 room Holiday Inn SunSpree Resort® hotel forapproximately $30 million was delayed pending Jamaican tax and regulatoryapprovals, and is expected to close later in 2006. Circumstances may delay thispurchase for an extended period or prevent its occurring. Simultaneous with ourpurchase of these eight hotels, we entered a long term combination managementagreement with subsidiaries of InterContinental, and simultaneous with thepurchase of the Holiday Inn SunSpree Resort® we expect to enter along term lease with a subsidiary of InterContinental. The annual combinedamount payable to us for all nine hotels as a minimum return under themanagement contract and minimum rent under the lease will be $15,800 in 2006,$17,800 in 2007, $18,700 in 2008 and approximately $19,000 thereafter, afterthe full $25,100 of planned hotel improvements have been funded by us. Inaddition, we are entitled to receive additional return payments, a percentageof gross revenue over a threshold at these hotels starting in 2008 and the cashflow remaining after the payment of base and incentive management fees. Theminimum return under the management agreement and the minimum rent under thelease are calculated and payable in U.S. dollars. Other amounts due under theseagreements with respect to the hotel in Jamaica may be calculated in Jamaicandollars but will be payable in U.S. dollars. The management agreement and thelease each extend through 2030, and InterContinental has two all or nonerenewal options for 15 years each. The obligations to pay the minimum returnunder the management agreement and the minimum rent under the lease aresupported by a limited guaranty from InterContinental until the operations atthese hotels reach negotiated levels. Further, the obligation to pay theminimum return under the management agreement will also be supported by alimited guaranty from the InterContinental subsidiary tenant for the hotel inJamaica. The agreements also require a reserve for capital expendituresstarting in 2008.

 

37

----

 

**Management Agreements and Leases**

** **

As of December 31, 2005, each of our 298 hotels is included in one often combinations of hotels which is either leased to one of our wholly ownedtaxable REIT subsidiaries, or TRSs, and managed by an independent hoteloperating company or leased to a third party. At December 31, 2005, we had 189managed hotels and 109 leased hotels. Our consolidated income statement includeshotel operating revenues and expenses of our managed hotels, and only rentalincome for leased hotels. After the acquisition of nine hotels in January 2006,described above, we own 307 hotels of which 198 are managed and 109 are leased.Additional information regarding the terms of our management agreements andleases is included in the table on pages 48 and 49.

 

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

** **

**Year Ended December 31, 2005 Compared to Year Ended December 31, 2004**

** **
| ** **                                                     | ** ** | **For the year ended December 31,**               | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                          | ** ** | **2004** | ** ** | **Increase  (Decrease)** | ** ** | **% Increase  (Decrease)** | ** ** |
|                                                           |       | **(amounts in dollars, except number of shares)** |       |   |   |
| Hotel operating revenues                                       |       | $                                                 | 682,541    |   | $ | 498,122 |   | $ | 184,419 |   | 37.0% |   |
| Rental income:                                                 |       |                                              |       |   |   |   |   |   |   |
| Minimum rent                                                   |       | 126,829                                           |       | 125,669 |   | 1,160 |   | 0.9% |   |
| Percentage rent                                                |       | 3,902                                             |       | 2,803 |   | 1,099 |   | 39.2% |   |
| FF&E reserve income                                        |       | 19,767                                            |       | 18,147 |   | 1,620 |   | 8.9% |   |
| Interest income                                                |       | 1,373                                             |       | 627 |   | 746 |   | 119.0% |   |
|                                                           |       |                                              |       |   |   |   |   |   |   |
| Hotel operating expenses                                       |       | 476,858                                           |       | 333,818 |   | 143,040 |   | 42.8% |   |
| Interest expense                                               |       | 65,263                                            |       | 50,393 |   | 14,870 |   | 29.5% |   |
| Depreciation and amortization                                  |       | 131,792                                           |       | 114,883 |   | 16,909 |   | 14.7% |   |
| General and administrative                                     |       | 23,296                                            |       | 19,386 |   | 3,910 |   | 20.2% |   |
| Loss on asset impairment                                       |       | 7,300                                             |       | — |   | 7,300 |   | — |   |
| Gain on sale of real estate                                    |       | —                                            |       | 203 |   | (203 | ) | — |   |
|                                                           |       |                                              |       |   |   |   |   |   |   |
| Net income                                                     |       | 129,903                                           |       | 127,091 |   | 2,812 |   | 2.2% |   |
| Net income available for common  shareholders                  |       | 122,247                                           |       | 114,624 |   | 7,623 |   | 6.7% |   |
| Weighted average shares outstanding                            |       | 69,866                                            |       | 66,503 |   | 3,363 |   | 5.1% |   |
| Net income available for common  shareholders per common share |       | $                                                 | 1.75       |   | $ | 1.72 |   | $ | 0.03 |   | 1.7% |   |

 

Theincreases in hotel operating revenues and expenses were caused by the increasein the number of managed hotels in 2005 due to our February and May 2005 hotelacquisitions and the general increase in hotel revenues due to the improvinglodging industry conditions during 2005.

 

Proforma annual hotel operating revenues of our 189 managed hotels, which includesrevenues for periods prior to our ownership of some of these hotels and forperiods when some of the hotels were leased from us by third parties andexcludes revenues from the hotel sold on September 30, 2005, were $704,170 for2005, an increase of 8.5% from pro forma annual hotel operating revenues of $649,222for 2004. The increase in revenues is attributable primarily to the improvinglodging market that has resulted in improved occupancy and average daily roomrate at many of our hotels, which was partially offset by lower revenues at ourformer Prime HotelsSM during their transition to Carlson brandedoperations. As described above, we transferred operating responsibility for ourPrime HotelsSM to Carlson on April 4, 2005. During the secondquarter of 2005, 11 of these 12 hotels were rebranded with Carlson brands andare currently undergoing renovations which have required some hotel rooms to betaken out of service. We sold the 12th Prime HotelSM inSeptember 2005.

 

38

----

 

Proforma annual hotel operating expenses of our managed hotels, which includesexpenses for periods prior to our ownership of some of these hotels and forperiods when some of the hotels were leased from us by third parties andexcludes revenues from the hotel sold on September 30, 2005, were $504,525 for2005, an increase of 5.1% from pro forma annual hotel operating expenses of$480,000 for 2004. This increase is primarily a result of higher hoteloccupancies and increases in the cost of labor and utilities.

 

Certainof our managed hotels had net operating results that were $2,491 and $10,595less than the minimum returns due to us in 2005 and 2004, respectively. Theseamounts are reflected in our consolidated statement of income as a netreduction to hotel operating expenses in these years because the minimumreturns were funded by our managers.

 

Theincrease in minimum rental income is primarily a result of theinitiation of a new lease for our hotel in San Juan, Puerto Rico in February2005, and the increase in minimum rent resulting from our funding ofimprovements at certain of our leased hotels in 2005 and 2004. This increasewas partially offset by the elimination of $5,222 of minimum rent for seven ofour hotels which were leased to third parties for a portion of 2004 but are nowmanaged for our account. The increase in percentage rental income is the resultof increased sales at our leased hotels.

 

FF&E reserve income represents amounts paid by our tenants intorestricted accounts owned by us, the purpose of which is to accumulate fundsfor future capital expenditures. The terms of our leases require these amountsto be calculated as a percentage of total sales at our hotels. The increase inFF&E reserve income is primarily due to increased levels of hotel sales in2005 versus 2004 at our leased  hotels. This increase waspartially offset by the elimination of FF&E reserve income for seven hotelswhich were leased to third parties for a portion of 2004, but are now managedfor our account. The amounts which are escrowed as FF&E reserves for ourmanaged hotels and for leased hotels where the FF&E reserve is owned by ourtenants are not reported as FF&E reserve income in our consolidatedstatement of income.

 

The increase in interest income is due to higher average cash balancesand higher average interest rates during 2005.

 

The increase in interest expense is primarily due to higher averageborrowings, which was partially offset by a lower weighted average interestrate during 2005 than in 2004.

 

The increase in depreciation and amortization is due principally to thedepreciation of 14 hotels acquired during 2005 and the impact of the purchasesin 2005 and 2004 of depreciable assets with funds from FF&E reserveaccounts owned by us. This increase was offset to some extent by the sale ofhotels in April 2004 and September 2005 and the retirement of fully depreciatedassets of $71,089 and $50,619 during 2005 and 2004, respectively.

 

The increase to general and administrative expense is due principallyto the impact of additional hotel investments during 2005.

 

We recorded a $7,300 loss on asset impairment to reduce the carryingvalue of our Prime HotelSM in Atlanta, Georgia to its net realizablevalue less cost to sell in the 2005 second quarter. We sold this hotel onSeptember 30, 2005, for $3,227.

 

We recorded a $203 gain on the sale of a Summerfield Suites®hotel located in Buckhead, Georgia in the 2004 second quarter.

 

Our 2004 income available to common shareholders was reduced by $2,793as a result of our redemption of our Series A preferred shares, which amountreflects the excess of the redemption payments over the carrying value of thesepreferred shares before their redemption.

 

The increases in net income, net income available for commonshareholders and net income available for common shareholders per common sharewere primarily due to the investment and operating activities discussed above.The increase in net income available for common shareholders and net incomeavailable for common

 

39

----

 

shareholders per common sharewere also impacted by the reduction in 2005 of preferred dividends and thepreferred share redemption costs due to the redemption of our Series Apreferred shares in April 2004. On a per share basis, the percentage increasein net income available for common shareholders was lower due to our issuanceand sale of 4.7 million common shares in June 2005.

 

**Year Ended December 31, 2004 Compared to Year Ended December 31, 2003**

 
| ** **                                                     | ** ** | **For the year ended December 31,**               | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **Increase  (Decrease)** | ** ** | **% Increase  (Decrease)** | ** ** |
|                                                           |       | **(amounts in dollars, except number of shares)** |       |   |   |
| Hotel operating revenues                                       |       | $                                                 | 498,122    |   | $ | 209,299 |   | $ | 288,823 |   | 138.0% |   |
| Rental income:                                                 |       |                                              |       |   |   |   |   |   |   |
| Minimum rent                                                   |       | 125,669                                           |       | 216,125 |   | (90,456 | ) | (41.9)% |   |
| Percentage rent                                                |       | 2,803                                             |       | 1,128 |   | 1,675 |   | 148.5% |   |
| FF&E reserve income                                        |       | 18,147                                            |       | 18,000 |   | 147 |   | 0.8% |   |
| Interest income                                                |       | 627                                               |       | 733 |   | (106 | ) | (14.5)% |   |
| Gain on lease terminations                                     |       | —                                            |       | 107,516 |   | (107,516 | ) | — |   |
|                                                           |       |                                              |       |   |   |   |   |   |   |
| Hotel operating expenses                                       |       | 333,818                                           |       | 145,863 |   | 187,955 |   | 128.9% |   |
| Interest expense                                               |       | 50,393                                            |       | 44,536 |   | 5,857 |   | 13.2% |   |
| Depreciation and amortization                                  |       | 114,883                                           |       | 104,807 |   | 10,076 |   | 9.6% |   |
| General and administrative                                     |       | 19,386                                            |       | 16,800 |   | 2,586 |   | 15.4% |   |
| Loss on early extinguishment of debt                           |       | —                                            |       | 2,582 |   | (2,582 | ) | — |   |
| Gain on sale of real estate                                    |       | 203                                               |       | — |   | 203 |   | — |   |
|                                                           |       |                                              |       |   |   |   |   |   |   |
| Net income                                                     |       | 127,091                                           |       | 238,213 |   | (111,122 | ) | (46.6)% |   |
| Net income available for common  shareholders                  |       | 114,624                                           |       | 223,433 |   | (108,809 | ) | (48.7)% |   |
| Weighted average shares outstanding                            |       | 66,503                                            |       | 62,576 |   | 3,927 |   | 6.3% |   |
| Net income available for common  shareholders per common share |       | $                                                 | 1.72       |   | $ | 3.57 |   | (1.85 | ) | (51.8)% |   |
|                                                                |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

Theincreases in hotel operating revenues and expenses were caused by the increasein the number of managed hotels in 2004 due to: (i) our July 2003 acquisitionof 16 hotels and the initiation of a management agreement for these hotels;(ii) the change of 13 hotels from leased to managed hotels after the 2003 firstquarter; (iii) the initiation of a new management agreement on December 31,2003, for 64 hotels previously leased to Candlewood Hotel Company, orCandlewood, and for 12 hotels purchased from Candlewood on that day; (iv) theinitiation of a new management agreement on January 1, 2004, for 24 hotelspreviously leased to Prime; (v) the initiation of management agreements and thetermination of leases for 27 hotels previously leased to Wyndham International,Inc., or Wyndham, in the second quarter of 2003; and (vi) the general increasein hotel revenues due to the improving lodging industry conditions during 2004.

 

Proforma annual hotel operating revenues of our 177 managed hotels, which includesrevenues for periods prior to our ownership of some of these hotels and forperiods when some of the hotels were leased from us by third parties, were$510,124 in 2004, an increase of 1.1% from pro forma annual hotel operatingrevenues of $504,714 in 2003. The increase in revenues is attributableprimarily to the strengthening lodging market that resulted in improvedoccupancy and average daily room rate at many of our hotels offset by lowerrevenues at our former Summerfield Suites by Wyndham® and Wyndham®hotels, which were in the process of being rebranded during 2004 as StaybridgeSuites® and Prime HotelsSM, respectively.

 

Proforma annual hotel operating expenses for our managed hotels, which includesexpenses for periods prior to our ownership of some of these hotels and forperiods when some of the hotels were leased from us by third parties, were$351,221 in 2004, a decrease of 0.8% from pro forma annual hotel operatingexpenses of $354,033 in

 

40

----

 

2003. This decrease is dueprimarily to lower franchise related costs at certain of our rebranded hotelspartially offset by increased labor costs.

 

Certainof our managed hotels had net operating results that were $10,595 and $6,922less than the minimum returns due to us in 2004 and 2003, respectively. Theseamounts have been reflected in our consolidated statement of income as a netreduction to hotel operating expenses in each year because the minimum returnswere funded by our managers.

 

Thedecrease in minimum rental income is primarily a result of theelimination of $94,313 of minimum rent for 128 of our hotels which werepreviously leased to third parties but are now managed for our account. Thisdecrease was partially offset by increased minimum rent resulting from ourfunding of improvements at certain of our leased hotels in 2004 and 2003.Percentage rental income increased as a result of higher sales at our leasedhotels in 2004 versus 2003.

 

The increase in FF&E reserve income is primarily due to increasedlevels of hotel sales in 2004 versus 2003 at certain of our recently modernizedCourtyard by Marriott® hotels. This increase waspartially offset by six hotels which were changed from leased to managed hotelsduring 2003 and seven additional hotels which were changed from leased tomanaged hotels in June 2004.

 

The decrease in interest income is due to a lower average cash balance,offset to some extent by a higher average interest rate during 2004 than in2003.

 

We recorded a $107,516 gain on lease terminations in 2003as a result of the termination of our leases with Wyndham and Candlewood.

 

The increase in interest expense is primarily due to higher averageborrowings and a higher weighted average interest rate during 2004.

 

The increase in depreciation and amortization is due principally to thedepreciation of 35 hotels acquired during 2003 and the impact of the purchasesin 2003 and 2004 of depreciable assets with funds from FF&E reserveaccounts owned by us. This is offset to some extent by the sale of one hotel in2004 and the retirement of fully depreciated assets of $50,619 and $36,418during 2004 and 2003, respectively.

 

The increase to general and administrative expense is due principallyto the impact of additional hotel investments during 2004 and 2003 anddiligence costs of approximately $500 incurred in 2004 in connection with afailed potential acquisition.

 

In 2003, we recorded an expense of $2,582 to write off the unamortizeddeferred financing costs associated with $150,000 of senior notes we redeemed.

 

We recorded a $203 gain on the sale of a Summerfield Suites by Wyndham®hotel located in Buckhead, Georgia in the 2004 second quarter.

 

Our 2004 income available to common shareholders was reduced by $2,793as a result of our redemption of our Series A preferred shares, which amountreflects the excess of the redemption payments over the carrying value of thesepreferred shares before their redemption.

 

The decreases in net income, net income available for commonshareholders and net income available for common shareholders per common sharewere primarily due to the gain on lease terminations recorded in 2003 and theother investment and operating activities discussed above. The percentagedecrease in net income available for common shareholders per common share washigher due to our sale of an aggregate of 4.6 million common shares in Februaryand March 2004.

 

41

----

** **

**Liquidity and Capital Resources**

** **

Our Operators and Tenants

 

As of March 10, 2006, all 307 of our hotels are operated undermanagement agreements or leases with unrelated third party hotel operatingcompanies. All costs of operating and maintaining our hotels are paid by thethird party hotel managers as agents for us or by third party tenants for theirown account. These third parties generally derive their funding for hoteloperating expenses, FF&E reserves, and returns and rents due us from hoteloperating revenues and, to the extent that these parties fund our minimumreturns and minimum rents under their guarantees to us, from their separateresources.

 

We define coverage for each of our combination hotel managementagreements or leases as total hotel sales minus all expenses which are notsubordinated to the minimum returns and minimum rents due to us and therequired FF&E reserve contributions, divided by the aggregate minimumpayments to us. More detail regarding coverage, guarantees and other securityfeatures of our operating agreements is presented in the table on pages 48 and49. Of our ten operating agreements in place during 2005, seven hotelcombinations, representing 237 hotels, generated coverage of at least 1.0xduring 2005. The remaining three combinations, representing 61 hotels,generated coverages of 0.90x to 0.99x in 2005.

