**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-K**

**ANNUAL REPORT**

**PURSUANT TO SECTIONS 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

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

**For the fiscal year ended December 31, 2006**

**OR**

**o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Commissionfile number 1-115272**

**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  Principal Executive Offices)     |   | (Zip Code)                         |

 

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

Securities registeredpursuant to Section 12(b) of the Act:

| Title Of Each Class                                                     | ** ** | **Names 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) of theAct:  None

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theAct.  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 the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x   Noo

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 or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large Accelerated Filer   x               Accelerated Filer  o            Non-Accelerated Filer  o

 

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

The aggregate market value of the voting shares of theregistrant held by non-affiliates was $3,139 million based on the $43.92 closingprice per common share on the New York Stock Exchange on June 30, 2006. Forpurposes of this calculation, an aggregate of 496,756 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 26, 2007: 93,835,751

 

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References in this Annual Report on Form 10-K to the “Company,”“HPT,” “we,” “us” or “our” include Hospitality Properties Trust and itsconsolidated subsidiaries unless otherwise expressly stated or the contextindicates otherwise.

**DOCUMENTS INCORPORATED BY REFERENCE**

Certain information required in Items 10, 11, 12, 13and 14 of Part III of this Annual Report on Form 10-K is to be incorporatedherein by reference from our definitive Proxy Statement for the annual meetingof shareholders scheduled for May 15, 2007, or our definitive Proxy Statement.

**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

THIS ANNUAL REPORTON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTSWITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 ANDOTHER FEDERAL SECURITIES LAWS.  THESEFORWARD LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FORM 10-K ANDINCLUDE STATEMENTS REGARDING OUR INTENT, BELIEF OR EXPECTATION, OR THE INTENT,BELIEF OR EXPECTATION OF OUR TRUSTEES AND OFFICERS WITH RESPECT TO:

·                  OUROPERATORS’ OR TENANTS’ ABILITY TO PAY RETURNS OR RENT TO US;

·                  OURABILITY TO PURCHASE ADDITIONAL PROPERTIES;

·                  OURINTENT TO IMPROVE AND MODERNIZE 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;

·                  THEBENEFITS THAT WE EXPECT TO DERIVE FROM THE TA TRANSACTION, AS DEFINED HEREIN,INCLUDING INCREASED EARNINGS, ADDITIONAL GROWTH OPPORTUNITIES ANDDIVERSIFICATION; AND

·                  OTHERMATTERS.

HOWEVER, ACTUALRESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARDLOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.  SUCH FACTORS INCLUDE, WITHOUT LIMITATION:

·                  THEIMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING PREVAILINGINTEREST RATES) ON US AND OUR OPERATORS AND TENANTS; FOR EXAMPLE, IF HOTEL ROOMDEMAND BECOMES DEPRESSED, THE OPERATING RESULTS OF OUR HOTELS MAY DECLINE, THEFINANCIAL RESULTS OF OUR OPERATORS AND TENANTS MAY DECLINE AND OUR OPERATORSAND TENANTS MAY BE UNABLE TO PAY OUR RETURNS OR RENTS;

·                  COMPLIANCEWITH AND CHANGES TO LAWS AND REGULATIONS AFFECTING THE REAL ESTATE, HOTEL ORTRAVEL CENTER INDUSTRIES; AND

·                  CHANGESIN FINANCING TERMS AND COMPETITION WITHIN THE REAL ESTATE, HOTEL AND TRAVELCENTER INDUSTRIES; FOR EXAMPLE, WE MAY BE UNABLE TO IDENTIFY PROPERTIES WHICHWE WANT TO BUY OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, MANAGEMENTAGREEMENTS OR LEASE TERMS FOR NEW PROPERTIES.

THESE UNEXPECTEDRESULTS COULD OCCUR FOR MANY DIFFERENT REASONS, SOME OF WHICH, SUCH AS NATURALDISASTERS OR CHANGES IN OUR OPERATORS’ OR TENANTS’ COSTS OR REVENUES OR CHANGESIN CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL.

OTHER RISKS MAYADVERSELY IMPACT US, AS DESCRIBED MORE FULLY UNDER “ITEM 1A. RISK FACTORS.”

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FORWARD LOOKINGSTATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR.

YOU SHOULD NOTPLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIREDBY LAW, WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY ANY REVISION TO THESEFORWARD LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCESAFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF PRESENTLY UNANTICIPATEDEVENTS.

**STATEMENT CONCERNING LIMITED LIABILITY**

OUR AMENDED AND RESTATEDDECLARATION OF TRUST, DATED AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALLAMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATEDEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME “HOSPITALITYPROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST ASTRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER,SHAREHOLDER, EMPLOYEE OR AGENT OF HOSPITALITY PROPERTIES TRUST SHALL BE HELD TOANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIMAGAINST, HOSPITALITY PROPERTIES TRUST. ALL PERSONS DEALING WITH HOSPITALITYPROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HOSPITALITYPROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANYOBLIGATION.

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**HOSPITALITY PROPERTIES TRUST**

**2006 FORM 10-K ANNUAL REPORT**

Table of Contents
|           | ** ** | ** **                                                                                                              | ** ** | **Page** |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
|      |       | Part I                                                                                                                  |       |     |
|      |       |                                                                                                                    |       |     |
| Item  1.  |       | Business                                                                                                                |       | 1        |
|      |       |                                                                                                                    |       |     |
| Item  1A. |       | Risk  Factors                                                                                                           |       | 30       |
|      |       |                                                                                                                    |       |     |
| Item 1B.  |       | Unresolved Staff  Comments                                                                                              |       | 35       |
|      |       |                                                                                                                    |       |     |
| Item  2.  |       | Properties                                                                                                              |       | 36       |
|      |       |                                                                                                                    |       |     |
| Item  3.  |       | Legal  Proceedings                                                                                                      |       | 37       |
|      |       |                                                                                                                    |       |     |
| Item 4.   |       | Submission of  Matters to a Vote of Security Holders                                                                    |       | 37       |
|      |       |                                                                                                                    |       |     |
|      |       | Part II                                                                                                                 |       |     |
|      |       |                                                                                                                    |       |     |
| Item 5.   |       | Market for the  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 38       |
|      |       |                                                                                                                    |       |     |
| Item 6.   |       | Selected Financial  Data                                                                                                |       | 39       |
|      |       |                                                                                                                    |       |     |
| Item 7.   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       | 40       |
|      |       |                                                                                                                    |       |     |
| Item 7A.  |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       | 56       |
|      |       |                                                                                                                    |       |     |
| Item 8.   |       | Financial  Statements and Supplementary Data                                                                            |       | 57       |
|      |       |                                                                                                                    |       |     |
| Item 9.   |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                   |       | 57       |
|      |       |                                                                                                                    |       |     |
| Item 9A.  |       | Controls and  Procedures                                                                                                |       | 57       |
|      |       |                                                                                                                    |       |     |
| Item 9B.  |       | Other Information                                                                                                       |       | 58       |
|      |       |                                                                                                                    |       |     |
|      |       | Part III                                                                                                                |       |     |
|      |       |                                                                                                                    |       |     |
| Item 10.  |       | Directors,  Executive Officers and Corporate Governance                                                                 |       | 59       |
|      |       |                                                                                                                    |       |     |
| Item 11.  |       | Executive  Compensation                                                                                                 |       | *        |
|      |       |                                                                                                                    |       |     |
| Item 12.  |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       | 59       |
|      |       |                                                                                                                    |       |     |
| 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                                                                             |       | 61       |

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*                 Incorporated by reference from our Proxy Statement for the annualmeeting of shareholders scheduled to be held on May 15, 2007, to be filedpursuant to Regulation 14A.

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**PART I**

**Item 1. Business**

**The Company.** Weare a real estate investment trust, or REIT, formed in 1995 under the laws ofthe State of Maryland. As of December 31, 2006, we owned 310 hotels with 45,656rooms or suites located in 38 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 externalgrowth strategy is to expand our investments in high quality real estate usedin hospitality industries and enter leases and management agreements withexperienced operators which generate returns to us that exceed our operatingand capital costs. Our principal internal growth strategy is to participatethrough percentage returns and rents in increases in total sales at ourproperties, and, under some of our management agreements, increases in theoperating income of our properties.

Our investment, financingand disposition policies and business strategies are established by our board oftrustees and may be changed by our board of trustees at any time withoutshareholder approval.

As of December 31, 2006,our hotels are operated as Courtyard by Marriott®, Candlewood Suites®, Staybridge Suites®, Residence Inn by Marriott®, AmeriSuites®, Hyatt PlaceTM, InterContinental Hotels & Resorts®, Homestead Studio Suites®, Crowne Plaza Hotels &Resorts®, MarriottHotels and Resorts®,Radisson® Hotels & Resorts, TownePlace Suites byMarriott®, CountryInns & Suites by Carlson®,Holiday Inn Hotels & Resorts®,Park Plaza® Hotels & Resorts, or SpringHill Suites byMarriott®. The averageage of the hotels we own was approximately 12 years at December 31, 2006.

**Courtyard by Marriott****®** hotels are designed to attract both businessand leisure travelers. A typical Courtyard by Marriott® hotel has 145 guest rooms. Most Courtyard byMarriott® hotels are situated on well landscaped groundsand typically are built with a courtyard containing a patio, pool andsocializing area that may be enclosed depending upon location. These hotelsgenerally have lounges, meeting rooms, an exercise room, a guest laundry and arestaurant. The guest rooms are similar in size and furnishings to guest roomsin full service Marriott® hotels. In addition, many of the sameamenities as would be available in full service Marriott® hotels are available in Courtyard by Marriott® hotels, except that restaurants may be openonly for breakfast or serve limited menus, room service may not be availableand meeting and function rooms are limited in size and number. According toMarriott International, Inc., or Marriott, as of December 2006, 733 Courtyardby Marriott® hotels were open and operating in the UnitedStates and internationally. We believe that the Courtyard by Marriott® brand is a leading brand in the upscale,limited service segment of the United States hotel industry. We have invested atotal of $841 million in 71 Courtyard by Marriott® hotels with a total of 10,280 rooms.

**Candlewood Suites****®** hotels are mid-priced extended stay hotels whichoffer studio and one-bedroom suites designed for business travelers expectingto stay five or more nights. Candlewood Suites® hotels compete in the mid-priced extended staysegment of the lodging industry. Each Candlewood Suites® suite contains a fully equipped kitchen, acombination living and work area and a sleeping area. The kitchen includes afull size microwave, full size refrigerator, stove, dishwasher and coffeemaker. The living area contains a convertible sofa or recliner, 32 inchtelevision, combination videocassette and DVD player and compact disc player.The work area includes a large desk and executive chair, free high speedinternet access, two phone lines, voice mail and a speaker phone. EachCandlewood Suites® suite contains a king size bed. Otheramenities offered at each Candlewood Suites® hotel include afitness center, free guest laundry facilities and a Candlewood Cupboard® area where guests can purchase light meals,snacks and other refreshments. According to InterContinental Hotels Group plc,or InterContintental, the owner of the Candlewood Suites® brand, there were 130 Candlewood Suites® hotels open and operating across the UnitedStates as of December 2006. We have invested $590 million in 76 CandlewoodSuites® hotels with a total of 9,220 suites.

**Staybridge Suites****®** hotels offer residential style studio,one-bedroom and two bedroom suites for business, governmental and familytravelers. Each suite offers a fully equipped kitchen and a work area with anoversized desk, two phone lines, an ergonomically designed chair and high speedinternet access. Other amenities include free breakfast buffet, an on siteconvenience store, fitness center and a 24 hour business center and conveniencestore. 

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According to InterContinental, the owner of theStaybridge Suites® brand, there were 97 Staybridge Suites® hotels open and operating in the United Statesand internationally as of December 2006. We have invested a total of $475million in 35 Staybridge Suites® hotels with a total of 4,338 suites.

**Residence Inn by Marriott****®** hotels are designed to attract business,governmental and family travelers who stay several consecutive nights.Residence Inn by Marriott® hotels generally have between 80 and 130studio, one bedroom and two bedroom suites. Most Residence Inn by Marriott® hotels are designed as residential stylebuildings 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 many havefireplaces. Most Residence Inn by Marriott® hotels also haveswimming pools, exercise rooms, sports courts and guest laundries. According toMarriott, as of December 2006, 511 Residence Inn by Marriott® hotels were open and operating in the UnitedStates, Mexico and Canada. We believe that the Residence Inn by Marriott® brand is a leading brand in the extended staysegment of the United States hotel industry. We have invested a total of $434million in 37 Residence Inn by Marriott® hotels with atotal of 4,695 suites.

**AmeriSuites****®** hotels are all suite hotels designed toattract value oriented business travelers. AmeriSuites® hotels compete in the all suite segment of thelodging industry. Global Hyatt Corporation, or Hyatt, acquired the AmeriSuites® brand in January 2005. In August 2005, Hyattannounced a plan for all qualifying AmeriSuites® hotels to be rebranded under the new upscaleHyatt PlaceTM brand. In connection with the rebranding, ourAmeriSuites® will be renovated to incorporate the newinterior and exterior design of the Hyatt PlaceTM brand. Each renovated Hyatt PlaceTM hotel room will include upgraded bedding, awet bar, granite counters, a sectional sofa and a media center with a 42 inchhigh definition plasma television. The renovation of 12 of our AmeriSuites® hotels began during 2006 with one hotelcompleted at December 31, 2006. Renovations are expected to be completed at allof our hotels during 2007. According to Hyatt,there were 136 AmeriSuites® hotels and four Hyatt PlaceTM hotels open and operating across the UnitedStates as of December 2006. We have invested $268 million in 24 AmeriSuites® and Hyatt PlaceTM hotels with a total of 2,929 suites.

**InterContinental Hotels &Resorts****®** hotelsblend consistent global standards with the distinctive cultural features oftheir locations in an effort to deliver a truly memorable guest experience. OurInterContinental Hotels&Resorts® contain between 189 and 485 rooms.InterContinental Hotels & Resorts® offer an exceptional service for business andleisure guests seeking a luxury hotel experience. Amenities include a widerange of personal and business services in addition to restaurants, cocktaillounges, pools, saunas and health/fitness centers. According toInterContinental, there were 148 InterContinental Hotels & Resorts® hotels open worldwide as of December 2006. Wehave invested a total of $292 million in five InterContinental Hotels & Resorts® with a total of 1,479 rooms.

**Homestead Studio Suites****®** hotels are extended stay hotels designed forvalue oriented business travelers. Each Homestead Studio Suites® room features a kitchen with a full sizerefrigerator, stovetop, microwave, coffee maker, utensils and dishes. A workarea is provided with a well lit desktop and a computer data port.Complimentary local phone calls, fax service, copy service, personalizedvoicemail and wireless high speed internet access are also available to guests.On site laundry and other personal care items are available. According to BRE /Homestead Village LLC, or Homestead, there were 132 Homestead Studio Suites® hotels open in the United States as ofDecember 2006. We have invested $145 million in 18 Homestead Studio Suites® hotels with a total of 2,399 suites.

**Crowne Plaza Hotels & Resorts****®** is InterContinental’supscale brand targeted at the business guest seeking upscale accommodations ata good value. Crowne Plaza Hotels & Resorts® have a particular focus on meetingaccommodations and related services. Our Crowne Plaza Hotels & Resorts® contain between 295 and 613rooms. With its wide variety of premium services and amenities, includingfully-appointed guest rooms with ample work space, full complement of businessservices, excellent dining choices, quality fitness facilities andcomprehensive meeting capabilities, Crowne Plaza Hotels & Resorts® are designed to exceed guest expectations byproviding “the right room, the right technology and the right service”. Accordingto InterContinental, there were 275 Crowne Plaza Hotels & Resorts® open and operating worldwide as of December2006. We have invested a total of $342 million in 11 Crowne Plaza Hotels &Resorts® with a total of 4,057 rooms.

**Marriott Hotels and Resorts****®** are renowned for the consistent quality oftheir physical appearances and the well trained staff. Our Marriott Hotels andResorts® containbetween 356 and 601 rooms. Our Marriott Hotels and 

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Resorts® have between 17,000 to 50,000 square feet ofmeeting and banquet space. Amenities include a wide range of personal andbusiness services in addition to a choice of restaurants, cocktail lounges,concierge floors, pools, saunas, and health/fitness centers. According toMarriott, there were 519 Marriott Hotels and Resorts® open worldwide as of December 2006. We haveinvested $117 million in three Marriott Hotels and Resorts® with a total of 1,356 guest rooms.

**Radisson****® Hotels & Resorts** is a leading full service hotel brand. OurRadisson® Hotels & Resorts hotels contain between180 and 381 rooms. Amenities and services include Sleep Number® beds, large desks, free high speed internetaccess, room service and access to 24 hour printing, telecopy and mail andpackage services. The meeting facilities at our Radisson® Hotels & Resorts generally can accommodategroups of between 10 and 600 people in a flexible meeting room design withaudiovisual equipment. Each of our Radisson® Hotels &Resorts hotels generally also has 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, there were 400Radisson® Hotels & Resorts open and operatingworldwide as of December 2006. We have invested a total of $104 million in fourRadisson® Hotels & Resorts with a total of 975rooms.

**TownePlace Suites by Marriott****®** are extended stay hotels offering studio, onebedroom and two bedroom suites for business and family travelers. TownePlaceSuites by Marriott® compete in the mid-priced extended staysegment of the lodging industry. Each suite offers a fully equipped kitchen, abedroom and separate living and work areas. Other amenities offered includevoice mail, free high speed internet access, on site business services, guestlaundry facilities and a fitness center. According to Marriott, there were 123TownePlace Suites by Marriott® open worldwide as of December 2006. We haveinvested $104 million in 12 TownePlace Suites by Marriott® with a total of 1,331 suites.

**Country Inns & Suites byCarlson****®** is a mid-tierlodging chain. Our Country Inns& Suites by Carlson® hotels contain between 84 and 180 rooms.Amenities and services at these hotels include large desks, free breakfast,weekday morning paper and high speed internet access. The meeting facilities atour Country Inns & Suites by Carlson® hotels generallycan accommodate groups of between 10 and 200 people in a flexible meeting roomdesign with audiovisual equipment. Most of our Country Inns & Suites byCarlson® hotels also feature a lobby with a fireplace,swimming pool, exercise facilities, fax and copy service and a restaurant andlounge. According to Carlson there were 412 Country Inns & Suites byCarlson® open and operating worldwide as of December2006. We have invested a total of $75 million in five Country Inns & Suitesby Carlson® with a total of 753 rooms.

**Holiday Inn Hotels & Resorts****®** combine all the services and amenities of afull service hotel in a contemporary style offered at a value price for eitherbusiness or leisure travelers. Our Holiday Inn Hotel® and our two Holiday Inn Select® hotels contain between 190 and 349 rooms.Amenities and services generally available at these hotels include a large workdesk, phone with voicemail, free high speed internet access, a business centerwith internet 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 18and 280 people in a flexible meeting room design with audiovisual equipment andcatering options. These hotels also offer a swimming pool, exercise facilities,guest self-service laundry, a lobby lounge and restaurant. According toInterContinental, the owner of the Holiday Inn Hotels & Resorts® brand, there were 1,395 Holiday Inn Hotels® open and operating worldwide as of December2006. We have invested a total of $53 million in four Holiday Inn Hotels® with a total of 1,046 rooms.

**Park Plaza****®** **Hotels & Resorts**isin the mid price segment of the full service hotel category. Our ParkPlaza® Hotels & Resorts contain between 159 and209 rooms. Amenities and services generally available at these hotels includelarge desks, free high speed internet access, room service and access to 24hour telecopy and mail and package services. The meeting facilities at our ParkPlaza® Hotels & Resorts generally can accommodategroups of between 10 and 400 people in a flexible meeting room design withaudiovisual equipment. Our Park Plaza® Hotels & Resorts hotels also feature alobby lounge, a swimming pool, exercise facilities and a restaurant. Accordingto Carlson, the owner of the Park Plaza® Hotels &Resorts brand, there were 39 Park Plaza® Hotels &Resorts open and operating as of December 2006. We have invested a total of $32million in three Park Plaza® Hotels & Resorts with a total of 534rooms.

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** **

**SpringHill Suites by Marriott**® are all suites hotels designed to attractvalue conscious business and family travelers. SpringHill Suites by Marriott® compete in the mid-priced all suite segment ofthe lodging industry. Each suite offers separate sleeping, living and workareas, a mini-refrigerator, a microwave and coffee service. Other amenitiesoffered include a pull out sofa bed, complimentary breakfast buffet, weekdaynewspaper, two line phones, free high speed internet access and voice mail, onsite business services, guest laundry facilities and a fitness center.According to Marriott, there were 153 SpringHill Suites by Marriott® open as of December 2006. We have invested $21million in two SpringHill Suites by Marriott® with a total of 264 suites.

**PRINCIPAL MANAGEMENT AGREEMENT OR LEASE FEATURES**

As of December 31, 2006,all of our hotels are operated by unrelated third parties. Each hotel we own isoperated as part of a combination of hotels under eleven agreements, asdescribed below. The principal features of the management agreements and leasesfor our 310 hotels are as follows:

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

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

·                  **Long Terms**. Our management agreements andleases are generally entered for initial terms of 15 years or more. All of themanagement agreements and leases for our hotels expire after 2010. The weightedaverage term remaining for our hotel agreements (weighted by our investment) is17.0 years as of December 31, 2006.

·                  **Pooled Agreements**. Each of our hotels ispart of a combination of hotels. The manager’s or tenant’s obligations to uswith respect to each hotel in a combination are subject to cross default withthe obligations with respect to all the other hotels in the same combination.The smallest combination includes 10 hotels with 2,937 rooms in which we haveinvested $229 million; the largest combination includes 76 hotels with 9,220rooms in which we have invested $590 million.

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

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

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

·                  **Security Features**. Each managementagreement or lease includes various terms intended to secure the payments tous, including some or all of the following: cash security deposits which wereceive but do not escrow; subordination of management fees payable to thehotel operator to some or all of our return or rent and full or limitedguarantees from the manager’s or tenant’s parent company. As of December 31,2006, seven of our eleven hotel combination agreements, including 185 hotels,have minimum return or minimum rent payable to us which are subject to full orlimited guarantees. These hotels represent 61% of our total investments, atcost.

## **RECENT ACQUISITIONS**

On January 31, 2007, wecompleted our acquisition of TravelCenters of America, Inc. or TravelCenters,for approximately $1.9 billion. Simultaneous with this acquisition, we restructured the business ofTravelCenters and distributed all of the common shares of our formersubsidiary, TravelCenters of America LLC (AMEX: TA), or TA, to 

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our shareholders in a spin off transaction.  The acquisition of TravelCenters, therestructuring of the TravelCenters business and the spin off transaction arecollectively referred to herein as the TA Transaction.  In connection with the TA Transaction, weretained ownership of 146 travel centers located in 39 states and other relatedassets with an estimated total value of approximately $1.68 billion.  TA leases this real estate from us and hascontinued the fuel services and hospitality business of TravelCenters.

The typical TAfacility generally offers fuel and non-fuel products and services 24 hours perday, 365 days per year and contains: over 20 acres of land with parking for 170tractor trailers and 100 cars; a 150 seat full service restaurant and one tothree quick service restaurants, or QSRs, that TA operates as a franchiseeunder various brands; a truck repair facility and parts store; multiple dieseland gasoline fueling points; and a travel and convenience store, game room,lounge and other amenities for professional truck drivers and motorists. Inaddition, some travel centers include a hotel.

Our lease with TAis a “triple net” lease, which requires TA to pay all costs incurred in theoperation of the leased travel centers, including personnel, utilities,inventories, services to customers, insurance, real estate and personalproperty taxes and ground lease payments. The annual minimum rent due to usunder this agreement is $154 million, $157 million, $161 million, $165 million,$170 million and $175 million in each of the first five years of the agreementand for the remaining years, thereafter, respectively. In addition, minimumrent may increase if we fund or reimburse the cost of renovations, improvementsand equipment related to the leased travel centers. Starting in 2012, the leaserequires TA to pay us as additional rent 3% of increases in non-fuel grossrevenues and 0.3% of increases in gross fuel revenues at each leased travelcenter over 2011 gross revenue amounts. Percentage rent attributable to fuelsales is subject to a maximum each year calculated by reference to changes inthe consumer price index. Our lease agreement with TA expires on December 31,2022.

We have agreed toprovide up to $25 million of funding annually for the first five years of thelease for certain specified improvements to the leased travel centers. Thisfunding is cumulative and may be drawn by TA from us in subsequent years untilDecember 2015. There will not be any adjustment in our minimum rent as we fundthese amounts. All improvements purchased with this funding will be owned byus. TA is required to maintain, at its expense, the leased travel centers ingood order and repair, including structural and non-structural components, butmay request that we fund amounts in addition to the $125 million, in return forminimum annual rent increases equal to a minimum of 8.5% of the amount we fund.

The TA Transaction ismore fully described in Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Annual Report on Form10-K.

**INVESTMENT AND OPERATING POLICIES**

We provide capital to ownersand operators in hospitality related industries who wish to divest theirproperties while remaining in the hospitality business. Many other publichospitality REITs seek to control the operations of properties in which theyinvest and generally design their management agreements or leases to capturesubstantially all net operating revenues from their businesses. Our agreementswith our operators and tenants are designed with the expectation that, overtheir terms, net operating revenues from our properties will exceed minimumamounts due to us. We believe that this difference in operating philosophy mayafford us a competitive advantage over other hospitality REITs in finding highquality investment opportunities on attractive terms and increase the dependabilityof our cash flows used to pay distributions.

Our investment objectivesinclude increasing cash flow from operations from dependable and diversesources in order to increase per share distributions. To achieve theseobjectives, we seek to operate as follows: maintain a strong capital base ofshareholders’ equity; invest in high quality properties operated by experiencedoperating companies; use moderate debt leverage to fund additional investmentswhich increase cash flow from operations because of positive spreads betweenour cost of investment capital and investment yields; structure investmentswhich generate a minimum return and provide an opportunity to participate inoperating growth at our properties; when market conditions permit, refinancedebt with additional equity or long term debt; and pursue diversification sothat our cash flow from operations is received from diverse properties andoperators.

In order to benefit frompotential property appreciation, we prefer to own properties rather than makemortgage investments. We may invest in real estate joint ventures if weconclude that we may benefit from the 

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participation of co-venturers or that the opportunityto participate in the investment is contingent on the use of a joint venture structure.We may invest in participating, convertible or other types of mortgages if weconclude that we may benefit from the cash flow or appreciation in the value ofthe mortgaged property. Convertible mortgages are similar to equityparticipation because they permit lenders to either participate in increasingrevenues from the property or convert some or all of that mortgage into equityownership interests. At December 31, 2006, we owned no convertible mortgages orjoint venture interests.

We may not achieve someor all of our investment objectives.

Because we are a REIT,generally, we may not operate our properties. We or our tenants have enteredinto arrangements for operation of our properties. As described elsewhere inthis Annual Report on Form 10-K, tax law changes known as the REITModernization Act, or the RMA, were enacted and became effective January 1,2001. The RMA, among other things, allows a REIT to lease hotels to a taxableREIT subsidiary, or TRS, if the hotel is managed by a third party. As ofDecember 31, 2006, 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 will be subject to income tax at customary corporate rates. As,and if, the financial performance of the hotels operated for the account of ourTRSs improves, these taxes may become material.

**ACQUISITION POLICIES**

We intend to pursuegrowth through the acquisition of additional properties. Generally, we preferto purchase multiple properties in one transaction because we believe a singlemanagement or lease agreement, cross default covenants and all or none renewalrights for multiple properties in diverse locations enhance the creditcharacteristics and the security of our investments. In implementing ouracquisition strategy, we consider a range of factors relating to proposedproperty purchases including: (i) historical and projected cash flows; (ii) thecompetitive market environment and the current or potential market position ofeach property; (iii) the availability of a qualified operator or lessee; (iv)the financial strength of the proposed operator or lessee; (v) the amount andtype of financial support available from the proposed operator or lessee; (vi)the property’s design, physical condition and age; (vii) the estimatedreplacement cost and proposed acquisition price of the property; (viii) thereputation of the particular management organization, if any, with which theproperty is or may become affiliated; (ix) the level of services and amenitiesoffered at the property; (x) the proposed management agreement or lease terms and(xi) the brand under which the property operates or is expected to operate. Indetermining the competitive position of a property, we examine the proximityand convenience of the property to its expected customer base, the number andcharacteristics of competitive properties within the property’s market area andthe existence of barriers to entry within that market, including siteavailability and zoning restrictions. While we have historically focused on theacquisition of upscale limited service, extended stay and full service hotelproperties and more recently full service travel centers, we consideracquisitions in all segments of the hospitality industry. An important part ofour acquisition strategy is to identify and select, or create, qualified,experienced and financially stable operators.

Whenever we purchase anindividual property or a small number of properties we attempt to arrange forthese properties to be added to agreements covering, and operated incombination with, properties we already own.

We have no policies whichspecifically limit the percentage of our assets which may be invested in anyindividual property, in any one type of property, in properties operated by orleased to any one entity or in properties operated by or leased to anaffiliated group of entities.

We may have in the pastconsidered and may in the future consider the possibility of entering into mergersor strategic combinations with other companies. A principal goal of any suchtransaction may be to further diversify our revenue sources and increase ourcash flow from operations.

**DISPOSITION POLICIES**

In the past we haveoccasionally sold a property or exchanged properties which we own for differentproperties. Although we may do so, we have no current intention to dispose ofany of our presently owned properties. We currently anticipate that dispositiondecisions, if any, will be based on factors including but not limited to thefollowing: (i) potential opportunities to increase revenues and property valuesby reinvesting sale proceeds; (ii) the 

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proposed sale price; (iii) the strategic fit of theproperty with the rest of our portfolio; (iv) our operator’s or tenant’s desireto cease operation of the property; and (v) the existence of alternativesources, uses or needs for capital.

**FINANCING POLICIES**

Although there are nolimitations in our organizational documents on the amount of indebtedness wemay incur, our $750 million unsecured revolving credit facility and our seniornote indenture and its supplements contain financial covenants which, amongother things, restrict our ability to incur indebtedness and require us tomaintain financial ratios and a minimum net worth. We currently intend topursue our growth strategies while maintaining debt that is less than 50% ofour total capitalization. We may from time to time re-evaluate and modify ourfinancing policies in light of then current economic conditions, relativeavailability and costs of debt and equity capital, market values of properties,growth and acquisition opportunities and other factors, and we may increase ordecrease our ratio of debt to total capitalization accordingly.

Our board of trustees maydetermine to obtain a replacement for our current credit facility or to seekadditional capital through equity offerings, interim or long term debtfinancings, or retention of cash flows in excess of distributions toshareholders or a combination of these methods. Only one of our properties isencumbered by a mortgage. To the extent that our board of trustees decides toobtain additional debt financing, we may do so on an unsecured basis or asecured basis. We may seek to obtain other lines of credit or to issuesecurities senior to our common and/or preferred shares, including preferredshares of beneficial interest and debt securities, either of which may beconvertible into common shares or be accompanied by warrants to purchase commonshares, 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**. Ourday to day operations are conducted by Reit Management & Research LLC, orRMR. RMR originates and presents investment opportunities to our board oftrustees and provides management and administrative services to us. RMR is aDelaware limited liability company that is beneficially owned by Barry M.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) 928-1300. The directors of RMR are David J.Hegarty, Gerard M. Martin, formerly one of our managing trustees, Adam D.Portnoy and Barry M. Portnoy. The executive officers of RMR are Adam D.Portnoy, President and Chief Executive Officer; David J. Hegarty, ExecutiveVice President and Secretary; John G. Murray, Executive Vice President; EvrettW. Benton, Senior Vice President; Ethan S. Bornstein, Senior Vice President;Jennifer B. Clark, Senior Vice President and General Counsel; John R. Hoadley,Senior Vice President; Mark L. Kleifges, Senior Vice 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 andJohn C. Popeo, Senior Vice President, Treasurer and Chief Financial Officer.Messrs. Murray, Kleifges and Bornstein are also our officers. Other officers ofRMR also serve as officers of other companies to which RMR provides managementor other services.

**Employees**. Wehave no employees. Services which would otherwise be provided by employees areprovided by RMR and by our managing trustees and officers. As of February 26,2007, RMR had approximately 450 full time employees.

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

The travel center andtruck stop industry is fragmented and highly competitive. Fuel and non-fuelproducts and services can be obtained by long haul truck drivers from a varietyof sources, including regional full service travel 

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centers and pumper only truck stop chains,independently owned and operated truck stops and some large service stations.In addition, some trucking companies operate their own terminals to providefuel and services to their own trucking fleets.

We expect to compete forproperty acquisition and financing opportunities with entities which may havesubstantially greater financial resources than us, including, withoutlimitation, other REITs, operating companies in the hospitality industry,banks, insurance companies, pension plans and public and private partnerships.These entities may be able to accept more risk than we can prudently manage,including risks with respect to the creditworthiness of property operators.Such competition may reduce the number of suitable property acquisition orfinancing opportunities available to us or increase the bargaining power ofproperty owners seeking to sell or finance their properties.

**Environmental Matters**.Under various laws, owners of real estate may be required to investigate andclean up hazardous substances present at their properties, and may be heldliable for property damage or personal injuries that result from such hazardoussubstances. These laws also expose us to the possibility that we become liable toreimburse the government for damages and costs it incurs in connection with thehazardous substances. Our travel centers include fueling areas, truck repairand maintenance facilities and tanks for the storage of petroleum products andother hazardous substances, all of which create a potential for environmentaldamages. We reviewed environmental surveys and other studies of the propertieswe own prior to their purchase. Based upon those reviews we do not believe thatany of our properties are subject to environmental contamination that is likelyto result in material adverse consequences to us. Under the terms of ourmanagement agreements and leases, our tenants and operators have agreed toindemnify us from all environmental liabilities arising during the term of theagreements. However, no assurances can be given that environmental conditionsfor which we would be liable are not present in our properties or that costs weincur to remediate contamination will not have a material adverse effect on ourbusiness or financial condition. Moreover, our tenants and operators may nothave sufficient resources to pay environmental liabilities.

**Internet Website**.Our internet website address is www.hptreit.com. Copies of our governanceguidelines, code of business conduct and ethics and the charters of our audit,compensation and nominating and governance committees may be obtained free ofcharge by writing to our Secretary, Hospitality Properties Trust, 400 CentreStreet, Newton, MA 02458 or at our website. We make available, free of charge,on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form10-Q, Current Reports on Form 8-K and amendments to these reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,as amended, or the Exchange Act, as soon as reasonably practicable after theseforms are filed with, or furnished to, the Securities and Exchange Commission,or the SEC. Any shareholder or other interested party who desires tocommunicate with our non-management trustees, individually or as a group, maydo so by filling out a report on our website. Our board also provides a processfor security holders to send communications to the entire board. Informationabout the process for sending communications to our board can be found on ourwebsite. Our website address is included several times in this Annual Report onForm 10-K as a textual reference only and the information in the website is notincorporated by reference into this Annual Report on Form 10-K.

