**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, DC 20549

** **

**FORM 10-K**

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**x**  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

** **

**For the fiscal year ended December 31, 2007**

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**or**

 

**o**  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

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**Commission file number 1-115272**

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**Hospitality Properties Trust**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Maryland**             | ** ** | **04-3262075**                     |
|--------------------------|------------|------------------------------------|
| (State of  Organization) |       | (IRS Employer  Identification No.) |

 

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

(Address of PrincipalExecutive Offices)**        **(ZipCode)

 

Registrant’s TelephoneNumber, Including Area Code     **617-964-8389**

 

Securities registeredpursuant 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                       |
| Series C Cumulative Redeemable Preferred Shares  of Beneficial Interest |       | New York Stock  Exchange                       |

 

Securities registered pursuant to Section 12(g) ofthe Act:  None

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No o

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes xNo o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

 

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

 

| Large accelerated filer x                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

 

The aggregate market value of the voting shares of theregistrant held by non-affiliates was $3.9 billion based on the $41.49 closingprice per common share on the New York Stock Exchange on June 30, 2007.For purposes of this calculation, an aggregate of 334,756 common shares ofbeneficial interest $0.01 par value, held by the trustees and officers of theregistrant have been included in the number of shares held by affiliates.

 

Number of the registrant’sCommon Shares outstanding as of February 27, 2008: 93,892,719

 

 

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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 BYREFERENCE**

 

Certaininformation required in Items 10, 11, 12, 13 and 14 of Part III of thisAnnual Report on Form 10-K is to be incorporated herein by reference fromour definitive Proxy Statement for the annual meeting of shareholders scheduledfor May 15, 2008, or our definitive Proxy Statement.

 

**WARNING CONCERNING FORWARDLOOKING STATEMENTS**

 

THIS ANNUAL REPORT ON FORM 10-K CONTAINSSTATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OFTHE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERALSECURITIES LAWS. THESE FORWARD LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACESIN THIS FORM 10-K AND INCLUDE  BUTARE NOT LIMITED TO STATEMENTS REGARDING OUR INTENT, BELIEF OR EXPECTATION, ORTHE INTENT, BELIEF OR EXPECTATION OF OUR TRUSTEES AND OFFICERS WITH RESPECT TO:

 

•                  OURMANAGERS’ OR TENANTS’ ABILITY TO PAY RETURNS OR RENT TO US;

 

•                  OURABILITY TO PURCHASE ADDITIONAL PROPERTIES;

 

•                  OURINTENT TO REFURBISH CERTAIN OF OUR PROPERTIES;

 

•                  OURABILITY TO PAY INTEREST AND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS;

 

•                  OURPOLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS;

 

•                  OURTAX STATUS AS A REAL ESTATE INVESTMENT TRUST;

 

•                  OURABILITY TO APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO RAISECAPITAL;

 

•                  LITIGATIONAFFECTING US AS DESCRIBED HEREIN; AND

 

•                  OTHERMATTERS.

 

ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSECONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OFVARIOUS FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION:

 

•                  THEIMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING THE RECENTCHANGES IN THE CAPITAL MARKETS) ON US AND OUR MANAGERS AND TENANTS;

 

•                  COMPLIANCEWITH AND CHANGES TO LAWS AND REGULATIONS AFFECTING THE REAL ESTATE, HOTEL,TRANSPORTATION AND TRAVEL CENTER INDUSTRIES;

 

•                  DISCOVERYAND JUDICIAL DECISIONS DURING LITIGATION; AND

 

•                  COMPETITIONWITHIN THE REAL ESTATE, HOTEL AND TRAVEL CENTER INDUSTRIES GENERALLY AND AMONGREITS.

 

FOREXAMPLE:

 

•                  IFTHE AVAILABILITY OF DEBT CAPITAL MARKET REMAINS RESTRICTED OR BECOMES MORERESTRICTED, WE MAY BE UNABLE TO REFINANCE OR REPAY OUR DEBT OBLIGATIONSWHEN THEY BECOME DUE OR ON TERMS WHICH ARE AS FAVORABLE AS WE NOW HAVE.

 

•                  HOTELROOM DEMAND IS USUALLY A REFLECTION OF THE GENERAL ECONOMIC ACTIVITY INTHE COUNTRY; AND IF HOTEL ROOM DEMAND BECOMES DEPRESSED BECAUSE OF AGENERAL SLOWING OF THE ECONOMY, THE OPERATING RESULTS OF OUR HOTELS MAY DECLINE,THE FINANCIAL RESULTS OF OUR MANAGERS AND TENANTS MAY DECLINE AND OUROPERATORS AND TENANTS MAY BE UNABLE TO PAY OUR RETURNS OR RENTS.

 

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•                  ASLOWING OF THE ECONOMY GENERALLY MAY RESULT IN LESS DEMAND FOR SERVICES ATOUR TRAVEL CENTERS; IF TRUCKING ACTIVITY DECLINES, OUR TRAVEL CENTER TENANTS MAY BECOMEUNABLE TO PAY OUR RENTS;

 

•                  THELITIGATION DESCRIBED HEREIN MAY HAVE RESULTS DIFFERENT THAN WE NOWANTICIPATE; AND

 

•                  WEMAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TONEGOTIATE ACCEPTABLE PURCHASE PRICES, AQCUISITION FINANCING TERMS, MANAGEMENTAGREEMENTS OR LEASE TERMS FOR NEW PROPERTIES.

 

THESE UNEXPECTED RESULTS COULD OCCUR FOR MANYDIFFERENT REASONS, SOME OF WHICH, SUCH AS NATURAL DISASTERS OR CHANGES IN OURMANAGERS’ OR TENANTS’ REVENUES OR COSTS, OR CHANGES IN CAPITAL MARKETS OR THEECONOMY GENERALLY, ARE BEYOND OUR CONTROL.

 

OTHER RISKS MAY ADVERSELY IMPACT US, ASDESCRIBED MORE FULLY UNDER “ITEM 1A. RISK FACTORS.”

 

FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TOOCCUR AND MAY NOT OCCUR.

 

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARDLOOKING STATEMENTS.

 

EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATIONTO UPDATE OR RELEASE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEWINFORMATION, FUTURE EVENTS OR OTHERWISE.

 

**STATEMENT CONCERNING LIMITEDLIABILITY**

 

OUR AMENDED AND RESTATED DECLARATION OF TRUST, DATED AUGUST 21,1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, ISDULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OFMARYLAND, PROVIDES THAT THE NAME “HOSPITALITY PROPERTIES TRUST” REFERS TO THETRUSTEES UNDER THE DECLARATION OF TRUST AS SO AMENDED AND SUPPLEMENTED,COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NOTRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HOSPITALITY PROPERTIESTRUST SHALL 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.

 

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**HOSPITALITYPROPERTIES TRUST**

 

**2007 FORM 10-KANNUAL REPORT**

 

Table of Contents

 
|     |   |                                                                                                                   |   | **Page** |
|----------|--------|------------------------------------------------------------------------------------------------------------------------|--------|----------|
|     |   |                                                                                                                   |   |     |
|     |   | Part I                                                                                                            |   |     |
|     |   |                                                                                                                   |   |     |
| Item 1.  |   | Business                                                                                                               |   | 1        |
|     |   |                                                                                                                   |   |     |
| Item 1A. |   | Risk Factors                                                                                                           |   | 30       |
|     |   |                                                                                                                   |   |     |
| Item 1B. |   | Unresolved Staff Comments                                                                                              |   | 36       |
|     |   |                                                                                                                   |   |     |
| Item 2.  |   | Properties                                                                                                             |   | 37       |
|     |   |                                                                                                                   |   |     |
| Item 3.  |   | Legal Proceedings                                                                                                      |   | 39       |
|     |   |                                                                                                                   |   |     |
| Item 4.  |   | Submission of Matters to a Vote of Security  Holders                                                                   |   | 39       |
|     |   |                                                                                                                   |   |     |
|     |   | Part II                                                                                                           |   |     |
|     |   |                                                                                                                   |   |     |
| Item 5.  |   | Market for the Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |   | 40       |
|     |   |                                                                                                                   |   |     |
| Item 6.  |   | Selected Financial Data                                                                                                |   | 41       |
|     |   |                                                                                                                   |   |     |
| Item 7.  |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            |   | 42       |
|     |   |                                                                                                                   |   |     |
| Item 7A. |   | Quantitative and Qualitative Disclosures  About Market Risk                                                            |   | 59       |
|     |   |                                                                                                                   |   |     |
| Item 8.  |   | Financial Statements and Supplementary Data                                                                            |   | 60       |
|     |   |                                                                                                                   |   |     |
| Item 9.  |   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                                  |   | 60       |
|     |   |                                                                                                                   |   |     |
| Item 9A. |   | Controls and Procedures                                                                                                |   | 60       |
|     |   |                                                                                                                   |   |     |
| Item 9B. |   | Other Information                                                                                                      |   | 61       |
|     |   |                                                                                                                   |   |     |
|     |   | Part III                                                                                                          |   |     |
|     |   |                                                                                                                   |   |     |
| Item 10. |   | Directors, Executive Officers and Corporate  Governance                                                                |   | 62       |
|     |   |                                                                                                                   |   |     |
| Item 11. |   | Executive Compensation                                                                                                 |   | *        |
|     |   |                                                                                                                   |   |     |
| Item 12. |   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                        |   | 62       |
|     |   |                                                                                                                   |   |     |
| Item 13. |   | Certain Relationships and Related  Transactions, and Director Independence                                             |   | *        |
|     |   |                                                                                                                   |   |     |
| Item 14. |   | Principal Accountant Fees and Services                                                                                 |   | *        |
|     |   |                                                                                                                   |   |     |
|     |   | Part IV                                                                                                           |   |     |
|     |   |                                                                                                                   |   |     |
| Item 15. |   | Exhibits and Financial Statement Schedules                                                                             |   | 64       |

 

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| * |   | Incorporated by reference  from our Proxy Statement for the annual meeting of shareholders scheduled to  be held on May 15, 2008, to be filed pursuant to Regulation 14A. |   |   |
|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

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**PART I**

 

**Item 1.Business**

 

**The Company.** We are a real estate investmenttrust, or REIT, formed in 1995 under the laws of the State of Maryland. As of December 31,2007, we owned 292 hotels with 43,223 rooms or suites, and 185 travel centers. Ourproperties are located in 44 states in the United States, Canada and PuertoRico. Our principal place of business is 400 Centre Street, Newton,Massachusetts 02458, and our telephone number is (617) 964-8389.

 

Our principal external growth strategy is to expand our investments inhigh quality real estate used in hospitality industries and enter leases andmanagement agreements with experienced operators which generate returns to usthat exceed our operating and capital costs. Our principal internal growthstrategy is to participate through percentage returns and rents in increases intotal sales at our properties, and, under some of our hotel managementagreements, increases in the operating income of our properties.

 

Our investment, financing and disposition policies and businessstrategies are established by our board of trustees and may be changed byour board of trustees at any time without shareholder approval.

 

**HOTEL PROPERTIES**

 

As of December 31, 2007, our hotels are operated as Courtyard byMarriott®, Candlewood Suites®, Staybridge Suites®,Residence Inn by Marriott®, Crowne Plaza Hotels & Resorts®,Hyatt PlaceTM, AmeriSuites®, InterContinental Hotels &Resorts®,Marriott Hotels and Resorts®, Radisson® Hotels &Resorts, TownePlace Suites by Marriott®, Country Inns &Suites by Carlson®, Holiday Inn Hotels & Resorts®,SpringHill Suites by Marriott®, or Park Plaza® Hotels & Resorts.

 

**Courtyard by Marriott®** hotels aredesigned to attract both business and leisure travelers. A typical Courtyard byMarriott® hotel has 80-150 guest rooms. Most Courtyard by Marriott®hotels are situated on well landscaped grounds and typically are built with acourtyard containing a patio, pool and socializing area that may beenclosed depending upon location. These hotels generally have lounges, meetingrooms, an exercise room, a guest laundry and a restaurant. The guest rooms aresimilar in 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 servelimited menus, room service may not be available and meeting andfunction rooms are limited in size and number. According to MarriottInternational, Inc., or Marriott, as of December 2007, 767 Courtyardby Marriott® hotels were open and operating in the United States andinternationally. We believe that the Courtyard by Marriott® brand isa leading brand in the upscale, limited service segment of the United Stateshotel industry. We have invested a total of $845 million in 71 Courtyard byMarriott® hotels with a total of 10,280 rooms.

 

**Candlewood Suites®** hotels aremid-priced extended stay hotels which offer studio and one-bedroom suitesdesigned for business and leisure travelers expecting to stay five or morenights. Each Candlewood Suites® suite contains a fully equippedkitchen, a combination living and work area and a sleeping area. The kitchentypically includes a full size microwave, full size refrigerator, stove,dishwasher and coffee maker. The living area generally contains a convertiblesofa or recliner, 32 inch television, combination videocassette and DVD playerand compact disc player. The work area includes a large desk and executivechair, free high speed internet access, two phone lines, voice mail and aspeaker phone. Most Candlewood Suites® suites contain a king sizebed. Other amenities generally offered at each Candlewood Suites®hotel include a fitness center, free guest laundry facilities and a CandlewoodCupboard® area where guests can purchase light meals, snacks andother refreshments 24 hours a day. According to InterContinental Hotels Groupplc, or InterContintental, the owner of the Candlewood Suites®brand, there were 158 Candlewood Suites® hotels open and operatingin the United States as of December 31, 2007. We have invested $589million in 76 Candlewood Suites® hotels with a total of 9,220suites.

 

**Staybridge Suites®** hotels generallyoffer residential style studio, one-bedroom and two bedroom suitesfor business, governmental and family travelers. Each suite typicallyoffers a fully equipped kitchen and a work area with an oversized desk, twophone lines, an ergonomically designed chair and high speed internet access.Other amenities

 

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usuallyinclude free breakfast buffet, evening receptions 3 days per week, an on siteconvenience store, fitness center and a 24 hour business center. According toInterContinental, the owner of the Staybridge Suites® brand, therewere 122 Staybridge Suites® hotels open and operating in the UnitedStates and internationally as of December 2007. We have invested a totalof $476 million in 35 Staybridge Suites® hotels with a total of4,338 suites.

 

**Residence Inn by Marriott®** hotelsare designed to attract business, governmental and family travelers who stayseveral consecutive nights. Residence Inn by Marriott® hotelsgenerally have between 80 and 130 studio, one bedroom and two bedroom suites.Most Residence Inn by Marriott® hotels are designed as residentialstyle buildings with landscaped walkways, courtyards and recreational areas.Residence Inn by Marriott® hotels do not have restaurants. All offercomplimentary continental breakfast and a complimentary evening hospitalityhour. In addition, each suite contains a fully equipped kitchen and manyhave fireplaces. Most Residence Inn by Marriott® hotels also haveswimming pools, exercise rooms, sports courts and guest laundries. According toMarriott, as of December 2007, 546 Residence Inn by Marriott®hotels were open and operating in the United States, Mexico and Canada. Webelieve that the Residence Inn by Marriott® brand is a leading brandin the extended stay segment of the United States hotel industry. We haveinvested a total of $438 million in 37 Residence Inn by Marriott®hotels with a total of 4,695 suites.

 

**Crowne Plaza Hotels & Resorts®** is InterContinental’s upscale brand targetedat the business guest seeking upscale accommodations at a reasonable price. CrownePlaza Hotels & Resorts® have a particular focus on meetingaccommodations and related services. Our Crowne Plaza Hotels & Resorts®contain between 295 and 613 rooms. With its wide variety of premium servicesand amenities, including fully-appointed guest rooms with ample work space,full complement of business services, dining choices, quality fitnessfacilities and comprehensive meeting capabilities, Crowne Plaza Hotels &Resorts® attempt to exceed guest expectations by providing “theright room, the right technology and the right service”. According toInterContinental, there were 299 Crowne Plaza Hotels & Resorts®open and operating worldwide as of December 2007. We have invested a totalof $368 million in 12 Crowne Plaza Hotels & Resorts® with atotal of 4,406 rooms.

 

**Hyatt Place****TM****and AmeriSuites®**hotels are all suite hotels designed to compete in the all suite segmentof the lodging industry. After it acquired the AmeriSuites® brand in2005, Global Hyatt Corporation, or Hyatt, announced a plan for all qualifyingAmeriSuites® hotels to be rebranded to the more upscale Hyatt PlaceTMbrand and renovated to incorporate the new interior and exterior design of theHyatt PlaceTM brand. The renovation of our AmeriSuites®hotels began during 2006. As of December 31, 2007, we have completedrenovations and rebranded 21 of our former AmeriSuites®hotels. Mostrenovated Hyatt PlaceTM hotel rooms include upgraded bedding, a wetbar, granite counters, a sectional sofa and a media center with a 42 inch highdefinition plasma television. We are scheduled to complete renovation of oneadditional property in 2008. The remaining two AmeriSuites® hotelswill not be rebranded and as of December 31, 2007, are being held for sale.According to Hyatt, there wereseven AmeriSuites® hotels and 120 Hyatt PlaceTM hotelsopen and operating in the United States as of December 2007. We haveinvested $310 million in 24 Hyatt PlaceTM and AmeriSuites®hotels with a total of 2,895 suites.

 

**InterContinental Hotels & Resorts®** hotels blend consistent globalstandards with the distinctive cultural features associated with their separatelocations in an effort to deliver favorable guest experiences. Our InterContinentalHotels & Resorts® contain between 189 and 485 rooms.InterContinental Hotels & Resorts® offer high levels ofservice for business and leisure guests seeking a luxury hotel experience.Amenities include a wide range of personal and business services in addition torestaurants, cocktail lounges, pools, saunas and health/fitness centers.According to InterContinental, there were 149 InterContinental Hotels &Resorts® hotels open worldwide as of December 2007. We haveinvested a total of $300 million in five InterContinental Hotels &Resorts® with a total of 1,479 rooms.

 

**Marriott Hotels and Resorts®** arerenowned for the consistent quality of their physical appearances and the welltrained staff. Our Marriott Hotels and Resorts® contain between 356and 601 rooms. Our Marriott Hotels and Resorts® have between 20,000to 29,000 square feet of meeting and banquet space. Amenities include a widerange of personal and business services in addition to a choice of restaurants,cocktail lounges, concierge floors, pools, saunas, and health/fitness centers.According to Marriott, there were 469 Marriott Hotels and Resorts®open worldwide as of December 2007. We have invested $117 million in 3Marriott Hotels and Resorts® with a total of 1,356 guest rooms.

 

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**Radisson® Hotels & Resorts** is a leading full service hotel brand. Our Radisson® Hotels &Resorts hotels contain between 159 and 381 rooms. Amenities and services ofteninclude Sleep Number® beds, large desks, free high speed internetaccess, room service and a pre-arrival online check in system. The meetingfacilities at our Radisson® Hotels & Resorts generally canaccommodate groups of between 10 and 600 people in a flexible meeting room designwith audiovisual equipment. Most of our Radisson® Hotels &Resorts hotels also have a lobby lounge, a swimming pool, exercise facilitiesand one or more restaurants. According to Carlson Hotels Worldwide, or Carlson,the owner of the Radisson® Hotels & Resorts brand, therewere 398 Radisson® Hotels & Resorts open and operatingworldwide as of December 2007. We have invested a total of $116 million infive Radisson® Hotels & Resorts with a total of 975 rooms.

 

**TownePlace Suites by Marriott®** are extended stay hotels offering studio, onebedroom and two bedroom suites for business and family travelers.TownePlace Suites by Marriott® compete in the mid-priced extendedstay segment of the lodging industry. Each suite usually offers a fullyequipped kitchen, a bedroom and separate living and work areas. Otheramenities offered typically include voice mail, free high speed internetaccess, on site business services, guest laundry facilities and a fitnesscenter. According to Marriott, there were 141 TownePlace Suites by Marriott®open worldwide as of December 2007. We have invested $104 million in 12TownePlace Suites by Marriott® with a total of 1,331 suites.

 

**Country Inns & Suites by Carlson®** is a mid-market priced lodging chain. Our Country Inns & Suitesby Carlson® hotels contain between 84 and 180 rooms. Amenities andservices at these hotels generally include large desks, free breakfast, weekdaymorning paper and high speed internet access. The meeting facilities at ourCountry Inns & Suites by Carlson® hotels generally can accommodategroups of between 10 and 200 people in a flexible meeting room design withaudiovisual equipment. Most of our Country Inns & Suites by Carlson®hotels also feature a lobby with a fireplace, swimming pool, exercisefacilities, fax and copy service and a restaurant and lounge. According toCarlson there were 436 Country Inns & Suites by Carlson®open and operating worldwide as of December 2007. We have invested a totalof $75 million in five Country Inns & Suites by Carlson®with a total of 753 rooms.

 

**Holiday Inn Hotels & Resorts®** attempt to offer all the servicesand amenities of a full service hotel in a contemporary style at a reasonableprice. Our three Holiday Inn Hotels® and our two Holiday InnSelect® hotels contain between 190 and 264 rooms. Amenities andservices generally available at these hotels include a large work desk, phonewith voicemail, free high speed internet access, a business center withinternet access, copy and fax service, in room coffee or tea service, arefrigerator and designer bath amenities. The meeting facilities at our HolidayInn Hotels® generally can accommodate groups of between 18 and 280people in a flexible meeting room design with audiovisual equipment andcatering options. These hotels typically also offer a swimming pool, exercisefacilities, guest self-service laundry, a lobby lounge and restaurant.According to InterContinental, the owner of the Holiday Inn Hotels &Resorts® brand, there were 1,381 Holiday Inn Hotels® openand operating worldwide as of December 2007. We have invested a total of$36 million in 3 Holiday Inn Hotels® with a total of 697 rooms.

 

**SpringHill Suites by Marriott®** are all suites hotels designed to attract valueconscious business and family travelers. Guest suites can be up to 25% largerthan standard hotel rooms. Each suite usually has separate sleeping,living and work areas, a mini-refrigerator, a microwave and coffee service. Otheramenities offered include a pull out sofa bed, complimentary breakfast buffet,weekday newspaper, two phone lines, free high speed internet access and voicemail, other on site business services, guest laundry facilities and a fitnesscenter. According to Marriott, there were 177 SpringHill Suites by Marriott®open as of December 2007. We have invested $21 million in two SpringHillSuites by Marriott® with a total of 264 suites.

 

**Park Plaza®****Hotels & Resorts**is in the midpriced segment of the full service hotel category. Our Park Plaza® Hotels & Resorts containbetween 166 and 209 rooms. Amenities and services generally available at thesehotels include large desks, free high speed internet access, room serviceand a restaurant. The meeting facilities at our Park Plaza® Hotels &Resorts generally can accommodate groups of between 10 and 400 people in a flexiblemeeting room design with audiovisual equipment. Our Park Plaza®Hotels & Resorts hotels also usually have a lobby lounge, a swimmingpool and exercise facilities. According to Carlson, the owner of the Park Plaza®Hotels & Resorts brand, there were 41 Park Plaza® Hotels &Resorts open and operating as of December 2007. At December 31, 2007,we had invested a total of $21 million in two Park Plaza® Hotels &Resorts with a total of 534 rooms. In February 2008, we sold one of ourPark Plaza® hotels for net proceeds of approximately $7.6 million.

 

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**TRAVEL CENTER PROPERTIES**

 

As of December 31, 2007 weowned 185 travel centers; 145 of our travel centers are operated under theTravelCenters of America® or TA® brand names and 40 areoperated under the Petro Stopping Centers® brand name.

 

Substantially all our travelcenters are full service sites located on or near an interstate highway andoffer fuel and non-fuel products and services 24 hours per day, 365 days peryear. The typical travel center generally contains: over 20 acres of land withparking for 170 tractor trailers and 100 cars; a full service restaurant andone to three quick service restaurants, or QSRs, which are operated undernationally recognized brands; a truck repair facility and parts store; multiplediesel and gasoline fueling points; a travel and convenience store; and, a gameroom, lounge, private showers and other amenities for professional truckdrivers and motorists. In addition, some of our travel centers include a hotel.

 

The physical layout of ourtravel centers vary from property to property. Many of our Travel Centers ofAmerica® and TA® properties have one building withseparate service areas, while many of our Petro Stopping Centers®branded properties have several separate buildings.

 

**PRINCIPAL MANAGEMENT AGREEMENT ORLEASE FEATURES**

 

As of December 31, 2007, each of our 292 hotels are included inone of 10 combinations of hotels; 201 hotels are leased to our taxable REITsubsidiaries, or TRSs, and managed by independent hotel operating companies,and 91 hotels are leased to third parties. Our 185 travel centers are leasedunder two agreements. The principal features of the management agreements andleases for our 477 properties 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 based on increases in grossproperty revenues over threshold amounts. In addition, certain of our hotelmanagement agreements provide for additional returns to us based on increasesin hotel operating income.

 

•                  **Long Terms**. Our management agreements andleases are generally entered for initial terms of 15 years or more. None of ourmanagement agreements and leases for our properties expire before December 2010.The weighted average term remaining for our agreements (weighted by ourinvestment) is 16.0 years as of December 31, 2007.

 

•                  **Pooled Agreements**. Each of our propertiesis part of a combination of properties. The manager’s or tenant’sobligations to us with respect to each property in a combination are subject tocross default with the obligations with respect to all the other properties inthe same combination. The smallest combination includes 10 hotels in which wehave invested $231 million; the largest combination includes 145 travel centersin which we have invested $1.7 billion.

 

•                  **Geographic Diversification**. Eachcombination of properties is geographically diversified. In addition, ourproperties are located in the vicinity of major demand generators such as largesuburban office parks, airports, medical or educational facilities or majortourist attractions for hotels and interstate highways for travel centers.

 

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

 

•                  **Property Maintenance**. Generally our hotelagreements require the deposit of 5% to 6% of gross hotel revenues into escrowsto fund periodic renovations. For recently built or renovated hotels, thisrequirement may be deferred for the first few years of the agreement. Ourtravel center leases require the tenants to maintain the leased travel centersat their expense, including structural and non-structural components.

 

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•                  **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 theoperator to some or all of our return or rent; and full or limited guaranteesfrom the manager’s or tenant’s parent company. As of December 31, 2007,eight of our 12 combination agreements, including 352 properties, have minimumreturn or minimum rent payable to us which are subject to full or limited guarantees.These properties represent 75% of our total investments, at cost, at December 31,2007.

 

On January 31, 2007, we distributed all thecommon shares of our formerly wholly owned subsidiary TravelCenters of AmericaLLC, or TA, to our common shareholders. Today, TA is a separate company listedon the American Stock Exchange under the symbol “TA”. As of December 31,2007, TA leases all of our travel center properties and is responsible for 39%of our annual minimum returns and rent. As of the date of this report, TA hasnot filed its Annual Report on Form 10-K for the year ended December 31,2007. Therefore, summary audited financial information regarding TA is not nowavailable. We expect to furnish such information by an amendment to this AnnualReport on Form 10-K when it becomes available to us.

 

**INVESTMENT AND OPERATING POLICIES**

 

We provide capital to owners and operators in hospitality relatedindustries who wish to divest their properties while remaining in thehospitality business. Many other public hospitality REITs seek to control theoperations of properties in which they invest and generally design theirmanagement agreements or leases to capture substantially all net operatingincome from their hotels’ businesses. Our agreements with our operators andtenants are designed with the expectation that, over their terms, net operatingincome from our properties will exceed minimum amounts due to us. We believethat this difference in operating philosophy may afford us a competitiveadvantage over other hospitality REITs in finding high quality investmentopportunities on attractive terms and increase the dependability of our cashflows used to pay distributions.

 

Our investment objectives include increasing cash flow from operationsfrom dependable and diverse sources in order to increase per sharedistributions. To achieve these objectives, we seek to: maintain a strongcapital base of shareholders’ equity; invest in high quality propertiesoperated by experienced 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 anopportunity to participate in operating growth at our properties; when marketconditions permit, refinance debt with additional equity or long term debt;and, pursue diversification so that our cash flow from operations comes fromdiverse properties and operators.

 

In order to benefit from potential property appreciation, we prefer toown properties rather than make mortgage investments. We may invest inreal estate joint ventures if we conclude that we may benefit from theparticipation of co-ventures or that the opportunity to participate in theinvestment is contingent on the use of a joint venture structure. We may investin participating, convertible or other types of mortgages if we conclude thatwe may 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, 2007, we owned no convertible mortgages orjoint venture interests.

 

We may not achieve some or all of our investment objectives.

 

Because we are a REIT, generally, we may not operate ourproperties. We or our tenants have entered into arrangements for operation ofour properties. As described elsewhere in this Annual Report on Form 10-K,tax law changes known as the REIT Modernization Act, or the RMA, were enactedand became effective January 1, 2001. The RMA, among other things, allowsa REIT to lease hotels to a TRS if the hotel is managed by a third party. As ofDecember 31, 2007, 201 of our hotels are leased to our TRSs and managed bythird parties. Any income realized by a TRS in excess of the rent paid to us bythe subsidiary is subject to income tax at customary corporate rates. As, andif, the financial performance of the hotels operated for the account of ourTRSs improves, these taxes may become material.

 

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** **

**ACQUISITION POLICIES**

** **

Weintend to pursue growth through the acquisition of additional properties.Generally, we prefer to purchase multiple properties in one transaction becausewe believe a single management or lease agreement, cross default covenants andall or none renewal rights for multiple properties in diverse locations enhancethe credit characteristics and the security of our investments. In implementingour acquisition strategy, we consider a range of factors relating to proposedproperty purchases including:

 

·                  Historical andprojected cash flows;

 

·                  The competitivemarket environment and the current or potential market position of eachproperty;

 

·                  Theavailability of a qualified operator or lessee;

 

·                  The financialstrength of the proposed operator or lessee;

 

·                  The amount andtype of financial support available from the proposed operator or lessee;

 

·                  The property’sdesign, physical condition and age;

 

·                  The estimatedreplacement cost and proposed acquisition price of the property;

 

·                  The reputationof the particular management organization, if any, with which the property isor may become affiliated;

 

·                  The level ofservices and amenities offered at the property;

 

·                  The proposedmanagement agreement or lease terms; and

 

·                  The brand underwhich the property operates or is expected to operate.

 

In determining the competitive position of a property, we examine theproximity and convenience of the property to its expected customer base, thenumber and characteristics of competitive properties within the property’smarket area and the existence of barriers to entry within that market,including site availability and zoning restrictions. While we have historicallyfocused on the acquisition of upscale limited service, extended stay and fullservice hotel properties and, more recently, full service travel centers, weconsider acquisitions in all segments of the hospitality industry. An importantpart of our acquisition strategy is to identify and select, or create,qualified, experienced and financially stable operators.

 

Wheneverwe purchase an individual property or a small number of properties we attemptto arrange for these properties to be added to agreements covering, andoperated in combination with, properties we already own.

 

Wehave no policies which specifically limit the percentage of our assets whichmay be invested in any individual property, in any one type of property, inproperties operated by or leased to any one entity or in properties operated byor leased to an affiliated group of entities.

 

Wehave in the past considered and may in the future consider the possibility ofentering into mergers or strategic combinations with other companies. Aprincipal goal of any such transaction may be to further diversify our revenuesources and increase our cash flow from operations.

 

**DISPOSITION POLICIES**

** **

Inthe past we have occasionally sold a property or exchanged properties which weown for different properties.   In December 2007,our board of trustees authorized us to pursue the disposition of three hotelswith a net carrying value of approximately $15.8 million at December 31,2007.  In February 2008, one hotelwas sold for net proceeds of approximately $7.6 million. Although we may do so,we have no current intention to dispose of any of our other presently ownedproperties. We currently make decisions to dispose of properties based onfactors including but not limited to the following:

 

·                  Potentialopportunities to increase revenues and property values by reinvesting saleproceeds;

 

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·                  The proposedsale price;

 

·                  The strategicfit of the property with the rest of our portfolio;

 

·                  Our operator’sor tenant’s desire to cease operation of the property; and

 

·                  The existenceof alternative sources, uses or needs for capital.

 

**FINANCING POLICIES**

** **

Althoughthere are 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 certain financial ratios and a minimum net worth. Wecurrently intend to pursue our growth strategies while maintaining debt that isless than 50% of our total capitalization. We may from time to time re-evaluateand modify 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.

 

Ourboard of trustees may determine to obtain a replacement for our current creditfacility or to seek additional capital through equity offerings, interim orlong term debt financings, or retention of cash flows in excess ofdistributions to shareholders or a combination of these methods. Only one ofour properties is encumbered by a mortgage. To the extent that our board oftrustees decides to obtain additional debt financing, we may do so on anunsecured basis or a secured basis. We may seek to obtain other lines of creditor to issue securities senior to our common and/or preferred shares, includingpreferred shares of beneficial interest and debt securities, either of whichmay be convertible into common shares or be accompanied by warrants to purchasecommon shares, or to engage in transactions which may involve a sale or otherconveyance of hotels to subsidiaries or to unaffiliated entities. We mayfinance acquisitions through an exchange of properties or through the issuanceof additional common shares or other securities. The proceeds from any of ourfinancings may be used to pay distributions, to provide working capital, torefinance existing indebtedness or to finance acquisitions and expansions ofexisting or new properties.

 

**Manager**. Our day today operations are conducted by Reit Management & Research LLC, orRMR. RMR originates and presents investment opportunities to our board oftrustees and provides property management and administrative services to us.RMR is a Delaware limited liability company that is beneficially owned by BarryM. Portnoy and his son, Adam D. Portnoy, our managing trustees. RMR has aprincipal place of business at 400 Centre Street, Newton, Massachusetts 02458;and its telephone number is (617) 332-3990. RMR also acts as the manager to HRPTProperties Trust, or HRP, and to Senior Housing Properties Trust, or SNH, andhas other business interersts. The directors of RMR: are David J. Hegarty,Gerard M. Martin, formerly one of our managing trustees, Adam D. Portnoy andBarry M. Portnoy. The executive officers of RMR are Adam D. Portnoy, Presidentand Chief Executive Officer; David J. Hegarty, Executive Vice President andSecretary; John G. Murray, Executive Vice President; Evrett W. Benton, SeniorVice President; Ethan S. Bornstein, Senior Vice President; Jennifer B. Clark,Senior Vice President and General Counsel; Richard A. Doyle Jr., Senior VicePresident; John R. Hoadley, Senior Vice President; Mark L. Kleifges, SeniorVice President; David M. Lepore, Senior Vice President; Bruce J. Mackey Jr.,Senior Vice President; John A. Mannix, Senior Vice President; Thomas M. O’Brien,Senior Vice President; John C. Popeo, Senior Vice President, Treasurer andChief Financial Officer and Andrew J. Rebholz, Senior Vice President.  Messrs. Murray, Kleifges and Bornsteinare also our officers. Other officers of RMR also serve as officers of other companiesto which RMR provides management or other services.

 

**Employees**. We have noemployees. Services which would otherwise be provided by employees are providedby RMR and by our managing trustees and officers. As of February 26, 2008,RMR had approximately 500 full time employees.

 

**Competition**. The hotelindustry is highly competitive. Generally our hotels are located in areas thatinclude other hotels. Increases in the number of hotels in a particular areacould have a material adverse effect on the occupancy and daily room rates atour hotels located in that area. Agreements with the operators of our hotelssometimes restrict the right of each operator and its affiliates for periods oftime to own, build, operate, franchise or manage other hotels of the same brandwithin various specified areas around our hotels. Under these agreementsneither the operators nor their affiliates are usually restricted fromoperating other brands of hotels in the market areas 

 

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of any of our hotels, and after such period of time, the operators andtheir affiliates may also compete with our hotels by opening, managing orfranchising additional hotels under the same brand name in direct competitionwith our hotels.

 

Thetravel center and truck stop industry is fragmented and highly competitive.Fuel and non-fuel products and services can be obtained by long haul truckdrivers from a variety of sources, including regional full service travelcenters and pumper only truck stop chains, independently owned and operatedtruck stops and some large gas stations. In addition, some trucking companiesoperate their own terminals to provide fuel and services to their own truckingfleets.

 

Weexpect to compete for property acquisition and financing opportunities withentities which may have substantially greater financial resources than us,including, without limitation, other REITs, operating companies in thehospitality industry, banks, insurance companies, pension plans and public and privatepartnerships. These entities may be able to accept more risk than we canprudently manage, including risks with respect to the creditworthiness ofproperty operators and the extent of leverage used in their capital structure.  Such competition may reduce the number ofsuitable property acquisition or financing opportunities available to us orincrease the bargaining power of property owners seeking to sell or financetheir 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 may become liable to reimburse the government for damagesand costs it incurs in connection with the hazardous substances. Our travelcenters include fueling areas, truck repair and maintenance facilities andtanks for the storage of petroleum products and other hazardous substances, allof which create a potential for environmental damages. We reviewedenvironmental surveys and other studies of the properties we own prior to theirpurchase. Based upon those reviews we do not believe that any of our propertiesare subject to environmental contamination that is likely to result in materialadverse consequences to us. Under the terms of our management agreements andleases, our tenants and operators have agreed to indemnify us from allenvironmental liabilities arising during the term of the agreements. However,no assurances can be given that environmental conditions for which we would beliable are not present at our properties or that costs we incur to remediatecontamination will not have a material adverse effect on our business orfinancial condition. Moreover, our tenants and operators may not havesufficient resources to pay environmental liabilities.

 

**InternetWebsite**. Our internet website address is www.hptreit.com. Copies of our governance guidelines, codeof business conduct and ethics and the charters of our audit, compensation andnominating and governance committees may be obtained free of charge by writingto our Secretary, Hospitality Properties Trust, 400 Centre Street, Newton, MA02458 or at our website. We make available, free of charge, on ourwebsite, our Annual Reports on Form 10-K, Quarterly Reports on Form 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 SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable after theseforms are filed with, or furnished to, the Securities and Exchange Commission. Any shareholder or other interested party who desires to communicatewith our non-management trustees, individually or as a group, may do so byfilling out a report on our website. Our board of trustees also provides aprocess for security holders to send communications to the entire board.Information about the process for sending communications to our board can befound on our website. Our website address is included several times in thisAnnual Report on Form 10-K as a textual reference only and the informationin the website is not incorporated by reference into this Annual Report on Form 10-K.

 

**SegmentInformation**. As of December 31, 2007, we have twooperating segments, hotel real estate investments and travel center real estateinvestments.