 

One hundred eighty-two (182) hotels, 60% of our total investments atcost, in seven combinations are operated under management agreements or leaseswhich are subject to full or limited guarantees. These guarantees may provideus with continued payments if the total hotel sales less total hotel expensesand required FF&E reserve payments fail to equal or exceed guaranteed amountsdue to us. Our managers and tenants or their affiliates may also supplementcash flow from our hotels in order to make payments to us and preserve theirrights to continue operating our hotels. Guarantee or supplemental payments tous, if any, made under any of our management agreements or leases, do notsubject us to repayment obligations but, under some of our agreements, theseguarantee or supplemental payments may be recovered by the manager or tenantfrom the future cash flows from our hotels after our future minimum returns andminimum rents are paid.

 

As of March 10, 2006, all payments due, including those payments dueunder management agreements or leases whose hotels generated less than 1.0xcoverage during 2005, are current. However, the effectiveness of our varioussecurity features to provide uninterrupted payments to us is not assured. If any of our hotel operators, tenants orguarantors default in their payment obligations to us, our revenues and cashflows may decline.

 

**Our OperatingLiquidity and Capital Resources**

** **

Our principal source of funds for current expenses and distributions toshareholders are minimum returns from our managed hotels and minimum rents fromour leased properties. We receive minimum returns and minimum rents from ourmanagers and tenants monthly. We receive additional returns, percentage returnsand rents and our share of the operating profits of our managed hotels afterpayment of all management fees and other deductions either monthly orquarterly. This flow of funds has historically been sufficient for us to payour operating expenses, interest and distributions to shareholders. We believethat our operating cash flow will be sufficient to meet our operating expenses,interest and distribution payments for the foreseeable future.

 

We maintain our status as a REIT under the Internal Revenue Code bymeeting certain requirements. As a REIT, we do not expect to pay federal incometaxes on the majority of our income. In 1999, federal legislation known as theREIT Modernization Act, or the RMA, was enacted and became effective on January1, 2001. The RMA, among other things, allows a REIT to lease hotels to a TRS ifthe hotel is managed by an independent third party. The income realized by ourTRS in excess of the rent it pays to us is subject to income tax at corporatetax rates. As, and if, the financial performance of the hotels operated for theaccount of our TRS improves, these taxes may become material, but theanticipated taxes are not material to our consolidated financial results atthis time.

 

42

----

 

**Our Investment andFinancing Liquidity and Capital Resources**

** **

Various percentages of total sales at most of our hotels are escrowedas FF&E reserves to fund future capital improvements at our hotels. As ofDecember 31, 2005, there was approximately $30,115 on deposit in these escrowaccounts, of which $29,063 was held directly by us and reflected on our balancesheet as restricted cash. The remaining $1,052 is held in an account owned byone of our tenants and is not reflected on our balance sheet; but we havesecurity and remainder interests in the account owned by this tenant. During2005, $35,115 was contributed to these accounts by our managers and tenants.Our operating agreements generally provide that, if necessary, we will provideour managers and tenants FF&E funding in excess of escrowed reserves. Tothe extent we make such fundings, our annual minimum returns or minimum rentgenerally increases by a percentage of the amount we fund. During 2005, we made$45,390 of such fundings. During 2005, $89,335 was spent to renovate andrefurbish our hotels.

 

During2005, we funded $13,726 for improvements to our Marriott hotel portfolios usingcash on hand and borrowings under our revolving credit facility. Weexpect to fund $26,669 for improvements to four of our Marriott hotelportfolios in 2006 with funds from existing cash balances or borrowings underour credit facility. Our minimum annual rent for these hotels is increased byapproximately 10% of the amounts we fund, which amounts are in addition torecurring FF&E reserve funding from hotel operations.

 

Pursuant to our agreement with InterContinental for management of 15Staybridge Suites® hotels (part of a 30 hotel combination), weagreed to fund $20,000 for rebranding costs and other capital improvements. Aspart of this agreement, InterContinental agreed to provide us with a $20,000deposit to secure its obligations under the management agreement that we willnot escrow. During the first quarter of 2005, the final $10,000 of thesefundings occurred. Our funding to InterContinental and its funding of thedeposit to us were simultaneous.

 

Pursuantto the agreement we entered into with Hyatt in April 2005 for management of 24hotels, we agreed to fund $8,000 to Hyatt for rebranding of the hotels to thenew Hyatt PlaceTM brand and other capital improvements. As ofDecember 31, 2005, $4,845 has been funded. We have also agreed to provideadditional funding to Hyatt for the rebranding of the hotels. To the extent ourfundings exceed $8,000, the minimum return payable by Hyatt to us will increaseas these funds are advanced. We expect to make additional fundings ofapproximately $35,270 in 2006 using cash on hand or borrowings under our revolvingcredit facility.

 

Pursuant to the agreement we entered into with Carlson in April 2005for management of 12 hotels, we agreed to fund $12,000 for rebranding costs andother capital improvements. We have also agreed to provide additional funding toCarlson for rebranding and refurbishment of the hotels. To the extent ourfundings exceed $12,000, the minimum return payable by Carlson to us willincrease as these funds are advanced. As of December 31, 2005, $21,664 has beenfunded. We expect to make additional fundings totaling $15,385 through June2006 with funds from existing cash balances or borrowings under our creditfacility.

 

In order to fund acquisitions and to meet cash needs that may resultfrom timing differences between our receipt of returns and rents and our desireor need to make distributions or pay operating expenses, we maintain arevolving credit facility with a group of commercial banks. On May 23, 2005, weamended and restated our unsecured revolving credit facility to increase themaximum borrowing amount from $350,000 to $750,000 and to extend the maturitydate to June 2009. Our amended and restated credit facility includes provisionswhereby the maturity date may be extended by one year upon payment of anadditional fee and the maximum borrowing may be expanded to up to $1,500,000 incertain circumstances. Several additional amendments were made to the terms ofour credit facility: the interest rate on drawings under the credit facilitywas reduced from LIBOR plus 135 basis points to LIBOR plus 80 basis points,subject to adjustments based on changes to our credit ratings; and certainfinancial and other covenants in the credit facility were also amended toreflect current market conditions. In October 2005, the credit ratings of oursenior unsecured debt obligations were raised to “BBB” and “Baa2” from “BBB-”and “Baa3” by Standard & Poor’s Rating Services and Moody’s InvestorsService, respectively. The interest rate on drawings under the credit facilitywas reduced to LIBOR plus 65 basis points as a result of these ratingsincreases. Under this credit facility funds may be drawn, repaid and redrawnuntil maturity, and no principal repayment is due until maturity. As ofDecember 31, 2005, we had $35,000 outstanding on our credit facility.

 

43

----

 

At December 31, 2005, we had $18,568 of cash and cash equivalents and$715,000 available on our revolving credit facility. We expect to use existingcash balances, borrowings under our credit facility or other lines of creditand net proceeds of offerings of equity or debt securities to fund futureproperty acquisitions.

 

As described above, on December 17, 2004, we announced our agreement topurchase 13 hotels from InterContinental for $450,000. We acquired 12 of thehotels on February 16, 2005 and the remaining hotel on May 31, 2005, for$425,000 using proceeds from the senior notes issuance described below andborrowings under our revolving credit facility. The $450,000 purchase priceincludes $25,000 which we have agreed to pay during the three years followingclosing in connection with certain improvements to the hotels. We paid $10,000of this amount in December 2005 and expect to pay the remaining balance in 2006and 2007 with funds from existing cash balances or borrowings under our creditfacility.

 

OnJanuary 6, 2006, we acquired the Harbor Court Complex in Baltimore, Marylandfor $78,000 using cash on hand and borrowings under our revolving creditfacility.

 

OnJanuary 25, 2006, we announced our agreement to purchase nine hotels for$196,200. As of March 10, 2006, we have acquired eight of these nine hotels forapproximately $166,200 using borrowings under our revolving credit facility. Weexpect to complete the purchase of the final hotel for approximately $30,000later in 2006, using existing cash balances or borrowings under our revolvingcredit facility.

 

Our term debt maturities (other than our revolving credit facility) areas follows: $150,000 in 2008; $50,000 in 2010; $125,000 in 2012, $300,000 in2013 and $300,000 in 2015. As of December 31, 2005, we had one mortgage note weassumed in connection with our acquisition of a hotel with a principal balanceof $3,766. This mortgage note requires monthly payments of principal andinterest of $32 and is expected to have a principal balance of $3,326 atmaturity in 2011. The mortgage note became prepayable at a premium to facevalue on September 1, 2005. None of our other debt obligations requireprincipal or sinking fund payments prior to their maturity date.

 

On March 1, 2005, June 1, 2005, September 1, 2005 and December 1, 2005,we declared distributions of $0.5546875 per Series B preferred share withrespect to each of the first, second, third and fourth quarters of 2005,respectively, and paid them to shareholders on April 15, 2005, July 15, 2005,October 17, 2005 and January 17, 2006. On April 7, 2005 and July 7, 2005, wedeclared distributions of $0.72 per common share with respect to each of thefirst and second quarters of 2005, respectively, and on October 6, 2005 andJanuary 12, 2006, we declared distributions of $0.73 per common share withrespect of each of the third and fourth quarters of 2005, respectively, andpaid them to shareholders on May 19, 2005, August 18, 2005, November 17, 2005and February 16, 2006. All of these distributions were funded using cash onhand and borrowings under our revolving credit facility.

 

OnFebruary 15, 2005, we issued $300,000 of 5.125% senior notes due 2015.Net proceeds after underwriting and other offering expenses were approximately$297,192. As described above, these proceeds were used to partially fund theacquisition of 13 hotels from InterContinental in February and May 2005.

 

On June 5, 2005, we sold 4,500,000 of our common shares at a price of$44.39 per share in a public offering. On June 24, 2005, we sold an additional200,000 common shares at a price of $44.39 pursuant to an over allotment optiongranted to the underwriters. Net proceeds from both these sales, afterunderwriting and other offering expenses, were $199,233. We used these proceedsto reduce borrowings outstanding under our revolving credit facility.

 

When amounts are outstanding on our revolving credit facility and, asthe maturity dates of our credit facility and term debt approach over thelonger term, we will explore alternatives for the repayment of amounts due.Such alternatives in the short term and long term may include incurringadditional long term debt and issuing new equity securities. As of December 31,2005, we had $1,578,439 available on our shelf registration. An effective shelfregistration allows us to issue public securities on an expedited basis, but itdoes not assure that there will be buyers for those securities. Although therecan be no assurance that we will consummate any debt or equity securityofferings or other financings, we believe we will have access to various typesof financing, including investment grade debt or equity securities offerings,with which to finance future acquisitions and to pay our debt and otherobligations.

 

44

----

 

As of December 31, 2005, our contractual obligations were as follows:

 
| ** **                   | ** ** | **Payment due by period** | ** ** |
|------------------------------|------------|---------------------------|------------|
| ** **                   | ** ** | **Total**                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-Term Debt Obligations   |       | $                         | 963,766    |   | $ | 66 |   | $ | 150,148 |   | $ | 85,176 |   | $ | 728,376 |   |
| Purchase Obligation (1)      |       | 15,000                    |       | 10,000 |   | 5,000 |   | — |   | — |   |
| Ground Lease Obligations (2) |       | 73,709                    |       | 1,994 |   | 3,988 |   | 3,568 |   | 64,159 |   |
| Capital improvements (3)     |       | 77,324                    |       | 77,324 |   | — |   | — |   | — |   |
| Total                        |       | $                         | 1,129,799  |   | $ | 89,384 |   | $ | 159,136 |   | $ | 88,744 |   | $ | 792,535 |   |

 

----

(1)          On December 17, 2004, we announced our agreement to purchase 13 hotelsfrom InterContinental. This remaining balance of our negotiated purchase priceis to fund capital improvements over the course of the next two years.

 

(2)          Thirteen of our hotels are on leased land. In each case the groundlessors are unrelated to us. Generally, payments of ground lease obligationsare made by our managers or tenants. However, if a manager or tenant fails toperform obligations under a ground lease or elects not to renew any groundlease, we might have to perform obligations under the ground lease or renew theground lease in order to protect our investment in the affected hotel.

 

(3)          Represents amounts we expect to fund in addition to recurring FF&Ereserve funding from hotel operations.

 

As of December 31, 2005, we had no off-balance sheet arrangements,commercial paper, derivatives, swaps, hedges, guarantees, joint ventures orpartnerships. As of December 31, 2005, our secured debt obligations werelimited to one mortgage note of $3,766 secured by a single property. None ofour debt documentation requires us to provide collateral security in the eventof a ratings downgrade.

 

**Debt Covenants**

** **

Our debt obligations at December 31, 2005, were our revolving creditfacility, our $925,000 of publicly issued term debt and our $3,766 mortgagenote. Our public debt is governed by an indenture. This indenture and relatedsupplements and our credit facility agreement contain a number of financialratio covenants which generally restrict our ability to incur debts, includingdebts secured by mortgages on our properties in excess of calculated amounts,require us to maintain a minimum net worth, restrict our ability to makedistributions under certain circumstances and require us to maintain otherratios. As of December 31, 2005, we were in compliance with all of ourcovenants under our indenture and its supplements and our credit facilityagreement.

 

Neither our indenture and its supplements nor our bank credit facilitycontain provisions for acceleration which could be triggered by our debtratings. However, under our credit facility agreement, our senior debt ratingis used to determine the fees and interest rate applied to borrowings.

 

Our public debt indenture and its supplements contain cross defaultprovisions to any other debts of $20,000 or more. Similarly, a default on ourpublic debt indenture would be a default on our credit facility.

 

**Related Party Transactions**

** **

RMR originates and presents investment opportunities to our board andprovides administrative services to us under an agreement. RMR is compensatedat an annual rate equal to 0.7% of our average real estate investments, asdefined, up to the first $250,000 and 0.5% thereafter, plus an incentive feebased upon increases in cash available for distribution per share, as defined.The incentive fee payable to RMR is paid in common shares. Aggregate feesearned by RMR during 2005 for services were $19,127, which includes anincentive fee of $1,397 which we plan to pay later in 2006, through theissuance of 33,973 of our common shares. RMR also provides the internal audit functionfor us and for other publicly traded companies to which it provides managementor other services. We pay a pro rata share of RMR’s costs in providing thatfunction. Our audit committee composed only of independent trustees approvesthe identity and salary of the individual serving as our director of internalaudit, as well as the pro rata share of the costs which we pay. As describedabove, on January 6, 2006, we entered into a management agreement with RMR tooperate the office building component of our Harbor Court Complex. Feespaid to RMR under this management agreement are based on a formula, generally3% of gross collected rents as a property management fee and 5% of

 

45

----

 

gross construction costs as aconstruction management fee. Prior to October 1, 2005, RMR was beneficiallyowned by Messrs. Barry Portnoy and Gerard Martin, each a managing trustee and amember of our board of trustees. Effective October 1, 2005, Messrs. Barry Portnoy and his son, AdamPortnoy, acquired Mr. Martin’s beneficial ownership in RMR. Mr. Adam Portnoy isan executive officer of RMR and the Executive Vice President of HRPT. Mr.Martin remains a director of RMR and, together with Mr. Barry Portnoy,continues to serve as one of our managing trustees.  All transactions between us and RMRare approved by our independent trustees.

 

**Critical Accounting Policies**

** **

Our critical accountingpolicies are those that have the most impact on the reporting of our financialcondition and results of operations and those requiring significant judgmentsand estimates. We believe that our judgments and assessments are consistentlyapplied and produce financial information that fairly presents our results ofoperations. Our four most critical accounting policies concern our investmentsin hotels and are as follows:

 

Classification of Leases. Certain of our hotel investments are leasedon a triple net basis, pursuant to non-cancelable, fixed term, operatingleases. Each time we enter a new lease or materially modify an existing leasewe evaluate its classification as either a capital lease or operating lease.The classification of a lease as capital or operating affects the carryingvalue of a property, as well as our recognition of rental payments as revenue.These evaluations require us to make estimates of, among other things, theremaining useful life and market value of a leased hotel, appropriate presentvalue discount rates and future cash flows. Incorrect assumptions or estimatesmay result in misclassification of our leases.

 

Allocation of Purchase Priceand Recognition of Depreciation Expense. The acquisition cost of each hotelinvestment is allocated to various property components such as land, buildingsand furniture, and each component generally has a different useful life. Forhotels acquired subsequent to June 1, 2001, the effective date of Statement ofFinancial Accounting Standards No. 141, “Business Combinations”, we allocatethe value of real estate acquired among building, land, furniture, fixtures andequipment, and, if applicable, the value of in-place leases, the fair marketvalue of above or below market leases and customer relationships. Acquisitioncost allocations and the determination of the useful lives are based on ourestimates or, under some circumstances, studies commissioned from independent experts.We compute related depreciation expense using the straight line method overestimated useful lives of up to 40 years for buildings and improvements, and upto 12 years for personal property. The value of intangible assets is amortizedover the term of the respective lease or the affected contract. The allocatedcost of land is not depreciated. Inappropriate allocation of acquisition costsor incorrect estimates of useful lives could result in depreciation andamortization expenses which do not appropriately reflect the allocation of ourcapital expenditures over future periods required by accounting principlesgenerally accepted in the United States.

