Summary of ASHFORD HOSPITALITY TRUST INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere herein. This report contains forward-looking statements within the meaning of the federal securities laws. Ashford Hospitality Trust, Inc. (the "Company" or "we" or "our" or "us") cautions investors that any forward-looking statements presented herein, or which management may express orally or in writing from time to time, are based on management's beliefs and assumptions at that time. Throughout this report, words such as "anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate," "project," "should," "will," "result," and other similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution investors that while forward-looking statements reflect our good-faith beliefs at the time such statements are made, said statements are not guarantees of future performance and are affected by actual events that occur after such statements are made. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time those statements were made, to anticipate future results or trends.
Some risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, those discussed in our Form 10-K as filed with the Securities and Exchange Commission on February 29, 2008. These risks and uncertainties continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment where new risk factors emerge from time to time. It is not possible for management to predict all such risk factors, nor can management assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as indicators of actual results.
EXECUTIVE OVERVIEW
We are a real estate investment trust ("REIT") that commenced operations upon completion of our initial public offering and related formation transactions on August 29, 2003. At September 30, 2008, we owned interests in 104 hotel properties, which included direct ownership in 98 hotel properties and between 75-89% interests in six hotel properties through equity investments with joint venture partners. Of these hotels, 43 were acquired in 2007. As of September 30, 2008, 103 of the 104 hotels were classified in continuing operations. In addition, at September 30, 2008, we owned $211.5 million of mezzanine or first-mortgage loans receivable and a 25% interest in a joint venture with Prudential Real Estate Investors ("PREI") formed in January 2008 (the "PREI JV"). The joint venture owned $95.5 million of mezzanine loans at September 30, 2008. See Notes 3 and 6 of Notes to Consolidated Financial Statements.
Based on our primary business objectives and forecasted operating conditions, our key priorities and financial strategies include, among other things:
• acquiring hotels with a favorable current yield with an opportunity for appreciation,

• implementing selective capital improvements designed to increase profitability,

• directing our hotel managers to minimize operating costs and increase revenues,

• originating or acquiring mezzanine loans, and

• other investing activities that our Board of Directors deems appropriate.

During the first quarter of 2008, we changed our debt strategy to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue Per Available Room). In connection with

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this strategy, we executed a five-year interest rate swap on $1.8 billion of fixed-rate debt at a weighted average interest rate of 5.84% for a floating interest rate of LIBOR plus 2.64%. In conjunction with the swap execution, we sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the first three years. As a result of rising LIBOR rates caused by the global financial crisis, on September 30, 2008, we entered into an additional LIBOR interest rate cap for $800 million notional amount at 3.75% effective October 14, 2008 for a one year term for an upfront cost of $1.8 million. In connection with these transactions, we recorded other income of $3.4 million and $6.2 million in interest savings for the three and nine months ended September 30, 2008, respectively, and recorded net unrealized gains of $12.5 million and net unrealized losses of $38.9 million for the three and nine months ended September 30, 2008, respectively, for the change in the fair value of these derivatives.
During the nine months ended September 30, 2008, we completed a total of $325.1 million in asset sales, repaid $186.9 million in related mortgage debt. We originated/acquired mezzanine loans in an aggregate principal amount of $209.1 million.
In addition, under our share repurchase program, we purchased a total of 10.6 million shares of our common shares for an aggregate purchase price of $46.0 million during the nine months ended September 30, 2008.
CRITICAL ACCOUNTING POLICIES
We formed the PREI joint venture and entered into interest rate swap, cap and floor transactions during the nine months ended September 30, 2008. The accounting policies related to these transactions are as follows. There have been no other significant accounting policies employed during the nine months ended September 30, 2008.
Investment in Unconsolidated Joint Venture - Investment in a joint venture in which we have a 25% ownership interest is accounted for under the equity method of accounting by recording our initial investment and our percentage of interest in the joint venture's net income. The equity accounting method is employed due to the fact that we do not control the joint venture pursuant to the guidance provided by Emerging Issue Task Force ("EITF") Abstract No. 04-5.
Derivative Financial Instruments and Hedges - We enter into interest rate swap agreements to increase stability related to interest expense and to manage our exposure to interest rate movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps and caps within our cash flow hedging strategy. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room) and to enhance dividend coverage. Interest rate swaps involve the exchange of fixed-rate payments for variable-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when actual rates exceed the cap strike. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in the fair value are recognized in earnings. We record all derivatives on the balance sheet at fair value.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combinations. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing accounting principles until January 1, 2009. We expect SFAS 141R will affect our

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consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquisitions, if any, we consummate after the effective date.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements", effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, and will impact the recording of minority interest. We are currently evaluating the effects the adoption of SFAS No. 160 will have on our financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities", effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles," effective 60 days following the Securities and Exchange Commission's (the "SEC") approval of the Public Company Accounting Oversight Board ("PCAOB") amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. SFAS No. 162 identifies sources of accounting principles and framework for selecting the principles to be used in preparation of financial statements that are prepared in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP Hierarchy). We do not expect this statement will result in a change in current practice.