 

**FEDERAL INCOME TAX CONSIDERATIONS**

 

The following summary of federal income tax considerations is based onexisting law, and is limited to investors who own our shares as investmentassets rather than as inventory or as property used in a trade orbusiness.  The summary 

 

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doesnot discuss the particular tax consequences that might be relevant to you ifyou are subject to special rules under federal income tax law, for exampleif you are:

 

·                  a bank, life insurance company,regulated investment company, or other financial institution;

 

·                  a broker or dealer in securitiesor foreign currency;

 

·                  a person who has a functionalcurrency other than the U.S. dollar;

 

·                  a person who acquires our sharesin connection with employment or other performance of services;

 

·                  a person subject to alternativeminimum tax;

 

·                  a person who owns our shares aspart of a straddle, hedging transaction, constructive sale transaction,constructive ownership transaction, or conversion transaction; or

 

·                  except as specifically describedin the following summary, a tax-exempt entity or a foreign person.

 

The Internal Revenue Code of 1986, as amended, or the IRC sections thatgovern federal income tax qualification and treatment of a REIT and itsshareholders are complex.  Thispresentation is a summary of applicable IRC provisions, related rules andregulations and administrative and judicial interpretations, all of which aresubject to change, possibly with retroactive effect.  Future legislative, judicial, oradministrative actions or decisions could also affect the accuracy ofstatements made in this summary.  We havenot received a ruling from the Internal Revenue Service, or the IRS, withrespect to any matter described in this summary,****andwe cannot assure you that the IRS, or a court will agree with the statementsmade in this summary.  The IRS or a courtcould, for example, take a different position, which could result insignificant tax liabilities for applicable parties, from that described in thissummary with respect to our acquisitions, operations, restructurings or anyother matters described in this summary. In addition, this summary is not exhaustive of all possible taxconsequences, and does not discuss any estate, gift, state, local, or foreigntax consequences.  For all these reasons,we urge you and any prospective acquiror of our shares to consult with a taxadvisor about the federal income tax and other tax consequences of theacquisition, ownership and disposition of our shares.  Our intentions and beliefs described in thissummary are based upon our understanding of applicable laws and regulationsthat are in effect as of the date of this Annual Report on Form 10-K.  If new laws or regulations are enacted whichimpact us directly or indirectly, we may change our intentions or beliefs.

 

Your federal income tax consequences may differ depending on whether ornot you are a “U.S. shareholder.”  Forpurposes of this summary, a “U.S. shareholder” for federal income tax purposesis:

 

·                  a citizen or resident of theUnited States, including an alien individual who is a lawful permanent residentof the United States or meets the substantial presence residency test under thefederal income tax laws;

 

·                  an entity treated as acorporation 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;

 

·                  an estate the income of which issubject to federal income taxation regardless of its source; or

 

·                  a trust if a court within theUnited States is able to exercise primary supervision over the administrationof the trust and one or more United States persons have the authority tocontrol all substantial decisions of the trust, or electing trusts in existenceon August 20, 1996, to the extent provided in Treasury regulations;

 

whosestatus as a U.S. shareholder is not overridden by an applicable taxtreaty.  Conversely, a “non-U.S.shareholder” is a beneficial owner of our shares who is not a U.S. shareholder.  If a partnership (including any entity treated as apartnership for federal income tax purposes) is a beneficial owner of ourshares, the tax treatment of a partner in the partnership generally will dependupon the status of the partner and the activities of the partnership. Abeneficial owner that is a partnership and partners in such a partnershipshould consult their tax advisors about the federal income tax consequences ofthe acquisition, ownership and disposition of our shares.

 

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**Taxation as a REIT**

 

We have elected to be taxed as a REIT under Sections 856 through 860 ofthe IRC, commencing with our taxable year ending December 31,****1995.** **Our REIT election,assuming continuing compliance with the then applicable qualification tests,continues in effect for subsequent taxable years.  Although no assurance can be given, webelieve that we are organized, have operated, and will continue to operate in amanner that qualifies us to be taxed under the IRC as a REIT.

 

As a REIT, we generally are not subject to federal income tax on our netincome distributed as dividends to our shareholders.  Distributions to our shareholders generallyare included in their income as dividends to the extent of our current or accumulatedearnings and profits.  Our dividends arenot generally entitled to the favorable 15% rate on qualified dividend income,but a portion of our dividends may be treated as capital gain dividends, all asexplained below.  No portion of any ofour dividends is eligible for the dividends received deduction for corporateshareholders.  Distributions in excess ofcurrent or accumulated earnings and profits generally are treated for federalincome tax purposes as return of capital to the extent of a recipientshareholder’s basis in our shares, and will reduce this basis.  Our current or accumulated earnings andprofits are generally allocated first to distributions made on our preferredshares, and thereafter to distributions made on our common shares.  For all these purposes, our distributionsinclude both cash distributions and any in kind distributions of property thatwe might make, for example, our January 2007 spin off of TA to our commonshareholders as described below.

 

If a shareholder actually or constructively owns none or a smallpercentage of our common shares, and such shareholder surrenders its preferredshares to us to be repurchased for cash only, then the repurchase of thepreferred shares is likely to qualify for sale or exchange treatment becausethe repurchase would not be “essentially equivalent to a dividend” as definedby the IRC. More specifically, a cash repurchase of preferred shares will betreated under Section 302 of the IRC as a distribution, and hence taxableas a dividend to the extent of our allocable current or accumulated earningsand profits, as discussed above, unless the repurchase satisfies one of thetests set forth in Section 302(b) of the IRC and is therefore treatedas a sale or exchange of the repurchased shares. The repurchase will be treatedas a sale or exchange if it (1) is “substantially disproportionate” withrespect to the surrendering shareholder’s ownership in us, (2) results ina “complete termination” of the surrendering shareholder’s common and preferredshare interest in us, or (3) is “not essentially equivalent to a dividend”with respect to the surrendering shareholder, all within the meaning of Section 302(b) ofthe IRC. In determining whether any of these tests have been met, a shareholdermust generally take into account our common and preferred shares considered tobe owned by such shareholder by reason of constructive ownership rules setforth in the IRC, as well as our common and preferred shares actually owned bysuch shareholder.  In addition, if a repurchase is treatedas a distribution under the preceding tests, then a shareholder’s tax basis inthe repurchased preferred shares will be transferred to the shareholder’sremaining shares of our common or preferred shares, if any, and if such shareholderowns no other shares of our common or preferred shares, such basis may betransferred to a related person or may be lost entirely.  Becausethe determination as to whether a shareholder will satisfy any of the tests of Section 302(b) ofthe IRC depends upon the facts and circumstances at the time that the preferredshares are repurchased, we encourage you to consult your own tax advisor todetermine your particular tax treatment.

 

Our counsel, Sullivan & Worcester LLP, has opined that we havebeen organized and have qualified as a REIT under the IRC for our 1995 through 2007 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 IRC.  Our continued qualification and taxation as aREIT will depend upon our compliance with various qualification tests imposedunder the IRC and summarized below. While we believe that we will satisfy these tests, our counsel has notreviewed and will not review compliance with these tests on a continuingbasis.  If we fail to qualify as a REIT,we will be subject to federal income taxation as if we were a C corporation andour shareholders will be taxed like shareholders 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 described below, we generallywill not pay federal income tax on amounts we distribute to ourshareholders.  However, even if wequalify as a REIT, we may be subject to federal tax in the followingcircumstances:

 

·                  We will be taxed at regularcorporate rates on any undistributed “real estate investment trust taxableincome,” including our undistributed net capital gains.

 

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·                  If our alternative minimumtaxable income exceeds our taxable income, we may be subject to the corporatealternative minimum tax on our items of tax preference.

 

·                  If we have net income from thedisposition of “foreclosure property” that is held primarily for sale tocustomers in the ordinary course of business or from other nonqualifying incomefrom foreclosure property, we will be subject to tax on this income at thehighest regular corporate rate, currently 35%.

 

·                  If we have net income fromprohibited transactions, including dispositions of inventory or property heldprimarily for sale to customers in the ordinary course of business other thanforeclosure property, we will be subject to tax on this income at a 100% rate.

 

·                  If we fail to satisfy the 75%gross income test or the 95% gross income test discussed below, but nonethelessmaintain our qualification as a REIT, we will be subject to tax at a 100% rateon the greater 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 anycalendar year at least the sum of 85% of our REIT ordinary income for thatyear, 95% of our REIT capital gain net income for that year, and anyundistributed taxable income from prior periods, we will be subject to a 4%nondeductible excise tax on the excess of the required distribution over theamounts actually distributed.

 

·                  If we acquire an asset from acorporation in a transaction in which our basis in the asset is determined byreference to the basis of the asset in the hands of a present or formerC corporation, and if we subsequently recognize gain on the disposition ofthis asset during the ten year period beginning on the date on which the assetceased to be owned by the C corporation, then we will pay tax at thehighest regular corporate tax rate, which is currently 35%, on the lesser ofthe excess of the fair market value of the asset over the C corporation’sbasis in the asset on the date the asset ceased to be owned by theC corporation, or the gain we recognize in the disposition.

 

·                  If we acquire a corporation, to preserve our status asa REIT we must generally distribute all of the C corporation earnings andprofits inherited in that acquisition, if any, not later than the end of thetaxable year of the acquisition. However, if we fail to do so, relief provisions would allow us tomaintain our status as a REIT provided we distribute any subsequentlydiscovered C corporation earnings and profits and pay an interest charge inrespect of the period of delayed distribution.  As discussed below, we have acquired Ccorporations in connection with our acquisition of real estate.  Our investigations of these C corporationsindicated that they did not have undistributed earnings and profits that we inheritedbut failed to timely distribute. However, upon review or audit, the IRS maydisagree.

 

·                  As summarized below, REITs arepermitted within limits to own stock and securities of a TRS.  A TRS is separately taxed on its net incomeas a C corporation, and is subject to limitations on the deductibility ofinterest expense paid to its REIT parent. In addition, its REIT parent is subject to a 100% tax on the differencebetween amounts charged and redetermined rents and deductions, including excessinterest.

 

·                  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 Canada and Puerto Rico.  Our profits from properties outside of theUnited States will generally be subject to tax in the local jurisdictions.  Through structuring and available taxexemptions, we have minimized the Canadian and Puerto Rican income taxes wemust pay, but there can be no assurance that these existing structures andexemptions will be available to us in the future to minimize taxes.  If we continue to operate as we do, then wewill distribute our taxable income to our shareholders each year and we willgenerally not pay federal income tax.  Asa result, we cannot recover the cost of foreign income taxes imposed on ourforeign investments by claiming foreign tax credits against our federal incometax 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 our shareholders if we donot qualify as a REIT will not be deductible by us 

 

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nor will distributions be required under theIRC.  In that event, distributions to ourshareholders will generally be taxable as ordinary dividends potentiallyeligible for the 15% income tax rate discussed below in “Taxation of U.S.Shareholders” and, subject to limitations in the IRC, will be eligible for thedividends received deduction for corporate 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 oneyear, this could result in reduction or elimination of distributions to ourshareholders, or in our incurring substantial indebtedness or liquidatingsubstantial investments in order to pay the resulting corporate-level taxes.  The IRC provides certain relief provisions under whichwe might avoid automatically ceasing to be a REIT for failure to meet certainREIT requirements, all as discussed in more detail below.

 

In the January 31,2007 spin off of TA, our common shareholders received a distribution from us inan amount equal to the fair market value of the TA common shares at the time ofthe spin off.  A recipient of TA commonshares in the spin off obtained a tax basis in those shares equal to their fairmarket value at the time of the spin off, and the recipient’s holding period inthose TA common shares commenced on the day after the spin off.  Sullivan & Worcester LLP is unableto render an opinion on the fair market value of the TA common shares becauseof the factual nature of value determinations. However, we believe that our shareholders may, for federal income taxpurposes, value the TA common shares at the time of the spin off as $32.34 perTA common share.

 

**REIT Qualification Requirements**

 

*General Requirements. *Section 856(a) ofthe IRC defines a REIT as a corporation, trust or association:

 

(1)   that is managed by one ormore trustees or directors;

 

(2)   the beneficial ownership ofwhich is evidenced by transferable shares or by transferable certificates ofbeneficial interest;

 

(3)   that would be taxable, butfor Sections 856 through 859 of the IRC, as a C corporation;

 

(4)   that is not a financialinstitution or an insurance company subject to special provisions of the IRC;

 

(5)   the beneficial ownership ofwhich is held by 100 or more persons;

 

(6)   that is not “closely held” asdefined under the personal holding company stock ownership test, as describedbelow; and

 

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

 

Section 856(b) ofthe IRC provides that conditions (1) through (4) must be met duringthe entire taxable year and that condition (5) must be met during at least335 days of a taxable year of 12 months, or during a pro rata part of a taxableyear of less than 12 months. Section 856(h)(2) of the IRC providesthat neither condition (5) nor (6) need be met for our firsttaxable year as a REIT.  We believe thatwe have met conditions (1) through (7) during each of the requisiteperiods ending on or before our most recently completed taxable year, and thatwe can continue to meet these conditions in future taxable years.  There can, however, be no assurance in thisregard.

 

By reason of condition (6), we will fail to qualify as a REIT for ataxable year if at any time during the last half of a year more than 50% invalue of our outstanding shares is owned directly or indirectly by five orfewer individuals. To help comply with condition (6), our declaration of trustrestricts transfers of our shares.  Inaddition, if we comply with applicable Treasury regulations to ascertain theownership of our shares and do not know, or by exercising reasonable diligencewould not have known, that we failed condition (6), then we will be treated ashaving met condition (6).  However, ourfailure to comply with these regulations for ascertaining ownership may resultin a penalty of $25,000, or $50,000 for intentional violations.  Accordingly, we intend to comply with theseregulations, and to request annually from record holders of significantpercentages of our shares information regarding the ownership of ourshares.  Under our declaration of trust,our shareholders are required to respond to these requests for information.

 

For purposes of condition (6), REIT shares held by a pension trust aretreated as held directly by the pension trust’s beneficiaries in proportion totheir actuarial interests in the pension trust. Consequently, five or fewer pension trusts 

 

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couldown more than 50% of the interests in an entity without jeopardizing thatentity’s federal income tax qualification as a REIT.  However, as discussed below, if a REIT is a “pension-heldREIT,” each pension trust owning more than 10% of the REIT’s shares by valuegenerally may be taxed on a portion of the dividends it receives from the REIT.

 

The IRC provides that wewill not automatically fail to be a REIT if we do not meet conditions (1) through(6), provided we can establish reasonable cause for any such failure.  Each such excused failure will result in theimposition of a $50,000 penalty instead of REIT disqualification.  It is impossible to state whether in allcircumstances we would be entitled to the benefit of this relief provision.  Thisrelief provision applies to any failure of the applicable conditions, even ifthe failure first occurred in a prior taxable year, as long as each of therequirements of the relief provision is satisfied after October 22, 2004.

 

*Our Wholly-Owned**Subsidiaries and OurInvestments through Partnerships.* Except in respect of TRSs as discussed below, Section 856(i) ofthe IRC provides that any corporation, 100% of whose stock is held by a REIT,is a qualified REIT subsidiary and shall not be treated as a separatecorporation.  The assets, liabilities anditems of income, deduction and credit of a qualified REIT subsidiary aretreated as the REIT’s.  We believe thateach of our direct and indirect wholly-owned subsidiaries, other than the TRSsdiscussed below, will either be a qualified REIT subsidiary within the meaningof Section 856(i) of the IRC, or a noncorporate entity that forfederal income tax purposes is not treated as separate from its owner underregulations issued under Section 7701 of the IRC.  Thus, except for the TRSs 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 mayinvest in real estate through one or more limited or general partnerships orlimited liability companies that are treated as partnerships for federal incometax purposes.  In the case of a REIT thatis a partner in a partnership, regulations under the IRC provide that, forpurposes of the REIT qualification requirements regarding income and assetsdiscussed below, the REIT is deemed to own its proportionate share of theassets of the partnership corresponding to the REIT’s proportionate capitalinterest in the partnership and is deemed to be entitled to the income of thepartnership attributable to this proportionate share.  In addition, for these purposes, thecharacter of the assets and gross income of the partnership generally retainthe same character in the hands of the REIT. 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.  In contrast, for purposes of the distributionrequirement discussed below, we must take into account as a partner our shareof the partnership’s income as determined under the general federal income tax rules governingpartners and partnerships under Sections 701 through 777 of the IRC.

 

*Taxable REIT Subsidiaries.* We are permitted to own any or all of the securities of a TRS as definedin Section 856(l) of the IRC, provided that no more than 20% of ourassets, at the close of each quarter, is comprised of our investments in thestock or securities of our TRSs.  Amongother requirements, a TRS must:

 

(1) be a non-REIT corporation for federal income tax purposes inwhich we directly or indirectly own shares;

 

(2) join with us in making a TRS election;

 

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

 

(4) not directly or indirectly provide to any person, under afranchise, license, or otherwise, rights to any brand name under which anylodging facility or health care facility is operated, except that in limitedcircumstances a subfranchise, sublicense or similar right can be granted to anindependent contractor to operate or manage a lodging facility.

 

In addition, a corporation other than a REIT in which a TRS directly orindirectly owns more than 35% of the voting power or value will automaticallybe treated as a TRS.  Subject to thediscussion below, we believe that we and each of our TRSs have complied with,and will continue to comply with, the requirements for TRS status during all timeseach subsidiary’s TRS election remains in effect, and we believe that the samewill be true for any TRS that we later form or acquire.

 

Our ownership of stock and securities in TRSs is exempt from the 10% and5% REIT asset tests discussed below.  Also,as discussed below, TRSs can perform services for our tenants withoutdisqualifying the rents we receive from 

 

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thosetenants under the 75% or 95% gross income tests discussed below.  Moreover, because TRSs are taxed as Ccorporations that are separate from us, their assets, liabilities and items ofincome, deduction and credit are not generally imputed to us for purposes ofthe REIT qualification requirements described in this summary.  Therefore, TRSs can generally undertakethird-party management and development activities and activities not related toreal estate.  Finally, while a REIT isgenerally limited in its ability to earn qualifying rental income from a TRS, aREIT can earn qualifying rental income from the lease of a qualified lodgingfacility to TRS if an eligible independent contractor operates the facility, asdiscussed more fully below.

 

Restrictions are imposed on TRSs to ensure that they will be subject toan appropriate level of federal income taxation.  For example, a TRS may not deduct interestpaid in any year to an affiliated REIT to the extent that the interest paymentsexceed, generally, 50% of the TRSs’ adjusted taxable income for that year.  However, the TRS may carry forward thedisallowed interest expense to a succeeding year, and deduct the interest inthat later year subject to that year’s 50% adjusted taxable incomelimitation.  In addition, if a TRS paysinterest, rent, or other amounts to its affiliated REIT in an amount thatexceeds what an unrelated third party would have paid in an arm’s lengthtransaction, then the REIT generally will be subject to an excise tax equal to100% of the excessive portion of the payment. Finally, if in comparison to an arm’s length transaction, a tenant hasoverpaid rent to the REIT in exchange for underpaying the TRS for servicesrendered, then the REIT may be subject to an excise tax equal to 100% of theoverpayment.  There can be no assurancethat arrangements involving our TRSs will not result in the imposition of oneor more of these deduction limitations or excise taxes, but we do not believethat we are or will be subject to these impositions.

 

*Income Tests.*  There aretwo gross income requirements for qualification as a REIT under the IRC:

 

·                  At least 75% of our gross income,excluding gross income from sales or other dispositions of property heldprimarily for sale, must be derived from investments relating to real property,including “rents from real property” as defined under Section 856 of theIRC, mortgages on real property, or shares in other REITs.  When we receive new capital in exchange forour shares or in a public offering of five-year or longer debt instruments,income attributable to the temporary investment of this new capital in stock ora debt instrument, if received or accrued within one year of our receipt of thenew capital, is generally also qualifying income under the 75% gross incometest.

 

·                  At least 95% of our gross income,excluding gross income from sales or other dispositions of property heldprimarily for sale, must be derived from a combination of items of realproperty income that satisfy the 75% gross income test described above, dividends,interest, gains from the sale or disposition of stock, securities, or realproperty or, for financial instruments entered into during our 2004 or earliertaxable years, certain payments under interest rate swap or cap agreements,options, futures contracts, forward rate agreements or similar financialinstruments.  But for financialinstruments entered into during our 2005 or later taxable years, the 95% grossincome test has been modified as follows: except as may be provided in Treasury regulations, gross income forthese purposes no longer includes income from a “hedging transaction” asdefined under clauses (ii) and (iii) of Section 1221(b)(2)(A) ofthe IRC, but only to the extent that (A) the transaction hedgesindebtedness we incur to acquire or carry real estate assets, and (B) thehedging transaction was “clearly identified,” meaning that the transaction mustbe identified as a hedging transaction before the end of the day on which it isentered and the risks being hedged must be identified generally within 35 daysafter 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 we will use our best efforts toensure that the income generated by our investments will be of a type thatsatisfies both the 75% and 95% gross income tests, there can be no assurance inthis regard.

 

In order to qualify as “rents from real property” under Section 856of the IRC, several requirements must be met:

 

·                  The amount of rent receivedgenerally must not be based on the income or profits of any person, but may bebased on receipts or sales.

 

·                  Rents do not qualify if the REITowns 10% or more by vote or value of the tenant, whether directly or afterapplication of attribution rules.  Whilewe intend not to lease property to any party if rents from that property wouldnot qualify as rents from real property, application of the 10% ownership rule isdependent upon complex 

 

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attribution rules and circumstances that may be beyond ourcontrol.  For example, an unaffiliatedthird party’s ownership directly or by attribution of 10% or more by value ofour shares, as well as 10% or more by vote or value of the stock of one of ourtenants, would result in that tenant’s rents not qualifying as rents from realproperty. 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 IRC. Nevertheless, there can be no assurance that these provisions in ourdeclaration of trust will be effective to prevent our REIT status from beingjeopardized under the 10% affiliated tenant rule.  Furthermore, there can be no assurance thatwe will be able to monitor and enforce these restrictions, nor will ourshareholders necessarily be aware of ownership of shares attributed to themunder the IRC’s attribution rules.

 

·                  There is a limited exception tothe above prohibition on earning “rents from real property” from a 10%affiliated tenant, if the tenant is a TRS. If at least 90% of the leased space of a property is leased to tenantsother than TRSs and 10% affiliated tenants, and if the TRS’s rent for space atthat property is substantially comparable to the rents paid by nonaffiliatedtenants for comparable space at the property, then otherwise qualifying rentspaid by the taxable REIT subsidiary to the REIT will not be disqualified onaccount of the rule prohibiting 10% affiliated tenants.

 

·                  There is a second exception to the above prohibition on earning “rentsfrom real property” from a 10% affiliated tenant.  For this second exception to apply, a realproperty interest in a “qualified lodging facility” must be leased by the REITto its TRS, and the facility must be operated on behalf of the TRS by a personwho is an “eligible independent contractor,” all as described in Section 856(d)(8)-(9) ofthe IRC. As described below, we believe our leases with our TRSs have satisfiedand will continue to satisfy these requirements.

 

·                  In order for rents to qualify, wegenerally must not manage the property or furnish or render services to thetenants of the property, except through an independent contractor from whom wederive no income or, for our 2001 taxable year and thereafter, through one ofour TRSs.  There is an exception to this rule permittinga REIT to perform customary tenant services of the sort that a tax-exemptorganization could perform without being considered in receipt of “unrelatedbusiness taxable income” as defined in Section 512(b)(3) of theIRC.  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.

 

·                  If rent attributable to personalproperty leased in connection with a lease of real property is 15% or less ofthe total rent received under the lease, then the rent attributable to personalproperty will qualify as “rents from real property”; if this 15% threshold isexceeded, the rent attributable to personal property will not so qualify.  For our taxable years through December 31,2000, the portion of rental income treated as attributable to personal propertywas determined according to the ratio of the tax basis of the personal propertyto the total tax basis of the real and personal 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 IRC,subject to the considerations in the following paragraph.

 

We have receivedopinions from our counsel Sullivan & Worcester LLP that (i) ourunderground storage tanks should constitute real estate assets, rather thanpersonal property, for purposes of the various REIT qualification testsdescribed in this summary, and (ii) with respect to each of our leaseswith TA, although the matter is not free from doubt, for purposes of applyingthe 15% incidental personal property test above, regarding rent attributable toincidental personal property leased in connection with real property, the testwill be applied in the aggregate to all the travel center sites leased undereach such lease on a lease by lease basis, rather than on a site by site basis.If the IRS or a court determines that one or both of these opinions isincorrect, then a portion of the rental income we receive from TA could benonqualifying income for purposes of the 75% and 95% gross income tests,possibly jeopardizing our compliance with the 95% gross income test. Underthose circumstances, however, we expect we would qualify for the gross incometests’ relief provision described below, and thereby preserve our qualificationas a REIT. If the relief provision below were to apply to us, we would besubject to tax at a 100% rate on the amount by which we failed the 95% grossincome test, with adjustments, multiplied by a fraction intended to reflect ourprofitability for the taxable 

 

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year; however, in atypical taxable year, we have little or no nonqualifying income from othersources and thus would expect to owe little tax in such circumstances.

 

In order to qualify as mortgage interest on real property for purposesof the 75% test, interest must derive from a mortgage loan secured by realproperty with a fair market value, at the time the loan is made, at least equalto the amount of the loan.  If the amountof the loan exceeds the fair market value of the real property, the interestwill be treated as interest on a mortgage loan in a ratio equal to the ratio ofthe fair market value of the real property to the total amount of the mortgageloan.

 

Amounts payable tous under agreements relating to the Canadian hotels we acquired in 2005 may bedetermined by reference to revenue and expenditure items denominated inCanadian dollars.  Currency translationor exchange gains or losses might not count favorably toward the 75% and 95%gross income tests summarized above, and thus, in sufficient amounts, currencygains could threaten our compliance with the REIT income tests.  However, because any amounts paid to us, asopposed to our TRS, under these Canadian hotel agreements will be denominatedin U.S. dollars and determined by reference to more than just exchange rates,we do not expect to have material amounts of currency gains in respect of ourCanadian investments.

 

Our January 31,2007 spin off of TA was treated for federal income tax purposes as though wedisposed of each of the individual assets of TA and its principal subsidiariesin a taxable transaction in which individual asset gains, but not losses, wererecognized.  The amount realized on eachasset in this taxable disposition was equal to the fair market value of thatasset at the time of the spin off, and our tax basis in the asset was thecarryover tax basis inherited from TravelCenters. For these purposes, the assetsand liabilities of any TRSs are ignored, and instead the stock in the TRS istreated like any other individual asset being distributed.  Even though some of the gains we recognizedon the distributed assets were not qualifying gross income under the 75% and95% gross income tests of Section 856(c) of the IRC, we do notbelieve the recognized gains from the distribution materially affected ourability to comply with these tests. Although our counsel Sullivan & Worcester LLP is unable toopine on factual matters such as the fair market value of the distributedassets at the time of the spin off, Sullivan & Worcester LLP hasopined that it is more likely than not that we have been reasonable in ourapproach to valuations and gain computations (including valuation methodology)in connection with the spin off of TA and thus that, even if our computationsshould be successfully challenged so as to result in our failing the 95% grossincome test, we would more likely than not qualify for the gross income tests’relief provision described below and thereby preserve our qualification as aREIT.  If the relief provision below wereto apply to us, we would be subject to tax at a 100% rate on the amount bywhich we failed the 95% gross income test, with adjustments, multiplied by afraction intended to reflect our profitability for the taxable year; but wewould expect to owe little tax in such circumstances.

 

Other than sales of foreclosure property, any gain we realize onthe sale of property held as inventory or other property held primarily forsale to customers in the ordinary course of business will be treated as incomefrom a prohibited transaction that is subject to a penalty tax at a 100%rate.  This prohibited transaction incomealso may adversely affect our ability to satisfy the 75% and 95% gross incometests for federal income tax qualification as a REIT.  We cannot provide assurances as to whether ornot the IRS might successfully assert that one or more of our dispositions issubject to the 100% penalty tax. However, we believe that dispositions of assets that we have made orthat we might make in the future will not be subject to the 100% penalty tax,because we intend to:

 

·                  own our assets for investmentwith a view to long-term income production and capital appreciation;

 

·                  engage in the business ofdeveloping, owning and operating our existing properties and acquiring,developing, owning and operating new properties; and

 

·                  make occasional dispositions ofour assets consistent with our long-term investment objectives.

 

If we fail to satisfy one or both of the 75% or the 95% gross incometests in any taxable year, we may nevertheless qualify as a REIT for that yearif we satisfy the following requirements after October 22, 2004:

 

·                  our failure to meetthe test is due to reasonable cause and not due to willful neglect, and

 

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·                  after we identifythe failure, we file a schedule describing each item of our gross incomeincluded in the 75% or 95% gross income tests for that taxable year.

 

It is impossible tostate whether in all circumstances we would be entitled to the benefit of thisrelief provision for the 75% and 95% gross income tests.  Even if this relief provision does apply, a100% tax is imposed upon the greater of the amount by which we failed the 75%test or the 95% test, with adjustments, multiplied by a fraction intended toreflect our profitability.  This reliefprovision applies to any failure of the applicable income tests, even if thefailure first occurred in a prior taxable year, as long as each of therequirements of the relief provision is satisfied after October 22, 2004.

 

Under prior law,if we failed to satisfy one or both of the 75% or 95% gross income tests, wenevertheless would have qualified as a REIT for that year if:  ourfailure to meet the test was due to reasonable cause and not due to willfulneglect; we reported the nature and amount of each item of our income includedin the 75% or 95% gross income tests for that taxable year on a scheduleattached to our tax return; and any incorrect information on the schedule wasnot due to fraud with intent to evade tax. For our 2004 and prior taxable years, we attached a schedule ofgross income to our federal income tax returns, but it is impossible to state whether in all circumstances we would beentitled to the benefit of this prior relief provision for the 75% and 95%gross income tests.  Even if this reliefprovision did apply, a 100% tax is imposed upon the greater of the amount bywhich we failed the 75% test or the 95% test, with adjustments, multiplied by afraction intended to reflect our profitability.

 

*Asset Tests.*  At the close ofeach quarter of each taxable year, we must also satisfy the following assetpercentage tests in order to qualify as a REIT for federal income tax purposes:

 

·                  At least 75% of our total assetsmust consist of real estate assets, cash and cash items, shares in other REITs,government securities, and temporary investments of new capital (that is, stockor debt instruments purchased with proceeds of a stock offering or a publicoffering of our debt with a term of at least five years, but only for theone-year period commencing with our receipt of the offering proceeds).

 

·                  Not more than 25% of our totalassets may be represented by securities other than those securities that countfavorably toward the preceding 75% asset test.

 

·                  Of the investments included inthe preceding 25% asset class, the value of any one non-REIT issuer’ssecurities that we own may not exceed 5% of the value of our total assets, andwe may not own more than 10% of any one non-REIT issuer’s outstanding votingsecurities.  For our 2001 taxable yearand thereafter, we may not own more than 10% of the vote or value of any onenon-REIT issuer’s outstanding securities, unless that issuer is our TRS or thesecurities are “straight debt” securities or otherwise excepted as discussedbelow.

 

·                  For our 2001 taxable year andthereafter, our stock and securities in a TRS are exempted from the preceding10% and 5% asset tests.  However, no morethan 20% of our total assets may be represented by stock or securities of TRSs.

 

When a failure to satisfy the above asset tests results from anacquisition of securities or other property during a quarter, the failure canbe cured by disposition of sufficient nonqualifying assets within 30 days afterthe close of that quarter.

 

In addition, if we fail the 5% value test or the 10% vote or value testsat the close of any quarter and do not cure such failure within 30 days afterthe close of that quarter, that failure will nevertheless be excused if (a) thefailure is de minimis and (b) within 6 months after the last day of thequarter 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 reliefprovision, the failure will be “de minimis” if the value of the assets causingthe failure does not exceed the lesser of (a) 1% of the total value of ourassets at the end of the relevant quarter or (b) $10,000,000.  If our failure is not de minimis, or if anyof the other REIT asset tests have been violated, we may nevertheless qualifyas a REIT if (a) we provide the IRS with a description of each assetcausing the failure, (b) the failure was due to reasonable cause and notwillful neglect, (c) we pay a tax equal to the greater of (i) $50,000or (ii) the highest rate of corporate tax imposed (currently 35%) on thenet income generated by the assets causing the failure during the period of thefailure, and (d) within 6 months after the last day of the quarter inwhich we identify the failure, we either dispose of the assets causing thefailure or otherwise satisfy all of the REIT asset tests.  These relief provisions apply to any failureof the applicable asset tests, even if the failure first 

 

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occurredin a prior taxable year, as long as each of the requirements of the reliefprovision is satisfied after October 22, 2004.

 

The IRC also provides, for our 2001 taxable year and thereafter, anexcepted securities safe harbor to the 10% value test that includes among otheritems (a) “straight debt” securities, (b) certain rental agreementsin which payment is to be made in subsequent years, (c) any obligation topay rents from real property, (d) securities issued by governmentalentities that are not dependent in whole or in part on the profits of orpayments from a nongovernmental entity, and (e) any security issued byanother REIT.

 

We intend tomaintain records of the value of our assets to document our compliance with theabove asset tests, and to take actions as may be required to cure any failureto satisfy the tests within 30 days after the close of any quarter.

 

*OurRelationship with TA*.  On January 31, 2007, we spun off all thethen outstanding TA common shares.  Underthe transaction agreement that governed the spin off, TA will generally beresponsible for the tax filings and liabilities, including federal income taxfilings and liabilities, of TravelCenters and its subsidiaries for the periodsending on or before the distribution date. Because TA and its principal subsidiaries were entities which were notregarded as separate from us for tax purposes prior to the spin off, TA andthese subsidiaries immediately after the spin off were (and expected thereafterto remain) tenants in whom we have at all times during each taxable year anactual and constructive ownership interest of less than 10% by vote and byvalue.  Moreover, our lease with TA, TA’slimited liability company operating agreement, and the transaction agreementgoverning the spin off collectively contain restrictions upon the ownership ofTA common shares and require TA to refrain from taking any actions that mayresult in any affiliation with us that would jeopardize our qualification as aREIT under the IRC. Accordingly, subject to the personal propertyconsiderations discussed above and commencing with the January 31, 2007spin off, we expect that the rental income we receive from TA and itssubsidiaries will be “rents from real property” under Section 856(d) ofthe IRC, and therefore qualifying income under the 75% and 95% gross incometests described above.

 

*Our Relationship with Our Taxable REIT Subsidiaries*.  We currently own hotels that we purchased tobe leased to our TRSs or which are being leased to our TRSs as a result ofmodifications to a prior lease that were agreed to among us, the former tenantand the manager.  We may from time totime in the future lease additional hotels that we acquire in this manner.

 

In connection with lease defaults, we terminated occupancy of some of ourhotels by defaulting tenants and immediately leased these hotels to our TRSsand entered into new third party management agreements for these hotels.  We may in the future employ similararrangements if we again face lease or occupancy terminations.

 

In transactions involving our TRSs, our intent is that the rents paid tous by the TRS qualify as “rents from real property” under the REIT gross incometests summarized above.  In order forthis to be the case, the manager engaged by the applicable TRS must be an “eligibleindependent contractor” within the meaning of Section 856(d)(9)(A) ofthe IRC, and the hotels leased to the TRS must be “qualified lodging facilities”within the meaning of Section 856(d)(9)(D) of the IRC.  Qualifiedlodging facilities are defined as hotels, motels, or other establishments wheremore than half of the dwelling units are used on a transient basis, providedthat legally authorized wagering or gambling activities are not conducted at orin connection with such facilities.  Alsoincluded in the definition are the qualified lodging facility’s customaryamenities and facilities.

 

For these purposes, a contractor qualifies asan “eligible independent contractor” if it is less than 35% affiliated with theREIT and, at the time the contractor enters into the agreement with the TRS tooperate the qualified lodging facility, that contractor or any person relatedto that contractor is actively engaged in the trade or business of operatingqualified lodging facilities for persons unrelated to the TRS or its affiliatedREIT.  For these purposes, an otherwiseeligible independent contractor is not disqualified from that status on accountof the TRS bearing the expenses of the operation of the qualified lodgingfacility, the TRS receiving the revenues from the operation of the qualifiedlodging facility, net of expenses for that operation and fees payable to the eligibleindependent contractor, or the REIT receiving income from the eligibleindependent contractor pursuant to a preexisting or otherwise grandfatheredlease of another property.

 

In one case involving a former manager whose hotel management activitiesfor parties unrelated to us were not as extensive as those of our currentmanagers, we received an opinion from our counsel Sullivan & WorcesterLLP that the particular manager should qualify as an “eligible independentcontractor” within the meaning of 

 

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Section 856(d)(9)(A) ofthe IRC, and that, although the matter is not free from doubt, it is reasonablefor us to rely on such opinion for purposes of the relief provisions under theREIT gross income tests summarized above. Although there can be no assurance in this regard, we expect that therental income we receive from our TRSs will qualify as “rents from realproperty” under the REIT gross income tests.  We also took steps toqualify for the 75% and 95% gross income tests’ relief provision, including forexample attaching an applicable schedule of gross income to our federal incometax returns as previously required by Section 856(c)(6) of theIRC.  Thus, even if the IRS or a court ultimately determines that one ormore of our managers failed to operate “qualified lodging facilities” forothers sufficient to qualify as an eligible independent contractor, and thatthis failure thereby implicated our compliance with the REIT gross incometests, we expect we would qualify for the gross income tests’ relief provisionand thereby preserve our qualification as a REIT.

 

As explained above, we will be subject to a 100% tax if the IRSsuccessfully asserts that the rents paid by our TRS to us exceed an arm’s lengthrental rate.  Although there is no clearprecedent to distinguish for federal income tax purposes among leases,management contracts, partnerships, financings, and other contractualarrangements, we believe that our leases and our TRSs’ management agreementswill be respected for purposes of the requirements of the IRC discussedabove.  Accordingly, we expect that therental income from our current and future TRSs will qualify as “rents from realproperty,” and that the 100% tax on excessive rents from a TRS will not apply.

 

*Annual Distribution Requirements.* In order to qualify for taxation as a REIT under the IRC, we arerequired to make annual distributions other than capital gain dividends to ourshareholders in an amount at least equal to the excess of:

 

(A)   the sum of 90% of our “realestate investment trust taxable income,” as defined in Section 857 of theIRC, computed by excluding any net capital gain and before taking into accountany dividends paid deduction for which we are eligible, and 90% of our netincome after tax, if any, from property received in foreclosure, over

 

(B)    the sum of our qualifyingnoncash income, *e.g*., imputed rental income orincome from transactions inadvertently failing to qualify as like-kindexchanges.