**Segment Information**.As of December 31, 2006, we have one operating segment, hotel real estateinvestments.

**FEDERAL INCOME TAX CONSIDERATIONS**

The following summary of federal income taxconsiderations is based on existing law, and is limited to investors who ownour shares as investment assets rather than as inventory or as property used ina trade or business.  The summary doesnot discuss all the particular tax consequences that might be relevant to youif you 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 securities orforeign currency;

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

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

·                  a person subject to alternativeminimum tax;

·                  a person who owns our shares as partof a straddle, hedging transaction, constructive sale transaction, constructiveownership transaction, or conversion transaction; or

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

The Internal Revenue Code of 1986, as amended, or theInternal Revenue Code, sections that govern federal income tax qualificationand treatment of a REIT and its shareholders are complex. This presentation isa summary of applicable Internal Revenue Code 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 have not received a ruling from the InternalRevenue Service, or the IRS, with respect to any matter described in thissummary, and we cannot assure you that the IRS or a court will agree with thestatements made in this summary. The IRS or a court could, for example, take adifferent position, which could result in significant tax liabilities forapplicable parties, from that described in this summary with respect to ouracquisitions, operations, restructurings or any other matters described in thissummary. 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 prospectiveacquirer of our shares to consult with a tax advisor about the federal income taxand other tax consequences of the acquisition, ownership and disposition of ourshares. Our intentions and beliefs described in this summary are based upon ourunderstanding of applicable laws and regulations that are in effect as of thedate of this Annual Report on Form 10-K. If new laws or regulations are enactedwhich impact us directly or indirectly, we may change our intentions orbeliefs.

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

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

·                  an entity treated as a corporationfor federal income tax purposes, that is created or organized in or under thelaws of the United States, any state thereof or the District of Columbia;

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

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

whosestatus as a U.S. shareholder is not overridden by an applicable taxtreaty.  Conversely, a “non-U.S.shareholder” is a beneficial owner of our shares who is not a U.S.shareholder.  If a partnership (includingany entity treated as a partnership for federal income tax purposes) is abeneficial owner of our shares, the tax treatment of a partner in the partnershipgenerally will depend upon the status of the partner and the activities of thepartnership. A beneficial owner that is a partnership and partners in such apartnership should consult their tax advisors about the federal income taxconsequences of the acquisition, ownership and disposition of our shares.

**Taxation asa REIT**

We have elected to be taxed as a REIT under Sections856 through 860 of the Internal Revenue Code, commencing with our taxable yearending December 31, 1995.  Our REITelection, assuming continuing compliance with the then applicable qualificationtests, 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 Internal Revenue Code as a REIT.

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As a REIT, we generally are not subject to federalincome tax on our net income distributed as dividends to our shareholders.  Distributions to our shareholders generallyare included in their income as dividends to the extent of our current oraccumulated earnings and profits.  Ourdividends are not generally entitled to the favorable 15% rate on qualifieddividend income, but a portion of our dividends may be treated as capital gaindividends, all as explained below.  Noportion of any of our dividends is eligible for the dividends receiveddeduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profitsgenerally are treated for federal income tax purposes as return of capital tothe extent of a recipient shareholder’s basis in our shares, and will reducethis basis.  Our current or accumulatedearnings and profits are generally allocated first to distributions made on ourpreferred shares, and thereafter to distributions made on our commonshares.  For all these purposes, ourdistributions include both cash distributions and any in kind distributions ofproperty that we might make (for example, as described below, our January 2007spin off of TA to our common shareholders).

If a shareholder actually or constructively owns noneor a small percentage of our common shares, and such shareholder surrenders itspreferred shares to us to be repurchased for cash only, then the repurchase ofthe preferred shares is likely to qualify for sale or exchange treatment becausethe repurchase would not be “essentially equivalent to a dividend” as definedby the Internal Revenue Code. More specifically, a cash repurchase of preferredshares will be treated under Section 302 of the Internal Revenue Code as adistribution, and hence taxable as a dividend to the extent of our allocablecurrent or accumulated earnings and profits, as discussed above, unless therepurchase satisfies one of the tests set forth in Section 302(b) of theInternal Revenue Code and is therefore treated as a sale or exchange of therepurchased shares. The repurchase will be treated as a sale or exchange if it(1) is “substantially disproportionate” with respect to the surrenderingshareholder’s ownership in us, (2) results in a “complete termination” of thesurrendering shareholder’s common and preferred share interest in us, or (3) is“not essentially equivalent to a dividend” with respect to the surrenderingshareholder, all within the meaning of Section 302(b) of the Internal RevenueCode. 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 Internal Revenue Code, as well as our common and preferred sharesactually owned by such shareholder.  Inaddition, if a repurchase is treated as a distribution under the precedingtests, then a shareholder’s tax basis in the repurchased preferred shares willbe transferred to the shareholder’s remaining shares of our common or preferredshares, if any, and if such shareholder owns no other shares of our common orpreferred shares, such basis may be transferred to a related person or may belost entirely.  Because the determinationas to whether a shareholder will satisfy any of the tests of Section 302(b) ofthe Internal Revenue Code depends upon the facts and circumstances at the timethat the preferred shares are repurchased, we encourage you to consult your owntax advisor to determine your particular tax treatment.

Our counsel, Sullivan & Worcester LLP, has opinedthat we have been organized and have qualified as a REIT under the InternalRevenue Code for our 1995 through 2006 taxable years, and that our currentinvestments and plan of operation enable us to continue to meet therequirements for qualification and taxation as a REIT under the InternalRevenue Code.  Our continuedqualification and taxation as a REIT will depend upon our compliance with variousqualification tests imposed under the Internal Revenue Code and summarizedbelow.  While we believe that we willsatisfy these tests, our counsel has not reviewed and will not reviewcompliance with these tests on a continuing basis.  If we fail to qualify as a REIT, we will besubject to federal income taxation as if we were a C corporation and ourshareholders 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 describedbelow, we generally will not pay federal income tax on amounts we distribute toour shareholders.  However, even if wequalify as a REIT, we may be subject tofederal tax in the following circumstances:

·                  We will be taxed at regular corporaterates on any undistributed “real estate investment trust taxable income,”including our undistributed net capital gains.

·                  If our alternative minimum taxableincome 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%.

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

·                  If we fail to satisfy the 75% grossincome 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.

·                  Ifwe fail to distribute for any calendar year at least the sum of 85% of our REITordinary income for that year, 95% of our REIT capital gain net income for thatyear, and any undistributed taxable income from prior periods, we will besubject to a 4% excise tax on the excess of the required distribution over theamounts actually distributed.

·                  Ifwe acquire an asset from a corporation in a transaction in which our basis inthe asset is determined by reference to the basis of the asset in the hands ofa present or former C corporation, and if we subsequently recognize gainon the disposition of this asset during the ten year period beginning on thedate on which the asset ceased to be owned by the C corporation, then wewill pay tax at the highest regular corporate tax rate, which is currently 35%,on the lesser of the excess of the fair market value of the asset over theC corporation’s basis in the asset on the date the asset ceased to beowned by the C corporation, or the gain we recognize in the disposition.

·                  Ifwe acquire a corporation, to preserve our status as a REIT we must generallydistribute all of the C corporation earnings and profits inherited in thatacquisition, if any, not later than the end of the taxable year of theacquisition.  However, if we fail to doso, relief provisions would allow us to maintain our status as a REIT providedwe distribute any subsequently discovered C corporation earnings and profitsand pay an interest charge in respect of the period of delayed distribution.  As discussed below, we have acquired Ccorporations in connection with our acquisition of real estate.  Our investigation of these C corporationsindicated that they did not have undistributed earnings and profits that wewould inherit and not distribute. However, upon review or audit, the IRS maydisagree with our conclusion.

·                  Assummarized below, REITs are permitted within limits to own stock and securitiesof a TRS.  A TRS is separately taxed onits net income as a C corporation, and is subject to limitations on thedeductibility of interest expense paid to its REIT parent.  In addition, its REIT parent is subject to a100% tax on the difference between amounts charged and redetermined rents anddeductions, including excess interest.

Ifand to the extent we invest in properties in foreign jurisdictions, our incomefrom those properties will generally be subject to tax in thosejurisdictions.  In 2005, we acquiredhotels in Canada and Puerto Rico.  Ourprofits from properties outside of the United States will generally be subjectto tax in the local jurisdictions. Through structuring and obtaining available tax exemptions, we expect tominimize the Canadian and Puerto Rican income taxes we have to pay, but therecan be no assurance that these existing structures and exemptions will beavailable 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.

If we fail toqualify or elect not to qualify as a REIT, we will be subject to federal incometax in the same manner as a C corporation. Distributions to our shareholders if we do not qualify as a REIT willnot be deductible by us nor will distributions be required under the InternalRevenue Code.  In that event,distributions to our shareholders will generally be taxable as ordinarydividends potentially eligible for the 15% income tax rate discussed below in “Taxationof U.S. Shareholders” and, subject to limitations in the Internal Revenue Code,will be eligible for the dividends received deduction for corporateshareholders.  Also, we will generally bedisqualified from qualification as a REIT for the four taxable years followingdisqualification.  If we do not qualifyas a REIT for even one year, this could result in reduction or elimination ofdistributions to our shareholders, or in our incurring substantial indebtednessor liquidating substantial investments in order to pay the resulting corporate-leveltaxes.  The Internal Revenue Code 

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provides certain reliefprovisions under which we might avoid automatically ceasing to be a REIT forfailure to meet certain REIT requirements, all as discussed in more detailbelow.

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 unable torender an opinion on the fair market value of the TA common shares because ofthe 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. Because of a number of factors unknown at this time, includingour final taxable income for 2007, a definitive calculation of the federalincome tax impact from the January 2007 spin off will not be possible untilafter the close of our 2007 taxable year. However, at this time we expect that:

·                  Ourspin off distribution will not reduce your total taxable dividends for 2007.

·                  Becausewe succeeded to and must distribute the earnings and profits of TravelCenters,a greater portion of our 2007 total distributions to our common shareholderswill be taxable than would have otherwise been the case, and these additionaltaxable dividends will generally be eligible for treatment as qualifieddividends in 2007, taxed to our noncorporate common shareholders at the maximumcapital gain rate of 15%.

·                  Asa result of any gain that we recognized in the spin off, a greater portion ofour 2007 distributions to our common shareholders will be taxable than wouldhave otherwise been the case. To the extent of these additional taxabledividends in 2007, our taxable dividends paid to our common shareholders in2008 will generally be eligible for treatment as qualified dividends that aretaxed to our noncorporate shareholders at the maximum capital gain rate of 15%.

**REIT Qualification Requirements**

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

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

(2)                                  the beneficial ownership of which is evidenced bytransferable shares or by transferable certificates of beneficial interest;

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

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

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

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

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

Section 856(b) of the Internal Revenue Codeprovides that conditions (1) through (4) must be met during the entire taxableyear and that condition (5) must be met during at least 335 days of ataxable year of 12 months, or during a pro rata part of a taxable year of lessthan 12 months. Section 856(h)(2) of the Internal Revenue Code providesthat neither condition (5) nor (6) need be met for our first taxable yearas a REIT.  We believe that we have metconditions (1) through (7) during each of the requisite periods ending onor before our most recently completed 

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taxableyear, and that we can continue to meet these conditions in future taxableyears.  There can, however, be noassurance in this regard.

By reason of condition (6), we will fail to qualify asa REIT for a taxable year if at any time during the last half of a year morethan 50% in value of our outstanding shares is owned directly or indirectly byfive or fewer individuals. To help comply with condition (6), our declarationof trust restricts transfers of our shares. In addition, if we comply with applicable Treasury regulations toascertain the ownership of our shares and do not know, or by exercisingreasonable diligence would not have known, that we failed condition (6), thenwe will be treated as having met condition (6). However, our failure to comply with these regulations for ascertainingownership may result in a penalty of $25,000, or $50,000 for intentionalviolations.  Accordingly, we intend tocomply with these regulations, and to request annually from record holders ofsignificantpercentages of our sharesinformation regarding the ownership of our shares.  Under our declaration of trust, ourshareholders are required to respond to these requests for information.

For purposes of condition (6), REIT shares held by apension trust are treated as held directly by the pension trust’s beneficiariesin proportion to their actuarial interests in the pensiontrust. Consequently, five orfewerpension trusts could own more than 50% of the interests in an entity withoutjeopardizing that entity’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 InternalRevenue Code provides that we will not automatically fail to be a REIT if we donot meet conditions (1) through (6), provided we can establish reasonable causefor any such failure.  Each such excusedfailure will result in the imposition of a $50,000 penalty instead of REITdisqualification.  It is impossible tostate whether in all circumstances we would be entitled to the benefit of thisrelief provision.  This relief provisionapplies to any failure of the applicable conditions, even if the failure firstoccurred in a prior taxable year, as long as each of the requirements of therelief provision is satisfied after October 22, 2004.

*Our Wholly-Owned Subsidiaries andOur Investments through Partnerships.*  Except in respect of TRSsas discussed below, Section 856(i) of the Internal Revenue Code providesthat any corporation, 100% of whose stock is held by a REIT, is a qualifiedREIT subsidiary and shall not be treated as a separate corporation.  The assets, liabilities and items of income,deduction and credit of a qualified REIT subsidiary are treated as the REIT’s.  We believe that each of our direct andindirect wholly-owned subsidiaries, other than the TRSs discussed below, willeither be a qualified REIT subsidiary within the meaning ofSection 856(i) of the Internal Revenue Code, or a noncorporate entitythat for federal income tax purposes is not treated as separate from its ownerunder regulations issued under Section 7701 of the Internal RevenueCode.  Thus, except for the TRSsdiscussed below, in applying all the federal income tax REIT qualificationrequirements described in this summary, all assets, liabilities and items ofincome, deduction and credit of our direct and indirect wholly-ownedsubsidiaries are treated as ours.

We have invested and may invest in real estate throughone or more limited or general partnerships or limited liability companies thatare treated as partnerships for federal income tax purposes.  In the case of a REIT that is a partner in apartnership, regulations under the Internal Revenue Code 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 taxrules governing partners and partnerships under Sections 701 through 777of the Internal Revenue Code.

*Taxable REIT Subsidiaries.*  Weare permitted to own any or all of the securities of a “taxable REIT subsidiary”as defined in Section 856(l) of the Internal Revenue Code, provided that nomore than 20% of our assets, at the close of each quarter, is comprised of ourinvestments in the stock or securities of our TRSs.  Among other requirements, a TRS must:

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(1) be a non-REIT corporation forfederal income tax purposes in which we directly or indirectly own shares;

(2) join with us in making a TRSelection;

(3) not directly or indirectlyoperate or manage a lodging facility or a health care facility; and

(4) not directly or indirectlyprovide to any person, under a franchise, license, or otherwise, rights to anybrand name under which any lodging facility or health care facility isoperated, except that in limited circumstances a subfranchise, sublicense or similarright can be granted to an independent contractor to operate or manage alodging facility.

In addition, a corporation other than a REIT in whicha TRS directly or indirectly owns more than 35% of the voting power or valuewill automatically be treated as a TRS. Subject to the discussion below, we believe that we and each of our TRSshave complied with, and will continue to comply with, the requirements for TRSstatus during all times each subsidiary’s TRS election remains in effect, andwe believe that the same will be true for any TRS that we later form oracquire.

Our ownership of stock and securities in TRSs isexempt from the 10% and 5% REIT asset tests discussed below.  Also, as discussed below, TRSs can performservices for our tenants without disqualifying the rents we receive from 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 a TRS if an eligible independent contractor operates the facility,as discussed more fully below.

Restrictions are imposed on TRSs to ensure that theywill be subject to an 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 TRS’s 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.*  Thereare two gross income requirements for qualification as a REIT under theInternal Revenue Code:

·                  At least 75% of our gross income, excluding grossincome from sales or other dispositions of property held primarily for sale,must be derived from investments relating to real property, including “rentsfrom real property” as defined under Section 856 of the Internal RevenueCode, 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 debtinstruments, income attributable to the temporary investment of this newcapital in stock or a debt instrument, if received or accrued within one yearof our receipt of the new capital, is generally also qualifying income underthe 75% gross income test.

·                  At least 95% of our gross income, excluding grossincome from sales or other dispositions of property held primarily for sale,must be derived from a combination of items of real property income thatsatisfy the 75% gross income test described above, dividends, interest, gainsfrom the sale or disposition of stock, securities, or real property or, forfinancial instruments entered into during our 2004 or earlier taxable years,certain payments under interest rate swap or cap agreements, options, futurescontracts, forward rate agreements or similar 

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financial instruments.  But forfinancial instruments entered into during our 2005 or later taxable years, the95% gross income test has been modified as follows:  except as may be provided in Treasuryregulations, gross income for these purposes no longer includes income from a “hedgingtransaction” as defined under clauses (ii) and (iii) of Section 1221(b)(2)(A)of the Internal Revenue Code, but only to the extent that (A) the transactionhedges indebtedness we incur to acquire or carry real estate assets, and (B)the hedging transaction was “clearly identified,” meaning that the transactionmust be identified as a hedging transaction before the end of the day on whichit is entered and the risks being hedged must be identified generally within 35days after the date the transaction is entered.

For purposes of the 75% and 95% gross income testsoutlined above, income derived from a “shared appreciation provision” in amortgage loan is generally treated as gain recognized on the sale of theproperty to which it relates.  Althoughwe will use our best efforts to ensure that the income generated by ourinvestments will be of a type that satisfies both the 75% and 95% gross incometests, there can be no assurance in this regard.

In order to qualify as “rentsfrom real property” under Section 856 of the Internal Revenue Code, severalrequirements must be met:

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

·                  Rents do not qualify if the REIT owns 10% or moreby vote or value of the tenant, whether directly or after application ofattribution rules.  While we intend notto lease property to any party if rents from that property would not qualify asrents from real property, application of the 10% ownership rule isdependent upon complex attribution rules and circumstances that may bebeyond our control.  For example, anunaffiliated third party’s ownership directly or by attribution of 10% or moreby value of our shares, as well as 10% or more by vote or value of the stock ofone of our tenants, would result in that tenant’s rents not qualifying as rentsfrom real property. Our declaration of trust disallows transfers or purportedacquisitions, directly or by attribution, of our shares to the extent necessaryto maintain our REIT status under the Internal Revenue Code.  Nevertheless, there can be no assurance thatthese provisions in our declaration of trust will be effective to prevent ourREIT status from being jeopardized 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 Internal Revenue Code’s attribution rules.

·                  There is a limited exception to the aboveprohibition on earning “rents from real property” from a 10% affiliated tenant,if the tenant is a TRS.  If at least 90%of the leased space of a property is leased to tenants other than TRSs and 10%affiliated tenants, and if the TRS’s rent for space at that property issubstantially comparable to the rents paid by nonaffiliated tenants forcomparable space at the property, then otherwise qualifying rents paid by theTRS to the REIT will not be disqualified on account of the rule prohibiting 10%affiliated tenants.

·                  There is a second exception to the above prohibitionon earning “rents from 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 Section856(d)(8)-(9) of the Internal Revenue Code. As described below, we believe ourleases with our TRSs have satisfied and will satisfy these requirements.

·                  In order for rents to qualify, we generally mustnot manage the property or furnish or render services to the tenants of theproperty, except through an independent contractor from whom we derive noincome or, for our 2001 taxable year and thereafter, through one of ourTRSs.  There is an exception to thisrule permitting a REIT to perform customary tenant services of the sortthat a tax-exempt organization could perform without being considered inreceipt of “unrelated business taxable income” as defined in Section512(b)(3) of the Internal Revenue Code. In addition, a de minimis amount of noncustomary services will notdisqualify income as “rents from real property” so long as the value of theimpermissible services does not exceed 1% of the gross income from theproperty.

·                  If rent attributable to personal property leasedin connection with a lease of real property is 15% or less of the total rentreceived under the lease, then the rent attributable to personal property willqualify as “rents from real 

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property”; if this 15% threshold is exceeded, the rent attributable topersonal property will not so qualify. For our taxable years through December 31, 2000, the portion of rentalincome treated as attributable to personal property was determined according tothe ratio of the tax basis of the personal property to the total tax basis ofthe real and personal property that is rented. For our 2001 taxable year and thereafter, the ratio is determined byreference to fair market values rather than tax bases.

We believe that all orsubstantially all our rents have qualified and will qualify as rents from realproperty for purposes of Section 856 of the Internal Revenue Code, subject tothe considerations in the following paragraph.

We have received opinions from our counsel Sullivan & Worcester LLPthat (i) our underground storage tanks should constitute real estate assets,rather than personal property, for purposes of the various REIT qualificationtests described in this summary, and (ii) although the matter is not free fromdoubt, for purposes of applying the 15% incidental personal property testabove, regarding rent attributable to incidental personal property leased inconnection with real property, the test will be applied in the aggregate to allthe travel center sites leased under our lease with TA, rather than on a siteby site basis. If the IRS or a court determines that one or both of theseopinions is incorrect, then a portion of the rental income we receive from TAcould be nonqualifying income for purposes of the 75% and 95% gross incometests, possibly jeopardizing our compliance with the 95% gross income test.Under those circumstances, however, we expect we would qualify for the grossincome tests’ relief provision described below, and thereby preserve ourqualification as a REIT. If the relief provision below were to apply to us, wewould be subject to tax at a 100% rate on the amount by which we failed the 95%gross income test, with adjustments, multiplied by a fraction intended toreflect our profitability for the taxable year; however, in a typical taxableyear, we have little or no nonqualifying income from other sources and thuswould expect to owe little tax in such circumstances.

In order to qualify as mortgageinterest on real property for purposes of the 75% test, interest must derivefrom a mortgage loan secured by real property with a fair market value, at thetime the loan is made, at least equal to the amount of the loan.  If the amount of the loan exceeds the fairmarket value of the real property, the interest will be treated as interest ona mortgage loan in a ratio equal to the ratio of the fair market value of thereal property to the total amount of the mortgage loan.

Amounts payable to us underagreements 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, suchcurrency gains could threaten 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 only, we do not expect to have material amounts of currencygains in respect of our Canadian investments.

Our January 31, 2007 spin off of TA is treated for federal income taxpurposes as though we disposed of each of the individual assets of TA and itsprincipal subsidiaries in a taxable transaction in which individual assetgains, but not losses, were recognized. The amount realized on each asset inthis taxable disposition is equal to the fair market value of that asset at thetime of the spin off, and our tax basis in the asset was the carryover taxbasis inherited from TravelCenters. For these purposes, the assets andliabilities 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 Internal Revenue Code, we donot believe the recognized gains from the distribution materially affect ourability to comply with these tests. Although our counsel, Sullivan & Worcester LLP, is unable to opineon factual matters such as the fair market value of the distributed assets atthe time of the spin off, Sullivan & Worcester LLP has opined that it ismore likely than not that we have been reasonable in our approach to valuationsand gain computations (including valuation methodology) in connection with thespin off of TA and thus that, even if our computations should be successfullychallenged so as to result in our failing the 95% gross income test, we wouldmore likely than not qualify for the gross income tests’ relief provisiondescribed below and thereby preserve our qualification as a REIT. If the reliefprovision below were to apply to us, we would be subject to tax at a 100% rateon the amount by which we failed the 95% gross income test, with adjustments,multiplied by a fraction intended to reflect our profitability for the taxableyear; but we would expect to owe little tax in such circumstances.

Other than sales of foreclosureproperty, any gain we realize on the sale of property held as inventory orother property held primarily for sale to customers in the ordinary course ofbusiness will be treated as income from a prohibited transaction that issubject to a penalty tax at a 100% rate. This prohibited transaction income also may 

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adversely affect our ability to satisfy the 75% and 95%gross income tests 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 investment with a view to long-termincome production and capital appreciation;

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

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

Ifwe fail to satisfy one or both of the 75% or the 95% gross income tests in anytaxable year, we may nevertheless qualify as a REIT for that year if we satisfythe following requirements after October 22, 2004:

·                  our failure to meet the test is due to reasonablecause and not due to willful neglect, and

·                  after we identify the failure, we file a scheduledescribing each item of our gross income included in the 75% or 95% grossincome tests for that taxable year.

It is impossible to state whetherin all circumstances we would be entitled to the benefit of this reliefprovision 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.

Underprior law, if we failed to satisfy one or both of the 75% or 95% gross incometests, we nevertheless would have qualified as a REIT for that year if:  our failure to meet the test was due toreasonable cause and not due to willful neglect; we reported the nature andamount of each item of our income included in the 75% or 95% gross income testsfor that taxable year on a schedule attached to our tax return; and anyincorrect information on the schedule was not due to fraud with intent to evadetax.  For our 2004 and prior taxableyears, we attached a schedule of gross income to our federal income taxreturns, 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 theclose of each quarter of each taxable year, we must also satisfy the followingasset percentage tests in order to qualify as a REIT for federal income taxpurposes:

·                  At least 75% of our total assets must consist ofreal estate assets, cash and cash items, shares in other REITs, government securities,and temporary investments of new capital (that is, stock or debt instrumentspurchased with proceeds of a stock offering or a public offering of our debtwith a term of at least five years, but only for the one-year periodcommencing with our receipt of the offering proceeds).

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

·                  Of the investments included in the preceding 25%asset class, the value of any one non-REIT issuer’s securities that we own maynot exceed 5% of the value of our total assets, and we may not own more than10% of any one non-REIT issuer’s outstanding voting securities.  For our 2001 taxable year and thereafter, wemay not own more than 10% of the vote or value of any one non-REIT issuer’soutstanding securities, unless that issuer is our TRS or the securities are “straightdebt” securities or otherwise excepted as discussed below.

·                  For our 2001 taxable year and thereafter, ourstock and securities in a TRS are exempted from the preceding 10% and 5% assettests.  However, no more than 20% of ourtotal assets may be represented by stock or securities of TRSs.

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When a failure to satisfy theabove asset tests results from an acquisition of securities or other propertyduring a quarter, the failure can be cured by disposition of sufficientnonqualifying assets within 30 days after the close of that quarter.

In addition, if we fail the 5%value test or the 10% vote or value tests at the close of any quarter and donot cure such failure within 30 days after the close of that quarter, thatfailure will nevertheless be excused if (a) the failure is de minimis and (b)within 6 months after the last day of the quarter in which we identify thefailure, we either dispose of the assets causing the failure or otherwisesatisfy the 5% value and 10% vote and value asset tests.  For purposes of this relief provision, thefailure will be “de minimis” if the value of the assets causing the failuredoes not exceed the lesser of (a) 1% of the total value of our assets at theend of the relevant quarter or (b) $10 million. If our failure is not deminimis, or if any of the other REIT asset tests have been violated, we maynevertheless qualify as a REIT if (a) we provide the IRS with a description ofeach asset causing the failure, (b) the failure was due to reasonable cause andnot willful neglect, (c) we pay a tax equal to the greater of (i) $50,000 or(ii) the highest rate of corporate tax imposed (currently 35%) on the netincome generated by the assets causing the failure during the period of thefailure, and (d) within 6 months after the last day of the quarter in which weidentify the failure, we either dispose of the assets causing the failure orotherwise satisfy all of the REIT asset tests. These relief provisions apply to any failure of the applicable assettests, even if the failure first occurred in a prior taxable year, as long aseach of the requirements of the relief provision is satisfied after October 22,2004.

The Internal Revenue Code alsoprovides, for our 2001 taxable year and thereafter, an excepted securities safeharbor to the 10% value test that includes among other items (a) “straight debt”securities, (b) certain rental agreements in which payment is to be made insubsequent years, (c) any obligation to pay rents from real property, (d)securities issued by governmental entities that are not dependent in whole orin part on the profits of or payments from a nongovernmental entity, and (e)any security issued by another REIT.

We intend to maintain records ofthe value of our assets to document our compliance with the above asset tests,and to take actions as may be required to cure any failure to satisfy the testswithin 30 days after the close of any quarter.

*Our Relationship with TA*.  On January31, 2007, we spun off all the then outstanding TA common shares.  Under the transaction agreement that governedthe spin off, TA will generally be responsible for the tax filings andliabilities, including federal income tax filings and liabilities, ofTravelCenters and its subsidiaries for the periods ending on or before thedistribution date.  Because TA and itsprincipal subsidiaries were entities which were not regarded as separate fromus for tax purposes prior to the spin off, TA and these subsidiaries wereimmediately after the spin off (and expected to thereafter remain) tenants inwhom we have at all times during each taxable year an actual and constructiveownership interest of less than 10% by vote and by value.  Moreover, our lease with TA, TA’s limitedliability company operating agreement, and the transaction agreement governingthe spin off collectively contain restrictions upon the ownership of TA commonshares and require TA to refrain from taking any actions that may result in anyaffiliation with us that would jeopardize our qualification as a REIT under theInternal Revenue Code. Accordingly, subject to the personal propertyconsiderations discussed above and commencing with the January 31, 2007 spinoff, we expect that the rental income we receive from TA and its subsidiarieswill be “rents from real property” under Section 856(d) of the Internal RevenueCode, and therefore qualifying income under the 75% and 95% gross income testsdescribed above.

*Our Relationship with Our Taxable REIT Subsidiaries*.  We currently own hotels that wepurchased to be leased to our TRSs or which are being leased to our TRSs as aresult of modifications to a prior lease that were agreed to among us, theformer tenant and the manager.  We mayfrom time to time in the future lease additional hotels that we acquire in thismanner.

In connection with lease defaults, weterminated occupancy of some of our hotels by defaulting tenants and immediatelyleased these hotels to our TRSs and entered into new third party managementagreements for these hotels.  We may inthe future employ similar arrangements if we ever again face lease or occupancyterminations.

In transactions involving our TRSs, ourintent is that the rents paid to us by the TRS qualify as “rents from realproperty” under the REIT gross income tests summarized above.  In order for this to be the case, the managerengaged by the applicable TRS must be an “eligible independent contractor”within the meaning of Section 856(d)(9)(A) of the Internal Revenue Code, andthe hotels leased to the TRS must be “qualified lodging facilities” within themeaning of Section 856(d)(9)(D) of the Internal Revenue Code.  Qualified lodging facilities are defined ashotels, motels, or other 

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establishments where more than half of the dwelling unitsare used on a transient basis, provided that legally authorized wagering orgambling activities are not conducted at or in connection with such facilities. Also included in the definition are thequalified lodging facility’s customary amenities and facilities.

For these purposes, a contractorqualifies as an “eligible independent contractor” if it is less than 35%affiliated with the REIT and, at the time the contractor enters into theagreement with the TRS to operate the qualified lodging facility, thatcontractor or any person related to that contractor is actively engaged in thetrade or business of operating qualified lodging facilities for persons unrelatedto the TRS or its affiliated REIT.  Forthese purposes, an otherwise eligible independent contractor is notdisqualified from that status on account of the TRS bearing the expenses forthe operation of the qualified lodging facility, the TRS receiving the revenuesfrom the operation of the qualified lodging facility, net of expenses for thatoperation and fees payable to the eligible independent contractor, or the REITreceiving income from the eligible independent contractor pursuant to apreexisting or otherwise grandfathered lease 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 of counsel that the particular manager shouldqualify as an “eligible independent contractor” within the meaning of Section856(d)(9)(A) of the Internal Revenue Code, and that, although the matter is notfree from doubt, it is reasonable for us to rely on such opinion for purposesof the relief provisions under the REIT gross income tests summarizedabove.  Although there can be noassurance in this regard, we expect that the rental income we receive from ourTRSs will qualify as “rents from real property” under the REIT gross incometests.  We also took steps to qualify for the 75% and 95% gross incometests’ relief provision, including for example attaching an applicable scheduleof gross income to our federal income tax returns as previously required bySection 856(c)(6) of the Internal Revenue Code.  Thus, even if the IRS ora court ultimately determines that one or more of our managers failed tooperate “qualified lodging facilities” for others sufficient to qualify as aneligible independent contractor, and that this failure thereby implicated ourcompliance with the REIT gross income tests, we expect we would qualify for thegross income tests’ relief provision and thereby preserve our qualification asa REIT.

As explained above, we will be subjectto a 100% tax if the IRS successfully asserts that the rents paid by our TRS tous exceed an arm’s length rental rate. Although there is no clear precedent to distinguish for federal incometax purposes among leases, management contracts, partnerships, financings, andother contractual arrangements, we believe that our leases and our TRSs’management agreements will be respected for purposes of the requirements of theInternal Revenue Code discussed above. Accordingly, we expect that the rental income from our current andfuture TRSs will qualify favorably as “rents from real property,” and that the100% tax on excessive rents from a TRS will not apply.

*Annual Distribution Requirements.*  In orderto qualify for taxation as a REIT under the Internal Revenue Code, 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 “real estate investmenttrust taxable income,” as defined in Section 857 of the Internal Revenue Code,computed by excluding any net capital gain and before taking into account anydividends paid deduction for which we are eligible, and 90% of our net incomeafter tax, if any, from property received in foreclosure, over

(B)                                the sum of our qualifying noncash income, e.g.,imputed rental income or income from transactions inadvertently failing toqualify as like-kind exchanges.

The distributions must be paid in the taxable year towhich they relate, or in the following taxable year if declared before wetimely file our tax return for the earlier taxable year and if paid on orbefore the first regular distribution payment after that declaration.  If a dividend is declared in October,November, or December to shareholders of record during one of those months, andis paid during the following January, then for federal income tax purposes thedividend will be treated as having been both paid and received onDecember 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interestsentitled to a distribution, or which is not consistent with the rights todistributions among our classes of beneficial interests, is a preferentialdistribution that is not taken into consideration for purposes of thedistribution requirements, and accordingly the payment of a preferentialdistribution 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 the 

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requirements 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 subjectto a 4% excise tax to the extent we fail within a calendar year to makerequired distributions to our shareholders of 85% of our ordinary income and95% of our capital gain net income plus the excess, if any, of the “grossed uprequired distribution” for the preceding calendar year over the amount treatedas distributed for that preceding calendar year.  For this purpose, the term “grossed uprequired distribution” for any calendar year is the sum of our taxable incomefor the calendar year without regard to the deduction for dividends paid andall amounts from earlier years that are not treated as having been distributedunder the provision. We will be treated as having sufficient earnings andprofits to treat as a dividend any distribution by us up to the amount requiredto be distributed in order to avoid imposition of the 4% excise tax.

If we do not have enough cash orother liquid assets to meet the 90% distribution requirements, we may find itnecessary and desirable to arrange for new debt or equity financing to providefunds for required distributions in order to maintain our REIT status.  We can provide no assurance that financingwould be available for these purposes on favorable terms.

We may be able to rectify a failure to pay sufficient dividends for anyyear by paying “deficiency dividends” to shareholders in a later year.  These deficiency dividends may be included inour deduction for dividends paid for the earlier year, but an interest chargewould be imposed upon us for the delay in distribution.  Although we may be able to avoid being taxedon amounts distributed as deficiency dividends, we will remain liable for the4% excise tax discussed above.

In addition to the other distribution requirements above, to preserveour status as a REIT we are required to timely distribute C corporationearnings and profits that we inherit from acquired corporations.