 

Impairment of Assets. We periodically evaluate our hotelinvestments for impairment indicators. These indicators may include weak ordeclining operating profitability, cash flow or liquidity, our decision todispose of an asset before the end of its estimated useful life or market orindustry changes that could permanently reduce the value of our investments. Ifindicators of impairment are present, we evaluate the carrying value of therelated investment by comparing it to the expected future undiscounted cashflows to be generated from that investment. If the sum of these expected futurecash flows is less than the carrying value, we reduce the net carrying value ofthe property to its estimated fair value. Estimated fair value is determinedthrough an evaluation of recent financial performance and projected discountedcash flows using standard industry valuation techniques. This analysis requiresus to judge whether indicators of impairment exist and to estimate likelyfuture cash flows. If we misjudge or estimate incorrectly or if futureoperating profitability, market or industry factors differ from ourexpectations we may record an impairment charge which is inappropriate or failto record a charge when we should have done so, or the amount of such chargesmay be inaccurate.

 

Variable Interest Entities. In January 2003, the Financial Accounting Standards Board, or FASB,issued FASB Interpretation No. 46, “Consolidation of Variable InterestEntities”, or FIN 46, that was effective for all enterprises with variableinterest entities created after January 31, 2003. In December 2003, FASB issueda revised FIN 46, which provided for the deferral of the effective date of theinterpretation to January 1, 2004, for variable interest entities created priorto January 31, 2003. Under FIN 46, if an entity is determined to be a variableinterest entity, it must be consolidated by the primary beneficiary. Theprimary beneficiary is the enterprise that absorbs the majority of the entity’sexpected losses, receives a majority of the entity’s expected residual returns,or both.

 

46

----

 

Generally, expected losses andexpected residual returns are the expected negative and positive variability,respectively, in the fair value of the variable interest entities’ net assets.When our TRS enters a new operating agreement or materially modifies anexisting operating agreement we are required to assess if we are or continue tobe the primary beneficiary. This assessment requires us to make estimates ofthe future cash flows of our TRS. Incorrect assumptions or estimates of, amongother things, occupancy, average daily room rate and operating expenses of ourhotels may result in an inaccurate determination of the primary beneficiary.The adoption of FIN 46 had no effect on our financial statements.

 

Thesepolicies involve significant judgments based upon our experience, includingjudgments about current valuations, ultimate realizable value, estimated usefullives, salvage or residual values, the ability of our tenants and operators toperform their obligations to us, and the current and likely future operatingand competitive environments in which our hotels operate. In the future we mayneed to revise our assessments to incorporate information which is not nowknown, and such revisions could increase or decrease our depreciation expense relatedto hotels we own, result in the classification of our leases as other thanoperating leases or decrease the carrying values of our assets.

 

**Property Management Agreements, Leases and Operating Statistics**

** **

As of March 10, 2006, we owned 307 hotels which are grouped into elevencombinations and managed by or leased to separate affiliates of hotel operatingcompanies including InterContinental, Marriott, Host Marriott Corporation, orHost, Barcelo Crestline Corporation, or Barcelo Crestline, Hyatt, Carlson andHomestead.

 

The tables on the following pages summarize the key terms of our leasesand management agreements as of March 10, 2006, and include statistics reportedto us or derived from information reported to us by our managers and tenants.These statistics include occupancy, average daily rate, or ADR, revenue per dayper available room, or RevPAR, and coverage of our minimum returns or minimumrents. We consider these statistics and the management agreement or leasesecurity features also presented in the tables on the following pages, to beimportant measures of our managers’ and tenants’ success in operating ourhotels and their ability to continue to pay us. However, none of this thirdparty reported information is a direct measure of our financial performance andnone of it has been independently verified by us.

 

47

----

 
| **Hotel Brand:**                             | ** ** | **Courtyard by  Marriott®**                                                                                                | ** ** | **Residence Inn by  Marriott®**                                                                                       | ** ** | **Marriott®/  Residence Inn by  Marriott®/  Courtyard by  Marriott®/  TownePlace Suites  by Marriott®/  SpringHill Suites  by Marriott®** | ** ** | **Residence Inn by  Marriott®/  Courtyard by  Marriott®/  TownePlace Suites  by Marriott®/  SpringHill Suites  by Marriott®** | ** ** | **Homestead  Studio Suites®**                   | ** ** | **Staybridge  Suites®**                     | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| Number of Hotels:                                 |       | 53                                                                                                                                   |       | 18                                                                                                                                   |       | 35                                                                                                                                                                                                    |       | 19                                                                                                                                                                                   |       | 18                                                        |       | 30                                               |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Number of Rooms /  Suites:                        |       | 7,610                                                                                                                                |       | 2,178                                                                                                                                |       | 5,382                                                                                                                                                                                                 |       | 2,756                                                                                                                                                                                |       | 2,399                                                     |       | 3,694                                            |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Number of States:                                 |       | 24                                                                                                                                   |       | 14                                                                                                                                   |       | 15                                                                                                                                                                                                    |       | 14                                                                                                                                                                                   |       | 5                                                         |       | 16                                               |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Tenant:                                           |       | Subsidiary of  Host Subleased to Subsidiary of Barcelo Crestline.                                                                    |       | Subsidiary of  Host Subleased to Subsidiary of Barcelo Crestline.                                                                    |       | Our TRS.                                                                                                                                                                                              |       | Subsidiary of  Barcelo Crestline.                                                                                                                                                    |       | Subsidiary of  Homestead.                                 |       | Our TRS.                                         |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Manager:                                          |       | Subsidiary of  Marriott.                                                                                                             |       | Subsidiary of  Marriott.                                                                                                             |       | Subsidiaries of  Marriott.                                                                                                                                                                            |       | Subsidiaries of Marriott.                                                                                                                                                            |       | Subsidiary of  Homestead.                                 |       | Subsidiary of  InterContinental.                 |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Investment  (000s) (1):                           |       | $560,635                                                                                                                             |       | $187,236                                                                                                                             |       | $462,332                                                                                                                                                                                              |       | $274,222                                                                                                                                                                             |       | $145,000                                                  |       | $415,708                                         |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Security  Deposit (000s):                         |       | $50,540                                                                                                                              |       | $17,220                                                                                                                              |       | $36,204                                                                                                                                                                                               |       | $28,508                                                                                                                                                                              |       | $15,960                                                   |       | $36,872(8)                                       |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| End  of Current Term:                             |       | 2012                                                                                                                                 |       | 2010                                                                                                                                 |       | 2019                                                                                                                                                                                                  |       | 2015                                                                                                                                                                                 |       | 2015                                                      |       | 2023                                             |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Renewal  Options (2):                             |       | 3 for 12 years  each.                                                                                                                |       | 1 for 10 years, 2  for 15 years each.                                                                                                |       | 2 for 15 years  each.                                                                                                                                                                                 |       | 2 for 10 years  each.                                                                                                                                                                |       | 2 for 15 years  each.                                     |       | 2 for 12.5 years  each.                          |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Annual  Minimum Return / Minimum Rent (000s) (3): |       | $55,951                                                                                                                              |       | $18,705                                                                                                                              |       | $47,986                                                                                                                                                                                               |       | $28,508                                                                                                                                                                              |       | $15,960                                                   |       | $36,097                                          |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Additional  Return:                               |       | —                                                                                                                               |       | —                                                                                                                               |       | $1,173(4)                                                                                                                                                                                             |       | —                                                                                                                                                                               |       | —                                                    |       | —                                           |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Percentage  Return / Rent (5):                    |       | 5.0% of revenues  above 1994/95 revenues.                                                                                            |       | 7.5% of revenues  above 1996 revenues.                                                                                               |       | 7.0% of revenues  above 2000/01 revenues.                                                                                                                                                             |       | 7.0% of revenues  above 1999/2000 revenues.                                                                                                                                          |       | 10.0% of revenues  above 1999/2000 revenues.              |       | 7.5% of revenues  above 2004/06 revenues.        |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Return  / Rent Coverage (6)(7):              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Year  ended 12/31/05:                             |       | 1.41x                                                                                                                                |       | 1.13x                                                                                                                                |       | 1.03x                                                                                                                                                                                                 |       | 0.99x                                                                                                                                                                                |       | 1.46x                                                     |       | 0.91x                                            |       |
| Year  ended 12/31/04:                             |       | 1.29x                                                                                                                                |       | 1.00x                                                                                                                                |       | 0.87x                                                                                                                                                                                                 |       | 0.85x                                                                                                                                                                                |       | 1.21x                                                     |       | 0.77x                                            |       |
|                                              |       |                                                                                                                                 |       |                                                                                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                 |       |                                                      |       |                                             |       |
| Other  Security Features:                         |       | HPT controlled lockbox  with minimum balance maintenance requirement; subtenant and subtenant parent  minimum net worth requirement. |       | HPT controlled lockbox  with minimum balance maintenance requirement; subtenant and subtenant parent  minimum net worth requirement. |       | —                                                                                                                                                                                                |       | Tenant minimum net worth  requirement.                                                                                                                                               |       | Homestead parent  guarantee and $15,960 letter of credit. |       | Limited guarantee  provided by InterContinental. |       |

 

----

(1)          Amounts exclude expenditures made fromFF&E reserves funded from hotel operations, but includes amounts funded byus separately from hotel operations.

(2)          Renewal options may be exercised by themanager or tenant for all, but not less than all, of the hotels within eachcombination of hotels.

(3)          Each management agreement or lease providesfor payment to us of an annual minimum return or minimum rent, respectively.Management fees are generally subordinated to these minimum payment amounts andcertain minimum payments are subject to full or limited guarantees.

(4)          This agreement provides for annual additionalreturn payment to us of $1,173 to the extent of available cash flow afterpayment of operating costs, funding of the FF&E reserve and payment of ourminimum return and percentage return.

(5)          Certain of our management agreements andleases provide for payment to us of a percentage of increases in total hotelsales over base year levels. Percentage returns under our management agreementsare payable to us only to the extent of available cash flow, as defined in theagreements. The payment of percentage rent under our leases is not subject toavailable cash flow.

(6)          We define coverage as total hotel sales minusall expenses which are not subordinated to minimum payments to us and therequired FF&E reserve contributions (which data is provided to us by ouroperators or tenants), divided by the minimum returns or minimum rent paymentsdue to us.

(7)          For the hotels managed by Marriott, the datapresented is for the comparable fiscal years ended December 30, 2005, andDecember 31, 2004.

(8)          The single $36,872 deposit secures InterContinental’sobligations under the Staybridge Suites® portfolio, theInterContinental® / Crowne Plaza® / Holliday Inn®/ Staybridge Suites® portfolio and the Crowne Plaza® /Holiday Inn® / Staybridge Suites® portfolio.

 

48

----

 
| **Hotel  Brand:**                                 | ** ** | **Candlewood  Suites ®**                   | ** ** | **InterContinental®/ Crowne Plaza®/  Holiday Inn®/  Staybridge   Suites® (1)** | ** ** | **Crowne  Plaza®/  Holiday Inn®/  Staybridge  Suites® (2)** | ** ** | **AmeriSuites®**                               | ** ** | **Radisson®  Hotels &  Resorts/ Park  Plaza® Hotels &  Resorts/ Country  Inns & Suites by  Carlson®** | ** ** | **Total/  Range/  Average  (all investments)  (1)(2)** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Number of Hotels:                                 |       | 76                                              |       | 14                                                                                                 |       | 8                                                                          |       | 24                                                  |       | 12                                                                                                                               |       | 307                                                    |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Number of Rooms /  Suites:                        |       | 9,220                                           |       | 4,141                                                                                              |       | 2,188                                                                      |       | 2,929                                               |       | 2,262                                                                                                                            |       | 44,759                                                 |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Number of States:                                 |       | 29                                              |       | 7 plus Ontario and  Puerto Rico                                                                    |       | 3                                                                          |       | 14                                                  |       | 7                                                                                                                                |       | 38 plus Ontario and  Puerto Rico                       |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Tenant:                                           |       | Our TRS.                                        |       | Our TRS and a subsidiary  of InterContinental.                                                     |       | Our TRS.                                                                   |       | Our TRS.                                            |       | Our TRS.                                                                                                                         |       |                                                   |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Manager:                                          |       | Subsidiary of  InterContinental.                |       | Subsidiaries of  InterContinental.                                                                 |       | Subsidiaries of  InterContinental.                                         |       | Subsidiary of Hyatt.                                |       | Subsidiary of Carlson.                                                                                                           |       |                                                   |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Investment (000s)  (3):                           |       | $590,250                                        |       | $503,000                                                                                           |       | $166,200                                                                   |       | $243,350                                            |       | $202,735                                                                                                                         |       | $3,750,668                                             |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Security Deposit  (000s):                         |       | —                                          |       | $36,872 (4)                                                                                        |       | $36,872 (4)                                                                |       | —                                              |       | —                                                                                                                           |       | $185,304                                               |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| End of Current  Term:                             |       | 2028                                            |       | 2029                                                                                               |       | 2030                                                                       |       | 2030                                                |       | 2030                                                                                                                             |       | 2010-2030  (average 16 years)                          |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Renewal Options  (5):                             |       | 2 for 15 years each.                            |       | 2 for 15 years each.                                                                               |       | 2 for 15 years each.                                                       |       | 2 for 15 years each.                                |       | 2 for 15 years each.                                                                                                             |       |                                                   |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Annual Minimum  Return / Minimum Rent (000s) (6): |       | $50,000                                         |       | $42,488                                                                                            |       | $13,296                                                                    |       | $17,000                                             |       | $10,732                                                                                                                          |       | $336,723                                               |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Additional  Return:                               |       | $10,000(7)                                      |       | $3,458(8)                                                                                          |       | $1,269(9)                                                                  |       | 50% of cash flow in  excess of minimum return. (10) |       | 50% of cash flow in  excess of minimum return. (10)                                                                              |       | $15,900                                                |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Percentage Return / Rent (11):                    |       | 7.5% of revenues above  2006 revenues.          |       | 7.5% of revenues above  2006 revenues.                                                             |       | 7.5% of revenues above  2006 revenues.                                     |       | —                                              |       | —                                                                                                                           |       |                                                   |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Return / Rent Coverage (12):                      |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Year ended  12/31/05:                             |       | 1.20x                                           |       | 1.29x                                                                                              |       | 1.34x                                                                      |       | 1.03x                                               |       | 0.90x                                                                                                                            |       | 0.90x – 1.46x                                     |       |
| Year ended  12/31/04:                             |       | 1.00x                                           |       | 0.95x                                                                                              |       | 1.06x                                                                      |       | 0.91x                                               |       | 1.49x                                                                                                                            |       | 0.77x – 1.49x                                     |       |
|                                              |       |                                            |       |                                                                                               |       |                                                                       |       |                                                |       |                                                                                                                             |       |                                                   |       |
| Other Security Features:                          |       | Limited guarantee provided by InterContinental. |       | Limited guarantee provided by InterContinental.                                                    |       | Limited guarantee provided by InterContinental.                            |       | Limited guarantee provided by Hyatt.                |       | Limited guarantee provided by Carlson.                                                                                           |       |                                                   |       |

 

----

(1)          Amountsgive effect to the acquisition of a hotel on January 6, 2006.

(2)          Amountsgive effect to the acquisition of eight hotels with an effective date ofJanuary 20, 2006. Amounts exclude one additional Holiday Inn SunSpree Resort®in Montego Bay, Jamaica with 524 rooms, which we expect to purchase fromInterContinental later in 2006 for $30,000.

(3)          Amountsexclude expenditures made from FF&E reserves funded from hotel operations,but includes amounts funded by us separately from hotel operations.

(4)          Thesingle $36,872 deposit secures InterContinental’s obligations under theStaybridge Suites® portfolio, the InterContinental® /Crowne Plaza® / Holliday Inn® / Staybridge Suites®portfolio and the Crowne Plaza® / Holiday Inn® / StaybridgeSuites® portfolio.

(5)          Renewaloptions may be exercised by the manager or tenant for all, but not less thanall, of the hotels within each combination of hotels.

(6)          Eachmanagement agreement or lease provides for payment to us of an annual minimumreturn or minimum rent, respectively. Management fees are generallysubordinated to these minimum payment amounts and certain minimum payments aresubject to full or limited guarantees.

(7)          Thisagreement provides for annual additional return payment to us of $10,000 to theextent of available cash flow after payment of operating costs, funding of theFF&E reserve, payment of our minimum return and payment of certainmanagement fees.

(8)          Thisagreement provides for annual additional return payment to us of $3,458 to theextent of available cash flow after payment of operating costs, funding of theFF&E reserve, payment of our minimum return and payment of certainmanagement fees.

(9)          Thisagreement provides for annual additional return payment to us of $1,269 to theextent of available cash flow after payment of operating costs, funding of theFF&E reserve, payment of our minimum return and payment of certainmanagement fees.

(10)    Theseagreements provide for payment to us of 50% of available cash flow afterpayment of operating costs, funding the FF&E reserve, payment of ourminimum return and reimbursement to the managers of working capital andguaranty advances, if any.

(11)    Certainof our management agreements and leases provides for payment to us of a percentageof increases in total hotel sales over base year levels. Percentage returnsunder our management agreements are payable to us only to the extent ofavailable cash flow, as defined in the agreements. The payment of percentagerent under our leases is not subject to available cash flow.