 

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 adividend is declared in October, November, or December to shareholders ofrecord during one of those months, and is paid during the following January,then for federal income tax purposes the dividend will be treated as havingbeen both paid and received on December 31 of the prior taxable year.  A distribution which is not pro rata within aclass of our beneficial interests entitled to a distribution, or which is notconsistent with the rights to distributions among our classes of beneficialinterests, is a preferential distribution that is not taken into considerationfor purposes of the distribution requirements, and accordingly the payment of apreferential distribution could affect our ability to meet the distributionrequirements.  Taking into account ourdistribution policies, including the dividend reinvestment plan we haveadopted, we expect that we will not make any preferential distributions. Thedistribution requirements may be waived by the IRS if a REIT establishes thatit failed to meet them by reason of distributions previously made to meet therequirements of the 4% excise tax discussed below.  To the extent that we do not distribute allof our net capital gain and all of our real estate investment trust taxableincome, as adjusted, we will be subject to tax on undistributed amounts.

 

In addition, we will be subject to a 4% nondeductible excise tax to theextent we fail within a calendar year to make required distributions to ourshareholders 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 thispurpose, the term “grossed up required distribution” for any calendar year isthe sum of our taxable income for the calendar year without regard to thededuction for dividends paid and all amounts from earlier years that are not treated ashaving been distributed under the provision. We will be treated as havingsufficient earnings and profits to treat as a dividend any distribution by usup to the amount required to be distributed in order to avoid imposition of the4% excise tax.

 

If we do not have enough cash or other liquid assets to meet the 90%distribution requirements, we may find it necessary and desirable to arrangefor new debt or equity financing to provide funds for required distributions inorder to maintain our REIT status.  Wecan provide no assurance that financing would be available for these purposeson favorable terms.

 

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We may be able to rectifya failure to pay sufficient dividends for any year by paying “deficiencydividends” to shareholders in a later year. These deficiency dividends may be included in our deduction fordividends paid for the earlier year, but an interest charge would be imposedupon 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.

 

In addition to the otherdistribution requirements above, to preserve our status as a REIT we arerequired to timely distribute C corporation earnings and profits that weinherit from acquired corporations.

 

**Acquisition of C Corporations**

 

In****2005 we purchased a hotel in PuertoRico.  In order to acquire the PuertoRican hotel, we acquired all of the outstanding stock of a C corporation thatowned that hotel as its primary asset. Upon our acquisition, the acquired C corporation became our qualifiedREIT subsidiary under Section 856(i) of the IRC.  Thus, after the acquisition, all assets,liabilities and items of income, deduction and credit of the acquiredcorporation are treated as ours for purposes of the various REIT qualificationtests described above.  In ouracquisitions of the stock of C corporations, we are generally treated as thesuccessor to the acquired corporation’s federal income tax attributes, such asits adjusted tax bases in its assets and its C corporation earnings andprofits.  However, because we made anelection under Section 338(g) of the IRC in respect of this acquiredPuerto Rican corporation, we did not succeed to its earnings and profits, nordo we have any built-in gain in this former C corporation’s assets.

 

On January 31, 2007,we acquired all of the outstanding stock of TravelCenters, a Ccorporation.  At the time of thatacquisition, this C corporation directly or indirectly owned all of theoutstanding equity interests in various corporate and noncorporatesubsidiaries.  Upon our acquisition, theacquired entities generally became either our qualified REIT subsidiaries underSection 856(i) of the IRC or disregarded entities under Treasuryregulations issued under Section 7701 of the IRC.  Thus, after the acquisition, all assets,liabilities and items of income, deduction and credit of these acquiredentities have been treated as ours for purposes of the various REITqualification tests described above.  Inaddition, we generally were treated as the successor to these acquiredsubsidiaries’ federal income tax attributes, such as these entities’ adjustedtax bases in their assets and their depreciation schedules; we were alsotreated as the successor to these acquired corporate subsidiaries’ earnings andprofits for federal income tax purposes, if any.

 

Upon completing theacquisition, we effected a restructuring of the travel center business so as todivide it between us and TA, and we then spun off TA on January 31, 2007.

 

*Earningsand Profits*.  A REIT may not have any undistributed Ccorporation earnings and profits at the end of any taxable year. Upon theclosing of the January 31, 2007 transaction, we succeeded to theundistributed earnings and profits, if any, of the acquired corporate entities.Thus, we needed to distribute any such earnings and profits no later than December 31,2007. If we failed to do so, we would not qualify to be taxed as a REIT for2007 and a number of years thereafter, unless we are able to rely on the reliefprovision described below.

 

Although Sullivan &Worcester LLP is unable to render an opinion on factual determinations such asthe amount of undistributed earnings and profits, we retained accountants tocompute the amount of undistributed earnings and profits that we inherited inthe January 31, 2007 transaction. Based on our calculations, we believe that we did not inherit anyundistributed earnings and profits in this transaction.  However, there can be no assurance that theIRS would not, upon examination, propose adjustments to our calculation of theundistributed earnings and profits that we inherited, including adjustmentsthat might be deemed necessary by the IRS as a result of its examination of thecompanies we acquired.  If it issubsequently determined that we had undistributed earnings and profits as of December 31,2007, we may be eligible for a relief provision similar to the “deficiencydividends” procedure described above. To utilize this relief provision, wewould have to pay an interest charge for the delay in distributing theundistributed earnings and profits; in addition, we would be required todistribute to our shareholders, in addition to our other REIT distributionrequirements, the amount of the undistributed earnings and profits less theinterest charge paid.

 

*Built-in-Gainsfrom C Corporations.* As described above,notwithstanding our qualification and taxation as a REIT, we may still besubject to corporate taxation in particular circumstances.  Specifically, if we acquire an asset from acorporation in a transaction in which our adjusted tax basis in the asset isdetermined by reference to the 

 

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adjusted tax basis ofthat asset in the hands of a present or former C corporation, and if wesubsequently recognize gain on the disposition of that asset during the tenyear period beginning on the date on which the asset ceased to be owned by theC corporation, then we will generally pay tax at the highest regular corporatetax rate, currently 35%, on the lesser of (1) the excess, if any, of theasset’s fair market value over its adjusted tax basis, each determined as ofthe time the asset ceased to be owned by the C corporation, or (2) ourgain recognized in the disposition. In the case of assets acquired in the January 31,2007 acquisition, any gain subject to this tax may generally be reduced bycertain net operating loss carryforwards that we inherited. Other than theassets we distributed in the spin off of TA as described above, we have nopresent plan or intent to dispose of any other assets acquired in the January 31,2007 acquisition.  We believe that werecognized only modest taxable gains from the spin off of TA, and we alsoexpect that net operating loss carryforwards will be available to us so as toreduce or eliminate any tax that we may owe in respect of any such recognizedgains.

 

To the extent of ourgains in a taxable year that are subject to the built in gains tax describedabove, net of any taxes paid on such gains with respect to that taxable year,our taxable dividends paid to you in the following year will be eligible fortreatment as qualified dividends that are taxed to our noncorporateshareholders at the maximum capital gain rate of 15% while that rate is ineffect.

 

**Acquisition of Partnership**

 

In2007, we acquired all of the limited partnership interests and the generalpartnership interest of a partnership as well as certain of the partnership’snoncorporate subsidiary entities. Pursuant to Treasury regulations issued underSection 7701 of the IRC, each of these acquired entities was either apartnership or disregarded entity for federal income tax purposes, and thusupon our acquisition these entities became disregarded entities of ours.  Accordingly, after this 2007 acquisition, allassets, liabilities and items of income, deduction and credit of these acquiredentities have been treated as ours for purposes of the various REITqualification tests described above.  Ourinitial tax basis in the acquired assets is our cost for acquiring them, and webelieve that we did not succeed to any C corporation earnings and profits inthis acquisition.

 

**Depreciationand Federal Income Tax Treatment of Leases**

 

Ourinitial tax bases in our assets will generally be our acquisition cost.  We will generally depreciate our realproperty on a straight-line basis over 40 years and our personal property overthe applicable shorter periods.  Thesedepreciation schedules may vary for properties that we acquire through tax-freeor carryover basis acquisitions.

 

Weare entitled to depreciation deductions from our facilities only if we aretreated for federal income tax purposes as the owner of the facilities.  This means that the leases of the facilitiesmust be classified for federal income tax purposes as true leases, rather thanas sales or financing arrangements, and we believe this to be the case.  In the case of sale-leaseback arrangements,the IRS could assert that we realized prepaid rental income in the year ofpurchase to the extent that the value of a leased property, at the time ofpurchase, exceeded the purchase price for that property.  While we believe that the value of leasedproperty at the time of purchase did not exceed purchase prices, because of thelack of clear precedent we cannot provide assurances as to whether the IRSmight successfully assert the existence of prepaid rental income in any of oursale-leaseback transactions.

 

**Taxation of U.S. Shareholders**

 

Themaximum individual federal income tax rate for long-term capital gains isgenerally 15% (for taxable years that begin on or before December 31,2010) and for most corporate dividends is generally also 15% (for taxable yearsthat begin on or before December 31, 2010).  However, because we are not generally subjectto federal income tax on the portion of our REIT taxable income or capital gainsdistributed to our shareholders, dividends on our shares generally are noteligible for such 15% tax rate on dividends. As a result, our ordinary dividends continue to be taxed at the higherfederal income tax rates applicable to ordinary income.  However, the 15% federal income tax rate forlong-term capital gains and dividends generally applies to:

 

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

 

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(2)           our distributions designated aslong-term capital gain dividends (except to the extent attributable to realestate depreciation recapture, in which case the distributions are subject to a25% federal income tax rate);

 

(3)           our dividends attributable todividends, if any, received by us from non-REIT corporations such as TRSs; and

 

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

 

As long as we qualify as a REIT for federal income tax purposes, adistribution to our U.S. shareholders that we do not designate as a capitalgain dividend will be treated as an ordinary income dividend to the extent ofour current or accumulated earnings and profits. Distributions made out of ourcurrent or accumulated earnings and profits that we properly designate ascapital gain dividends will be taxed as long-term capital gains, as discussedbelow, to the extent they do not exceed our actual net capital gain for thetaxable year.  However, corporateshareholders may be required to treat up to 20% of any capital gain dividend asordinary income under Section 291 of the IRC.

 

In addition, we may elect to retain net capital gain income and treat itas constructively distributed.  In thatcase:

 

(1)           we will be taxed at regular corporatecapital gains tax rates on retained amounts;

 

(2)           each U.S. shareholder will betaxed on its designated proportionate share of our retained net capital gainsas though that amount were distributed and designated a capital gain dividend;

 

(3)           each U.S. shareholder willreceive a credit for its designated proportionate share of the tax that we pay;

 

(4)           each U.S. shareholder willincrease its adjusted basis in our shares by the excess of the amount of itsproportionate share of these retained net capital gains over its proportionateshare of this tax that we pay; and

 

(5)           both we and our corporateshareholders will make commensurate adjustments in our respective earnings andprofits for federal 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-termcapital gains are generally taxed at maximum rates of 15% or 25%, dependingupon the type of property disposed of and the previously claimed depreciationwith respect to this property.  If forany taxable year we designate capital gain dividends for U.S. shareholders,then the portion of the capital gain dividends we designate will be allocatedto the holders of a particular class of shares on a percentage basis equal tothe ratio of the amount of the total dividends paid or made available for theyear to the holders of that class of shares to the total dividends paid or madeavailable for the year to holders of all classes of our shares.  We will similarly designate the portion ofany capital gain dividend that is to be taxed to noncorporate U.S. shareholdersat the maximum rates of 15% or 25% so that the designations will beproportionate among all classes of our shares.

 

Distributions in excess of current or accumulated earnings and profitswill not be taxable to a U.S. shareholder to the extent that they do not exceedthe shareholder’s adjusted tax basis in the shareholder’s shares, but willreduce the shareholder’s basis in those shares. To the extent that these excess distributions exceed the adjusted basisof a U.S. shareholder’s shares, they will be included in income as capitalgain, with long-term gain generally taxed to noncorporate U.S. shareholders ata maximum rate of 15%.  No U.S.shareholder may include on his federal income tax return any of our netoperating losses or any of our capital losses.

 

Dividends that we declare in October, November or December ofa taxable year to U.S. shareholders of record on a date in those months will bedeemed to have been received by shareholders on December 31 of thattaxable year, provided we actually pay these dividends during the following January.  Also, items that are treated differently forregular and alternative minimum tax purposes are to be allocated between a REITand its shareholders under Treasury regulations 

 

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whichare to be prescribed.  It is possiblethat these Treasury regulations will require tax preference items to beallocated to our shareholders with respect to any accelerated depreciation orother tax preference items that we claim.

 

A U.S. shareholder will generally recognize gain or loss equal to thedifference between the amount realized and the shareholder’s adjusted basis inour shares that are sold or exchanged. This gain or loss will be capital gain or loss, and will be long-termcapital gain or loss if the shareholder’s holding period in the shares exceedsone year.  In addition, any loss upon asale or exchange of our shares held for six months or less will generally betreated as a long-term capital loss to the extent of our long-term capital gaindividends during the holding period.

 

Effective for federal tax returns with due dates afterOctober 22, 2004, the IRC imposes a penalty for the failure to properlydisclose 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) $10million in any single year or $20 million in any combination of years in thecase of our shares held by a C corporation or by a partnership with only Ccorporation partners or (ii) $2 million in any single year or $4 millionin any combination of years in the case of our shares held by any otherpartnership or an S corporation, trust or individual, including losses thatflow through pass through entities to individuals.  A taxpayer discloses a reportable transactionby filing IRS Form 8886 with its federal income tax return and, in thefirst year of filing, a copy of Form 8886 must be sent to the IRS’s Officeof Tax Shelter Analysis.  The penalty forfailing to disclose a reportable transaction is generally $10,000 in the caseof a natural person and $50,000 in any other case.

 

Noncorporate U.S. shareholders who borrow funds to finance theiracquisition of our shares could be limited in the amount of deductions allowedfor the interest paid on the indebtedness incurred.  Under Section 163(d) of the IRC,interest paid or accrued on indebtedness incurred or continued to purchase orcarry property held for investment is generally deductible only to the extentof the investor’s net investment income. A U.S. shareholder’s net investment income will include ordinary incomedividend distributions received from us and, if an appropriate election is madeby the shareholder, capital gain dividend distributions received from us;however, distributions treated as a nontaxable return of the shareholder’sbasis will not enter into the computation of net investment income.

 

**Taxation of Tax-Exempt Shareholders**

 

In Revenue Ruling 66-106, the IRS ruled that amounts distributed by aREIT to a tax-exempt employees’ pension trust did not constitute “unrelatedbusiness taxable income,” even though the REIT may have financed some of itsactivities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject torevocation or modification by the IRS, based upon the analysis and conclusionof Revenue Ruling 66-106, our distributions made to shareholders that aretax-exempt pension plans, individual retirement accounts, or other qualifyingtax-exempt entities should not constitute unrelated business taxable income,provided that the shareholder has not financed its acquisition of our shareswith “acquisition indebtedness” within the meaning of the IRC, and providedfurther that, consistent with our present intent, we do not hold a residualinterest in a real estate mortgage investment conduit.

 

Tax-exempt pension trusts, including so-called 401(k) plans butexcluding individual retirement accounts or government pension plans, that ownmore than 10% by value of a “pension-held REIT” at any time during a taxableyear may be required to treat a percentage of all dividends received from thepension-held REIT during the year as unrelated business taxable income.  This percentage is equal to the ratio of:

 

(1)           the pension-held REIT’s gross incomederived from the conduct of unrelated trades or businesses, determined as ifthe pension-held REIT were a tax-exempt pension fund, less direct expensesrelated to that income, to

 

(2)           the pension-held REIT’s grossincome from all sources, 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-heldREIT if:

 

·      the REIT is “predominantly held”by tax-exempt pension trusts; and

 

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·      the REIT would fail to satisfythe “closely held” ownership requirement discussed above if the stock orbeneficial interests in the REIT held by tax-exempt pension trusts were viewedas held by tax-exempt pension trusts rather than by their respectivebeneficiaries.

 

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 publiclytraded, we cannot completely control whether or not we are or will become apension-held REIT.

 

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 IRC, 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 federal income taxation ofnon-U.S. shareholders are complex, and the following discussion is intendedonly as a summary of these rules.  If youare a non-U.S. shareholder, we urge you to consult with your own tax advisor todetermine the impact of United States federal, state, local, and foreign taxlaws, including any tax return filing and other reporting requirements, withrespect to your investment in our shares.

 

In general, a non-U.S. shareholder will be subject to regular UnitedStates federal income tax in the same manner as a U.S. shareholder with respectto its investment in our shares if that investment is effectively connectedwith the non-U.S. shareholder’s conduct of a trade or business in the UnitedStates.  In addition, a corporatenon-U.S. shareholder that receives income that is or is deemed effectively connectedwith a trade or business in the United States may also be subject to the 30%branch profits tax under Section 884 of the IRC, which is payable inaddition to regular United States federal corporate income tax.  The balance of this discussion of the UnitedStates federal income taxation of non-U.S. shareholders addresses only thosenon-U.S. shareholders whose investment in our shares is not effectivelyconnected with the conduct of a trade or business in the United States.

 

A distribution by us to a non-U.S. shareholder that is not attributableto gain from the sale or exchange of a United States real property interest andthat is not designated as a capital gain dividend will be treated as anordinary income dividend to the extent that it is made out of current oraccumulated earnings and profits.  Adistribution of this type will generally be subject to United States federalincome tax and withholding at the rate of 30%, or at a lower rate if thenon-U.S. shareholder has in the manner prescribed by the IRS demonstrated itsentitlement to benefits under a tax treaty. In the case of any in kind distributions of property, we or otherapplicable withholding agents will collect the amount required to be withheldby reducing to cash for remittance to the IRS a sufficient portion of theproperty that the non-U.S. shareholder would otherwise receive, and thenon-U.S. shareholder may bear brokerage or other costs for this withholdingprocedure.  Because we cannot determineour current and accumulated earnings and profits until the end of the taxableyear, withholding at the rate of 30% or applicable lower treaty rate willgenerally be imposed on the gross amount of any distribution to a non-U.S.shareholder that we make and do not designate a capital gain dividend.  Notwithstanding this withholding ondistributions in excess of our current and accumulated earnings and profits,these distributions are a nontaxable return of capital to the extent that theydo not exceed the non-U.S. shareholder’s adjusted basis in our shares, and thenontaxable return of capital will reduce the adjusted basis in theseshares.  To the extent that distributionsin excess of current and accumulated earnings and profits exceed the non-U.S.shareholder’s adjusted basis in our shares, the distributions will give rise totax liability if the non-U.S. shareholder would otherwise be subject to tax onany gain from the sale or exchange of these shares, as discussed below.  A non-U.S. shareholder may seek a refund fromthe IRS of amounts withheld on distributions to him in excess of our currentand accumulated earnings and profits.

 

From time to time, some of our distributions may be attributable to thesale or exchange of United States real property interests.  However, capital gain dividends that arereceived by a non-U.S. shareholder, including dividends attributable to oursales of United States real property interests, and that are deductible by usin respect of our 2005 taxable year and thereafter will be subject to thetaxation and withholding regime applicable to ordinary income dividends and thebranch 

 

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profitstax 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” such as the New York Stock Exchange,or the NYSE, both as defined by applicable Treasury regulations, and (2) thenon-U.S. shareholder does not own more than 5% of that class of shares at anytime during the one-year period ending on the date of distribution of thecapital gain dividends.  If both of theseprovisions are satisfied, qualifying non-U.S. shareholders will not be subjectto 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 willbe subject to United States federal income tax and withholding as ordinarydividends, currently at a 30% tax rate unless reduced by applicable treaty, asdiscussed below.  We believe that ourshares have been and will remain “regularly traded” on an “establishedsecurities market” within the definition of each term provided in applicableTreasury regulations; however, we can provide no assurance that our shares willcontinue to be “regularly traded” on an “established securities market” infuture taxable years.

 

Except as discussed above, for any year in which we qualify as a REIT,distributions that are attributable to gain from the sale or exchange of aUnited States real property interest are taxed to a non-U.S. shareholder as ifthese distributions were gains effectively connected with a trade or businessin the United States conducted by the non-U.S. shareholder.  Accordingly, a non-U.S. shareholder that doesnot qualify for the provision above or that received dividends for taxable yearsbefore 2005 will be taxed on these amounts at the normal capital gain ratesapplicable to a U.S. shareholder, subject to any applicable alternative minimumtax and to a special alternative minimum tax in the case of nonresident alienindividuals; such a non-U.S. shareholder will be required to file a UnitedStates federal income tax return reporting these amounts, even if applicablewithholding is imposed as described below; and such a non-U.S. shareholder thatis also a corporation may owe the 30% branch profits tax under Section 884of the IRC in respect of these amounts. We will be required to withhold from distributions to such non-U.S.shareholders, and remit to the IRS, 35% of the maximum amount of anydistribution that could be designated as a capital gain dividend.  In addition, for purposes of this withholdingrule, if we designate prior distributions as capital gain dividends, thensubsequent distributions up to the amount of the designated prior distributionswill be treated as capital gain 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.

 

Effectivegenerally from and after 2006, a special “wash sale” rule applies to anon-U.S. shareholder who owns any class of our shares if (1) theshareholder owns more than 5% of that class of shares at any time during theone-year period ending on the date of the distribution described below, or (2) thatclass of our shares is not, within the meaning of applicable TreasuryRegulations, “regularly traded” on a domestic “established securities market”such as the NYSE.  Although there can beno assurance in this regard, we believe that our common shares and each classof our preferred shares has been and will remain “regularly traded” on adomestic “established securities market” within the meaning of applicableTreasury regulations, all as discussed above. We thus anticipate this wash sale rule to apply, if at all, only toa non-U.S. shareholder that owns more than 5% of either our common shares orany class of our preferred shares.  Sucha non-U.S. shareholder will be treated as having made a “wash sale” of ourshares if it (1) disposes of an interest in our shares during the 30 dayspreceding the ex-dividend date of a distribution by us that, but for suchdisposition, would have been treated by the non-U.S. shareholder in whole or inpart as gain from the sale or exchange of a United States real propertyinterest, and then (2) acquires or enters into a contract to acquire asubstantially identical interest in our shares, either actually orconstructively through a related party, during the 61-day period beginning 30days prior to the ex-dividend date.  Inthe event of such a wash sale, the non-U.S. shareholder will have gain from thesale or exchange of a United States real property interest in an amount equalto the portion of the distribution that, but for the wash sale, would have beena gain from the sale or exchange of a United States real propertyinterest.  As discussed above, a non-U.S.shareholder’s gain from the sale or exchange of a United States real propertyinterest can trigger increased United States taxes, such as the branch profitstax applicable to non-U.S. corporations, and increased United States tax filingrequirements.

 

If for any taxable year we designate capital gain dividends for ourshareholders, then the portion of the capital gain dividends we designate willbe allocated to the holders of a particular class of shares on a percentagebasis equal to the ratio of the amount of the total dividends paid or madeavailable for the year to the holders of that class of shares to the totaldividends paid or made available for the year to holders of all classes of ourshares.

 

Tax treaties may reduce the withholding obligations on ourdistributions.  Under some treaties,however, rates below 30% that are applicable to ordinary income dividends fromUnited States corporations may not apply to ordinary income dividends from aREIT or may apply only if the REIT meets certain additional conditions.  You must generally use an 

 

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applicableIRS Form W-8, or substantially similar form, to claim tax treatybenefits.  If the amount of tax withheldby us with respect to a distribution to a non-U.S. shareholder exceeds theshareholder’s United States federal income tax liability with respect to thedistribution, the non-U.S. shareholder may file for a refund of the excess fromthe IRS.  The 35% withholding tax ratediscussed above on some capital gain dividends corresponds to the maximumincome tax rate applicable to corporate non-U.S. shareholders but is higherthan the 15% and 25% maximum rates on capital gains generally applicable tononcorporate non-U.S. shareholders. Treasury regulations also provide special rules to determinewhether, for purposes of determining the applicability of a tax treaty, ourdistributions to a non-U.S. shareholder that is an entity should be treated aspaid to the entity or to those owning an interest in that entity, and whetherthe entity or its owners are entitled to benefits under the tax treaty.  In the case of any in kind distributions ofproperty, we or other applicable withholding agents will have to collect theamount required to be withheld by reducing to cash for remittance to the IRS asufficient portion of the property that the non-U.S. shareholder wouldotherwise receive, and the non-U.S. shareholder may bear brokerage or othercosts for this withholding procedure.

 

If our shares are not “United States real property interests” within themeaning of Section 897 of the IRC, then a non-U.S. shareholder’s gain onsale of these shares generally will not be subject to United States federalincome taxation, except that a nonresident alien individual who was in theUnited States for 183 days or more during the taxable year may be subject to a30% tax on this gain.  Our shares willnot constitute a United States real property interest if we are a “domesticallycontrolled REIT.”  A domesticallycontrolled REIT is a REIT in which at all times during the preceding five-yearperiod less than 50% in value of its shares is held directly or indirectly byforeign persons.  We believe that we havebeen and will remain a domestically controlled REIT and thus a non-U.S.shareholder’s gain on sale of our shares will not be subject to United Statesfederal income taxation.  However, becauseour shares are publicly traded, we can provide no assurance that we will be adomestically controlled REIT.  If we arenot a domestically controlled REIT, a non-U.S. shareholder’s gain on sale ofour shares will not be subject to United States federal income taxation as asale of a United States real property interest, if that class of shares is “regularlytraded,” as defined by applicable Treasury regulations, on an establishedsecurities market like the NYSE, and the non-U.S. shareholder has at all timesduring the preceding five years owned 5% or less by value of that class ofshares.  In this regard, because thepreferred shares of others may be redeemed,****anon-U.S. shareholder’s percentage interest in a class of our preferred sharesmay increase even if it acquires no additional preferred shares in thatclass.  If the gain on the sale of ourshares were subject to United States federal income taxation, the non-U.S.shareholder will generally be subject to the same treatment as a U.S.shareholder with respect to its gain, will be required to file a United Statesfederal income tax return reporting that gain, and a corporate non-U.S.shareholder might owe branch profits tax under Section 884 of theIRC.  A purchaser of our shares from anon-U.S. shareholder will not be required to withhold on the purchase price ifthe purchased shares are regularly traded on an established securities marketor if we are a domestically controlled REIT. Otherwise, a purchaser of our shares from a non-U.S. shareholder may berequired to withhold 10% of the purchase price paid to the non-U.S. shareholderand to remit the withheld amount to the IRS.

 

**Backup Withholding and Information Reporting**

 

Information reporting and backup withholding may apply to distributionsor proceeds paid to our shareholders under the circumstances discussedbelow.  The backup withholding rate is currently 28% and isscheduled to increase to 31% after 2010. Amounts withheld under backupwithholding are generally not an additional tax and may be refunded by the IRSor credited against the REIT shareholder’s federal income tax liability.  In the case of any in kind distributions ofproperty by us to a shareholder, we or other applicable withholding agents willhave to collect any applicable backup withholding by reducing to cash forremittance to the IRS a sufficient portion of the property that our shareholderwould otherwise receive, and the shareholder may bear brokerage or other costsfor this withholding procedure.

 

A U.S. shareholder will be subject to backup withholding when itreceives distributions on our shares or proceeds upon the sale, exchange,redemption, retirement or other disposition of our shares, unless the U.S.shareholder properly executes, or has previously properly executed, under penaltiesof perjury an IRS Form W-9 or substantially similar form that:

 

·      provides the U.S. shareholder’scorrect taxpayer identification number; and

 

·      certifies that the U.S.shareholder is exempt from backup withholding because it is a corporation or comeswithin another exempt category, it has not been notified by the IRS that it issubject to backup withholding, or it has been notified by the IRS that it is nolonger subject to backup withholding.

 

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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 may be subject to penalties imposed by the IRS, and the REIT or otherwithholding agent may have to withhold a portion of any distributions paid toit. Unless the U.S. shareholder has established on a properly executed IRS Form W-9or substantially similar form that it is a corporation or comes within anotherexempt category, distributions on our shares paid to it during the calendaryear, and the amount of tax withheld, if any, will be reported to it and to theIRS.

 

Distributions on our shares to a non-U.S. shareholder during eachcalendar year and the amount of tax withheld, if any, will generally be reportedto the non-U.S. shareholder and to the IRS. This information reportingrequirement applies regardless of whether the non-U.S. shareholder is subjectto withholding on distributions on our shares or whether the withholding wasreduced or eliminated by an applicable tax treaty.  Also, distributions paid to a non-U.S.shareholder on our shares may be subject to backup withholding, unless thenon-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRSForm W-8 or substantially similar form in the 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 an IRS Form W-8or substantially similar form, however, in some cases information reporting andbackup withholding will not apply to proceeds that a non-U.S. shareholderreceives upon the sale, exchange, redemption, retirement or other dispositionof our shares if the non-U.S. shareholder receives those proceeds through abroker’s foreign office.

 

**Other Tax Consequences**

 

Our tax treatment and that of our shareholders may be modified bylegislative, judicial, or administrative actions at any time, which actions maybe retroactive in effect.  The rules dealingwith federal income taxation are constantly under review by the Congress, theIRS and the Treasury Department, and statutory changes, new regulations,revisions to existing regulations, and revised interpretations of establishedconcepts are issued frequently. Likewise, the rules regarding taxes other than federal income taxesmay also be modified.  No prediction canbe made as to the likelihood of passage of new tax legislation or otherprovisions or the direct or indirect effect 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 ourshareholders may also be subject to taxation by state, local or otherjurisdictions, including those in which we or our shareholders transactbusiness or reside.  These taxconsequences may not be comparable to the federal income tax consequencesdiscussed above.

 

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**ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS**

 

**General Fiduciary Obligations**

 

Fiduciaries of a pension, profit-sharing or other employee benefit plansubject to Title I of the Employee Retirement Income Security Act of 1974, asamended, or ERISA, must consider whether:

 

·      their investment in our sharessatisfies the diversification requirements of ERISA;

 

·      the investment is prudent inlight of possible limitations on the marketability of our shares;

 

·      they have authority to acquireour shares under the applicable governing instrument and Title I of ERISA; and

 

·      the investment is otherwise consistentwith their fiduciary responsibilities.

 

Trustees and other fiduciaries of an ERISA plan may incur personalliability for any loss suffered by the plan on account of a violation of theirfiduciary responsibilities.  In addition,these fiduciaries may be subject to a civil penalty of up to 20% of any amountrecovered by the plan on account of a violation. Fiduciaries of any IRA, RothIRA, Keogh Plan or other qualified retirement plan not subject to Title I ofERISA, referred to as “non-ERISA plans,” should consider that a plan may onlymake investments that are authorized by the appropriate governing instrument.

 

Fiduciaries considering an investment in our securities should consulttheir own legal advisors if they have any concern as to whether the investmentis consistent with the foregoing criteria or is otherwise appropriate.  The sale of our securities to a plan is in norespect a representation by us or any underwriter of the securities that theinvestment meets all relevant legal requirements with respect to investments byplans generally or any particular plan, or that the investment is appropriatefor plans generally or any particular plan.

 

**Prohibited Transactions**

 

Fiduciaries of ERISA plans and persons making the investment decisionfor an IRA or other non-ERISA plan should consider the application of theprohibited transaction provisions of ERISA and the IRC in making theirinvestment decision. Sales and other transactions between an ERISA or non-ERISAplan, and persons related to it, are prohibited transactions.  The particular facts concerning thesponsorship, operations and other investments of an ERISA plan or non-ERISAplan may cause a wide range of other persons to be treated as disqualifiedpersons or parties in interest with respect to it.  A prohibited transaction, in addition toimposing potential personal liability upon fiduciaries of ERISA plans, may alsoresult in the imposition of an excise tax under the IRC or a penalty underERISA upon the disqualified person or party in interest with respect to theplan.  If the disqualified person whoengages in the transaction is the individual on behalf of whom an IRA or RothIRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exemptstatus and its assets may be deemed to have been distributed to the individualin a taxable distribution on account of the prohibited transaction, but noexcise tax will be imposed.  Fiduciariesconsidering an investment in our securities should consult their own legaladvisors as to whether the ownership of our securities involves a prohibitedtransaction.

 

**“Plan Assets” Considerations**

 

The Department of Labor, which has administrative responsibility overERISA plans as well as non-ERISA plans, has issued a regulation defining “planassets.” The regulation generally provides that when an ERISA or non-ERISA planacquires a security that is an equity interest in an entity and that securityis neither a “publicly offered security” nor a security issued by an investmentcompany registered under the Investment Company Act of 1940, as amended, theERISA plan’s or non-ERISA plan’s assets include both the equity interest and anundivided interest in each of the underlying assets of the entity, unless it isestablished either that the entity is an operating company or that equityparticipation in the entity by benefit plan investors is not significant.

 

Debt instruments that we issue with any “substantial equity feature”will be treated as an equity interest. However, an example in the applicableregulations concludes that a convertible debt instrument issued by acorporation, apparently on conventional terms, would not be treated as anequity interest because the conversion feature was deemed “incidental” to 

 

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theissuer’s obligation to pay principal and interest. Based on the foregoing, ourcounsel Sullivan & Worcester LLP has opined that, while the matter isnot free from doubt, our 3.80% Convertible Senior Notes due 2027 will not betreated as equity interests under ERISA’s plan assets rules.

 

Each class of our shares (that is, our common shares and any class ofpreferred shares that we have issued ormay issue) must be analyzed separately to ascertain whether it is a publiclyoffered security. The regulation defines a publicly offered security as asecurity that is “widely held,” “freely transferable” and either part of aclass of securities registered under the Exchange Act, or sold under aneffective registration statement under the Securities Act of 1933, as amended,provided the securities are registered under the Exchange Act within 120 daysafter the end of the fiscal year of the issuer during which the offeringoccurred.  Each class of our outstandingshares has been registered under the Exchange Act.

 

The regulation provides that a security is “widely held” only if it ispart of a class of securities that is owned by 100 or more investorsindependent of the issuer and of one another. However, a security will not failto be “widely held” because the number of independent investors falls below 100subsequent to the initial public offering as a result of events beyond theissuer’s control.  Our common shares andour preferred shares have been widely held and we expect our common shares andour preferred shares to continue to be widely held.  We expect the same to be true of anyadditional class of preferred stock that we may issue, but we can give noassurance in that regard.

 

The regulation provides that whether a security is “freely transferable”is a factual question to be determined on the basis of all relevant facts andcircumstances. The regulation further provides that, where a security is partof an offering in which the minimum investment is $10,000 or less, somerestrictions on transfer ordinarily will not, alone or in combination, affect afinding that these securities are freely transferable. The restrictions ontransfer enumerated in the regulation as not affecting that finding include:

 

·      any restriction on or prohibitionagainst any transfer or assignment which would result in a termination orreclassification for federal or state tax purposes, or would otherwise violateany state or federal law or court order;

 

·      any requirement that advancenotice of a transfer or assignment be given to the issuer and any requirementthat either the transferor or transferee, or both, execute documentationsetting forth representations as to compliance with any restrictions ontransfer which are among those enumerated in the regulation as not affectingfree transferability, including those described in the preceding clause of thissentence;

 

·      any administrative procedurewhich establishes an effective date, or an event prior to which a transfer orassignment will not be effective; and

 

·      any limitation or restriction ontransfer or assignment that is not imposed by the issuer or a person acting onbehalf of the issuer.

 

We believe that the restrictions imposed under our declaration of truston the transfer of shares do not result in the failure of our shares to be “freelytransferable.”  Furthermore, we believethat there exist no other facts or circumstances limiting the transferabilityof our shares which are not included among those enumerated as not affectingtheir free transferability under the regulation, and we do not expect or intendto impose 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 eachclass of our shares will be “widely held” and that no other facts andcircumstances exist which restrict transferability of these shares, we havereceived 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.

 

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**Item 1A.Risk Factors**

 

Our business faces manyrisks. The risks described below may not be the only risks we face. Additionalrisks that we do not yet know of, or that we currently think are immaterial,may also impair our business operations or financial results. If any of theevents or circumstances described in the following risks actually occurs, ourbusiness, financial condition or results of operations could suffer and thetrading price of our debt or equity securities could decline. Investors and prospectiveinvestors should consider the following risks and the information containedunder the heading “Warning Concerning Forward-Looking Statements” beforedeciding whether to invest in our securities.

 

**Financialdifficulties at TA could adversely effect us.**

 

Welease all of our travel center properties, which constitute approximately 39%of our investments, to TA.  TA’s totalrevenues for the eight months ended September 30, 2007 were $4.0 billionand its net loss from operations was $42.1 million.  TA’s fuel sales generate low margins; in theeight months ended September 30, 2007, TA generated a gross profit fromfuel sales of $113 million on sales of $3.3 billion.  In addition, during the past few years theprice of fuel has materially increased and fuel supplies have been occasionallydisrupted and made more expensive by natural disasters, wars and acts ofterrorism; these fuel price increases and volatility have increased TA’sworking capital requirements.  Recently,the slowing of the U.S. economy appears to have had an adverse impact upon theU.S. trucking industry from which TA draws customers.  Price increases and volatility in fuel pricesand continued weakness in the U.S. trucking industry may result in futurelosses at TA, including losses in excess of those previously experienced, whichcould jeopardize TA’s ability to pay rent to us.

 

**In the past, events beyond our control, including aneconomic slowdown, the wars in Iraq and Afghanistan and on terrorism, reducedthe financial results experienced in the hotel industry generally and thefinancial performance of our hotels. If these or similar events occur again orcontinue for substantial periods, our operating and financial results may beharmed by declines in average daily room rates or occupancy at our hotels.**

** **

Theterrorist attacks of September 11, 2001 had a dramatic adverse effect onbusiness and leisure travel and on our hotels’ 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 warsin Iraq and Afghanistan and the impact of a recessionary economy, the U.S.hotel industry generally and our hotels specifically experienced significantdeclines in occupancy, revenues and profitability in 2001, 2002 and 2003. Whilethe performance of our hotels has improved, the uncertainty associated withfuture acts of terrorism and the current economic slowdown in the U.S. mayadversely impact business and leisure travel patterns and, accordingly, ourbusiness.

 

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

** **

TAleases all of our travel center properties, which constitute approximately 39%of our investments. In addition, two of our hotel operators, InterContinentaland Marriott, operate approximately 46% and 40%, respectively, of our hotelinvestments. If we were to have a dispute with any of these operators, or ifany of these operators were to fail to provide quality services and amenitiesor to maintain quality brands, our income from these properties may beadversely affected. Further if we were required to replace any of ouroperators, this could result in significant disruptions at the affectedproperties and declines in our profitability and cash flows.