**Acquisition of C Corporations**

In 2005 we purchased a hotel inPuerto Rico.  In order to acquire thePuerto Rican hotel, we acquired all of the outstanding stock of a C corporationthat owned that hotel as its primary asset. Upon our acquisition, the acquired C corporation became our qualifiedREIT subsidiary under Section 856(i) of the Internal Revenue Code.  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 Internal Revenue Code in respect of thisacquired Puerto Rican corporation, we did not succeed to its earnings andprofits, nor do we have any built-in gain in this former C corporation’sassets.

On January 31, 2007, we acquired all of the outstanding stock ofTravelCenters, a C corporation.  At thetime of that acquisition, this C corporation directly or indirectly owned allof the outstanding equity interests in various corporate and noncorporatesubsidiaries.  Upon our acquisition, theacquired entities generally became either our qualified REIT subsidiaries underSection 856(i) of the Internal Revenue Code or disregarded entities underTreasury regulations issued under Section 7701 of the Internal RevenueCode.  Thus, after the 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.  Inaddition, we generally were treated as the successor to these acquiredsubsidiaries’ federal income tax attributes, such as these entities’ adjustedtaxbases in their assets and theirdepreciation schedules; we were also treated as the successor to these acquiredcorporate subsidiaries’ earnings and profits for federal income tax purposes,if any.

Upon completing the acquisition, we effected a restructuring of thetravel center business so as to divide it between us and TA, and we then spunoff TA on January 31, 2007.

*Earnings and Profits*. A REIT may not have any undistributedC corporation earnings and profits at the end of any taxable year. Upon theclosing of the TA Transaction, we succeeded to the undistributed earnings andprofits, if any, of the acquired corporate entities.  Thus, we need to distribute all of theseearnings and profits no later than December 31, 2007. If we fail to do so, wewill not qualify to be taxed as a REIT for 2007 and a number of yearsthereafter, unless we are able to rely on the relief provision described below.

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Although Sullivan & Worcester LLP is unable to render an opinion onfactual determinations such as the amount of undistributed earnings andprofits, we have retained accountants to compute the amount of undistributedearnings and profits that we inherited in the TA Transaction.  We believe this inherited amount is not morethan $20 million.  In such case, ourtotal 2007 distributions, including the spin off of TA, are expected to be morethan sufficient to distribute both our 2007 earnings and profits and theundistributed earnings and profits that we inherited in the TA Transaction.

Upon examination, the IRS may propose adjustments to our calculation ofundistributed 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, despite ourbest estimates, we subsequently discover that we have inherited undistributedearnings and profits that would not be eliminated by way of our regulardistributions to shareholders by December 31, 2007, then we will elect topreserve our qualification as a REIT by making a special distribution for our2007 taxable year.  If, despite our bestefforts, it is subsequently determined that we have not distributed theseearnings and profits before December 31, 2007, we may be eligible for a reliefprovision similar to the “deficiency dividends” procedure described above. Toutilize this relief provision, we would have to pay an interest charge for thedelay in distributing the undistributed earnings and profits; in addition, wewould be required to distribute to our shareholders, in addition to our otherREIT distribution requirements, the amount of the undistributed earnings andprofits less the interest charge paid.

Any inherited C corporation earnings and profits that we distribute toour shareholders in 2007 will be additional taxable dividends, and theseadditional amounts will be eligible for treatment as qualified dividends thatare taxed to our noncorporate shareholders at the maximum capital gain rate of15%.

*Built-in-Gains from C Corporations.* As described above, notwithstanding ourqualification and taxation as a REIT, we may still be subject to corporatetaxation in particular circumstances. Specifically, if we acquire an asset from a corporation in a transactionin which our adjusted tax basis in the asset is determined by reference to theadjusted tax basis of that asset in the hands of a present or former Ccorporation, and if we subsequently recognize gain on the disposition of thatasset during the ten year period beginning on the date on which the asset ceasedto be owned by the C corporation, then we will generally pay tax at the highestregular corporate tax rate, currently 35%, on the lesser of (1) the excess, ifany, of the asset’s fair market value over its adjusted tax basis, eachdetermined as of the time the asset ceased to be owned by the C corporation, or(2) our gain recognized in the disposition. In the case of assets acquired inthe TA Transaction, any gain subject to this tax may generally be reduced bycertain net operating loss carryforwards, if any, that we inherit. Other thanthe assets 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 TATransaction.  We believe that werecognized only modest taxable gains from the spin off of TA, and we alsocurrently expect that some net operating loss carryforwards will be availableto us so as to reduce or eliminate any tax that we may owe in respect of anysuch recognized gains.

To the extent of our gains in a taxable year that are subject to thebuilt in gains tax described above, net of any taxes paid on such gains withrespect to that taxable year, our taxable dividends paid to you in thefollowing year will be eligible for treatment as qualified dividends that aretaxed to our noncorporate shareholders at the maximum capital gain rate of 15%while that rate is in effect.

**Depreciation and Federal IncomeTax Treatment of Leases**

Our initial tax bases in ourassets will generally be our acquisition cost. We will generally depreciate our real property on a straight-linebasis over 40 years and our personal property over the applicable shorterperiods.  These depreciation schedulesmay vary for properties that we acquire through tax-free or carryoverbasis acquisitions.

We are entitled to depreciationdeductions from our facilities only if we are treated for federal income taxpurposes as the owner of the facilities. This means that the leases of the facilities must be classified forfederal income tax purposes as true leases, rather than as sales or financingarrangements, and we believe this to be the case.  In the case of sale-leasebackarrangements, the IRS could assert that we realized prepaid rental income inthe year of purchase to the extent that the value of a leased property, at thetime of purchase, 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.

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**Taxation of U.S. Shareholders**

The maximum individual federalincome tax rate for long-term capital gains is generally 15% (for taxable yearsthat begin on or before December 31, 2010) and for most corporatedividends is generally also 15% (for taxable years that begin on or beforeDecember 31, 2010).  However,because we are not generally subject to federal income tax on the portion ofour REIT taxable income or capital gains distributed to our shareholders, dividendson our shares generally are not eligible for such 15% tax rate ondividends.  As a result, our ordinarydividends continue to be taxed at the higher federal income tax ratesapplicable to ordinary income.  However,the 15% federal income tax rate for long-term capital gains and dividendsgenerally applies to:

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

(2)                                  our distributions designated as long-term capitalgain dividends (except to the extent attributable to real estate depreciationrecapture, in which case the distributions are subject to a 25% federal incometax rate);

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

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

As long as we qualify as a REITfor federal income tax purposes, a distribution to our U.S. shareholders thatwe do not designate as a capital gain dividend will be treated as an ordinaryincome dividend to the extent of our current or accumulated earnings andprofits. Distributions made out of our current or accumulated earnings andprofits that we properly designate as capital gain dividends will be taxed aslong-term capital gains, as discussed below, to the extent they do notexceed our actual net capital gain for the taxable year.  However, corporate shareholders may berequired to treat up to 20% of any capital gain dividend as ordinary incomeunder Section 291 of the Internal Revenue Code.

In addition, we may elect toretain net capital gain income and treat it as constructively distributed.  In that case:

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

(2)           each U.S. shareholder will be taxed on its designatedproportionate share of our retained net capital gains as though that amountwere distributed and designated a capital gain dividend;

(3)           each U.S. shareholder will receive a credit for itsdesignated proportionate share of the tax that we pay;

(4)           each U.S. shareholder will increase its adjusted basis inour shares by the excess of the amount of its proportionate share of theseretained net capital gains over its proportionate share of this tax that wepay; and

(5)           both we and our corporate shareholders will makecommensurate adjustments in our respective earnings and profits for federalincome tax purposes.

If we elect to retain our net capital gains in thisfashion, we will notify our U.S. shareholders of the relevant tax informationwithin 60 days after the close of the affected taxable year.

As discussed above, fornoncorporate U.S. shareholders, long-term capital gains are generallytaxed at maximum rates of 15% or 25%, depending upon the type of propertydisposed of and the previously claimed depreciation with respect to thisproperty.  If for any taxable year wedesignate capital gain dividends for U.S. shareholders, then the portion of thecapital gain dividends we designate will be allocated to the holders of aparticular class of shares on a percentage basis equal to the ratio of theamount of the total dividends paid or made available for the year to theholders of that class of shares to the total dividends paid or made availablefor the year to holders of all classes of our shares.  We will 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.

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Distributions in excess ofcurrent or accumulated earnings and profits will not be taxable to a U.S.shareholder to the extent that they do not exceed the shareholder’s adjustedtax basis in the shareholder’s shares, but will reduce the shareholder’s basisin those shares.  To the extent thatthese excess distributions exceed the adjusted basis of a U.S. shareholder’sshares, they will be included in income as capital gain, with long-termgain generally taxed to noncorporate U.S. shareholders at a maximum rate of15%.  No U.S. shareholder may include onhis federal income tax return any of our net operating losses or any of ourcapital losses.

Dividends that we declare inOctober, November or December of a taxable year to U.S. shareholders of recordon a date in those months will be deemed to have been received by shareholderson December 31 of that taxable year, provided we actually pay thesedividends during the following January. Also, items that are treated differently for regular and alternativeminimum tax purposes are to be allocated between a REIT and its shareholdersunder Treasury regulations which are to be prescribed.  It is possible that these Treasuryregulations will require tax preference items to be allocated to ourshareholders with respect to any accelerated depreciation or other tax preferenceitems that we claim.

A U.S. shareholder will generallyrecognize gain or loss equal to the difference between the amount realized andthe shareholder’s adjusted basis in our shares that are sold or exchanged.  This gain or loss will be capital gain orloss, and will be long-term capital gain or loss if the shareholder’sholding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for sixmonths or less will generally be treated as a long-term capital loss tothe extent of our long-term capital gain dividends during the holdingperiod.

Effective for federal tax returnswith due dates after October 22, 2004, the Internal Revenue Code imposes apenalty for the failure to properly disclose a “reportable transaction.”  A reportable transaction currently includes,among other things, a sale or exchange of our shares resulting in a tax loss inexcess of (i) $10 million in any single year or $20 million in anycombination of years in the case of our shares held by a C corporation or by apartnership with only C corporation partners or (ii) $2 million in anysingle year or $4 million in any combination of years in the case of ourshares held by any other partnership or an S corporation, trust or individual,including losses that flow through pass through entities to individuals.  A taxpayer discloses a reportable transactionby filing IRS Form 8886 with its federal income tax return and, in the firstyear of filing, a copy of Form 8886 must be sent to the IRS’s Office of TaxShelter Analysis.  The penalty 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. shareholderswho borrow funds to finance their acquisition of our shares could be limited inthe amount of deductions allowed for the interest paid on the indebtednessincurred.  Under Section 163(d) ofthe Internal Revenue Code, interest paid or accrued on indebtedness incurred orcontinued to purchase or carry property held for investment is generallydeductible only to the extent of the investor’s net investment income.  A U.S. shareholder’s net investment incomewill include ordinary income dividend distributions received from us and, if anappropriate election is made by the shareholder, capital gain dividenddistributions received from us; however, distributions treated as a nontaxablereturn of the shareholder’s basis will not enter into the computation of netinvestment income.

**Taxation of Tax-ExemptShareholders**

In Revenue Ruling 66-106,the IRS ruled that amounts distributed by a REIT to a tax-exemptemployees’ pension trust did not constitute “unrelated business taxable income,”even though the REIT may have financed some of its activities with acquisitionindebtedness.  Although revenue rulingsare interpretive in nature and subject to revocation or modification by theIRS, based upon the analysis and conclusion of Revenue Ruling 66-106, ourdistributions made to shareholders that are tax-exempt pension plans,individual retirement accounts, or other qualifying tax-exempt entitiesshould not constitute unrelated business taxable income, unless the shareholderhas financed its acquisition of our shares with “acquisition indebtedness”within the meaning of the Internal Revenue Code.

Tax-exempt pension trusts,including so-called 401(k) plans but excluding individual retirementaccounts or government pension plans, that own more than 10% by value of a “pension-heldREIT” at any time during a taxable year may be required to treat a percentageof all dividends received from the pension-held REIT during the year asunrelated business taxable income.  Thispercentage is equal to the ratio of:

(1)           the pension-held REIT’s gross income derived fromthe conduct of unrelated trades or businesses, determined as if the pension-heldREIT were a tax-exempt pension fund, less direct expenses related to thatincome, to

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

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except that this percentage shall be deemed to be zerounless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if:

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

·                  the REIT would fail to satisfy the “closely held”ownership requirement discussed above if the stock or beneficial interests inthe REIT held by tax-exempt pension trusts were viewed as held by tax-exemptpension trusts rather than by their respective beneficiaries.

A REIT is predominantly held by tax-exempt pensiontrusts if at least one tax-exempt pension trust owns more than 25% byvalue of the REIT’s stock or beneficial interests, or if one or more tax-exemptpension trusts, each owning more than 10% by value of the REIT’s stock orbeneficial interests, own in the aggregate more than 50% by value of the REIT’sstock or beneficial interests. Because of the share ownership concentrationrestrictions in our declaration of trust, we believe that we are not and willnot be a pension-held REIT.  However,because our shares are publicly traded, we cannot completely control whether ornot we are or will become a pension-held REIT.

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

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

The rules governing the UnitedStates federal income taxation of non-U.S. shareholders are complex, andthe following discussion is intended only as a summary of these rules.  If you are a non-U.S. shareholder, weurge you to consult with your own tax advisor to determine the impact of UnitedStates federal, state, local, and foreign tax laws, including any tax returnfiling and other reporting requirements, with respect to your investment in ourshares.

In general, a non-U.S.shareholder will be subject to regular United States federal income tax in thesame manner as a U.S. shareholder with respect to its investment in our sharesif that investment is effectively connected with the non-U.S. shareholder’sconduct of a trade or business in the United States.  In addition, a corporate non-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 Internal Revenue Code, which ispayable in addition 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 onlythose non-U.S. shareholders whose investment in our shares is noteffectively connected with the conduct of a trade or business in the UnitedStates.

A distribution by us to a non-U.S.shareholder that is not attributable to gain from the sale or exchange of aUnited States real property interest and that is not designated as a capitalgain dividend will be treated as an ordinary income dividend to the extent thatit is made out of current or accumulated earnings and profits.  A distribution of this type will generally besubject to United States federal income tax and withholding at the rate of 30%,or at a lower rate if the non-U.S. shareholder has in the mannerprescribed by the IRS demonstrated its entitlement to benefits under a taxtreaty.  In the case of any in kinddistributions of property, we or other applicable withholding agents willcollect the amount required to be withhold by reducing to cash for remittanceto the IRS a sufficient portion of the property that the non-U.S. shareholderwould otherwise receive, and the non-U.S. shareholder may bear brokerage orother costs for this withholding procedure. Because we cannot determine our current and accumulated earnings andprofits until the end of the taxable year, withholding at the rate of 30% orapplicable lower treaty rate will generally be imposed on the gross amount ofany distribution to a non-U.S. shareholder that we make and do notdesignate a capital gain dividend. Notwithstanding this withholding on distributions in excess of ourcurrent and accumulated earnings and profits, these distributions are anontaxable return of capital to the extent that they do not exceed the non-U.S.shareholder’s adjusted basis in our shares, and the nontaxable return ofcapital will reduce the adjusted basis in these shares.  To the extent that distributions in excess ofcurrent 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 totax on any gain from the sale or exchange of these shares, as discussedbelow.  A non-U.S. shareholder mayseek a refund from the IRS of amounts withheld on distributions to him inexcess of our current and accumulated earnings and profits.

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Some of our 2007 distributionsare expected to be attributable to the sale or exchange of United States realproperty interests.  However, capitalgain dividends that are received by a non-U.S. shareholder, including dividendsattributable to our sales of United States real property interests, and thatare deductible by us in respect of our 2005 taxable year and thereafter will besubject to the taxation and withholding regime applicable to ordinary incomedividends and the branch profits tax will not apply, provided that (1) thecapital gain dividends are received with respect to a class of shares that is “regularlytraded” on a domestic “established securities market” such as the New YorkStock Exchange, or the NYSE, both as defined by applicable Treasuryregulations, and (2) the non-U.S. shareholder does not own more than 5% of thatclass of shares at any time during the one-year period ending on the date ofdistribution of the capital gain dividends. If both of these provisions are satisfied, qualifying non-U.S.shareholders will not be subject to withholding on capital gain dividends asthough those amounts were effectively connected with a United States trade orbusiness, and qualifying non-U.S. shareholders will not be required to fileUnited States federal income tax returns or pay branch profits tax in respectof these capital gain dividends. Instead, these dividends will be subject to United States federal incometax and withholding as ordinary dividends, currently at a 30% tax rate unlessreduced by applicable treaty, as discussed below.  We believe that our shares have been and willremain “regularly traded” on an “established securities market” within thedefinition of each term provided in applicable Treasury regulations; however,we can provide no assurance that our shares will continue to be “regularlytraded” on an “established securities market” in future taxable years.

Except as discussed above, forany year in which we qualify as a REIT, distributions that are attributable togain from the sale or exchange of a United States real property interest aretaxed to a non-U.S. shareholder as if these distributions were gainseffectively connected with a trade or business in the United States conductedby the non-U.S. shareholder. Accordingly, a non-U.S. shareholder that does not qualify for theprovision above or that received dividends for taxable years before 2005 willbe taxed on these amounts at the normal capital gain rates applicable to a U.S.shareholder, subject to any applicable alternative minimum tax and to a specialalternative minimum tax in the case of nonresident alien individuals; such anon-U.S. shareholder will be required to file a United States federal incometax return reporting these amounts, even if applicable withholding is imposedas described below; and such a non-U.S. shareholder that is also a corporationmay owe the 30% branch profits tax under Section 884 of the Internal RevenueCode in respect of these amounts.  Wewill be required to withhold from distributions to such non-U.S. shareholders,and remit to the IRS, 35% of the maximum amount of any distribution that couldbe designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designateprior distributions as capital gain dividends, then subsequent distributions upto the amount of the designated prior distributions will be treated as capitalgain dividends.  The amount of any taxwithheld is creditable against the non-U.S. shareholder’s United States federalincome tax liability, and the non-U.S. shareholder may file for a refund fromthe IRS of any amount of withheld tax in excess of that tax liability.

Effective generally from andafter 2006, a special “wash sale” rule applies to a non-U.S. shareholder whoowns any class of our shares if (1) the shareholder owns more than 5% of thatclass of shares at any time during the one-year period ending on the date ofthe distribution described below, or (2) that class of our shares is not,within the meaning of applicable Treasury Regulations, “regularly traded” on adomestic “established securities market” such as the NYSE.  Although there can be no assurance in thisregard, we believe that our common shares and each class of our preferredshares has been and will remain “regularly traded” on a domestic “establishedsecurities market” within the meaning of applicable Treasury regulations, allas discussed above.  We thus anticipatethis wash sale rule to apply, if at all, only to a non-U.S. shareholder thatowns more than 5% of either our common shares or any class of our preferredshares.  Such a non-U.S. shareholder willbe treated as having made a “wash sale” of our shares if it (1) disposes of aninterest in our shares during the 30 days preceding the ex-dividend date of adistribution by us that, but for such disposition, would have been treated bythe non-U.S. shareholder in whole or in part as gain from the sale or exchangeof a United States real property interest, and then (2) acquires or enters intoa contract to acquire a substantially identical interest in our shares, eitheractually or constructively through a related party, during the 61-day periodbeginning 30 days prior to the ex-dividend date.  In the event of such a wash sale, thenon-U.S. shareholder will have gain from the sale or exchange of a UnitedStates real property interest in an amount equal to the portion of thedistribution that, but for the wash sale, would have been a gain from the saleor exchange of a United States real property interest.  As discussed above, a non-U.S. shareholder’sgain from the sale or exchange of a United States real property interest cantrigger increased United States taxes, such as the branch profits taxapplicable to non-U.S. corporations, and increased United States tax filingrequirements.

If for any taxable year wedesignate capital gain dividends for our shareholders, then the portion of thecapital gain dividends we designate will be allocated to the holders of aparticular class of shares on a percentage basis equal to

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the ratio of the amount of the total dividends paid ormade available 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 thewithholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable toordinary income dividends from United States corporations may not apply toordinary income dividends from a REIT or may apply only if the REIT meetscertain additional conditions.  You mustgenerally use an applicable IRS Form W-8, or substantially similar form, toclaim tax treaty benefits.  If the amountof tax withheld by us with respect to a distribution to a non-U.S. shareholderexceeds the shareholder’s United States federal income tax liability withrespect to the distribution, the non-U.S. shareholder may file for a refund ofthe excess from the IRS.  The 35%withholding tax rate discussed above on some capital gain dividends correspondsto the maximum income tax rate applicable to corporate non-U.S. shareholdersbut is higher than the 15% and 25% maximum rates on capital gains generallyapplicable to noncorporate non-U.S. shareholders.  Treasury regulations also provide specialrules to determine whether, for purposes of determining the applicabilityof a tax treaty, our distributions to a non-U.S. shareholder that is an entityshould be treated as paid to the entity or to those owning an interest in thatentity, and whether the entity or its owners are entitled to benefits under thetax treaty.  In the case of any in kinddistributions of property, we or other applicable withholding agents will haveto collect the amount required to be withhold by reducing to cash forremittance to the IRS a sufficient portion of the property that the non-U.S. shareholderwould otherwise receive, and the non-U.S. shareholder may bear brokerage orother costs for this withholding procedure.

If our shares are not “UnitedStates real property interests” within the meaning of Section 897 of theInternal Revenue Code, then a non-U.S. shareholder’s gain on sale ofthese shares generally will not be subject to United States federal incometaxation, except that a nonresident alien individual who was in the UnitedStates for 183 days or more during the taxable year may be subject to a 30% taxon this gain.  Our shares will notconstitute 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,because our shares are publicly traded, we can provide no assurance that wewill be a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S.shareholder’s gain on sale of our shares will not be subject to United Statesfederal income taxation as a sale of a United States real property interest, ifthat class of shares is “regularly traded,” as defined by applicable Treasuryregulations, on an established securities market like the NYSE, and the non-U.S.shareholder has at all times during the preceding five years owned 5% or lessby value of that class of shares.  Inthis regard, because the preferred shares of others may be redeemed, a non-U.S.shareholder’s percentage interest in a class of our preferred shares mayincrease even if it acquires no additional preferred shares in that class.  If the gain on the sale of our shares weresubject 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 the Internal RevenueCode.  A purchaser of our shares from anon-U.S. shareholder will not be required to withhold on the purchaseprice if the purchased shares are regularly traded on an established securitiesmarket or if we are a domestically controlled REIT.  Otherwise, a purchaser of our shares from anon-U.S. shareholder may be required to withhold 10% of the purchaseprice paid to the non-U.S. shareholder and to remit the withheld amountto the IRS.

**Backup Withholding andInformation Reporting**

Information reporting and backup withholding may apply to distributionsor proceeds paid to our shareholders under the circumstances discussedbelow.  The backup withholding rate iscurrently 28%.  Amounts withheld underbackup withholding are generally not an additional tax and may be refunded bythe IRS or credited against the REIT shareholder’s federal income taxliability.  In the case of any in kinddistributions of property by us to a shareholder, we or other applicablewithholding agents will have to collect any applicable backup withholding byreducing to cash for remittance to the IRS a sufficient portion of the propertythat our shareholder would otherwise receive, and the shareholder may bearbrokerage or other costs for this withholding procedure.

A U.S. shareholder will besubject to backup withholding when it receives distributions on our shares orproceeds upon the sale, exchange, redemption, retirement or other dispositionof our shares, unless the U.S. shareholder properly executes, or has previouslyproperly executed, under penalties of perjury an IRS Form W-9 orsubstantially similar form that:

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·                  provides the U.S. shareholder’s correct taxpayeridentification number; and

·                  certifies that the U.S. shareholder is exempt frombackup withholding because it is a corporation or comes within another exemptcategory, it has not been notified by the IRS that it is subject to backupwithholding, or it has been notified by the IRS that it is no longer subject tobackup withholding.

If the U.S. shareholder has not and does not provide itscorrect taxpayer identification number on the IRS Form W-9 orsubstantially similar form, it may be subject to penalties imposed by the IRS,and the REIT or other withholding agent may have to withhold a portion of any distributionspaid to it. Unless the U.S. shareholder has established on a properly executedIRS Form W-9 or substantially similar form that it is a corporation orcomes within another exempt category, distributions on our shares paid to itduring the calendar year, and the amount of tax withheld, if any, will bereported to it and to the IRS.

Distributions on our shares to anon-U.S. shareholder during each calendar year and the amount of taxwithheld, if any, will generally be reported to the non-U.S. shareholderand to the IRS. This information reporting requirement applies regardless ofwhether the non-U.S. shareholder is subject to withholding ondistributions on our shares or whether the withholding was reduced oreliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our sharesmay be subject to backup withholding, unless the non-U.S. shareholderproperly certifies its non-U.S. shareholder status on an IRS Form W-8or substantially similar form in the manner described above.  Similarly, information reporting and backupwithholding will not apply to proceeds a non-U.S. shareholder receivesupon the sale, exchange, redemption, retirement or other disposition of ourshares, if the non-U.S. shareholder properly certifies its non-U.S.shareholder status on an 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 througha broker’s foreign office.

**Other Tax Consequences**

Our tax treatment and that of ourshareholders may be modified by legislative, judicial, or administrativeactions at any time, which actions may be retroactive in effect.  The rules dealing with federal incometaxation are constantly under review by the Congress, the IRS and the Treasury Department,and statutory changes, new regulations, revisions to existing regulations, andrevised interpretations of established concepts are issued frequently.  Likewise, the rules regarding taxes otherthan federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new taxlegislation or other provisions or the direct or indirect effect on us and ourshareholders.  Revisions to tax laws andinterpretations of these laws could adversely affect the tax or otherconsequences of an investment in our shares. We and our shareholders may also be subject to taxation by state, localor other jurisdictions, including those in which we or our shareholderstransact business or reside.  These taxconsequences may not be comparable to the federal income tax consequencesdiscussed above.

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

**General Fiduciary Obligations**

Fiduciaries of a pension, profit-sharingor other employee benefit plan subject to Title I of the Employee RetirementIncome Security Act of 1974, as amended, or ERISA, must consider whether:

·                  their investment in our shares satisfies thediversification requirements of ERISA;

·                  the investment is prudent in light of possiblelimitations on the marketability of our shares;

·                  they have authority to acquire our shares underthe applicable governing instrument and Title I of ERISA; and

·                  the investment is otherwise consistent with theirfiduciary responsibilities.

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Trustees and other fiduciaries ofan ERISA plan may incur personal liability for any loss suffered by the plan onaccount of a violation of their fiduciary responsibilities.  In addition, these fiduciaries may be subjectto a civil penalty of up to 20% of any amount recovered by the plan on account ofa violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualifiedretirement plan not subject to Title I of ERISA, referred to as “non-ERISAplans,” should consider that a plan may only make investments that areauthorized by the appropriate governing instrument.

Fiduciaries considering aninvestment in our securities should consult their own legal advisors if theyhave any concern as to whether the investment is consistent with the foregoingcriteria or is otherwise appropriate. The sale of our securities to a plan is in no respect a representationby us or any underwriter of the securities that the investment meets allrelevant legal requirements with respect to investments by plans generally orany particular plan, or that the investment is appropriate for plans generallyor any particular plan.

**Prohibited Transactions**

Fiduciaries of ERISA plans andpersons making the investment decision for an IRA or other non-ERISA planshould consider the application of the prohibited transaction provisions ofERISA and the Internal Revenue Code in making their investment decision. Salesand other transactions between an ERISA or non-ERISA plan, and personsrelated to it, are prohibited transactions. The particular facts concerning the sponsorship, operations and otherinvestments of an ERISA plan or non-ERISA plan may cause a wide range ofother persons to be treated as disqualified persons or parties in interest withrespect to it.  A prohibited transaction,in addition to imposing potential personal liability upon fiduciaries of ERISAplans, may also result in the imposition of an excise tax under the InternalRevenue Code or a penalty under ERISA upon the disqualified person or party ininterest with respect to the plan.  Ifthe disqualified person who engages in the transaction is the individual onbehalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA orRoth IRA may lose its tax-exempt status and its assets may be deemed tohave been distributed to the individual in a taxable distribution on account ofthe prohibited transaction, but no excise tax will be imposed.  Fiduciaries considering an investment in our securitiesshould consult their own legal advisors as to whether the ownership of our securitiesinvolves a prohibited transaction.

**“Plan Assets” Considerations**

The Department of Labor, whichhas administrative responsibility over ERISA plans as well as non-ERISAplans, has issued a regulation defining “plan assets.” The regulation generallyprovides that when an ERISA or non-ERISA plan acquires a security that isan equity interest in an entity and that security is neither a “publiclyoffered security” nor a security issued by an investment company registeredunder the Investment Company Act of 1940, as amended, the ERISA plan’s or non-ERISAplan’s assets include both the equity interest and an undivided interest ineach of the underlying assets of the entity, unless it is established eitherthat the entity is an operating company or that equity participation in theentity by benefit plan investors is not significant.

Each class of our shares (thatis, our common shares and any class of preferred 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,or the Securities Act, provided the securities are registered under theExchange Act within 120 days after the end of the fiscal year of the issuerduring which the offering occurred.  Eachclass of our outstanding shares has been registered under the Exchange Act.

The regulation provides that asecurity is “widely held” only if it is part of a class of securities that isowned by 100 or more investors independent of the issuer and of one another.However, a security will not fail to be “widely held” because the number ofindependent investors falls below 100 subsequent to the initial public offeringas a result of events beyond the issuer’s control.  Our common shares and our preferred shareshave been widely held and we expect our common shares and our preferred sharesto continue to be widely held.  We expectthe same to be true of any additional class of preferred stock that we mayissue, but we can give no assurance in that regard.

The regulation provides thatwhether a security is “freely transferable” is a factual question to bedetermined on the basis of all relevant facts and circumstances. The regulationfurther provides that, where a security is part of an offering in which theminimum investment is $10,000 or less, some restrictions on transfer ordinarilywill not, alone or in

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combination, affect a finding that these securities arefreely transferable. The restrictions on transfer enumerated in the regulationas not affecting that finding include:

·                  any restriction on or prohibition against anytransfer or assignment which would result in a termination or reclassificationfor federal or state tax purposes, or would otherwise violate any state orfederal law or court order;

·                  any requirement that advance notice of a transferor assignment be given to the issuer and any requirement that either thetransferor or transferee, or both, execute documentation setting forthrepresentations as to compliance with any restrictions on transfer which areamong those enumerated in the regulation as not affecting free transferability,including those described in the preceding clause of this sentence;

·                  any administrative procedure which establishes aneffective date, or an event prior to which a transfer or assignment will not beeffective; and

·                  any limitation or restriction on transfer orassignment that is not imposed by the issuer or a person acting on behalf ofthe issuer.

We believe that the restrictionsimposed under our declaration of trust on the transfer of shares do not resultin the failure of our shares to be “freely transferable.”  Furthermore, we believe that there exist noother facts or circumstances limiting the transferability of our shares whichare not included among those enumerated as not affecting their freetransferability under the regulation, and we do not expect or intend to imposein the future, or to permit any person to impose on our behalf, any limitationsor restrictions on transfer which would not be among the enumerated permissiblelimitations or restrictions.

Assuming that each class of ourshares will be “widely held” and that no other facts and circumstances existwhich restrict transferability of these shares, we have received an opinionof  our counsel, Sullivan & WorcesterLLP, that our shares will not fail to be “freely transferable” for purposes ofthe regulation due to the restrictions on transfer of the shares under ourdeclaration of trust and that under the regulation each class of our currentlyoutstanding shares is publicly offered and our assets will not be deemed to be “planassets” of any ERISA plan or non-ERISA plan that invests in our shares.

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**Item 1A. Risk Factors**

Our business facesmany risks. The risks described below may not be the only risks we face.Additional risks that we do not yet know of, or that we currently think areimmaterial, may also impair our business operations or financial results. Ifany of the events or circumstances described in the following risks actuallyoccurs, our business, financial condition or results of operations could sufferand the trading price of our debt or equity securities could decline. Investorsand prospective investors should consider the following risks and theinformation contained under the heading “Warning Concerning Forward-LookingStatements” before deciding whether to invest in our securities.

**Some of our returns andrents are guaranteed by parent entities or affiliates of our tenants oroperators, but these guarantees may be limited or the guarantors may be unableto honor their commitments. Other security features in our managementagreements and leases may not be sufficient to cover all obligations due to us.**

Each management agreement or lease that we haveentered into includes various terms intended to secure the payments due to us,including some or all of the following: security deposits which we received butdo not escrow, subordination of management fees payable to the operator to someor all of our return or rent and full or limited guarantees from the manager’sor tenant’s parent company. However, the effectiveness of these varioussecurity features to provide uninterrupted payments to us is not assured,particularly if the profitability of our properties is at a depressed level foran extended period. Also, these security features may not be sufficient tocover all obligations due to us. We may not receive payments under certain ofour guarantees because the guaranty amount is exhausted, because the guarantor’sfinancial condition deteriorates and it is unable to meet its obligations orfor some other reason. Under the terms of some of our guarantees, theguarantors may be released if cash flows from the affected properties exceedcertain threshold amounts, and such releases would be effective even if cashflows subsequently decline.

**We are not permitted tooperate our properties and we are dependent on the managers and tenants of ourproperties.**

Because federal income tax laws restrict REITs andtheir subsidiaries from operating hotels or travel centers, we do not manageour hotels or our travel centers. Instead, we or our subsidiaries that qualifyas “TRSs” under applicable REIT laws, either retain third party managers tomanage our properties pursuant to management agreements or lease our propertiesto operating companies. Our income from our properties may be adverselyaffected if our managers or tenants fail to provide quality services andamenities to customers or if they fail to maintain a quality brand. While wemonitor our managers’ and tenants’ performance, we have limited recourse underour management agreements and leases if we believe that the managers or tenantsare not performing adequately. Failure by our managers or tenants to fullyperform the duties agreed to in our management agreements and leases couldadversely affect our results of operations. In addition, our managers ortenants manage, and in some cases own or have invested in, properties thatcompete with our properties, which may result in conflicts of interest. As aresult, our managers or tenants have in the past made and may in the futuremake decisions regarding competing properties that are not or would not be inour best interests.

**In the recent past,events beyond our control, including an economic slowdown, the wars in Iraq andAfghanistan and on terrorism, harmed the operating performance of the hotelindustry generally and the performance of our hotels. If these or similarevents occur again or continue for substantial periods, our operating andfinancial results may be harmed by declines in average daily room rates oroccupancy at our hotels.**

The terrorist attacks of September 11, 2001 had adramatic adverse effect on business and leisure travel and on our hotels’occupancy and average daily rate, or ADR. Future terrorist activities couldhave a similarly harmful effect on both the hotel industry and us. As a resultof terrorism concerns, the wars in Iraq and Afghanistan and the impact of arecessionary economy, the U.S. hotel industry generally and our hotelsspecifically experienced significant declines in occupancy, revenues andprofitability in 2001, 2002 and 2003. While the performance of our hotels haveimproved, the uncertainty associated with the continuing war on terrorism andthe possibility of future attacks may adversely impact business and leisuretravel patterns and, accordingly, our business.