(12)    Wedefine coverage as total hotel sales minus all expenses which are notsubordinated to minimum payments to us and the required FF&E reservecontributions (which data is provided to us by our operators or tenants),divided by the minimum return or minimum rent payments due to us. The returncoverage amounts for certain of our management agreements have been revised forall periods presented to include only the minimum returns. The calculation inprior periods included additional return amounts for certain of our managementagreements. For some combinations, amounts have been calculated using data forperiods prior to our ownership of certain hotels and prior to commencement ofoperating agreements.

 

49

----

 

The following tables summarize the operating statistics, includingoccupancy, ADR and RevPAR, reported to us by our hotel operators by managementagreement or lease for the periods indicated for the 298 hotels we owned as ofDecember 31, 2005:

 
| ** **                     | ** ** | **No. of** | ** ** | **No. of**       | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Management Agreement/Lease** | ** ** | **Hotels** | ** ** | **Rooms/Suites** | ** ** | **2005(1)** | ** ** | **2004(1)** | ** ** | **Change** | ** ** |
| **ADR**                        |       |       |       |             |       |        |       |        |       |       |       |
| Host (no. 1)                   |       | 53         |       | 7,610            |       | $           | 108.15     |        | $          | 100.38     |       | 7.7 | % |
| Host (no. 2)                   |       | 18         |       | 2,178            |       | 101.36      |       | 94.86       |       | 6.9        | %          |
| Marriott                       |       | 35         |       | 5,382            |       | 101.33      |       | 94.72       |       | 7.0        | %          |
| Barcelo Crestline              |       | 19         |       | 2,756            |       | 102.64      |       | 92.26       |       | 11.3       | %          |
| InterContinental (no. 1)(2)    |       | 30         |       | 3,694            |       | 96.67       |       | 89.65       |       | 7.8        | %          |
| InterContinental (no. 2)       |       | 76         |       | 9,220            |       | 61.03       |       | 55.97       |       | 9.0        | %          |
| InterContinental (no. 3)(3)    |       | 13         |       | 3,946            |       | 117.38      |       | 110.92      |       | 5.8        | %          |
| Hyatt  (4)                |       | 24         |       | 2,929            |       | 75.45       |       | 69.07       |       | 9.2        | %          |
| Carlson(3)  (4)  (5) |       | 12         |       | 2,262            |       | 81.64       |       | 80.62       |       | 1.3        | %          |
| Homestead                      |       | 18         |       | 2,399            |       | 56.44       |       | 50.14       |       | 12.6       | %          |
| Total/Average                  |       | 298        |       | 42,376           |       | $           | 89.62      |        | $          | 83.23      |       | 7.7 | % |
|                           |       |       |       |             |       |        |       |        |       |       |       |
| **Occupancy**                  |       |       |       |             |       |        |       |        |       |       |       |
| Host (no. 1)                   |       | 53         |       | 7,610            |       | 70.9%       |       | 71.3%       |       | -0.4       | pt    |
| Host (no. 2)                   |       | 18         |       | 2,178            |       | 81.3%       |       | 79.3%       |       | 2.0        | pt         |
| Marriott                       |       | 35         |       | 5,382            |       | 77.5%       |       | 76.3%       |       | 1.2        | pt         |
| Barcelo Crestline              |       | 19         |       | 2,756            |       | 72.8%       |       | 73.8%       |       | -1.0       | pt         |
| InterContinental (no. 1)(2)    |       | 30         |       | 3,694            |       | 77.5%       |       | 75.3%       |       | 2.2        | pt         |
| InterContinental (no. 2)       |       | 76         |       | 9,220            |       | 75.0%       |       | 71.2%       |       | 3.8        | pt         |
| InterContinental (no. 3)(3)    |       | 13         |       | 3,946            |       | 74.5%       |       | 70.5%       |       | 4.0        | pt         |
| Hyatt(4)                       |       | 24         |       | 2,929            |       | 67.2%       |       | 65.3%       |       | 1.9        | pt         |
| Carlson(3)  (4)  (5) |       | 12         |       | 2,262            |       | 49.6%       |       | 57.8%       |       | -8.2       | pt         |
| Homestead                      |       | 18         |       | 2,399            |       | 77.3%       |       | 79.2%       |       | -1.9       | pt         |
| Total/Average                  |       | 298        |       | 42,376           |       | 73.1%       |       | 72.1%       |       | 1.0        | pt         |
|                           |       |       |       |             |       |        |       |        |       |       |       |
| **RevPAR**                     |       |       |       |             |       |        |       |        |       |       |       |
| Host (no. 1)                   |       | 53         |       | 7,610            |       | $           | 76.68      |        | $          | 71.57      |       | 7.1 | % |
| Host (no. 2)                   |       | 18         |       | 2,178            |       | 82.41       |       | 75.22       |       | 9.6        | %          |
| Marriott                       |       | 35         |       | 5,382            |       | 78.53       |       | 72.27       |       | 8.7        | %          |
| Barcelo Crestline              |       | 19         |       | 2,756            |       | 74.72       |       | 68.09       |       | 9.7        | %          |
| InterContinental (no. 1)(2)    |       | 30         |       | 3,694            |       | 74.92       |       | 67.51       |       | 11.0       | %          |
| InterContinental (no. 2)       |       | 76         |       | 9,220            |       | 45.77       |       | 39.85       |       | 14.9       | %          |
| InterContinental (no. 3)(3)    |       | 13         |       | 3,946            |       | 87.45       |       | 78.20       |       | 11.8       | %          |
| Hyatt(4)                       |       | 24         |       | 2,929            |       | 50.70       |       | 45.10       |       | 12.4       | %          |
| Carlson(3)  (4)  (5) |       | 12         |       | 2,262            |       | 40.49       |       | 46.60       |       | -13.1      | %          |
| Homestead                      |       | 18         |       | 2,399            |       | 43.63       |       | 39.71       |       | 9.9        | %          |
| Total/Average                  |       | 298        |       | 42,376           |       | $           | 65.51      |        | $          | 60.01      |       | 9.2 | % |
|                                |            |            |            |                  |            |             |            |             |            |            |            |  |  |  |

 

----

(1)          Includes data for the calendar year indicated, except for our Marriottbranded hotels, which include data for the 52 week fiscal periods endedDecember 30, 2005 and December 31, 2004, respectively.

 

(2)          Data (other than No. of Hotels and No. of Rooms/Suites) excludes onehotel which has been closed temporarily due to fire damage sustained in May2005.

 

(3)          Includes data for periods prior to our ownership of certain hotels.

 

(4)          Includes data for periods hotels were not operated by the currentmanager.

 

(5)          We transferred operating responsibility for our Prime HotelsSMto Carlson on April 4, 2005. During the second quarter of 2005, 11 of these 12hotels were rebranded with Carlson brands and are currently undergoingrenovations which have required some hotel rooms to be taken out of service. Wesold the 12th Prime HotelSM on September 30, 2005 andpurchased an 84 room Country Inns & Suites by Carlson® hotel onNovember 1, 2005, as a replacement hotel to be added to this combination.

 

50

----

 

**Seasonality**

 

Our hotels have historically experienced seasonal differences typicalof the U.S. hotel industry with higher revenues in the second and thirdquarters of calendar years compared with the first and fourth quarters. Thisseasonality is not expected to cause material fluctuations in our income orcash flow because our contractual management agreements and leases require ourmanagers and tenants to make the substantial portion of our return payments andrents to us in equal amounts throughout a year. Seasonality may affect ourhotel operating revenues, but we do not expect seasonal variations to have amaterial impact upon our financial results of operations or upon our managers’or tenants’ ability to meet their contractual obligations to us.

 

**Impact of Inflation**

 

Inflation might have both positive and negative impacts upon us.Inflation might cause the value of our real estate investments to increase. Inan inflationary environment, the percentage returns and rents which we receivebased upon a percentage of gross hotel revenues should increase. Offsettingthese benefits, inflation might cause our costs of equity and debt capital andother operating costs to increase. An increase in our capital costs or in ouroperating costs will result in decreased earnings unless it is offset byincreased revenues. In periods of rapid inflation, our managers’ or tenants’ operating costs may increasefaster than revenues and this fact may have an adverse impact upon us ifthe operating income from our properties becomes insufficient to pay ourreturns or rents. To mitigate the adverse impact of increased operating costsat our properties, all of our operating agreements contain security features,such as security deposits, and in certain instances, guarantees of our returnsor rents. To mitigate the adverse impact of increased costs of debt capital inthe event of material inflation, we may enter into interest rate hedgearrangements in the future. The decision to enter into these agreements will bebased on the amount of our floating rate debt outstanding, our belief thatmaterial interest rate increases are likely to occur and upon requirements ofour borrowing arrangements.

 

**Item 7A. Quantitative and Qualitative Disclosures About Market Risk(dollar amounts in thousands)**

 

We are exposed to risks associated with market changes in interestrates. We manage our exposure to this market risk by monitoring availablefinancing alternatives. Our strategy to manage exposure to changes in interestrates is unchanged from December 31, 2004. Other than as described below,we do not foresee any significant changes in our exposure to fluctuations ininterest rates or in how we manage this exposure in the near future.

 

As of December 31, 2005, our outstanding publicly traded debt consistedof five issues of fixed rate, senior unsecured notes:

 
| ** **            | ** ** | **Annual**        | ** ** | **Annual**           | ** ** | ** **   | ** ** | ** **                | ** ** |
|-----------------------|------------|-------------------|------------|----------------------|------------|--------------|------------|---------------------------|------------|
| **Principal Balance** | ** ** | **Interest Rate** | ** ** | **Interest Expense** | ** ** | **Maturity** | ** ** | **Interest Payments Due** | ** ** |
|                  | $          | 150,000           |       |                 | 7.000%     |         |       | $                         | 10,500     |   |   | 2008 |   | Semi-Annually |   |
|                  | 50,000     |              |       | 9.125%               |       |         | 4,563      |                      |       | 2010 |   | Semi-Annually |   |
|                  | 125,000    |              |       | 6.850%               |       |         | 8,563      |                      |       | 2012 |   | Semi-Annually |   |
|                  | 300,000    |              |       | 6.750%               |       |         | 20,250     |                      |       | 2013 |   | Semi-Annually |   |
|                  | 300,000    |              |       | 5.125%               |       |         | 15,375     |                      |       | 2015 |   | Semi-Annually |   |
|                  | $          | 925,000           |       |                 |       |         |       | $                         | 59,251     |   |   |   |   |   |   |

 

No principal repayments are due under these notes until maturity.Because these notes bear interest at fixed rates, changes in market interestrates during the term of this debt will not affect our operating results. If atmaturity these notes were refinanced at interest rates which are 10% higherthan shown above, our per annum interest cost would increase by approximately$5,925. Changes in market interest rates also affect the fair value of our debtobligations; increases in market interest rates decrease the fair value of ourfixed rate debt while decreases in market interest rates increase the fairvalue of our fixed rate debt. Based on the balances outstanding at December 31,2005, and discounted cash flow analyses, a hypothetical immediate 10% change ininterest rates would change the fair value of our fixed rate debt obligationsby approximately $27,747.

 

51

----

 

Each of our fixed rate unsecured debt arrangements allows us to makerepayments earlier than the stated maturity date. We are generally allowed tomake prepayments only at face value plus a premium equal to a make-wholeamount, as defined, which is generally designed to preserve a stated yield tothe note holder. These prepayment rights may afford us the opportunity tomitigate the risk of refinancing at maturity at higher rates by refinancingprior to maturity.

 

We have one mortgage payable secured by a hotel in Wichita, Kansas,with a fixed rate of 8.3% that matures on July 1, 2011. This note requiresprincipal and interest payments through maturity pursuant to an amortization schedule andcontains a provision that allows us to make repayment at a premium to facevalue.

 

Ourrevolving credit facility bears interest at floating rates and matures in June 2009.We can extend the maturity for one year for a fee. At December 31, 2005,we had $35,000 outstanding and $715,000 available for drawing under ourrevolving credit facility. Repayments under our revolving credit facility may bemade at any time without penalty. We borrow in U.S. dollars and borrowingsunder our revolving bank credit facility are subject to interest at LIBOR plusa premium. Accordingly, we are vulnerable to changes in U.S. dollar based shortterm interest rates, specifically LIBOR. A change in interest rates would notaffect the value of this floating rate debt but would affect our operatingresults. For example, the interest rate payable on our outstanding indebtednessof $35,000 at December 31, 2005, was 5.0% per annum. The following tablepresents the impact a 10% change in interest rates would have on floating rateinterest expense as of December 31, 2005:

 
| ** **                | ** ** | **Impact of Changes in Interest  Rates** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **Interest Rate  Per Year**              | ** ** | **Outstanding Debt** | ** ** | **Total Interest  Expense Per Year** | ** ** |
| At December 31, 2005 |       | 5.0%                                     |       |   | $ | 35,000 |   |   |   | $ | 1,750 |   |   |
| 10% reduction             |       | 4.5%                                     |       |   | $ | 35,000 |   |   |   | $ | 1,575 |   |   |
| 10% increase              |       | 5.5%                                     |       |   | $ | 35,000 |   |   |   | $ | 1,925 |   |   |

 

The foregoing table shows the impact of an immediatechange in floating interest rates. If interest rates were to change graduallyover time, the impact would be spread over time. Our exposure to fluctuationsin floating interest rates will increase or decrease in the future withincreases or decreases in the outstanding amount under our revolving bankcredit facility or other floating rate debt.

 

**Item 8. Financial Statements and Supplementary Data**

 

The information required by this item is included in Item 15 of thisAnnual Report on Form 10-K.

 

**Item 9. Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure**

 

We have no changes in or disagreements with our accountants regardingaccounting and financial disclosure.

 

**Item 9A. Controls and Procedures**

 

Asof the end of the period covered by this report, our management carried out anevaluation, under the supervision and with the participation of our managingtrustees, President and Chief Operating Officer and Treasurer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based uponthat evaluation, our managing trustees, President and Chief Operating Officerand Treasurer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective.

 

Therehave been no changes in our internal control over financial reporting duringthe quarter ended December 31, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

52

----

 

**Management Report on Assessment of InternalControl Over Financial Reporting**

 

We are responsible for establishing and maintainingadequate internal control over financial reporting. Our internal control systemis designed to provide reasonable assurance to our management and board of trusteesregarding the preparation and fair presentation of published financialstatements. All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation.

 

Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2005. Inmaking this assessment, it used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission in *InternalControl-Integrated Framework*. Based on our assessment, we believethat, as of December 31, 2005, our internal control over financialreporting is effective.

 

Ernst & Young LLP, the independentregistered public accounting firm that audited our 2005 consolidated financialstatements included in this Annual Report on Form 10-K, has issued anattestation report on our assessment of our internal control over financialreporting. Its report appears elsewhereherein.

 

**Item 9B. Other Information**

 

None.

 

53

----

 

**PART III**

 

**Item 10. Directors and Executive Officers of the Registrant**

 

Wehave adopted a code of business conduct and ethics that applies to all ourrepresentatives, including our officers and trustees and employees of RMR. Ourcode of business conduct and ethics is posted on our website, www.hptreit.com.A printed copy of our code of business conduct and ethics is also available freeof charge to any shareholder who requests a copy. We intend to disclose anyamendments or waivers to our code of business conduct and ethics applicable toour principal executive officer, principal financial officer, principalaccounting officer or controller (or any person performing similar functions)on our website.

 

The remainder of the information required by Item 10 is incorporated byreference to our definitive Proxy Statement, which will be filed not later than120 days after the end of our fiscal year.

 

**Item 11. Executive Compensation**

 

The information required by Item 11 is incorporated by reference to ourdefinitive Proxy Statement, which will be filed no later than 120 days afterthe end of our fiscal year.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Shareholder Matters**

 

**Equity Compensation Plan Information**. We may grant common shares to ourofficers and other employees of RMR under either our 1995 Incentive Share AwardPlan or our 2003 Incentive Share Award Plan, collectively referred to as theAward Plans. In addition, our independent trustees receive 500 shares per yeareach as part of their annual compensation for serving as our trustees andsuch shares may be awarded under either of these plans. The terms ofgrants made under these plans are determined by our trustees at the time of thegrant. The following table is as of December 31, 2005.

 
| ** **                                                  | ** ** | ** **               | ** ** | ** **               | ** ** | **Number of securities**    | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | ** **               | ** ** | ** **               | ** ** | **remaining available for** | ** ** |
| ** **                                                  | ** ** | **Number of securities** | ** ** | ** **               | ** ** | **future issuance under**   | ** ** |
| ** **                                                  | ** ** | **to be issued upon**    | ** ** | **Weighted-average**     | ** ** | **equity compensation**     | ** ** |
| ** **                                                  | ** ** | **exercise of**          | ** ** | **exercise price of**    | ** ** | **plans (excluding**        | ** ** |
| ** **                                                  | ** ** | **outstanding options,** | ** ** | **outstanding options,** | ** ** | **securities reflected in** | ** ** |
| **Plan category**                                           | ** ** | **warrants and rights**  | ** ** | **warrants and rights**  | ** ** | **column (a)) (1)**         | ** ** |
| ** **                                                  | ** ** | **(a)**                  | ** ** | **(b)**                  | ** ** | **(c)**                     | ** ** |
| Equity  compensation plans approved by security holders     |       | None.                    |       | None.                    |       | 2,862,979                   |       |
|                                                        |       |                     |       |                     |       |                        |       |
| Equity  compensation plans not approved by security holders |       | None.                    |       | None.                    |       | 2,862,979                   |       |
|                                                        |       |                     |       |                     |       |                        |       |
| Total                                                       |       | None.                    |       | None.                    |       | 2,862,979                   |       |

 

----

(1)   The 1995 Incentive Share Award Plan wasapproved by our shareholder at the time; the 2003 Incentive Share Award Planwas approved by our Board of Trustees. Pursuant to the terms of the AwardPlans, in no event shall the number of shares issued under both plans combinedexceed 3,128,791; and 2,862,979 represents the combined total shares availableunder both plans on December 31, 2005.