 

**Some of our returns and rents are guaranteed by parententities or affiliates of our tenants or operators, but these guarantees may belimited or the guarantors may be unable to honor their commitments. Othersecurity features in our management agreements and leases may not be sufficientto cover all obligations due to us.**

** **

Eachmanagement agreement or lease that we have entered into includes various termsintended to secure the payments due to us, including some or all of thefollowing: security deposits which we received but do not escrow, subordinationof management fees payable to the operator to some or all of our return or rentand full or limited guarantees from the manager’s or tenant’s parent company.However, the effectiveness of these various security features to provideuninterrupted payments to us is not assured, particularly if the profitabilityof our properties is at a depressed level for an extended period. Also, thesesecurity features may not be sufficient to cover all obligations due to us. Wemay not receive payments under certain of our guarantees because the guarantyamount is exhausted, because the guarantor’s financial condition deterioratesand it is unable to meet its obligations or for some other reason. Under theterms of some of our guarantees, the guarantors may be released if cash flowsfrom the affected properties exceed certain threshold amounts, and suchreleases would be effective even if cash flows subsequently decline.

 

** **

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** **

**We are not permitted to operate our properties and weare dependent on the managers and tenants of our properties.**

** **

Becausefederal income tax laws restrict REITs and their subsidiaries from operatinghotels or travel centers, we do not manage our hotels or our travel centers.Instead, we or our subsidiaries that qualify as TRSs under applicable REITlaws, either retain third party managers to manage our properties pursuant tomanagement agreements or lease our properties to operating companies. Ourincome from our properties may be adversely affected if our managers or tenantsfail to provide quality services and amenities to customers or if they fail tomaintain a quality brand. While we monitor our managers’ and tenants’performances, we have limited recourse under our management agreements andleases if we believe that the managers or tenants are not performingadequately. Failure by our managers or tenants to fully perform the dutiesagreed to in our management agreements and leases could adversely affect ourresults of operations. In addition, our managers or tenants manage, and in somecases own or have invested in, properties that compete with our properties,which may result in conflicts of interest. As a result, our managers or tenantshave in the past made and may in the future make decisions regarding competingproperties that are not or would not be in our best interests.

 

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

** **

Toretain our status as a REIT, we are required to distribute 90% of our taxableincome to shareholders and we generally cannot retain sufficient income fromoperations to repay debts, to invest in our properties or fund our acquisitions.Accordingly, our business and growth strategy depend, in part, upon our abilityto raise additional capital at reasonable costs to repay our debt maturitiesand to fund new investments. We believe we will be able to raise additionaldebt and equity capital at reasonable costs and to refinance our debts at orprior to their maturities, including our $150 million of senior notes due March 1,2008, to maintain our properties and to invest at yields which exceed our costof capital. However, the U.S. capital markets are currently experiencing severeliquidity constraints and 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 as thecurrent restrictive market conditions in the debt capital market. Our businessand growth strategy is not assured and may fail.

 

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

** **

Ourbusiness strategy contemplates additional acquisitions. We cannot assure ourinvestors that we will be able to consummate further acquisitions or thatacquisitions we make will prove to be successful. We might encounterunanticipated difficulties and expenditures relating to any acquiredproperties. Newly acquired properties might require significant managementattention that would otherwise be devoted to our ongoing business. Also,acquisitions of properties may not yield the returns we expect and, if financedusing debt or new equity issuances may result in shareholder dilution.

 

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

** **

Wecompete with pension funds, private equity investors, other REITs, owneroperators and other businesses which are engaged in the acquisition ofhospitality properties. Some of our competitors have greater financialresources and more experienced personnel than we have. These competitors mayaffect the supply/demand dynamics and, accordingly, increase the price we mustpay for properties we seek to acquire. Furthermore, owners of hospitalityproperties who offer them for sale may find our competitors to be moreattractive buyers because they may have greater financial resources, may bewilling to pay more, or may have a more compatible operating philosophy.

 

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**We haverecently learned of litigation against us.**

 

Wehave recently learned that a purported shareholder of TA has commenced aderivative action against TA’s directors which also seeks damages againstus.  This litigation alleges that ourlease to TA of travel centers we acquired when we purchased Petro StoppingCenters Holdings L.P., or Petro, is unfair to TA.  Although we are only beginning to assess ourdefenses to this litigation, we believe this allegation is not true and weexpect to vigorously defend this litigation. Nonetheless, we understand that rulings made in litigation can sometimesproduce unexpected results and litigation can be expensive to conduct.  Accordingly, we can not predict the finalimpact of this litigation on us at this time.

 

**The lossof our tax status as a REIT or tax authority challenges could have significantadverse consequences to us and reduce the market price of our securities.**

 

As a REIT, we generally do notpay federal and state income taxes. However, our continued qualification as aREIT is dependent upon our compliance with complex provisions of the InternalRevenue Code, for which only limited judicial or administrative interpretationsare available. We believe we have operated, and are operating, as a REIT incompliance with the Internal Revenue Code. However, we cannot be certain that,upon review or audit, the IRS will agree with this conclusion. If we cease tobe a REIT, we would violate a covenant in our bank credit facilities, ourability to raise capital could be adversely affected, we may be subject tomaterial amounts of federal and state income taxes and the value of our shareswould likely decline.

 

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

** **

Weintend to continue to pay quarterly distributions to our shareholdersconsistent with our historical practice. However, our ability to paydistributions may be adversely affected if any of the risks described hereinoccur. Our payment of distributions is subject to compliance with restrictionscontained in our revolving credit facility and our debt indenture. All ourdistributions are made at the discretion of our board of trustees and ourfuture distributions will depend upon our earnings, our cash flows, ouranticipated cash flows, our financial condition, maintenance of our REIT taxstatus and such other factors as our board of trustees may deem relevant fromtime to time. There are no assurances of our ability to pay distributions inthe future. In addition, our distributions in the past have included, and mayin the future include, a return of capital.

 

**We may be unable to provide the funding required forthe refurbishment of our properties.**

** **

Someof our management agreements and lease arrangements require us to invest moneyfor refurbishments and capital improvements to our properties.  We may have to invest more than expected inorder to achieve and maintain the competitive position and future financialperformance of our properties. We may not have the necessary funds to invest,and such expenditures, if made, may not be sufficient to maintain thesuccessful financial performance of our properties. Our management agreementsand lease arrangements require us to maintain the properties in a certainrequired condition. If we fail to maintain these required standards, then themanager or tenant may terminate the management or lease agreement and hold usliable for damages we may have caused.

 

**Our business dealings with ourmanaging trustees and affiliated entities may create conflicts of interest.**

We have no employees.Personnel and other services which we require are provided to us undercontracts by our manager, RMR. RMR is beneficially owned by our managingtrustees, Barry Portnoy and Adam Portnoy. Barry Portnoy is Chairman, and AdamPortnoy is President, Chief Executive Officer and a director of RMR. Inaddition, John Murray, our President, Chief Operating Officer and Secretary,Mark Kleifges, our Treasurer and Chief Financial Officer, and Ethan Bornstein,our Senior Vice President, are executive officers of RMR. We pay RMR a feebased in  part upon the  historical cost of our  investments plus  incentive fees based upon increases in ourcash flow, as defined. Any incentive fees are payable through  our issuance of restricted common shares .Our total fees paid to RMR in 2007 were $31.8 million.  Although we do not believe it has done so,our fee arrangement with RMR could encourage RMR to advocate acquisitions anddiscourage sales by us.  RMR also acts asthe manager for two other publicly owned REITs: HRPT Properties Trust, or HRPT,which primarily owns office buildings; and, Senior Housing Properties Trust, orSNH, which primarily owns healthcare properties.  RMR also provides management services to oneof our tenants, TA,  and other public andprivate companies.  These multipleresponsibilities to public companies and other businesses could create competitionamong these companies for the time and efforts of RMR and Messrs. Barry Portnoyand Adam Portnoy.  A termination of ourcontract with RMR is a default under our revolving credit facility unlessapproved by a majority of our lenders. We believe that the quality and depth of management available to us bycontracting with RMR could not be duplicated by our being a self-managedcompany or by our contracting with unrelated third parties, withoutconsiderable cost increases.   We believeour contractual arrangement with our managing trustees and RMR are commerciallyreasonable.  All of our contractualarrangements with RMR have been approved by our independent trustees.

 

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**Ownership limitations and anti-takeover provisions inour declaration of trust, bylaws and rights agreement and under Maryland lawmay prevent our shareholders from receiving a takeover premium.**

** **

Ourdeclaration of trust prohibits any shareholder, other than RMR and theiraffiliates, 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 staggered board of trustees with three separate classes;

 

·                  the two-thirds majority shareholder vote required for removal oftrustees;

 

·                  the ability of our board of trustees to increase, without shareholderapproval, the amount of shares (including common shares) that we are authorizedto issue under our declaration of trust and bylaws, and to issue additionalshares on terms that it determines;

 

·                  advance notice procedures with respect to nominations of trustees andshareholder proposals; and

 

·                  the fact that only the board of trustees may call shareholder meetingsand that shareholders are not entitled to act without a meeting.

 

Wehave a rights agreement whereby, in the event a person or group of personsacquires or attempts to acquire 10% or more of our outstanding common shares,our shareholders, other than such person or group, will be entitled to purchaseadditional shares or other securities or property at a discount. In addition,certain provisions of Maryland law may have an anti-takeover effect. For all ofthese reasons, our shareholders may be unable to realize a change of controlpremium for shares they own.

 

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

** **

Underthe terms of some of our hotel management agreements and leases, we generallymay not sell, lease or otherwise transfer the properties unless the transfereeis not a competitor of the manager and the transferee assumes the relatedmanagement agreements and meets other specified conditions. Our ability tofinance or sell our properties, depending upon the structure of suchtransactions, may require the manager’s consent or the tenant’s consent underour management agreements and leases. If, in these circumstances, the manageror the tenant does not consent, we may be prevented from taking actions whichmight be beneficial to our shareholders.

 

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

** **

Ourbusiness is subject to risks associated with real estate acquisitions andownership, including:

 

·                  increased supply of similar properties inour markets;

 

·                  catastrophic property and casualtylosses, such as losses due to wars, terrorist attacks or natural disasters,some of which may be uninsured;

 

·                  defaults and bankruptcies by our managersor tenants;

 

·                  the illiquid nature of real estatemarkets which impairs our ability to purchase or sell our assets rapidly torespond to changing economic conditions;

 

·                  management agreements or leases which arenot renewed at expiration and may be replaced with management agreements withless favorable terms or relet at lower rents; and

 

·                  costs that may be incurred relating tomaintenance and repair, and the need to make capital expenditures to maintainour properties’ values or due to contractual obligations or changes ingovernmental regulations, including the Americans with Disabilities Act.

 

**Compliancewith environmental laws may be costly.**

 

Acquisition and ownership of real estate is subject torisks associated with environmental hazards. We may be liable for environmental hazards at our properties, includingthose created by prior owners or occupants, existing tenants, abutters or otherpersons. The travel centers we own and that TA leases from us include fuelingareas, truck repair and maintenance facilities and tanks for the storage ofpetroleum products and other hazardous substances, all of which create thepotential for environmental damages. As a result, TA is expected to regularlyincur environmental clean up costs. In the leases that we entered with TA, TAagreed to indemnify us from all environmental liabilities arising at any travelcenter property during the term of the lease. Despite this indemnity, variousfederal and state laws impose environmental liabilities upon property owners,such as us, for any environmental damages arising on properties they own oroccupy, and we cannot be assured that we will not be held liable forenvironmental clean up at our properties, including environmental damages atsites we own and lease to TA. As an owner or previous owner of properties whichcontain environmental hazards, we also may be liable to pay damages togovernmental agencies or third parties for costs and damages they incur arisingfrom environmental hazards at the properties. Moreover, the costs and damageswhich may arise from environmental hazards are often difficult to project andTA may not have sufficient resources to pay its environmental liabilities.

 

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

** **

At December 31,2007, we had $2.6 billion in debt outstanding, which was 48% of our total bookcapitalization. Our note indenture and revolving credit facility permit us andour subsidiaries to incur additional debt, including secured debt. If wedefault in paying any of our debts or honoring our debt covenants, these debtsmay be accelerated and we could be forced to liquidate our assets for less thanthe values we would receive in a more orderly process.

 

**If weissue secured debt or subsidiary debt, such debt will have priority claims oncertain of our assets which are senior to our existing debts.**

 

We conduct substantiallyall of our business through, and substantially all of our properties are ownedby, subsidiaries. Consequently, our ability to pay debt service on our outstandingnotes and any notes we issue in the future will be dependent upon the cash flowof our subsidiaries and payments by those subsidiaries to us as dividends orotherwise. Our subsidiaries are separate legal entities and have their ownliabilities. Payments due on our outstanding notes, and any notes we may issue,are, or will be, effectively subordinated to liabilities of our subsidiaries,including guaranty liabilities. Substantially all of our subsidiaries haveguaranteed our revolving credit facility; none of our subsidiaries guaranty ouroutstanding notes. In addition, at December 31, 2007, one of oursubsidiaries has $3.6 million of secured 

 

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debt. Our outstandingnotes are, and any notes we may issue will be, also effectively subordinated toour secured debt with regard to our assets pledged to secure those debts.

 

**Ournotes may permit redemption before maturity, and our noteholders may be unableto reinvest proceeds at the same or a higher rate.**

 

The terms of our notesmay permit us to redeem all or a portion of our outstanding notes after acertain amount of time, or up to a certain percentage of the notes prior tocertain dates. Generally, the redemption price will equal the principal amountbeing redeemed, plus accrued interest to the redemption date, plus anyapplicable premium. If a redemption occurs, our noteholders may be unable toreinvest the money they receive in the redemption at a rate that is equal to orhigher than the rate of return on the applicable notes.

 

**Theremay be no public market for notes we may issue and one may not develop.**

 

Generally, any notes wemay issue will be a new issue for which no trading market currently exists. Wemay not list our notes on any securities exchange or seek approval for pricequotations to be made available through any automated quotation system. Thereis no assurance that an active trading market for any of our notes will existin the future. Even if a market does develop, the liquidity of the trading marketfor any of our notes and the market price quoted for any such notes may beadversely affected by changes in the overall market for fixed incomesecurities, by changes in our financial performance or prospects, or by changesin the prospects for REITs or for the hospitality industries generally.

 

**We may not have the cashnecessary to pay the principal return and any net amount upon the conversion ofour convertible notes or to repurchase the convertible notes on specified datesor following certain change in control transactions.**

 

We have $575 million ofconvertible notes outstanding at this time. Upon a conversion of notes in accordance with their terms, we will berequired to pay the principal return of these notes in cash.  Furthermore, there may be circumstances thatprevent the issuance of our common shares for all or any portion of any netamount deliverable upon the conversion of notes, thereby requiring us tosatisfy our net amount obligation in cash. Holders of notes also have the right to require us to repurchase thenotes for cash on March 20, 2012, March 15, 2017 and March 15,2022 or upon the occurrence of certain change in control transactions prior to March 20,2012.  Some of our future debt agreementsor securities may contain similar provisions. We may not have sufficient funds to pay the principal return and anysuch net cash amount or make the required repurchase of notes, as the case maybe, in cash at the applicable time; and, in such circumstances, we may not beable to arrange the necessary financing on favorable terms.  In addition, our ability to pay the principalreturn and any such net cash amount or make the required repurchase, as thecase may be, may be limited by law or the terms of other debt agreements orsecurities.  Moreover, our failure to paythe principal return and any such net cash amount or make the requiredrepurchase, as the case may be, would constitute an event of default under theindenture governing the notes which, in turn, would constitute an event of defaultunder other debt agreements or securities, thereby resulting in theiracceleration and required prepayment and further restricting our ability tomake such payments and repurchases.

 

**An increase in interest rates would increase our interestcosts on variable rate debt and could adversely impact our ability to refinanceexisting debt or sell assets. Also, interest rate changes often affect thevalue of dividend paying securities.**

 

Our revolving creditfacility requires interest at variable rates and matures in October 2010.At December 31, 2007, we had an outstanding balance of $158 million and$592 million available for drawing under our revolving credit facility. As weuse this facility, if market interest rates increase, so will our interestcosts, which could adversely affect our cash flow and our ability to payprincipal and interest on our debt and our ability to make distributions to ourshareholders. Further, rising interest rates may raise our cost to refinanceexisting debt when it matures. In addition, an increase in interest rates coulddecrease the amount buyers may be willing to pay for our properties, therebylimiting our ability to sell properties, to raise capital or realize gains.

 

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Wepay regular dividends to our common and preferred shareholders. When interestrates available to investors rise, the trading market price of dividend payingsecurities often decline. If interest rates rise, the value of your ownershipof our securities may decline.

 

**Item 1B. Unresolved Staff Comments**

** **

**None.**

 

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**Item 2. Properties**

** **

At December 31, 2007, weowned 292 hotels and 185 travel centers. The following table summarizes certaininformation about our properties as of December 31, 2007.

 
| **Location of  Properties** | ** ** | **Number  of  Hotels** | ** ** | **Undepreciated  Carrying  Value** | ** ** | **Depreciated  Carrying  Value** | ** ** | **Number  of  Travel  Centers** | ** ** | **Undepreciated  Carrying  Value** | ** ** | **Depreciated  Carrying  Value** | ** ** | **Total  Properties** | ** ** | **Total  Undepreciated  Carrying  Value** | ** ** | **Total  Depreciated  Carrying  Value** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
|                             |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
| United States                    |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
|                             |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
| Alabama                          |       | 4                      |       | $                                  | 33,994     |                             | $          | 25,237                          |       | 4                                  |       | $                                | 50,807     |                  | $          | 49,378                                    |       | 8                                       |       | $ | 84,801 |   | $ | 74,615 |   |
| Arizona                          |       | 14                     |       | 153,831                            |       | 117,075                          |       | 6                               |       | 121,480                            |       | 118,364                          |       | 20                    |       | 275,311                                   |       | 235,439                                 |       |
| Arkansas                         |       | —                 |       | —                             |       | —                           |       | 4                               |       | 81,058                             |       | 75,854                           |       | 4                     |       | 81,058                                    |       | 75,854                                  |       |
| California                       |       | 34                     |       | 591,070                            |       | 486,814                          |       | 9                               |       | 137,723                            |       | 135,753                          |       | 43                    |       | 728,793                                   |       | 622,567                                 |       |
| Colorado                         |       | 4                      |       | 38,692                             |       | 30,989                           |       | 3                               |       | 25,220                             |       | 24,328                           |       | 7                     |       | 63,912                                    |       | 55,317                                  |       |
| Connecticut                      |       | 1                      |       | 7,788                              |       | 6,565                            |       | 3                               |       | 24,670                             |       | 23,523                           |       | 4                     |       | 32,458                                    |       | 30,088                                  |       |
| Delaware                         |       | 1                      |       | 15,456                             |       | 11,263                           |       | —                          |       | —                             |       | —                           |       | 1                     |       | 15,456                                    |       | 11,263                                  |       |
| Florida                          |       | 12                     |       | 163,957                            |       | 130,290                          |       | 7                               |       | 103,977                            |       | 102,027                          |       | 19                    |       | 267,934                                   |       | 232,317                                 |       |
| Georgia                          |       | 20                     |       | 261,091                            |       | 213,010                          |       | 9                               |       | 92,560                             |       | 89,230                           |       | 29                    |       | 353,651                                   |       | 302,240                                 |       |
| Hawaii                           |       | 1                      |       | 59,673                             |       | 47,050                           |       | —                          |       | —                             |       | —                           |       | 1                     |       | 59,673                                    |       | 47,050                                  |       |
| Idaho                            |       | —                 |       | —                             |       | —                           |       | 1                               |       | 13,862                             |       | 13,557                           |       | 1                     |       | 13,862                                    |       | 13,557                                  |       |
| Illinois                         |       | 14                     |       | 162,406                            |       | 127,335                          |       | 7                               |       | 48,241                             |       | 46,935                           |       | 21                    |       | 210,647                                   |       | 174,270                                 |       |
| Indiana                          |       | 3                      |       | 35,910                             |       | 29,154                           |       | 7                               |       | 48,585                             |       | 45,098                           |       | 10                    |       | 84,495                                    |       | 74,252                                  |       |
| Iowa                             |       | 2                      |       | 16,014                             |       | 11,565                           |       | 1                               |       | 7,252                              |       | 7,061                            |       | 3                     |       | 23,266                                    |       | 18,626                                  |       |
| Kansas                           |       | 4                      |       | 28,438                             |       | 22,948                           |       | —                          |       | —                             |       | —                           |       | 4                     |       | 28,438                                    |       | 22,948                                  |       |
| Kentucky                         |       | 1                      |       | 5,096                              |       | 3,906                            |       | 3                               |       | 37,827                             |       | 36,775                           |       | 4                     |       | 42,923                                    |       | 40,681                                  |       |
| Louisiana                        |       | 1                      |       | 28,209                             |       | 22,358                           |       | 6                               |       | 92,123                             |       | 89,928                           |       | 7                     |       | 120,332                                   |       | 112,286                                 |       |
| Maryland                         |       | 7                      |       | 153,384                            |       | 131,989                          |       | 3                               |       | 41,332                             |       | 40,509                           |       | 10                    |       | 194,716                                   |       | 172,498                                 |       |
| Massachusetts                    |       | 13                     |       | 159,544                            |       | 125,370                          |       | —                          |       | —                             |       | —                           |       | 13                    |       | 159,544                                   |       | 125,370                                 |       |
| Michigan                         |       | 12                     |       | 110,808                            |       | 91,310                           |       | 4                               |       | 24,239                             |       | 23,625                           |       | 16                    |       | 135,047                                   |       | 114,935                                 |       |
| Minnesota                        |       | 4                      |       | 37,315                             |       | 29,330                           |       | 1                               |       | 3,377                              |       | 3,314                            |       | 5                     |       | 40,692                                    |       | 32,644                                  |       |
| Mississippi                      |       | —                 |       | —                             |       | —                           |       | 1                               |       | 20,665                             |       | 19,932                           |       | 1                     |       | 20,665                                    |       | 19,932                                  |       |
| Missouri                         |       | 6                      |       | 90,569                             |       | 61,721                           |       | 5                               |       | 45,542                             |       | 44,127                           |       | 11                    |       | 136,111                                   |       | 105,848                                 |       |
| Nebraska                         |       | 1                      |       | 6,495                              |       | 4,795                            |       | 3                               |       | 33,780                             |       | 32,703                           |       | 4                     |       | 40,275                                    |       | 37,498                                  |       |
| Nevada                           |       | 3                      |       | 45,612                             |       | 36,411                           |       | 5                               |       | 86,914                             |       | 85,646                           |       | 8                     |       | 132,526                                   |       | 122,057                                 |       |
| New Hampshire                    |       | —                 |       | —                             |       | —                           |       | 1                               |       | 3,968                              |       | 3,491                            |       | 1                     |       | 3,968                                     |       | 3,491                                   |       |
| New Jersey                       |       | 12                     |       | 184,687                            |       | 149,394                          |       | 4                               |       | 92,515                             |       | 90,379                           |       | 16                    |       | 277,202                                   |       | 239,773                                 |       |
| New Mexico                       |       | 2                      |       | 21,977                             |       | 16,229                           |       | 6                               |       | 78,270                             |       | 75,352                           |       | 8                     |       | 100,247                                   |       | 91,581                                  |       |
| New York                         |       | 5                      |       | 96,822                             |       | 79,677                           |       | 6                               |       | 19,115                             |       | 16,979                           |       | 11                    |       | 115,937                                   |       | 96,656                                  |       |
| North Carolina                   |       | 13                     |       | 119,672                            |       | 94,031                           |       | 3                               |       | 30,538                             |       | 29,758                           |       | 16                    |       | 150,210                                   |       | 123,789                                 |       |
| Ohio                             |       | 5                      |       | 42,770                             |       | 33,486                           |       | 14                              |       | 140,140                            |       | 136,318                          |       | 19                    |       | 182,910                                   |       | 169,804                                 |       |
| Oklahoma                         |       | 2                      |       | 16,994                             |       | 13,050                           |       | 4                               |       | 31,324                             |       | 29,733                           |       | 6                     |       | 48,318                                    |       | 42,783                                  |       |
| Oregon                           |       | —                 |       | —                             |       | —                           |       | 3                               |       | 35,105                             |       | 34,356                           |       | 3                     |       | 35,105                                    |       | 34,356                                  |       |
| Pennsylvania                     |       | 10                     |       | 156,832                            |       | 126,609                          |       | 9                               |       | 103,321                            |       | 100,593                          |       | 19                    |       | 260,153                                   |       | 227,202                                 |       |
| Rhode Island                     |       | 1                      |       | 12,417                             |       | 8,637                            |       | —                          |       | —                             |       | —                           |       | 1                     |       | 12,417                                    |       | 8,637                                   |       |
| South Carolina                   |       | 4                      |       | 55,702                             |       | 47,272                           |       | 2                               |       | 22,528                             |       | 21,764                           |       | 6                     |       | 78,230                                    |       | 69,036                                  |       |
| Tennessee                        |       | 9                      |       | 131,321                            |       | 99,001                           |       | 8                               |       | 73,460                             |       | 71,876                           |       | 17                    |       | 204,781                                   |       | 170,877                                 |       |
| Texas                            |       | 35                     |       | 424,622                            |       | 349,802                          |       | 17                              |       | 313,165                            |       | 303,789                          |       | 52                    |       | 737,787                                   |       | 653,591                                 |       |
| Utah                             |       | 3                      |       | 62,242                             |       | 46,736                           |       | 2                               |       | 15,318                             |       | 14,726                           |       | 5                     |       | 77,560                                    |       | 61,462                                  |       |
| Virginia                         |       | 15                     |       | 165,060                            |       | 125,652                          |       | 4                               |       | 46,442                             |       | 45,174                           |       | 19                    |       | 211,502                                   |       | 170,826                                 |       |
| Washington                       |       | 6                      |       | 83,649                             |       | 63,358                           |       | 2                               |       | 3,476                              |       | 3,202                            |       | 8                     |       | 87,125                                    |       | 66,560                                  |       |
| West Virginia                    |       | 1                      |       | 8,578                              |       | 6,916                            |       | 2                               |       | 6,815                              |       | 6,591                            |       | 3                     |       | 15,393                                    |       | 13,507                                  |       |
| Wisconsin                        |       | 1                      |       | 10,305                             |       | 7,409                            |       | 2                               |       | 11,541                             |       | 11,154                           |       | 3                     |       | 21,846                                    |       | 18,563                                  |       |
| Wyoming                          |       | —                 |       | —                             |       | —                           |       | 4                               |       | 55,146                             |       | 53,306                           |       | 4                     |       | 55,146                                    |       | 53,306                                  |       |
|                             |       | 286                    |       | 3,799,002                          |       | 3,033,744                        |       | 185                             |       | 2,223,421                          |       | 2,156,208                        |       | 471                   |       | 6,022,423                                 |       | 5,189,952                               |       |
|                             |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
| Other                            |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
| Ontario, Canada                  |       | 2                      |       | 39,117                             |       | 34,532                           |       | —                          |       | —                             |       | —                           |       | 2                     |       | 39,117                                    |       | 34,532                                  |       |
| Puerto Rico                      |       | 1                      |       | 134,691                            |       | 122,277                          |       | —                          |       | —                             |       | —                           |       | 1                     |       | 134,691                                   |       | 122,277                                 |       |
|                             |       | 3                      |       | 173,808                            |       | 156,809                          |       | —                          |       | —                             |       | —                           |       | 3                     |       | 173,808                                   |       | 156,809                                 |       |
|                             |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
| Held for sale                    |       |                   |       |                               |       |                             |       |                            |       |                               |       |                             |       |                  |       |                                      |       |                                    |       |
| Arizona                          |       | 1                      |       | 9,338                              |       | 6,951                            |       | —                          |       | —                             |       | —                           |       | 1                     |       | 9,338                                     |       | 6,951                                   |       |
| Florida                          |       | 1                      |       | 4,437                              |       | 3,431                            |       | —                          |       | —                             |       | —                           |       | 1                     |       | 4,437                                     |       | 3,431                                   |       |
| N. Carolina                      |       | 1                      |       | 8,208                              |       | 6,716                            |       | —                          |       | —                             |       | —                           |       | 1                     |       | 8,208                                     |       | 6,716                                   |       |
| Total                            |       | 292                    |       | $                                  | 3,994,793  |                             | $          | 3,207,651                       |       | 185                                |       | $                                | 2,223,421  |                  | $          | 2,156,208                                 |       | 477                                     |       | $ | 6,218,214 |   | $ | 5,363,859 |   |
|                                  |            |                        |            |                                    |            |                                  |            |                                 |            |                                    |            |                                  |            |                       |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

37

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At December 31,2007, 14 of our hotels were on leased land. The average remaining term of the ground leases (including renewaloptions) is in excess of 50 years; the ground lessors are unrelated to us.Ground rent payable under nine of the ground leases is generally calculated asa percentage of hotel revenues. Twelve of the 14 ground leases require minimumannual rents ranging from approximately $102,406 to $556,400 per year; futurerents under two ground leases have been pre-paid. Generally payments of groundlease obligations are made by our hotel managers or tenants. However, if amanager or tenant did not perform obligations under a ground lease or electednot to renew any ground lease, we might have to perform obligations under theground lease or renew the ground lease in order to protect our investment inthe affected property. Any pledge of our interests in a ground lease mayrequire the consent of the applicable ground lessor and its lenders.

 

At December 31,2007, 26 of our travel centers were on land leased partially or in itsentirety.  The average remaining term ofthe ground leases (including renewal options) is 20 years, and the groundlessors are unrelated to us. Ground rent payable under the ground leases isgenerally a fixed amount, averaging $375,397. Payments of these travel centers ground lease obligations are made by ourtenants. However, if our tenants did not perform obligations under a groundlease or elected not to renew any ground lease, we might have to performobligations under the ground lease or renew the ground lease in order toprotect our investment in the affected property. Any pledge of our interests ina ground lease may require the consent of the applicable ground lessor and itslenders.

 

38

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**Item 3. Legal Proceedings**

 

**We are aware of acomplaint filed in the Delaware Court of Chancery on February 1, 2008which purports to be a derivative action against TA’s directors, us andRMR.  This complaint appears to allegethat our lease of Petro travel centers to TA is unfair to TA.  We are only beginning to assess our defensesto this litigation.  However, we believethe underlying premises of this litigation about the Petro lease are not true,and we expect to vigorously defend this litigation.  At this time, we do not believe thislitigation is likely to have a material adverse impact upon us.**

** **

In the ordinarycourse of business we are involved in litigation incidental to our business;however we are not aware of any material pending or threatened legal proceedingaffecting us or any of our properties for which we might become liable or theoutcome of which we expect to have a material impact on us.

 

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

** **

None.

 

39

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**PART II**

** **

**Item 5. Market for the Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

** **

Our commonshares are traded on the New York Stock Exchange, or the NYSE (symbol: HPT).The following table sets forth for the periods indicated the high and low saleprices for our common shares as reported in the NYSE Composite Transactionsreports:

 
| **2006**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 46.47      |    | $          | 39.32 |   |
| Second Quarter |       | 44.10    |       | 40.08   |       |
| Third Quarter  |       | 48.00    |       | 42.50   |       |
| Fourth Quarter |       | 51.46    |       | 46.65   |       |
|                |            |          |            |         |            |  |  |

 
| **2007**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 49.00      |    | $          | 37.52 |   |
| Second Quarter |       | 47.88    |       | 40.75   |       |
| Third Quarter  |       | 44.30    |       | 36.00   |       |
| Fourth Quarter |       | 43.18    |       | 32.02   |       |
|                |            |          |            |         |            |  |  |

 

The closingprice of our common shares on the NYSE on February 27, 2008, was $36.09per share.

 

As of February 27,2008, there were 946 shareholders of record, and we estimate that as of suchdate there were in excess of 78,600 beneficial owners of our common shares.

 

Informationabout cash distributions paid to common shareholders is summarized in the tablebelow. Common share distributions are generally paid in the quarter followingthe quarter to which they relate.

 
| ** **     | ** ** | **Distributions**              | ** ** |
|----------------|------------|--------------------------------|------------|
| ** **     | ** ** | **Per Common Share** | ** ** |
| ** **     | ** ** | **2006**                       | ** ** | **2007** | ** ** |
| First Quarter  |       | $                              | 0.73       |   | $ | 0.76 |   |
| Second Quarter |       | 0.74                           |       | 0.76 |   |
| Third Quarter  |       | 0.74                           |       | 0.77 |   |
| Fourth Quarter |       | 0.74                           |       | 0.77 |   |
| Total          |       | $                              |  2.95 |   | $ |  3.06 |   |

 

All commonshare distributions shown in the table above have been paid. We currentlyintend to continue to declare and pay common share distributions on a quarterlybasis. However, distributions are made at the discretion of our board oftrustees and depend on our earnings, cash available for distribution, financialcondition, capital market conditions, growth prospects and other factors whichour board of trustees deems relevant.

 

In addition tothe cash distributions paid to common shareholders in 2007, we distributed allof the shares of our former subsidiary, TA, to our common shareholders on January 31,2007.  One share of TA was distributed toour common shareholders with respect to every 10 of our shares owned; and thisresulted in a taxable valuation of this in kind distribution of $3.234 for eachof our shares.

 

We issuedunregistered shares during the fourth quarter as follows: on December 12,2007, we made share grants pursuant to our incentive share award plans tocertain employees of our manager, RMR, totaling 2,450 common shares ofbeneficial interest, par value $0.01 per share, valued at $35.50 per share, theclosing price of our common shares on the NYSE on that day. All of these grantswere made pursuant to an exemption from registration contained in section 4(2) ofthe Securities Act.

 

40

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** **

**Item 6. Selected Financial Data**

** **

The following table sets forth selected financial data for the periodsand dates indicated. Comparative results are affected by property acquisitionsand dispositions during the periods shown. This data should be read inconjunction with, and is qualified in its entirety by reference to, management’sdiscussion and analysis of financial condition and results of operations andthe consolidated financial statements and accompanying notes included elsewherein this Annual Report on Form 10-K.

 
| ** **                                                                |       | **Year  Ended December 31,**          |       |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** |   |
| ** **                                                                |       | **(In  thousands, except per share data)** |       |
| **Income  Statement Data:**                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Hotel operating revenues                                                  |       | $                                          | 941,455    |   | $ | 879,324 |   | $ | 682,541 |   | $ | 498,122 |   | $ | 209,299 |   |
| Rental income                                                             |       | 316,819                                    |       | 120,649 |   | 114,332 |   | 112,325 |   | 201,197 |   |
| FF&E reserve income                                                   |       | 22,286                                     |       | 20,299 |   | 19,767 |   | 18,147 |   | 18,000 |   |
| Interest income                                                           |       | 4,919                                      |       | 2,674 |   | 1,373 |   | 627 |   | 733 |   |
| Gain on lease terminations                                                |       | —                                     |       | — |   | — |   | — |   | 107,516 |   |
| Total revenues                                                            |       | 1,285,479                                  |       | 1,022,946 |   | 818,013 |   | 629,221 |   | 536,745 |   |
| Expenses:                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Hotel operating expenses                                                  |       | 657,000                                    |       | 618,334 |   | 476,858 |   | 333,818 |   | 145,863 |   |
| Interest                                                                  |       | 140,517                                    |       | 81,451 |   | 65,263 |   | 50,393 |   | 44,536 |   |
| Depreciation and amortization                                             |       | 216,688                                    |       | 141,198 |   | 127,242 |   | 110,333 |   | 100,257 |   |
| General and administrative                                                |       | 37,223                                     |       | 25,090 |   | 22,514 |   | 18,659 |   | 16,075 |   |
| Loss on early extinguishment of debt                                      |       | —                                     |       | — |   | — |   | — |   | 2,582 |   |
| Loss on asset impairment                                                  |       | 1,332                                      |       | — |   | 7,300 |   | — |   | — |   |
| TA spin off costs                                                         |       | 2,711                                      |       | — |   | — |   | — |   | — |   |
| Total expenses                                                            |       | 1,055,471                                  |       | 866,073 |   | 699,177 |   | 513,203 |   | 309,313 |   |
| Income before income taxes                                                |       | 230,008                                    |       | 156,873 |   | 118,836 |   | 116,018 |   | 227,432 |   |
| Income tax expense                                                        |       | (2,191                                     | )          | (372 | ) | (57 | ) | — |   | — |   |
| Income before gain on sale of real estate and  discontinued operations    |       | 227,817                                    |       | 156,501 |   | 118,779 |   | 116,018 |   | 227,432 |   |
| Gain on sale of real estate                                               |       | —                                     |       | — |   | — |   | 203 |   | — |   |
| Income from continuing operations                                         |       | 227,817                                    |       | 156,501 |   | 118,779 |   | 116,221 |   | 227,432 |   |
| Discontinued operations:                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Income from discontinued operations                                       |       | 7,440                                      |       | 12,538 |   | 11,124 |   | 10,870 |   | 10,781 |   |
| Gain on sale of real estate used by discontinued  operations              |       | 95,711                                     |       | — |   | — |   | — |   | — |   |
| Net income                                                                |       | 330,968                                    |       | 169,039 |   | 129,903 |   | 127,091 |   | 238,213 |   |
| Preferred distributions                                                   |       | 26,769                                     |       | 7,656 |   | 7,656 |   | 9,674 |   | 14,780 |   |
| Excess of liquidation preference over carrying  value of preferred shares |       | —                                     |       | — |   | — |   | 2,793 |   | — |   |
| Net income available for common  shareholders                             |       | $                                          | 304,199    |   | $ | 161,383 |   | $ | 122,247 |   | $ | 114,624 |   | $ | 223,433 |   |
| Common distributions declared                                             |       | $                                          | 287,272    |   | $ | 225,927 |   | $ | 205,162 |   | $ | 193,523 |   | $ | 180,242 |   |
| Weighted average common shares outstanding                                |       | 93,109                                     |       | 73,279 |   | 69,866 |   | 66,503 |   | 62,576 |   |
| ** **                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Per  Common Share Data:**                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Income from continuing operations available  for common shareholders      |       | $                                          | 2.16       |   | $ | 2.03 |   | $ | 1.59 |   | $ | 1.56 |   | $ | 3.40 |   |
| Income from discontinued operations available  for common shareholders    |       | $                                          | 1.11       |   | $ | 0.17 |   | $ | 0.16 |   | $ | 0.16 |   | $ | 0.17 |   |
| Net income available for common  shareholders                             |       | $                                          | 3.27       |   | $ | 2.20 |   | $ | 1.75 |   | $ | 1.72 |   | $ | 3.57 |   |
| Distributions per common share                                            |       | $                                          | 3.06       |   | $ | 2.95 |   | $ | 2.90 |   | $ | 2.88 |   | $ | 2.88 |   |
|                                                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data (as of December 31):**                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Real estate properties, at cost                                           |       | $                                          | 6,196,231  |   | $ | 4,018,781 |   | $ | 3,606,404 |   | $ | 3,161,259 |   | $ | 3,160,675 |   |
| Real estate properties, net                                               |       | 5,346,761                                  |       | 3,316,268 |   | 2,997,605 |   | 2,608,019 |   | 2,668,982 |   |
| Total assets                                                              |       | 5,679,307                                  |       | 3,957,463 |   | 3,114,607 |   | 2,689,425 |   | 2,761,601 |   |
| Debt, net of discount                                                     |       | 2,579,391                                  |       | 1,199,830 |   | 960,372 |   | 697,505 |   | 826,126 |   |
| Shareholders’ equity                                                 |       | 2,786,434                                  |       | 2,447,540 |   | 1,855,455 |   | 1,685,873 |   | 1,645,528 |   |

 

 

41

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** **

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

** **

**Overview**

** **

The followinginformation should be read in conjunction with our consolidated financialstatements and accompanying notes included in this Annual Report on Form 10-K.