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

TA leases all of our travel center properties, whichconstitute approximately 30% of our investments. In addition, two of ourunaffiliated hotel operators operate approximately 84% of our hotel investment.If we were to have a dispute with TA or either of these two hotel operators, orif any of these operators were to fail to provide quality services andamenities or to maintain quality brands, our income from these properties maybe adversely 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.

**TA’soperating margins will be narrow.**

TA leases all of our travel center properties, whichconstitute approximately 30% of our investments. TravelCenters’ total operatingrevenues for the nine months ended September 30, 2006, were $3.7 billion; andTravelCenters’ cost of goods sold (excluding depreciation) and operatingexpenses for the same period totaled $3.5 billion. Fuel sales in particulargenerate low gross margins. TravelCenters’ fuel sales for the nine months endedSeptember 30, 2006 were $3.0 billion and TravelCenters generated a gross profiton fuel sales of $111 million. A small decline in TA’s future revenues orincrease in TA’s future expenses, especially revenues and expenses related tofuel, may have a material adverse effect upon TA’s income or may jeopardize TA’sability to pay rent to us.

**The priceof fuel can be volatile.**

TA purchases fuel at rates that fluctuate with marketprices and are reset daily. TA resells fuel at rates it establishes daily. Inthe future, numerous factors beyond TA’s control, including global demand forfuel and other petroleum products, speculative trading, natural disasters,terrorism, wars or political events in oil producing regions of the world mayresult in periods of rapid fluctuations in its cost of fuel. When TA’s cost topurchase fuel increases rapidly, TA may not be able to increase its fuel salesprices at the same rate as the increase in fuel costs. When the market price offuel declines rapidly, the value of any inventory may decline, and TA may haveto sell its fuel inventory for less than what TA paid for it. Volatility in thefuel market may have a material adverse effect on TA’s income and mayjeopardize TA’s ability to pay rent to us.

**Aninterruption in TA’s fuel supplies would materially and adversely affect TA’sbusiness.**

To mitigate the risks arising from fuel pricevolatility, TA generally maintains limited inventories of fuel. In the future,an interruption in TA’s fuel supplies would materially and adversely affect itsbusiness. Interruptions in fuel supplies may be caused by local conditions,such as a malfunction in a particular pipeline or terminal, or by national orinternational conditions, such as government rationing, acts of terrorism, warand the like. Any limitation in available fuel supplies, which causes a declinein truck freight or which limits the fuel TA can offer for sale, may have amaterial adverse effect on TA’s sales of fuel and non-fuel products andservices or may cause TA to experience losses and jeopardize TA’s ability topay rent to us.

**If TAloses the ability to pay for fuel after delivery, TA’s working capitalrequirements may increase.**

TA’s suppliers historically have agreed to permit TAto pay for fuel after it is delivered. These terms may be changed by TA’ssuppliers. If TA’s suppliers require TA to pay for fuel prior to delivery, theworking capital required to operate TA’s business will increase. An increase inTA’s working capital requirements may reduce TA’s financial flexibility,increase TA’s expenses and may cause TA to experience losses and jeopardize TA’sability to pay rent to us.

**We may be unable toaccess the capital necessary to repay debts or grow.**

To retain our status as a REIT, we are required todistribute 90% of our taxable income to shareholders and we generally cannotuse income from operations to repay debts or fund our growth. Accordingly, ourbusiness and growth strategy depends in part, upon our ability to raiseadditional capital at reasonable costs to fund new investments. We believe wewill be able to raise additional debt and equity capital at reasonable costs torepay debts and to refinance our debts at or prior to their maturities and toinvest at yields that exceed our cost of capital. However, our ability to raisereasonably priced capital is not guaranteed; we may be unable to raisereasonably priced capital because of

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reasons related to our business or for reasons beyondour control, such as market conditions. Our growth strategy is not assured andmay fail.

**Acquisitions that we makemay not be successful.**

Our business strategy contemplates additionalacquisitions. We cannot assure our investors that we will be able to consummatefurther acquisitions or that acquisitions we make will prove to be successful.We might encounter unanticipated difficulties and expenditures relating to anyacquired properties. Newly acquired properties might require significantmanagement attention that would otherwise be devoted to our ongoing business.Also, acquisitions of properties, including our recent acquisition ofTravelCenters, may not yield the returns we expect and, if financed using highcost debt or equity, may result in shareholder dilution.

**We face competition forthe acquisition of properties.**

We compete with pension funds, private equityinvestors, other REITs, owner operators and other institutions who are engagedin the acquisition of hospitality properties. Some of our competitors havegreater financial resources and more experienced personnel than we have. Thesecompetitors may affect the supply/demand dynamics and, accordingly, increasethe price we must pay for properties we seek to acquire. Furthermore, owners ofhospitality properties who offer them for sale may find our competitors to bemore attractive buyers because they may have greater financial resources, maybe willing to pay more, or may have a more compatible operating philosophy.

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

As a REIT, we generally do not pay federal and stateincome taxes. However, our continued qualification as a REIT is dependent uponour compliance with complex provisions of the Internal Revenue Code, for whichonly limited judicial or administrative interpretations are available. Webelieve we have operated, and are operating, as a REIT in compliance with theInternal Revenue Code. However, we cannot assure that, upon review or audit,the IRS will agree with this conclusion. If we cease to be a REIT, we wouldviolate a covenant in our bank credit facilities, our ability to raise capitalcould be adversely affected, we may be subject to material amounts of federaland state income taxes and the value of our shares would likely decline.

**There is no assurancethat we will make distributions in the future.**

We intend to continue to pay quarterly distributionsto our shareholders consistent with our historical practice. However, ourability to pay distributions may be adversely affected if any of the risksdescribed herein occur. Our payment of distributions is subject to compliancewith restrictions contained in our revolving credit facility and our debtindenture. All our distributions are made at the discretion of our board oftrustees and our future distributions will depend upon our earnings, our cashflows, our anticipated cash flows, our financial condition, maintenance of our REITtax status and such other factors as our board of trustees may deem relevantfrom time to time. There are no assurances of our ability to pay distributionsin the future. In addition, our distributions in the past have included, andmay in the future include, a return of capital.

**We may be unable toprovide the funding required for the refurbishment of our properties.**

Some of our management agreements and leasearrangements require us to invest money for refurbishments and capitalimprovements to our properties in some circumstances. We may have to investmore than expected in order to achieve and maintain the competitive positionand future financial performance of our properties. We may not have thenecessary funds to invest, and such expenditures, if made, may not besufficient to maintain the successful financial performance of our properties.Our management agreements and lease arrangements require us to maintain theproperties in a certain required condition. If we fail to maintain theserequired standards, then the manager or tenant may terminate the management orlease agreement and hold us liable for damages we may have caused.

**Our business dealingswith our managing trustees and affiliated entities may create conflicts ofinterest.**

We have no employees. Personnel and other serviceswhich we require are provided to us under contract by RMR. RMR is beneficiallyowned by our managing trustees, Barry and Adam Portnoy, who are also Chairmanand President

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and Chief Executive Officer of RMR, respectively. Inaddition, John Murray, our President, Chief Operating Officer and Secretary,Mark Kleifges, our Treasurer and Chief Financial Officer, and Ethan Bornstein,our Vice President are executive officers of RMR. We pay RMR a fee based inlarge part upon the amount of our investments. Our agreement with RMR alsoprovides for payment to RMR of incentive fees under certain circumstances. Anyincentive fees are payable through the issuance of restricted common shares byus to RMR. Our fee arrangement with RMR could encourage RMR to advocateacquisitions and discourage sales by us. RMR also provides services to one ofour tenants, TA, under a management and shared services agreement and BarryPortnoy serves as a managing director of TA. This agreement could encourage RMRto advocate we make travel center acquisitions over hotel acquisitions. RMRalso acts as the manager for two other publicly owned REITs: HRPT PropertiesTrust, or HRPT, which primarily owns office buildings; and Senior HousingProperties Trust, or SNH, which owns senior housing properties. We wereformerly a 100% owned subsidiary of HRPT. In addition, RMR provides services toFive Star Quality Care, Inc., or Five Star, under a shared services agreement,and RMR has other business interests. Barry and Adam Portnoy also serve asmanaging trustees of HRPT.  Barry Portnoyalso serves as a managing trustee of SNH and a managing director of Five Star.These multiple responsibilities to public companies and other businesses couldcreate competition among these companies for the time and efforts of RMR andMessrs. Barry and Adam Portnoy. All of the contractual arrangementsbetween us and RMR have been approved by our independent trustees. Each of ourtrustees other than Messrs. Barry and Adam Portnoy serve as a trustee ordirector of one or more other companies with which RMR has contractualarrangements similar to its contracts with us. We believe that the quality anddepth of management available to us by contracting with RMR could not beduplicated by our being a self-advised company or by our contracting withunrelated third parties without considerable cost increases. A termination ofour contract with RMR is a default under our revolving credit facility unlessapproved by a majority of our lenders. The fact that we believe that ourrelationships with RMR and our managing trustees have been beneficial to us inthe past does not guarantee that these related person transactions may not bedetrimental to us in the future.

**Ownership limitations andanti-takeover provisions in our declaration of trust, bylaws and rightsagreement and under Maryland law may prevent our shareholders from receiving atakeover premium.**

Our declaration of trust prohibits any shareholderother than HRPT, RMR and their affiliates from owning more than 9.8% of ouroutstanding shares. This provision of the declaration of trust may help uscomply with REIT tax requirements. However, this provision will also inhibit achange of control. Our declaration of trust and bylaws contain other provisionsthat may increase the difficulty of acquiring control of us by means of atender offer, open market purchases, a proxy fight or otherwise, if theacquisition is not approved by our board of trustees. These other anti-takeoverprovisions include the following:

·                  a staggered board of trustees withthree separate classes;

·                  the two-thirds majority shareholdervote required for removal of trustees;

·                  the ability of our board of trusteesto increase, without shareholder approval, the amount of shares (includingcommon shares) that we are authorized to issue under our declaration of trustand bylaws, and to issue additional shares on terms that it determines;

·                  advance notice procedures withrespect to nominations of trustees and shareholder proposals; and

·                  the fact that only the board oftrustees may call shareholder meetings and that shareholders are not entitledto act without a meeting.

We maintain a rights agreement whereby, in the event aperson or group of persons acquires or attempts to acquire 10% or more of ouroutstanding common shares, our shareholders, other than such person or group,will be entitled to purchase additional shares or other securities or propertyat a discount. In addition, certain provisions of Maryland law may have an anti-takeovereffect. For all of these reasons, our shareholders may be unable to realize achange of control premium for shares they own.

**Some of our managementagreements and leases limit our ability to sell or finance some of ourproperties.**

Under the terms of some of our management agreementsand leases, we generally may not sell, lease or otherwise transfer theproperties unless the transferee is not a competitor of the manager and thetransferee assumes the related

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management agreements and meets other specified conditions.Our ability to finance or sell our properties, depending upon the structure ofsuch transactions, may require the manager’s consent or the tenant’s consentunder our management agreements and leases. If, in these circumstances, themanager or the tenant does not consent, we may be prevented from taking actionswhich might be beneficial to our shareholders.

**Real estate ownershipcreates risks and liabilities.**

Our business is subject to risks associated with realestate acquisitions and ownership, including:

·                  increased supply of similarproperties in our 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 ourmanagers or tenants;

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

·                  management agreements or leases whichare not renewed at expiration and may be replaced with management agreementswith less favorable terms or relet at lower rents; and

·                  costs that may be incurred relatingto maintenance and repair, and the need to make capital expenditures tomaintain our 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 lease 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, or for future environmental damagesat sites we own and lease to TA. As an owner or previous owner of propertieswhich contain 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 debtobligations and may incur additional debt.**

At December 31, 2006, wehad $1.2 billion in debt outstanding, which was 33% 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.

On January 31, 2007, weused $1.4 billion of short term financing to partially fund the TravelCentersacquisition. As of February 26, 2007 we repaid $552 million of this debt withthe net proceeds of common and preferred equity offerings. We currentlyanticipate repaying the remainder of this debt by the issuance of additionaldebt or equity securities. We believe we will be able to raise the requiredcapital to permanently finance the TA Transaction, but there can be noassurance that long term financing will be available or, if available, will beon terms favorable to us. Our ability to raise reasonably priced capital isdependent on many factors, including some beyond our control, such as

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market conditions. If weare unable to access the capital markets or to raise capital at a reasonablecost, the TravelCenters acquisition may not provide any financial benefit to usand may cause us to experience losses.

**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 ouroutstanding notes and any notes we issue in the future will be dependent uponthe cash flow of our subsidiaries and payments by those subsidiaries to us asdividends or otherwise. Our subsidiaries are separate legal entities and havetheir own liabilities. Payments due on our outstanding notes, and any notes wemay issue are, or will be, effectively subordinated to liabilities of oursubsidiaries, including guaranty liabilities. Substantially all of oursubsidiaries have guaranteed our revolving credit facility; none of oursubsidiaries guaranty our outstanding notes. In addition, at December 31, 2006,one of our subsidiaries has $4 million of secured debt. Our outstanding notesare, and any notes we may issue will be, also effectively subordinated to oursecured 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 to reinvestthe money they receive in the redemption at a rate that is equal to or higherthan 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 tradingmarket for any of our notes and the market price quoted for any such notes maybe adversely 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.

**An increase in interest rates wouldincrease our interest costs on variable rate debt and could adversely impactour ability to refinance existing debt or sell assets. Also, interest ratechanges often affect the value of dividend paying securities.**

Ourrevolving credit facility requires interest at variable rates and matures inOctober 2010. At December 31, 2006, we had no outstanding balance and $750million available for drawing under our revolving credit facility. As we usethis facility, if market interest rates increase, so will our interest costs,which could adversely affect our cash flow and our ability to pay principal andinterest on our debt and our ability to make distributions to our shareholders.Further, rising interest rates could limit our ability to refinance existingdebt when it matures. We may from time to time enter into agreements such asinterest rate swaps, caps, floors and other interest rate hedging contractswith respect to a portion of our variable rate debt. While these agreements maylessen the impact of rising interest rates on us, they also expose us to therisk that other parties to the agreements will not perform or that theagreements will be unenforceable. In addition, an increase in interest ratescould decrease the amount third parties are willing to pay for our assets,thereby limiting our ability to change our portfolio promptly in response tochanges in economic or other conditions. Also, increases in interest ratesgenerally reduce the value of dividend paying securities; accordingly, ifinterest rates rise the market value of our common and preferred shares maydecline.

**Item 1B.Unresolved Staff Comments**

None.

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**Item2. Properties**

At December 31, 2006, weowned 310 hotels. The following table summarizes certain information about ourproperties as of December 31, 2006.
| ** **                           | ** ** | **Number of** | ** ** | **Undepreciated**       | ** ** | **Depreciated**         | ** ** |
|--------------------------------------|------------|--------------------|------------|-------------------------|------------|-------------------------|------------|
| **Location of Properties** | ** ** | **Properties**     | ** ** | **Carrying Value** | ** ** | **Carrying Value** | ** ** |
| ** **                           | ** ** | ** **         | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** |
| United States                        |       |               |       | ** **              | ** ** | ** **              | ** ** | ** ** |
| Alabama                              |       | 4                  |       | $                       | 33,460     |                    | $          | 25,826 |   |
| Arizona                              |       | 15                 |       | 162,030                 |       | 126,607                 |       |
| California                           |       | 34                 |       | 580,657                 |       | 493,658                 |       |
| Colorado                             |       | 4                  |       | 37,415                  |       | 31,116                  |       |
| Connecticut                          |       | 1                  |       | 7,486                   |       | 6,582                   |       |
| Delaware                             |       | 1                  |       | 15,375                  |       | 11,691                  |       |
| Florida                              |       | 19                 |       | 207,161                 |       | 168,533                 |       |
| Georgia                              |       | 22                 |       | 267,490                 |       | 224,733                 |       |
| Hawaii                               |       | 1                  |       | 58,149                  |       | 48,229                  |       |
| Illinois                             |       | 14                 |       | 158,591                 |       | 129,428                 |       |
| Indiana                              |       | 3                  |       | 31,297                  |       | 23,631                  |       |
| Iowa                                 |       | 2                  |       | 15,771                  |       | 11,794                  |       |
| Kansas                               |       | 4                  |       | 17,886                  |       | 14,810                  |       |
| Kentucky                             |       | 1                  |       | 4,898                   |       | 3,878                   |       |
| Louisiana                            |       | 1                  |       | 28,272                  |       | 22,997                  |       |
| Maryland                             |       | 9                  |       | 167,006                 |       | 147,164                 |       |
| Massachusetts                        |       | 13                 |       | 155,874                 |       | 123,096                 |       |
| Michigan                             |       | 12                 |       | 105,399                 |       | 87,820                  |       |
| Minnesota                            |       | 4                  |       | 36,551                  |       | 28,876                  |       |
| Missouri                             |       | 6                  |       | 89,350                  |       | 62,093                  |       |
| Nebraska                             |       | 1                  |       | 6,383                   |       | 4,939                   |       |
| Nevada                               |       | 3                  |       | 46,445                  |       | 37,456                  |       |
| New Jersey                           |       | 12                 |       | 187,751                 |       | 155,452                 |       |
| New Mexico                           |       | 2                  |       | 21,785                  |       | 16,695                  |       |
| New York                             |       | 5                  |       | 95,581                  |       | 81,753                  |       |
| North Carolina                       |       | 16                 |       | 136,757                 |       | 109,528                 |       |
| Ohio                                 |       | 5                  |       | 40,614                  |       | 32,790                  |       |
| Oklahoma                             |       | 2                  |       | 16,831                  |       | 13,467                  |       |
| Pennsylvania                         |       | 10                 |       | 154,511                 |       | 127,185                 |       |
| Rhode Island                         |       | 1                  |       | 12,254                  |       | 8,913                   |       |
| South Carolina                       |       | 4                  |       | 56,609                  |       | 48,962                  |       |
| Tennessee                            |       | 9                  |       | 128,841                 |       | 99,881                  |       |
| Texas                                |       | 35                 |       | 407,979                 |       | 344,612                 |       |
| Utah                                 |       | 3                  |       | 61,666                  |       | 48,269                  |       |
| Virginia                             |       | 21                 |       | 217,483                 |       | 172,701                 |       |
| Washington                           |       | 6                  |       | 83,261                  |       | 66,020                  |       |
| West Virginia                        |       | 1                  |       | 7,433                   |       | 6,333                   |       |
| Wisconsin                            |       | 1                  |       | 10,246                  |       | 7,671                   |       |
|                                 |       | 307                |       | 3,872,548               |       | 3,175,189               |       |
| Other                                |       |               |       |                    |       |                    |       |   |
| Ontario, Canada                      |       | 2                  |       | 38,166                  |       | 35,526                  |       |
| Puerto Rico                          |       | 1                  |       | 131,303                 |       | 123,464                 |       |
|                                 |       |               |       |                    |       |                    |       |
| Total                                |       | 310                |       | $                       | 4,042,017  |                    | $          | 3,334,179 |   |
|                                      |            |                    |            |                         |            |                         |            |  |  |  |  |

 

36

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At December 31, 2006,fourteen of our hotels were on leased land. In each case, the remaining term ofthe ground lease (including renewal options) is in excess of 42 years, and theground lessors are unrelated to us. Ground rent payable under nine of theground leases is generally calculated as a percentage of hotel revenues. Twelveof the fourteen ground leases require minimum annual rents ranging fromapproximately $102,406 to $556,400 per year; future rents under two groundleases have been pre-paid. Generally payments of ground lease obligations aremade by our managers or tenants. However, if a manager or tenant did notperform obligations under a ground lease or elected not to renew any groundlease, we might have to perform obligations under the ground lease or renew theground lease in order to protect our investment in the affected property. Anypledge of our interests in a ground lease may require the consent of theapplicable ground lessor and its lenders.

As described in “Item 1.Business,” on January 31, 2007, in connection with the TA Transaction weretained the real estate and related assets of 146 travel centers located in 39states. Twenty-two of these travel centers are located in part on leased land,subject to ground leases requiring minimum annual rents of $9,287,829, whichare obligations of our tenant under our lease with TA.

The physical layouts ofthe travel centers in the TA network vary from site to site. The majority ofthe developed acreage at our travel centers consists of truck and car fuelislands, separate truck and car parking lots, a main building, which contains afull service restaurant and one or more QSRs, a travel and convenience store, atruck maintenance and repair shop and other amenities. The following tablesummarizes the locations of the TA travel centers we own.
| ** **                  | ** ** | **Number of**      | ** ** | ** **                 | ** ** | **Number of**      |
|-----------------------------|------------|--------------------|------------|----------------------------|------------|--------------------|
| **Location of  Properties** | ** ** | **Travel Centers** | ** ** | **Location of Properties** | ** ** | **Travel Centers** |
| Alabama                     |       | 3                  |       | Nevada                     |       | 3                  |
| Arizona                     |       | 4                  |       | New Hampshire              |       | 1                  |
| Arkansas                    |       | 2                  |       | New Jersey                 |       | 3                  |
| California                  |       | 8                  |       | New Mexico                 |       | 5                  |
| Colorado                    |       | 3                  |       | New York                   |       | 5                  |
| Connecticut                 |       | 3                  |       | North Carolina             |       | 2                  |
| Florida                     |       | 6                  |       | Ohio                       |       | 10                 |
| Georgia                     |       | 8                  |       | Oklahoma                   |       | 3                  |
| Idaho                       |       | 1                  |       | Oregon                     |       | 2                  |
| Illinois                    |       | 6                  |       | Pennsylvania               |       | 8                  |
| Indiana                     |       | 6                  |       | South Carolina             |       | 2                  |
| Iowa                        |       | 1                  |       | Tennessee                  |       | 6                  |
| Kentucky                    |       | 2                  |       | Texas                      |       | 11                 |
| Louisiana                   |       | 3                  |       | Utah                       |       | 2                  |
| Maryland                    |       | 3                  |       | Virginia                   |       | 4                  |
| Michigan                    |       | 4                  |       | Washington                 |       | 1                  |
| Minnesota                   |       | 1                  |       | West Virginia              |       | 2                  |
| Mississippi                 |       | 1                  |       | Wisconsin                  |       | 2                  |
| Missouri                    |       | 4                  |       | Wyoming                    |       | 3                  |
| Nebraska                    |       | 2                  |       |                       |       |               |
|                        |       |               |       | Total                      |       | 146                |

 

**Item 3. LegalProceedings**

In the ordinary course ofbusiness we are involved in litigation incidental to our business; however weare not aware of any material pending or threatened legal proceeding affectingus or any of our properties for which we might become liable or the outcome ofwhich we expect to have a material impact on us.

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

None.

37

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**PART II**

**Item 5. Market forthe Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

Our common shares aretraded on the NYSE (symbol: HPT). The following table sets forth for theperiods indicated the high and low sale prices for our common shares asreported in the NYSE Composite Transactions reports:
| 2005           | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 46.28      |    | $          | 38.00 |   |
| Second Quarter |       | 44.72    |       | 39.67   |       |
| Third Quarter  |       | 45.04    |       | 40.51   |       |
| Fourth Quarter |       | 43.30    |       | 38.42   |       |
|           |       |     |       |    |       |
| **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   |       |

The closing priceof our common shares on the NYSE on February 26, 2007, was $47.09 per share.

As of February 26, 2007,there were 965 shareholders of record, and we estimate that as of such datethere were in excess of 60,000 beneficial owners of our common shares.

Information aboutdistributions paid to common shareholders is summarized in the table below.Common share distributions are generally paid in the quarter following thequarter to which they relate.
|                | ** ** | **Distributions**              | ** ** |
|----------------|------------|--------------------------------|------------|
| ** **     | ** ** | **Per Common Share** | ** ** |
| ** **     | ** ** | **2005**                       | ** ** | **2006** | ** ** |
| First Quarter  |       | $                              | 0.72       |   | $ | 0.73 |   |
| Second Quarter |       | 0.72                           |       | 0.74 |   |
| Third Quarter  |       | 0.73                           |       | 0.74 |   |
| Fourth Quarter |       | 0.73                           |       | 0.74 |   |
| Total          |       | $                              | 2.90       |   | $ | 2.95 |   |

All common share distributionsshown in the table above have been paid. We currently intend to continue todeclare and pay common share distributions on a quarterly basis. However,distributions are made at the discretion of our board of trustees and depend onour earnings, cash available for distribution, financial condition, capitalmarket conditions, growth prospects and other factors which our board oftrustees deems relevant.

Issuances of unregisteredshares during the fourth quarter were as follows: on December 6, 2006, pursuantto our incentive share award plans, certain employees of our manager, RMR,received grants totaling 2,300 common shares of beneficial interest, par value$0.01 per share, valued at $50.41 per share, the closing price of our commonshares on the NYSE on that day. All of these grants were made pursuant to anexemption from registration contained in section 4(2) of the Securities Act.

38

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**Item 6. Selected Financial Data**

The following table setsforth selected financial data for the periods and dates indicated. Comparativeresults are impacted by property acquisitions and dispositions during theperiods shown. This data should be read in conjunction with, and is qualifiedin its entirety by reference to, management’s discussion and analysis offinancial condition and results of operations and the consolidated financialstatements and accompanying notes included in this Annual Report on Form 10-K.
| ** **                                                                | ** ** | **Year Ended December 31,**                         | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                | ** ** | **(In thousands, except per share data)** | ** ** |
| **Income  Statement Data:**                                               | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Hotel operating revenues                                                  |       | $                                                                  | 879,324    |   | $ | 682,541 |   | $ | 498,122 |   | $ | 209,299 |   | $ | 79,328 |   |
| Rental income                                                             |       | 137,118                                                            |       | 130,731 |   | 128,472 |   | 217,253 |   | 247,488 |   |
| FF&E reserve income                                                   |       | 20,299                                                             |       | 19,767 |   | 18,147 |   | 18,000 |   | 20,830 |   |
| Interest income                                                           |       | 2,674                                                              |       | 1,373 |   | 627 |   | 733 |   | 1,060 |   |
| Gain on lease terminations                                                |       | —                                                             |       | — |   | — |   | 107,516 |   | — |   |
| Total revenues                                                            |       | 1,039,415                                                          |       | 834,412 |   | 645,368 |   | 552,801 |   | 348,706 |   |
|                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Expenses:                                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Hotel operating expenses                                                  |       | 618,334                                                            |       | 476,858 |   | 333,818 |   | 145,863 |   | 50,515 |   |
| Interest                                                                  |       | 81,451                                                             |       | 65,263 |   | 50,393 |   | 44,536 |   | 42,424 |   |
| Depreciation and amortization                                             |       | 144,404                                                            |       | 131,792 |   | 114,883 |   | 104,807 |   | 96,474 |   |
| General and administrative                                                |       | 26,187                                                             |       | 23,296 |   | 19,386 |   | 16,800 |   | 15,491 |   |
| Loss on early extinguishment of debt                                      |       | —                                                             |       | — |   | — |   | 2,582 |   | 1,600 |   |
| Loss on asset impairment                                                  |       | —                                                             |       | 7,300 |   | — |   | — |   | — |   |
| Total expenses                                                            |       | 870,376                                                            |       | 704,509 |   | 518,480 |   | 314,588 |   | 206,504 |   |
| Income before gain on sale of real estate                                 |       | 169,039                                                            |       | 129,903 |   | 126,888 |   | 238,213 |   | 142,202 |   |
| Gain on sale of real estate                                               |       | —                                                             |       | — |   | 203 |   | — |   | — |   |
| Net income                                                                |       | 169,039                                                            |       | 129,903 |   | 127,091 |   | 238,213 |   | 142,202 |   |
| Preferred distributions                                                   |       | 7,656                                                              |       | 7,656 |   | 9,674 |   | 14,780 |   | 7,572 |   |
| Excess of  liquidation preference over carrying value of preferred shares |       | —                                                             |       | — |   | 2,793 |   | — |   | — |   |
| Net income  available for common shareholders                             |       | $                                                             | 161,383    |   | $  | 122,247 |   | $  | 114,624 |   | $  | 223,433 |   | $  | 134,630 |   |
|                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Common distributions declared                                             |       | $                                                                  | 225,927    |   | $ | 205,162 |   | $ | 193,523 |   | $ | 180,242 |   | $ | 179,504 |   |
| Weighted average  common shares outstanding                               |       | 73,279                                                             |       | 69,866 |   | 66,503 |   | 62,576 |   | 62,538 |   |
|                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
|                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Per  Common Share Data:**                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income  available for common shareholders                             |       | $                                                             | 2.20       |   | $  | 1.75 |   | $  | 1.72 |   | $  | 3.57 |   | $  | 2.15 |   |
| Distributions per common share                                            |       | $                                                                  | 2.95       |   | $ | 2.90 |   | $ | 2.88 |   | $ | 2.88 |   | $ | 2.87 |   |
|                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
|                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (as of December 31):**                               | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate properties, at cost                                           |       | $                                                                  | 4,042,017  |   | $ | 3,626,693 |   | $ | 3,180,990 |   | $ | 3,179,507 |   | $ | 2,762,322 |   |
| Real estate properties, net                                               |       | 3,334,179                                                          |       | 3,013,686 |   | 2,624,473 |   | 2,685,208 |   | 2,336,412 |   |
| Total assets                                                              |       | 3,957,463                                                          |       | 3,114,607 |   | 2,689,425 |   | 2,761,601 |   | 2,403,756 |   |
| Debt, net of discount                                                     |       | 1,199,830                                                          |       | 960,372 |   | 697,505 |   | 826,126 |   | 473,965 |   |
| Shareholders’  equity                                                |       | 2,447,540                                                          |       | 1,855,455 |   | 1,685,873 |   | 1,645,528 |   | 1,645,020 |   |

** **

39

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

**Overview**

The following informationshould be read in conjunction with our consolidated financial statements andaccompanying notes included in this Annual Report on Form 10-K.

**Hotel Industry Conditions**

During2006, the U.S. hotel industry has continued to enjoy increasing demand from anexpanding economy and limited new hotel supply. For 2006, ten of our elevencombinations of hotels reported increases in revenue per available room, orRevPAR and nine of our eleven combinations of hotels reported increases in cashflow available to pay minimum returns and rents due to us. All of ourmanagement agreements and leases contain security features, such as securitydeposits or guarantees, which are intended to protect payments of our minimumreturns and rents. However, the effectiveness of these various securityfeatures to provide uninterrupted payments to us is not assured. If any of ourhotel operators, tenants or guarantors default in their payment obligations tous, our revenues and cash flows may decline and our ability to continue to paydistributions may be jeopardized.

**2006 Developments**

On January 6, 2006, wepurchased the Harbor Court Complex in the Inner Harbor area of Baltimore,Maryland for $78,000. The Harbor Court Complex is a mixed use propertycomprised of the five star, five diamond Harbor Court Hotel, a 72,042 squarefoot office building and a 530 space seven story parking garage. The hotel has195 guest rooms, including 22 suites, 8,000 square feet of meeting space and aroof top fitness center that includes a tennis court, squash court, indoorpool, aerobics center and spa therapy rooms. Simultaneously with this purchase,we entered an agreement with InterContinental to manage the Harbor Court Hotelunder its InterContinental Hotels & Resorts® brand. We added this hotel to the combinationmanagement agreement for 13 hotels we acquired from InterContinental in 2005.As a result, our annual minimum return from this expanded combination of hotelswas increased by $4,800 in 2006, $5,200 in 2007 and $5,300 per year thereafter.We agreed to invest up to $2,300 in connection with the rebranding of theHarbor Court Hotel as the InterContinental® Harbor CourtBaltimore. In addition to the returns generated by the hotel component of thecomplex, we receive the net cash flow from the office and parking parts of theproperty; and we have entered into a management agreement with RMR to operatethe office building and an agreement with an unaffiliated third party to managethe parking garage.

On January 25, 2006, wepurchased eight hotels for $166,200 with an effective date of January 20, 2006.We also agreed to fund $17,135 of capital improvements to these hotels duringthe three years following closing. The eight acquired hotels include five fullservice Crowne Plaza® hotels, one full service Holiday Inn Select® hotel and two Staybridge Suites® hotels; they have a total of 2,188rooms/suites and approximately 63,800 square feet of meeting space and arelocated in three states. Simultaneous with our purchase of these hotels, weentered a long term combination management agreement with subsidiaries ofInterContinental. On April 6, 2006, we purchased two Crowne Plaza® hotels, one in Miami, Florida and the other inPhiladelphia, Pennsylvania, for $63,000 and agreed to fund $7,093 of capitalimprovements to these hotels during the three years following closing. Thesehotels have 749 rooms/suites and over 23,000 square feet of meeting space. Weadded these hotels to the combination management agreement withInterContinental for the eight hotels we acquired in January 2006. The annualamount payable to us for all ten hotels as a minimum return under themanagement contract is $18,336 in 2006, $20,306 in 2007, $21,130 in 2008 andapproximately $21,541 thereafter, after the full $24,228 of planned hotelimprovements have been funded by us. In addition, we are entitled to receiveadditional return payments, a percentage of gross revenue over thresholdamounts starting in 2008 and the cash flow remaining after the payment of baseand incentive management fees. The management agreement extends through 2030,and InterContinental has two, all or none, renewal options for 15 years each.The obligation to pay the minimum return under the management agreement issupported by a limited guaranty from InterContinental until the operations atthese hotels reach negotiated levels. The agreement requires a reserve forcapital expenditures starting in 2008.

40

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On April 13, 2006, wepurchased a newly developed 150 room Staybridge Suites® hotel in Parsippany, New Jersey for $21,000.This hotel was added to our combination management agreement with a subsidiaryof InterContinental which includes 30 other Staybridge Suites® hotels. The initial term of this contract was extended to 2031 and the annualminimum return from this expanded combination of hotels increased by $1,700until April 2007 at which time it will increase by $1,800. We may also receivea percentage of gross revenue increases at this hotel starting in 2009 and thenet cash flow after payment of management fees to InterContinental.

**Subsequent Events**

On January 31, 2007, wecompleted our acquisition of TravelCenters for approximately $1,900,000 pursuantto the Agreement and Plan of Merger dated as of September 15, 2006, as amended,among TravelCenters, us, one of our former subsidiaries and Oak Hill CapitalPartners, L.P., solely in its capacity as the representative for 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.

As a part of the restructuring of TravelCenters which occurred inconnection with the TA Transaction, on January 31, 2007:

·                  TravelCentersbecame a subsidiary of our subsidiary, TA;

·                  certain real property interests of 146 travelcenters that were operated by TravelCenters and all trademarks, tradenames and certainother assets used in connection with the travel center business with anestimated total value of approximately $1,680,000 were transferred tosubsidiaries of ours that were not owned by TA;

·                  TA became the owner of all of the working capitalof TravelCenters, including current assets (primarily consisting of cash,receivables and inventory) net of current liabilities (primarily consisting oftrade payables and accrued liabilities);

·                  we contributed cash to TA so that the sum of itscurrent assets, net of current liabilities, was $200 million;

·                  TA became the owner of one travel center inOntario, Canada, the operator of two travel centers leased from owners otherthan us, the manager of one travel center for an owner other than us, thefranchisor of 13 travel centers owned and operated by third parties and theowner of certain other assets historically owned and used by TravelCenters;

·                  we entered into a lease of the 146 travel centerswe acquired and certain related assets with TA; and

·                  TA commenced operating the travel center businessformerly conducted by TravelCenters.