 

Paymentsby us to RMR are described in Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Liquidity and Capital Resources– Related Party Transactions”. The remainder

 

54

----

 

of the information required by Item 12 is incorporated by reference toour definitive Proxy Statement, which will be filed not later than 120 daysafter the end of our fiscal year.

 

**Item 13. Certain Relationships and Related Transactions**

 

The information required by Item 13 is incorporated by reference to ourdefinitive Proxy Statement, which will be filed not later than 120 days afterthe end of our fiscal year.

 

**Item 14. Principal Accountant Fees and Services**

 

The information required by Item 14 is incorporated by reference to ourdefinitive Proxy Statement, which will be filed not later than 120 days after theend of our fiscal year.

 

55

----

 

**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules**

 

**(a) **Index to Financial Statements andFinancial Statement Schedules

 

The following audited consolidated financial statements and schedule ofHospitality Properties Trust are included on the pages indicated:

 
| ** **                                                                                                    | **Page** |
|---------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                          |     |
| Reports of Ernst & Young LLP, Independent Registered Public  Accounting Firm                         | F-1      |
|                                                                                                          |     |
| Consolidated  Balance Sheet as of December 31, 2005 and 2004                                             | F-3      |
|                                                                                                          |     |
| Consolidated Statement of Income for each of the three years ended December 31,  2005                    | F-4      |
|                                                                                                          |     |
| Consolidated Statement of Shareholders’ Equity for each of the three  years ended December 31, 2005 | F-5      |
|                                                                                                          |     |
| Consolidated Statement of Cash Flows for each of the three years  ended December 31, 2005                | F-6      |
|                                                                                                          |     |
| Notes to Consolidated Financial Statements                                                                    | F-7      |
|                                                                                                          |     |
| Schedule III  - Real Estate and Accumulated Depreciation as of December 31, 2005                    | S-1      |

 

All other schedules for whichprovision is made in the applicable accounting regulations of the Securitiesand Exchange Commission are not required under the related instructions or areinapplicable, and therefore have been omitted.

 

56

----

 

(b) Exhibits

 
| 3.1    |   | Composite  copy of Amended and Restated Declaration of Trust dated August 21, 1995,  as amended to date. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K  FOR THE YEAR ENDED DECEMBER 31, 1998)                                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2    |   | Articles  Supplementary dated June 2, 1997. (INCORPORATED BY REFERENCE TO THE  COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  1997)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3    |   | Articles  Supplementary dated May 16, 2000. (INCORPORATED BY REFERENCE TO THE  COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  2000)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.4    |   | Articles  Supplementary dated December 9, 2002. (INCORPORATED BY REFERENCE TO THE  COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  2002)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.5    |   | Composite  copy of Amended and Restated Bylaws of the Company, as amended to date  (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED MARCH 10, 2004)                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1    |   | Form of  Common Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’S  REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330))                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.2    |   | Form of  temporary 8.875% Series B Cumulative Redeemable Preferred Share  Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED DECEMBER 5, 2002)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3    |   | Indenture,  dated as of February 25, 1998, between the Company and State Street Bank  and Trust Company. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT  ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997)                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.4    |   | Supplemental  Indenture No. 1, dated as of February 25, 1998, between the Company  and State Street Bank and Trust Company, relating to the Company’s 7.00%  Senior Notes due 2008, including form thereof. (INCORPORATED BY  REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED  DECEMBER 31, 1997)                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5    |   | Supplemental  Indenture No. 4 dated as of July 14, 2000, between the Company and  State Street Bank and Trust Company, relating to the Company’s 9.125% Senior  Notes due 2010, including form thereof. (INCORPORATED BY REFERENCE TO  THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  2000)                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6    |   | Supplemental  Indenture No. 5, dated as of July 28, 2000, between the Company and  State Street Bank and Trust Company, relating to the Company’s 9.125% Senior  Notes due 2010, including form thereof. (INCORPORATED BY REFERENCE TO  THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  2000)                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.7    |   | Supplemental  Indenture No. 6 dated as of July 8, 2002 between the Company and  State Street Bank and Trust Company, including form of 6.85% Senior  Notes due 2012. (INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT  ON FORM 10- Q FOR THE QUARTER ENDED JUNE 30, 2002)                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.8    |   | Supplemental  Indenture No. 7 dated as of January 24, 2003 between the Company  and U.S. Bank National Association, as successor trustee, relating to the  Company’s 6 3/4% Senior Notes due 2013, including form of thereof.  (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K  FOR THE YEAR ENDED DECEMBER 31, 2002) |

 

57

----

 
| 4.9    |   | Supplemental Indenture No. 8  dated as of February 15, 2005 between the Company and U.S. Bank National  Association, as successor trustee, relating to the Company’s 5 1/8% Senior  Notes due 2015, including form of thereof. (INCORPORATED BY REFERENCE  TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 10,  2005)                                                                                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.10   |   | Rights Agreement, dated as  of May 20, 1997, between the Company and State Street Bank and Trust  Company, as Rights Agent. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT  REPORT ON FORM 8-K DATED MAY 29, 1997)                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.11   |   | Appointment  of Successor Rights Agent, dated as of December 13, 2004, by and between  the Company and Wells Fargo Bank, National Association. (INCORPORATED BY  REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED DECEMBER 13,  2004)                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 8.1    |   | Opinion of  Sullivan & Worcester LLP as to certain tax matters. (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1   |   | Amended and  Restated Advisory Agreement, dated January 1, 2006, by and between Reit  Management & Research LLC and the Company. (+) (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2   |   | Master Management  Agreement, dated as of January 6, 2006, by and among Reit Management &  Research LLC and the Company. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S  CURRENT REPORT ON FORM 8-K DATED JANUARY 6, 2006)                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3   |   | Summary of Trustee  Compensation. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S REPORT ON FORM 10-Q  FOR THE QUARTER ENDED MARCH 31, 2005)                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4   |   | The Company’s  1995 Incentive Share Award Plan (+). (INCORPORATED BY REFERENCE TO THE  COMPANY’S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330))                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5   |   | Amendment to  the Company’s 1995 Incentive Share Award Plan effective as of May 30,  2003 (+). (INCORPORATED BY REFERENCE TO THE COMPANY’S REPORT ON FORM 10-Q  FOR THE QUARTER ENDED JUNE 30, 2003)                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6   |   | The Company’s  2003 Incentive Share Award Plan effective as of May 30, 2003. (+)  (INCORPORATED BY REFERENCE TO THE COMPANY’S REPORT ON FORM 10-Q FOR THE  QUARTER ENDED JUNE 30, 2003)                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7   |   | Form of  Restricted Share Agreement. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S  REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003)                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8   |   | Representative form of  Indemnification Agreement. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S  REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004)                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Master Lease  Agreement, dated as of April 30, 1999, by and among the Company, HPTCY  Properties Trust and HMH HPT Courtyard LLC. (INCORPORATED BY REFERENCE TO THE  COMPANY’S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999)                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10  |   | Agreement to  Assign, Release, Franchise and Manage, dated as of June 15, 2001, by and  among HPT, HPTMI Properties Trust (“HPTMI”), HPTMI Hawaii, Inc. (“HPTMI  Hawaii”), HPT TRS MI-135, Inc. (“TRS”), Marriott International, Inc.  (“MI”), CR14 Tenant Corporation (“CR14”), CRTM17 Tenant Corporation (“CRTM17”),  Courtyard Marriott Corporation (“Courtyard”), Marriott Hotel Services, Inc. |

 

58

----

 
|   |   | (“Full  Service Manager”), Residence Inn by Marriott, Inc. (“Residence Inn”),  SpringHill SMC Corporation (“SpringHill”) and TownePlace Management  Corporation, (“TownePlace”). (INCORPORATED BY REFERENCE TO THE COMPANY’S  CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001)                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Form of  Management Agreement by and between Courtyard and TRS. (INCORPORATED BY  REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER  ENDED JUNE 30, 2001)                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Pooling  Agreement, dated as of June 15, 2001, by and among MI, Full Service  Manager, Residence Inn, Courtyard, SpringHill, TownePlace and TRS.  (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED JULY 31, 2001)                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Amended and  Restated Limited Rent Guaranty, dated as of June 15, 2001, made by MI in  favor of HPTMI. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON  FORM 8-K DATED JULY 31, 2001)                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | Guaranty,  dated as of June 15, 2001, made by MI in favor of TRS. (INCORPORATED BY  REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JULY 31,  2001)                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | Holdback and  Security Agreement, dated as of June 15, 2001, by and among MI, St.  Louis Airport, L.L.C., Nashville Airport, L.L.C., Residence Inn, Courtyard,  SpringHill, TownePlace, Full Service Manager, CR14, CRTM17, TRS, HPTMI Hawaii  and HPTMI. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED JULY 31, 2001) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | Amended and  Restated Deposit Agreement, dated as of January 6, 2006, by and among  HPT TRS IHG-1, HPT TRS IHG-2, Inc. (“HPT TRS IHG-2”), HPT TRS  IHG-3, InterContinental Hotels Group Resources, Inc., IHG Management  (Maryland) LLC and InterContinental Hotels Group (Canada), Inc. (FILED  HEREWITH)                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | Management  Agreement, dated as of July 1, 2003, by and between HPT TRS IHG-1, Inc.  (“HPT TRS IHG-1”) and InterContinental Hotels Group Resources, Inc.  (FILED HEREWITH)                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | First  Amendment to Management Agreement, dated as of September 18, 2003, by  and between HPT TRS IHG-1 and InterContinental Hotels Group Resources, Inc.  (FILED HEREWITH)                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | Second  Amendment to Management Agreement, dated as of March 2004, by and  between HPT TRS IHG-1 and InterContinental Hotels Group Resources, Inc.  (FILED HEREWITH)                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | Third  Amendment to Management Agreement, dated as of February 16, 2005, by and  between HPT TRS IHG-1 and InterContinental Hotels Group Resources, Inc.  (FILED HEREWITH)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | Fourth  Amendment to Management Agreement, dated as of September 18, 2003, by  and between HPT TRS IHG-1 and InterContinental Hotels Group Resources, Inc.  (FILED HEREWITH)                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.22  |   | Management  Agreement, dated as of January 6, 2006, by and between HPT TRS IHG-1 and  InterContinental Hotels Group Resources, Inc. (INCORPORATED BY REFERENCE  TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED OCTOBER 27, 2003)                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.23  |   | First Amendment to Management Agreement, dated as of February 16,  2005, by and between HPT TRS IHG-1 and InterContinental. (INCORPORATED BY  REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED  DECEMBER 31, 2004)                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.24  |   | Amended and  Restated Management Agreement, dated as of January 6, 2006, by  and among HPT TRS IHG-2, IHG Management (Maryland) LLC and Intercontinental  Hotels Group (Canada), Inc. (INCORPORATED BY REFERENCE TO THE COMPANY’S  CURRENT REPORT ON FORM 8-K DATED JANUARY 6, 2006)                                                              |

 

59

----

 
| 10.25  |   | Lease Agreement, dated as  of February 16, 2005, by and among HPT IHG PR, Inc. and InterContinental Hotels (Puerto  Rico) Inc. (INCORPORATED BY REFERENCE  TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  2004)                                                                                                                                                                                                                                                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.26  |   | Second Amended and  Restated Consolidated Guaranty Agreement, dated as of January 20, 2006,  made by Intercontinental Hotels Group plc for the benefit of HPT TRS  IHG-1, HPT TRS IHG-2, HPT TRS IHG-3, Inc., HPT IHG PR, Inc. and the  Company. (FILED HEREWITH)                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.27  |   | Amended and Restated  Credit Agreement, dated as of May 23, 2005, by and among the Company,  Wachovia Bank, National Association, as Agent and the additional agents,  arrangers and financial institutions signatory thereto. (INCORPORATED BY  REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MAY 23,  2005)                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.28  |   | Registration Agreement,  dated as of October 10, 2003, by and between the Company and HRPT  Properties Trust. (INCORPORATED BY REFERENCE TO THE COMPANY’S REGISTRATION  STATEMENT ON FORM S-3 FILED AS OF OCTOBER 14, 2003 (FILE NO. 333-109658))                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.29  |   | Assumption, Termination  and Amendment Agreement among InterContinental Hotels Limited,  InterContinental Hotels Group plc, HPT TRS IHG-1, HPT TRS IHG-2, HPT IHG PR, Inc.  and the Company dated July 1, 2005. (INCORPORATED BY REFERENCE TO THE  COMPANY’S CURRENT REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30,  2005)                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.30  |   | Amended and  Restated Purchase and Sale Agreement, dated as of February 9, 2005, by  and among BHR Texas, L.P., InterContinental Hotels Group Resources, Inc.  (“InterContinental”), Crowne Plaza LAX, LLC, Holiday Pacific Partners Limited  Partnership, 220 Bloor Street Hotel, Inc. and Staybridge Markham, Inc.,  as sellers, and HPT IHG-2 Properties Trust (“HPT IHG-2”), as buyer.  (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED FEBRUARY 10, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.31  |   | Amended and  Restated Stock Purchase Agreement, dated as of February 9, 2005, by and  between Six Continents International Holdings, B.V., as seller, and HPT  IHG-2, as buyer. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT  ON FORM 8-K DATED FEBRUARY 10, 2005)                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.32  |   | Amended and  Restated Purchase and Sale Agreement, dated as of February 9, 2005, by  and between BHR Texas, L.P., InterContinental and Crowne Plaza LAX.  (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED FEBRUARY 10, 2005)                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.1   |   | Computation  of Ratio of Earnings to Fixed Charges. (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.2   |   | Computation  of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions.  (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 21.1   |   | Subsidiaries  of the Registrant. (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.1   |   | Consent of  Ernst & Young LLP. (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.2   |   | Consent of  Sullivan & Worcester LLP. (INCLUDED IN EXHIBIT 8.1 TO THIS  ANNUAL REPORT ON FORM 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Rule 13a-14(a) Certification.  (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Rule 13a-14(a) Certification.  (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.3   |   | Rule 13a-14(a) Certification.  (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.4   |   | Rule 13a-14(a) Certification.  (FILED HEREWITH)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

60

----

 
| 32.1 |   | Section 1350  Certification. (FURNISHED HEREWITH) |
|------|--------|--------------------------------------------------------|

 

----

**(+)**           Management contract or compensatory plan or agreement.

 

61

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**To the Trustees and Shareholders ofHospitality Properties Trust:**

 

Wehave audited the accompanying consolidated balance sheets of HospitalityProperties Trust as of December 31, 2005 and 2004, and the relatedconsolidated statements of income, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2005. Our auditsalso included the financial statement schedule listed in the Index at Item15(a). These financial statements and schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of HospitalityProperties Trust at December 31, 2005 and 2004, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Hospitality Properties Trust’s internalcontrol over financial reporting as of December 31, 2005, based oncriteria established in Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 3, 2006 expressed an unqualified opinion thereon.

 
|                   | /s/ Ernst &  Young LLP |   |
|------------------------|---------------------------------|--------|
|                   |
| Boston,  Massachusetts |
| March 3,  2006    |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

**To the Trustees and Shareholders of**HospitalityProperties Trust:

 

We have auditedmanagement’s assessment, included in Item 9A of Hospitality Properties Trust’sAnnual Report on Form 10-K under the heading Management Report on Assessment ofInternal Control Over Financial Reporting, that Hospitality Properties Trust maintained effective internal controlover financial reporting as of December 31, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Hospitality Properties Trust’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

 

Inour opinion, management’s assessment that Hospitality Properties Trust maintained effective internal controlover financial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, Hospitality Properties Trustmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on****the COSO criteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the 2005 consolidatedfinancial statements****of Hospitality Properties Trust and ourreport dated March 3, 2006 expressed an unqualified opinion thereon.

 
|                   | /s/ Ernst &  Young LLP |   |
|------------------------|---------------------------------|--------|
|                   |
| Boston,  Massachusetts |
| March 3,  2006    |

 

F-2

----

 