 

**2007 Developments**

** **

On January 31, 2007, wecompleted our acquisition of TravelCenters of America, Inc., orTravelCenters, pursuant to the Agreement and Plan of Merger dated as of September 15,2006, as amended, among TravelCenters, us, one of our former subsidiaries andthe stockholders of TravelCenters. Upon completion of the acquisition, werestructured the business of TravelCenters and distributed all of the commonshares of our former subsidiary, or TA, to our shareholders in a spin off transaction. Theacquisition of TravelCenters, the restructuring of the TravelCenters businessand the spin off transaction are collectively referred to herein as the TATransaction.

 

As a part of the restructuring of TravelCenters whichoccurred in connection with the TA Transaction, on January 31, 2007:

 
| · |   | TravelCenters  became a subsidiary of our subsidiary, TA;                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| · |   | certain real property interests of 146 travel centers  that were operated by TravelCenters and certain other assets used in  connection with the travel center business with an estimated total value of  $1,697,221 were transferred to subsidiaries of ours that were not owned by  TA;                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| · |   | TA became the owner of all of the working capital of  TravelCenters, including current assets (primarily consisting of cash,  receivables and inventory) and current liabilities (primarily consisting of  trade payables and accrued liabilities);                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| · |   | we contributed cash of $121,166 to TA so that the sum  of its current assets, net of current liabilities, was $200,000;                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| · |   | TA became the owner of one travel center in Ontario,  Canada, the operator of two travel centers leased from owners other than us,  the manager of one travel center for an owner other than us, the franchisor  of 13 travel centers owned and operated by third parties and the owner of  certain other assets historically owned and used by TravelCenters; |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| · |   | we entered into a lease of the 146 travel centers we  acquired (one travel center was subsequently disposed of) and certain related  assets to TA; and                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| · |   | TA commenced operating the travel center business  formerly conducted by TravelCenters.                                                                                                                                                                                                                                                                        |

 

Afterthis restructuring, on January 31, 2007, we distributed all of the sharesof TA to our common shareholders of record on January 26, 2007. The bookvalue of this distribution was $337,250. Shareholders were entitled to receiveone TA common share for every ten of our common shares owned on the recorddate. Fractional shares were issued as necessary. TA’s common shares are listedon the American Stock Exchange under the symbol “TA”. We expensed $2,711 ofcosts in connection with the spin off transaction.

 

Ourlease with TA is a “triple net” lease, which requires TA to pay all costsincurred in the operation of the leased travel centers, including personnel,utilities, inventories, services to customers, insurance, real estate andpersonal property taxes and ground lease payments, if any. The annual minimumrent due to us under this agreement is scheduled to increase to $158,962 in2008, $162,625 in 2009, $166,638 in 2010, $171,613 in 2011 and $176,620 in2012.  The annual straight line rentcurrently reported by us under Generally Accepted Accounting Principle, orGAAP, is $171,389. Starting in 2012, the lease requires TA to pay us certainpercentages of increases in gross revenues at the leased travel centers. Wehave agreed to provide up to $125,000 of funding during the first five years ofthe lease for certain specified improvements to the leased travel centers. Thisfunding may be drawn by TA from us in subsequent years until December 2015.There will not be any adjustment in our minimum rent as we fund these amounts.All improvements funded by us will be owned by us. As of December 31,2007, we have funded $25,000 under this agreement. TA is required to maintain,at its expense, the leased travel centers in good order and repair, 

 

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includingstructural and non-structural components, but may request that we fund amountsin addition to the $125,000, in return for minimum annual rent increases equalto a percentage of the amount we fund. Our lease agreement with TA expires on December 31,2022.

 

OnMay 30, 2007, we acquired Petro for approximately $630,000 plus certaincosts. Petro owns 40 travel centers located in 25 states. In connection withour acquisition of Petro, we acquired certain Petro properties which securedebt that was previously issued by Petro Stopping Centers, L.P., or PetroCenters, a former subsidiary of Petro acquired by TA on May 30, 2007. Uponclosing of our acquisition of Petro, the Petro Centers debt assumed by TA wascovenant defeased and funds were escrowed by TA at closing and used to redeemthe Petro Centers debt on February 15, 2008. We agreed to pay certaincosts associated with our acquisition of Petro, including those relating to thedefeasance and prepayment of the Petro Centers debt, and customary closingcosts, which totaled approximately $25,000. We funded the purchase price andcosts by borrowing under our revolving credit facility. Simultaneous with ouracquisition of Petro, we leased the 40 travel centers which Petro owned to TAfor an initial minimum rent of $62,225 per year. Starting in 2013, the leaserequires TA to pay us additional rent calculated as certain percentages ofincreases in gross revenues at the leased travel centers. This lease agreementwith TA expires on June 30, 2024, and TA has two renewal options of 15years each exercisable for all, but not less than all, of these 40 leasedtravel centers.

 

On July 26,2007, we sold 18 Homestead Studio Suites hotels for $205,350 and recognized again on sale of $95,711. Seventeen of these hotels were sold to an unrelatedparty. One hotel was purchased by a subsidiary of HRPT, a publicly traded realestate investment trust that is our former parent company, and which is managedby RMR, which is also our manager. We used the net proceeds from these sales,totaling $189,309 after the refund of a $15,960 security deposit and payment ofclosing costs, to reduce amounts outstanding under our revolving creditfacility.

 

**ManagementAgreements and Leases**

 

At December 31,2007, each of our 292 hotels is included in one of ten combinations of hotelsof which 201 are leased to one of our wholly owned taxable REIT subsidiaries,or TRSs, and managed by an independent hotel operating company and 91 areleased to third parties.  Our 185 travelcenters are leased to TA under two agreements. Our consolidated statement of income includes operating revenues andexpenses of our managed hotels and rental income from our leased hotels andtravel centers. Additional information regarding the terms of our managementagreements and leases is included in the table on pages 56 and 57.

 

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

** **

**Year Ended December 31, 2007 Compared to Year Ended December 31,2006**

 
| ** **                                                                              | ** ** | **For the year ended December 31,**                    | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** | **Increase   (Decrease)** | ** ** | **% Increase   (Decrease)** | ** ** |
| ** **                                                                              | ** ** | **(amounts in dollars, except number of shares)** | ** ** | ** ** | ** ** |
| Revenues:                                                                               |       |                                                                            |       |   |   |   |   |   |   |
| Hotel operating revenues                                                                |       | $                                                                               | 941,455    |   | $ | 879,324 |   | $ | 62,131 |   | 7.1 | % |
| Rental income:                                                                          |       |                                                                            |       |   |   |   |   |   |   |
| Minimum rents - hotels                                                                  |       | 117,193                                                                         |       | 115,461 |   | 1,732 |   | 1.5 | % |
| Minimum rents - travel centers                                                          |       | 193,571                                                                         |       | — |   | 193,571 |   | — |   |
|                                                                                    |       | 310,764                                                                         |       | 115,461 |   | 195,303 |   | 169.2 | % |
| Percentage rent - hotels                                                                |       | 6,055                                                                           |       | 5,188 |   | 867 |   | 16.7 | % |
| Total rental income                                                                     |       | 316,819                                                                         |       | 120,649 |   | 196,170 |   | 162.6 | % |
| FF&E reserve income - hotels                                                        |       | 22,286                                                                          |       | 20,299 |   | 1,987 |   | 9.8 | % |
| Interest income                                                                         |       | 4,919                                                                           |       | 2,674 |   | 2,245 |   | 84.0 | % |
|                                                                                    |       |                                                                            |       |   |   |   |   |   |   |
| Expenses:                                                                               |       |                                                                            |       |   |   |   |   |   |   |
| Hotel operating expenses                                                                |       | 657,000                                                                         |       | 618,334 |   | 38,666 |   | 6.3 | % |
| Interest expense                                                                        |       | 140,517                                                                         |       | 81,451 |   | 59,066 |   | 72.5 | % |
| Depreciation and amortization - hotels                                                  |       | 147,401                                                                         |       | 141,198 |   | 6,203 |   | 4.4 | % |
| Depreciation and amortization - travel  centers                                         |       | 69,287                                                                          |       | — |   | 69,287 |   | — |   |
| Total depreciation and amortization                                                     |       | 216,688                                                                         |       | 141,198 |   | 75,490 |   | 53.5 | % |
| General and administrative                                                              |       | 37,223                                                                          |       | 25,090 |   | 12,133 |   | 48.4 | % |
| TA spin off costs                                                                       |       | 2,711                                                                           |       | — |   | 2,711 |   | — |   |
| Loss on asset impairment                                                                |       | 1,332                                                                           |       | — |   | 1,332 |   | — |   |
| Income tax expense                                                                      |       | 2,191                                                                           |       | 372 |   | 1,819 |   | 489.0 | % |
|                                                                                    |       |                                                                            |       |   |   |   |   |   |   |
| Income from continuing operations                                                       |       | 227,817                                                                         |       | 156,501 |   | 71,316 |   | 45.6 | % |
| Discontinued operations:                                                                |       |                                                                            |       |   |   |   |   |   |   |
| Income from discontinued operations                                                     |       | 7,440                                                                           |       | 12,538 |   | (5,098 | ) | (40.7 | )% |
| Gain on sale of real estate from  discontinued operations                               |       | 95,711                                                                          |       | — |   | 95,711 |   | — |   |
| Net income                                                                              |       | 330,968                                                                         |       | 169,039 |   | 161,929 |   | 95.8 | % |
| Net income available for common  shareholders                                           |       | 304,199                                                                         |       | 161,383 |   | 142,816 |   | 88.5 | % |
| Weighted average shares outstanding                                                     |       | 93,109                                                                          |       | 73,279 |   | 19,380 |   | 27.1 | % |
| Income from continuing operations available  for common shareholders per common share   |       | $                                                                               | 2.16       |   | $ | 2.03 |   | $ | 0.13 |   | 6.4 | % |
| Income from discontinued operations  available for common shareholders per common share |       | $                                                                               | 1.11       |   | $ | 0.17 |   | $ | 0.94 |   | 552.9 | % |
| Net income available for common shareholders  per common share                          |       | $                                                                               | 3.27       |   | $ | 2.20 |   | $ | 1.07 |   | 48.6 | % |

 

The increase in hoteloperating revenues in 2007 versus 2006 was caused by the increase in revenuesat our managed hotels and our acquisition of four managed hotels in April 2006.  Revenues increased at most of our managedhotels from 2006 due to higher average daily room rates, or ADR, partiallyoffset by slightly lower occupancy rates. Additional operating statistics of our hotels are included in the tableon page 58.

 

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The increase in hoteloperating expenses from 2006 was caused primarily by the general increase inthe cost of labor, real estate taxes and insurance in 2007 and increasedmanagement fees due to the growth in hotel revenues in 2007 described above.

 

Our share ofthe operating results of our managed hotels in excess of the minimum returnsdue to us, or additional returns, under our hotel management agreements isrecognized as income at year end when all contingencies are met and the incomeis earned. We recognized additional returns of $24,181 and $20,029 in thefourth quarter 2007 and 2006, respectively. The increase in additional returns from 2006 is due to the improvedoperating performance of our managed hotels in 2007 described above.

 

As a result of renovationswhich required hotel rooms to be taken out of service in 2007 and 2006, certainof our managed hotels had net operating results that were $9,780 and $3,542less than the minimum returns due to us in 2007 and 2006, 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.

 

The increase in rentalincome - hotels is a result of our funding of improvements at certain of ourleased hotels in 2006 and 2007 that caused in increases in the annual minimumrents due to us.

 

The increase in rentalincome - travel centers is a result of our acquisition of 146 travel centersand commencement of our lease with TA on January 31, 2007 and ouracquisition of an additional 40 travel centers and commencement of our secondlease with TA on May 30, 2007. Rental income - travel centersincludes $15,813 of adjustments necessary to record rent on the straight linebasis for the twelve months ended December 31, 2007.

 

The increasein percentage rent - hotels is the result of increased sales at our leasedhotels.

 

FF&Ereserve income - hotels represents amounts paid by our third party hoteltenants into restricted accounts owned by us, the purpose of which is toaccumulate funds for future capital expenditures. The terms of our hotel leasesrequire these amounts to be calculated as a percentage of total sales at ourhotels. The increase in FF&E reserve income - hotels is primarily due toincreased levels of hotel sales in 2007 versus 2006 at our leased  hotels.We do not report 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 as FF&E reserve income.

 

The increase in interestincome is due to higher average cash balances and higher average interest ratesduring 2007.

 

The increase in interestexpense is primarily due to higher average borrowings as a result of our 2006and 2007 acquisitions, which was partially offset by a lower weighted averageinterest rate during 2007 than in 2006.

 

The increase in depreciationand amortization - hotels is due principally to the depreciation andamortization of assets acquired in our 2006 acquisitions and the purchase ofdepreciable assets with funds from FF&E reserve accounts owned by us in2006 and 2007.  The increase was offsetsomewhat by the sale of our Homestead Studio Suites hotels in July 2007.

 

The increase in depreciationand amortization - travel centers is due to the depreciation and amortizationof assets acquired in our 2007 travel center acquisitions described above.

 

The increase to general andadministrative expense is due principally to the impact of additional propertyinvestments during 2006 and 2007.

 

We recorded a$1,332 loss on asset impairment in the 2007 fourth quarter to reduce thecarrying value of a  hotel heldfor sale to its estimated net realizable value less costs to sell.

 

The increase in income taxexpense is primarily due to increased Canadian income taxes at one of our TRSsand higher state income taxes as a result of a change in tax laws in the stateof Texas.

 

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The decrease in income fromdiscontinued operations is the result of the sale of our 18 Homestead StudioSuites hotels in July 2007.

 

The gain onsale of real estate from discontinued operations in 2007 reflects the sale ofour 18 Homestead Studio Suites hotels in July 2007 for $205,350.

 

The increasesin income from continuing operations available for common shareholders, incomefrom discontinued operations available for common shareholders, net incomeavailable for common shareholders and the corresponding per common shareamounts are primarily due to the investment and operating activity discussedabove. On a per share basis, the percentage increases in income from continuingoperations available for common shareholders, income from discontinuedoperations available for common shareholders and net income available forcommon shareholders was lower due to our issuance of common shares in July andDecember 2006 and February 2007.

 

**Year Ended December 31, 2006 Compared to Year Ended December 31,2005**

 
| ** **                                                                              | ** ** | **For the year ended December 31,**                    | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** | **Increase   (Decrease)** | ** ** | **% Increase   (Decrease)** | ** ** |
|                                                                                    |       | **(amounts in dollars, except number of shares)** |       |   |   |
| Revenues:                                                                               |       |                                                                            |       |   |   |   |   |   |   |
| Hotel operating revenues                                                                |       | $                                                                               | 879,324    |   | $ | 682,541 |   | $ | 196,783 |   | 28.8 | % |
| Rental income:                                                                          |       |                                                                            |       |   |   |   |   |   |   |
| Minimum rent - hotels                                                                   |       | 115,461                                                                         |       | 110,869 |   | 4,592 |   | 4.1 | % |
| Percentage rent - hotels                                                                |       | 5,188                                                                           |       | 3,463 |   | 1,725 |   | 49.8 | % |
| Total rental income                                                                     |       | 120,649                                                                         |       | 114,332 |   | 6,317 |   | 5.5 | % |
| FF&E reserve income - hotels                                                        |       | 20,299                                                                          |       | 19,767 |   | 532 |   | 2.7 | % |
| Interest income                                                                         |       | 2,674                                                                           |       | 1,373 |   | 1,301 |   | 94.8 | % |
|                                                                                    |       |                                                                            |       |   |   |   |   |   |   |
| Expenses:                                                                               |       |                                                                            |       |   |   |   |   |   |   |
| Hotel operating expenses                                                                |       | 618,334                                                                         |       | 476,858 |   | 141,476 |   | 29.7 | % |
| Interest expense                                                                        |       | 81,451                                                                          |       | 65,263 |   | 16,188 |   | 24.8 | % |
| Depreciation and amortization - hotels                                                  |       | 141,198                                                                         |       | 127,242 |   | 13,956 |   | 11.0 | % |
| General and administrative                                                              |       | 25,090                                                                          |       | 22,514 |   | 2,576 |   | 11.4 | % |
| Loss on asset impairment                                                                |       | —                                                                          |       | 7,300 |   | (7,300 | ) | (100.0 | )% |
| Income tax expense                                                                      |       | 372                                                                             |       | 57 |   | 315 |   | 552.6 | % |
|                                                                                    |       |                                                                            |       |   |   |   |   |   |   |
| Income from continuing operations                                                       |       | 156,501                                                                         |       | 118,779 |   | 37,722 |   | 31.8 | % |
| Discontinued operations:                                                                |       |                                                                            |       |   |   |   |   |   |   |
| Income from discontinued operations                                                     |       | 12,538                                                                          |       | 11,124 |   | 1,414 |   | 12.7 | % |
| Net income                                                                              |       | 169,039                                                                         |       | 129,903 |   | 39,136 |   | 30.1 | % |
| Net income available for common  shareholders                                           |       | 161,383                                                                         |       | 122,247 |   | 39,136 |   | 32.0 | % |
| Weighted average shares outstanding                                                     |       | 73,279                                                                          |       | 69,866 |   | 3,413 |   | 4.9 | % |
| Income from continuing operations available  for common shareholders per common share   |       | $                                                                               | 2.03       |   | $ | 1.59 |   | $ | 0.44 |   | 27.7 | % |
| Income from discontinued operations  available for common shareholders per common share |       | $                                                                               | 0.17       |   | $ | 0.16 |   | $ | 0.01 |   | 6.3 | % |
| Net income available for common  shareholders per common share                          |       | $                                                                               | 2.20       |   | $ | 1.75 |   | $ | 0.45 |   | 25.7 | % |

 

The increase in hoteloperating revenues from 2005 was caused by the increase in the number ofmanaged hotels in 2006 due to our January and April 2006 hotelacquisitions and the general increase in hotel revenues at most 

 

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of our managed hotels due toimprovements in the lodging market that resulted in ADR increases at most ofour managed hotels.  The increasedrevenues resulting from the higher ADR was partially offset by lower revenuesat certain of our managed hotels in 2006 which were under renovations in 2006which required hotel rooms to be taken out of service. Additional operatingstatistics of our hotels is included in the table on page 58.

 

The increase in hoteloperating expenses was caused by the increase in the number of managed hotelsin 2006 due to our January and April 2006 hotel acquisitions and thegeneral increase in the cost of labor and utilities in 2006.

 

We recognizedadditional returns from our managed hotels of $20,029 and $13,568 in the fourthquarter of 2006 and 2005, respectively. The increase in additional returns from 2005 is due to the improvedoperating performance of our managed hotels in 2006 described above.

 

As a result of therenovations described above, certain of our managed hotels had net operatingresults that were $3,542 and $2,491 less than the minimum returns due to us in2006 and 2005, respectively. These amounts are reflected in our consolidatedstatement of income as a net reduction to hotel operating expenses in theseyears because the minimum returns were funded by our managers.

 

The increase in minimumrental income- hotels is primarily a result of the increased minimumrents resulting from our funding of improvements at certain of our leasedhotels in 2006 and our acquisition of a hotel in January 2006.

 

The increasein percentage rent - hotels is the result of increased sales at our leasedhotels.

 

The increasein FF&E reserve income- hotels is primarily due to increased sales in 2006versus 2005 at our leased  hotels.

 

The increasein interest income is due to higher average cash balances and higher averageinterest rates during 2006.

 

The increasein interest expense is primarily due to higher average borrowings as a resultof our hotel acquisitions, which was partially offset by a lower weightedaverage interest rate during 2006 than in 2005.

 

The increasein depreciation and amortization- hotels is due principally to the depreciationof 12 hotels acquired during 2006 and the impact of the purchases in 2006 and2005 of depreciable assets with funds from FF&E reserve accounts owned byus. This increase was offset to some extent by the sale of a hotel in September 2005and certain assets becoming fully depreciated in 2006 and 2005.

 

The increaseto general and administrative expense is due principally to the impact ofadditional hotel investments during 2006.

 

In 2005, werecorded a $7,300 loss on asset impairment to reduce the carrying value of ahotel held for sale to its estimated net realizable value less costs to sell.

 

The increase to income taxexpense is primarily due to higher state income taxes as a result of our hotelacquisitions and increased Canadian income taxes at our TRS which owns hotelsin Canada.

 

The increasein income from discontinued operations is the result of increasedpercentage rent at our 18 Homestead Studio Suites® hotels due tohigher sales in 2006.

 

The increases in income fromcontinuing operations available for common shareholders, income fromdiscontinued operations available for common shareholders, net income availablefor common shareholders and the corresponding per common share amounts areprimarily due to the investment and operating activity discussed above.On a per share basis, the percentage increase in income from continuingoperations available for common shareholders, income from discontinuedoperations available for common shareholders and net income available forcommon shareholders was lower due to our issuance of common shares in July andDecember 2006 and in June 2005.

 

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** **

**Liquidity and Capital Resources**

** **

Our Managers and Tenants

 

All 477 of ourproperties are operated under management agreements or leases with third partyoperating companies. All costs of operating and maintaining our properties arepaid by the third party hotel managers as agents for us or by tenants for theirown account. These managers and tenants derive their funding for propertyoperating expenses, FF&E reserves, and returns and rents due to usgenerally from property operating revenues and, to the extent that thesemanagers and tenants fund our minimum returns and minimum rents, from their separateresources.

 

We definecoverage for each of our combination management agreements or leases as totalproperty sales minus all property level expenses that are not subordinated tothe minimum returns and minimum rents due to us and the required FF&Ereserve contributions, divided by the aggregate minimum payments due to us.More detail regarding coverage, guarantees and other security features of ouroperating agreements is presented in the table on pages 56 and 57.Assuming our twelve operating agreements as of December 31, 2007, had beenin place during the twelve months ended December 31, 2007 (September 30,2007, for the TA operating agreements), eleven combinations, representing 453properties, generated coverage of at least 1.0x using historical operatingresults. The remaining combination, representing 24 hotels, generated coverageof 0.54x in 2007; twenty of the hotels in this combination were undergoingsignificant renovations that had a negative impact on the operating results ofthis combination during 2006 and 2007. We expect to complete renovations at these hotels in the first half of2008.

 

Three hundredfifty two (352) of our properties, representing 75% of our total investments atcost as of December 31, 2007, in eight combinations are operated undermanagement agreements or leases which are subject to full or limitedguarantees. These guarantees may provide us with continued payments if thetotal sales less total expenses and required FF&E reserve payments fail toequal or exceed guaranteed amounts due to us. Our managers and tenants or theiraffiliates may also supplement cash flow from our properties in order to makepayments to us and preserve their rights to continue operating our properties.Guarantee or supplemental payments to us, if any, made under any of ourmanagement agreements or leases, do not subject us to repayment obligationsbut, under some of our agreements, these guarantee or supplemental payments maybe recovered by the manager or tenant from the future cash flows from ourproperties after our future minimum returns and minimum rents are paid.

 

As of February 26,2008, all payments due, including those payments due under the combinationmanagement agreement whose hotels generated less than 1.0x coverage during2007, are current. However, the effectiveness of our various security featuresto provide uninterrupted payments to us is not assured. If any of our property operators, tenants or guarantors default intheir payment obligations to us, our revenues and cash flows will decline.

 

**Our OperatingLiquidity and Capital Resources**

** **

Our principalsource of funds for current expenses and distributions to shareholders areminimum returns from our managed hotels and minimum rents from our leasedhotels and travel centers. We receive minimum returns and minimum rents fromour managers and tenants monthly. We receive additional returns, percentagereturns and rents and our share of the operating profits of our managed hotelsafter payment 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 maintainour status as a real estate investment trust, or REIT under the InternalRevenue Code of 1986, as amended, or IRC, by meeting certain requirements. As aREIT, we do not expect to pay federal income taxes on the majority of ourincome. In 1999, federal legislation known as the REIT Modernization Act, orthe RMA, was enacted and became effective on January 1, 2001. The RMA,among other things, allows a REIT to lease hotels to TRSs if the hotels aremanaged by an independent third party. The income realized by our TRSs inexcess of the rent they pay to us is subject to income tax at corporate taxrates.  Also, the income we receive fromour hotels in Canada, Puerto Rico and certain states is subject to taxes inthose jurisdictions.

 

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** **

**Our Investment andFinancing Liquidity and Capital Resources**

** **

Variouspercentages of total sales at most of our hotels are escrowed as FF&Ereserves to fund future capital improvements at our hotels. During 2007, ourmanagers and tenants contributed $57,476 to these accounts. As of December 31,2007, there was approximately $28,134 on deposit in these escrow accounts,which was  held directly by us and isincluded on our balance sheet as restricted cash.

 

Our hoteloperating agreements generally provide that, if necessary, we will provide ourmanagers and tenants funding for capital improvements to our hotels in excessof amounts available in escrowed FF&E reserves. To the extent we make suchadditional FF&E reserve fundings, our annual minimum returns or minimumrent generally increase by a percentage of the amount we fund. During 2007, wefunded $64,241 for capital improvements to our hotels in addition to FF&Ereserve fundings from hotel operations.

 

During 2007,$122,138 was spent from the FF&E reserve escrow accounts to renovate andrefurbish our hotels.

 

  FF&E escrow deposits are not requiredunder our travel centers leases with TA. However, TA is required to maintainthe leased travel centers at its expense, including structural andnon-structural components.  Under our TAlease for 145 travel centers, we have agreed to fund up to $25,000 per year forcertain specified capital improvements to the leased properties during thefirst five years of the lease term or thereafter on a cumulative basis.  All of the capital improvements funded underthis agreement will be owned by us.  As ofDecember 31, 2007, we have funded $25,000 under this agreement and weexpect to fund $25,000 in 2008, using funds from our existing cash balances orborrowings under our revolving credit facility. Under both leases, TA may request that we fund additional amounts forcapital improvements to the leased facilities in return for annual minimum rentincreases.  In 2007, we funded $1,438 ofsuch additional amounts under these agreements.

 

During 2007, we funded$8,020 for improvements to our Marriott International branded hotels using cashon hand and borrowings under our revolving credit facility. We expect tofund approximately $90,000 for improvements to our four Marriott branded hotelportfolios throughout 2008 with funds from our existing cash balances orborrowings under our revolving credit facility. Our minimum annual rent for thesehotels is increased by approximately 10% of the amounts we fund, which amountsare in addition to recurring FF&E reserve funding from hotel operations.

 

Pursuant to an April 2005agreement we entered with a subsidiary of Hyatt for management of 24 AmeriSuites®hotels, we agreed to provide funding to Hyatt for rebranding of these hotels tothe Hyatt PlaceTM brand and for other improvements. To the extentour fundings exceed $8,000, the minimum return payable by Hyatt to us increasesas these funds are advanced by approximately 10% of the funded amounts peryear.  As of December 31, 2007,$71,500 has been funded.  During 2007, wefunded $42,000 of this amount and we expect to fund approximately $4,000 in2008, using funds from our existing cash balances or borrowings under ourrevolving credit facility.

 

Pursuant to anApril 2005 agreement we entered with a subsidiary of Carlson, formanagement of 12 PrimeSM hotels, we agreed to provide funding toCarlson for rebranding these hotels to Carlson brands and for otherimprovements at these hotels.  To theextent our payments exceed $12,000, the minimum return payable by Carlson to usincreases as these funds are advanced by approximately 10% of the fundedamounts per year.  As of December 31,2007, $26,408 has been funded.  During2007, we funded $553 of this amount and we expect to fund $400 in 2008,using funds from our existing cash balances or borrowings under our revolvingcredit facility.

 

Pursuant to a December 2004agreement we entered to purchase 13 hotels from InterContinental, we agreed topay $25,000 during the three years following closing to fund improvements tothe hotels. We paid $10,000 of this amount in 2005 and paid the remaining$15,000 in December 2007.

 

Pursuant to a January 2006agreement we entered with InterContinental for the management of the HarborCourt Complex in Baltimore, Maryland, we agreed to fund $2,300 for rebrandingand other improvements during the two years following closing. We paid$1,000 of this amount in 2006 and funded the remaining $1,300 in December 2007.

 

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Pursuant to January and April 2006agreements we entered with InterContinental for the management of ten hotels,we agreed to fund $24,228 for capital improvements to these hotels during thethree years following closing. We funded $9,691 in January 2007, $9,691 inJanuary 2008 and expect to fund $4,846 in January 2009, using fundsfrom our existing cash balances or borrowings under our revolving creditfacility.

 

On January 16, 2007, April 16,2007, July 16, 2007 and October 15, 2007, we paid a $0.5546875 pershare distribution to our Series B preferred shareholders with respect tothe periods ended January 14, 2007, April 14, 2007, July 14,2007 and October 14, 2007, respectively. On December 3, 2007, wedeclared a $0.5546875 per share distribution to Series B preferredshareholders of record on December 31, 2007 with respect to the periodended January 14, 2008.  We paidthis distribution on January 15, 2008, using existing cash balances andborrowings under our revolving credit facility.

 

On May 15, 2007, wepaid a $0.40833 per share distribution to our Series C preferredshareholders with respect to the period ended May 14, 2007.  On August 15, 2007 and November 15,2007, we paid a $0.4375 per share distribution to our Series C preferredshareholders with respect to the periods ended August 14, 2007 and November 14,2007, respectively. These distributions were funded using cash on hand andborrowings under our revolving credit facility. On January 3, 2008, wedeclared a distribution of $0.4375 per Series C preferred shareholderswith respect to the period ending February 14, 2008. We paid thisdistribution on February 15, 2008, using existing cash balances andborrowings under our revolving credit facility.

 

On February 15, 2007, May 17,2007, August 16, 2007 and November 15, 2007, we paid a $0.74, $0.76,$0.76 and $0.77 per share distribution to our common shareholders, for thequarters ended December 31, 2006, March 31, 2007, June 30, 2007and September 30, 2007, respectively. On January 3, 2008, we declared a $0.77 per share distribution toour common shareholders of record on January 14, 2008.  We paid this distribution on February 15,2008, using existing cash balances and borrowings under our revolving creditfacility.

 

On January 22, 2007, we entered into anew $2,000,000 interim loan agreement, or the Acquisition Facility, with agroup of institutional lenders that became effective concurrently with ouracquisition of TravelCenters. We funded the acquisition of TravelCenters andthe capitalization of TA with a $1,400,000 borrowing under the AcquisitionFacility and with our existing cash balances. We subsequently repaid allborrowings under the Acquisition Facility during the first quarter of 2007 withnet proceeds from certain of the financing transactions described below.

 

In January 2007, we sold 1,800,000 ofour common shares at a price of $47.51 per share pursuant to an over allotmentoption granted to the underwriters of our December 2006 common shareoffering. Net proceeds from this sale of $81,775 (after underwriting and otheroffering expenses) were used to partially fund our acquisition ofTravelCenters.

 

In February 2007, we sold 5,750,000 ofour common shares at a price of $47.67 per share in a public offering. Netproceeds from this sale of $261,677 (after underwriting and other offeringexpenses) were used to reduce borrowings under our Acquisition Facility.

 

Also in February 2007, we sold12,700,000 Series C cumulative redeemable preferred shares at a price of$25.00 per share in a public offering. Net proceeds from this sale of $306,833(after underwriting and other offering expenses) were used to reduce borrowingsunder our Acquisition Facility.

 

In March 2007, we sold$575,000 of 3.8% convertible senior notes due 2027 to initial purchasers forresale to qualified institutional buyers pursuant to the exemption fromregistration provided by Rule 144A under the Securities Act of 1933, asamended, or the Securities Act. Net proceeds from this sale of $562,525 (afterplacement and other offering expenses) were used to repay amounts outstandingunder the Acquisition Facility and for general business purposes. Resales ofthese notes and any underlying common shares were registered on behalf ofcertain selling security holders on April 5, 2007.

 

In March 2007, we sold$300,000 of 5.625% senior notes due 2017 to initial purchasers for resale toqualified institutional buyers pursuant to the exemption from registrationprovided by Rule 144A under the Securities Act. We used net proceeds fromthis sale of $296,468 (after placement and other offering expenses) to reduceborrowings under 

 

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our Acquisition Facility. In June 2007,we issued $300,000 of 5.625% senior notes due 2017 that were registered withthe Securities and Exchange Commission in exchange for all of our privatelyplaced 5.625% senior notes due 2017.

 

In May 2007, wepurchased Petro for approximately $655,000, including acquisition costs, usingborrowings under our revolving credit facility.

 

In July 2007, we sold18 Homestead Studio Suites hotels for $205,350. We used the net proceeds of approximately $189,309 to reduce amountsoutstanding under our revolving credit facility.

 

On September 24, 2007,we sold $350,000 of 6.7% unsecured senior notes due 2018.  We used net proceeds from this offering of$344,226 (after placement and other offering expenses) to reduce borrowingsunder our revolving credit facility.

 

In order to fund capital improvements to ourproperties and acquisitions and to meet cash needs that may result from timingdifferences between our receipt of returns and rents and our desire or need tomake distributions or pay operating expenses, we maintain a revolving creditfacility with a group of institutional lenders. The maturity date of ourrevolving credit facility is October 24, 2010 and we have the option toextend the facility for one additional year upon payment of an extension fee.The annual interest rate payable for drawn amounts under the facility is LIBORplus a premium (5.41% per annum at December 31, 2007).  We may borrow up to $750,000 under therevolving credit facility and it includes a feature under which the maximumamount available for borrowing may be expanded to $1,500,000 in certaincircumstances. Borrowings under our revolving credit facility are unsecured. Wemay draw, repay and redraw funds until maturity, and no principal repayment isdue until maturity. As of December 31, 2007, we had a balance of $158,000outstanding under our revolving credit facility.

 

At December 31,2007, we had $23,401 of cash and cash equivalents and $592,000 available fromour revolving credit facility. We expect to use existing cash balances,borrowings under our revolving credit facility and net proceeds of offerings ofequity or debt securities to fund future property acquisitions and othergeneral business purposes.

 

Our term debt maturities (other than ourrevolving credit facility) are as follows: $150,000 in 2008; $50,000 in 2010;$125,000 in 2012; $300,000 in 2013; $300,000 in 2015; $275,000 in 2016;$300,000 in 2017; $350,000 in 2018; and $575,000 in 2027.  We expect to fund the redemption of our$150,000 of 7% senior notes due March 1, 2008, with existing cash balancesand borrowings under our revolving credit facility.  Our 3.8% convertible senior notes areconvertible if certain conditions are met (including certain changes incontrol) into cash equal to the principal amount of the notes and, to theextent the market price of our common shares exceeds the initial exchange priceof $50.50 per share, subject to adjustment, either cash or our common shares atour option with a value based on such excess amount. Holders of our convertiblesenior notes may require us to repurchase all or a portion of the notes on March 20,2012, March 15, 2017 and March 15, 2022, or upon the occurrence ofcertain change in control events.

 

As of December 31, 2007, we had onemortgage note we assumed in connection with our acquisition of one hotel with acurrent principal balance of $3,635. This mortgage note requires monthlypayments of principal and interest of $32 and is expected to have a principalbalance of $3,326 at maturity in 2011. None of our other debt obligationsrequire principal or sinking fund payments prior to their maturity date. Inconnection with our acquisition of Petro, we acquired certain Petro propertieswhich secure debt that was previously issued by Petro Centers. Upon closing ofour acquisition of Petro, the Petro Centers debt assumed by TA was covenantdefeased and funds were escrowed at closing by TA and used to redeem this debton February 15, 2008.

 

When amounts are outstanding under ourrevolving credit facility and as the maturity or repurchase dates of ourrevolving credit facility and term debts approach over the longer term, we willexplore alternatives for the repayment of amounts due. Such alternatives in theshort term and long term may include incurring additional debt and issuing newequity securities. We have an effective shelf registration statement thatallows us to issue public securities on an expedited basis, but does not assurethat there will be buyers for such securities. Although there can be noassurance that we will complete any debt or equity security offerings or otherfinancings, we believe we will have access to various types of financing,including investment grade debt or equity securities, with which to financefuture acquisitions and capital expenditures and to pay our debt and otherobligations.

 

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As of December31, 2007, 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     |       | $                         | 2,586,635  |   | $ | 150,077 |   | $ | 208,182 |   | $ | 128,376 |   | $ | 2,100,000 |   |
| Ground Lease  Obligations (1)   |       | 175,818                   |       | 13,846 |   | 26,721 |   | 24,038 |   | 111,213 |   |
| Capital  improvements (2)       |       | 208,937                   |       | 129,091 |   | 54,846 |   | 25,000 |   | — |   |
| Projected  interest expense (3) |       | 1,296,964                 |       | 143,542 |   | 274,937 |   | 247,547 |   | 630,938 |   |
| Total                           |       | $                         | 4,268,354  |   | $ | 436,556 |   | $ | 564,686 |   | $ | 424,961 |   | $ | 2,842,151 |   |
|                            |       |                      |       |   |   |   |   |   |   |   |   |

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(1)     14 of our hotels and 26 of our travel centersare on land leased partially or in its entirety.  In each case the ground lessors are unrelatedto us. Generally, payments of ground lease obligations are made by our managersor tenants. However, if a manager or tenant fails to perform obligations undera ground lease or elects not to renew any ground lease, we might have toperform obligations under the ground lease or renew the ground lease in orderto protect our investment in the affected hotel or travel center. 

(2)     Represents amounts we expect to fund forcapital improvements to our properties in addition to recurring FF&Ereserve funding from hotel operations.

(3)     Projected interest expense is attributable toonly the long term debt obligations listed above at existing rates and is notintended to project future interest costs which may result from debtprepayments, new debt issuances or changes in interest rates.

 

As of December 31, 2007,we had no off-balance sheet arrangements, commercial paper, derivatives, swaps,hedges, guarantees, joint ventures or partnerships. As of December 31,2007, our secured debt obligations were limited to one mortgage note of $3,635secured by a single property. None of our debt documentation requires us toprovide collateral security in the event of a ratings downgrade.