After givingeffect to this restructuring, on January 31, 2007, we distributed all of theshares of TA to our common shareholders of record on January 26, 2007.Shareholders were entitled to receive one TA common share for every ten of ourcommon shares owned on the record date. Fractional shares were issued asnecessary.  TA’s common shares are listed on the American Stock Exchangeunder the symbol “TA”. We expect to record a charge of between $2,500 and$3,000 in the first quarter of 2007 related to costs incurred in connectionwith the spin off transaction.

Our lease with TAis a “triple net” lease, which requires TA to pay all costs incurred in theoperation of the leased travel centers, including personnel, utilities,inventories, services to customers, insurance, real estate and personalproperty taxes and ground lease payments. The annual minimum rent due to usunder this agreement is $153,500, $157,000, $161,000, $165,000, $170,000 and$175,000 in each of the first five years of the agreement and for the remainingyears thereafter, respectively. Starting in 2012, the lease requires TA to payus as additional rent 3% of increases in non-fuel gross revenues and 0.3% ofincreases in gross fuel revenues at each leased travel center over 2011 grossrevenue amounts. Percentage rent attributable to fuel sales is subject to amaximum each year calculated by reference to changes in the consumer priceindex. Our lease agreement with TA expires on December 31, 2022.

We have agreed toprovide up to $25,000 of funding annually for the first five years of the leasefor certain specified improvements to the leased travel centers. This fundingis cumulative and may be drawn by TA from us in subsequent years until December2015. There will not be any adjustment in our minimum rent as we fund these 

41

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amounts. All improvementspurchased with this funding will be owned by us. TA is required to maintain, atits expense, the leased travel centers in good order and repair, 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 minimum of 8.5% of the amount we fund.

**Management Agreements and Leases**

At December 31, 2006,each of our 310 hotels is included in one of eleven combinations of hotels ofwhich 201 are leased to one of our wholly owned TRSs and managed by anindependent hotel operating company and 109 are leased to third parties. Ourconsolidated statement of income includes operating revenues and expenses ofour managed hotels and rental income for leased properties. Additionalinformation regarding the terms of our management agreements and leases isincluded in the table on pages 53 and 54.

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

**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)** | ** ** | ** ** | ** ** |
| Hotel operating  revenues                                      |       | $                                                                               | 879,324    |       | $          | 682,541 |   | $ | 196,783 |   | 28.8 | % |
| Rental income:                                                 |       |                                                                            |       |       |       |   |   |   |   |
| Minimum rent                                                   |       | 131,421                                                                         |       | 126,829    |       | 4,592 |   | 3.6 | % |
| Percentage rent                                                |       | 5,697                                                                           |       | 3,902      |       | 1,795 |   | 46.0 | % |
| FF&E reserve  income                                       |       | 20,299                                                                          |       | 19,767     |       | 532 |   | 2.7 | % |
| Interest income                                                |       | 2,674                                                                           |       | 1,373      |       | 1,301 |   | 94.8 | % |
|                                                           |       |                                                                            |       |       |       |   |   |   |   |
| Hotel operating  expenses                                      |       | 618,334                                                                         |       | 476,858    |       | 141,476 |   | 29.7 | % |
| Interest expense                                               |       | 81,451                                                                          |       | 65,263     |       | 16,188 |   | 24.8 | % |
| Depreciation and  amortization                                 |       | 144,404                                                                         |       | 131,792    |       | 12,612 |   | 9.6 | % |
| General and  administrative                                    |       | 26,187                                                                          |       | 23,296     |       | 2,891 |   | 12.4 | % |
| Loss on asset  impairment                                      |       | —                                                                          |       | 7,300      |       | (7,300 | ) | — |   |
|                                                           |       |                                                                            |       |       |       |   |   |   |   |
| 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 | % |
| Net income  available for common shareholders per common share |       | $                                                                               | 2.20       |       | $          | 1.75 |   | $ | 0.45 |   | 25.7 | % |
|                                                           |       |                                                                            |       |       |       |   |   |   |   |

 

The increase in hotel operating revenues was caused bythe increase in the number of managed hotels in 2006 due to our January andApril 2006 hotel acquisitions and the general increase in hotel revenues atmost of our managed hotels due to strengthening of the lodging market that hasresulted in improved average daily room rate, or ADR, at most of our managedhotels partially offset by lower revenues at certain of our managed hotels as aresult of renovations in 2006. Additional operating statistics of our hotels isincluded in the table on page 55.

The increase in hotel operating expenses was caused bythe increase in the number of managed hotels in 2006 due to our January andApril 2006 hotel acquisitions and the general increase in the cost of labor andutilities in 2006.

Our share of theoperating results of our managed hotels in excess of the minimum returns due tous, or additional returns, are generally determined annually. Hotel operatingincome in excess of the minimum returns due to us under our managementagreements is recognized as income at year end when all contingencies are metand the income is earned. We recognized additional returns of $20,029 and$13,568 in 2006 and 2005, respectively.

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Certain of our managedhotels had net operating results that were $3,542 and $2,491 less than theminimum returns due to us in 2006 and 2005, respectively. These amounts arereflected in our consolidated statement of income as a net reduction to hoteloperating expenses in these years because the minimum returns were funded byour managers.

The increase in minimumrental income is primarily a result of the increased minimum rents resultingfrom our funding of improvements at certain of our leased hotels in 2006 andthe acquisition of the Harbor Court office building in January 2006. Theincrease in percentage rental income is the result of increased sales at ourleased hotels.

FF&E reserve incomerepresents amounts paid by our tenants into restricted accounts owned by us,the purpose of which is to accumulate funds for future capital expenditures.The terms of our leases require these amounts to be calculated as a percentageof total sales at our hotels. The increase in FF&E reserve income isprimarily due to increased levels of hotel sales in 2006 versus 2005 at ourleased hotels. We do not report the amounts which are escrowed as FF&E reservesfor our managed hotels and for leased hotels where the FF&E reserve isowned by our tenants as FF&E reserve income.

The increase in interestincome is due to higher average cash balances and higher average interest ratesduring 2006.

The increase in interestexpense is primarily due to higher average borrowings as a result of our hotelacquisitions, which was partially offset by a lower weighted average interestrate during 2006 than in 2005.

The increase indepreciation and amortization is due principally to the depreciation of 12hotels acquired during 2006 and the impact of the purchases in 2006 and 2005 ofdepreciable assets with funds from FF&E reserve accounts owned by us. Thisincrease was offset to some extent by the sale of a hotel in September 2005 andcertain assets becoming fully depreciated in 2006 and 2005.

The increase to generaland administrative expense is due principally to the impact of additional hotelinvestments during 2006.

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

The increases in netincome, net income available for common shareholders and net income availablefor common shareholders per common share are primarily due to the investmentand operating activity discussed above. On a per share basis, the percentageincrease in net income available for common shareholders was lower due to ourissuance and sale of a total of 14.3 million common shares in July and December2006 and the sale of 4.7 million shares in June 2005.

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

 

The increase in hoteloperating revenues was caused by the increase in the number of managed hotelsin 2005 due to our February and May 2005 hotel acquisitions and the increase inrevenues is attributable primarily to the improving lodging market that hasresulted in improved occupancy and ADR at many of our hotels, which waspartially offset by lower revenues at our former Prime HotelsSM during their transition to Carlson brandedoperations during 2005. Additional operating statistics of our hotels isincluded in the table on page 55.

The increase in hoteloperating expenses was caused by the increase in the number of managed hotelsin 2005 due to our February and May 2005 hotel acquisitions and a result ofhigher hotel occupancies and increases in the cost of labor and utilities in2005.

We recognized additionalreturns of $13,568 and $1,397 in 2005 and 2004, respectively.

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Certain of our managedhotels had net operating results that were $2,491 and $10,595 less than theminimum returns due to us in 2005 and 2004, respectively. These amounts arereflected in our consolidated statement of income as a net reduction to hoteloperating expenses in these years because the minimum returns were funded byour managers.

The increase in minimumrental income is primarily a result of the initiation of a new lease for ourhotel in San Juan, Puerto Rico in February 2005, and the increase in minimumrents resulting from our funding of improvements at certain of our leasedhotels in 2005 and 2004. This increase was partially offset by the eliminationof $5,222 of minimum rent for seven of our hotels which were leased to thirdparties for a portion of 2004 but are now managed for our account. The increasein percentage rental income is the result of increased sales at our leasedhotels.

The increase in FF&Ereserve income is primarily due to increased levels of hotel sales in 2005versus 2004 at our leased hotels. This increase was partially offset by theelimination of FF&E reserve income for seven hotels which were leased tothird parties for a portion of 2004, but are now managed for our account.

The increase in interestincome is due to higher average cash balances and higher average interest ratesduring 2005.

The increase in interestexpense is primarily due to higher average borrowings as a result of our hotelacquisitions, which was partially offset by a lower weighted average interestrate during 2005 than in 2004.

The increase indepreciation and amortization is due principally to the depreciation of 14hotels acquired during 2005 and the impact of the purchases in 2005 and 2004 ofdepreciable assets with funds from FF&E reserve accounts owned by us. Thisincrease was offset to some extent by the sale of two hotels in April 2004 andSeptember 2005 and certain assets becoming fully depreciated assets during 2005and 2004.

The increase to generaland administrative expense is due principally to the impact of additional hotelinvestments during 2005.

We recorded a $7,300 losson asset impairment to reduce the carrying value of our Prime HotelSM in Atlanta, Georgia to its net realizable valueless cost to sell in the 2005 second quarter. We sold this hotel on September30, 2005, for $3,227.

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

Our 2004 income availableto common shareholders was reduced by $2,793 as a result of our redemption ofour Series A preferred shares, which amount reflects the excess of theredemption payments over the carrying value of these preferred shares beforetheir redemption.

The increases in netincome, net income available for common shareholders and net income availablefor common shareholders per common share were primarily due to the investmentand operating activities discussed above. On a per share basis, the percentageincrease in net income available for common shareholders was lower due to ourissuance and sale of 4.7 million common shares in June 2005.

**Liquidity and CapitalResources**

Our Operators and Tenants

All of our hotels andtravel centers are operated under management agreements or leases withunrelated third party operating companies. All costs of operating andmaintaining our hotels are paid by the third party managers as agents for us orby third party tenants for their own account. These third parties derive theirfunding for property operating expenses, FF&E reserves, and returns andrents due to us generally from property operating revenues and, to the extentthat these parties fund our minimum returns and minimum rents, from theirseparate resources.

We define coverage foreach of our combination management agreements or leases as total property salesminus all property level expenses which are not subordinated to the minimumreturns and minimum rents due to us and the required FF&E reservecontributions, divided by the aggregate minimum payments to us. More detailregarding coverage, guarantees and other security features of our operatingagreements is presented in the table on pages 53 and 54. Assuming our elevenoperating agreements in place at December 31, 2006, were in place during all 

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of 2006, ten of these combinations, representing 286properties, generated coverage using historical operating results of at least1.0x. The remaining combination, representing 24 hotels, generated coverage of0.80x in 2006; approximately half the hotels in this combination are undergoingsignificant renovations that had a negative impact on the operating results ofthis combination during the last six months of 2006. We expect hotels in thiscombination to be under renovation through the first nine months of 2007.

Three hundred thirty-one(331) of our properties, representing 73% of our total investments at cost asof February 26, 2007, in eight combinations are operated under managementagreements or leases which are subject to full or limited guarantees. Theseguarantees may provide us with continued payments if the total sales less totalexpenses and required FF&E reserve payments fail to equal or exceedguaranteed amounts due to us. Our managers and tenants or their affiliates may alsosupplement cash flow from our properties in order to make payments to us andpreserve their rights to continue operating our properties. Guarantee orsupplemental payments to us, if any, made under any of our managementagreements or leases, do not subject us to repayment obligations but, undersome of our agreements, these guarantee or supplemental payments may berecovered 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, 2007,all payments due, including those payments due under the combination managementagreement whose hotels generated less than 1.0x coverage during 2006, arecurrent. However, the effectiveness of our various security features to provideuninterrupted 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.

**OurOperating Liquidity and Capital Resources**

Our principal source offunds for current expenses and distributions to shareholders are minimumreturns from our managed hotels and minimum rents from our leased properties.We receive minimum returns and minimum rents from our managers and tenantsmonthly. We receive additional returns, percentage returns and rents and ourshare of the operating profits of our managed hotels after payment of allmanagement fees and other deductions either monthly or quarterly. This flow offunds has historically been sufficient for us to pay our operating expenses,interest and distributions to shareholders. We believe that our operating cashflow will be sufficient to meet our operating expenses, interest anddistribution payments for the foreseeable future.

We maintain our status asa REIT under the Internal Revenue Code 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, amongother things, allows a REIT to lease hotels to a TRS if the hotel is managed byan independent third party. The income realized by our TRS in excess of therent it pays to us is subject to income tax at corporate tax rates. As, and if,the financial performance of the hotels operated for the account of our TRSimproves, these taxes may become material. Also, the income we receive from ourhotels in Canada and Puerto Rico is subject to taxes in those jurisdictions.

**OurInvestment and Financing Liquidity and Capital Resources**

Various percentages oftotal sales at most of our hotels are escrowed as FF&E reserves to fundfuture capital improvements at our hotels. During 2006 our managers and tenantscontributed $48,796 to these accounts. As of December 31, 2006, there wasapproximately $27,365 on deposit in these escrow accounts, of which $27,363 washeld directly by us and reflected on our balance sheet as restricted cash. Theremaining $2 is held in an account owned by one of our tenants and is notreflected on our balance sheet; but we have security and remainder interests inthe account owned by this tenant. During 2006, $130,365 was spent from theFF&E reserve escrow accounts to renovate and refurbish our hotels.

Our hotel operatingagreements generally provide that, if necessary, we will provide our managersand tenants funding for capital improvements to our properties in excess ofamounts available in escrowed FF&E reserves. To the extent we make suchadditional fundings, our annual minimum returns or minimum rent generallyincreases by 

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a percentage of the amount we fund. During 2006, wefunded $72,556 for capital improvements to our hotels in addition to FF&Ereserve fundings.

FF&E escrow depositsare not required under our travel centers lease with TA. However, TA isrequired to maintain the leased travel centers in good order and repair,including structural and non-structural components and we have agreed toprovide up to $25,000 per year for capital improvements to the leasedproperties for the first five years of the lease term or thereafter on acumulative basis. TA may request that we fund additional amounts for capitalimprovements to the leased facilities in return for annual minimum rentincreases.

During 2006, we funded$32,157 for improvements to our Marriott International, Inc., or Marriott,branded hotel portfolios using cash on hand and borrowings under our revolvingcredit facility. We expect to fund approximately $5,000 for improvements to ourfour Marriott branded hotel portfolios throughout 2007 with funds from ourexisting cash balances or borrowings under our revolving credit facility. Ourminimum annual rent for these hotels is increased by approximately 10% of theamounts we fund, which amounts are in addition to recurring FF&E reservefunding from hotel operations.

Pursuant to an April 2005agreement we entered with a subsidiary of Global Hyatt Corporation, or Hyatt,for management of 24 AmeriSuites® hotels, we agreed to provide funding to Hyattfor rebranding of these hotels to the Hyatt PlaceTM brand and for other improvements. To theextent our fundings exceed $8,000, the minimum return payable by Hyatt to usincreases as these funds are advanced by approximately 10% of the fundedamounts per year. As of December 31, 2006, $29,500 has been funded, and weexpect to fund an additional approximately $49,300 throughout 2007, using fundsfrom our existing cash balances or borrowings under our revolving creditfacility.

Pursuant to an April 2005agreement we entered with a subsidiary of Carlson Hotels Worldwide, or Carlson,for management of 12 PrimeSM hotels, we agreedto provide funding to Carlson for rebranding these hotels to Carlson brands andfor other improvements at these hotels by approximately 10% of the fundedamounts per year. To the extent our payments exceed $12,000, the minimum returnpayable by Carlson to us increases as these funds are advanced. As of December31, 2006, $36,563 has been funded. We funded $14,898 of this amount during2006, and we expect to fund approximately $1,000 throughout 2007, using fundsfrom our existing cash balances or borrowings under our revolving creditfacility.

Pursuant to a December2004 agreement we entered to purchase 13 hotels from InterContinental we agreedto pay $25,000 during the three years following closing to fund improvements tothe hotels. We paid $10,000 of this amount in December 2005 and expect to pay$15,000 in December 2007, using funds from our existing cash balances orborrowings under our revolving credit facility.

On January 6, 2006, weacquired the Harbor Court Complex in Baltimore, Maryland for $78,000 using cashon hand and borrowings under our revolving credit facility. Pursuant to theagreement we entered with InterContinental for the management of the HarborCourt Hotel, we agreed to fund $2,300 for rebranding and other improvementsduring the two years following closing. As of December 31, 2006, $1,000 hadbeen funded and we expect to fund an additional $1,300 in December 2007, usingfunds from our existing cash balances or borrowings under our revolving creditfacility.

On January 25, 2006, weacquired eight hotels for $166,200 using borrowings under our revolving creditfacility. Pursuant to the agreement we entered with InterContinental for themanagement of these hotels, we agreed to fund $17,135 for capital improvementsduring the three years following closing. We funded $6,854 in January 2007, andexpect to fund $6,854 in January 2008 and $3,427 in January 2009, using fundsfrom our existing cash balances or borrowings under our revolving creditfacility.

On April 6, 2006, weacquired two Crowne Plaza® hotels for $63,000using borrowings under our revolving credit facility. We agreed to fund $7,093for capital improvements to these hotels during the three years followingclosing. We funded $2,837 in January 2007, and expect to fund $2,837 in January2008 and $1,419 in January 2009, using funds from our existing cash balances orborrowings under our revolving credit facility.

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On April 13, 2006, weacquired a Staybridge Suites® for $21,000 usingborrowings under our revolving credit facility.

Pursuant to the January2007 lease we entered with TA, we have agreed to provide up to $125,000 forcertain specified improvements to the leased travel centers which may be drawnby TA from us in subsequent years until December 2015. There will be noadjustment in our minimum rent as we fund these amounts. We expect to fundthese amounts using funds from our existing cash balances or borrowings underour revolving credit facility.

On January 17, 2006,April 17, 2006, July 17, 2006 and October 16, 2006, we paid a $0.5546875 pershare distribution to our Series B preferred shareholders for the quartersended December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006,respectively. On December 1, 2006, we declared a distribution of $0.5546875 perSeries B preferred share with respect to the fourth quarter of 2006 and paid itto shareholders on January 16, 2007. These distributions were funded using cashon hand and borrowings under our revolving credit facility.

On February 16, 2006, May11, 2006, August 17, 2006 and November 16, 2006, we paid a $0.73, $0.73, $0.74and $0.74 per share distribution to our common shareholders for the quartersended December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006,respectively. These distributions were funded using cash on hand and borrowingsunder our revolving credit facility. On January 4, 2007, we declared adistribution of $0.74 per common share with respect to the fourth quarter of2006 and paid it to shareholders on February 15, 2007. These distributions werefunded using cash on hand and borrowings under our revolving credit facility.

On June 15, 2006, weissued $275,000 of 6.3% senior notes due 2016. Net proceeds from this offeringof $271,937 after discounts and other expenses were used to reduce borrowingsunder our revolving credit facility.

On July 26, 2006, we sold2,000,000 of our common shares at a price of $43.66 per share in a publicoffering. On July 28, 2006, we sold an additional 300,000 common shares at aprice of $43.66 per share pursuant to an option we granted to the underwriters.Net proceeds from these sales of approximately $95,823 after discounts and otherexpenses were used to repay borrowings outstanding under our revolving creditfacility and for general business purposes.

On December 22, 2006, wesold 12,000,000 of our common shares at a price of $47.51 per share in a publicoffering. On January 5, 2007, we sold an additional 1,800,000 common shares ata price of $47.51 per share pursuant to an option we granted to theunderwriters. Net proceeds from these sales of approximately $627,215 afterdiscounts and other expenses were used to repay borrowings outstanding underour revolving credit facility and to partially fund the TA Transaction.

On January 22, 2007, weentered into a new $2,000,000 interim loan agreement, or the AcquisitionFacility, with a group of institutional lenders that became effectiveconcurrently with our acquisition of TravelCenters. The Acquisition Facility permits only a single borrowing, and thestated maturity date of the borrowing is January 30, 2008. Borrowings under theAcquisition Facility are unsecured. We are required to prepay a stated portionof outstanding borrowings under the Acquisition Facility upon the occurrence ofevents, including certain equity or debt issuances and asset sales. Theannual interest rate on borrowings under the Acquisition Facility is computedat LIBOR plus a premium, subject to adjustment based on changes to our creditratings. The initial annual interest rate of the Acquisition Facility was6.02%.

The total considerationwe paid to acquire TravelCenters was approximately $1,900,000. The cashpurchase price and the capitalization of TA were funded primarily by a$1,400,000 borrowing under the Acquisition Facility and the approximately$627,776 net proceeds from our issuance of 13,800,000 common shares ofbeneficial interest in December 2006 and January 2007 as described above.

On February 16, 2007, wesold 5,000,000 of our common shares at a price of $47.67 per share in a publicoffering. On February 23, 2007, we sold an additional 750,000 common shares ata price of $47.67 per share pursuant to an option we granted to theunderwriters. Net proceeds from these sales, after underwriting and otherestimated offering expenses, were $261,810. We used these proceeds to reduceborrowings under the Acquisition Facility.

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On February 21, 2007, wesold 12,000,000 Series C cumulative redeemable preferred shares at a price of$25.00 per share in a public offering. Net proceeds from this offering, after underwriting and other estimatedoffering expenses, were $290,250. We used these proceeds to reduce borrowingsunder the Acquisition Facility. Each of our Series C preferred shares has adistribution rate of $1.75 per annum, payable in equal quarterly amounts, and aliquidation preference of $25 ($300,000 in aggregate). Series C preferredshares are redeemable at our option for $25 each plus accrued and unpaiddistributions at any time on or after February 15, 2012. On February 22, 2007,the underwriters partially exercised a 30 day option to purchase additionalSeries C preferred shares from us to cover overallotments. As a result, weexpect to issue 700,000 Series C preferred shares on February 28, 2007 and toreceive net proceeds after underwriting and other estimated offering expensesof $16,949.

As of February 26, 2007,we had $848,000 outstanding under the Acquisition Facility.

In order to fund capitalimprovements to our properties and acquisitions and to meet cash needs that mayresult from timing differences between our receipt of returns and rents and ourdesire or need to make distributions or pay operating expenses, we maintain arevolving credit facility with a group of institutional lenders. On August 22,2006, we amended and extended the maturity of our unsecured revolving creditfacility. As a result of the amendment, the maturity date was extended toOctober 24, 2010 and we have the option to extend the facility for oneadditional year upon payment of an extension fee. The annual interest ratepayable for drawn amounts under the facility was reduced to LIBOR plus 55 basispoints (5.9% per annum at December 31, 2006). Certain financial and othercovenants in the facility were amended to reflect current market conditions.Borrowings under the revolving credit facility can be up to $750,000 and therevolving bank credit facility 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.Funds may be drawn, repaid and redrawn until maturity, and no principalrepayment is due until maturity. As of December 31, 2006, we had zerooutstanding under our revolving credit facility.

At February 26,2007, we had approximately $13,887 of cash and cash equivalents and $670,000available from our revolving credit facility. We expect to use existing cashbalances, borrowings under our credit facility and net proceeds of offerings ofequity or debt securities to fund the repayment of the Acquisition Facility andfuture property acquisitions.

Our term debt maturities(other than our revolving credit facility and the Acquisition Facility) are asfollows: $150,000 in 2008; $50,000 in 2010; $125,000 in 2012, $300,000 in 2013,$300,000 in 2015 and $300,000 in 2016. As of December 31, 2006, we had onemortgage note we assumed in connection with our acquisition of a hotel with acurrent principal balance of $3,700. 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. The mortgage note became prepayable at apremium to face value on September 1, 2005. None of our other debt obligationsrequire principal or sinking fund payments prior to their maturity date.

When amounts areoutstanding on our revolving credit facility and as the maturity 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 no assurancethat 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 December 31, 2006,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   |       | $                                        | 1,203,700  |   | $ | 71 |   | $ | 150,161 |   | $ | 53,468 |   | $ | 1,000,000 |   |
| Purchase  Obligation (1)      |       | 1,900,000                                |       | 1,900,000 |   | — |   | — |   | — |   |
| Ground Lease  Obligations (2) |       | 72,358                                   |       | 2,154 |   | 4,225 |   | 4,034 |   | 61,945 |   |
| Capital  improvements (3)     |       | 95,828                                   |       | 81,291 |   | 14,537 |   | — |   | — |   |
| Total                         |       | $                                        | 3,271,886  |   | $ | 1,983,516 |   | $ | 168,923 |   | $ | 57,502 |   | $ | 1,061,945 |   |

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(1)             OnJanuary 31, 2007, we purchased TravelCenters of America, Inc. for approximately$1,900,000. As of February 26, 2007, we had borrowings of $848,000 outstandingunder the Acquisition Facility used to partially fund the acquisition. TheAcquisition Facility matures on January 30, 2008.

(2)             Fourteenof our hotels are on leased land. 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. On January 31, 2007, weacquired 22 travel centers which are located on leased land; the total groundlease obligations for these travel center locations is $105,266, of which$9,288 is due within one year.

(3)             Representsamounts we expect to fund in addition to recurring FF&E reserve fundingfrom hotel operations.

As of December 31, 2006,we had no off-balance sheet arrangements, commercial paper, derivatives, swaps,hedges, guarantees, joint ventures or partnerships. As of December 31, 2006,our secured debt obligations were limited to one mortgage note of $3,700secured 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 atDecember 31, 2006, consist of our revolving credit facility, our $1,200,000 ofpublicly issued term debt and our $3,700 mortgage note. Our public debt isgoverned by an indenture. This indenture and related supplements and ourrevolving credit facility agreement contain a number of financial ratiocovenants which generally restrict our ability to incur debts, including debtssecured by mortgages on our properties in excess of calculated amounts, requireus to maintain a minimum net worth, restrict our ability to make distributionsunder certain circumstances and require us to maintain various financialratios. As of December 31, 2006, we were in compliance with all of ourcovenants under our indenture and its supplements and our revolving credit facilityagreement. Subsequent to December 31, 2006, our debt obligations also includedthe Acquisition Facility. At February 26, 2007, the Acquisition Facility had anoutstanding balance of $848,000. The Acquisition Facility contains financialratio covenants and requirements similar to those in our revolving creditfacility. As of February 26, 2007, we were in compliance with all of ourcovenants under our indenture and its supplements, our revolving creditfacility and Acquisition Facility agreements.

None of our indenture andits supplements, our revolving credit facility nor the Acquisition Facilitycontain provisions for acceleration which could be triggered by our debtratings. However, under our revolving credit facility agreement and the AcquisitionFacility, our senior debt rating is used to determine the fees and interestrate applied to borrowings.

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

**Related PersonTransactions**

As more fully describedabove, on January 31, 2007, we acquired TravelCenters and, in connection withthe acquisition, restructured the business of TravelCenters, distributed all ofthe common shares of our former subsidiary, TA, to our shareholders in a spinoff transaction, and leased 146 travel centers to TA for a total annual minimumrent of $153,500. In order to effect the reorganization and spin off, we enteredinto a transaction agreement effective as of January 29, 2007, with TA and RMR.That agreement 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 sold, leased,mortgaged or otherwise financed with another party, and TA agreed to indemnifyus for liabilities relating to its business and operations for periods beforeand after the spin off and for liabilities relating to the ownership andoperation of the leased travel centers which arise during the term of our leasewith TA. Barry M. Portnoy, one of our managing trustees, is a managing directorof TA, and Thomas M. O'Brien, an officer of RMR, is the other managing directorof TA. Arthur G. Koumantzelis, who was one of our independent trustees prior tothe spin off, serves as an independent director of TA.

RMR originates andpresents investment opportunities to our board and provides management andadministrative services to us under an agreement. RMR is compensated at anannual rate equal to 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 uponincreases in cash available for distribution per share, as defined. Theincentive fee payable to RMR is paid in our

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common shares. As described above, on January 6, 2006, we entered into a managementagreement with RMR to operate the office building component of our Harbor CourtComplex. 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 during 2006 for services were $21,378, which includes anincentive fee of $1,487 which we plan to pay later in 2007 through the issuanceof 29,928 of our common shares. RMRalso provides the internal audit function for us and for other publicly tradedcompanies to which it provides management or other services. Our pro rata shareof RMR’s costs in providing that function was $173 in 2006. Our audit committeeappoints our director of internal audit and our compensation committee approveshis salary. Our compensation committee also approves the costs we pay.  All transactions between us and RMR are approvedby our compensation committee. Both our audit and compensation committees are100% composed of trustees who are independent of RMR.

**Critical AccountingPolicies**

Our critical accounting policies are those that havethe most impact on the reporting of our financial condition and results ofoperations and those requiring significant judgments and estimates. We believethat our judgments and assessments are consistently applied and producefinancial information that fairly presents our results of operations. Our fourmost critical accounting policies concern our investments in hospitalityrelated real estate and are as follows:

Classification of Leases. Certain ofour properties are leased on a triple net basis, pursuant to non-cancelable,fixed term, operating leases. Each time we enter a new lease or materiallymodify an existing lease we evaluate its classification as either a capitallease or operating lease. The classification of a lease as capital or operatingaffects the carrying value of a property, as well as our recognition of rentalpayments as revenue. These evaluations require us to make estimates of, amongother things, the remaining useful life and market value of a leased property,appropriate present value discount rates and future cash flows. Incorrectassumptions or estimates may result in misclassification of our leases.

Allocation of Purchase Price and Recognition ofDepreciation Expense. The acquisition cost of each propertyinvestment is allocated to various property components such as land, buildingsand furniture, and each component generally has a different useful life. Forhospitality related real estate acquired subsequent to June 1, 2001, theeffective date of Statement of Financial Accounting Standards No. 141, “BusinessCombinations”, we allocate the value of real estate acquired among building,land, furniture, fixtures and equipment, and, if applicable, the value ofin-place leases, the fair market value of above or below market leases andcustomer relationships. Acquisition cost allocations and the determination ofthe useful lives are based on our estimates or, under some circumstances,studies from independent experts. We compute related depreciation expense usingthe straight line method over estimated useful lives of up to 40 years forbuildings and improvements, and up to 12 years for personal property. The valueof intangible assets is amortized over the term of the respective lease or theaffected contract. The allocated cost of land is not depreciated. Inappropriateallocation of acquisition costs or incorrect estimates of useful lives couldresult in depreciation and amortization expenses which do not appropriatelyreflect the allocation of our capital expenditures over future periods requiredby accounting principles generally accepted in the United States.

Impairment of Assets. Weperiodically evaluate our real estate investments for impairment indicators.These indicators may include weak or declining operating profitability, cashflow or liquidity, our decision to dispose of an asset before the end of itsestimated useful life or market or industry changes that could permanentlyreduce the value of our investments. If indicators of impairment are present,we evaluate the carrying value of the related investment by comparing it to theexpected future undiscounted cash flows to be generated from that investment.If the sum of these expected future cash flows is less than the carrying value,we reduce the net carrying value of the property to its estimated fair value. Estimatedfair value is determined through an evaluation of recent financial performanceand projected discounted cash flows using standard industry valuationtechniques. This analysis requires us to judge whether indicators of impairmentexist and to estimate likely future cash flows. If we misjudge or estimateincorrectly or if future operating profitability, market or industry factorsdiffer from our expectations we may record an impairment charge which isinappropriate or fail to record a charge when we should have done so, or theamount of such charges may be inaccurate.

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Variable InterestEntities. In January 2003, the Financial Accounting StandardsBoard, or FASB, issued FASB Interpretation No. 46, “Consolidation of VariableInterest Entities”, or FIN 46, that was effective for all enterprises withvariable interest entities created after January 31, 2003. In December 2003,FASB issued a revised FIN 46, which provided for the deferral of the effectivedate of the interpretation to January 1, 2004, for variable interest entitiescreated prior to January 31, 2003. Under FIN 46, if an entity is determined tobe a variable interest entity, it must be consolidated by the primarybeneficiary. The primary beneficiary is the enterprise that absorbs the majorityof the entity’s expected losses, receives a majority of the entity’s expectedresidual returns, or both. Generally, expected losses and expected residualreturns are the expected negative and positive variability, respectively, inthe fair value of the variable interest entities’ net assets. When our TRSenters a new operating agreement or materially modifies an existing operatingagreement we are required to assess if we are or continue 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. The adoptionof FIN 46 had no effect on our financial statements.

These policiesinvolve significant judgments based upon our experience, including judgmentsabout current valuations, ultimate realizable value, estimated useful lives,salvage or residual values, the ability of our tenants and operators to performtheir obligations to us, and the current and likely future operating andcompetitive environments in which our properties operate. In the future we mayneed to revise our assessments to incorporate information which is not nowknown, and such revisions could increase or decrease our depreciation expenserelated to properties we own, result in the classification of our leases asother than operating leases or decrease the carrying values of our assets.

**Property ManagementAgreements, Leases and Operating Statistics**

As of February 26, 2007,we owned 310 hotels and 146 travel centers which are grouped into twelvecombinations. Our eleven hotel combinations are managed by or leased toseparate affiliates of hotel operating companies including InterContinental,Marriott, Host Hotels & Resorts Inc., or Host, Barcelo CrestlineCorporation, or Barcelo Crestline, Hyatt, Carlson and BRE/Homestead VillageLLC, or Homestead. Our 146 travel centers are leased to and operated by TA.