**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATED BALANCE SHEET**

(dollars in thousands, except share data)

 
| ** **                                                                                                                                                     | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                     | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Real estate  properties, at cost:                                                                                                                              |       |                        |       |   |   |
| Land                                                                                                                                                           |       | $                           | 537,389    |   | $ | 460,748 |   |
| Buildings,  improvements and equipment                                                                                                                         |       | 3,089,304                   |       | 2,720,242 |   |
|                                                                                                                                                           |       | 3,626,693                   |       | 3,180,990 |   |
| Accumulated  depreciation                                                                                                                                      |       | (613,007                    | )          | (556,517 | ) |
|                                                                                                                                                           |       | 3,013,686                   |       | 2,624,473 |   |
| Cash and  cash equivalents                                                                                                                                     |       | 18,568                      |       | 15,894 |   |
| Restricted  cash (FF&E escrow)                                                                                                                             |       | 29,063                      |       | 38,511 |   |
| Other  assets, net                                                                                                                                             |       | 53,290                      |       | 10,547 |   |
|                                                                                                                                                           |       | $                           | 3,114,607  |   | $ | 2,689,425 |   |
| ** **                                                                                                                                                     |       |                        |       |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                 |       |                        |       |   |   |
| Revolving  credit facility                                                                                                                                     |       | $                           | 35,000     |   | $ | 72,000 |   |
| Senior  notes, net of discounts                                                                                                                                |       | 921,606                     |       | 621,679 |   |
| Mortgage  payable                                                                                                                                              |       | 3,766                       |       | 3,826 |   |
| Security  deposits                                                                                                                                             |       | 185,304                     |       | 175,304 |   |
| Dividends  payable                                                                                                                                             |       | 1,914                       |       | 50,300 |   |
| Accounts  payable and other                                                                                                                                    |       | 108,595                     |       | 77,782 |   |
| Due to  affiliate                                                                                                                                              |       | 2,967                       |       | 2,661 |   |
| Total  liabilities                                                                                                                                             |       | 1,259,152                   |       | 1,003,552 |   |
|                                                                                                                                                           |       |                        |       |   |   |
| Commitments  and contingencies                                                                                                                                 |       |                        |       |   |   |
|                                                                                                                                                           |       |                        |       |   |   |
| Shareholders’  equity:                                                                                                                                    |       |                        |       |   |   |
| Preferred  shares of beneficial interest, no par value,  100,000,000 shares authorized:                                                                        |       |                        |       |   |   |
| Series B  preferred shares; 8 7/8% cumulative redeemable;  3,450,000 shares issued and outstanding, aggregate  liquidation preference $86,250             |       | 83,306                      |       | 83,306 |   |
| Common  shares of beneficial interest; $0.01 par value;  100,000,000 shares authorized, 71,920,578 and 67,203,228 shares  issued and outstanding, respectively |       | 719                         |       | 672 |   |
| Additional  paid-in capital                                                                                                                                    |       | 2,059,883                   |       | 1,859,936 |   |
| Cumulative  net income                                                                                                                                         |       | 1,211,072                   |       | 1,081,169 |   |
| Cumulative  preferred distributions                                                                                                                            |       | (59,336                     | )          | (51,680 | ) |
| Cumulative  common distributions                                                                                                                               |       | (1,440,189                  | )          | (1,287,530 | ) |
| Total  shareholders’ equity                                                                                                                               |       | 1,855,455                   |       | 1,685,873 |   |
|                                                                                                                                                           |       | $                           | 3,114,607  |   | $ | 2,689,425 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-3

----

 

**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATEDSTATEMENT OF INCOME**

(in thousands, except per sharedata)

 
| ** **                                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues:**                                                                                              |       |                                       |       |   |   |   |   |
| Hotel  operating revenues                                                                                  |       | $                                          | 682,541    |   | $ | 498,122 |   | $ | 209,299 |   |
| Rental  income:                                                                                            |       |                                       |       |   |   |   |   |
| Minimum rent                                                                                               |       | 126,829                                    |       | 125,669 |   | 216,125 |   |
| Percentage  rent                                                                                           |       | 3,902                                      |       | 2,803 |   | 1,128 |   |
|                                                                                                       |       | 130,731                                    |       | 128,472 |   | 217,253 |   |
| FF&E  reserve income                                                                                   |       | 19,767                                     |       | 18,147 |   | 18,000 |   |
| Interest  income                                                                                           |       | 1,373                                      |       | 627 |   | 733 |   |
| Gain on  lease terminations                                                                                |       | —                                     |       | — |   | 107,516 |   |
| Total  revenues                                                                                            |       | 834,412                                    |       | 645,368 |   | 552,801 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| **Expenses:**                                                                                              |       |                                       |       |   |   |   |   |
| Hotel  operating expenses                                                                                  |       | 476,858                                    |       | 333,818 |   | 145,863 |   |
| Interest  (including amortization of deferred financing costs of $2,894, $2,744 and  $2,536, respectively) |       | 65,263                                     |       | 50,393 |   | 44,536 |   |
| Depreciation  and amortization                                                                             |       | 131,792                                    |       | 114,883 |   | 104,807 |   |
| General and  administrative                                                                                |       | 23,296                                     |       | 19,386 |   | 16,800 |   |
| Loss on  early extinguishment of debt                                                                      |       | —                                     |       | — |   | 2,582 |   |
| Loss on  asset impairment                                                                                  |       | 7,300                                      |       | — |   | — |   |
| Total  expenses                                                                                            |       | 704,509                                    |       | 518,480 |   | 314,588 |   |
| Income  before gain on sale of real estate                                                                 |       | 129,903                                    |       | 126,888 |   | 238,213 |   |
| Gain on sale  of real estate                                                                               |       | —                                     |       | 203 |   | — |   |
| Net income                                                                                                 |       | 129,903                                    |       | 127,091 |   | 238,213 |   |
| Preferred  distributions                                                                                   |       | 7,656                                      |       | 9,674 |   | 14,780 |   |
| Excess of  liquidation preference over carrying value of preferred shares                                  |       | —                                     |       | 2,793 |   | — |   |
| Net income  available for common shareholders                                                              |       | $                                          | 122,247    |   | $ | 114,624 |   | $ | 223,433 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| Weighted  average common shares outstanding                                                                |       | 69,866                                     |       | 66,503 |   | 62,576 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| Basic and  diluted earnings per common share:                                                              |       |                                       |       |   |   |   |   |
| Net income  available for common shareholders                                                              |       | $                                          | 1.75       |   | $ | 1.72 |   | $ | 3.57 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-4

----

 

**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

(in thousands, except sharedata)

 
| ** **                        | ** ** | **Preferred Shares**       | ** ** | **Common Shares**     | ** ** | ** **                 | ** ** | ** **            | ** ** | ** **                   | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------|------------|----------------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Series A**          | ** ** | **Series B**     | ** ** | **Cumulative**             | ** ** | ** **            | ** ** | ** **                   | ** ** | **Cumulative** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Number of  Shares** | ** ** | **Preferred  Shares** | ** ** | **Number of  Shares** | ** ** | **Preferred  Shares** | ** ** | **Preferred  Distributions** | ** ** | **Number of  Shares** | ** ** | **Common  Shares** | ** ** | **Common  Distributions** | ** ** | **Paid-in  Capital** | ** ** | **Cumulative  Net Income** | ** ** | **Total** | ** ** |
| Balance at December 31, 2002 |       | 3,000,000                  |       | $                     | 72,207     |                       | 3,450,000  |                  | $          | 83,306                       |       | $ | (26,481 | ) | 62,547,348 |   | $ | 625 |   | $ | (868,732 | ) | $ | 1,668,230 |   | $ | 715,865 |   | $ | 1,645,020 |   |
|                              |       |                       |       |                  |       |                       |       |                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Common share grants               |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | 39,730 |   | 1 |   | — |   | 1,181 |   | — |   | 1,182 |   |
| Net income                        |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | — |   | 238,213 |   | 238,213 |   |
| Distributions                     |       | —                     |       | —                |       | —                     |       | —                |       | (13,611                      | )          | — |   | — |   | (225,276 | ) | — |   | — |   | (238,887 | ) |
| Balance at December 31, 2003 |       | 3,000,000                  |       | 72,207                |       | 3,450,000                  |       | 83,306                |       | (40,092                      | )          | 62,587,078 |   | 626 |   | (1,094,008 | ) | 1,669,411 |   | 954,078 |   | 1,645,528 |   |
|                              |       |                       |       |                  |       |                       |       |                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares, net           |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | 4,600,000 |   | 46 |   | — |   | 192,638 |   | — |   | 192,684 |   |
| Common share grants               |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | 16,150 |   | — |   | — |   | 680 |   | — |   | 680 |   |
| Redemption of preferred shares    |       | (3,000,000                 | )          | (72,207               | )          | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | (2,793 | ) | — |   | (75,000 | ) |
| Net income                        |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | — |   | 127,091 |   | 127,091 |   |
| Distributions                     |       | —                     |       | —                |       | —                     |       | —                |       | (11,588                      | )          | — |   | — |   | (193,522 | ) | — |   | — |   | (205,110 | ) |
| Balance at December 31, 2004 |       | —                     |       | —                |       | 3,450,000                  |       | 83,306                |       | (51,680                      | )          | 67,203,228 |   | 672 |   | (1,287,530 | ) | 1,859,936 |   | 1,081,169 |   | 1,685,873 |   |
|                              |       |                       |       |                  |       |                       |       |                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares, net           |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | 4,700,000 |   | 47 |   | — |   | 199,186 |   | — |   | 199,233 |   |
| Common share grants               |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | 17,350 |   | — |   | — |   | 761 |   | — |   | 761 |   |
| Net income                        |       | —                     |       | —                |       | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | — |   | 129,903 |   | 129,903 |   |
| Distributions                     |       | —                     |       | —                |       | —                     |       | —                |       | (7,656                       | )          | — |   | — |   | (152,659 | ) | — |   | — |   | (160,315 | ) |
| Balance at December 31, 2005 |       | —                     |       | $                     | —     |                       | 3,450,000  |                  | $          | 83,306                       |       | $ | (59,336 | ) | 71,920,578 |   | $ | 719 |   | $ | (1,440,189 | ) | $ | 2,059,883 |   | $ | 1,211,072 |   | $ | 1,855,455 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-5

----

 

**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

(in thousands)

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash Flows From Operating Activities:**                                      |       |                             |       |   |   |   |   |
| Net income                                                                     |       | $                                | 129,903    |   | $ | 127,091 |   | $ | 238,213 |   |
| Adjustments  to reconcile net income to cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation  and amortization                                                 |       | 131,792                          |       | 114,883 |   | 104,807 |   |
| Non-cash  portion of gain on lease terminations                                |       | —                           |       | — |   | (104,951 | ) |
| Amortization  of deferred financing costs as interest                          |       | 2,894                            |       | 2,744 |   | 2,536 |   |
| Non-cash  income                                                               |       | (2,952                           | )          | (2,952 | ) | (6,719 | ) |
| FF&E  reserve income and deposits                                          |       | (32,338                          | )          | (29,522 | ) | (25,248 | ) |
| Loss on  early extinguishment of debt                                          |       | —                           |       | — |   | 2,582 |   |
| Gain on sale  of real estate                                                   |       | —                           |       | (203 | ) | — |   |
| Loss on  asset impairment                                                      |       | 7,300                            |       | — |   | — |   |
| Changes in  assets and liabilities:                                            |       |                             |       |   |   |   |   |
| (Increase)  decrease in other assets                                           |       | (1,091                           | )          | 2,262 |   | (1,339 | ) |
| Increase in  accounts payable and other                                        |       | 6,492                            |       | 7,490 |   | 9,485 |   |
| Increase in  due to affiliate                                                  |       | 306                              |       | 1,325 |   | 39 |   |
| Cash  provided by operating activities                                         |       | 242,306                          |       | 223,118 |   | 219,405 |   |
| **Cash  Flows From Investing Activities:**                                     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  acquisitions                                                      |       | (443,104                         | )          | — |   | (354,577 | ) |
| FF&E  reserve fundings                                                     |       | (45,390                          | )          | (10,211 | ) | (33,905 | ) |
| Real estate  acquisition deposit                                               |       | (10,000                          | )          | — |   | — |   |
| Increase in  security deposits                                                 |       | 10,000                           |       | — |   | 16,872 |   |
| Proceeds  from sale of real estate                                             |       | 3,227                            |       | 7,750 |   | — |   |
| Cash used in  investing activities                                             |       | (485,267                         | )          | (2,461 | ) | (371,610 | ) |
| **Cash  Flows From Financing Activities:**                                     |       |                             |       |   |   |   |   |
| Proceeds  from issuance of common shares, net                                  |       | 199,233                          |       | 192,684 |   | — |   |
| Debt issuance,  net of discount                                                |       | 299,442                          |       | — |   | 296,997 |   |
| Repayment of  senior notes                                                     |       | —                           |       | — |   | (150,000 | ) |
| Redemption  of preferred shares                                                |       | —                           |       | (75,000 | ) | — |   |
| Draws on  revolving credit facility                                            |       | 319,000                          |       | 293,000 |   | 391,000 |   |
| Repayments  of revolving credit facility                                       |       | (356,000                         | )          | (422,000 | ) | (190,000 | ) |
| Deferred  finance costs paid                                                   |       | (7,339                           | )          | (2 | ) | (2,877 | ) |
| Distributions  to preferred shareholders                                       |       | (7,656                           | )          | (11,588 | ) | (13,611 | ) |
| Distributions  to common shareholders                                          |       | (201,045                         | )          | (188,285 | ) | (180,213 | ) |
| Cash  provided by (used in) financing activities                               |       | 245,635                          |       | (211,191 | ) | 151,296 |   |
| Increase  (decrease) in cash and cash equivalents                              |       | 2,674                            |       | 9,466 |   | (909 | ) |
| Cash and  cash equivalents at beginning of year                                |       | 15,894                           |       | 6,428 |   | 7,337 |   |
| Cash and  cash equivalents at end of year                                      |       | $                                | 18,568     |   | $ | 15,894 |   | $ | 6,428 |   |
| **Supplemental  Information:**                                                 |       |                             |       |   |   |   |   |
| Cash paid  for interest                                                        |       | $                                | 56,597     |   | $ | 47,612 |   | $ | 34,929 |   |
| Non-cash  operating activities:                                                |       |                             |       |   |   |   |   |
| Net assets  transferred in lease default                                       |       | —                           |       | 4,920 |   | 151,445 |   |
| Non-cash  investing activities:                                                |       |                             |       |   |   |   |   |
| Property  managers deposits in FF&E reserve                                |       | 31,056                           |       | 27,296 |   | 22,679 |   |
| Purchases of  fixed assets with FF&E reserve                               |       | (76,860                          | )          | (46,529 | ) | (53,337 | ) |
| Non-cash  financing activities:                                                |       |                             |       |   |   |   |   |
| Issuance of  common shares                                                     |       | 761                              |       | 680 |   | 1,181 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-6

----

 

**HOSPITALITYPROPERTIES TRUST**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(dollars in thousands, exceptshare data)

 

**1. Organization**

 

Hospitality Properties Trust, or HPT, we or us, is a real estateinvestment trust, or REIT, organized on February 7, 1995, under the lawsof the State of Maryland, which invests in hotels. At December 31, 2005,HPT, directly and through subsidiaries, owned 298 properties.

 

The properties of HPT and its subsidiaries are operated by companiesunaffiliated with HPT: Host Marriott Corporation, or Host; MarriottInternational, Inc., or Marriott; InterContinental Hotels Group, plc, orInterContinental; Barcelo Crestline Corporation, or Barcelo Crestline; GlobalHyatt Corporation, or Hyatt; Carlson Hotels Worldwide, or Carlson; andBRE/Homestead Village LLC, or Homestead. Hereinafter these hotel operators aresometimes referred to as managers and/or tenants.

 

**2. Summary of Significant Accounting Policies**

 

**Consolidation**. These consolidated financialstatements include the accounts of HPT and its subsidiaries, all of which are100% owned directly or indirectly by HPT. We have determined that each of ourtaxable REIT subsidiaries, or TRSs, is a variable interest entity that must beconsolidated because we are the primary beneficiary. All intercompanytransactions and balances have been eliminated.

 

**Real Estate Properties.** Real estate propertiesare recorded at cost. We allocate thecost of real estate acquired among building, land, furniture, fixtures andequipment, and, if applicable, the value of in-place leases, the fair marketvalue of above or below market leases and customer relationships. Depreciationon real estate properties is recognized on a straight line basis over estimateduseful lives of up to 40 years for buildings and improvements and up to 12years for personal property. The valueof intangible assets is amortized over the term of the associated lease.

 

We regularly evaluate whether events or changes in circumstances haveoccurred that could indicate an impairment in the value of long-lived assets.If there is an indication that the carrying value of an asset is notrecoverable, we estimate the projected undiscounted cash flows of the relatedproperties to determine if an impairment loss should be recognized. The amountof impairment loss is determined by comparing the historical carrying value ofthe asset to its estimated fair value. Estimated fair value is determinedthrough an evaluation of recent financial performance and projected discountedcash flows of properties using standard industry valuation techniques. Inaddition to consideration of impairment upon the events or changes incircumstances described above, we regularly evaluate the remaining lives of itslong-lived assets. If estimated lives are changed, the carrying values ofaffected assets are allocated over the revised remaining lives.

 

**Cash and Cash Equivalents**. Highly liquidinvestments with original maturities of three months or less at date ofpurchase are considered to be cash equivalents. The carrying amount of cash andcash equivalents is equal to its fair value.

 

**Restricted Cash**. Restricted cash consists ofamounts escrowed to fund periodic renovations and improvements at our hotels.

 

**Deferred Financing Costs**. Costs incurred toborrow are capitalized and amortized as interest expense over the term of therelated borrowing. Deferred financing costs were $9,110 and $4,180 at December 31,2005 and 2004, respectively, net of accumulated amortization of $3,301 and$6,699, respectively, and are included in other assets, net in the accompanyingconsolidated balance sheet.