 

**Debt Covenants**

** **

Our debt obligations at December 31,2007, consist of our revolving credit facility, our $2,425,000 of unsecuredterm debt and convertible notes and our $3,635 mortgage note. Our unsecuredterm debt and convertible notes are governed by an indenture. This indentureand related supplements and our revolving credit facility agreement contain anumber of financial ratio covenants which generally restrict our ability toincur debts, including debts secured by mortgages on our properties, in excessof calculated amounts, require us to maintain a minimum net worth, restrict ourability to make distributions under certain circumstances and require us to maintainvarious financial ratios. As of December 31, 2007, we were in compliancewith all of our covenants under our indenture and its supplements and ourrevolving credit facility agreement.

 

Neither our indenture and its supplements,nor our revolving credit facility contain provisions for acceleration whichcould be triggered by our debt ratings. However, under our revolving creditfacility agreement, our senior debt rating is used to determine the fees andinterest rate applied to borrowings.

 

Our public debt indenture and its supplementscontain cross default provisions to any other debts of $20,000 or more.Similarly, a default on our public debt indenture would be a default on ourcredit facility.

 

**Related PersonTransactions**

** **

As more fully described above,on January 31, 2007, we acquired TravelCenters and, in connection with theacquisition, restructured the business of TravelCenters so as to place itsoperating business in our subsidiary, TA, distributed all of the common sharesof TA, to our shareholders in a spin off transaction, and leased 146 travelcenters to TA for an average minimum rent of $170.7 million per year during thelease term.  In order to effect thereorganization and spin off, we entered into a transaction agreement effectiveas of January 29, 2007, with TA and RMR. That agreement provided forcertain of the steps in the restructuring of the TravelCenters business and thespin off. In addition, under this agreement TA entered into a management andshared services agreement with RMR, TA granted to us a right of first refusalto purchase, lease, mortgage or otherwise finance any interest it owns oracquires in a travel center before it is purchased, sold, leased, mortgaged orotherwise financed with another party, and TA agreed to indemnify us forliabilities relating to its business and operations for periods before andafter the spin off and for liabilities relating to the ownership and operationof the leased travel centers which arise during the term of our lease with TA.  On May 30, 2007, we purchased Petro andsimultaneously leased the 40 travel centers owned by Petro to a subsidiary ofTA for an initial minimum rent of $62.2 million per year.  Starting in 2013, the lease requires TA topay us additional rent calculated as certain percentages of increases in grossrevenues at the leased travel centers. As a result of the transaction in January 2007 and the Petro leasein May 2007, we have on-going business dealings with TA, including fundingimprovements to the leased properties and adding or removing 

 

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properties from the leases.  RMR provides management services to us and toTA.  Barry M. Portnoy, one of ourmanaging trustees, is an owner and director of RMR and a managing director ofTA.  Adam D. Portnoy, our other managingtrustee, is an owner, a director and president of RMR.  Thomas M. O’Brien is a senior vice presidentof RMR and a managing director and president of TA.  Because of the potential for conflicts ofinterests between the responsibilities of Messrs. Barry Portnoy, AdamPortnoy and Thomas O’Brien to us, RMR and TA, all transactions between us andTA are approved by our trustees who are independent of TA and RMR, and by TA’sdirectors who are independent of us and RMR, respectively.

 

RMR presents investment anddivestment opportunities to us and provides management and administrativeservices to us under an agreement. RMR is compensated at an annual rate equalto 0.7% of our average real estate investments, as defined, up to the first$250,000 and 0.5% thereafter, plus an incentive fee based upon increases incash available for distribution per share, as defined. The incentive feepayable to RMR is paid in our common shares. On January 6, 2006, we entered into amanagement agreement with RMR to operate the office building component of oneof our properties. Fees paid to RMR under this management agreement arebased on a formula, generally 3% of gross collected rents as a propertymanagement fee and 5% of gross construction costs as a construction managementfee. Aggregate fees earned by RMR from us during 2007 were $31,799, whichincludes an incentive fee of $1,862 which we plan to pay later in 2008 throughthe issuance of 53,541 of our common shares. RMR also provides the internal audit function for us and for otherpublicly traded companies to which it provides management or other services.Our audit committee appoints our director of internal audit and ourcompensation committee approves his salary and the other internal audit costswe pay.  Our pro rata share of RMR’s costs in providing that function was $169in 2007.  All transactions between us and RMR are approved by our compensationcommittee. Both our audit and compensation committees are solely composed ofindependent trustees.

 

**CriticalAccounting 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 five most critical accounting policies are as follows:

 

Classification of Leases. Certain of our properties are leased on atriple net basis, pursuant to non-cancelable, fixed term, operating leases.Each time we enter a new lease or materially modify an existing lease weevaluate its classification as either a capital lease or operating lease. Theclassification of a lease as capital or operating affects the carrying value ofa property, as well as our recognition of rental payments as revenue. Theseevaluations require us to make estimates of, among other things, the remaininguseful life and market value of a leased property, appropriate present valuediscount rates and future cash flows. Incorrect assumptions or estimates mayresult in misclassification of our leases.

 

Allocation of Purchase Priceand Recognition of Depreciation and Amortization Expense. The acquisition cost of each propertyinvestment is allocated to various property components such as land, buildingsand equipment, and each component generally has a different useful life. Forreal estate acquired, we allocate the purchase price among building, land,furniture, fixtures and equipment, and, if applicable, the value of in-placeleases, the fair market value of above or below market leases and customerrelationships. Acquisition cost allocations and the determination of the usefullives are based on our estimates or studies from independent experts. Wecompute 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 shorter of its estimated useful life, or the term of the respectivelease or the affected contract. The allocated cost of land is not depreciated.Inappropriate allocation of acquisition costs or incorrect estimates of usefullives could result in depreciation and amortization expenses which do notappropriately reflect the allocation of our capital expenditures over futureperiods required by accounting principles generally accepted in the UnitedStates.

 

Impairment of Long LivedAssets. Weperiodically evaluate our real estate investments and intangible assets forimpairment indicators. These indicators may include weak or declining operatingprofitability, cash flow or liquidity, our decision to dispose of an asset beforethe end of its estimated useful life or market or industry 

 

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changes that couldpermanently reduce the value of our investments. If indicators of impairmentare present, we evaluate the carrying value of the related investment bycomparing it to the expected future undiscounted cash flows to be generatedfrom that investment. If the sum of these expected future cash flows is lessthan the carrying value, we reduce the net carrying value of the property toits estimated fair value. Estimated fair value is determined through anevaluation of recent financial performance and projected discounted cash flowsusing standard industry valuation techniques. This analysis requires us tojudge whether indicators of impairment exist and to estimate likely future cashflows. If we misjudge or estimate incorrectly or if future operatingprofitability, market or industry factors differ from our expectations we mayrecord an impairment charge which is inappropriate, fail to record a chargewhen we should have done so or the amount of such charges may be inaccurate.

 

Variable Interest Entities.  Under Financial Accounting Standards BoardInterpretation No. 46, “Consolidation of Variable Interest Entities”, ifan entity is determined to be a variable interest entity, it must beconsolidated by the primary beneficiary. The primary beneficiary is theenterprise that absorbs the majority of the entity’s expected losses, receivesa majority of the entity’s expected residual returns, or both. Generally,expected losses and expected residual returns are the expected negative andpositive variability, respectively, in the fair value of the variable interestentities’ net assets. When our TRS enters a new operating agreement or materiallymodifies an existing operating agreement with a third party hotel manager weare required to assess if our TRS is or continues to be the primarybeneficiary. This assessment requires us to make estimates of the future cashflows of our TRS. Incorrect assumptions or estimates of, among other things,occupancy, average daily room rate and operating expenses of our hotels mayresult in an inaccurate determination of the primary beneficiary.

 

Income Taxes. We account forincome taxes in accordance with SFAS 109 “Accounting for Income Taxes.”  Under this method deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered or settled.  Valuation allowances are established to reducedeferred tax assets to the amounts that are expected to be realized whennecessary. We have elected to be taxed as a REIT under the IRC and aregenerally not subject to federal and state income taxation on our operatingincome provided we distribute our taxable income to our shareholders and meetcertain organization and operating requirements.  We are subject to income tax in Canada,Puerto Rico and in certain states despite our REIT status.  Further, we lease our managed hotels to ourwholly owned TRS that, unlike most of our subsidiaries is generally subject tofederal, state and foreign income tax. Our consolidated income tax provision (or benefit) includes the incometax provision (or benefit) related to the operations of the TRS and state andforeign income taxes incurred by us despite our tax status as a REIT.  In June 2006, the FASB issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes”, orFIN 48.  FIN 48 prescribes how we shouldrecognize, measure and present in our financial statements uncertain taxpositions that have been taken or are expected to be taken in a taxreturn.  Pursuant to FIN 48, we canrecognize a tax benefit only if it is “more likely than not” that a particulartax position will be sustained upon examination or audit.  To the extent the “more likely than not”standard has been satisfied, the benefit associated with a tax position ismeasured as the largest amount that has a greater than 50% likelihood of beingrealized upon settlement.  As required,we adopted FIN 48 effective January 1, 2007 and have concluded that theeffect is not material to our consolidated financial statements.  Accordingly, we did not record a cumulativeeffect adjustment related to the adoption of FIN 48.  We classify interest and penalties related touncertain tax positions, if any, in our financial statements as a component ofgeneral and administrative expense.

 

These policies involvesignificant judgments based upon our experience, including judgments aboutcurrent valuations, ultimate realizable value, estimated useful lives, salvageor residual values, the ability of our tenants and operators to perform theirobligations to us, and the current and likely future operating and competitiveenvironments in which our properties operate. In the future we may need torevise our assessments to incorporate information which is not now known, andsuch revisions could increase or decrease our depreciation expense related toproperties we own, result in the classification of our leases as other thanoperating leases or decrease the carrying values of our assets.

 

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**PropertyManagement Agreements, Leases and Operating Statistics**

** **

As of December 31, 2007,we owned 292 hotels and 185 travel centers which are grouped into twelvecombinations. Our ten hotel combinations are managed by or leased tosubsidiaries of hotel operating companies including InterContinental, Marriott,Host Hotels & Resorts Inc., or Host, Barcelo Crestline Corporation, orBarcelo Crestline, Hyatt and Carlson. Our 185 travel centers are leased to andoperated by subsidiaries of TA under two agreements.

 

The tables on the following pages summarizethe key terms of our leases and management agreements as of December 31,2007, and include statistics reported to us or derived from informationreported to us by our managers and tenants. These statistics include coverageof our minimum returns or minimum rents and occupancy, average daily rate, orADR, revenue per day per available room, or RevPAR, for our hotelproperties.  We consider thesestatistics, and the management agreement or lease security features alsopresented in the tables on the following pages, to be important measures of ourmanagers’ and tenants’ success in operating our properties and their ability tocontinue to pay us. However, none of this third party reported information is adirect measure of our financial performance and none of it has beenindependently verified by us.

 

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| **Property 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****®** | ** ** | **Staybridge  Suites****®**          | ** ** | **Candlewood  Suites****®**       | ** ** |
|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| Agreement  Reference Name:     |       | Marriott (no. 1)                                                                                                     |       | Marriott (no. 2)                                                                                                     |       | Marriott (no. 3)                                                                                                                                                                                                                          |       | Marriott (no. 4)                                                                                                                                                                                                 |       | InterContinental  (no. 1)                 |       | InterContinental  (no. 2)              |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Number of  Properties:         |       | 53                                                                                                                   |       | 18                                                                                                                   |       | 35                                                                                                                                                                                                                                        |       | 19                                                                                                                                                                                                               |       | 31                                        |       | 76                                     |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Number of Rooms /  Suites:     |       | 7,610                                                                                                                |       | 2,178                                                                                                                |       | 5,382                                                                                                                                                                                                                                     |       | 2,756                                                                                                                                                                                                            |       | 3,844                                     |       | 9,220                                  |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Number of States:              |       | 24                                                                                                                   |       | 14                                                                                                                   |       | 15                                                                                                                                                                                                                                        |       | 14                                                                                                                                                                                                               |       | 16                                        |       | 29                                     |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| 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.                                                                                                                                                                                |       | Our TRS.                                  |       | Our TRS.                               |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Manager:                       |       | Subsidiary of Marriott.                                                                                              |       | Subsidiary of Marriott.                                                                                              |       | Subsidiaries of  Marriott.                                                                                                                                                                                                                |       | Subsidiaries of  Marriott.                                                                                                                                                                                       |       | Subsidiary of  InterContinental.          |       | Subsidiary of  InterContinental.       |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Investment (000s)  (1):        |       | $585,229                                                                                                             |       | $193,059                                                                                                             |       | $472,410                                                                                                                                                                                                                                  |       | $274,222                                                                                                                                                                                                         |       | $436,708                                  |       | $589,429                               |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Security Deposit  (000s):      |       | $50,540                                                                                                              |       | $17,220                                                                                                              |       | $36,204                                                                                                                                                                                                                                   |       | $28,508                                                                                                                                                                                                          |       | $36,872 (7)                               |       | —                                 |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| End of Current  Term:          |       | 2012                                                                                                                 |       | 2010                                                                                                                 |       | 2019                                                                                                                                                                                                                                      |       | 2015                                                                                                                                                                                                             |       | 2031                                      |       | 2028                                   |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| 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 12.5 years  each.                   |       | 2 for 15 years  each.                  |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Annual Minimum  Return /       |       | $58,379                                                                                                              |       | $19,287                                                                                                              |       | $49,034                                                                                                                                                                                                                                   |       | $28,508                                                                                                                                                                                                          |       | $37,882                                   |       | $50,000                                |       |
| Minimum Rent  (000s) (3):      |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Additional  Return:            |       | —                                                                                                               |       | —                                                                                                               |       | $1,173 (6)                                                                                                                                                                                                                                |       | —                                                                                                                                                                                                           |       | —                                    |       | $10,000 (6)                            |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Percentage Return  / Rent (4): |       | 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.                                                                                                                                                                      |       | 7.5% of revenues above  2004/06 revenues. |       | 7.5% of revenues above  2006 revenues. |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Return / Rent  Coverage (5):   |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Year ended  12/31/07:          |       | 1.63x                                                                                                                |       | 1.33x                                                                                                                |       | 1.24x                                                                                                                                                                                                                                     |       | 1.22x                                                                                                                                                                                                            |       | 1.09x                                     |       | 1.43x                                  |       |
| Year ended  12/31/06:          |       | 1.49x                                                                                                                |       | 1.34x                                                                                                                |       | 1.11x                                                                                                                                                                                                                                     |       | 1.21x                                                                                                                                                                                                            |       | 1.07x                                     |       | 1.35x                                  |       |
|                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                             |       |                                      |       |                                   |       |
| Other Security  Features:      |       | HPT controlled                                                                                                       |       | HPT controlled                                                                                                       |       | —                                                                                                                                                                                                                                    |       | Tenant minimum                                                                                                                                                                                                   |       | Limited guarantee                         |       | Limited guarantee                      |       |
|                           |       | lockbox with minimum balance maintenance requirement;  subtenant and subtenant parent minimum net worth requirement. |       | lockbox with minimum balance maintenance requirement;  subtenant and subtenant parent minimum net worth requirement. |       |                                                                                                                                                                                                                                      |       | net worth  requirement.                                                                                                                                                                                          |       | provided by InterContinental.             |       | provided by InterContinental.          |       |

 

----

|   |   | (1) |   | Amounts  exclude expenditures made from FF&E reserves funded from hotel  operations, but includes amounts funded by us separately from hotel  operations.                                                                                                                                                                                                                         |
|--------|--------|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (2) |   | Renewal  options may be exercised by the tenant or manager (when the property is  leased to our TRS) for all, but not less than all, of the properties within  each combination of properties.                                                                                                                                                                                        |
|   |   | (3) |   | Each  management agreement or lease provides for payment to us of an annual minimum  return or minimum rent, respectively. Management fees are generally  subordinated to these minimum payment amounts and certain minimum payments  are subject to full or limited guarantees.                                                                                                      |
|   |   | (4) |   | Certain of  our management agreements and leases provide for payment to us of a  percentage of increases in total sales over base year levels. Percentage  returns under our management agreements are payable to us only to the extent  of available cash flow, as defined in the agreements. The payment of  percentage rent under our leases is not subject to available cash flow |
|   |   | (5) |   | We define  coverage as total property sales minus all property level expenses which are  not subordinated to minimum payments to us and the required FF&E reserve  contributions (which data is provided to us by our operators or tenants),  divided by the minimum returns or minimum rent payments due to us.                                                                  |
|   |   | (6) |   | These  agreements provide for annual additional return payment to us in the amount  listed to the extent of available cash flow after payment of operating costs,  funding of the FF&E reserve and payment of our minimum return and  percentage return.                                                                                                                          |
|   |   | (7) |   | A single  $36,872 deposit secures InterContinental’s obligations under the  InterContinental No. 1, No. 3 and No. 4 portfolios.                                                                                                                                                                                                                                   |

 

56

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| **Property Brand:**                         | ** ** | **InterContinental****®****/  Crowne Plaza****®****/  Holiday Inn****®****/  Staybridge Suites****®** | ** ** | **Crowne Plaza****®****/  Holiday Inn****®****/  Staybridge Suites****®** | ** ** | **Hyatt PlaceTM  /Amerisuites****®** | ** ** | **Radisson****®**** Hotels &  Resorts/ Park Plaza****®****Hotels & Resorts/  Country Inns &  Suites by Carlson****®** | ** ** | **TravelCenters of  America**                                     | ** ** | **Petro Stopping  Centers****®**                             | ** ** | **Total/  Range/  Average  (all  investments)** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Agreement  Reference Name:                       |       | InterContinental  (no. 3)                                                                                                                |       | InterContinental  (no. 4)                                                                               |       | Hyatt                                              |       | Carlson                                                                                                                                                                                            |       | TA (1)                                                                 |       | TA (2)                                                                 |       | 12                                              |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Number of  Properties:                           |       | 14                                                                                                                                       |       | 10                                                                                                      |       | 24                                                 |       | 12                                                                                                                                                                                                 |       | 145                                                                    |       | 40                                                                     |       | 477                                             |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Number of Rooms /  Suites:                       |       | 4,139                                                                                                                                    |       | 2,937                                                                                                   |       | 2,895                                              |       | 2,262                                                                                                                                                                                              |       | — (9)                                                             |       | —                                                                 |       | 43,223 (2)                                      |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Number of States:                                |       | 7 plus Ontario and  Puerto Rico                                                                                                          |       | 5                                                                                                       |       | 14                                                 |       | 7                                                                                                                                                                                                  |       | 39                                                                     |       | 25                                                                     |       | 44 plus  Ontario and  Puerto Rico               |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Tenant:                                          |       | Our TRS and a subsidiary  of InterContinental.                                                                                           |       | Our TRS.                                                                                                |       | Our TRS.                                           |       | Our TRS.                                                                                                                                                                                           |       | Subsidiary of  TA.                                                     |       | Subsidiary of TA.                                                      |       |                                            |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Manager:                                         |       | Subsidiaries of  InterContinental.                                                                                                       |       | Subsidiaries of  InterContinental.                                                                      |       | Subsidiary of  Hyatt.                              |       | Subsidiary of  Carlson.                                                                                                                                                                            |       | TA.                                                                    |       | TA.                                                                    |       |                                            |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Investment (000s)  (1):                          |       | $512,300                                                                                                                                 |       | $230,649                                                                                                |       | $309,850                                           |       | $211,309                                                                                                                                                                                           |       | $1,747,962                                                             |       | $654,288                                                               |       | $6,217,415                                      |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Security Deposit  (000s):                        |       | $36,872 (6)                                                                                                                              |       | $36,872 (6)                                                                                             |       | —                                             |       | —                                                                                                                                                                                             |       | —                                                                 |       | —                                                                 |       | $169,344                                        |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| End of Current  Term:                            |       | 2029                                                                                                                                     |       | 2030                                                                                                    |       | 2030                                               |       | 2030                                                                                                                                                                                               |       | 2022                                                                   |       | 2024                                                                   |       | 2010-2031  (average 16  years)                  |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Renewal Options  (2):                            |       | 2 for 15 Years each.                                                                                                                     |       | 2 for 15 years each.                                                                                    |       | 2 for 15 years each.                               |       | 2 for 15 years each.                                                                                                                                                                               |       | N/A                                                                    |       | 2 for 15 years each                                                    |       |                                            |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Annual Minimum Return / Minimum Rent (000s) (3): |       | $42,873                                                                                                                                  |       | $20,306                                                                                                 |       | $23,050                                            |       | $11,890                                                                                                                                                                                            |       | $155,713 (10)                                                          |       | $62,225                                                                |       | $559,147                                        |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Additional  Return:                              |       | $3,458 (7)                                                                                                                               |       | $1,750 (7)                                                                                              |       | 50% of cash flow in  excess of minimum return. (8) |       | 50% of cash flow in  excess of minimum return. (8)                                                                                                                                                 |       | —                                                                 |       | —                                                                 |       | $16,381                                         |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Percentage Return  / Rent (4):                   |       | 7.5% of revenues  above 2006  revenues.                                                                                                  |       | 7.5% of revenues  above 2006  revenues.                                                                 |       | —                                             |       | —                                                                                                                                                                                             |       | 3% of non-fuel revenues  and .3% of fuel revenues above 2011 revenues. |       | 3% of non-fuel revenues  and .3% of fuel revenues above 2012 revenues. |       |                                            |       |
| Return / Rent  Coverage (5):                     |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Year ended  12/31/07:                            |       | 1.33x                                                                                                                                    |       | 1.39x                                                                                                   |       | 0.54x                                              |       | 1.63x                                                                                                                                                                                              |       | 1.39x (11)                                                             |       | 1.14x (11)                                                             |       | 0.54x – 1.63x                              |       |
| Year ended  12/31/06                             |       | 1.37x                                                                                                                                    |       | 1.51x                                                                                                   |       | 0.80x                                              |       | 1.36x                                                                                                                                                                                              |       | 1.47x                                                                  |       | 1.3x                                                                   |       | 0.80x – 1.51x                              |       |
|                                             |       |                                                                                                                                     |       |                                                                                                    |       |                                               |       |                                                                                                                                                                                               |       |                                                                   |       |                                                                   |       |                                            |       |
| Other Security  Features:                        |       | Limited guarantee provided by InterContinental.                                                                                          |       | Limited guarantee provided by InterContinental.                                                         |       | Limited guarantee  provided by Hyatt.              |       | Limited guarantee  provided by Carlson.                                                                                                                                                            |       | TA parent guarantee.                                                   |       | TA parent guarantee.                                                   |       |                                            |       |

 

----

|   |   | (1)  |   | Amounts exclude expenditures made from FF&E reserves funded from  hotel operations, but includes amounts funded by us separately from hotel  operations.                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (2)  |   | Renewal  options may be exercised by the tenant or manager (when the property is  leased to our TRS) for all, but not less than all, of the hotels within each  combination of properties.                                                                                                                                                                                                                                                                                                        |
|   |   | (3)  |   | Each  management agreement or lease provides for payment to us of an annual minimum  return or minimum rent, respectively. Hotel management fees are generally  subordinated to these minimum payment amounts and certain minimum payments  are subject to full or limited guarantees.                                                                                                                                                                                                            |
|   |   | (4)  |   | Certain of  our management agreements and leases provides for payment to us of a  percentage of increases in total sales over base year levels. Percentage  returns under our management agreements are payable to us only to the extent  of available cash flow, as defined in the agreements. The payment of  percentage rent under our leases is not subject to available cash flow.                                                                                                           |
|   |   | (5)  |   | We define  coverage as total property sales minus all property level expenses which are  not subordinated to minimum payments to us and the required FF&E reserve  contributions (which data is provided to us by our operators or tenants),  divided by the minimum return or minimum rent payments due to us. For some  combinations, amounts have been calculated using data for periods prior to  our ownership of certain properties and prior to commencement of operating  agreements. |
|   |   | (6)  |   | A single  $36,872 deposit secures InterContinental’s obligations under the  InterContinental No. 1, No. 3 and No. 4 portfolios.                                                                                                                                                                                                                                                                                                                                               |
|   |   | (7)  |   | These  agreements provide for annual additional return payment to us of the amounts  stated to the extent of available cash flow after payment of operating costs,  funding of the FF&E reserve, payment of our minimum return and payment of  certain management fees.                                                                                                                                                                                                                       |
|   |   | (8)  |   | These  agreements provide for payment to us of 50% of available cash flow after  payment of operating costs, funding the FF&E reserve, payment of our  minimum return and reimbursement to the managers of working capital and  guaranty advances, if any.                                                                                                                                                                                                                                    |
|   |   | (9)  |   | 18 of the TA  properties include a hotel. The rooms associated with these hotels have been  excluded from total hotel rooms.                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | (10) |   | The amount  of minimum rent payable to us by TA is scheduled to increase to $158,962,  $162,625, $166,638, $171,613 and $176,620 in 2008, 2009, 2010, 2011 and 2012,  respectively. The annual straight line rent for GAAP purposes is $171,389.                                                                                                                                                                                                                                                  |
|   |   | (11) |   | Represents  data for the 12 months ended September 30, 2007. Data for the period  ended December 31, 2007 is not currently available from our tenant, TA.                                                                                                                                                                                                                                                                                                                               |

 

57

----

 

 

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:

 
| ** **                                 | ** ** | **No. of** | ** ** | **No. of**  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------|------------|------------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Management Agreement/Lease**        | ** ** | **Hotels**      | ** ** | **Rooms/Suites** | ** ** | **2007(1)** | ** ** | **2006(1)** | ** ** | **Change** | ** ** |
| **ADR**                                    | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| InterContinental  (no. 1)(2)          |       | 31              |       | 3,844            |       | $           | 110.47     |        | $          | 104.38     |       | 5.8 | % |
| InterContinental  (no. 2)             |       | 76              |       | 9,220            |       | 69.81       |       | 66.50       |       | 5.0        | %          |
| InterContinental  (no. 3)(3) (4) |       | 14              |       | 4,139            |       | 141.79      |       | 134.49      |       | 5.4        | %          |
| InterContinental  (no.4)(3)                |       | 10              |       | 2,937            |       | 109.64      |       | 101.22      |       | 8.3        | %          |
| Marriott (no. 1)                      |       | 53              |       | 7,610            |       | 123.67      |       | 117.76      |       | 5.0        | %          |
| Marriott (no. 2)                      |       | 18              |       | 2,178            |       | 119.69      |       | 112.81      |       | 6.1        | %          |
| Marriott (no. 3)                      |       | 35              |       | 5,382            |       | 116.65      |       | 110.34      |       | 5.7        | %          |
| Marriott (no. 4)                      |       | 19              |       | 2,756            |       | 116.47      |       | 114.74      |       | 1.5        | %          |
| Hyatt                                      |       | 24              |       | 2,895            |       | 95.45       |       | 82.02       |       | 16.4       | %          |
| Carlson                                    |       | 12              |       | 2,262            |       | 99.58       |       | 92.73       |       | 7.4        | %          |
| Total/Average                              |       | 292             |       | 43,223           |       | $           | 107.18     |        | $          | 101.04     |       | 6.1 | % |
|                                       |       |            |       |             |       |        |       |        |       |       |       |
| **Occupancy**                              | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| InterContinental  (no. 1)(2)          |       | 31              |       | 3,844            |       | 75.9        | %          | 76.0        | %          | -0.1       | pts        |
| InterContinental  (no. 2)             |       | 76              |       | 9,220            |       | 74.5        | %          | 75.7        | %          | -1.2       | pts        |
| InterContinental  (no. 3)(3) (4) |       | 14              |       | 4,139            |       | 76.8        | %          | 75.1        | %          | 1.7        | pts        |
| InterContinental  (no.4)(3)                |       | 10              |       | 2,937            |       | 68.6        | %          | 71.8        | %          | -3.2       | pts        |
| Marriott (no. 1)                      |       | 53              |       | 7,610            |       | 69.2        | %          | 69.3        | %          | -0.1       | pts        |
| Marriott (no. 2)                      |       | 18              |       | 2,178            |       | 76.5        | %          | 79.9        | %          | -3.4       | pts        |
| Marriott (no. 3)                      |       | 35              |       | 5,382            |       | 75.7        | %          | 75.4        | %          | 0.3        | pts        |
| Marriott (no. 4)                      |       | 19              |       | 2,756            |       | 73.0        | %          | 73.2        | %          | -0.2       | pts        |
| Hyatt                                      |       | 24              |       | 2,895            |       | 58.8        | %          | 61.1        | %          | -2.3       | pts        |
| Carlson                                    |       | 12              |       | 2,262            |       | 67.0        | %          | 63.6        | %          | 3.4        | pts        |
| Total/Average                              |       | 292             |       | 43,223           |       | 72.2        | %          | 72.6        | %          | -0.4       | pts        |
|                                       |       |            |       |             |       |        |       |        |       |       |       |
| **RevPAR**                                 | ** ** | ** **      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| InterContinental  (no. 1)(2)          |       | 31              |       | 3,844            |       | $           | 83.85      |        | $          | 79.33      |       | 5.7 | % |
| InterContinental  (no. 2)             |       | 76              |       | 9,220            |       | 52.01       |       | 50.34       |       | 3.3        | %          |
| InterContinental  (no. 3)(3) (4) |       | 14              |       | 4,139            |       | 108.89      |       | 101.00      |       | 7.8        | %          |
| InterContinental  (no.4)(3)                |       | 10              |       | 2,937            |       | 75.21       |       | 72.68       |       | 3.5        | %          |
| Marriott (no. 1)                      |       | 53              |       | 7,610            |       | 85.58       |       | 81.61       |       | 4.9        | %          |
| Marriott (no. 2)                      |       | 18              |       | 2,178            |       | 91.56       |       | 90.14       |       | 1.6        | %          |
| Marriott (no. 3)                      |       | 35              |       | 5,382            |       | 88.30       |       | 83.20       |       | 6.1        | %          |
| Marriott (no. 4)                      |       | 19              |       | 2,756            |       | 85.02       |       | 83.99       |       | 1.2        | %          |
| Hyatt                                      |       | 24              |       | 2,895            |       | 56.12       |       | 50.11       |       | 12.0       | %          |
| Carlson                                    |       | 12              |       | 2,262            |       | 66.72       |       | 58.98       |       | 13.1       | %          |
| Total/Average                              |       | 292             |       | 43,223           |       | $           | 77.38      |        | $          | 73.36      |       | 5.5 | % |

 

----

(1)         Includes data for the calendar year indicated, exceptfor our Marriott branded hotels, which include data for comparable fiscalperiods.

 

(2)         Excludes operating statistics of one hotel which wasclosed from May 2005 through May 2006 due to fire damage and a newlydeveloped hotel acquired in April 2006.

 

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

 

(4)         Includes data for periods hotels were not operated bythe current manager.

 

**Seasonality**

 

Our hotels and travel centers have historically experienced seasonaldifferences typical of their industries with higher revenues in the second andthird quarters of calendar years compared with the first and fourth quarters.This

 

58

----

 

seasonality isnot expected to cause material fluctuations in our income or cash flow becauseour contractual management agreements and leases require our managers andtenants to make the substantial portion of our return payments and rents to usin equal amounts throughout a year. Seasonality may affect our hoteloperating revenues, but we do not expect seasonal variations to have a materialimpact upon our financial results of operations or upon our managers’ ortenants’ 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 revenues should increase. Offsetting thesebenefits, inflation might cause our costs of equity and debt capital and otheroperating 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 insufficient income at ourproperties, all of our operating agreements contain security features, such assecurity deposits or guarantees of our returns or rents. To mitigate theadverse impact of increased costs of debt capital in the event of materialinflation, we may enter into interest rate hedge arrangements in thefuture; the decision to enter into these agreements will be based on the amountof our floating rate debt outstanding, our belief that material interest rateincreases are likely to occur and upon requirements of our borrowingarrangements.

 

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

 

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, 2006. 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, 2007, our outstanding publicly tradable debtconsisted of eight issues of fixed rate, senior unsecured notes and one issueof fixed rate convertible senior 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                       |       |
| 275,000                    |       | 6.300                  | %          | 17,325                    |       | 2016         |       | Semi-Annually                       |       |
| 300,000                    |       | 5.625                  | %          | 16,875                    |       | 2017         |       | Semi-Annually                       |       |
| 350,000                    |       | 6.700                  | %          | 23,450                    |       | 2018         |       | Semi-Annually                       |       |
| 575,000                    |       | 3.800                  | %          | 21,850                    |       | 2027         | (1)        | Semi-Annually                       |       |
| $                          | 2,425,000  |                   |       |                      | $          | 138,751      |       |                                |       |   |   |

 

----

(1)  The convertible senior notes areconvertible if certain conditions are met (including certain changes incontrol) into cash equal to the principal amount of the notes and, to theextent the market price of our common shares exceeds the initial exchange priceof $50.50 per share, subject to adjustment, either cash or our common shares atour option with a value based on such excess amount. Holders of our convertiblesenior notes may require us to repurchase all or a portion of the notes onMarch 20, 2012, March 15, 2017, and March 15, 2022, or upon theoccurrence of certain change in control events.

 

Except as described in the footnote to the table above, no principalrepayments are due under these notes until maturity. Because these notes bearinterest at fixed rates, changes in market interest rates during the term ofthis debt will not affect our operating results. However, if at maturity thesenotes were refinanced at interest rates which are

 

59

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10% higherthan shown above, our per annum interest cost would increase by approximately$13,875. Changes in market interest rates also affect the fair value of ourdebt obligations; increases in market interest rates decrease the fair value ofour fixed rate debt while decreases in market interest rates increase the fairvalue of our fixed rate debt. Based on the balances outstanding at December 31,2007, and discounted cash flow analyses, a hypothetical immediate 10% change ininterest rates would change the fair value of our fixed rate debt obligationsby approximately $90,557. Change in the trading price of our common shares may alsoaffect the fair value of our $575,000 of convertible senior notes.

 

Each of these fixed rate unsecured debt arrangementsallows us to make repayments earlier than the stated maturity date. We aregenerally allowed to make prepayments only at face value plus a premium equalto a make-whole amount, as defined, which is generally designed to preserve astated yield to the note holder. These prepayment rights may afford us theopportunity to mitigate the risk of refinancing at maturity at higher rates byrefinancing prior to maturity.

 

At December 31, 2007, we had one mortgage payable secured by onehotel, with a fixed rate of 8.3% that matures on July 1, 2011. This noterequires principal and interest payments through maturity pursuant to anamortization schedule and contains a provision that allows us to makerepayment at a premium to face value.

 

Ourrevolving credit facility bears interest at floating rates and matures in October 2010.We can extend the maturity for one year for a fee. At December 31, 2007,we had $158,000 outstanding and $592,000 available for drawing under ourrevolving credit facility. Repayments under this agreement may be made atany time without penalty. We borrow in U.S. dollars and borrowings under theseagreements are subject to interest at LIBOR plus a premium. Accordingly, we arevulnerable to changes in U.S. dollar short term interest rates, specificallyLIBOR. A change in interest rates would not affect the value of this floatingrate debt but would affect our operating results. For example, the interestrate payable on our outstanding indebtedness of $158,000 under our revolvingcredit facility was 5.41% per annum at December 31, 2007. The followingtable presents the impact a 10% change in interest rates would have on ourweighted average floating rate interest expense as of December 31, 2007:

 
| ** **                 | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|----------------------------|------------|------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Interest Rate  Per Year**                            | ** ** | **Outstanding Debt** | ** ** | **Total Interest  Expense Per Year** | ** ** |
| At December 31,  2008 |       | 5.41                                                             | %          | $ | 158,000 |   | $ | 8,548 |   |
| 10% increase               |       | 5.95                                                             | %          | $ | 158,000 |   | $ | 9,401 |   |
| 10%  reduction             |       | 4.87                                                             | %          | $ | 158,000 |   | $ | 7,695 |   |

 

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 creditfacility or Acquisition Facility.

 

**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 and FinancialDisclosure**

 

None.

 

**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

 

60

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Rules 13a-15 and15d-15. Based upon that evaluation, our managing trustees, President and ChiefOperating Officer and Treasurer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective.

 

Therehave been no changes in our internal control over financial reporting duringthe quarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**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 oftrustees regarding 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, 2007. 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, 2007, our internal control over financialreporting is effective.

 

Ernst & Young LLP, the independentregistered public accounting firm that audited our 2007 consolidated financialstatements included in this Annual Report on Form 10-K, has issued anattestation report on our internal control over financial reporting.  Its report appears elsewhere herein.

 

**Item 9B. OtherInformation**

 

None.

 

61

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**PART III**

 

**Item 10.Directors, Executive Officers and Corporate Governance**

 

Wehave 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 availablefree of charge to any person 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 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 Management and RelatedStockholder Matters**

 

**Equity Compensation Plan Information**. We may grant common shares to our officersand other employees of RMR under either our 1995 Incentive Share Award Plan orour 2003 Incentive Share Award Plan, collectively referred to as the AwardPlans. In addition, each of our trustees receives 750 shares per year as part oftheir annual compensation for serving as our trustees and such shares may beawarded under either of these plans. The terms of grants made under these plansare determined by our board of trustees, or a committee thereof, at the time ofthe grant. The following table is as of December 31, 2007.

 
| ** **                                                              | ** ** | ** **                           | ** ** | ** **                        | ** ** | **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** | ** ** |
| ** **                                                              | ** ** | **warrants and rights**    | ** ** | **warrants and rights** | ** ** | **column (a)) (1)**         | ** ** |
| **Plan category**                                                  | ** ** | **(a)**                              | ** ** | **(b)**                           | ** ** | **(c)**                               | ** ** |
| Equity  compensation plans approved by security holders (1995 Plan)     |       | None.                                |       | None.                             |       | 2,740,838                             |       |
| Equity  compensation plans not approved by security holders (2003 Plan) |       | None.                                |       | None.                             |       | 2,740,838                             |       |
| Total                                                                   |       | None.                                |       | None.                             |       | 2,740,838                             |       |

 

----

(1)         The 1995 Incentive Share Award Plan was approved by our shareholder atthat time; the 2003 Incentive Share Award Plan was approved by our Board ofTrustees. Pursuant to the terms of the Award Plans, in no event shall thenumber of shares issued under both plans combined exceed 3,128,791; and2,740,838 represents the combined total shares available under both plans on December 31,2007.

 

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 Person Transactions”. The remainder

 

62

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of theinformation required by Item 12 is incorporated by reference to our definitiveProxy Statement, which will be filed not later than 120 days after the end ofour fiscal year.

 

**Item 13.Certain Relationships and Related Transactions, and Director Independence**

 

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 afterthe end of our fiscal year.