The tables on thefollowing pages summarize the key terms of our leases and management agreementsas of February 26, 2007, and include statistics reported to us or derived frominformation reported to us by our managers and tenants. These statisticsinclude occupancy, ADR, revenue per day per available room, or RevPAR, andcoverage of our minimum returns or minimum rents. We consider these statisticsand the management agreement or lease security features also presented in thetables on the following pages, to be important measures of our managers’ andtenants’ success in operating our properties and their ability to continue topay us. However, none of this third party reported information is a directmeasure of our financial performance and none of it has been independentlyverified 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® | Homestead Studio  Suites®                            | Staybridge Suites®                         |
|---------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|-------------------------------------------------|
| Agreement  Reference Name:                        | Marriott (no. 1)                                                                                                                     | Marriott (no. 2)                                                                                                                     | Marriott (no. 3)                                                                                                                                       | Marriott (no. 4)                                                                                                                        | Homestead                                                 | InterContinental  (no. 1)                       |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Number of  Properties:                            | 53                                                                                                                                   | 18                                                                                                                                   | 35                                                                                                                                                     | 19                                                                                                                                      | 18                                                        | 31                                              |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Number of Rooms /  Suites:                        | 7,610                                                                                                                                | 2,178                                                                                                                                | 5,382                                                                                                                                                  | 2,756                                                                                                                                   | 2,399                                                     | 3,844                                           |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Number of States:                                 | 24                                                                                                                                   | 14                                                                                                                                   | 15                                                                                                                                                     | 14                                                                                                                                      | 5                                                         | 16                                              |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Tenant:                                           | Subsidiary of  Host Subleased to Subsidiary of Barcelo Crestline.                                                                    | Subsidiary of  Host Subleased to Subsidiary of Barcelo Crestline.                                                                    | Our TRS.                                                                                                                                               | Subsidiary of  Barcelo Crestline.                                                                                                       | Subsidiary of  Homestead.                                 | Our TRS.                                        |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Manager:                                          | Subsidiary of  Marriott.                                                                                                             | Subsidiary of  Marriott.                                                                                                             | Subsidiaries of  Marriott.                                                                                                                             | Subsidiaries of  Marriott.                                                                                                              | Subsidiary of  Homestead.                                 | Subsidiary of  InterContinental.                |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Investment (000s)  (1):                           | $581,223                                                                                                                             | $188,727                                                                                                                             | $472,410                                                                                                                                               | $274,222                                                                                                                                | $145,000                                                  | $436,708                                        |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Security Deposit  (000s):                         | $50,540                                                                                                                              | $17,220                                                                                                                              | $36,204                                                                                                                                                | $28,508                                                                                                                                 | $15,960                                                   | $36,872 (8)                                     |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| End of Current  Term:                             | 2012                                                                                                                                 | 2010                                                                                                                                 | 2019                                                                                                                                                   | 2015                                                                                                                                    | 2015                                                      | 2031                                            |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Renewal Options  (2):                             | 3 for 12 years  each.                                                                                                                | 1 for 10 years, 2  for 15 years each.                                                                                                | 2 for 15 years  each.                                                                                                                                  | 2 for 10 years  each.                                                                                                                   | 2 for 15 years  each.                                     | 2 for 12.5 years each.                          |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Annual Minimum  Return / Minimum Rent (000s) (3): | $58,010                                                                                                                              | $18,854                                                                                                                              | $49,034                                                                                                                                                | $28,508                                                                                                                                 | $15,960                                                   | $37,777                                         |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Additional  Return:                               | —                                                                                                                               | —                                                                                                                               | $1,173 (4)                                                                                                                                             | —                                                                                                                                  | —                                                    | —                                          |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Percentage Return  / Rent (5):                    | 5.0% of revenues  above 1994/95 revenues.                                                                                            | 7.5% of revenues  above 1996 revenues.                                                                                               | 7.0% of revenues  above 2000/01 revenues.                                                                                                              | 7.0% of revenues  above 1999/2000 revenues.                                                                                             | 10.0% of revenues  above 1999/2000 revenues.              | 7.5% of revenues  above 2004/06 revenues.       |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Return / Rent  Coverage (6)(7):                   |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Year ended 12/31/06:                              | 1.49x                                                                                                                                | 1.34x                                                                                                                                | 1.11x                                                                                                                                                  | 1.21x                                                                                                                                   | 1.46x                                                     | 1.07x                                           |
| Year ended 12/31/05:                              | 1.41x                                                                                                                                | 1.13x                                                                                                                                | 1.03x                                                                                                                                                  | 0.99x                                                                                                                                   | 1.46x                                                     | 0.91x                                           |
|                                              |                                                                                                                                 |                                                                                                                                 |                                                                                                                                                   |                                                                                                                                    |                                                      |                                            |
| Other Security  Features:                         | HPT controlled lockbox with minimum balance  maintenance requirement; subtenant and subtenant parent minimum net worth  requirement. | HPT controlled lockbox with minimum balance  maintenance requirement; subtenant and subtenant parent minimum net worth  requirement. | —                                                                                                                                                 | Tenant minimum net worth requirement.                                                                                                   | Homestead parent guarantee and $15,960 letter of  credit. | Limited guarantee provided by InterContinental. |

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

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

(3)             Each management agreement or leaseprovides for payment to us of an annual minimum return or minimum rent,respectively. Hotel management fees are generally subordinated to these minimumpayment amounts and certain minimum payments are subject to full or limitedguarantees.

(4)             This agreement provides for annualadditional return payment to us of $1,173 to the extent of available cash flowafter payment of operating costs, funding of the FF&E reserve and paymentof our minimum return and percentage return.

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

(6)             We define coverage as total property salesminus all property level expenses which are not subordinated to minimumpayments to us and the required FF&E reserve contributions (which data isprovided to us by our operators or tenants), divided by the minimum returns orminimum rent payments due to us.

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

(8)             The single $36,872 deposit securesInterContinental’s obligations under the InterContinental No. 1, No. 3 and No.4 portfolios.

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|  Property Brand:                             | Candlewood Suites  ®                       | InterContinental®/ Crowne Plaza®/ Holiday Inn®/ Staybridge Suites® | Crowne Plaza®/ Holiday Inn®/ Staybridge Suites® | AmeriSuites®                                  | Radisson® Hotels &  Resorts/ Park Plaza® Hotels & Resorts/ Country Inns &  Suites by Carlson® | TravelCenters of  America (1)                                          | Total/ Range/  Average (all investments) (1) |
|---------------------------------------------------|-------------------------------------------------|----------------------------------------------------------------------------------------|----------------------------------------------------------------|----------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|----------------------------------------------|
| Agreement Reference  Name:                        | InterContinental  (no. 2)                       | InterContinental  (no. 3)                                                              | InterContinental  (no. 4)                                      | Hyatt                                              | Carlson                                                                                                                            | TA                                                                     | 12                                           |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Number of Properties:                             | 76                                              | 14                                                                                     | 10                                                             | 24                                                 | 12                                                                                                                                 | 146                                                                    | 456                                          |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Number of Rooms /  Suites:                        | 9,220                                           | 4,139                                                                                  | 2,937                                                          | 2,929                                              | 2,262                                                                                                                              | — (10)                                                            | 45,656 (10)                                  |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Number of States:                                 | 29                                              | 7 plus Ontario  and Puerto Rico                                                        | 5                                                              | 14                                                 | 7                                                                                                                                  | 39                                                                     | 44 plus Ontario  and Puerto Rico             |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Tenant:                                           | Our TRS.                                        | Our TRS and a  subsidiary of InterContinental.                                         | Our TRS.                                                       | Our TRS.                                           | Our TRS.                                                                                                                           | Subsidiary of TA.                                                      |                                         |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Manager:                                          | Subsidiary of  InterContinental.                | Subsidiaries of  InterContinental.                                                     | Subsidiaries of  InterContinental.                             | Subsidiary of  Hyatt.                              | Subsidiary of  Carlson.                                                                                                            | TA.                                                                    |                                         |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Investment (000s) (2):                            | $590,250                                        | $496,000                                                                               | $238,891                                                       | $283,850                                           | $210,757                                                                                                                           | $1,680,000 (11)                                                        | $5,598,038                                   |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Security Deposit (000s):                          | —                                          | $36,872 (3)                                                                            | $36,872 (3)                                                    | —                                             | —                                                                                                                             | —                                                                 | $185,304                                     |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| End of Current Term:                              | 2028                                            | 2029                                                                                   | 2030                                                           | 2030                                               | 2030                                                                                                                               | 2022                                                                   | 2010-2030 (average  16 years)                |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Renewal Options (4):                              | 2 for 15 years  each.                           | 2 for 15 years  each.                                                                  | 2 for 15 years  each.                                          | 2 for 15 years  each.                              | 2 for 15 years  each.                                                                                                              | N/A                                                                    |                                         |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Annual Minimum Return /  Minimum Rent (000s) (5): | $50,000                                         | $42,873                                                                                | $19,482                                                        | $20,750                                            | $11,535                                                                                                                            | $153,500 (12)                                                          | $506,283                                     |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Additional Return:                                | $10,000 (6)                                     | $3,458 (6)                                                                             | $1,750 (6)                                                     | 50% of cash flow  in excess of minimum return. (7) | 50% of cash flow  in excess of minimum return. (7)                                                                                 | —                                                                 | $16,381                                      |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Percentage Return / Rent  (8):                    | 7.5% of revenues  above 2006 revenues.          | 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. |                                         |
| * *                                          |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Return / Rent Coverage  (9):                      |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Year ended 12/31/06:                              | 1.35x                                           | 1.37x                                                                                  | 1.51x                                                          | 0.80x                                              | 1.36x                                                                                                                              | N/A                                                                    | 0.80x — 1.51x                           |
| Year ended 12/31/05                               | 1.33x                                           | 1.29x                                                                                  | 1.29x                                                          | 1.03x                                              | 0.90x                                                                                                                              | N/A                                                                    | 0.90x — 1.46x                           |
|                                              |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |
| Other Security Features:                          | Limited guarantee provided by InterContinental. | Limited guarantee provided by InterContinental.                                        | Limited guarantee provided by InterContinental.                | Limited guarantee provided by Hyatt.               | Limited guarantee provided by Carlson.                                                                                             | TA parent guarantee.                                                   |                                         |
| * *                                          |                                            |                                                                                   |                                                           |                                               |                                                                                                                               |                                                                   |                                         |

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(1)             Amounts give effect to the TA Transactionon January 31, 2007.

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

(3)             The single $36,872 deposit securesInterContinental’s obligations under the InterContinental No. 1, No. 3 and No.4 portfolios.

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

(5)             Each management agreement or leaseprovides for payment to us of an annual minimum return or minimum rent,respectively. Hotel management fees are generally subordinated to these minimumpayment amounts and certain minimum payments are subject to full or limitedguarantees.

(6)             These agreements provide for annualadditional return payment to us of the amounts stated to the extent ofavailable cash flow after payment of operating costs, funding of the FF&Ereserve, payment of our minimum return and payment of certain management fees.

(7)             These agreements provide for payment to usof 50% of available cash flow after payment of operating costs, funding theFF&E reserve, payment of our minimum return and reimbursement to themanagers of working capital and guaranty advances, if any.

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

(9)             We define coverage as total property salesminus all property level expenses which are not subordinated to minimumpayments to us and the required FF&E reserve contributions (which data isprovided to us by our operators or tenants), divided by the minimum return orminimum rent payments due to us. For some combinations, amounts have beencalculated using data for periods prior to our ownership of certain propertiesand prior to commencement of operating agreements.

(10)       21 of the TA properties include a hotel.The rooms associated with these hotels have been excluded from total hotelrooms.

(11)       Based on preliminary purchase priceallocation.

(12)       The amount of minimum rent payable to usby TA is scheduled to increase to $157,000, $161,000, $165,000, $170,000 and$175,000 on January 31, 2008, 2009, 2010, 2011 and 2012, respectively.

 

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The following tablessummarize the operating statistics, including occupancy, ADR and RevPAR,reported to us by our hotel operators by management agreement or lease for theperiods indicated:
| ** **                          | ** ** | **No. of** | ** ** | **No. of**  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------|------------|------------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Management Agreement/Lease** | ** ** | **Hotels**      | ** ** | **Rooms/Suites** | ** ** | **2006**(1) | ** ** | **2005**(1) | ** ** | **Change** | ** ** |
| **ADR**                             |       |            |       |             |       |        |       |        |       |       |       |
| Marriott (no. 1)                    |       | 53              |       | 7,610            |       | $           | 117.76     |        | $          | 108.15     |       | 8.9 | % |
| Marriott (no. 2)                    |       | 18              |       | 2,178            |       | 112.81      |       | 101.36      |       | 11.3       | %          |
| Marriott (no. 3)                    |       | 35              |       | 5,382            |       | 110.34      |       | 101.33      |       | 8.9        | %          |
| Marriott (no. 4)                    |       | 19              |       | 2,756            |       | 114.74      |       | 102.64      |       | 11.8       | %          |
| InterContinental (no. 1)(2)         |       | 29              |       | 3,554            |       | 104.38      |       | 96.71       |       | 7.9        | %          |
| InterContinental (no. 2)            |       | 76              |       | 9,220            |       | 66.50       |       | 61.03       |       | 9.0        | %          |
| InterContinental (no. 3)(3) (4)     |       | 14              |       | 4,139            |       | 134.49      |       | 122.97      |       | 9.4        | %          |
| InterContinental (no.4)(3)          |       | 10              |       | 2,937            |       | 101.22      |       | 90.19       |       | 12.2       | %          |
| Hyatt(4)                            |       | 24              |       | 2,929            |       | 82.02       |       | 75.45       |       | 8.7        | %          |
| Carlson(3) (4)                      |       | 12              |       | 2,262            |       | 92.73       |       | 81.64       |       | 13.6       | %          |
| Homestead                           |       | 18              |       | 2,399            |       | 61.70       |       | 56.44       |       | 9.3        | %          |
| Total/Average                       |       | 308             |       | 45,366           |       | $           | 99.00      |        | $          | 90.28      |       | 9.7 | % |
|                                |       |            |       |             |       |        |       |        |       |       |       |
| **Occupancy**                       |       |            |       |             |       |        |       |        |       |       |       |
| Marriott (no. 1)                    |       | 53              |       | 7,610            |       | 69.3        | %          | 70.9        | %          | -1.6 pts   |       |
| Marriott (no. 2)                    |       | 18              |       | 2,178            |       | 79.9        | %          | 81.3        | %          | -1.4 pts   |       |
| Marriott (no. 3)                    |       | 35              |       | 5,382            |       | 75.4        | %          | 77.5        | %          | -2.1 pts   |       |
| Marriott (no. 4)                    |       | 19              |       | 2,756            |       | 73.2        | %          | 72.8        | %          | 0.4 pts    |       |
| InterContinental (no. 1)(2)         |       | 29              |       | 3,554            |       | 76.0        | %          | 77.8        | %          | -1.8 pts   |       |
| InterContinental (no. 2)            |       | 76              |       | 9,220            |       | 75.7        | %          | 75.0        | %          | 0.7 pts    |       |
| InterContinental (no. 3)(3) (4)     |       | 14              |       | 4,139            |       | 75.1        | %          | 74.1        | %          | 1.0 pts    |       |
| InterContinental (no.4)(3)          |       | 10              |       | 2,937            |       | 71.8        | %          | 70.7        | %          | 1.1 pts    |       |
| Hyatt(4)                            |       | 24              |       | 2,929            |       | 61.1        | %          | 67.2        | %          | -6.1 pts   |       |
| Carlson(3) (4)                      |       | 12              |       | 2,262            |       | 63.6        | %          | 49.6        | %          | 14.0 pts   |       |
| Homestead                           |       | 18              |       | 2,399            |       | 70.7        | %          | 77.3        | %          | -6.6 pts   |       |
| Total/Average                       |       | 308             |       | 45,366           |       | 72.5        | %          | 73.0        | %          | -0.5 pts   |       |
|                                |       |            |       |             |       |        |       |        |       |       |       |
| **RevPAR**                          |       |            |       |             |       |        |       |        |       |       |       |
| Marriott (no. 1)                    |       | 53              |       | 7,610            |       | $           | 81.61      |        | $          | 76.68      |       | 6.4 | % |
| Marriott (no. 2)                    |       | 18              |       | 2,178            |       | 90.14       |       | 82.41       |       | 9.4        | %          |
| Marriott (no. 3)                    |       | 35              |       | 5,382            |       | 83.20       |       | 78.53       |       | 5.9        | %          |
| Marriott (no. 4)                    |       | 19              |       | 2,756            |       | 83.99       |       | 74.72       |       | 12.4       | %          |
| InterContinental (no. 1)(2)         |       | 29              |       | 3,554            |       | 79.33       |       | 75.24       |       | 5.4        | %          |
| InterContinental (no. 2)            |       | 76              |       | 9,220            |       | 50.34       |       | 45.77       |       | 10.0       | %          |
| InterContinental (no. 3)(3) (4)     |       | 14              |       | 4,139            |       | 101.00      |       | 91.12       |       | 10.8       | %          |
| InterContinental (no.4)(3)          |       | 10              |       | 2,937            |       | 72.68       |       | 63.76       |       | 14.0       | %          |
| Hyatt(4)                            |       | 24              |       | 2,929            |       | 50.11       |       | 50.70       |       | -1.2       | %          |
| Carlson(3) (4)                      |       | 12              |       | 2,262            |       | 58.98       |       | 40.49       |       | 45.7       | %          |
| Homestead                           |       | 18              |       | 2,399            |       | 43.62       |       | 43.63       |       | 0.0        | %          |
| Total/Average                       |       | 308             |       | 45,366           |       | $           | 71.78      |        | $          | 65.90      |       | 8.9 | % |

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(1)          Includes data for thecalendar year indicated, except for our Marriott branded hotels, which includedata for comparable fiscal periods.

(2)          Excludes operating statisticsof one hotel which was closed from May 2005 through May 2006 due to fire damageand a newly developed hotel acquired in April 2006.

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

(4)          Includes data for periodshotels were not operated by the current manager.

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**Seasonality**

Our hotels and travelcenters have historically experienced seasonal differences typical of theirindustries with higher revenues in the second and third quarters of calendaryears compared with the first and fourth quarters. This seasonality is not expectedto cause material fluctuations in our income or cash flow because ourcontractual management agreements and leases require our managers and tenantsto make the substantial portion of our return payments and rents to us in equalamounts throughout a year. Seasonality may affect our hotel operating revenues,but we do not expect seasonal variations to have a material impact upon ourfinancial results of operations or upon our managers’ or tenants’ ability tomeet their contractual obligations to us.

**Impact ofInflation**

Inflation might have bothpositive and negative impacts upon us. Inflation might cause the value of ourreal estate investments to increase. In an inflationary environment, thepercentage returns and rents which we receive based upon a percentage of grossrevenues should increase. Offsetting these benefits, inflation might cause ourcosts of equity and debt capital and other operating costs to increase. Anincrease in our capital costs or in our operating costs will result indecreased earnings unless it is offset by increased revenues. In periods ofrapid inflation, our managers’ or tenants’ operating costs may increase faster than revenues and thisfact may have an adverse impact upon us if the operating income from ourproperties becomes insufficient to pay our returns or rents. To mitigate theadverse impact of insufficient income at our properties, all of our operatingagreements contain security features, such as security deposits, or, guaranteesof our returns or rents. To mitigate the adverse impact of increased costs ofdebt capital in the event of material inflation, we may enter into interestrate hedge arrangements in the future; the decision to enter into theseagreements will be based on the amount of our floating rate debt outstanding,our belief that material interest rate increases are likely to occur and uponrequirements of our borrowing arrangements.

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

We are exposed to risks associatedwith market changes in interest rates. We manage our exposure to this marketrisk by monitoring available financing alternatives. Our strategy to manageexposure to changes in interest rates is unchanged from December 31, 2005.Other than as described below, we do not foresee any significant changes in ourexposure to fluctuations in interest rates or in how we manage this exposure inthe near future.

As of December 31, 2006,our outstanding publicly tradable debt consisted of six issues of fixed rate,senior unsecured notes:
| ** **                 | ** **                                       | **Annual**             | ** ** | **Annual**                | ** ** | ** **   | ** ** | ** **                          | ** **                    |
|----------------------------|--------------------------------------------------|------------------------|------------|---------------------------|------------|--------------|------------|-------------------------------------|-------------------------------|
| **Principal Balance** | ** **                                       | **Interest Rate** | ** ** | **Interest Expense** | ** ** | **Maturity** | ** ** | **Interest Payments Due** | ** **                    |
|                       |    $150,000                       |                   |       |                      | 7.000%     |         |       |                                | $10,500                       |   |   | 2008 |   |   | Semi-Annually |   |   |
|                       |        50,000 |                   |       |                      | 9.125%     |         |       |                                |     4,563 |   |   | 2010 |   |   | Semi-Annually |   |   |
|                       |      125,000            |                   |       |                      | 6.850%     |         |       |                                |     8,563 |   |   | 2012 |   |   | Semi-Annually |   |   |
|                       |      300,000            |                   |       |                      | 6.750%     |         |       |                                |   20,250            |   |   | 2013 |   |   | Semi-Annually |   |   |
|                       |      300,000            |                   |       |                      | 5.125%     |         |       |                                |   15,375            |   |   | 2015 |   |   | Semi-Annually |   |   |
|                       |      275,000            |                   |       |                      | 6.300%     |         |       |                                |   17,325            |   |   | 2016 |   |   | Semi-Annually |   |   |
|                       | $1,200,000                                       |                   |       |                      |       |         |       |                                | $76,576                       |   |   |   |   |   |   |   |   |

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. If at maturity these noteswere refinanced at interest rates which are 10% higher than shown above, ourper annum interest cost would increase by approximately $7,658. Changes inmarket interest rates also affect the fair value of our debt obligations; increasesin market interest rates decrease the fair value of our fixed rate debt whiledecreases in market interest rates increase the fair value of our fixed ratedebt. Based on the balances outstanding at December 31, 2006, and discountedcash flow analyses, a hypothetical immediate 10% change in interest rates wouldchange the fair value of our fixed rate debt obligations by approximately$36,086.

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Each of these fixed rateunsecured debt arrangements allows us to make repayments earlier than thestated maturity date. We are generally allowed to make prepayments only at facevalue plus a premium equal to a make-whole amount, as defined, which isgenerally designed to preserve a stated yield to the note holder. Theseprepayment rights may afford us the opportunity to mitigate the risk ofrefinancing at maturity at higher rates by refinancing prior to maturity.

At December 31, 2006, wehad one mortgage payable secured by a hotel in Wichita, Kansas, with a fixedrate of 8.3% that matures on July 1, 2011. This note requires principal andinterest payments through maturity pursuant to an amortization schedule andcontains a provision that allows us to make repayment at a premium to facevalue.

Our revolving creditfacility bears interest at floating rates and matures in October 2010. We canextend the maturity for one year for a fee. At December 31, 2006, we had nooutstanding balance and $750,000 available for drawing under our revolvingcredit facility. In connection with the TA Transaction, we entered into the AcquisitionFacility.  At December 31, 2006, we hadno outstanding balance under the Acquisition Facility. Repayments under theseagreements may be made at any time without penalty. We borrow in U.S. dollarsand borrowings under these agreements and are subject to interest at LIBOR plusa premium. Accordingly, we are vulnerable to changes in U.S. dollar based shortterm interest rates, specifically LIBOR. A change in interest rates would notaffect the value of this floating rate debt but would affect our operatingresults. For example, the interest rate payable on our outstanding indebtednessof $80,000 under our revolving credit facility was 5.87% per annum and on ourindebtedness of $848,000 under the Acquisition Facility was 6.02% at February26, 2007. The following table presents the impact a 10% change in interestrates would have on our weighted average floating rate interest expense as ofFebruary 26, 2007:

|                       | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|-----------------------|------------|------------------------------------------------------------------|------------|
| ** **            | ** ** | **Interest Rate  Per Year**                            | ** ** | **Outstanding Debt** | ** ** | **Total Interest  Expense Per Year** | ** ** |
| At February 26,  2007 |       |                                                             | 6.01       | % |   |   | $928,000 |   |   |   | $55,773 |   |   |
| 10% increase          |       |                                                             | 6.61       | % |   |   | $928,000 |   |   |   | $61,341 |   |   |
| 10% reduction         |       |                                                             | 5.41       | % |   |   | $928,000 |   |   |   | $50,205 |   |   |

 

Theforegoing table shows the impact of an immediate change in floating interestrates. If interest rates were to change gradually over time, the impact wouldbe spread over time. Our exposure to fluctuations in floating interest rateswill increase or decrease in the future with increases or decreases in theoutstanding amount under our revolving credit facility or Acquisition Facility.

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

The information requiredby this item is included in Item 15 of this Annual Report on Form 10-K.

**Item 9. Changes in and Disagreements With Accountantson Accounting and Financial Disclosure**

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 Rules 13a-15 and 15d-15. Based upon thatevaluation, our managing trustees, President and Chief Operating Officer andTreasurer and Chief Financial Officer concluded that our disclosure controlsand procedures are effective.

Therehave been no changes in our internal control over financial reporting duringthe quarter ended December 31, 2006 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

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**Management Reporton Assessment of Internal Control Over Financial Reporting**

We are responsiblefor establishing and maintaining adequate internal control over financialreporting. Our internal control system is designed to provide reasonableassurance to our management and board of trustees regarding the preparation andfair presentation of published financial statements. All internal controlsystems, no matter how well designed, have inherent limitations. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.

Our managementassessed the effectiveness of our internal control over financial reporting asof December 31, 2006. In making this assessment, it used the criteria set forthby the Committee of Sponsoring Organizations of the Treadway Commission in *Internal Control-Integrated Framework*. Based on ourassessment, we believe that, as of December 31, 2006, our internal control overfinancial reporting is effective.

Ernst & YoungLLP, the independent registered public accounting firm that audited our 2006consolidated financial statements included in this Annual Report on Form 10-K,has issued an attestation report on our assessment of our internal control overfinancial reporting. Its report appearselsewhere herein.

**Item 9B. Other Information**

None.

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**PART III**

**Item 10. Directors, Executive Officers and CorporateGovernance**

We have a code ofbusiness conduct and ethics that applies to all our representatives, includingour officers and trustees and employees of RMR. Our code of business conductand ethics is posted on our website, www.hptreit.com. A printed copy of ourcode of business conduct and ethics is also available free of charge to any personwho requests a copy. We intend to disclose any amendments or waivers to ourcode of business conduct and ethics applicable to our principal executiveofficer, principal financial officer, principal accounting officer or anyperson performing similar functions on our website.

The remainder of theinformation required by Item 10 is incorporated by reference to our definitiveProxy Statement, which will be filed not later than 120 days after the end ofour fiscal year.

**Item 11. Executive Compensation**

The information requiredby Item 11 is incorporated by reference to our definitive Proxy Statement,which will be filed no later than 120 days after the end of our fiscal year.

**Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

**Equity Compensation PlanInformation**. We may grant common shares to our officers andother employees of RMR under either our 1995 Incentive Share Award Plan or our2003 Incentive Share Award Plan, collectively referred to as the Award Plans.In addition, each of our trustees receives 750 shares per year as part of theirannual compensation for serving as our trustees and such shares may be awardedunder either of these plans. The terms of grants made under these plans aredetermined by our board of trustees, or a committee thereof, at the time of thegrant. The following table is as of December 31, 2006.
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                        | ** ** | **Number of securities**    | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                        | ** ** | **remaining available for** | ** ** |
| ** **                                                  | ** ** | **Number of securities**   | ** ** | ** **                        | ** ** | **future issuance under**   | ** ** |
| ** **                                                  | ** ** | **to be issued upon** | ** ** | **Weighted-average**              | ** ** | **equity compensation**          | ** ** |
| ** **                                                  | ** ** | **exercise of**                 | ** ** | **exercise price of**   | ** ** | **plans (excluding**             | ** ** |
| ** **                                                  | ** ** | **outstanding options,**        | ** ** | **outstanding options,**     | ** ** | **securities reflected in** | ** ** |
| **Plan category**                                      | ** ** | **warrants and rights**    | ** ** | **warrants and rights** | ** ** | **column (a)) **(1)         | ** ** |
| ** **                                                  | ** ** | **(a)**                              | ** ** | **(b)**                           | ** ** | **(c)**                               | ** ** |
| Equity compensation plans  approved by security holders     |       | None.                                |       | None.                             |       | 2,799,306                             |       |
|                                                        |       |                                 |       |                              |       |                                  |       |
| Equity compensation plans  not approved by security holders |       | None.                                |       | None.                             |       | 2,799,306                             |       |
|                                                        |       |                                 |       |                              |       |                                  |       |
| Total                                                       |       | None.                                |       | None.                             |       | 2,799,306                             |       |

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(1)           The 1995 Incentive Share Award Planwas approved by our shareholder at that time; the 2003 Incentive Share 

Award Plan was approvedby our Board of Trustees. Pursuant to the terms of the Award Plans, in no eventshall the number of shares issued under both plans combined exceed 3,128,791;and 2,799,306 represents the combined total shares available under both planson December 31, 2006.

Payments by us toRMR are described in Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Liquidity and Capital Resources — RelatedPerson Transactions”. The remainder 

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of the information requiredby Item 12 is incorporated by reference to our definitive Proxy Statement,which will be filed not later than 120 days after the end of our fiscal year.

**Item 13. Certain Relationships and RelatedTransactions, and Director Independence**

The information requiredby Item 13 is incorporated by reference to our definitive Proxy Statement,which will be filed not later than 120 days after the end of our fiscal year.

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

The information requiredby Item 14 is incorporated by reference to our definitive Proxy Statement,which will be filed not later than 120 days after the end of our fiscal year.

 

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**PART IV**

**Item 15. Exhibitsand Financial Statement Schedules**

**(a)**Indexto Financial Statements and Financial Statement Schedules

The following auditedconsolidated financial statements and schedule of Hospitality Properties Trustare 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, 2006  and 2005                                             |       | F-3      |
|                                                                                                     |       |     |
| Consolidated Statement of Income for each of the  three years ended December 31, 2006                    |       | F-4      |
|                                                                                                     |       |     |
| Consolidated Statement of Shareholders’ Equity for  each of the three years ended December 31, 2006 |       | F-5      |
|                                                                                                     |       |     |
| Consolidated Statement of Cash Flows for each of the  three years ended December 31, 2006                |       | F-6      |
|                                                                                                     |       |     |
| Notes to Consolidated Financial Statements                                                               |       | F-7      |
|                                                                                                     |       |     |
| Schedule III - Real Estate and Accumulated  Depreciation as of December 31, 2006                         |       | S-1      |

All other schedules for which provision is made in theapplicable accounting regulations of the Securities and Exchange Commission arenot required under the related instructions or are inapplicable, and thereforehave been omitted.

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(b) Exhibits

3.1                                 Compositecopy of Amended and Restated Declaration of Trust dated August 21, 1995, asamended to date. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ONFORM 8-K DATED MAY 24, 2006)

3.2                                 ArticlesSupplementary dated June 2, 1997. (INCORPORATED BY REFERENCE TO THE COMPANY’SANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997)

3.3                                 ArticlesSupplementary dated May 16, 2000. (INCORPORATED BY REFERENCE TO THE COMPANY’SANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000)

3.4                                 ArticlesSupplementary dated December 9, 2002. (INCORPORATED BY REFERENCE TO THE COMPANY’SANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002)

3.5                                 ArticlesSupplementary dated February 15, 2007. (INCORPORATED BY REFERENCE TO THECOMPANY’S CURRENT REPORT ON FORM 8-K DATED February 15, 2007)

3.6                                 Compositecopy 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 DATEDMARCH 10, 2004)

4.1                                 Formof Common Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY’SREGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330))

4.2                                 Formof temporary 8.875% Series B Cumulative Redeemable Preferred Share Certificate.(INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATEDDECEMBER 5, 2002)

4.3                                 Formof temporary 7% Series C Cumulative Redeemable Preferred Share Certificate.(INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATEDFEBRUARY 15, 2007)

4.4                                 Indenture,dated as of February 25, 1998, between the Company and State Street Bank andTrust Company. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ONFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997)

4.5                                 SupplementalIndenture No. 1, dated as of February 25, 1998, between the Company and StateStreet Bank and Trust Company, relating to the Company’s 7.00% Senior Notes due2008, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’SANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997)

4.6                                 SupplementalIndenture No. 4 dated as of July 14, 2000, between the Company and State StreetBank and Trust Company, relating to the Company’s 9.125% Senior Notes due 2010,including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUALREPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000)

4.7                                 SupplementalIndenture No. 5, dated as of July 28, 2000, between the Company and StateStreet Bank and Trust Company, relating to the Company’s 9.125% Senior Notesdue 2010, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY’SANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000)

4.8                                 SupplementalIndenture No. 6 dated as of July 8, 2002 between the Company and State StreetBank and Trust Company, including form of 6.85% Senior Notes due 2012.(INCORPORATED BY REFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FORTHE QUARTER ENDED JUNE 30, 2002)

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4.9                                 SupplementalIndenture No. 7 dated as of January 24, 2003 between the Company and U.S. BankNational Association, as successor trustee, relating to the Company’s 6 3/4%Senior Notes due 2013, including form of thereof. (INCORPORATED BY REFERENCE TOTHE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002)

4.10                           SupplementalIndenture No. 8 dated as of February 15, 2005 between the Company and U.S. BankNational Association, as successor trustee, relating to the Company’s 5 1/8%Senior Notes due 2015, including form of thereof. (INCORPORATED BY REFERENCE TOTHE COMPANY’S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 10, 2005)

4.11                           SupplementalIndenture No. 9 dated as of June 15, 2006 between the Company and U.S. BankNational Association, as successor trustee, relating to the Company’s 6.30%Senior Notes due 2016, including form of thereof. (INCORPORATED BY REFERENCE TOTHE COMPANY’S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED JUNE 30,2006)

4.12                           RightsAgreement, dated as of May 20, 1997, between the Company and State Street Bankand Trust Company, as Rights Agent. (INCORPORATED BY REFERENCE TO THE COMPANY’SCURRENT REPORT ON FORM 8-K DATED MAY 29, 1997)

4.13                           Appointmentof Successor Rights Agent, dated as of December 13, 2004, by and between theCompany and Wells Fargo Bank, National Association. (INCORPORATED BY REFERENCETO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED DECEMBER 13, 2004)

8.1                                 Opinionof Sullivan & Worcester LLP as to certain tax matters. (FILED HEREWITH)

10.1                           Amendedand Restated Advisory Agreement, dated January 1, 2006, by and between ReitManagement & Research LLC and the Company. (+) (INCORPORATED BY REFERENCETO THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,2005)

10.2                           MasterManagement Agreement, dated as of January 6, 2006, by and among ReitManagement & Research LLC and the Company. (+) (INCORPORATED BYREFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JANUARY 6, 2006)

10.3                           Summaryof Trustee Compensation (+). (INCORPORATED BY REFERENCE TO THE COMPANY’SCURRENT REPORT ON FORM 8-K DATED MAY 24, 2006)

10.4                           TheCompany’s 1995 Incentive Share Award Plan (+). (INCORPORATED BY REFERENCE TOTHE COMPANY’S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330))

10.5                           Amendmentto the Company’s 1995 Incentive Share Award Plan effective as of May 30, 2003(+).  (INCORPORATED BY REFERENCE TO THECOMPANY’S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003)

10.6                           TheCompany’s 2003 Incentive Share Award Plan effective as of May 30, 2003.(+)  (INCORPORATED BY REFERENCE TO THECOMPANY’S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003)

10.7                           Form ofRestricted Share Agreement. (+) (INCORPORATED BY REFERENCE TO THE COMPANY’S REPORT ON FORM 10-Q FOR THEQUARTER ENDED JUNE 30, 2003)

10.8                           Representativeform of Indemnification Agreement. (+) (INCORPORATED BY REFERENCE TO THECOMPANY’S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004)

10.9                           MasterLease Agreement, dated as of April 30, 1999, by and among the Company, HPTCYProperties Trust and HMH HPT Courtyard LLC. (INCORPORATED BY REFERENCE TO THECOMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999)

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10.10                     Agreement toAssign, Release, Franchise and Manage, dated as of June 15, 2001, by and amongHPT, HPTMI Properties Trust (“HPTMI”), HPTMI Hawaii, Inc. (“HPTMI Hawaii”), HPTTRS MI-135, Inc. (“TRS”), Marriott International, Inc. (“MI”), CR14 TenantCorporation (“CR14”), CRTM17 Tenant Corporation (“CRTM17”), Courtyard MarriottCorporation (“Courtyard”), Marriott Hotel Services, Inc. (“Full Service Manager”),Residence Inn by Marriott, Inc. (“Residence Inn”), SpringHill SMC Corporation (“SpringHill”)and TownePlace Management Corporation, (“TownePlace”). (INCORPORATED BYREFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001)