 

**Revenue Recognition.** We report hotel operatingrevenues for managed hotels in our consolidated statement of income. Hoteloperating revenues, consisting primarily of room sales and sales of food,beverage and

 

F-7

----

 

communication services are generally recognized when services areperformed. Our share of the operating results of our managed hotels in excessof the minimum returns due us are generally determined annually. Hoteloperating income in excess of the minimum returns due to us under ourmanagement agreements is recognized when all contingencies are met and theincome is earned.

 

We recognize rental income from operating leases on a straight linebasis over the life of the lease agreements. Percentage rent is recognized whenall contingencies are met and the rent is earned.

 

We own all the FF&E reserve escrows for hotels leased to our TRSsand for most of the hotels leased to third parties. One third party leaseprovides that the FF&E reserve escrow is owned by the tenant and we have asecurity and remainder interest in that escrow account. When we own the escrowaccount, payments by our third party tenants into the escrow are reported by usas FF&E reserve income. When we have a security and remainder interest inthe escrow account, tenant deposits are not included in revenue.

 

**Per Common Share Amounts.** Per common shareamounts are computed using the weighted average number of common sharesoutstanding during the period. We have no common share equivalents, instrumentsconvertible into common shares or other dilutive instruments.

 

**Reclassifications.** Reclassifications have beenmade to the prior year’s financial statements to conform to the currentyear’s presentation.

 

**Use of Estimates.** The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectreported amounts. Actual results could differ from those estimates.

 

**Segment Information.** We have only oneoperating segment, hotel investments.

 

**Income Taxes.** We have elected to be taxed as aREIT under the Internal Revenue Code of 1986, as amended, or the InternalRevenue Code. As a REIT, we are generally not subject to federal income taxeson our net income provided we distribute our taxable income to our shareholdersand meet certain organization and operating requirements. Even as a REIT, weare subject to taxes in non-U.S. jurisdictions in which we own hotels and incertain state and local jurisdictions. Further, we lease our managed hotels toour wholly owned TRSs that, unlike most of our other subsidiaries, are taxableentities that together file one consolidated tax return.

 

We account forincome taxes under the provisions of Statement of Financial AccountingStandards, or SFAS, No. 109, Accounting for Income Taxes. Under thismethod, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax bases of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to affect taxable income. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amounts thatare expected to be realized. SFAS 109 generally permits deferred tax assets andliabilities to be offset and presented as a single amount except in cases wherethey are attributable to different tax paying components such as a REIT and itsTRS.

 

At December 31, 2005 we had a deferred tax liability of $9,333related to the hotel we purchased in Puerto Rico in February 2005. Specifically,we acquired all of the outstanding stock of a C corporation that owned thehotel as its primary asset, which generally would cause us to succeed to the acquired corporation’s taxbases. However, for U.S tax purposes we made an election under Section 338(g) ofthe Internal Revenue Code to avoid being treated as the successor to theacquired corporation’s federal income tax attributes, including its adjustedtax bases. We made no such election for Puerto Rico tax purposes. Under SFAS109 we are required to establish deferred tax assets and liabilities for thetax effects of differences between assigned values in the purchase priceallocation and the tax bases of assets and liabilities assumed in a purchasebusiness combination. Because a REIT (or its

 

F-8

----

 

subsidiary) is subject to tax in Puerto Rico, we recorded in purchaseaccounting a deferred tax liability for these bases differences at our PuertoRico effective tax rate.

 

At December 31, 2005 and 2004 our consolidated TRS had a netdeferred tax asset, prior to any valuation allowance, of $2,314 and $2,806,respectively, which consists primarily of net operating loss carryforwards andreserves for bad debts. Because of the uncertainty surrounding our ability torealize the future benefit of these assets we have provided a 100% valuationallowance as of December 31, 2005 and 2004. Accordingly, no provision orbenefit for income taxes with respect to our consolidated TRS is reflected inthe accompanying consolidated statement of income. As of December 31, 2005our consolidated TRS had net operating loss carryforwards for federal incometax purposes of approximately $3,823 which will expire beginning in 2024, ifthey remain unused.

 

**3. Shareholders’ Equity**

 

We reserved an aggregate of 3,128,791 shares of our common shares to beissued under the terms of the 1995 Incentive Share Award Plan and the 2003Incentive Share Award Plan, collectively referred to as the Award Plans. Duringthe year ended December 31, 2005, we awarded 15,850 common shares to ourofficers and certain employees of our manager pursuant to these plans. Inaddition, our independent trustees are each awarded 500 common shares annuallyas part of their annual fees. The shares awarded to the trustees vestimmediately. The shares awarded to our officers and certain employees of ourmanager vest in three annual installments beginning on the date of grant. Shareawards are expensed over their vesting period. At December 31, 2005,2,862,979 of our common shares remain reserved for issuance under the AwardPlans.

 

On June 5, 2005, we sold 4,500,000 of our common shares at a priceof $44.39 per share in a public offering. On June 24, 2005, we sold anadditional 200,000 common shares at a price of $44.39 pursuant to an overallotment option granted to the underwriters. Net proceeds from these sales,after underwriting and other offering expenses, were $199,233. We used theseproceeds to reduce borrowings outstanding under our revolving credit facility.

 

On April 12, 2004, we redeemed all of our outstanding 9 1⁄2% Series Apreferred shares at their liquidation preference of $25 per share plus accruedand unpaid distributions of $0.0792 per share. The excess of the liquidationpreference of the redeemed shares over their carrying amount of $2,793 wascharged to additional paid in capital and deducted from net income to determinenet income available to common shareholders in the calculation of earnings pershare.

 

Each of our 3,450,000 Series B cumulative redeemable preferredshares has a distribution rate of $2.21875 per annum, payable in equalquarterly amounts, and a liquidation preference of $25 ($86,250 in aggregate). Series Bpreferred shares are redeemable at our option for $25 each plus accrued and unpaiddistributions at any time on or after December 10, 2007.

 

Cashdistributions paid or payable by us to our common shareholders for the yearsended December 31, 2005, 2004 and 2003, were $2.90 per share, $2.88 pershare and $2.88 per share, respectively. The characterization for incometax reporting purposes of the distributions paid to our common shareholders in2005, 2004 and 2003 was 96.9%, 100.0% and 100.0% ordinary income, respectively,and 3.1%, 0.0% and 0.0% return of capital, respectively.

 

**4. Management Agreements and Leases**

 

As of December 31, 2005, each of our 298 hotels is included in oneof ten combinations of hotels and either leased to our TRSs and managed by anindependent hotel operating company or leased to a third party. We do not operatehotels. At December 31, 2005, we had 189 managed hotels and 109 leasedhotels. Our agreements have initial terms expiring between 2010 and 2030. Eachof these agreements is for a combination or pool of between 12

 

F-9

----

 

and 76 of our hotels. The agreements contain renewal options for all,but not less than all, of the affected properties, and the renewal terms total20 to 40 years. Each agreement generally requires the third party manager ortenant to: (i) make payments to us of minimum returns or minimum rents; (ii) deposita percentage of total hotel sales into reserves established for the regularrefurbishment of our hotels, or FF&E reserves; and (iii) make paymentsto us of percentage returns or rent of 5% to 10% of increases in gross hotelrevenues over threshold amounts and/or, in certain circumstances, make paymentsto our TRSs of additional returns based on increases in hotel operating income.Some of the third party managers or tenants have provided deposits orguarantees to secure their obligation to pay us.

 

As of December 31, 2005, our management agreements and leasesprovide for minimum return payments or minimum rents to be paid to us duringthe remaining initial terms as follows:

 
| ** ** | ** ** | **Total Minimum  Return Payments  Under Management  Agreements with  Third Parties** | ** ** | **Total Minimum  Lease Payments  from Third Parties** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| 2006       |       | $                                                                                    | 192,684    |                                                  | $          | 125,256 |   |
| 2007       |       | 193,534                                                                              |       | 125,256                                               |       |
| 2008       |       | 193,959                                                                              |       | 125,256                                               |       |
| 2009       |       | 193,959                                                                              |       | 125,256                                               |       |
| 2010       |       | 193,959                                                                              |       | 125,256                                               |       |
| Thereafter |       | 2,965,822                                                                            |       | 450,739                                               |       |
|       |       | $                                                                                    | 3,933,917  |                                                  | $          | 1,077,019 |   |

 

As of December 31, 2005, the average remaining initial terms ofour leases and management agreements, weighted based on minimum returns orrents from third parties, was approximately 15.9 years, and the weightedaverage remaining total term, including renewal options which may beexercised, was 46.1 years.

 

We settled all our outstanding claims with Prime Hospitality Corp., orPrime, a former manager, arising from its July 2003 lease default byentering a management agreement for our 24 AmeriSuites® hotelseffective on January 1, 2004. The balance of the retained deposits and thevalue of other property received from Prime pursuant to this settlement,totaling approximately $44,281, is being amortized into our income on astraight line basis over the initial 15 year term of the management contractfor the affected hotels. The unamortized balance of $38,377 at December 31,2005, is included in accounts payable and other liabilities in the accompanyingconsolidated balance sheet. In October 2004, Prime was sold to theBlackstone Group, or Blackstone. In January 2005, Blackstone sold theAmeriSuites® brand and transferred operating responsibility forthese hotels to Hyatt.

 

During 2003, we entered into agreements related to the termination ofthree leases. We recorded gains of $107,516 in connection with theseagreements.

 

**5. Real Estate Properties**

 

Our real estate properties, at cost, consisted of land of $537,389,buildings and improvements of $2,717,965 and furniture, fixtures and equipmentof $371,339, as of December 31, 2005; and land of $460,748, buildings andimprovements of $2,356,860 and furniture, fixtures and equipment of $363,382,as of December 31, 2004. As of December 31, 2005, we owned 298 hotelproperties.

 

During 2005, 2004 and 2003, we invested $45,390, $10,211 and $33,905respectively, in our owned hotels in excess of amounts funded from FF&Ereserves. As a result of these additional investments, manager and tenant

 

F-10

----

 

obligations to us for annual minimum return payments or minimum rentsincreased $2,384, $841 and $3,391 in 2005, 2004 and 2003, respectively.

 

On December 17, 2004, we agreed to purchase 13 hotels fromInterContinental for $450,000. The hotels include four full serviceInterContinental®hotels, four full service Crowne Plaza® hotels, three full service Holiday Inn® hotels and two extended stayStaybridge Suites®hotels. These hotels have a total of 3,946 rooms/suites and approximately164,000 square feet of meeting space. The hotels are located in six states inthe United States; one InterContinental® hotel and one Staybridge Suites® hotel are located in Ontario,Canada; and one InterContinental®hotel is located in San Juan, Puerto Rico. The $450,000 purchase price includes$25,000 which we have agreed to pay during the three years following theclosing in connection with certain improvements to the hotels. On February 16,2005, we completed the acquisition of 12 of the 13 hotels; on May 31,2005, we completed the purchase of the final hotel.

 

In connection with our decision in June 2005 to sell our PrimeHotelSM located in Atlanta, Georgia we recorded $7,300 loss on assetimpairment to reduce the carrying value of the hotel to its estimated netrealizable value less cost to sell. We sold the hotel in September 2005.

 

On November 1, 2005, we acquired aCountry Inns & Suites by Carlson® hotel located in BrooklynCenter, Minnesota with 84 guestrooms from Carlson for $4,100.

 

At December 31, 2005, 13 of our hotels were on land leased fromunrelated third parties. The remaining term of each ground lease (includingrenewal options) is in excess of 29 years. Ground rent payable under nine ofthese ground leases is generally calculated as a percentage of hotel revenues.Eleven of the 13 ground leases require minimum annual rent ranging fromapproximately $102 to $556 per year; and minimum rents under two groundleases have been pre-paid. Under the terms of our leases and management agreements,payments of ground lease obligations are made by our managers or tenants.However, if a manager or tenant did not perform obligations under aground lease or elected not to renew any ground lease, we might have to perform obligationsunder the ground lease or renew the ground lease in order to protect ourinvestment in the affected hotel. Future minimum annual rent paymentsdue under the ground leases are $1,994 for 2006 through 2008, $1,784 for 2009and 2010 and total $73,709 for all years thereafter.

 

**6. Indebtedness**

 

At December 31, 2005 and 2004, our indebtedness was as follows:

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Senior Notes, due 2008 at 7%        |       | $                           | 150,000    |   | $ | 150,000 |   |
| Senior Notes, due 2010 at 9.125%    |       | 50,000                      |       | 50,000 |   |
| Senior Notes, due 2012 at 6.85%     |       | 125,000                     |       | 125,000 |   |
| Senior Notes, due 2013 at 6.75%     |       | 300,000                     |       | 300,000 |   |
| Senior Notes, due 2015 at 5.125%    |       | 300,000                     |       | — |   |
| Unamortized discounts               |       | (3,394                      | )          | (3,321 | ) |
| Total unsecured senior notes        |       | 921,606                     |       | 621,679 |   |
| Unsecured revolving credit facility |       | 35,000                      |       | 72,000 |   |
| Mortgage Note, due 2011 at 8.3%     |       | 3,766                       |       | 3,826 |   |
|                                |       | $                           | 960,372    |   | $ | 697,505 |   |

 

F-11

----

 

All of our senior notes are prepayable at any time prior to theirmaturity date at par plus accrued interest plus a premium equal to a make wholeamount, as defined, generally designed to preserve a stated yield to thenoteholder. Interest on all of our senior notes is payable semi-annually inarrears.

 

On May 23, 2005, we amended and restated our revolving creditfacility with a group of commercial banks. Our credit facility matures in June 2009and may be extended at our option to June 2010 upon our payment of anextension fee. Borrowings under the credit facility can be up to $750,000 andthe credit facility includes a feature under which the maximum amount availablefor borrowing may be increased to $1,500,000, in certain circumstances.Borrowings under our credit facility are unsecured. Funds may be drawn,repaid and redrawn until maturity, and no principal repayment is due untilmaturity. Interest on borrowings under the credit facility is payable at aspread above LIBOR. As of December 31, 2005, the $35,000 outstanding onour credit facility accrued interest at 5.03% and $715,000 was available to bedrawn. During 2005, 2004 and 2003, the weighted average interest rate on theamounts outstanding under our revolving credit facility was 4.2%, 2.8% and2.5%, respectively.

 

Our revolving credit agreement and note indenture and its supplementscontain financial covenants which, among other things, restrict our ability toincur indebtedness and require us to maintain financial ratios and a minimumnet worth. We were in compliance with these covenants during the periodspresented.

 

As of December 31, 2005 and 2004, the estimated aggregate marketvalues of our indebtedness were as follows:

 
| ** **                         | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Revolving credit facility at 5.03% |       | $                           | 35,000     |   | $ | 72,000 |   |
| Senior Notes, due 2008 at 7%       |       | 157,635                     |       | 165,287 |   |
| Senior Notes, due 2010 at 9.125%   |       | 59,126                      |       | 62,676 |   |
| Mortgage Note, due 2011 at 8.3%    |       | 4,470                       |       | 4,504 |   |
| Senior Notes, due 2012 at 6.85%    |       | 137,521                     |       | 143,207 |   |
| Senior Notes, due 2013 at 6.75%    |       | 327,832                     |       | 340,760 |   |
| Senior Notes, due 2015 at 5.125%   |       | 295,539                     |       | — |   |
|                               |       | $                           | 1,017,123  |   | $ | 788,434 |   |

 

**7. Transactions with Affiliates**

 

Reit Management & Research LLC, or RMR, originates andpresents investment opportunities to our board and provides administrativeservices to us. Our contract with RMR for such services continues from year toyear and is subject to the annual approval by a board committee comprised ofour independent trustees. RMR is compensated at an annual rate equal to 0.7% ofour average real estate investments, as defined, up to the first $250,000 ofsuch investments and 0.5% thereafter plus an incentive fee based upon increasesin cash available for distribution per share, as defined. Management fees,excluding incentive fees, earned for the years ended 2005, 2004 and 2003 were$17,730, $15,812 and $14,540, respectively. Incentive fees are paid inrestricted common shares based on a formula. Incentive fees for 2005, 2004 and2003 were $1,397, $0 and $0, respectively. We expect to issue 33,973 restrictedcommon shares in satisfaction of the 2005 incentive fees in 2006. As of December 31,2005, RMR and its affiliates owned 459,834 of our common shares. RMR isbeneficially owned by Barry M. Portnoy, who also serves as one of our managingtrustees, and his son, Adam D. Portnoy, who is a Vice President of RMR.

 

**8. Concentration**

 

At December 31, 2005, our 298 hotels contained 42,376 rooms andwere located in 38 states in the United States, Ontario, Canada and PuertoRico. Between 5% and 14% of our hotels, by investment, were located in each of

 

F-12

----

 

California, Texas, Virginia, Georgia and Florida. Our two hotels inOntario, Canada and our hotel in Puerto Rico represent 1% and 4% of our hotels,by investment, respectively.