 

63

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**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,  2007 and 2006                                              |       | F-3      |
|                                                                                                           |       |     |
| Consolidated  Statement of Income for each of the three years ended December 31, 2007                     |       | F-4      |
|                                                                                                           |       |     |
| Consolidated  Statement of Shareholders’ Equity for each of the three years ended December 31,  2007 |       | F-5      |
|                                                                                                           |       |     |
| Consolidated  Statement of Cash Flows for each of the three years ended December 31,  2007                |       | F-6      |
|                                                                                                           |       |     |
| Notes to  Consolidated Financial Statements                                                                    |       | F-7      |
|                                                                                                           |       |     |
| Schedule III - Real Estate and  Accumulated Depreciation as of December 31, 2007                     |       | F-21     |

 

| All other  schedules for which provision is made in the applicable accounting  regulations of the Securities and Exchange Commission are not required under  the related instructions or are inapplicable, and therefore have been  omitted. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

64

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(b) Exhibits

 
| 2.1    |   | Purchase Agreement, dated May 30, 2007, among  the Company, Petro Stopping Centers Holdings, L.P. and the partners of Petro  Stopping Centers Holdings, L.P. (INCORPORATED BY REFERENCE TO THE COMPANY’S  CURRENT REPORT ON FORM 8-K DATED JUNE 4, 2007)                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 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 QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED MARCH 30,  2007)                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 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    |   | Articles Supplementary dated February 15, 2007. (INCORPORATED BY  REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED February 16, 2007)                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 3.6    |   | Articles Supplementary dated March 5,  2007 (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K  DATED MARCH 7, 2007)                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 3.7    |   | 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 DECEMBER 13, 2007)                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 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    |   | Form of temporary 7% Series C Cumulative Redeemable Preferred Share  Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON  FORM 8-K DATED FEBRUARY 15, 2007)                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.4    |   | 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)                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | 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) |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | 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)     |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.7    |   | Supplemental Indenture No. 5, dated as of July 28, 2000, between the  Company and State Street Bank and                                                                                                                                                                                                                             |

 

65

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|   |   | 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)                                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.8    |   | Supplemental Indenture No. 6, dated as of July 8, 2002, between the  Company and State Street Bank and Trust Company, relating to the Company’s  6.85% Senior Notes due 2012, including form thereof. (INCORPORATED BY  REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER  ENDED JUNE 30, 2002)                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.9    |   | Supplemental Indenture No. 7, dated as of January 24, 2003, between  the Company and U.S. Bank National Association, as  Trustee, relating to the Company’s 6 3/4%  Senior Notes due 2013, including form thereof. (INCORPORATED BY REFERENCE TO  THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,  2002)          |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.10   |   | Supplemental Indenture No. 8, dated as of February 15, 2005, between  the Company and U.S. Bank National Association, as Trustee, relating to the  Company’s 5 1/8% Senior Notes due 2015, including form thereof. (INCORPORATED  BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 11,  2005)                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.11   |   | Supplemental Indenture No. 9, dated as of June 15, 2006, between the  Company and U.S. Bank National Association, as Trustee, relating to the  Company’s 6.30% Senior Notes due 2016, including form thereof. (INCORPORATED  BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER  ENDED JUNE 30, 2006)                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.12   |   | Supplemental Indenture No. 10, dated as of March 7, 2007, between the  Company and U.S. Bank National Association, as Trustee, relating to the  Company’s 3.80% Convertible Senior Notes due 2027, including form thereof.  (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED  MARCH 7, 2007)                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.13   |   | Supplemental Indenture No. 11, dated as of March 12, 2007, between  the Company and U.S. Bank National Association, as Trustee, relating to the  Company’s 5.625% Senior Notes due 2017, including form thereof. (INCORPORATED  BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MARCH 12,  2007)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.14   |   | Supplemental Indenture No. 12, dated as of September 28, 2007,  between the Company and U.S. Bank National Association, as Trustee, relating  to the Company’s 6.70% Senior Notes due 2018, including form thereof.  (INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q  FOR THE QUARTER ENDED SEPTEMBER 30, 2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.15   |   | Renewed Rights Agreement, dated as of May 15, 2007, between  Hospitality Properties Trust and Wells Fargo Bank, National Association, as  Rights Agent, including all exhibits thereto (INCORPORATED BY REFERENCE TO  THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MAY 16, 2007)                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4.16   |   | Registration Rights Agreement, dated as of March 7, 2007 among the  Company and the several initial purchasers, for whom Merrill Lynch, Pierce,  Fenner & Smith Incorporated is acting as representative (INCORPORATED BY  REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MARCH 7, 2007)                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 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,  between Reit Management & Research LLC and the Company. (+) (INCORPORATED  BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED  DECEMBER 31, 2005)                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.2   |   | Master Management Agreement, dated as of January 6, 2006,  between Reit Management & Research LLC                                                                                                                                                                                                                                           |

 

66

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|   |   | 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 CURRENT REPORT ON FORM 8-K DATED MAY 24, 2006)                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 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. (+) (FILED  HEREWITH)                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 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 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED  DECEMBER 31, 1999)                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | 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 initially a signatory  thereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM  8-K DATED MAY 23, 2005)                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11  |   | First Amendment to Amended and Restated Credit Agreement, dated as of  August 22, 2006, by and among the Company, Wachovia Bank, National  Association, as Administrative 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 AUGUST 22, 2006) |

 

 

67

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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12  |   | Second Amendment to Amended and Restated Credit Agreement, dated as  of January 12, 2007, 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 JANUARY 22, 2007)                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13  |   | Interim Loan Agreement, dated as of January 22, 2007, by and among  the Company, Merrill Lynch Capital Corporation, as Administrative Agent,  Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger and  Lead Bookrunner, and the additional agents and financial institutions  signatory thereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT  ON FORM 8-K DATED JANUARY 22, 2007)                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14  |   | Amendment No. 1, dated as of February 26, 2007, to the Interim Loan  Agreement by and among the Company, Merrill Lynch Capital Corporation, as  Administrative Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated  as Lead Arranger and Lead Bookrunner, and the additional agents and financial  institutions signatory thereto. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM  10-K FOR THE YEAR ENDED DECEMBER 31, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15  |   | Agreement and Plan of Merger, dated as of September 15, 2006, by and  among the Company TravelCenters of America, Inc., HPT TA Merger Sub Inc. and  Oak Hill Capital Partners, L.P.  (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM  8-K DATED SEPTEMBER 20, 2006)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |   | Amendment No. 1, dated as of January 30, 2007, to the Agreement and  Plan of Merger by and among the Company, TravelCenters of America, Inc., HPT  TA Merger Sub Inc. and Oak Hill Capital Partners, L.P.  (INCORPORATED BY  REFERENCE TO the company’s  CURRENT REPORT ON FORM 8-K DATED FEBRUARY 2, 2007)                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Transaction Agreement, dated as of January 29, 2007, by and among the  Company, TravelCenters of America LLC, HPT TA Properties Trust, HPT TA  Properties LLC, HPT TA Merger Sub Inc. and Reit Management & Research  LLC.  (INCORPORATED BY REFERENCE TO the  company’s CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007)                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18  |   | Lease Agreement, dated as of January 31, 2007, by and among HPT TA  Properties Trust, HPT TA Properties LLC and TA Leasing LLC. (INCORPORATED BY  REFERENCE TO the company’s  CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007)                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19  |   | Guaranty Agreement, dated as of January 31, 2007, by TravelCenters of  America LLC and certain of its subsidiaries, for the benefit of HPT TA  Properties Trust and HPT TA Properties LLC. (INCORPORATED BY REFERENCE TO the company’s CURRENT REPORT ON FORM  8-K DATED FEBRUARY 12, 2007)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20  |   | Lease Agreement, dated as of May 30, 2007, by and among HPT PSC  Properties Trust and HPT PSC Properties LLC as Landlord, and Petro Stopping  Centers, L.P., as Tenant.  (INCORPORATED  BY                                                                                                                                                                                                                                                                  |

 

 

68

----

 
|   |   | REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JUNE 4,  2007)                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
| 10.21  |   | Guaranty Agreement, dated as of May 30, 2007, made by TravelCenters  of America LLC, as Guarantor, for the benefit of HPT PSC Properties Trust and  HPT PSC Properties LLC.  (INCORPORATED  BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JUNE 4, 2007) |
|   |   |                                                                                                                                                                                                                                                                               |
| 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)                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.1   |   | Section 1350 Certification. (FURNISHED HEREWITH)                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                               |
| (+)    |   | Management contract or compensatory plan or agreement.                                                                                                                                                                                                                             |

 

 

69

----

 

**REPORT OF INDEPENDENT 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, 2007 and 2006, and the relatedconsolidated statements of income, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2007, 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 also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Hospitality Properties Trust’s internal control over financialreporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 21,2008 expressed an unqualified opinion thereon.

 
|                    |  /s/ Ernst & Young LLP |
|-------------------------|--------------------------------------|
|                    |
| Boston,  Massachusetts  |
| February 21,  2008 |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

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

 

We have audited Hospitality Properties Trust’sinternal control over financial reporting as of December 31, 2007, basedon 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 included in Item 9A of Hospitality PropertiesTrust’s Annual Report on Form 10-K under the heading Management Report onAssessment of Internal Control Over Financial Reporting. Our responsibility isto express an opinion on the company’s internal control over financialreporting based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting Oversight Board(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, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis 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, Hospitality PropertiesTrust maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2007, based on****theCOSO criteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the 2007 consolidatedfinancial statements****of Hospitality Properties Trust and ourreport dated February 21, 2008 expressed an unqualified opinion thereon.

 
|                    | /s/ Ernst &  Young LLP |
|-------------------------|---------------------------------|
|                    |
| Boston,  Massachusetts  |
| February 21,  2008 |

 

F-2

----

 

**HOSPITALITY PROPERTIES TRUST**

 

**CONSOLIDATED BALANCE SHEET**

 

(dollars in thousands, except share data)

 
| ** **                                                                                                                                                             | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                                                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                                                                                                                                   |       |                                  |       |   |   |
| Real estate  properties, at cost:                                                                                                                                      |       |                                  |       |   |   |
| Land                                                                                                                                                                   |       | $                                     | 1,377,520  |   | $ | 582,562 |   |
| Buildings,  improvements and equipment                                                                                                                                 |       | 4,818,711                             |       | 3,436,219 |   |
|                                                                                                                                                                   |       | 6,196,231                             |       | 4,018,781 |   |
| Accumulated  depreciation                                                                                                                                              |       | (849,470                              | )          | (702,513 | ) |
|                                                                                                                                                                   |       | 5,346,761                             |       | 3,316,268 |   |
| Cash and  cash equivalents                                                                                                                                             |       | 23,401                                |       | 553,256 |   |
| Restricted  cash (FF&E escrow)                                                                                                                                     |       | 28,134                                |       | 27,363 |   |
| Other assets,  net                                                                                                                                                     |       | 281,011                               |       | 60,576 |   |
|                                                                                                                                                                   |       | $                                     | 5,679,307  |   | $ | 3,957,463 |   |
|                                                                                                                                                                   |       |                                  |       |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                         |       |                                  |       |   |   |
|                                                                                                                                                                   |       |                                  |       |   |   |
| Revolving  credit facility                                                                                                                                             |       | $                                     | 158,000    |   | $ | — |   |
| Senior  notes, net of discounts                                                                                                                                        |       | 1,842,756                             |       | 1,196,130 |   |
| Convertible  senior notes                                                                                                                                              |       | 575,000                               |       | — |   |
| Mortgage  payable                                                                                                                                                      |       | 3,635                                 |       | 3,700 |   |
| Security  deposits                                                                                                                                                     |       | 169,406                               |       | 185,366 |   |
| Dividends  payable                                                                                                                                                     |       | 4,754                                 |       | 1,914 |   |
| Accounts  payable and other liabilities                                                                                                                                |       | 134,705                               |       | 119,536 |   |
| Due to  affiliate                                                                                                                                                      |       | 4,617                                 |       | 3,277 |   |
| Total  liabilities                                                                                                                                                     |       | 2,892,873                             |       | 1,509,923 |   |
|                                                                                                                                                                   |       |                                  |       |   |   |
| 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 |   |
| Series C  preferred shares; 7% cumulative redeemable; 12,700,000 shares and none issued  and outstanding, respectively, aggregate liquidation preference $317,500 |       | 306,833                               |       | — |   |
| Common  shares of beneficial interest; $0.01 par value;                                                                                                                |       |                                  |       |   |   |
| 150,000,000  shares authorized, 93,892,719 and 86,284,251 shares issued and outstanding,  respectively                                                                 |       | 939                                   |       | 863 |   |
| Additional  paid-in capital                                                                                                                                            |       | 3,048,881                             |       | 2,703,687 |   |
| Cumulative  net income                                                                                                                                                 |       | 1,711,079                             |       | 1,380,111 |   |
| Cumulative  preferred distributions                                                                                                                                    |       | (93,761                               | )          | (66,992 | ) |
| Cumulative  common distributions                                                                                                                                       |       | (2,270,843                            | )          | (1,653,435 | ) |
| Total  shareholders’ equity                                                                                                                                       |       | 2,786,434                             |       | 2,447,540 |   |
|                                                                                                                                                                   |       | $                                     | 5,679,307  |   | $ | 3,957,463 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-3

----

 

 

**HOSPITALITY PROPERTIES TRUST**

 

**CONSOLIDATED STATEMENT OF INCOME**

 

(in thousands, except per sharedata)

 
| ** **                                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues:**                                                                                              |       |                                       |       |   |   |   |   |
| Hotel  operating revenues                                                                                  |       | $                                          | 941,455    |   | $ | 879,324 |   | $ | 682,541 |   |
| Rental  income:                                                                                            |       |                                       |       |   |   |   |   |
| Minimum rent                                                                                               |       | 310,764                                    |       | 115,461 |   | 110,869 |   |
| Percentage  rent                                                                                           |       | 6,055                                      |       | 5,188 |   | 3,463 |   |
|                                                                                                       |       | 316,819                                    |       | 120,649 |   | 114,332 |   |
| FF&E  reserve income                                                                                   |       | 22,286                                     |       | 20,299 |   | 19,767 |   |
| Interest  income                                                                                           |       | 4,919                                      |       | 2,674 |   | 1,373 |   |
| Total  revenues                                                                                            |       | 1,285,479                                  |       | 1,022,946 |   | 818,013 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| **Expenses:**                                                                                              |       |                                       |       |   |   |   |   |
| Hotel  operating expenses                                                                                  |       | 657,000                                    |       | 618,334 |   | 476,858 |   |
| Interest  (including amortization of deferred financing costs of $3,659, $2,584 and  $2,894, respectively) |       | 140,517                                    |       | 81,451 |   | 65,263 |   |
| Depreciation  and amortization                                                                             |       | 216,688                                    |       | 141,198 |   | 127,242 |   |
| General and  administrative                                                                                |       | 37,223                                     |       | 25,090 |   | 22,514 |   |
| Loss on  asset impairment                                                                                  |       | 1,332                                      |       | — |   | 7,300 |   |
| TA spin off  costs                                                                                         |       | 2,711                                      |       | — |   | — |   |
| Total  expenses                                                                                            |       | 1,055,471                                  |       | 866,073 |   | 699,177 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| Income  before income taxes                                                                                |       | 230,008                                    |       | 156,873 |   | 118,836 |   |
| Income tax  expense                                                                                        |       | (2,191                                     | )          | (372 | ) | (57 | ) |
|                                                                                                       |       |                                       |       |   |   |   |   |
| Income from  continuing operations                                                                         |       | 227,817                                    |       | 156,501 |   | 118,779 |   |
| Discontinued  operations:                                                                                  |       |                                       |       |   |   |   |   |
| Income from  discontinued operations                                                                       |       | 7,440                                      |       | 12,538 |   | 11,124 |   |
| Gain on sale  of real estate used by discontinued operations                                               |       | 95,711                                     |       | — |   | — |   |
| Net Income                                                                                                 |       | 330,968                                    |       | 169,039 |   | 129,903 |   |
| Preferred  distributions                                                                                   |       | 26,769                                     |       | 7,656 |   | 7,656 |   |
| Net income  available for common shareholders                                                              |       | $                                          | 304,199    |   | $ | 161,383 |   | $ | 122,247 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| Weighted  average common shares outstanding                                                                |       | 93,109                                     |       | 73,279 |   | 69,866 |   |
|                                                                                                       |       |                                       |       |   |   |   |   |
| Basic and  diluted earnings per common share:                                                              |       |                                       |       |   |   |   |   |
| Income from  continuing operations available for common shareholders                                       |       | $                                          | 2.16       |   | $ | 2.03 |   | $ | 1.59 |   |
| Income from  discontinued operations available for common shareholders                                     |       | $                                          | 1.11       |   | $ | 0.17 |   | $ | 0.16 |   |
| Net income  available for common shareholders                                                              |       | $                                          | 3.27       |   | $ | 2.20 |   | $ | 1.75 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-4

----

 

**HOSPITALITY PROPERTIES TRUST**

 

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

 

(in thousands, except sharedata)

 
| ** **                        | ** ** | **Preferred Shares**  | ** ** | **Common Shares** | ** ** | ** **                 | ** ** | ** **            | ** ** | ** **                   | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------------|------------|----------------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Series B**          | ** ** | **Series C**      | ** ** | **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, 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 |   |
| Redemption of preferred shares    |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| 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 |   |
|                              |       |                       |       |                   |       |                       |       |                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares, net           |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | 14,300,000 |   | 143 |   | — |   | 641,509 |   | — |   | 641,652 |   |
| Common share grants               |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | 63,673 |   | 1 |   | — |   | 2,295 |   | — |   | 2,296 |   |
| Net income                        |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | — |   | 169,039 |   | 169,039 |   |
| Distributions                     |       | —                     |       | —                 |       | —                     |       | —                |       | (7,656                       | )          | — |   | — |   | (213,246 | ) | — |   | — |   | (220,902 | ) |
| Balance at December 31, 2006 |       | 3,450,000                  |       | 83,306                 |       | —                     |       | —                |       | (66,992                      | )          | 86,284,251 |   | 863 |   | (1,653,435 | ) | 2,703,687 |   | 1,380,111 |   | 2,447,540 |   |
|                              |       |                       |       |                   |       |                       |       |                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares, net           |       | —                     |       | —                 |       | 12,700,000                 |       | 306,833               |       | —                       |       | 7,550,000 |   | 75 |   | — |   | 343,376 |   | — |   | 650,284 |   |
| Common share grants               |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | 58,468 |   | 1 |   | — |   | 1,818 |   | — |   | 1,819 |   |
| Net income                        |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | — |   | — |   | — |   | — |   | 330,968 |   | 330,968 |   |
| Distributions                     |       | —                     |       | —                 |       | —                     |       | —                |       | (26,769                      | )          | — |   | — |   | (280,158 | ) | — |   | — |   | (306,927 | ) |
| Distribution of TA                |       | —                     |       | —                 |       | —                     |       | —                |       | —                       |       | — |   | — |   | (337,250 | ) | — |   | — |   | (337,250 | ) |
| Balance at December 31, 2007 |       | 3,450,000                  |       | $                      | 83,306     |                       | 12,700,000 |                  | $          | 306,833                      |       | $ | (93,761 | ) | 93,892,719 |   | $ | 939 |   | $ | (2,270,843 | ) | $ | 3,048,881 |   | $ | 1,711,079 |   | $ | 2,786,434 |   |
|                                   |            |                            |            |                        |            |                            |            |                       |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these financial statements.

 

F-5

----

 

**HOSPITALITY PROPERTIES TRUST**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 

(in thousands)

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                     |       |                                       |       |   |   |   |   |
| Net income                                                                     |       | $                                          | 330,968    |   | $ | 169,039 |   | $ | 129,903 |   |
| Adjustments  to reconcile net income to cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation  and amortization                                                 |       | 218,319                                    |       | 144,404 |   | 131,792 |   |
| Amortization  of deferred financing costs as interest                          |       | 3,659                                      |       | 2,584 |   | 2,894 |   |
| Straight  line rent adjustments                                                |       | (15,851                                    | )          | (113 | ) | — |   |
| Other  non-cash (income) expense, net                                          |       | (4,363                                     | )          | (2,969 | ) | (2,952 | ) |
| FF&E  reserve income and deposits                                          |       | (57,912                                    | )          | (46,095 | ) | (32,338 | ) |
| Gain on sale  of real estate used by discontinued operations                   |       | (95,711                                    | )          | — |   | — |   |
| Loss on  asset impairment                                                      |       | 1,332                                      |       | — |   | 7,300 |   |
| Changes in  assets and liabilities:                                            |       |                                       |       |   |   |   |   |
| Increase in  other assets                                                      |       | (14,089                                    | )          | (2,488 | ) | (1,091 | ) |
| Increase in  accounts payable and other                                        |       | 19,147                                     |       | 5,462 |   | 6,492 |   |
| Increase in  due to affiliate                                                  |       | 2,730                                      |       | 1,729 |   | 306 |   |
| Cash  provided by operating activities                                         |       | 388,229                                    |       | 271,553 |   | 242,306 |   |
| **Cash  Flows From Investing Activities:**                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate  acquisitions                                                      |       | (2,629,215                                 | )          | (320,776 | ) | (443,104 | ) |
| FF&E  reserve fundings                                                     |       | (64,241                                    | )          | (72,556 | ) | (45,390 | ) |
| Real estate  acquisition deposit                                               |       | —                                     |       | — |   | (10,000 | ) |
| Sale of real  estate used by discontinued operations                           |       | 205,350                                    |       | — |   | — |   |
| Increase  (decrease) in security deposits                                      |       | (15,960                                    | )          | 2 |   | 10,000 |   |
| Proceeds  from sale of real estate                                             |       | —                                     |       | — |   | 3,227 |   |
| Cash used in  investing activities                                             |       | (2,504,066                                 | )          | (393,330 | ) | (485,267 | ) |
| **Cash  Flows From Financing Activities:**                                     |       |                                       |       |   |   |   |   |
| Proceeds  from issuance of common shares, net                                  |       | 343,451                                    |       | 641,652 |   | 199,233 |   |
| Proceeds  from issuance of preferred shares, net                               |       | 306,833                                    |       | — |   | — |   |
| Issuance of  senior notes, net of discount                                     |       | 645,843                                    |       | 273,974 |   | 299,442 |   |
| Issuance of  convertible senior notes, net of discount                         |       | 575,000                                    |       | — |   | — |   |
| Draws on  revolving credit facility                                            |       | 1,022,000                                  |       | 511,000 |   | 319,000 |   |
| Repayments  of revolving credit facility                                       |       | (864,000                                   | )          | (546,000 | ) | (356,000 | ) |
| Draws on  interim credit facility                                              |       | 1,400,000                                  |       | — |   | — |   |
| Repayments  of interim credit facility                                         |       | (1,400,000                                 | )          | — |   | — |   |
| Deferred  finance costs incurred                                               |       | (17,892                                    | )          | (3,259 | ) | (7,339 | ) |
| Distributions  to preferred shareholders                                       |       | (23,929                                    | )          | (7,656 | ) | (7,656 | ) |
| Distributions  to common shareholders                                          |       | (280,158                                   | )          | (213,246 | ) | (201,045 | ) |
| Distribution  of TA to common shareholders                                     |       | (121,166                                   | )          | — |   | — |   |
| Cash  provided by financing activities                                         |       | 1,585,982                                  |       | 656,465 |   | 245,635 |   |
| Increase  (decrease) in cash and cash equivalents                              |       | (529,855                                   | )          | 534,688 |   | 2,674 |   |
| Cash and  cash equivalents at beginning of year                                |       | 553,256                                    |       | 18,568 |   | 15,894 |   |
| Cash and  cash equivalents at end of year                                      |       | $                                          | 23,401     |   | $ | 553,256 |   | $ | 18,568 |   |
| **Supplemental  Information:**                                                 |       |                                       |       |   |   |   |   |
| Cash paid  for interest                                                        |       | $                                          | 119,200    |   | $ | 78,157 |   | $ | 56,597 |   |
| Non-cash  investing activities:                                                |       |                                       |       |   |   |   |   |
| Property  managers deposits in FF&E reserve                                |       | 58,668                                     |       | 44,946 |   | 31,056 |   |
| Purchases of  fixed assets with FF&E reserve                               |       | (122,138                                   | )          | (116,129 | ) | (76,860 | ) |
| Non-cash  financing activities:                                                |       |                                       |       |   |   |   |   |
| Issuance of  common shares                                                     |       | 1,819                                      |       | 2,296 |   | 761 |   |
| Distribution  of net assets of TravelCenters of America LLC                    |       | (216,084                                   | )          | — |   | — |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F-6

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**HOSPITALITYPROPERTIES TRUST**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**December 31,2007**

 

**(dollars inthousands, except per share 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 real estate used in hospitalityindustries. At December 31, 2007, HPT, directly and through subsidiaries,owned 292 hotels and 185 travel centers.

 

At December 31, 2007, our properties were leased to and oroperated by subsidiaries of the following companies: Host Hotels &Resorts, Inc., or Host; Marriott International, Inc., or Marriott;InterContinental Hotels Group, plc, or InterContinental; Barcelo CrestlineCorporation, or Barcelo Crestline; Global Hyatt Corporation, or Hyatt; CarlsonHotels Worldwide, or Carlson; and TravelCenters of America, LLC, or TA.Hereinafter these hotel and travel center operators are sometimes referred toas 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.**We record real estateproperties 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. We depreciatereal estate properties  on a straightline basis over estimated useful lives of up to 40 years for buildings and improvementsand up to 12 years for personal property and we amortize finite lived intangible assets over the shorter of theiruseful lives or the term of the associated lease.

 

**Intangible Assets and Liabilities.**Intangibleassets consist of acquired trademarks and tradenames and below market groundleases. Intangible liabilities consist of acquired above market ground leases. Wedo not amortize our indefinite life trademarks and tradenames, but we evaluatethem for impairment. We amortize above and below market ground leases on astraight line basis over the term of the lease (19 and 11 years on a weightedaverage basis for intangible assets and liabilities, respectively). We includeintangible assets in other assets and intangible liabilities in accounts payableand other liabilities in the accompanying consolidated balance sheet. At December 31,2007, our intangible assets and liabilities were as follows:

 
| Assets:                                                                |   |   |    |
|------------------------------------------------------------------------|--------|--------|---------|
| Tradenames  and trademarks                                             |   | $      | 142,600 |   |
| Below market  ground leases, net of accumulated amortization of $3,208 |   | 45,868 |    |
|                                                                   |   | $      | 188,468 |   |
| Liabilities:                                                           |   |   |    |
| Above market  ground leases, net of accumulated amortization of $2,492 |   | $      | 8,158   |   |

 

F-7

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We had no intangible assets or liabilities at December 31, 2006. Forthe year ended December 31, 2007, amortization relating to intangibleassets and liabilities were $3,284 and $1,206, respectively.

 

As of December 31, 2007, amortization expense relating tointangible assets and liabilities is projected as follows:

 
| ** ** | ** ** | **Intangible  Assets** | ** ** | **Intangible  Liabilities** | ** ** |
|------------|------------|------------------------|------------|-----------------------------|------------|
|       |       |                   |       |                        |       |
| 2008       |       | $                      | 2,744      |                        | $          | (865 | ) |
| 2009       |       | 2,744                  |       | (734                        | )          |
| 2010       |       | 2,744                  |       | (726                        | )          |
| 2011       |       | 2,744                  |       | (695                        | )          |
| 2012       |       | 2,744                  |       | (653                        | )          |
| Thereafter |       | 32,148                 |       | (4,486                      | )          |
|       |       | $                      | 45,868     |                        | $          | (8,158 | ) |

 

**Impairment of Long Lived Assets.**We regularlyevaluate whether events or changes in circumstances have occurred that couldindicate an impairment in the value of our long lived assets. If there is anindication that the carrying value of an asset is not recoverable, we estimatethe projected undiscounted cash flows of the asset to determine if animpairment loss should be recognized. We determine the amount of an impairmentloss by comparing the historical carrying value of the asset to its estimatedfair value. We estimate fair value by evaluating recent financial performanceand projecting discounted cash flows of properties using standard industryvaluation techniques. In addition to consideration of impairment upon theevents or changes in circumstances described above, we regularly evaluate theremaining lives of its long lived assets. If we change estimated lives, weallocate the carrying values of affected assets over the revised remaininglives.

 

**Cash and Cash Equivalents**. We consider highlyliquid investments with original maturities of three months or less at date ofpurchase to be cash equivalents. The carrying amount of cash and cashequivalents 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**. We capitalize costsincurred to borrow and we amortize that cost as interest expense over the termof the related borrowing. Deferred financing costs were $25,352 and $10,335 at December 31,2007 and 2006, respectively, net of accumulated amortization of $8,210 and$5,335, respectively, and are included in other assets, net, in theaccompanying consolidated balance sheet. Future amortization of deferredfinancing fees to be recognized by us during the current terms of our loans asof December 31, 2007, are approximately $3,089 million in 2008, $3,063million in 2009, $2,810 million in 2010, $1,918 million 2011, $1,909 million in2012 and $12,563 million thereafter.

 

**Revenue Recognition.** We report hotel operatingrevenues for managed hotels in our consolidated statement of income. Wegenerally recognize hotel operating revenues, consisting primarily of room,food and beverage sales when services are provided. Our share of the netoperating results of our managed hotels in excess of the minimum returns dueus, or additional returns, are generally determined annually. We recognizeadditional returns due to us under our management agreements as income at yearend when all contingencies are met and the income is earned. We recognizedadditional returns of $24,181, $20,029 and $13,568 in 2007, 2006 and 2005,respectively.

 

We recognize rental income from operating leases on a straight linebasis over the life of the lease agreements. Rental income includes $15,851,$113, and $0 of adjustments necessary to record rent on the straight line basisin 2007, 2006 and 2005, respectively. Percentage rent due to us under ourleases is generally determined

 

F-8

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annually andis recognized as income at year end when all contingencies are met and the rentis earned. We recognized percentage rental income of $6,055, $5,188 and $3,463in 2007, 2006 and 2005, respectively.

 

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

 

**Per Common Share Amounts.**We compute percommon share amounts using the weighted average number of common sharesoutstanding during the period. We had no dilutive common share equivalentsduring the periods presented.

 

**Reclassifications.**We reclassified prior year’sfinancial statements to conform to the current year’s presentation.

 

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

 

**Segment Information.** As of December 31,2007, we have two reportable business segments: hotel and travel center realestate investments. Prior to January 31, 2007, our only reportable segmentwas hotel real estate investments.

 

**Income Taxes.** We have elected to be taxed as a REIT under the InternalRevenue Code of 1986, as amended and, as such, are generally not subject tofederal and most state income taxation on our operating income provided wedistribute our taxable income to our shareholders and meet certain organizationand operating requirements. We are subject to income tax in Canada, Puerto Ricoand certain states despite our REIT status. Further, we lease our managedhotels to our wholly owned TRSs that, unlike most of our subsidiaries, file aseparate consolidated tax return and are subject to federal, state and foreignincome taxes. Our consolidated income tax provision (or benefit) includes theincome tax provision (or benefit) related to the operations of our TRSs andcertain state and foreign income taxes incurred by us despite our REIT status.

 

**New Accounting Pronouncement.** In June 2006, the Financial Accounting Standards Board issuedInterpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN48. FIN 48 prescribes how we should recognize, measure and present in ourfinancial statements uncertain tax positions that have been taken or areexpected to be taken in a tax return. Pursuant to FIN 48, we can recognize atax benefit only if it is “more likely than not” that a particular tax positionwill be sustained upon examination or audit. To the extent the “more likelythan not” standard has been satisfied, the benefit associated with a taxposition is measured as the largest amount that is greater than 50% likely ofbeing realized upon settlement. As required, we adopted FIN 48 effective January 1,2007, and concluded that the effect was not material to our consolidated financialstatements. Accordingly, we did not record a cumulative effect adjustmentrelated to the adoption of FIN 48. Tax returns filed for the 2003 through 2007tax years are subject to examination by taxing authorities. We classifyinterest and penalties related to uncertain tax positions, if any, in ourfinancial statements as a component of general and administrative expense.

 

In September 2006, the Financial AccountingStandards Board, or FASB, issued Statement of Financial Accounting StandardsNo. 157, “Fair Value Measurement”, or SFAS No. 157, which defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurement.  This statementis effective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  We are currentlyevaluating the effect that the adoption of SFAS No. 157 will have on ourconsolidated financial statements; however, we do not anticipate the effect, ifany, will be material.

 

In February 2007, the FASB issued Statementof Financial Accounting Standards No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities”, or SFAS No. 159, which permits entities tochoose to measure many financial assets and financial liabilities at fairvalue.  Unrealized gains and losses onitems for which the fair value option has been elected are reported inearnings.  SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS No. 159will have on our consolidated financial statements; however, we do notanticipate the effect, if any, will be material. 

 

**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 years ended December 31, 2007, 2006 and 2005, 23,290 common shareswith an aggregate market value of $950, 25,950 common shares with an aggregatemarket value of $1,224 and 15,850 common shares with an aggregate market valueof $698, respectively, were awarded to our officers and certain employees ofour manager pursuant to these plans. In January 2007, we issued 1,500common shares with a market value of $71 to our two new trustees at the time oftheir election as trustees. In addition, each of our trustees were awarded 750common shares in 2007 with an aggregate market value of $166 and 750 commonshares each in 2006 with an

 

F-9

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aggregatevalue of $153, as part of their annual fees. Our independent trustees wereeach awarded 750 common shares in 2005 with an aggregate market value of $64,as part of their annual fees. The shares awarded to our trustees vestimmediately. The shares awarded to our officers and certain employees of ourmanager vest in three or five annual installments beginning on the date ofgrant. Share awards are expensed over their vesting period and are included ingeneral and administrative expenses. At December 31, 2007, 2,740,838 ofour common shares remain reserved for issuance under the Award Plans.

 

Under the terms of our management agreement with Reit Management &Research LLC, or RMR, on March 26, 2007, we issued 29,928 common shares inpayment of an incentive fee of $1,390 for services rendered by RMR during 2006.

 

InJanuary 2007, we sold 1,800,000 of our common shares at a price of $47.51per share in a public offering pursuant to an over allotment option granted tothe underwriters of our December 2006 common share offering. Net proceedsfrom this sale of $81,775 (after underwriting and other offering expenses) wereused to partially fund our acquisition of TravelCenters of America, Inc.,or TravelCenters (see Note 8).

 

InFebruary 2007, we sold 5,750,000 of our common shares at a price of $47.67per share in a public offering. Net proceeds from these sales of $261,677(after underwriting and other offering expenses) were used to reduce borrowingsunder our $1,400,000 interim loan borrowing, or the Acquisition Facility (seeNote 8).

 

InFebruary 2007, we sold 12,700,000 Series C cumulative redeemablepreferred shares at a price of $25.00 per share in a public offering. Netproceeds from these sales of $306,833 (after underwriting and other offeringexpenses) were used to reduce borrowings under our Acquisition Facility (seeNote 8). Each of our Series C preferred shares has a distribution rate of$1.75 per annum, payable in equal quarterly amounts, and a liquidationpreference of $25.00 per share ($317,500 in aggregate). The Series Cpreferred shares are redeemable at our option for $25.00 each plus accrued andunpaid distributions at any time on or after February 15, 2012.

 

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 $25.00 ($86,250 inaggregate). Series B preferred shares are redeemable at our option for$25.00 each plus accrued and unpaid distributions at any time on or after December 10,2007.

 

Cashdistributions paid or payable by us to our common shareholders for the yearsended December 31, 2007, 2006 and 2005, were $3.06 per share, $2.95 pershare and $2.90 per share, respectively. Further, as described in Note 8, in January 2007,we distributed all of the shares of our former subsidiary, TA, to our commonshareholders. The characterization for income tax reporting purposes ofthe distributions to our common shareholders in 2007 is as follows:  45.05% ordinary income, 11.53% capital gain,39.23% return of capital, and 4.19% un-recaptured section 1250 gain. In2006 and 2005, the characterization was 82.6% and 96.9% ordinary income,respectively, and 17.4% and 3.1% return of capital, respectively.

 

**4. Management Agreements and Leases**

 

As of December 31, 2007, we owned 292 hotels and 185 travelcenters which are grouped into twelve combinations. We do not operate any ofour properties. 201 of our hotels are leased to our TRSs and managed by anindependent hotel operating company and 91 are leased to third parties. Our tenhotel combinations are managed by or leased to separate subsidiaries of hoteloperating companies including InterContinental, Marriott, Host, Barcelo Crestline,Hyatt, and Carlson. Our hotel agreements have initial terms expiring between2010 and 2031. Each of these agreements is for a combination of between 10 and76 of our hotels. The agreements contain renewal options for all, but not lessthan all, of the affected properties, and the renewal terms total 20 to 40years. Each agreement generally requires the third party manager or tenant to: (i) makepayments to us of minimum returns or minimum rents; (ii) deposit apercentage of total hotel sales into reserves established for the regularrefurbishment of our hotels, or FF&E reserves; (iii) make payments tous 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

 

F-10

----

 

provideddeposits or guarantees to secure their obligation to pay us. Our 185 travelcenters are leased to and operated by separate subsidiaries of TA under twoagreements. Our lease for 145 travel centers expires in 2022. Our lease for 40travel centers expires in 2024 and has two fifteen year renewal options. Bothof the leases with TA require them to: (i) make minimum payments to us ofminimum rents; and (ii) pay us 3% of non-fuel revenue and .3% of fuelrevenues over threshold amounts to be established in 2011 and 2012 respectivelyand (iii) maintain the leased travel centers, including structural andnon-structural components. TA has provided guarantees of the tenantsobligations under the leases.

 

As of December 31, 2007, our management agreements and leasesprovide for minimum return payments or minimum rents to be paid to us duringthe remaining initial terms as follows:

 
| 2008       |   | $         | 564,604   |   |
|------------|--------|-----------|-----------|--------|
| 2009       |   | 568,679   |      |
| 2010       |   | 572,693   |      |
| 2011       |   | 558,381   |      |
| 2012       |   | 563,438   |      |
| Thereafter |   | 6,169,859 |      |
|       |   | $         | 8,997,654 |   |

 

As of December 31, 2007, the average remaining initial terms ofour leases and management agreements, weighted based on minimum returns orrents from third parties, was approximately 15.5 years, and the weightedaverage remaining total term, including renewal options which may beexercised, was 38 years.

 

Our hotel operating agreements generally provide that, if necessary, wewill provide our managers and tenants funding for capital improvements to ourproperties in excess of amounts available in escrowed FF&E reserves. To theextent that we make such additional fundings, our annual minimum returns orrent generally increase by a percentage of the amount we fund. One of ourleases with TA provides for us to fund up to $25 million annually forthe first five years of the lease for certain specified capital improvements tothe leased travel centers. This funding is cumulative and may be drawn byTA from us in subsequent years until December 2015. We will own allcapital improvements funded by us under this agreement. There will not be anyadjustment in our minimum rent as we fund these amounts. At December 31,2007, we expect to provide funding for capital improvements at our hotels andtravel centers of approximately $129,000 in 2008.