10.11                     Form ofManagement Agreement by and between Courtyard and TRS. (INCORPORATED BYREFERENCE TO THE COMPANY’S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDEDJUNE 30, 2001)

10.12                     PoolingAgreement, dated as of June 15, 2001, by and among MI, Full Service Manager,Residence Inn, Courtyard, SpringHill, TownePlace and TRS. (INCORPORATED BYREFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001)

10.13                     Amended andRestated Limited Rent Guaranty, dated as of June 15, 2001, made by MI in favorof HPTMI. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM8-K DATED JULY 31, 2001)

10.14                     Guaranty,dated as of June 15, 2001, made by MI in favor of TRS. (INCORPORATED BY REFERENCETO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001)

10.15                     Holdback andSecurity Agreement, dated as of June 15, 2001, by and among MI, St. LouisAirport, L.L.C., Nashville Airport, L.L.C., Residence Inn, Courtyard,SpringHill, TownePlace, Full Service Manager, CR14, CRTM17, TRS, HPTMI Hawaiiand HPTMI. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM8-K DATED JULY 31, 2001)

10.16                     ManagementAgreement, dated as of October 27, 2003, by and between HPT TRS IHG-1, Inc. (“HPTTRS IHG-1”) and InterContinental (INCORPORATED BY REFERENCE TO THE COMPANY’SCURRENT REPORT ON FORM 8-K DATED OCTOBER 27, 2003)

10.17                     FirstAmendment to Management Agreement, dated as of February 16, 2005, by andbetween HPT TRS IHG-1 and InterContinental. (INCORPORATED BY REFERENCE TO THECOMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,2004)

10.18                     Amended andRestated Purchase and Sale Agreement, dated as of February 9, 2005, by andamong BHR Texas, L.P., InterContinental, Crowne Plaza LAX, LLC, Holiday PacificPartners Limited Partnership, 220 Bloor Street Hotel, Inc. and StaybridgeMarkham, Inc., as sellers, and HPT IHG-2, as buyer. (INCORPORATED BYREFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATEDFEBRUARY 10, 2005)

10.19                     FirstAmendment to Amended and Restated Purchase and Sale Agreement, dated December21, 2006, by and among BHR Texas, L.P., InterContinental, Crowne Plaza LAX,LLC, Holiday Pacific Partners Limited Partnership, and HPT IHG-2.  (INCORPORATED BY REFERENCE TO OUR CURRENTREPORT ON FORM 8-K DATED FEBRUARY 12, 2007)

10.20                     Amended andRestated Stock Purchase Agreement, dated as of February 9, 2005, by andbetween Six Continents International Holdings, B.V., as seller, and HPT IHG-2,as buyer. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ONFORM 8-K DATED FEBRUARY 10, 2005)

10.21                     LeaseAgreement, dated as of February 16, 2005, by and among HPT IHGPR, Inc. (“HPT IHG PR”) and InterContinental Hotels (Puerto Rico) Inc. (“IHGPR”). (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ONFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004)

10.22                     FirstAmendment to Lease Agreement, dated December 21, 2006, by and among HPT IHG PRand IHG PR.  

64

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(INCORPORATED BY REFERENCE TO OUR CURRENT REPORT ONFORM 8-K DATED FEBRUARY 12, 2007)

10.23                     Assumption,Termination and Amendment Agreement among InterContinental Hotels Limited,InterContinental Hotels Group PLC, HPT TRS IHG-1, HPT TRS IHG-2, HPT IHG PR andthe Company dated July 1, 2005. (INCORPORATED BY REFERENCE TO THE COMPANY’SCURRENT REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2005)

10.24                     Amended andRestated Management Agreement, dated as of January 6, 2006, by and amongHPT TRS IHG-2, Inc. (“HPT TRS IHG-2”), IHG Management (Maryland) LLC (“IHGMaryland”) and Intercontinental Hotels Group (Canada), Inc. (“IHG Canada”).(INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-KDATED JANUARY 6, 2006)

10.25                     FirstAmendment to Amended and Restated Management Agreement, dated December 21,2006, by and among HPT TRS IHG-2, IHG Maryland, and IHG Canada.  (INCORPORATED BY REFERENCE TO OUR CURRENTREPORT ON FORM 8-K DATED FEBRUARY 12, 2007)

10.26                     Amended andRestated Deposit Agreement, dated as of January 20, 2006, by and among HPTTRS IHG-1, HPT TRS IHG-2, HPT TRS IHG-3, Inc. (“HPT TRS IHG-3”),InterContinental, IHG Maryland and IHG Canada (INCORPORATED BY REFERENCE TO THECOMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005)

10.27                     SecondAmended and Restated Consolidated Guaranty Agreement, dated as ofJanuary 20, 2006, made by Intercontinental Hotels Group plc for thebenefit of HPT TRS IHG-1, HPT TRS IHG-2, HPT TRS IHG-3, HPT IHG PR and theCompany. (INCORPORATED BY REFERENCE TO THE COMPANY’S ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2005)

10.28                     FirstAmendment to Second Amended and Restated Consolidated Guaranty Agreement, datedas of December 21, 2006, made by InterContinental Hotel Groups PLC, HPTTRS IHG-1, HPT TRS IHG-2, HPT TRS IHG-3, HPT IHG PR and the Company.  (INCORPORATED BY REFERENCE TO OUR CURRENTREPORT ON FORM 8-K DATED FEBRUARY 12, 2007)

10.29                     Amended andRestated Management Agreement, dated as of April 13, 2006, by and among HPT TRSIHG-1 and Intercontinental. (INCORPORATED BY REFERENCE TO THE COMPANY’SQUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006)

10.30                     Amended andRestated Credit Agreement, dated as of May 23, 2005, by and among the Company,Wachovia Bank, National Association, as Agent and the additional agents,arrangers and financial institutions signatory thereto. (INCORPORATED BYREFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED MAY 23, 2005)

10.31                     FirstAmendment to Amended and Restated Credit Agreement, dated as of August 22,2006, by and among the Company, Wachovia Bank, National Association, as Agent,and the additional agents, arrangers and financial institutions signatorythereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-KDATED AUGUST 22, 2006)

10.32                     SecondAmendment 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 signatorythereto. (INCORPORATED BY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-KDATED JANUARY 22, 2007)

10.33                     Interim LoanAgreement, dated as of January 22, 2007, by and among the Company, MerrillLynch Capital Corporation, as Administrative Agent, Merrill Lynch, Pierce,Fenner & Smith Incorporated as Lead Arranger and Lead Bookrunner, and theadditional agents and financial institutions signatory thereto. (INCORPORATEDBY REFERENCE TO THE COMPANY’S CURRENT REPORT ON FORM 8-K DATED JANUARY 22, 2007)

65

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10.34                  AmendmentNo. 1, dated as of February 26, 2007, to the Interim Loan Agreement by andamong the Company, Merrill Lynch Capital Corporation, as Administrative Agent,Merrill Lynch, Pierce, Fenner & Smith Incorporated as Lead Arranger andLead Bookrunner, and the additional agents and financial institutions signatorythereto. (FILED HEREWITH) 

10.35                     RegistrationAgreement, dated as of October 10, 2003, by and between the Company and HRPTProperties Trust. (INCORPORATED BY REFERENCE TO THE COMPANY’S REGISTRATIONSTATEMENT ON FORM S-3 FILED AS OF OCTOBER 14, 2003 (FILE NO. 333-109658))

10.36                     Agreement andPlan of Merger, dated as of September 15, 2006, by and among the CompanyTravelCenters of America, Inc., HPT TA Merger Sub Inc. and Oak Hill CapitalPartners, L.P.  (INCORPORATED BY REFERENCE TO OUR CURRENT REPORT ON FORM8-K DATED SEPTEMBER 20, 2006)

10.37                     Amendment No.1, dated as of January 30, 2007, to the Agreement and Plan of Merger by andamong the Company, TravelCenters of America, Inc., HPT TA Merger Sub Inc. andOak Hill Capital Partners, L.P.  (INCORPORATED BY REFERENCE TO OUR CURRENTREPORT ON FORM 8-K DATED FEBRUARY 2, 2007)

10.38                     TransactionAgreement, 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.  (INCORPORATEDBY REFERENCE TO OUR CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007)

10.39                     LeaseAgreement, 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 OUR CURRENT REPORT ON FORM 8-K DATEDFEBRUARY 12, 2007)

10.40                     GuarantyAgreement, dated as of January 31, 2007, by TravelCenters of America LLC andcertain of its subsidiaries, for the benefit of HPT TA Properties Trust and HPTTA Properties LLC.  (INCORPORATED BYREFERENCE TO OUR CURRENT REPORT ON FORM 8-K DATED FEBRUARY 12, 2007)

12.1                           Computationof Ratio of Earnings to Fixed Charges. (FILED HEREWITH)

12.2                           Computationof Ratio of Earnings to Combined Fixed Charges and Preferred Distributions.(FILED HEREWITH)

21.1                           Subsidiariesof the Registrant. (FILED HEREWITH)

23.1                           Consentof Ernst & Young LLP. (FILED HEREWITH)

23.2                           Consentof Sullivan & Worcester LLP. (INCLUDED IN EXHIBIT 8.1 TO THIS ANNUAL REPORTON FORM 10-K)

31.1                           Rule13a-14(a) Certification.  (FILED HEREWITH)

31.2                           Rule13a-14(a) Certification.  (FILED HEREWITH)

31.3                           Rule13a-14(a) Certification.  (FILED HEREWITH)

31.4                           Rule13a-14(a) Certification.  (FILED HEREWITH)

32.1                           Section1350 Certification. (FURNISHED HEREWITH)

(+)                                 Managementcontract or compensatory plan or agreement.

66

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To the Trustees andShareholders of Hospitality Properties Trust:**

We have audited theaccompanying consolidated balance sheets of Hospitality Properties Trust as ofDecember 31, 2006 and 2005, and the related consolidated statements of income,shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006.  Our audits alsoincluded the financial statement schedule listed in the Index at Item15(a).  These financial statements andschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Hospitality Properties Trustat December 31, 2006 and 2005, and the consolidated results of its operationsand its cash flows for each of the three years in the period ended December 31,2006, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Hospitality Properties Trust’s internal control over financialreporting as of December 31, 2006, based on criteria established in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 23, 2007expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts February 23, 2007

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To the Trustees andShareholders of**HospitalityProperties Trust:

We have audited management’s assessment,included in Item 9A of Hospitality Properties Trust’s Annual Report on Form10-K under the heading Management Report on Assessment of Internal Control OverFinancial Reporting, that HospitalityProperties Trust maintained effective internal control over financialreporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). HospitalityProperties Trust’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control overfinancial reporting is a process designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions 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 prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

In our opinion,management’s assessment that HospitalityProperties Trust maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all material respects,based on the COSO criteria.  Also, in ouropinion, Hospitality Properties Trustmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2006, based on****the COSO criteria.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the 2006 consolidated financial statements****of Hospitality Properties Trust and our report dated February 23,2007 expressed an unqualified opinionthereon.

/s/ Ernst & Young LLP

Boston, Massachusetts February 23, 2007

 

F-2

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**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATED BALANCE SHEET**

(dollars inthousands, except share data)
| ** **                                                                                                                                                    | ** ** | **As of December 31,**                                                                                                       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2006**                                                                                                                                    | ** ** | **2005** | ** ** |
| **Assets**                                                                                                                                                    | ** ** | ** **                                                                                                                                  | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                    | ** ** | ** **                                                                                                                                  | ** ** | ** ** | ** ** |
| Real estate properties,  at cost:                                                                                                                             |       |                                                                                                                                        |       |   |   |
| Land                                                                                                                                                          |       | $             584,199                                                      |       | $             537,389 |   |
| Buildings,  improvements and equipment                                                                                                                        |       | 3,457,818                                                                                                                                   |       | 3,089,304 |   |
|                                                                                                                                                          |       | 4,042,017                                                                                                                                   |       | 3,626,693 |   |
| Accumulated  depreciation                                                                                                                                     |       | (707,838                                                                                                                                    | )          | (613,007 | ) |
|                                                                                                                                                          |       | 3,334,179                                                                                                                                   |       | 3,013,686 |   |
| Cash and cash  equivalents                                                                                                                                    |       | 553,256                                                                                                                                     |       | 18,568 |   |
| Restricted cash  (FF&E escrow)                                                                                                                            |       | 27,363                                                                                                                                      |       | 29,063 |   |
| Other assets, net                                                                                                                                             |       | 42,665                                                                                                                                      |       | 53,290 |   |
|                                                                                                                                                          |       | $          3,957,463                                                                      |       | $          3,114,607 |   |
| **Liabilities and Shareholders’  Equity**                                                                                                                | ** ** | ** **                                                                                                                                  | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                    | ** ** | ** **                                                                                                                                  | ** ** | ** ** | ** ** |
| Revolving credit  facility                                                                                                                                    |       | $                      — |       | $               35,000 |   |
| Senior notes, net of  discounts                                                                                                                               |       | 1,196,130                                                                                                                                   |       | 921,606 |   |
| Mortgage payable                                                                                                                                              |       | 3,700                                                                                                                                       |       | 3,766 |   |
| Security deposits                                                                                                                                             |       | 185,366                                                                                                                                     |       | 185,304 |   |
| Dividends payable                                                                                                                                             |       | 1,914                                                                                                                                       |       | 1,914 |   |
| Accounts payable and  other                                                                                                                                   |       | 119,536                                                                                                                                     |       | 108,595 |   |
| Due to affiliate                                                                                                                                              |       | 3,277                                                                                                                                       |       | 2,967 |   |
| Total  liabilities                                                                                                                                            |       | 1,509,923                                                                                                                                   |       | 1,259,152 |   |
|                                                                                                                                                          |       |                                                                                                                                        |       |   |   |
| Commitments and  contingencies                                                                                                                                |       |                                                                                                                                        |       |   |   |
|                                                                                                                                                          |       |                                                                                                                                        |       |   |   |
| Shareholders’ equity:                                                                                                                                    |       |                                                                                                                                        |       |   |   |
| Preferred shares  of beneficial interest, no par value,                                                                                                       |       |                                                                                                                                        |       |   |   |
| 100,000,000  shares authorized:                                                                                                                               |       |                                                                                                                                        |       |   |   |
| Series B  preferred shares; 8 7/8% cumulative redeemable; 3,450,000 shares issued and  outstanding, aggregate liquidation preference $86,250                  |       | 83,306                                                                                                                                      |       | 83,306 |   |
| Common shares of  beneficial interest; $0.01 par value; 100,000,000 shares authorized,  86,284,251 and 71,920,578 shares issued and outstanding, respectively |       | 863                                                                                                                                         |       | 719 |   |
| Additional paid-in  capital                                                                                                                                   |       | 2,703,687                                                                                                                                   |       | 2,059,883 |   |
| Cumulative net income                                                                                                                                         |       | 1,380,111                                                                                                                                   |       | 1,211,072 |   |
| Cumulative preferred  distributions                                                                                                                           |       | (66,992                                                                                                                                     | )          | (59,336 | ) |
| Cumulative common  distributions                                                                                                                              |       | (1,653,435                                                                                                                                  | )          | (1,440,189 | ) |
| Total  shareholders’ equity                                                                                                                              |       | 2,447,540                                                                                                                                   |       | 1,855,455 |   |
|                                                                                                                                                          |       | $          3,957,463                                                                      |       | $          3,114,607 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

F-3

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**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATED STATEMENT OF INCOME**

(inthousands, except per share data)
| ** **                                                                                                | ** ** | **Year Ended December 31,**            | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                                             |       |                                                  |       |   |   |   |   |
| Hotel operating revenues                                                                                  |       | $  879,324                                  |       | $  682,541 |   | $  498,122 |   |
| Rental income:                                                                                            |       |                                                  |       |   |   |   |   |
| Minimum rent                                                                                              |       | 131,421                                               |       | 126,829 |   | 125,669 |   |
| Percentage rent                                                                                           |       | 5,697                                                 |       | 3,902 |   | 2,803 |   |
|                                                                                                      |       | 137,118                                               |       | 130,731 |   | 128,472 |   |
| FF&E reserve income                                                                                   |       | 20,299                                                |       | 19,767 |   | 18,147 |   |
| Interest income                                                                                           |       | 2,674                                                 |       | 1,373 |   | 627 |   |
| Total revenues                                                                                            |       | 1,039,415                                             |       | 834,412 |   | 645,368 |   |
|                                                                                                      |       |                                                  |       |   |   |   |   |
| **Expenses:**                                                                                             |       |                                                  |       |   |   |   |   |
| Hotel operating expenses                                                                                  |       | 618,334                                               |       | 476,858 |   | 333,818 |   |
| Interest (including amortization of deferred financing  costs of $2,584, $2,894 and $2,744, respectively) |       | 81,451                                                |       | 65,263 |   | 50,393 |   |
| Depreciation and amortization                                                                             |       | 144,404                                               |       | 131,792 |   | 114,883 |   |
| General and administrative                                                                                |       | 26,187                                                |       | 23,296 |   | 19,386 |   |
| Loss on asset impairment                                                                                  |       | —                                                |       | 7,300 |   | — |   |
| Total expenses                                                                                            |       | 870,376                                               |       | 704,509 |   | 518,480 |   |
| Income before  gain on sale of real estate                                                                |       | 169,039                                               |       | 129,903 |   | 126,888 |   |
| Gain on sale of real estate                                                                               |       | —                                                |       | — |   | 203 |   |
| Net income                                                                                                |       | 169,039                                               |       | 129,903 |   | 127,091 |   |
| Preferred distributions                                                                                   |       | 7,656                                                 |       | 7,656 |   | 9,674 |   |
| Excess of liquidation preference over carrying value  of preferred shares                                 |       | —                                                |       | — |   | 2,793 |   |
| Net income  available for common shareholders                                                             |       | $  161,383                                  |       | $  122,247 |   | $  114,624 |   |
|                                                                                                      |       |                                                  |       |   |   |   |   |
| Weighted average  common shares outstanding                                                               |       | 73,279                                                |       | 69,866 |   | 66,503 |   |
|                                                                                                      |       |                                                  |       |   |   |   |   |
| Basic and  diluted earnings per common share:                                                             |       |                                                  |       |   |   |   |   |
| Net income  available for common shareholders                                                             |       | $        2.20 |       | $        1.75 |   | $        1.72 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

F-4

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**HOSPITALITY PROPERTIES TRUST**

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

(inthousands, except share data)

 
| ** **                     | ** ** | **Preferred Shares** | ** ** | **Common Shares** | ** **                                        | ** **                   | ** ** | ** **            | ** ** | ** **                               | ** **    |
|--------------------------------|------------|---------------------------|------------|------------------------|---------------------------------------------------|------------------------------|------------|-----------------------|------------|------------------------------------------|---------------|
| ** **                     | ** ** | **Series A**         | ** ** | **Series B**      | ** **                                        | ** **                   | ** ** | ** **            | ** ** | ** **                               | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Number  of  Shares**    | ** ** | **Preferred  Shares**  | ** **                                        | **Number  of   Shares** | ** ** | **Preferred  Shares** | ** ** | **Cumulative  Preferred  Distributions** | ** **    | **Number  of   Shares** | ** ** | **Common  Shares** | ** ** | **Cumulative  Common  Distributions** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Cumulative  Net  Income** | ** ** | **Total** | ** ** |
| Balance at December 31, 2003   |       | 3,000,000                 |       |                   | $ 72,207                                     |                         |       | 3,450,000             |       |                                     | $ 83,306 |   |   |   | $ (40,092 | ) |   | 62,587,078 |   |   | $ 626 |   |   |   | $ (1,094,008 | ) |   |   | $ 1,669,411 |   |   |   | $   954,078 |   |   | $ 1,645,528 |   |
|                           |       |                      |       |                   |                                              |                         |       |                  |       |                                     |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares, net        |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | 4,600,000 |   |   | 46 |   |   |   | — |   |   |   | 192,638 |   |   |   | — |   |   | 192,684 |   |
| Common share grants            |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | 16,150 |   |   | — |   |   |   | — |   |   |   | 680 |   |   |   | — |   |   | 680 |   |
| Redemption of preferred shares |       | (3,000,000                | )          |                   | (72,207                                           | )                            |       | —                |       |                                     | —        |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | (2,793 | ) |   |   | — |   |   | (75,000 | ) |
| Net income                     |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 127,091 |   |   | 127,091 |   |
| Distributions                  |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | (11,588 | ) |   | — |   |   | — |   |   |   | (193,522 | ) |   |   | — |   |   |   | — |   |   | (205,110 | ) |
| Balance at December 31, 2004   |       | —                    |       |                   | —                                            |                         |       | 3,450,000             |       |                                     | 83,306        |   |   |   | (51,680 | ) |   | 67,203,228 |   |   | 672 |   |   |   | (1,287,530 | ) |   |   | 1,859,936 |   |   |   | 1,081,169 |   |   | 1,685,873 |   |
|                           |       |                      |       |                   |                                              |                         |       |                  |       |                                     |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares, net        |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | 4,700,000 |   |   | 47 |   |   |   | — |   |   |   | 199,186 |   |   |   | — |   |   | 199,233 |   |
| Common share grants            |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | 17,350 |   |   | — |   |   |   | — |   |   |   | 761 |   |   |   | — |   |   | 761 |   |
| Net income                     |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 129,903 |   |   | 129,903 |   |
| Distributions                  |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | (7,656 | ) |   | — |   |   | — |   |   |   | (152,659 | ) |   |   | — |   |   |   | — |   |   | (160,315 | ) |
| Balance at December 31, 2005   |       | —                    |       |                   | —                                            |                         |       | 3,450,000             |       |                                     | 83,306        |   |   |   | (59,336 | ) |   | 71,920,578 |   |   | 719 |   |   |   | (1,440,189 | ) |   |   | 2,059,883 |   |   |   | 1,211,072 |   |   | 1,855,455 |   |
|  Issuance of shares, net  |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | 14,300,000 |   |   | 143 |   |   |   | — |   |   |   | 641,009 |   |   |   | — |   |   | 641,152 |   |
| Common share grants            |       | —                    |       |                   | —                                            |                         |       | —                |       |                                     | —        |   |   |   | — |   |   | 63,673 |   |   | 1 |   |   |   | — |   |   |   | 2,795 |   |   |   | — |   |   | 2,796 |   |
| 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 |   |

** **

The accompanying notes are an integral part of thesefinancial statements.

F-5

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**HOSPITALITY PROPERTIES TRUST**

** **

**CONSOLIDATED STATEMENT OF CASH FLOWS**

(in thousands)
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  Flows From Operating Activities:**                                     |       |                                       |       |   |   |   |   |
| Net income                                                                     |       | $ 169,039                             |       | $ 129,903 |   | $ 127,091 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                  |       | 144,404                                    |       | 131,792 |   | 114,883 |   |
| Amortization of deferred financing costs as interest                           |       | 2,584                                      |       | 2,894 |   | 2,744 |   |
| Non-cash income                                                                |       | (3,082                                     | )          | (2,952 | ) | (2,952 | ) |
| FF&E reserve income and deposits                                           |       | (46,095                                    | )          | (32,338 | ) | (29,522 | ) |
| Gain on sale of real estate                                                    |       | —                                     |       | — |   | (203 | ) |
| Loss on asset impairment                                                       |       | —                                     |       | 7,300 |   | — |   |
| Changes in assets and liabilities:                                             |       |                                       |       |   |   |   |   |
| (Increase) decrease in other assets                                            |       | (2,488                                     | )          | (1,091 | ) | 2,262 |   |
| Increase in accounts payable and other                                         |       | 5,462                                      |       | 6,492 |   | 7,490 |   |
| Increase in due to affiliate                                                   |       | 1,729                                      |       | 306 |   | 1,325 |   |
| Cash provided by operating activities                                          |       | 271,553                                    |       | 242,306 |   | 223,118 |   |
|                                                                           |       |                                       |       |   |   |   |   |
| **Cash  Flows From Investing Activities:**                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate acquisitions                                                       |       | (320,776                                   | )          | (443,104 | ) | — |   |
| FF&E reserve fundings                                                      |       | (72,556                                    | )          | (45,390 | ) | (10,211 | ) |
| Real estate acquisition deposit                                                |       | —                                     |       | (10,000 | ) | — |   |
| Increase in security deposits                                                  |       | 2                                          |       | 10,000 |   | — |   |
| Proceeds from sale of real estate                                              |       | —                                     |       | 3,227 |   | 7,750 |   |
| Cash used in investing activities                                              |       | (393,330                                   | )          | (485,267 | ) | (2,461 | ) |
|                                                                           |       |                                       |       |   |   |   |   |
| **Cash  Flows From Financing Activities:**                                     |       |                                       |       |   |   |   |   |
| Proceeds from issuance of common shares, net                                   |       | 641,652                                    |       | 199,233 |   | 192,684 |   |
| Debt issuance, net of discount                                                 |       | 273,974                                    |       | 299,442 |   | — |   |
| Redemption of preferred shares                                                 |       | —                                     |       | — |   | (75,000 | ) |
| Draws on revolving credit facility                                             |       | 511,000                                    |       | 319,000 |   | 293,000 |   |
| Repayments of revolving credit facility                                        |       | (546,000                                   | )          | (356,000 | ) | (422,000 | ) |
| Deferred finance costs paid                                                    |       | (3,259                                     | )          | (7,339 | ) | (2 | ) |
| Distributions to preferred shareholders                                        |       | (7,656                                     | )          | (7,656 | ) | (11,588 | ) |
| Distributions to common shareholders                                           |       | (213,246                                   | )          | (201,045 | ) | (188,285 | ) |
| Cash provided by (used in) financing activities                                |       | 656,465                                    |       | 245,635 |   | (211,191 | ) |
| Increase in cash  and cash equivalents                                         |       | 534,688                                    |       | 2,674 |   | 9,466 |   |
| Cash and cash  equivalents at beginning of year                                |       | 18,568                                     |       | 15,894 |   | 6,428 |   |
| Cash and cash  equivalents at end of year                                      |       | $ 553,256                             |       | $   18,568 |   | $   15,894 |   |
|                                                                           |       |                                       |       |   |   |   |   |
| **Supplemental  Information:**                                                 |       |                                       |       |   |   |   |   |
| Cash paid for interest                                                         |       | $   78,157                  |       | $   56,597 |   | $   47,612 |   |
| Non-cash  operating activities:                                                |       |                                       |       |   |   |   |   |
| Net assets transferred in lease default                                        |       | —                                     |       | — |   | 4,920 |   |
| Non-cash  investing activities:                                                |       |                                       |       |   |   |   |   |
| Property managers deposits in FF&E reserve                                 |       | 44,946                                     |       | 31,056 |   | 27,296 |   |
| Purchases of fixed assets with FF&E reserve                                |       | (116,129                                   | )          | (76,860 | ) | (46,529 | ) |
| Non-cash  financing activities:                                                |       |                                       |       |   |   |   |   |
| Issuance of  common shares                                                     |       | 2,296                                      |       | 761 |   | 680 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

F-6

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**HOSPITALITYPROPERTIES TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(dollars in thousands,except share data)

**1. Organization**

Hospitality PropertiesTrust, or HPT, we or us, is a real estate investment trust, or REIT, organizedon February 7, 1995, under the laws of the State of Maryland, which invests inreal estate used in hospitality industries. At December 31, 2006, HPT, directlyand through subsidiaries, owned 310 properties.

At December 31, 2006, theproperties of HPT and its subsidiaries were leased to and or operated by thefollowing companies: Host Hotels & Resorts, Inc., or Host; MarriottInternational, Inc., or Marriott; InterContinental Hotels Group, plc, orInterContinental; Barcelo Crestline Corporation, or Barcelo Crestline; Global HyattCorporation, or Hyatt; Carlson Hotels Worldwide, or Carlson; and BRE/HomesteadVillage LLC, or Homestead. Hereinafter these hotel operators are sometimesreferred to as managers and/or tenants.

**2. Summary of SignificantAccounting Policies**

**Consolidation**.These consolidated financial statements include the accounts of HPT and itssubsidiaries, all of which are 100% owned directly or indirectly by HPT. Wehave determined that each of our taxable REIT subsidiaries, or TRSs, is avariable interest entity that must be consolidated because we are the primarybeneficiary. All intercompany transactions and balances have been eliminated.

**Real Estate Properties.**Real estate properties are recorded at cost. We allocate the cost of realestate acquired among building, land, furniture, fixtures and equipment, and,if applicable, the value of in-place leases, the fair market value of above orbelow market leases and customer relationships. Depreciation on real estateproperties is recognized on a straight line basis over estimated useful livesof up to 40 years for buildings and improvements and up to 12 years forpersonal property. The value of intangible assets is amortized over the term ofthe associated lease.

We regularly evaluatewhether events or changes in circumstances have occurred that could indicate animpairment in the value of long lived assets. If there is an indication thatthe carrying value of an asset is not recoverable, we estimate the projectedundiscounted cash flows of the related properties to determine if an impairmentloss should be recognized. The amount of impairment loss is determined bycomparing the historical carrying value of the asset to its estimated fairvalue. Estimated fair value is determined through an evaluation of recentfinancial performance and projected discounted cash flows of properties usingstandard industry valuation techniques. In addition to consideration ofimpairment upon the events or changes in circumstances described above, weregularly evaluate the remaining lives of its long lived assets. If estimatedlives are changed, the carrying values of affected assets are allocated overthe revised remaining lives.

**Cash and Cash Equivalents**.Highly liquid investments with original maturities of three months or less atdate of purchase are considered to be cash equivalents. The carrying amount ofcash and cash equivalents is equal to its fair value.

**Restricted Cash**.Restricted cash consists of amounts escrowed to fund periodic renovations andimprovements at our hotels.

**Deferred Financing Costs**.Costs incurred to borrow are capitalized and amortized as interest expense overthe term of the related borrowing. Deferred financing costs were $10,335 and$9,110 at December 31, 2006 and 2005, respectively, net of accumulatedamortization of $5,335 and $3,301, respectively, and are included in otherassets, net, in the accompanying consolidated balance sheet.

**Revenue Recognition.**We report hotel operating revenues for managed hotels in our consolidatedstatement of income. Hotel operating revenues, consisting primarily of room foodand beverage sales, are

F-7

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**HOSPITALITYPROPERTIES TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(dollars in thousands,except share data)

generally recognized when services are performed. Ourshare of the operating results of our managed hotels in excess of the minimumreturns due us, or additional returns, are generally determined annually. Hoteloperating income in excess of the minimum returns due to us under ourmanagement agreements is recognized as income at year end when allcontingencies are met and the income is earned. We recognized additionalreturns of $20,029, $13,568 and $1,397 in 2006, 2005 and 2004, respectively.

We recognize rentalincome from operating leases on a straight line basis over the life of thelease agreements. Percentage rent due to us under our leases is generallydetermined annually and is recognized as income at year end when allcontingencies are met and the rent is earned.

We own all the capitalexpenditure reserves, or FF&E reserve escrows, for hotels leased to ourTRSs. We do not report the amounts which are escrowed as FF&E reserves forour managed hotels as FF&E reserve income. Most of our third party leasesprovide that FF&E reserve escrows are owned by us. One third party leaseprovides that the FF&E reserve escrow is owned by the tenant and we have asecurity and remainder interest in that escrow account. When we own the escrowaccount, we report deposits by our third party tenants into the escrow accountas FF&E reserve income. When we have a security and remainder interest inthe escrow account, we do not report such tenant deposits as FF&E reserveincome.

**Per Common Share Amounts.**Per common share amounts are computed using the weighted average number ofcommon shares outstanding during the period. We have no common shareequivalents, instruments convertible into common shares or other dilutiveinstruments.

**Reclassifications.**Reclassifications have been made to the prior year’s financial statements toconform to the current year’s presentation.

**Use of Estimates.**The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect reported amounts. Actual results coulddiffer from those estimates.

**Segment Information.**As of December 31, 2006, we have only one operating segment, hotel investments.

**Income Taxes.**We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,as amended, or the Internal Revenue Code. As a REIT, we are generally notsubject to federal income taxes on our net real estate income provided wedistribute our taxable income to our shareholders and meet certain organizationand operating requirements. Even as a REIT, we are subject to taxes in non-U.S.jurisdictions in which we own real estate and in certain state and localjurisdictions. Further, we lease our managed hotels to our wholly owned TRSsthat, unlike most of our other subsidiaries, are taxable entities that togetherfile one consolidated tax return.

We account for incometaxes under the provisions of Statement of Financial Accounting Standards, orSFAS No. 109, “Accounting for Income Taxes”. Under this method, deferred taxassets and liabilities are determined based on the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to affecttaxable income. Valuation allowances are established when necessary to reducedeferred tax assets to the amounts that are expected to be realized. SFAS 109generally permits deferred tax assets and liabilities to be offset andpresented as a single amount except in cases where they are attributable todifferent tax paying components such as a REIT and its TRS.

At December 31, 2006 wehad a deferred tax liability of $9,333 related to the hotel we purchased inPuerto Rico in February 2005. Specifically, we acquired all of the outstandingstock of a C corporation that owned the hotel as its primary asset, which generally would cause us to succeed to theacquired corporation’s tax bases. However, for U.S tax purposes we madean election under Section 338(g) of the Internal Revenue Code to avoid beingtreated

F-8

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**HOSPITALITYPROPERTIES TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(dollars in thousands,except share data)

as the successor to the acquired corporation’s federalincome tax attributes, including its adjusted tax bases. We made no suchelection for Puerto Rico tax purposes. Under SFAS 109 we are required toestablish deferred tax assets and liabilities for the tax effects ofdifferences between assigned values in the purchase price allocation and thetax bases of assets and liabilities assumed in a purchase business combination.Because a REIT (or its subsidiary) is subject to tax in Puerto Rico, werecorded in purchase accounting a deferred tax liability for these basesdifferences at our Puerto Rico effective tax rate.

At December 31, 2006 and2005 our consolidated TRS had a net deferred tax asset, prior to any valuationallowance, of $10,527 and $2,314, respectively, which consists primarily of netoperating loss carryforwards and reserves for bad debts. Because of theuncertainty surrounding our ability to realize the future benefit of theseassets we have provided a 100% valuation allowance as of December 31, 2006 and2005. Accordingly, no provision or benefit for income taxes with respect to ourconsolidated TRS is reflected in the accompanying consolidated statement ofincome. As of December 31, 2006 our consolidated TRS had net operating losscarryforwards for federal income tax purposes of approximately $25,588 whichwill expire beginning in 2024, if they remain unused.