 

All of our third party managers or tenants are subsidiaries of othercompanies. The percentage of our minimum return payments and minimum rents, foreach combination of hotels is shown below, as of December 31, 2005.

 
| **Manager / Tenant is a**      | ** ** | **Number of**  | ** ** | **Minimum Return /** | ** ** | **% of**  | ** ** |
|--------------------------------|------------|----------------|------------|----------------------|------------|-----------|------------|
| **Subsidiary of:**             | ** ** | **Properties** | ** ** | **Minimum Rent**     | ** ** | **Total** | ** ** |
| Host (no. 1)              |       | 53             |       | $                    | 55,951     |      | 18%        |   |
| InterContinental  (no. 2) |       | 76             |       | 50,000               |       | 16%       |       |
| Marriott                       |       | 35             |       | 47,986               |       | 15%       |       |
| InterContinental  (no. 1) |       | 30             |       | 36,097               |       | 11%       |       |
| InterContinental  (no. 3) |       | 13             |       | 34,713               |       | 11%       |       |
| Barcelo  Crestline             |       | 19             |       | 28,508               |       | 9%        |       |
| Host (no. 2)              |       | 18             |       | 18,705               |       | 6%        |       |
| Hyatt                          |       | 24             |       | 18,000               |       | 6%        |       |
| Homestead                      |       | 18             |       | 15,960               |       | 5%        |       |
| Carlson                        |       | 12             |       | 9,045                |       | 3%        |       |
| Total                          |       | 298            |       | $                    | 314,965    |      | 100%       |   |

 

Minimum return and minimum rent payments due to us under some of ourmanagement agreements and leases are supported by guarantees. The guaranteeprovided by Hyatt with respect to the 24 hotels managed by Hyatt is limited to$50,000 ($50,000 remaining at December 31, 2005). The guarantee providedby Carlson with respect to the 12 hotels managed by Carlson is limited to$40,000 ($37,790 remaining at December 31, 2005). The combined guaranteeprovided by InterContinental for the 119 hotels managed or leased byInterContinental is limited to $125,000 ($115,922 remaining at December 31,2005) and will expire if and when the hotels achieve stipulated operatingresults. The guarantee provided by Homestead expires if and when the hotelsachieve stipulated operating results.

 

Each of our hotels is included in a combined management agreement orlease as described above. Operations at some of our managed hotels generatednet financial results that were $2,491, $10,470 and $6,922 less than theguaranteed minimum returns due us in 2005, 2004 and 2003, respectively. Theseamounts have been paid by the hotel managers or their guarantors and arereflected as a reduction of hotel operating expenses in our consolidatedstatement of income.

 

F-13

----

 

**9. Selected Quarterly Financial Data(Unaudited)**

 
| ** **                                                  | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                                                  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Revenues                                                    |       | $           | 180,747    |   | $ | 218,081 |   | $ | 221,687 |   | $ | 213,897 |   |
| Net income  available for common shareholders               |       | 26,792      |       | 20,497 |   | 28,671 |   | 46,287 |   |
| Net income  available for common shareholders per share (1) |       | .40         |       | .30 |   | .40 |   | .64 |   |
| Distributions  per common share (2)                         |       | .72         |       | .72 |   | .73 |   | .73 |   |
|                                                             |            |             |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                        | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                        | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                                                        | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Revenues                                                          |       | $           | 153,311    |   | $ | 163,231 |   | $ | 171,992 |   | $ | 156,834 |   |
| Net income  available for common shareholders                     |       | 23,054      |       | 28,835 |   | 28,793 |   | 33,942 |   |
| Net income  available for common shareholders per share  (1) |       | . 36        |       | . 43 |   | . 43 |   | .51 |   |
| Distributions  per common share (2)                               |       | .72         |       | .72 |   | .72 |   | .72 |   |
|                                                                   |            |             |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   The sum of per common share amounts for thefour quarters differs from annual per share amounts due to the required methodof computing weighted average number of shares in interim periods and rounding.

(2)   Amounts represent distributions declared withrespect to the periods shown. Distributions are generally paid in the quarterlyperiod following the quarterly period to which they relate.

 

**10. Subsequent Events**

 

On January 6, 2006, we purchased the Harbor Court Complexin the Inner Harbor area of Baltimore, Maryland for $78,000. The Harbor CourtComplex is a mixed use development comprised of the five star, five diamondHarbor Court Hotel, a 72,042 square foot office building and a 530 space sevenstory parking garage. The hotel has 195 guest rooms, including 22 suites, 8,000square feet of meeting space and a roof top fitness center that includes atennis court, squash court, indoor pool, aerobics center and spa therapy rooms.Simultaneously with this purchase, we entered into an agreement withInterContinental to manage the Harbor Court Hotel under its InterContinentalHotels & Resorts® brand. This hotel has been added to thecombination agreement for 13 hotels managed by InterContinental. Our minimumreturn from this expanded combination of hotels will increase by $4,800 in2006, $5,200 in 2007 and $5,300 per year thereafter. We have agreed to investup to $2,300 over the next two years in connection with the rebranding of theHarbor Court Hotel as the InterContinental® Harbor Court Baltimore.In addition to the returns generated by the hotel component of the complex, wewill receive the net cash flow from the office and parking parts of theproperty; and we have entered into a management agreement with RMR to operatethe office building and an agreement with an unaffiliated third party to managethe parking garage.

 

On January 25, 2006, we agreed to purchase nine hotels for$196,200 and to invest $25,100 in these hotels during the three years followingclosing to fund capital improvements. These hotels include five full serviceCrowne Plaza® hotels, one full service Holiday Inn Select®hotel, two Staybridge Suites® hotels and one Holiday Inn SunSpreeResort® hotel; they have a total of 2,712 rooms/suites andapproximately 68,000 square feet of meeting space. These hotels are located inthree states in the United States and the Holiday Inn SunSpree Resort®hotel is located in Montego Bay, Jamaica. On January 25, 2006, wecompleted the acquisition of eight of the nine hotels with an effective date ofJanuary 20, 2006. The purchase of the 524 room Holiday Inn SunSpreeResort® hotel for approximately $30 million was delayed pendingJamaican tax and regulatory approvals, and is expected to close later in 2006.Circumstances may delay this purchase for an extended period or preventits occurring. Simultaneous

 

F-14

----

 

with our purchase of these eight hotels, we entered a long termcombination management agreement with subsidiaries of InterContinental;simultaneous with our purchase of the Holiday Inn SunSpree Resort®we expect to enter a long term lease with a subsidiary of InterContinental. Theannual combined amount payable to us for all nine hotels as a minimum returnunder the management contract and minimum rent under the lease will be $15,800in 2006, $17,800 in 2007, $18,700 in 2008 and approximately $19,000 thereafter.In addition, we are entitled to receive additional return payments, apercentage of gross revenue over a threshold at these hotels starting in 2008and the hotel cash flow remaining after the payment of base and incentivemanagement fees. The minimum return under the management agreement and theminimum rent under the lease are calculated and payable in U.S. dollars. Otheramounts due with respect to the hotel in Jamaica may be calculated inJamaican dollars but will be payable in U.S. dollars. The management agreementand the lease each extend through 2030, and InterContinental has two all ornone renewal options for 15 years each. The obligations to pay the minimumreturn under the management agreement and the minimum rent under the lease aresupported by a limited guaranty from InterContinental until these hotelsachieve stipulated levels of operating income. Further, the obligation to paythe minimum return under the management agreement will also be supported by alimited guaranty from the InterContinental subsidiary tenant for the hotel inJamaica. The agreements also require a reserve for capital expendituresstarting in 2008.

 

F-15

----

 

**HOSPITALITY PROPERTIES TRUST**

**SCHEDULE III - REAL ESTATEAND ACCUMULATED DEPRECIATION**DECEMBER 31, 2005(dollars in millions)

 
| ** **                        | ** ** | ** **          | ** ** | ** **        | ** ** | ** **                     | ** ** | **Costs**        | ** ** | ** ** | ** ** | ** **               | ** ** | ** **   | ** ** |
|-----------------------------------|------------|---------------------|------------|-------------------|------------|--------------------------------|------------|------------------|------------|------------|------------|--------------------------|------------|--------------|------------|
| ** **                        | ** ** | ** **          | ** ** | ** **        | ** ** | ** **                     | ** ** | **Capitalized**  | ** ** | ** ** | ** ** | ** **               | ** ** | ** **   | ** ** |
| ** **                        | ** ** | **Initial**         | ** ** | **Subsequent to** | ** ** | **Gross Amount at which**      | ** ** |
| ** **                        | ** ** | **Cost to Company** | ** ** | **Acquisition**   | ** ** | **Carried at Close of Period** | ** ** |
| ** **                        | ** ** | ** **          | ** ** | ** **        | ** ** | **Buildings &**       | ** ** | ** **       | ** ** | ** ** | ** ** | **Buildings &** | ** ** | ** **   | ** ** |
| ** **                        | ** ** | **Encumbrances**    | ** ** | **Land**          | ** ** | **Improvements**               | ** ** | **Improvements** | ** ** | **Land**   | ** ** | **Improvements**         | ** ** | **Total(1)** | ** ** |
| 71  Courtyards                    |       | $                   | —     |              | $          | 127                            |       | $                | 589        |       | $          | 54                       |       | $            | 127        |   | $ | 643 |   | $ | 770 |   |
| 76  Candlewood Hotels             |       | 4                   |       | 86                |       | 455                            |       | 2                |       | 86         |       | 457                      |       | 543          |       |
| 32 Staybridge  Suites             |       | —              |       | 85                |       | 318                            |       | 12               |       | 85         |       | 330                      |       | 415          |       |
| 37 Residence  Inns                |       | —              |       | 69                |       | 322                            |       | 12               |       | 69         |       | 334                      |       | 403          |       |
| 24  AmeriSuites                   |       | —              |       | 25                |       | 193                            |       | 2                |       | 25         |       | 195                      |       | 220          |       |
| 4  InterContinental               |       | —              |       | 24                |       | 196                            |       | —           |       | 24         |       | 196                      |       | 220          |       |
| 18 Homestead  Village             |       | —              |       | 28                |       | 106                            |       | 1                |       | 28         |       | 107                      |       | 135          |       |
| 4 Crowne  Plaza                   |       | —              |       | 37                |       | 89                             |       | —           |       | 37         |       | 89                       |       | 126          |       |
| 3 Marriott  Full Service          |       | —              |       | 14                |       | 82                             |       | 8                |       | 14         |       | 90                       |       | 104          |       |
| 12  TownePlace Suites             |       | —              |       | 17                |       | 78                             |       | —           |       | 17         |       | 78                       |       | 95           |       |
| 4 Radisson                        |       | —              |       | 7                 |       | 74                             |       | 7                |       | 7          |       | 81                       |       | 88           |       |
| 5 Country  Inns & Suites |       | —              |       | 6                 |       | 51                             |       | 7                |       | 6          |       | 58                       |       | 64           |       |
| 3 Holiday  Inn                    |       | —              |       | 7                 |       | 24                             |       | —           |       | 7          |       | 24                       |       | 31           |       |
| 3 Park Plaza                      |       | —              |       | 2                 |       | 20                             |       | 2                |       | 2          |       | 22                       |       | 24           |       |
| 2 SpringHill  Suites              |       | —              |       | 3                 |       | 15                             |       | —           |       | 3          |       | 15                       |       | 18           |       |
| Total (298  hotels)               |       | $                   | 4          |              | $          | 537                            |       | $                | 2,612      |       | $          | 107                      |       | $            | 537        |   | $ | 2,719 |   | $ | 3,256 |   |

 
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** **         | **Life on which**   | ** **    |
|-----------------------------------|------------|---------------------|------------|--------------------|--------------------|--------------------|--------------------|---------------------|---------------|
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** **         | **Depreciation in** | ** **    |
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** **         | **Latest Income**   | ** **    |
| ** **                        | ** ** | **Accumulated**     | ** ** | **Date of**        | ** **         | **Date**           | ** **         | **Statement is**    | ** **    |
| ** **                        | ** ** | **Depreciation(1)** | ** ** | **Construction**   | ** **         | **Acquired**       | ** **         | **Computed**        | ** **    |
| 71  Courtyards                    |       | $                   | (139       | )                  | 1987 through  2000 |               | 1995 through  2003 |                | 15 - 40 Years |   |
| 76  Candlewood Hotels             |       | (62                 | )          | 1996 through  2000 |               | 1997 through  2003 |               | 15 - 40  Years      |          |
| 32  Staybridge Suites             |       | (48                 | )          | 1989 through  2002 |               | 1998 through  2005 |               | 15 - 40  Years      |          |
| 37 Residence  Inns                |       | (71                 | )          | 1989 through  2001 |               | 1996 through  2001 |               | 15 - 40  Years      |          |
| 24  AmeriSuites                   |       | (35                 | )          | 1992 through  2000 |               | 1997 through  2002 |               | 15 - 40  Years      |          |
| 4  InterContinental               |       | (5                  | )          | 1924 through  1989 |               | 2005               |               | 15 - 40  Years      |          |
| 18 Homestead  Village             |       | (21                 | )          | 1996 through  1998 |               | 1999               |               | 15 - 40  Years      |          |
| 4 Crowne  Plaza                   |       | (2                  | )          | 1981 through  1986 |               | 2005               |               | 15 - 40  Years      |          |
| 3 Marriott  Full Service          |       | (15                 | )          | 1972 through  1995 |               | 1998 through  2001 |               | 15 - 40  Years      |          |
| 12  TownePlace Suites             |       | (13                 | )          | 1997 through  2000 |               | 1998 through  2001 |               | 15 - 40  Years      |          |
| 4 Radisson                        |       | (17                 | )          | 1987 through  1990 |               | 1996 through  1997 |               | 15 - 40  Years      |          |
| 5 Country  Inns & Suites |       | (12                 | )          | 1987 through  1997 |               | 1996 and  2005     |               | 15 - 40  Years      |          |
| 3 Holiday  Inn                    |       | (1                  | )          | 1986 through  2001 |               | 2005               |               | 15 - 40  Years      |          |
| 3 Park Plaza                      |       | (5                  | )          | 1987 through  1990 |               | 1996               |               | 15 - 40  Years      |          |
| 2 SpringHill  Suites              |       | (2                  | )          | 1997 through  2000 |               | 2000 through  2001 |               | 15 - 40  Years      |          |
| Total (298  hotels)               |       | $                   | (448       | )                  |               |               |               |                |          |   |

 

----

(1)   Excludes $371 of personal property classifiedon our consolidated balance sheet as furniture, fixtures and equipment and $165of related accumulated depreciation.

 

S-1

----

 

**HOSPITALITY PROPERTIES TRUST**

**NOTES TO SCHEDULE III**DECEMBER 31, 2005(dollars in thousands)

 

(A) Thechange in accumulated depreciation for the period from January 1, 2003 to December 31,2005, is as follows:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at beginning of year    |       | $        | 379,594    |     | $          | 319,204  |       | $ | 262,231 |   |
|                            |       |     |       |     |       |     |       |
| Additions: depreciation expense |       | 72,339   |       | 61,623   |       | 56,973   |       |
| Dispositions                    |       | (3,541   | )          | (1,233   | )          | —   |       |
|                            |       |     |       |     |       |     |       |
| Balance at close of year        |       | $        | 448,392    |     | $          | 379,594  |       | $ | 319,204 |   |

 

(B) The change in total cost of properties for the period from January 1,2003 to December 31, 2005, is as follows:

 
| ** **                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**  | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Balance at  beginning of year                           |       | $        | 2,817,608  |     | $          | 2,813,737 |       | $ | 2,462,876 |   |
|                                                    |       |     |       |     |       |      |       |
| Additions:  hotel acquisitions and capital expenditures |       | 451,126  |       | 12,332   |       | 350,861   |       |
| Dispositions                                            |       | (13,381  | )          | (8,461   | )          | —    |       |
|                                                    |       |     |       |     |       |      |       |
| Balance at  close of year                               |       | $        | 3,255,353  |     | $          | 2,817,608 |       | $ | 2,813,737 |   |

 

(C) Thenet tax basis for federal income tax purposes of our real estate properties was$2,793,791 on December 31, 2005.

 

S-2

----

 

**Signatures**

 

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

 
|                                         | **Hospitality Properties Trust** |
|----------------------------------------------|----------------------------------|
|                                         |                             |   |
|                                         | By:                              | /s/ John G. Murray |   |
|                                         |                             | John G. Murray |
|                                         |                             | President and Chief Operating Officer |
| Dated:    March 13, 2006 |                             |   |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**              | ** ** | **Title** | ** **                        | **Date** | ** **          |
|----------------------------|------------|-----------|-----------------------------------|----------|---------------------|
|                       |       |      |                              |     |                |
| /s/ John G. Murray         |       |      | President and                     |     | March 13, 2006 |   |
| John G. Murray             |       |      | Chief Operating Officer           |     |                |   |
|                       |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
| /s/ Mark L. Kleifges       |       |      | Treasurer and Chief               |     | March 13, 2006 |   |
| Mark L. Kleifges           |       |      | Financial Officer                 |     |                |   |
|                       |       |      | (principal financial officer      |     |                |   |
|                       |       |      | and principal accounting officer) |     |                |   |
|                       |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
| /s/ Frank J. Bailey        |       |      | Trustee                           |     | March 13, 2006 |   |
| Frank J. Bailey            |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
| /s/ John L. Harrington     |       |      | Trustee                           |     | March 13, 2006 |   |
| John L. Harrington         |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
| /s/ Arthur G. Koumantzelis |       |      | Trustee                           |     | March 13, 2006 |   |
| Arthur G. Koumantzelis     |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
| /s/ Gerard M. Martin       |       |      | Trustee                           |     | March 13, 2006 |   |
| Gerard M. Martin           |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
|                       |       |      |                              |     |                |   |
| /s/ Barry M. Portnoy       |       |      | Trustee                           |     | March 13, 2006 |   |
| Barry M. Portnoy           |       |      |                              |     |                |   |

 

----