 

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 $32,473 at December 31,2007, 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.

 

**5. Real Estate Properties**

 

Ourreal estate properties, at cost, consisted of land of $1,377,520, buildings andimprovements of $4,305,529 and furniture, fixtures and equipment of $513,182,as of December 31, 2007; and land of $582,562, buildings and improvementsof $3,027,204 and furniture, fixtures and equipment of $409,015 as of December 31,2006. In December 2007, our board of trustees authorized us to pursue thesale of three hotels. In connection with this decision, we recorded a $1,332loss on asset impairment to reduce the carrying value of one hotel to itsestimated net realizable value less costs to sell. The $15,767 carrying valueof the hotels held for sale at December 31, 2007, is included in otherassets in the accompanying consolidated balance sheet. In February 2008,we sold one hotel with a carrying value of $6,951 for net proceeds ofapproximately $7,644.

 

F-11

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During 2007, 2006 and 2005,we invested $64,241, $72,555 and $45,390, respectively, in certain of ourproperties that are leased to or managed by others, which resulted in increasesin our annual minimum returns and rents of $6,003, $6,981 and $2,384 in 2007,2006 and 2005, respectively.

 

AtDecember 31, 2007, 14 of our hotels were on leased land. In each case, theremaining term of the ground lease (including renewal options) is in excess of27 years, and the ground lessors are unrelated to us. Ground rent payable undernine of the ground leases is generally calculated as a percentage of hotelrevenues. 12 of the 14 ground leases require minimum annual rents ranging fromapproximately $102 to $556 per year; future rents under two ground leases havebeen pre-paid. 26 of our travel centers are on land leased partially or in itsentirety. The remaining terms on the leases range from two to 35 years withrents ranging from approximately $2 to $2,043 per year. Generally payments ofground lease obligations are made by our managers or tenants. However, if amanager or tenant did not perform obligations under a ground lease or didnot renew any ground lease, we might have to perform obligations under theground lease or renew the ground lease in order to protect our investment inthe affected property. Any pledge of our interests in a ground lease may requirethe consent of the applicable ground lessor and its lenders.

 

**6. Indebtedness**

 

At December 31, 2007 and 2006, our indebtedness was as follows:

 
| ** **                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| 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                               |       | 300,000 |   |
| Senior  Notes, due 2016 at 6.3%             |       | 275,000                               |       | 275,000 |   |
| Senior  Notes, due 2017 at 5.625%           |       | 300,000                               |       | — |   |
| Convertible  Senior Notes, due 2027 at 3.8% |       | 575,000                               |       | — |   |
| Senior  Notes, due 2018 at 6.7%             |       | 350,000                               |       | — |   |
| Unamortized  discounts                      |       | (7,244                                | )          | (3,870 | ) |
| Total  unsecured senior notes               |       | 2,417,756                             |       | 1,196,130 |   |
| Unsecured  revolving credit facility        |       | 158,000                               |       | — |   |
| Mortgage  Note, due 2011 at 8.3%            |       | 3,635                                 |       | 3,700 |   |
|                                        |       | $                                     | 2,579,391  |   | $ | 1,199,830 |   |

 

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.

 

We have a $750,000, interest only, unsecured revolving credit facilitywith a group of institutional lenders. Our credit facility matures in October 2010and may be extended at our option to October 2011 upon payment of anextension fee. Funds may be drawn, repaid and redrawn until maturity, andno principal payment is due until maturity. The interest rate on drawings underthe credit facility is LIBOR plus a spread (5.41% per annum at December 31,2007). As of December 31, 2007, we had $158,000 outstanding under ourrevolving credit facility and $592,000 available to be drawn for acquisitionsand general business purposes. During 2007, 2006 and 2005, the weighted averageinterest rate on the amounts outstanding under our revolving credit facilitywas 5.9%, 5.6% and 4.2%, respectively.

 

In March 2007, we sold $575,000 of 3.8%convertible senior notes due 2027. Net proceeds from these offerings of$562,525 (after placement and other offering expenses) were used to repayamounts outstanding under the Acquisition Facility (see Note 8) and for generalbusiness purposes. The convertible senior notes are convertible if certainconditions are met (including certain changes in control) into cash equal tothe principal amount of the notes and, to the extent the market price of ourcommon shares exceeds the initial exchange price of $50.50 per

 

F-12

----

 

share,subject to adjustment, either cash or our common shares at our option with avalue based on such excess amount. Holders of our convertible senior notes may requireus to repurchase all or a portion of the notes on March 20, 2012, March 15,2017, and March 15, 2022, or upon the occurrence of certain change incontrol events.

 

On March 12, 2007, we sold $300,000 of 5.625%senior notes due 2017. Net proceeds from this offering of $296,468 (afterplacement and other offering expenses) were used to reduce borrowings under ourAcquisition Facility (see Note 8).

 

On September 24, 2007, we sold $350,000 of 6.7%unsecured senior notes due 2018. Net proceeds from this offering of $344,226(after underwriting and other offering expenses) were used to reduce borrowingsunder our revolving credit facility.

 

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, 2007 and 2006, the estimated aggregate fairvalues of our indebtedness were as follows:

 
| ** **                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Revolving  credit facility at 5.41%         |       | $                                     | 158,000    |   | $ | — |   |
| Senior  Notes, due 2008 at 7%               |       | 153,738                               |       | 154,860 |   |
| Senior  Notes, due 2010 at 9.125%           |       | 55,582                                |       | 57,263 |   |
| Mortgage  Note, due 2011 at 8.3%            |       | 4,254                                 |       | 4,279 |   |
| Senior  Notes, due 2012 at 6.85%            |       | 131,053                               |       | 134,953 |   |
| Senior  Notes, due 2013 at 6.75%            |       | 308,985                               |       | 321,667 |   |
| Senior  Notes, due 2015 at 5.125%           |       | 278,414                               |       | 292,082 |   |
| Senior  Notes, due 2016 at 6.3%             |       | 265,262                               |       | 284,739 |   |
| Senior  Notes, due 2017 at 5.625%           |       | 277,600                               |       | — |   |
| Convertible  Senior Notes, due 2027 at 3.8% |       | 604,922                               |       | — |   |
| Senior  Notes, due 2018 at 6.7%             |       | 347,505                               |       | — |   |
|                                        |       | $                                     | 2,585,315  |   | $ | 1,249,843 |   |

 

We estimate fair value of ourindebtedness using discounted cash flow analysis and currently prevailinginterest rates.

 

**7. Income Taxes**

 

Our provision for income taxes consists of thefollowing:

 
| ** **            | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|
| ** **            | ** ** | **2007**                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current-              | Federal    |                                                          | $          | 70 |   | $ | — |   | $ | 6 |   |
|                  | State      |                                                          | 1,410      |   | 225 |   | — |   |
|                  | Foreign    |                                                          | 761        |   | 105 |   | — |   |
|                  |       | 2,241                                                         |       | 330 |   | 6 |   |
| Deferred-             | Federal    |                                                          | —     |   | — |   | — |   |
|                  | State      |                                                          | —     |   | — |   | — |   |
|                  | Foreign    |                                                          | (50        | ) | 42 |   | 51 |   |
|                  |       | (50                                                           | )          | 42 |   | 51 |   |
| Income tax  provision |       | $                                                             | 2,191      |   | $ | 372 |   | $ | 57 |   |

 

F-13

----

 

A reconciliation of our effective tax rate and theU.S. Federal statutory income tax rate is as follows:

 
| ** **                                                | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Taxes at  statutory U.S. federal income tax rate          |       | 35.0%                                                        |       | 35.0% |   | 35.0% |   |
| Nontaxable  income of HPT                                 |       | (35.0)%                                                      |       | (35.0)% |   | (35.0)% |   |
| State and  local income taxes, net of federal tax benefit |       | 4.2%                                                         |       | 4.0% |   | 3.9% |   |
| Alternative  Minimum Tax                                  |       | 0.1%                                                         |       | 0.0% |   | 0.0% |   |
| Foreign  taxes                                            |       | 0.2%                                                         |       | 0.1% |   | 0.0% |   |
| Change in  valuation allowance                            |       | (0.5)%                                                       |       | (1.0)% |   | (0.2)% |   |
| Other  differences, net                                   |       | (3.4)%                                                       |       | (2.9)% |   | (3.7)% |   |
| Effective  tax rate                                       |       | 0.6%                                                         |       | 0.2% |   | 0.0% |   |

 

Significant components of our deferred tax assets and liabilities areas follows:

 
| ** **                             | ** ** | **For the year ended December 31,** |       |
|----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                                     | ** ** | **2006** | ** ** |
| Deferred tax  assets:                  |       |                                                         |       |   |   |
| Tax credits                            |       | $                                                            | 643        |   | $ | 101 |   |
| Tax loss  carry forwards               |       | 8,659                                                        |       | 9,948 |   |
| Other                                  |       | 124                                                          |       | 478 |   |
|                                   |       | 9,426                                                        |       | 10,527 |   |
| Valuation  allowance:                  |       | (9,426                                                       | )          | (10,527 | ) |
|                                   |       | —                                                       |       | — |   |
| Deferred tax  liabilities:             |       |                                                         |       |   |   |
| Puerto Rico  basis difference          |       | (9,376                                                       | )          | (9,426 | ) |
|                                   |       | (9,376                                                       | )          | (9,426 | ) |
|                                   |       |                                                         |       |   |   |
| Net deferred  tax assets (liabilities) |       | $                                                            | (9,376     | ) | $ | (9,426 | ) |

 

Deferredtax liabilities are included in accounts payable and other liabilities in theaccompanying consolidated balance sheet.

 

AtDecember 31, 2007 and 2006, we had a deferred tax liability related to thehotel we purchased in Puerto Rico. Specifically, we acquired all of theoutstanding stock of a C corporation that owned the hotel 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. Because we made no such election for Puerto Rico tax purposes werecorded in purchase accounting a deferred tax liability for these basisdifferences at our Puerto Rico effective tax rate.

 

At December 31, 2007 and 2006, our consolidated TRS had a netdeferred tax asset, prior to any valuation allowance, of $9,426 and $10,527,respectively, which consists primarily of net operating loss carryforwards andtax credits. Because of the uncertainty surrounding our ability to realize thefuture benefit of these assets we have

 

F-14

----

 

provided a100% valuation allowance as of December 31, 2007 and 2006. As of December 31,2007 our consolidated TRS had net operating loss carryforwards for federalincome tax purposes of approximately $22,396 which begin to expire in 2023 if unused.

 

**8. Acquisitions**

 

OnJanuary 31, 2007, we completed our acquisition of TravelCenters pursuantto the Agreement and Plan of Merger dated as of September 15, 2006, asamended, among TravelCenters, us, one of our former subsidiaries and thestockholders of TravelCenters. Upon completion of the acquisition, werestructured the business of TravelCenters and distributed all of the commonshares of our former subsidiary, TA, to our shareholders in a spin offtransaction. The acquisition of TravelCenters, the restructuring of theTravelCenters business and the spin off transaction are collectively referredto herein as the TA Transaction.

 

Asa part of the restructuring of TravelCenters which occurred in connectionwith the TA Transaction, on January 31, 2007:

 

•                  TravelCentersbecame a subsidiary of our subsidiary, TA;

 

•                  certainreal property interests of 146 travel centers that were operated byTravelCenters and certain other assets used in connection with the travelcenter business with an estimated total value of $1,697,221 were transferred tosubsidiaries of ours that were not owned by TA;

 

•                  TAbecame the owner of all of the working capital of TravelCenters, includingcurrent assets (primarily consisting of cash, receivables and inventory) andcurrent liabilities (primarily consisting of trade payables and accruedliabilities);

 

•                  wecontributed cash of $121,166 to TA so that the sum of its current assets, netof current liabilities, was $200,000;

 

•                  TAbecame the owner of one travel center in Ontario, Canada, the operator of twotravel centers leased from owners other than us, the manager of one travelcenter for an owner other than us, the franchisor of 13 travel centers ownedand operated by third parties and the owner of certain other assets historicallyowned and used by TravelCenters;

 

•                  Weentered into a lease of the 146 travel centers we acquired (one travel centerwas subsequently disposed of) and certain related assets to TA; and

 

•                  TAcommenced operating the travel center business formerly conducted byTravelCenters.

 

After this restructuring, on January 31, 2007,we distributed all of the shares of TA to our common shareholders of record on January 26,2007. The book value of this distribution was $337,250. Shareholders wereentitled to receive one TA common share for every ten of our common sharesowned on the record date. Fractional shares were issued as necessary. TA’scommon shares are listed on the American Stock Exchange under the symbol “TA”.We expensed $2,711 of costs in connection with the spin off transaction.

 

Thecost of the TravelCenters acquisition was as follows:

 
| Cash  consideration                   |   | $       | 1,222,336 |   |
|---------------------------------------|--------|---------|-----------|--------|
| Indebtedness  extinguished at closing |   | 681,148 |      |
| Fees and  other expenses              |   | 9,821   |      |
|                                  |   | $       | 1,913,305 |   |

 

Weallocated the cost to the fair value of assets and liabilities acquired asfollows:

 
| Net assets  and liabilities retained by TA in the restructuring  |   | $         | 216,084   |   |
|------------------------------------------------------------------|--------|-----------|-----------|--------|
| Assets and  liabilities transferred to HPT in the restructuring: |   |      |      |
| Real estate                                                      |   | 1,532,895 |      |
| Trademarks  and tradenames                                       |   | 142,600   |      |
| Other, net                                                       |   | 21,726    |      |
|                                                             |   | $         | 1,913,305 |   |

 

F-15

----

 

On January 22, 2007, we entered into a new$2,000,000 interim loan agreement, or the Acquisition Facility, with a group ofinstitutional lenders that became effective concurrently with our acquisitionof TravelCenters. We funded the acquisition of TravelCenters and thecapitalization of TA with a $1,400,000 borrowing under the Acquisition Facilityand our then existing cash balances. We subsequently repaid all borrowingsunder the Acquisition Facility during the first quarter of 2007 with netproceeds from the financing transactions described in Notes 3 and 6. The annualinterest rate of the Acquisition Facility was 6.02% during the period it wasoutstanding.

 

On May 30, 2007, we acquired Petro StoppingCenters Holdings, L.P., or Petro, for approximately $630,000 plus certain costs.Petro owns 40 travel centers located in 25 states. In connection with ouracquisition of Petro, we acquired certain Petro properties which secure debtthat was previously issued by Petro Stopping Centers, L.P., or Petro Centers, aformer subsidiary of Petro acquired by TA on May 30, 2007. Upon closing ofour acquisition of Petro, the Petro debt assumed by TA was covenant defeasedand funds were escrowed by TA at closing and used to redeem the Petro Centersdebt on February 15, 2008. We agreed to pay certain costs associated withour acquisition of Petro, including those related to the defeasance andprepayment of the Petro Centers debt and customary closing costs, that totaledapproximately $25,000. Simultaneous with our acquisition of Petro, we leasedthe acquired travel centers to TA.

 

Theallocation of the Petro purchase price to the fair value of assets acquired wasas follows:

 
| Real estate     |   | $      | 638,300 |   |
|----------------------|--------|--------|---------|--------|
| Leasehold  interests |   | 16,700 |    |
|                 |   | $      | 655,000 |   |

 

The following table presents our pro forma resultsof operations as if the TA Transaction and the Petro acquisition and therelated financing transactions were completed on January 1, 2006. This proforma data is not necessarily indicative of what our actual results ofoperations would have been for the periods presented, nor does it represent theresults of operations for any future period.

 
| ** **                                                           | ** ** | **(unaudited)**                                          | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Twelve months ended December 31,** | ** ** |
| ** **                                                           | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| Total  revenues                                                      |       | $                                                        | 1,325,286  |   | $ | 1,255,867 |   |
| Income from  continuing operations                                   |       | 236,182                                                  |       | 220,013 |   |
| Income from  continuing operations available for common shareholders |       | 206,303                                                  |       | 190,132 |   |
| Basic and  diluted per common share data:                            |       |                                                     |       |   |   |   |   |
| Income from  continuing operations available for common shareholders |       | $                                                        | 2.20       |   | $ | 2.06 |   |
|                                                                      |            |                                                          |            |  |  |  |  |  |  |

Income from continuing operations and incomefrom continuing operations available for common shareholders for the twelvemonths ended December 31, 2007, excludes $2,711, or $0.03 per commonshare, of costs related to the spin off of TA.

 

F-16

----

 

**9. Discontinued Operations**

 

On July 26, 2007, we sold 18 Homestead Studio Suites hotels for grossproceeds of $205,350 and recognized a gain on sale of $95,711. Seventeen ofthese hotels were sold to an unrelated party. One hotel was purchased by asubsidiary of HRPT Properties Trust, a publicly traded real estate investmenttrust that is managed by Reit Management & Research LLC, or RMR, whichis also our manager. We used the net proceeds from these sales, totaling$189,309 after the refund of a $15,960 security deposit and payment of closingcosts, to reduce amounts outstanding under our revolving credit facility. Wehave reclassified our consolidated statement of income for all periodspresented to show the results of operations of the hotels which have been soldas discontinued. Following is a summary of the operating results of thesediscontinued operations:

 
| ** **                           | ** ** | **Twelve Months Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Minimum rent                         |       | $                                                        | 9,218      |   | $ | 15,960 |   | $ | 15,960 |   |
| Percentage  rent                     |       | 267                                                      |       | 509 |   | 439 |   |
| Total  revenue                       |       | 9,485                                                    |       | 16,469 |   | 16,399 |   |
| Depreciation  and amortization       |       | (1,636                                                   | )          | (3,206 | ) | (4,550 | ) |
| General and  administrative          |       | (409                                                     | )          | (725 | ) | (725 | ) |
| Income from  discontinued operations |       | $                                                        | 7,440      |   | $ | 12,538 |   | $ | 11,124 |   |

 

**10. Transactions with Affiliates**

 

RMR originates and presents investment opportunities to our board andprovides management and administrative services to us. Our contract with RMRfor such services continues from year to year and is subject to annual approvalby a board committee comprised of our independent trustees. RMR is compensatedat an annual rate equal to 0.7% of our average real estate investments, asdefined, up to the first $250,000 of such investments and 0.5% thereafter, plusan incentive fee based upon increases in cash available for distribution pershare, as defined. OnJanuary 6, 2006, we entered into a management agreement with RMR tooperate an office building which we acquired in connection with an adjacenthotel. Fees paid to RMR under this management agreement are based on aformula, generally 3% of gross collected rents as a property management fee and5% of gross construction costs as a construction management fee. Aggregate feesearned by RMR from us, excluding incentive fees, for the years ended 2007, 2006and 2005 were $29,937, $19,891 and $17,730, respectively. Incentive fees arepaid in restricted common shares based on a formula. Incentive fees earned byRMR from us for 2007, 2006 and 2005 were $1,862, $1,487 and $1,397,respectively. We expect to issue 53,541 restricted common shares insatisfaction of the 2007 incentive fees in 2008. RMR also provides the internal audit function for us and for otherpublicly traded companies to which it provides management or other services.Our pro rata share of RMR’s costs in providing that function for the yearsended 2007, 2006 and 2005 was $169, $173 and $112, respectively. As of December 31,2007, RMR and its affiliates owned 344,856 of our common shares. RMR isbeneficially owned by Barry M. Portnoy and his son, Adam D. Portnoy, ourmanaging trustees.

 

In order to effect the TA Transaction, we entered into a transactionagreement effective as of January 29, 2007, with TA and RMR. Thatagreement provided for certain of the steps in the restructuring of theTravelCenters business and the spin off. In addition, under this agreement TAentered into a management and shared services agreement with RMR, TA granted tous a right of first refusal to purchase, lease, mortgage or otherwise financeany interest it owns or acquires in a travel center before it is purchased,sold, leased, mortgaged or otherwise financed with another party, and TA agreedto indemnify us for liabilities relating to its business and operations forperiods before and after the spin off and for liabilities relating to theownership and operation of the leased travel centers which arise during theterm of our lease with TA.

 

F-17

----

 

**11. Concentration**

 

At December 31, 2007, our 477 properties were located in 44 statesin the United States, Ontario, Canada and Puerto Rico. Between 5% and 12% ofour properties, by investment, were located in each of California, Texas andGeorgia. Our two hotels in Ontario, Canada and our hotel in Puerto Ricorepresent 1% and 2% of our hotels, by investment, respectively.

 

All of our managers and tenants are subsidiaries of other companies. Thepercentage of our minimum return payments and minimum rents, for eachcombination is shown below, as of December 31, 2007.

 
| **Manager / Tenant is a** | ** ** | **Number of** | ** ** | **Minimum Return /** | ** ** | **% of** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|--------------------------------|------------|---------------|------------|
| **Subsidiary of:**                       | ** ** | **Properties**     | ** ** | **Minimum Rent**          | ** ** | **Total**     | ** ** |
| TA                                            |       | 145                |       | $                              | 155,713    |          | 28%        |   |
| TA                                            |       | 40                 |       | 62,225                         |       | 11%           |       |
| Host*                                         |       | 53                 |       | 58,379                         |       | 10%           |       |
| InterContinental                              |       | 76                 |       | 50,000                         |       | 9%            |       |
| Marriott                                      |       | 35                 |       | 49,034                         |       | 9%            |       |
| InterContinental                              |       | 14                 |       | 42,873                         |       | 8%            |       |
| InterContinental                              |       | 31                 |       | 37,882                         |       | 7%            |       |
| Barcelo  Crestline**                          |       | 19                 |       | 28,508                         |       | 5%            |       |
| Hyatt                                         |       | 24                 |       | 23,050                         |       | 4%            |       |
| InterContinental                              |       | 10                 |       | 20,306                         |       | 4%            |       |
| Host*                                         |       | 18                 |       | 19,287                         |       | 3%            |       |
| Carlson                                       |       | 12                 |       | 11,890                         |       | 2%            |       |
| Total                                         |       | 477                |       | $                              | 559,147    |          | 100%       |   |

 

*These hotels are subleasedto Barceló Crestline and managed by Marriott.

**These hotels are managedby Marriott.

 

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 ($36,678 remaining at December 31, 2007). The guarantee providedby Carlson with respect to the 12 hotels managed by Carlson is limited to$40,000 ($40,000 remaining at December 31, 2007). The combined guaranteeprovided by InterContinental for the 131 hotels managed or leased byInterContinental is limited to $125,000 ($115,922 remaining at December 31,2007) and will expire if and when the hotels achieve stipulated operatingresults. The guarantees provided by TA are not limited and do not expire.

 

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 $9,780, $3,542 and $2,491 less than theguaranteed minimum returns due us in 2007, 2006 and 2005, respectively. Theseamounts have been paid by the hotel managers or their guarantors and arereflected as a reduction of hotel operating expenses in our consolidated statementof income.

 

F-18

----

 

**12. SelectedQuarterly Financial Data (Unaudited)**

** **
| ** **                                                                           | ** ** | **2007**                   | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                           | ** ** | **First   Quarter****(3)** | ** ** | **Second   Quarter****(3)** | ** ** | **Third  Quarter****(3)** | ** ** | **Fourth   Quarter** | ** ** |
| Revenues                                                                             |       | $                          | 290,668    |   | $ | 333,741 |   | $ | 334,310 |   | $ | 326,760 |   |
| Income from  continuing operations                                                   |       | 40,314                     |       | 51,227 |   | 52,822 |   | 83,454 |   |
| Income from  discontinued operations                                                 |       | 3,058                      |       | 3,055 |   | 97,038 |   | — |   |
| Net income  available for common shareholders                                        |       | 39,013                     |       | 46,812 |   | 142,390 |   | 75,984 |   |
| Income from continuing operations available  for common shareholders per share (1)   |       | .40                        |       | .47 |   | .48 |   | .81 |   |
| Income from discontinued operations  available for common shareholders per share (1) |       | .03                        |       | .03 |   | 1.03 |   | — |   |
| Net income  available for common shareholders per share (1)                          |       | .43                        |       | .50 |   | 1.52 |   | .81 |   |
| Distributions  per common share (2)                                                  |       | .76                        |       | .76 |   | .77 |   | .77 |   |
|                                                                                      |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

 
| ** **                                                                           | ** ** | **2006****(3)** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                           | ** ** | **First**       | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                                                                           | ** ** | **Quarter**     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Revenues                                                                             |       | $               | 235,726    |   | $ | 268,208 |   | $ | 265,125 |   | $ | 253,887 |   |
| Income from  continuing operations                                                   |       | 32,367          |       | 32,321 |   | 33,510 |   | 58,303 |   |
| Income from  discontinued operations                                                 |       | 2,866           |       | 3,056 |   | 3,053 |   | 3,563 |   |
| Net income  available for common shareholders                                        |       | 33,319          |       | 33,463 |   | 34,649 |   | 59,952 |   |
| Income from continuing operations available  for common shareholders per share (1)   |       | .42             |       | .42 |   | .43 |   | .75 |   |
| Income from discontinued operations  available for common shareholders per share (1) |       | .04             |       | .04 |   | .04 |   | .05 |   |
| Net income  available for common shareholders per share (1)                          |       | .46             |       | .47 |   | .47 |   | .79 |   |
| Distributions  per common share (2)                                                  |       | .73             |       | .74 |   | .74 |   | .74 |   |
|                                                                                      |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

(1)   The sum of per common share amounts for the fourquarters differs from annual per share amounts due to the required method ofcomputing 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.

(3)   Amounts previously reported have beenadjusted to reflect the sale of a discontinued operation in July 2007 (seeNote 9).

 

F-19

----

 

**13. Segment Information**

 

We have tworeportable business segments: hotel investments and travel center investments.Prior to our acquisition of TravelCenters in January 2007, our only reportablesegment was hotels.

 
| ** **                               | ** ** | **Year Ended December 31, 2007** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Hotels**                                      | ** ** | **Travel  Centers** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Hotel  operating revenues                |       | $                                               | 941,455    |   | $ | — |   | $ | — |   | $ | 941,455 |   |
| Minimum rent                             |       | 117,193                                         |       | 193,571 |   | — |   | 310,764 |   |
| Percentage rent                          |       | 6,055                                           |       | — |   | — |   | 6,055 |   |
| FF&E reserve income                  |       | 22,286                                          |       | — |   | — |   | 22,286 |   |
| Interest income                          |       | —                                          |       | — |   | 4,919 |   | 4,919 |   |
| Total revenues                           |       | 1,086,989                                       |       | 193,571 |   | 4,919 |   | 1,285,479 |   |
| Hotel operating expenses                 |       | 657,000                                         |       | — |   | — |   | 657,000 |   |
| Operating income                         |       | 429,989                                         |       | 193,571 |   | 4,919 |   | 628,479 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| Interest expense                         |       | —                                          |       | — |   | 140,517 |   | 140,517 |   |
| Depreciation and amortization expense    |       | 147,401                                         |       | 69,287 |   | — |   | 216,688 |   |
| General and administrative expense       |       | —                                          |       | — |   | 37,223 |   | 37,223 |   |
| TA spin off costs                        |       | —                                          |       | — |   | 2,711 |   | 2,711 |   |
| Loss on asset impairment                 |       | 1,332                                           |       | — |   | — |   | 1,332 |   |
| Total expenses                           |       | 148,733                                         |       | 69,287 |   | 180,451 |   | 398,471 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| Income before income taxes               |       | 281,256                                         |       | 124,284 |   | (175,532 | ) | 230,008 |   |
| Income tax expense                       |       | —                                          |       | — |   | (2,191 | ) | (2,191 | ) |
|                                     |       |                                            |       |   |   |   |   |   |   |
| Income (loss) from continuing operations |       | $                                               | 281,256    |   | $ | 124,284 |   | $ | (177,723 | ) | $ | 227,817 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| Total assets                             |       | $                                               | 3,247,770  |   | $ | 2,378,651 |   | $ | 52,886 |   | $ | 5,679,307 |   |

 

F-20

----

 

**Hospitality Properties Trust**

 

**SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION**

**DECEMBER 31, 2007**

**(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)** | ** ** |
| 145 TravelCenters of America     |       | $                | —     |                          | $          | 586                      |       | $                                                  | 885        |       | $          | 51                       |       | $            | 596        |   | $ | 926 |   | $ | 1,522 |   |
| 40 Petro Stopping Centers        |       | —           | (2)        | 229                           |       | 401                      |       | —                                             |       | 229        |       | 401                      |       | 630          |       |
| 71 Courtyards                    |       | —           |       | 127                           |       | 643                      |       | 40                                                 |       | 126        |       | 684                      |       | 810          |       |
| 76 Candlewood Hotels             |       | 4                |       | 86                            |       | 457                      |       | 2                                                  |       | 86         |       | 459                      |       | 545          |       |
| 37 Residence Inn                 |       | —           |       | 69                            |       | 334                      |       | 13                                                 |       | 69         |       | 347                      |       | 416          |       |
| 35 Staybridge Suites             |       | —           |       | 91                            |       | 353                      |       | 4                                                  |       | 91         |       | 357                      |       | 448          |       |
| 22 AmeriSuites/Hyatt Place       |       | —           |       | 24                            |       | 185                      |       | 23                                                 |       | 24         |       | 208                      |       | 232          |       |
| 5 InterContinental               |       | —           |       | 32                            |       | 196                      |       | 76                                                 |       | 32         |       | 272                      |       | 304          |       |
| 12 Crowne Plaza                  |       | —           |       | 67                            |       | 251                      |       | 8                                                  |       | 67         |       | 259                      |       | 326          |       |
| 3 Marriott Full Service          |       | —           |       | 14                            |       | 90                       |       | 4                                                  |       | 14         |       | 94                       |       | 108          |       |
| 12 TownePlace Suites             |       | —           |       | 17                            |       | 78                       |       | 1                                                  |       | 17         |       | 79                       |       | 96           |       |
| 5 Radisson                       |       | —           |       | 7                             |       | 81                       |       | 4                                                  |       | 7          |       | 85                       |       | 92           |       |
| 5 Country Inns & Suites |       | —           |       | 6                             |       | 58                       |       | 5                                                  |       | 6          |       | 63                       |       | 69           |       |
| 3 Holiday Inn                    |       | —           |       | 10                            |       | 24                       |       | 14                                                 |       | 10         |       | 38                       |       | 48           |       |
| 1 Park Plaza                     |       | —           |       | 1                             |       | 16                       |       | —                                             |       | 1          |       | 16                       |       | 17           |       |
| 2 SpringHill Suites              |       | —           |       | 3                             |       | 15                       |       | —                                             |       | 3          |       | 15                       |       | 18           |       |
|                             |       |             |       |                          |       |                     |       |                                               |       |       |       |                     |       |         |       |
| Held for sale                    |       |             |       |                          |       |                     |       |                                               |       |       |       |                     |       |         |       |
| 2 AmeriSuites                    |       | —           |       | 1                             |       | 10                       |       | 1                                                  |       | 1          |       | 11                       |       | 12           |       |
| 1 Park Plaza                     |       | —           |       | 1                             |       | 5                        |       | 4                                                  |       | 1          |       | 9                        |       | 10           |       |
| Total (477 properties)           |       | $                | 4          |                          | $          | 1,371                    |       | $                                                  | 4,082      |       | $          | 250                      |       | $            | 1,380      |   | $ | 4,323 |   | $ | 5,703 |   |

 

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(1)         Excludes $515 of personal property classified on our consolidatedbalance sheet as furniture, fixtures and equipment.

(2)         Upon closing of our acquisition of PetroHoldings, the Petro debt was covenant defeased and funds were escrowed toredeem the Petro debt on February 15, 2008.

 

F-21

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**HospitalityProperties Trust**

 

**SCHEDULE III - REAL ESTATEAND ACCUMULATED DEPRECIATION**DECEMBER 31, 2007(dollars in millions)

 
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** ** | **Life on which** | ** **     |
|-----------------------------------|------------|---------------------|------------|--------------------|--------------------|--------------------|------------|-----------------------------|----------------|
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** ** | **Depreciation in**    | ** **     |
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** ** | **Latest Income**      | ** **     |
| ** **                        | ** ** | **Accumulated**     | ** ** | **Date of**   | ** **         | **Date**           | ** ** | **Statement is**       | ** **     |
| ** **                        | ** ** | **Depreciation(1)** | ** ** | **Construction**   | ** **         | **Acquired**       | ** ** | **Computed**                | ** **     |
| ** **                        | ** ** | ** **          | ** ** | ** **         | ** **         | ** **         | ** ** | ** **                  | ** **     |
| 145 Travel  Centers of America    |       | $                   | (49        | )                  | 1962 through  2005 |               | 2007       |                        | 10 - 40  Years |   |
| 40 Petro  Stopping Centers        |       | (13                 | )          | 1975 through  2005 |               | 2007               |       | 10 - 40  Years              |           |
| 71  Courtyards                    |       | (176                | )          | 1987 through  2000 |               | 1995 through  2003 |       | 10 - 40  Years              |           |
| 76  Candlewood Hotels             |       | (86                 | )          | 1996 through  2000 |               | 1997 through  2003 |       | 10 - 40  Years              |           |
| 37 Residence  Inn                 |       | (89                 | )          | 1989 through  2002 |               | 1998 through  2005 |       | 10 - 40  Years              |           |
| 35  Staybridge Suites             |       | (67                 | )          | 1989 through  2002 |               | 1996 through  2006 |       | 10 - 40  Years              |           |
| 22  AmeriSuites/Hyatt Place       |       | (44                 | )          | 1992 through  2000 |               | 1997 through  2002 |       | 10 - 40  Years              |           |
| 5  InterContinental               |       | (21                 | )          | 1924 through  1989 |               | 2006               |       | 10 - 40  Years              |           |
| 12 Crowne  Plaza                  |       | (15                 | )          | 1971 through  1987 |               | 2006               |       | 10 - 40  Years              |           |
| 3 Marriott  Full Service          |       | (22                 | )          | 1972 through  1995 |               | 1998 through  2001 |       | 10 - 40  Years              |           |
| 12  TownePlace Suites             |       | (17                 | )          | 1997 through  2000 |               | 1998 through  2001 |       | 10 - 40  Years              |           |
| 5 Radisson                        |       | (23                 | )          | 1987 through  1990 |               | 1996 through  1997 |       | 10 - 40  Years              |           |
| 5 Country  Inns & Suites |       | (16                 | )          | 1987 through  1997 |               | 1996 and  2005     |       | 10 - 40  Years              |           |
| 3 Holiday  Inn                    |       | (3                  | )          | 1984 through  2001 |               | 2006               |       | 10 - 40  Years              |           |
| 1 Park Plaza                      |       | (5                  | )          | 1987 through  1990 |               | 1996               |       | 10 - 40  Years              |           |
| 2 SpringHill  Suites              |       | (3                  | )          | 1997 through  2000 |               | 2000 through  2001 |       | 10 - 40  Years              |           |
| Held for  sale                    |       |                |       |               |               |               |       |                        |           |
| 2  Amerisuites                    |       | (3                  | )          | 1992 through  2000 |               | 1997 through  2000 |       | 10 - 40  Years              |           |
| 1 Park Plaza                      |       | (2                  | )          | 1988               |               | 1996               |       | 10 - 40  Years              |           |
|                              |       |                |       |               |               |               |       |                        |           |
| Total (477  properties)           |       | $                   | (654       | )                  |               |               |       |                        |           |   |

 

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(1) Excludes accumulateddepreciation of $200 related to personal property classified on ourconsolidated balance sheet as furniture, fixtures and equipment.

 

F-22

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**HOSPITALITY PROPERTIES TRUST**

 

**NOTES TO SCHEDULE III**DECEMBER 31, 2007(dollars in thousands)

 

(A) The change in total cost of properties for the period from January 1,2005 to December 31, 2007, is as follows:

 
| ** **                                        | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year                     |       | $          | 3,627,587  |       | $          | 3,255,353  |       | $ | 2,817,608 |   |
|                                              |       |       |       |       |       |       |       |
| Additions:  acquisitions and capital expenditures |       | 2,210,407  |       | 372,329    |       | 451,126    |       |
| Dispositions                                      |       | (135,438   | )          | (95        | )          | (13,381    | )          |
|                                              |       |       |       |       |       |       |       |
| Balance at  close of year                         |       | $          | 5,702,556  |       | $          | 3,627,587  |       | $ | 3,255,353 |   |

 

 

(B) Thechange in accumulated depreciation for the period from January 1, 2005 to December 31,2007, is as follows:

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at  beginning of year    |       | $        | 531,792    |     | $          | 448,392  |       | $ | 379,594 |   |
|                             |       |     |       |     |       |     |       |
| Additions:  depreciation expense |       | 148,799  |       | 83,495   |       | 72,339   |       |
| Dispositions                     |       | (26,367  | )          | (95      | )          | (3,541   | )          |
|                             |       |     |       |     |       |     |       |
| Balance at  close of year        |       | $        | 654,224    |     | $          | 531,792  |       | $ | 448,392 |   |

 

(C) Thenet tax basis for federal income tax purposes of our real estate properties was$4,365,157 on December 31, 2007.

 

F-23

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**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: | February 28,  2008          |   |
|        |                                  |  |  |

 

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 thecapacity and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                         | ** ** | **Date**               |
|------------------------|------------|-----------------------------------|------------|------------------------|
|                   |       |                              |       |                   |
| /s/ John G. Murray     |       | President and                     |       | February 28, 2008 |
| John G. Murray         |       | Chief Operating Officer           |       |                   |
|                   |       |                              |       |                   |
|                   |       |                              |       |                   |
| /s/ Mark L. Kleifges   |       | Treasurer and Chief               |       | February 28, 2008 |
| Mark L. Kleifges       |       | Financial Officer                 |       |                   |
|                   |       | (principal financial officer      |       |                   |
|                   |       | and principal accounting officer) |       |                   |
|                   |       |                              |       |                   |
|                   |       |                              |       |                   |
| /s/ Frank J. Bailey    |       | Trustee                           |       | February 28, 2008 |
| Frank J. Bailey        |       |                              |       |                   |
|                   |       |                              |       |                   |
|                   |       |                              |       |                   |
| /s/ John L. Harrington |       | Trustee                           |       | February 28, 2008 |
| John L. Harrington     |       |                              |       |                   |
|                   |       |                              |       |                   |
|                   |       |                              |       |                   |
| /s/ William A. Lamkin  |       | Trustee                           |       | February 28, 2008 |
| William A. Lamkin      |       |                              |       |                   |
|                   |       |                              |       |                   |
|                   |       |                              |       |                   |
| /s/ Adam D. Portnoy    |       | Trustee                           |       | February 28, 2008 |
| Adam D. Portnoy        |       |                              |       |                   |
|                   |       |                              |       |                   |
|                   |       |                              |       |                   |
| /s/ Barry M. Portnoy   |       | Trustee                           |       | February 28, 2008 |
| Barry M. Portnoy       |       |                              |       |                   |

 

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