**New Accounting Pronouncement.**In June 2006, the Financial Accounting Standards Board issuedInterpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48.FIN 48 is effective for fiscal years beginning after December 15, 2006.  FIN 48 prescribes how we should recognize,measure and present in our financial statements uncertain tax positions thathave been taken or are expected to be taken in a tax return.  Pursuant to FIN 48, we can recognize a taxbenefit only if it is “more likely than not” that a particular tax positionwill 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 is measured as the largest amountthat is greater than 50% likely of being realized upon settlement.  We are currently evaluating the effect thatadoption of FIN 48 will have on our consolidated financial statements however,we do not anticipate the effect, if any, will be material.

**3. Shareholders’ Equity**

We reserved an aggregateof 3,128,791 shares of our common shares to be issued under the terms of the1995 Incentive Share Award Plan and the 2003 Incentive Share Award Plan,collectively referred to as the Award Plans. During the year ended December 31,2006, we awarded 25,950 common shares to our officers and certain employees ofour manager pursuant to these plans. In addition, our trustees are each awarded750 common shares annually as part of their annual fees. The shares awarded tothe trustees vest immediately. The shares awarded to our officers and certainemployees of our manager vest in three or five annual installments beginning onthe date of grant. Share awards are expensed over their vesting period. AtDecember 31, 2006, 2,799,306 of our common shares remain reserved for issuance underthe Award Plans.

On April 10, 2006, weissued 33,973 common shares to our manager, Reit Management & Research LLC,or RMR, in payment of an incentive fee of $1,418 for services rendered during2005 based upon a per common share price of $41.75, the closing price of ourcommon shares on the New York Stock Exchange, or NYSE, on that day.

On July 26, 2006, we sold2,000,000 of our common shares at a price of $43.66 per share in a publicoffering. On August 2, 2006, we sold an additional 300,000 common shares at aprice of $43.66 per share pursuant to an over allotment option granted to theunderwriters. Net proceeds from these sales, after underwriting and otheroffering expenses, were $95,821. We used these proceeds to reduce borrowingsoutstanding under our revolving credit facility.

On December 22, 2006, wesold 12,000,000 of our common shares at a price of $47.51 per share in a publicoffering.  Net proceeds from these sales,after underwriting and other offering expenses, were $545,331. On January 5, 2007,the underwriters exercised an option we granted them to purchase an additional1,800,000 of our common

F-9

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**HOSPITALITYPROPERTIES TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(dollars in thousands,except share data)

shares at a price of $47.51 per share to coveroverallotments. Net proceeds from this sale after underwriting and otheroffering expenses, were $81,884. We used these proceeds to partially fund theJanuary 31, 2007, acquisition of TravelCenters of America, Inc. (see Note 10.).

Each of our 3,450,000Series B cumulative redeemable preferred shares has a distribution rate of$2.21875 per annum, payable in equal quarterly amounts, and a liquidationpreference of $25 ($86,250 in aggregate). Series B preferred shares areredeemable at our option for $25 each plus accrued and unpaid distributions atany time on or after December 10, 2007.

Cash distributions paidor payable by us to our common shareholders for the years endedDecember 31, 2006, 2005 and 2004, were $2.95 per share, $2.90 per share and$2.88 per share, respectively. The characterization for income tax reportingpurposes of the distributions paid to our common shareholders in 2006, 2005 and2004 was 82.6%, 96.9% and 100.0% ordinary income, respectively, and 17.4%, 3.1%and 0.0% return of capital, respectively.

**4. Management Agreementsand Leases**

As of December 31, 2006,each of our 310 hotels is included in one of eleven combinations of hotels ofwhich 201 are leased to our TRSs and managed by an independent hotel operatingcompany and 109 are leased to third parties. We do not operate hotels. Ouragreements have initial terms expiring between 2010 and 2030. Each of theseagreements is for a combination of between 10 and 76 of our hotels. Theagreements contain renewal options for all, but not less than all, of theaffected properties, and the renewal terms total 20 to 40 years. Each agreementgenerally requires the third party manager or tenant to: (i) make payments tous of minimum returns or minimum rents; (ii) deposit a percentage of totalhotel sales into reserves established for the regular refurbishment of ourhotels, or FF&E reserves; and (iii) make payments to us of percentagereturns or rent of 5% to 10% of increases in gross hotel revenues overthreshold amounts and/or, in certain circumstances, make payments to our TRSsof additional returns based on increases in hotel operating income. Some of thethird party managers or tenants have provided deposits or guarantees to securetheir obligation to pay us.

As of December 31, 2006,our management agreements and leases provide for minimum return payments orminimum rents to be paid to us during the remaining initial terms as follows:

| 2007       |   | $         | 351,553 |   |
|------------|--------|-----------|---------|--------|
| 2008       |   | 351,587   |    |
| 2009       |   | 351,587   |    |
| 2010       |   | 351,587   |    |
| 2011       |   | 332,734   |    |
| Thereafter |   | 3,937,384 |    |
|       |   | 5,676,432 |    |

 

As of December 31, 2006,the average remaining initial terms of our leases and management agreements,weighted based on minimum returns or rents from third parties, wasapproximately 16.1 years, and the weighted average remaining total term,including renewal options which may be exercised, was 46.1 years.

Our hotel operatingagreements generally provide that, if necessary, we will provide our managersand tenants funding for capital improvements to our properties in excess ofamounts available in escrowed FF&E reserves. To the extent that we makesuch additional fundings, our annual minimum returns or rent generallyincreases by a percentage of the amount we fund. At December 31, 2006, we have commitmentsto provide fundings for capital improvements of $81,291 and $14,537 in 2007 and2008, respectively.

We settled all ouroutstanding claims with Prime Hospitality Corp., or Prime, a former manager,arising from its July 2003 lease default by entering a management agreement forour 24 AmeriSuites® hotels effective on 

F-10

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**HOSPITALITYPROPERTIES TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(dollars in thousands,except share data)

January 1, 2004. The balance of the retained depositsand the value of other property received from Prime pursuant to thissettlement, totaling approximately $44,281, is being amortized into our incomeon a straight line basis over the initial 15 year term of the managementcontract for the affected hotels. The unamortized balance of $35,425 atDecember 31, 2006, is included in accounts payable and other liabilities in theaccompanying consolidated balance sheet. In October 2004, Prime was sold to theBlackstone Group, or Blackstone. In January 2005, Blackstone sold theAmeriSuites® brand and transferred operating responsibilityfor these hotels to Hyatt.

**5. Real Estate Properties**

As of December 31, 2006,we owned 310 hotel properties. Our real estate properties, at cost, consistedof land of $584,199, buildings and improvements of $3,043,519 and furniture,fixtures and equipment of $414,299, as of December 31, 2006; and land of$537,389, buildings and improvements of $2,717,965 and furniture, fixtures andequipment of $371,339, as of December 31, 2005.

During 2006, 2005 and2004, we invested $72,555, $45,390 and $10,211 respectively, in our ownedhotels in excess of amounts funded from FF&E reserves. As a result of theseadditional investments, manager and tenant obligations to us for annual minimumreturn payments or minimum rents increased $6,981, $2,384 and $841 in 2006,2005 and 2004, respectively.

On January 6, 2006, wepurchased the Harbor Court Complex in the Inner Harbor area of Baltimore,Maryland for $78,000. The Harbor Court Complex is a mixed use developmentcomprised of the Harbor Court Hotel, a 72,042 square foot office building and a530 space seven story parking garage. The hotel has 195 guest rooms, including22 suites, 8,000 square feet of meeting space and a roof top fitness centerthat includes a tennis court, squash court, indoor pool, aerobics center andspa therapy rooms. We have agreed to invest $2,300 over the next two years inconnection with the rebranding of the Harbor Court Hotel as theInterContinental® Harbor Court Baltimore.

On January 25, 2006, wepurchased eight hotels for $166,200 with an effective date of January 20, 2006.We also agreed to fund $17,135 of capital improvements to these hotels duringthe three years following closing. The eight acquired hotels include five fullservice Crowne Plaza® hotels, one full service Holiday Inn Select® hotel and two Staybridge Suites® hotels; they have a total of 2,188rooms/suites and approximately 63,800 square feet of meeting space and arelocated in three states.

On April 6, 2006, wepurchased two Crowne Plaza® hotels, one inMiami, Florida and the other in Philadelphia, Pennsylvania, for $63,000 andagreed to fund $7,093 of capital improvements to these hotels during the threeyears following closing. These hotels have 749 rooms/suites and over 23,000square feet of meeting space.

On April 13, 2006, wepurchased a newly developed 150 room Staybridge Suites® hotel in Parsippany, New Jersey for $21,000.

At December 31, 2006,fourteen of our hotels were on leased land. In each case, the remaining term ofthe ground lease (including renewal options) is in excess of 42 years, and theground lessors are unrelated to us. Ground rent payable under nine of theground leases is generally calculated as a percentage of hotel revenues. Twelveof the fourteen ground leases require minimum annual rents ranging fromapproximately $102 to $556 per year; future rents under two ground leases havebeen pre-paid. Generally payments of ground lease obligations are made by ourmanagers or tenants. However, if a manager or tenant did not performobligations under a ground lease or elected not to renew any ground lease, wemight have to perform obligations under the ground lease or renew the groundlease in order to protect our investment in the affected hotel. Any pledge ofour interests in a ground lease may require the consent of the applicableground lessor and its lenders.

F-11

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**HOSPITALITYPROPERTIES TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(dollars in thousands,except share data)

**6. Indebtedness**

At December 31, 2006 and2005, our indebtedness was as follows:
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| 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                               |       | — |   |
| Unamortized  discounts               |       | (3,870                                | )          | (3,394 | ) |
| Total unsecured senior notes         |       | 1,196,130                             |       | 921,606 |   |
| Unsecured  revolving credit facility |       | —                                |       | 35,000 |   |
| Mortgage Note,  due 2011 at 8.3%     |       | 3,700                                 |       | 3,766 |   |
|                                 |       | $                                     | 1,199,830  |   | $ | 960,372 |   |

 

All of our senior notesare prepayable at any time prior to their maturity date at par plus accruedinterest plus a premium equal to a make whole amount, as defined, generallydesigned to preserve a stated yield to the noteholder. Interest on all of oursenior notes is payable semi-annually in arrears.

On August 22, 2006, weamended and extended our revolving credit facility with a group of institutionallenders. As a result of the amendment, the maturity date was extended toOctober 24, 2010 and we have the option to extend the facility for oneadditional year upon payment of an extension fee. Borrowings under the creditfacility can be up to $750,000 and the credit facility includes a feature underwhich the maximum amount available for borrowing may be increased to$1,500,000, in certain circumstances. Borrowings under our credit facility areunsecured. Funds may be drawn, repaid and redrawn until maturity, and noprincipal repayment is due until maturity. Interest on borrowings under thecredit facility is payable at LIBOR plus 55 basis points. As of December 31,2006, there was no outstanding balance on our credit facility and $750,000 wasavailable to be drawn. During 2006, 2005 and 2004, the weighted averageinterest rate on the amounts outstanding under our revolving credit facilitywas 5.6%, 4.2% and 2.8%, respectively.

Our revolving creditagreement and note indenture and its supplements contain financial covenantswhich, among other things, restrict our ability to incur indebtedness andrequire us to maintain financial ratios and a minimum net worth. We were incompliance with these covenants during the periods presented.

As of December 31, 2006and 2005, the estimated aggregate market values of our indebtedness were asfollows:
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Revolving credit  facility at 5.03% |       | $                                     | —     |   | $ | 35,000 |   |
| Senior Notes,  due 2008 at 7%       |       | 154,860                               |       | 157,635 |   |
| Senior Notes,  due 2010 at 9.125%   |       | 57,263                                |       | 59,126 |   |
| Mortgage Note,  due 2011 at 8.3%    |       | 4,279                                 |       | 4,470 |   |
| Senior Notes,  due 2012 at 6.85%    |       | 134,953                               |       | 137,521 |   |
| Senior Notes,  due 2013 at 6.75%    |       | 321,667                               |       | 327,832 |   |
| Senior Notes,  due 2015 at 5.125%   |       | 292,082                               |       | 295,539 |   |
| Senior Notes,  due 2016 at 6.3%     |       | 284,739                               |       | — |   |
|                                |       | $                                     | 1,249,843  |   | $ | 1,017,123 |   |

 

F-12

----

**HOSPITALITY PROPERTIES TRUST**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(dollars in thousands,except share data)

** **

**7. Transactions withAffiliates**

RMR originates andpresents investment opportunities to our board and provides management and administrativeservices to us. Our contract with RMR for such services continues from year toyear and is subject to annual approval by a board committee comprised of ourindependent trustees. RMR is compensated at an annual rate equal to 0.7% of ouraverage real estate investments, as defined, up to the first $250,000 of suchinvestments and 0.5% thereafter plus an incentive fee based upon increases incash available for distribution per share, as defined. As described above, on January 6, 2006, weentered into a management agreement with RMR to operate the office buildingcomponent of our Harbor Court Complex. Fees paid to RMR under thismanagement agreement are based on a formula, generally 3% of gross collectedrents as a property management fee and 5% of gross construction costs as aconstruction management fee. Investment and administrative related fees,excluding incentive fees, earned for the years ended 2006, 2005 and 2004 were$19,856, $17,730 and $15,812, respectively. Incentive fees are paid inrestricted common shares based on a formula. Incentive fees for 2006, 2005 and2004 were $1,487, $1,397 and $0, respectively. We expect to issue 29,928restricted common shares in satisfaction of the 2006 incentive fees in 2007.Management fees paid to RMR were $35 for the year ended 2006. RMR also provides the internal audit functionfor us and for other publicly traded companies to which it provides managementor other services. Our pro rata share of RMR’s costs in providing that functionfor the years ended 2006, 2005 and 2004 was $173, $112 and $126, respectively. Asof December 31, 2006, RMR and its affiliates owned 510,071 of our commonshares. RMR is beneficially owned by Barry M. Portnoy and his son, Adam D.Portnoy, our managing trustees. Prior to October 1, 2005, RMR was beneficiallyowned by Barry M. Portnoy and Gerard M. Martin. Effective October 1, 2005, Mr.Barry Portnoy and Mr. Adam Portnoy, acquired Mr. Martin’s ownership in RMR. Mr.Martin remains a director of RMR and served as one of our managing trusteesthrough January 2007.

**8. Concentration**

At December 31, 2006, our310 hotels contained 45,656 rooms and were located in 38 states in the UnitedStates, Ontario, Canada and Puerto Rico. Between 5% and 15% of our hotels, byinvestment, were located in each of California, Texas, Virginia, Georgia andFlorida. Our two hotels in Ontario, Canada and our hotel in Puerto Ricorepresent 1% and 3% of our hotels, by investment, respectively.

All of our third partymanagers or tenants are subsidiaries of other companies. The percentage of ourminimum return payments and minimum rents, for each combination of hotels isshown below, as of December 31, 2006.

| Manager / Tenant is a  Subsidiary of: | ** ** | **Number of   Properties** | ** ** | **Minimum Return /  Minimum Rent** | ** ** | **% of   Total** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------|------------|----------------------------|------------|
| Host (no. 1)                                                   |       | 53                                   |       | $                                                 | 58,010     |                       | 17         | % |
| InterContinental  (no. 2)                                      |       | 76                                   |       | 50,000                                            |       | 15                         | %          |
| Marriott (no. 3)                                               |       | 35                                   |       | 49,034                                            |       | 14                         | %          |
| InterContinental  (no. 3)                                      |       | 14                                   |       | 42,873                                            |       | 12                         | %          |
| InterContinental  (no. 1)                                      |       | 31                                   |       | 37,777                                            |       | 11                         | %          |
| Barcelo  Crestline (no. 4)                                     |       | 19                                   |       | 28,508                                            |       | 8                          | %          |
| Hyatt                                                          |       | 24                                   |       | 19,150                                            |       | 5                          | %          |
| Host (no. 2)                                                   |       | 18                                   |       | 18,854                                            |       | 5                          | %          |
| InterContinental  (no. 4)                                      |       | 10                                   |       | 18,336                                            |       | 5                          | %          |
| Homestead                                                      |       | 18                                   |       | 15,960                                            |       | 5                          | %          |
| Carlson                                                        |       | 12                                   |       | 11,535                                            |       | 3                          | %          |
| Total                                                          |       | 310                                  |       | $                                                 | 350,037    |                       | 100        | % |

 

F-13

----

**HOSPITALITY PROPERTIES TRUST**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(dollars in thousands,except share data)

Minimum return andminimum rent payments due to us under some of our management agreements andleases are supported by guarantees. The guarantee provided by Hyatt withrespect to the 24 hotels managed by Hyatt is limited to $50,000 ($46,458remaining at December 31, 2006). The guarantee provided by Carlson with respectto the 12 hotels managed by Carlson is limited to $40,000 ($40,000 remaining atDecember 31, 2006). The combined guarantee provided by InterContinental for the131 hotels managed or leased by InterContinental is limited to $125,000($115,922 remaining at December 31, 2006) and will expire if and when thehotels achieve stipulated operating results. The guarantee provided by Homesteadexpires if and when the hotels achieve stipulated operating results.

Each of our hotels isincluded in a combined management agreement or lease as described above.Operations at some of our managed hotels generated net financial results thatwere $3,542, $2,491and $10,470 less than the guaranteed minimum returns due usin 2006, 2005 and 2004, respectively. These amounts have been paid by the hotelmanagers or their guarantors and are reflected as a reduction of hoteloperating expenses in our consolidated statement of income.

**9. Selected QuarterlyFinancial Data (Unaudited)**
| ** **                                                   | ** ** | **2006**                 | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                   | ** ** | **First   Quarter** | ** ** | **Second   Quarter** | ** ** | **Third   Quarter** | ** ** | **Fourth   Quarter** | ** ** |
| Revenues                                                     |       | $                        | 239,716    |   | $ | 272,198 |   | $ | 269,115 |   | $ | 258,386 |   |
| Net income  available for common shareholders                |       | 33,319                   |       | 33,463 |   | 34,649 |   | 59,952 |   |
| Net income  available for common shareholders  per share (1) |       | .46                      |       | .47 |   | .47 |   | .79 |   |
| Distributions per  common share (2)                          |       | .73                      |       | .74 |   | .74 |   | .74 |   |
|                                                              |            |                          |            |  |  |  |  |  |  |  |  |  |  |

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

----

(1)                                  Thesum of per common share amounts for the four quarters differs from annual pershare amounts due to the required method of computing weighted average numberof shares in interim periods and rounding.

(2)                                  Amountsrepresent distributions declared with respect to the periods shown.Distributions are generally paid in the quarterly period following thequarterly period to which they relate.

 

**10. TravelCenters ofAmerica, Inc. Acquisition**

On January 31, 2007, wecompleted our acquisition of TravelCenters of America, Inc., or TravelCenters,for approximately $1,900,000, pursuant to the Agreement and Plan of Mergerdated as of September 15, 2006, as amended, among TravelCenters, us, one of ourformer subsidiaries and Oak Hill Capital Partners, L.P., solely in its capacityas the representative for the stockholders of TravelCenters. Upon completion ofthe acquisition, we restructured the business of TravelCenters and distributedall of the common shares of our former subsidiary, TravelCenters of America LLC,or TA, to our shareholders in a spin off transaction. The acquisition ofTravelCenters, the restructuring of the TravelCenters business and the spin offtransaction are collectively referred to herein as the TA Transaction.

F-14

----

**HOSPITALITY PROPERTIES TRUST**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(dollars in thousands,except share data)

 

As a part of the restructuring of TravelCenters which occurred inconnection with the TA Transaction, on January 31, 2007:

·                  TravelCentersbecame a subsidiary of our subsidiary, TA;

·                  certain real property interests of 146 travelcenters that were operated by TravelCenters and all trademarks, tradenames andcertain other assets used in connection with the travel center business with anestimated total value of approximately $1,680,000 were transferred tosubsidiaries of ours that were not owned by TA;

·                  TA became the owner of all of the working capitalof TravelCenters, including current assets (primarily consisting of cash,receivables and inventory) and current liabilities (primarily consisting oftrade payables and accrued liabilities);

·                  we contributed cash to TA so that the sum of itscurrent assets, net of current liabilities, was $200 million;

·                  TA became the owner of one travel center inOntario, Canada, the operator of two travel centers leased from owners otherthan us, the manager of one travel center for an owner other than us, thefranchisor of 13 travel centers owned and operated by third parties and theowner of certain other assets historically owned and used by TravelCenters;

·                  we entered into a lease of the 146 travel centerswe acquired and certain related assets to TA pursuant to the lease describedbelow; and

·                  TA commenced operating the travel center businessformerly conducted by TravelCenters.

After givingeffect to this restructuring, on January 31, 2007, we distributed all of theshares of TA to our common shareholders of record on January 26, 2007.Shareholders were entitled to receive one TA common share for every ten of ourcommon shares owned on the record date. Fractional shares were issued asnecessary.  TA’s common shares are listed on the American Stock Exchangeunder the symbol “TA”. We expect to record a charge of between $2,500 and$3,000 in the first quarter of 2007 related to costs incurred in connectionwith the spin off transaction.

The preliminaryallocation of the purchase price to the fair value of assets and liabilitiesacquired was as follows:

| Net assets and liabilities  transferred to TA in the restructuring |   | $         | 220,000   |   |
|--------------------------------------------------------------------|--------|-----------|-----------|--------|
| Real estate                                                        |   | 1,506,000 |      |
| Trademarks and  tradenames                                         |   | 139,000   |      |
| Other                                                              |   | 35,000    |      |
|                                                               |   | $         | 1,900,000 |   |

 

We are obtaining updatedvaluations of certain of the acquired assets and we may change our preliminarypurchase price allocation as a result of such valuations. In addition, we areevaluating the tax effects of the spin off and the final determination willdepend in part on the final purchase price allocation, however, we do not expectthat any tax liability would be material.

On January 22, 2007, weentered into a new $2,000,000 interim loan agreement, or the AcquisitionFacility, with a group of institutional lenders that became effectiveconcurrently with our acquisition of TravelCenters. The Acquisition Facility permits only a single borrowing, and thestated maturity date of the borrowing is January 30, 2008. Borrowings under theAcquisition Facility are unsecured. We are required to prepay a stated portionof outstanding borrowings under the Acquisition Facility upon the occurrence ofevents, including certain equity or debt issuances and asset sales. Theannual interest rate on borrowings under the Acquisition Facility is computedat LIBOR plus a

F-15

----

**HOSPITALITY PROPERTIES TRUST**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(dollars in thousands,except share data)

** **

premium,subject to adjustment based on changes to our credit ratings. The initialannual interest rate of the Acquisition Facility was 6.02%.

The totalconsideration we paid to acquire TravelCenters was approximately$1,900,000. The cash purchase price and the capitalization of TA werefunded primarily by a $1,400,000 borrowing under the Acquisition Facility andthe approximately $627,776 net proceeds from our issuance of 13,800,000 commonshares of beneficial interest in December 2006 and January 2007 (see Note 3.).

Our lease with TA is a “triplenet” lease, which requires TA to pay all costs incurred in the operation of theleased travel centers, including personnel, utilities, inventories, services tocustomers, insurance, real estate and personal property taxes and ground leasepayments. The annual minimum rent due to us under this agreement is $153,500,$157,000, $161,000, $165,000, $170,000 and $175,000 in each of the first fiveyears of the agreement and for the remaining years thereafter, respectively.Starting in 2012, the lease requires TA to pay us as additional rent 3% ofincreases in non-fuel gross revenues and 0.3% of increases in gross fuelrevenues at each leased travel center over 2011 gross revenue amounts.Percentage rent attributable to fuel sales is subject to a maximum each year calculatedby reference to changes in the consumer price index. Our lease agreement withTA expires on December 31, 2022.

                 We have agreed to provideup to $25,000 of funding annually for the first five years of the lease forcertain specified improvements to the leased travel centers. This funding iscumulative and may be drawn by TA from us in subsequent years until December2015. There will not be any adjustment in our minimum rent as we fund theseamounts. All improvements funded by us will be owned by us. TA is required tomaintain, at its expense, the leased travel centers in good order and repair,including structural and non-structural components, but may request that wefund amounts in addition to the $125,000, in return for minimum annual rentincreases equal to a minimum of 8.5% of the amount we fund.

**11. Subsequent Events**

On February 16, 2007, wesold 5,000,000 of our common shares at a price of $47.67 per share in a publicoffering. On February 23, 2007, we sold an additional 750,000 common shares ata price of $47.67 per share pursuant to an option we granted to theunderwriters. Net proceeds from these sales, after underwriting and otherestimated offering expenses, were $261,810. We used these proceeds to reduceborrowings under the Acquisition Facility.

On February 21, 2007, wesold 12,000,000 Series C cumulative redeemable preferred shares at a price of$25.00 per share in a public offering. Net proceeds from this offering, after underwriting and other estimatedoffering expenses, were $290,250. We used these proceeds to reduce borrowingsunder the Acquisition Facility. Each of our Series C preferred shares has adistribution rate of $1.75 per annum, payable in equal quarterly amounts, and aliquidation preference of $25 ($300,000 in aggregate). Series C preferredshares are redeemable at our option for $25 each plus accrued and unpaiddistributions at any time on or after February 15, 2012. On February 22, 2007,the underwriters partially exercised a 30 day option to purchase additionalSeries C preferred shares from us to cover overallotments. As a result, weexpect to issue 700,000 Series C preferred shares on February 28, 2007 and toreceive net proceeds, after underwriting and other estimated offering expenses,of $16,949.

 

F-16

----

 

**HOSPITALITY PROPERTIES TRUST**

**SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION**DECEMBER31, 2006(dollars in millions)
| ** **                   | ** ** | ** **                                   | ** ** | ** **                                | ** ** | ** **                                                                                     | ** ** | **Costs   Capitalized** | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **   | ** ** |
|------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------|------------|----------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **Initial   Cost to Company** | ** ** | **Subsequent to   Acquisition** | ** ** | **Gross Amount at which   Carried at Close of Period** | ** ** |
| ** **                   | ** ** | **Encumbrances**                             | ** ** | **Land**                                  | ** ** | **Buildings &   Improvements**                                                   | ** ** | **Improvements**             | ** ** | **Land**   | ** ** | **Buildings &   Improvements** | ** ** | **Total(1)** | ** ** |
| 71 Courtyards                |       | $                                            | —     |                                      | $          | 127                                                                                            |       | $                            | 643        |       | $          | 26                                           |       | $            | 127        |   | $ | 669 |   | $ | 796 |   |
| 76 Candlewood Hotels         |       | 4                                            |       | 86                                        |       | 457                                                                                            |       | 2                            |       | 86         |       | 459                                          |       | 545          |       |
| 37 Residence Inn             |       | —                                       |       | 69                                        |       | 334                                                                                            |       | 3                            |       | 69         |       | 337                                          |       | 406          |       |
| 35 Staybridge Suites         |       | —                                       |       | 91                                        |       | 353                                                                                            |       | 2                            |       | 91         |       | 355                                          |       | 446          |       |
| 24 AmeriSuites               |       | —                                       |       | 25                                        |       | 195                                                                                            |       | 8                            |       | 25         |       | 203                                          |       | 228          |       |
| 5 InterContinental           |       | —                                       |       | 32                                        |       | 264                                                                                            |       | 4                            |       | 32         |       | 268                                          |       | 300          |       |
| 18 Homestead Village         |       | —                                       |       | 28                                        |       | 107                                                                                            |       | —                       |       | 28         |       | 107                                          |       | 135          |       |
| 11 Crowne Plaza              |       | —                                       |       | 67                                        |       | 251                                                                                            |       | 1                            |       | 67         |       | 252                                          |       | 319          |       |
| 3 Marriott Full Service      |       | —                                       |       | 14                                        |       | 90                                                                                             |       | 1                            |       | 14         |       | 91                                           |       | 105          |       |
| 12 TownePlace Suites         |       | —                                       |       | 17                                        |       | 78                                                                                             |       | 1                            |       | 17         |       | 79                                           |       | 96           |       |
| 4 Radisson                   |       | —                                       |       | 7                                         |       | 81                                                                                             |       | 3                            |       | 7          |       | 84                                           |       | 91           |       |
| 5 Country Inns &  Suites |       | —                                       |       | 6                                         |       | 58                                                                                             |       | 5                            |       | 6          |       | 63                                           |       | 69           |       |
| 4 Holiday Inn                |       | —                                       |       | 10                                        |       | 37                                                                                             |       | —                       |       | 10         |       | 37                                           |       | 47           |       |
| 3 Park Plaza                 |       | —                                       |       | 2                                         |       | 22                                                                                             |       | 3                            |       | 2          |       | 25                                           |       | 27           |       |
| 2 SpringHill Suites          |       | —                                       |       | 3                                         |       | 15                                                                                             |       | —                       |       | 3          |       | 15                                           |       | 18           |       |
| Total (310 hotels)           |       | $                                            | 4          |                                      | $          | 584                                                                                            |       | $                            | 2,985      |       | $          | 59                                           |       | $            | 584        |   | $ | 3,044 |   | $ | 3,628 |   |

** **
| ** **                   | ** ** | ** **                             | ** ** | ** **                           | ** **         | ** **               | ** **         | **Life on which   Depreciation in   Latest Income** | ** **     |
|------------------------------|------------|----------------------------------------|------------|--------------------------------------|--------------------|--------------------------|--------------------|-----------------------------------------------------------------------------------|----------------|
| ** **                   | ** ** | **Accumulated   Depreciation(1)** | ** ** | **Date of   Construction** | ** **         | **Date   Acquired** | ** **         | **Statement is   Computed**                                             | ** **     |
| 71 Courtyards                |       | $                                      | (157       | )                                    | 1987  through 2000 |                     | 1995  through 2003 |                                                                              | 15  - 40 Years | ** ** |
| 76 Candlewood Hotels         |       | (74                                    | )          | 1996  through 2000                   |               | 1997  through 2003       |               | 15  - 40 Years                                                                    |           |
| 37 Residence Inn             |       | (80                                    | )          | 1989  through 2002                   |               | 1998  through 2005       |               | 15  - 40 Years                                                                    |           |
| 35 Staybridge Suites         |       | (58                                    | )          | 1989  through 2002                   |               | 1996  through 2006       |               | 15  - 40 Years                                                                    |           |
| 24 AmeriSuites               |       | (41                                    | )          | 1992  through 2000                   |               | 1997  through 2002       |               | 15  - 40 Years                                                                    |           |
| 5 InterContinental           |       | (12                                    | )          | 1924  through 1989                   |               | 2006                     |               | 15  - 40 Years                                                                    |           |
| 18 Homestead Village         |       | (24                                    | )          | 1996  through 1998                   |               | 1999                     |               | 15  - 40 Years                                                                    |           |
| 11 Crowne Plaza              |       | (8                                     | )          | 1971  through 1987                   |               | 2006                     |               | 15  - 40 Years                                                                    |           |
| 3 Marriott Full Service      |       | (19                                    | )          | 1972  through 1995                   |               | 1998  through 2001       |               | 15  - 40 Years                                                                    |           |
| 12 TownePlace Suites         |       | (15                                    | )          | 1997  through 2000                   |               | 1998  through 2001       |               | 15  - 40 Years                                                                    |           |
| 4 Radisson                   |       | (20                                    | )          | 1987  through 1990                   |               | 1996  through 1997       |               | 15  - 40 Years                                                                    |           |
| 5 Country Inns &  Suites |       | (14                                    | )          | 1987  through 1997                   |               | 1996  and 2005           |               | 15  - 40 Years                                                                    |           |
| 4 Holiday Inn                |       | (2                                     | )          | 1984  through 2001                   |               | 2006                     |               | 15  - 40 Years                                                                    |           |
| 3 Park Plaza                 |       | (6                                     | )          | 1987  through 1990                   |               | 1996                     |               | 15  - 40 Years                                                                    |           |
| 2 SpringHill Suites          |       | (2                                     | )          | 1997  through 2000                   |               | 2000  through 2001       |               | 15  - 40 Years                                                                    |           |
| Total (310 hotels)           |       | $                                      | (532       | )                                    |               |                     |               |                                                                              |           |   |

----

(1)           Excludes $414 ofpersonal property classified on our consolidated balance sheet as furniture,fixtures and equipment and $176 of related accumulated depreciation.

S-1

----

** **

**HOSPITALITY PROPERTIES TRUST**

**NOTES TO SCHEDULE III**DECEMBER31, 2005(dollars in thousands)

(A) The change intotal cost of properties for the period from January 1, 2004 to December 31,2006, is as follows:
| ** **                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Balance at  beginning of year                            |       | $        | 3,255,353  |     | $          | 2,817,608 |       | $ | 2,813,737 |   |
| Additions:hotel  acquisitions and   capital expenditures |       | 372,329  |       | 451,126  |       | 12,332    |       |
| Dispositions                                             |       | (95      | )          | (13,381  | )          | (8,461    | )          |
| Balance at close of  year                                |       | $        | 3,627,587  |     | $          | 3,255,353 |       | $ | 2,817,608 |   |

 

(B) The change in accumulated depreciation for theperiod from January 1, 2004 to December 31, 2006, is as follows:
| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at  beginning of year    |       | $        | 448,392    |     | $          | 379,594  |       | $ | 319,204 |   |
| Additions:  depreciation expense |       | 83,495   |       | 72,339   |       | 61,623   |       |
| Dispositions                     |       | (95      | )          | (3,541   | )          | (1,233   | )          |
| Balance at close of  year        |       | $        | 531,792    |     | $          | 448,392  |       | $ | 379,594 |   |

(C) The net tax basis forfederal income tax purposes of our real estate properties was $3,089,942 onDecember 31, 2006.

 

S-2

----

 

**Signatures**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon 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  27, 2007 |                             |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
| Signature              | ** ** | **Title**                         | ** ** | **Date**          |
|------------------------|------------|-----------------------------------|------------|-------------------|
|                   |       |                              |       |              |
| /s/ John G. Murray     |       | President and                     |       | February 27, 2007 |
| John G. Murray         |       | Chief Operating Officer           |       |              |
|                   |       |                              |       |              |
|                   |       |                              |       |              |
| /s/ Mark L. Kleifges   |       | Treasurer and Chief               |       | February 27, 2007 |
| Mark L. Kleifges       |       | Financial Officer                 |       |              |
|                   |       | (principal financial officer      |       |              |
|                   |       | and principal accounting officer) |       |              |
|                   |       |                              |       |              |
|                   |       |                              |       |              |
| /s/ Frank J. Bailey    |       | Trustee                           |       | February 27, 2007 |
| Frank J. Bailey        |       |                              |       |              |
|                   |       |                              |       |              |
|                   |       |                              |       |              |
| /s/ John L. Harrington |       | Trustee                           |       | February 27, 2007 |
| John L. Harrington     |       |                              |       |              |
|                   |       |                              |       |              |
|                   |       |                              |       |              |
| /s/ William A. Lamkin  |       | Trustee                           |       | February 27, 2007 |
| William A. Lamkin      |       |                              |       |              |
|                   |       |                              |       |              |
|                   |       |                              |       |              |
| /s/ Adam D. Portnoy    |       | Trustee                           |       | February 27, 2007 |
| Adam D. Portnoy        |       |                              |       |              |
|                   |       |                              |       |              |
|                   |       |                              |       |              |
| /s/ Barry M. Portnoy   |       | Trustee                           |       | February 27, 2007 |
| Barry M. Portnoy       |       |                              |       |              |

** **

 

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