RESULTS OF OPERATIONS
   The following table summarizes the changes in key line items from our
consolidated statements of operations for the three and nine months ended
September 30, 2008 and 2007 ($ in thousands):

                                   Three Months Ended                                                                 Nine Months Ended
                                      September 30,                       Favorable/(Unfavorable)                       September 30,                       Favorable/(Unfavorable)
                                2008                 2007               $ Change             %Change              2008                 2007                $ Change             %Change
Total revenue               $  285,281           $  279,466           $     5,815               2.1 %         $  877,806           $  697,415           $    180,391              25.9 %
Total hotel expenses          (184,252 )           (185,678 )               1,426               0.8 %           (558,116 )           (447,157 )             (110,959 )           (24.8 )%
Property taxes,
insurance and other            (14,918 )            (14,248 )                (670 )            (4.7 )%           (45,776 )            (36,106 )               (9,670 )           (26.8 )%
Depreciation and
amortization                   (44,406 )            (33,137 )             (11,269 )           (34.0 )%          (126,405 )            (97,171 )              (29,234 )           (30.1 )%
Corporate general and
administrative                  (8,834 )             (8,069 )                (765 )            (9.5 )%           (24,903 )            (19,810 )               (5,093 )           (25.7 )%
Operating income                32,871               38,334                (5,463 )           (14.3 )%           122,606               97,171                 25,435              26.2 %
Equity in earnings of
unconsolidated joint
venture                            491                    -                   491                 - *              2,304                    -                  2,304                 - *
Interest income                    697                  776                   (79 )           (10.2 )%             1,594                2,249                   (655 )           (29.1 )%
Other income                     3,379                    -                 3,379                 - *              6,244                    -                  6,244                 - *
Interest expense and
amortization of loan
costs                          (39,870 )            (40,842 )                 972               2.4 %           (116,771 )            (95,283 )              (21,488 )           (22.6 )%
Write-off of loan
costs and exit fees             (1,226 )                  -                (1,226 )               - *             (1,226 )             (3,709 )                2,483              66.9 %
Unrealized gains
(losses) on
derivatives                     12,528                 (175 )              12,703                 - *            (38,861 )               (144 )              (38,717 )               - *
Income tax expense                (421 )             (2,116 )               1,695                 - *             (1,150 )               (762 )                 (388 )           (50.9 )%
Minority interest in
(earnings)/losses of
consolidated joint
ventures                          (123 )               (106 )                 (17 )           (16.0 )%            (2,907 )                417                 (3,324 )               - *
Minority interest in
(earnings)/losses of
operating partnership             (747 )                253                 1,000                 - *              1,987                 (741 )                2,740                 - *
Income/(loss) from
continuing operations            7,579               (3,876 )              11,455                 - *            (26,180 )               (802 )              (25,378 )               - *
Income from
discontinued
operations                       1,220                4,384                (3,164 )           (72.2 )%            14,660               33,885                (19,225 )           (56.7 )%
Net (loss)/income                8,799                  508                 8,291                 - *            (11,520 )             33,083                (44,603 )               - *

* Not meaningful.

In April 2007, we acquired a 51-property hotel portfolio ("CNL Portfolio") from CNL Hotels and Resorts, Inc. ("CNL"). Pursuant to the purchase agreement, we acquired 100% of 33 properties and interests ranging from 70% to 89% in 18 properties through existing joint ventures. In conjunction with the CNL transaction, we acquired the 15% remaining joint venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007 two other hotel properties previously owned by CNL (collectively, the "CNL Acquisition"). In December 2007, we completed an asset swap with Hilton Hotels Corporation ("Hilton"), whereby we surrendered our majority ownership interest in two hotel properties in exchange for Hilton's minority ownership interest in nine hotel properties. Net of

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subsequent sales and the asset swap, 43 of these hotels were included in our hotel property portfolio at September 30, 2008. In the second quarter of 2008, we finalized the allocation of the CNL Acquisition purchase price. These hotels are referred to as non-comparable hotels in the following discussions as we did not own these properties for the entire nine months ended September 30, 2007.
The 43 non-comparable hotels that are included in continuing operations contributed the following for the periods indicated (in thousands):

                                                Nine Months Ended
                                                  September 30,
                                               2008          2007
                   Total revenue            $ 449,699     $ 275,093
                   Total operating income   $  66,461     $  30,672

Of our total hotel properties, 103 hotels for the three months and 60 hotels included in income from continuing operations for the nine months ended September 30, 2008 and 2007 are referred in the following discussions as "comparable hotels" for we have owned these properties throughout the entire three and nine months for both 2008 and 2007. The following table illustrates the key performance indicators of the comparable hotels for the periods indicated:

                                           Three Months Ended           Nine Months Ended
                                              September 30,               September 30,
                                           2008          2007          2008          2007
 Total revenue (in thousands)            $ 275,953     $ 276,129     $ 410,837     $ 412,103
 Total operating income (in thousands)   $  32,612     $  43,454     $  65,355     $  76,887
 RevPAR (revenue per available room)     $  103.45     $  104.13     $  102.76     $  103.12
 Occupancy                                   74.46 %       76.36 %       72.89 %       75.87 %
 ADR (average daily rate)                $  138.94     $  136.36     $  140.98     $  135.91

Comparison of the Three Months Ended September 30, 2008 with Three Months Ended September 30, 2007
Revenue. Total revenue for the three months ended September 30, 2008 (the "current quarter") increased $5.8 million, or 2.1%, to $285.3 million from $279.5 million for the three months ended September 30, 2007 (the "prior year quarter"). The increase was substantially due to an increase of $6.4 million in interest income from mezzanine loans. Mezzanine loans originated and acquired after September 30, 2007 contributed a $6.9 million increase in interest income from notes receivable. Fees received from certain asset management consulting agreements we entered into after September 30, 2007 also contributed $131,000 to the increase. These increases were partially offset by an decrease of $789,000 in hotel revenue due primarily to lower occupancy rate experienced during the current quarter as compared to the prior year quarter.
Room revenues for the current quarter decreased $1.4 million, or 0.7%, compared to the prior year quarter, primarily due to a slight decrease in RevPAR from $104.13 to $103.45 driven by a 1.9% decrease in occupancy principally as a result of six hotel properties being under renovation. The effect of decreased occupancy is partially offset by a 1.9% increase in ADR. Excluding the six hotel properties under renovation, the remaining 97 comparable hotel properties' RevPAR increased from $105.06 in the prior year quarter to $105.31 in the current quarter driven by a 1.8% increase in ADR which effect is partially offset by a 1.2% decrease in occupancy. Due to the economic downturn, many hotels experienced lower occupancy rates, however, the lower occupancy is mostly offset by moderate increases in ADR which is consistent with industry trends. Certain hotels benefited from increasing or garnering more favorable group room-night contracts, eliminating less favorable contracts, and charging higher rates on transient business. Although occupancy increased at several hotels, renovations at certain hotels reduced room availability, which offset these increases.
Food and beverage revenues decreased $215,000 in the current quarter compared to the prior year quarter primarily due to a decline in banquet and catered events and lower occupancy.
Rental income from operating leases represents rental income recognized on a straight-line basis associated with a hotel property acquired in April 2007, which is leased to a third-party tenant on a triple-net basis.

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Other revenue for the current quarter increased $498,000 compared to the prior year quarter due to $1.9 million of furniture and fixture reserve income received from the third-party tenant on a triple-net lease which is partially offset by a decrease in other ancillary income as a result of lower occupancy.
Interest income from notes receivable increased $6.4 million for the current quarter compared to the prior year quarter. The increase is attributable to the acquisition and origination of new mezzanine loans during the nine months totaling $209.1 million in principal balance which accounted for $6.9 million of the increase. The increase was partially offset by the decline in LIBOR rates during the current quarter compared to prior year quarter.
The discount of $65.6 million on the mezzanine loan acquired for $98.4 million in July 2008 that is secured by 681 extended stay hotel properties with a principal amount of $164.0 million is being amortized over the life of the loan including extension periods. Based on trailing 12-month net cash flow from the portfolio, the debt service coverage ratio at closing through our position of approximately 1.63x, and our investment in the capital structure of approximately 75% to 80% loan to cost, or $82,142 per key, we expect full repayment of the principal amount at maturity and are recognizing the discount amount of $65.6 million over the potential four year life of the loan. There can be no assurance that our estimate of collectible amounts will not change over time or that they will be representative of the amounts we may actually collect. The risk is that changes in market conditions may prevent the borrower from repaying the loan amount in full and we may have to reverse some of the discount recognized in our income stream in prior periods which may have a material impact on our future financial position and results of operations.
Asset management fees and other increased $176,000 during the current quarter. The increase is primarily related to a sourcing fee of $42,000 from PREI JV and a consulting fee of $131,000 from a consulting agreement we entered into in December 2007 in connection with an asset swap transaction.
Hotel Operating Expenses. Hotel operating expenses, which consists of room expense, food and beverage expense, other direct expenses, indirect expenses, and management fees, decreased $1.4 million, or 0.8%, for the current quarter compared to the prior year quarter, primarily due to lower occupancy in the current quarter compared to prior year quarter. Management has instituted cost control measures to mitigate the effects of lower revenue.
Property Taxes, Insurance and Other. Property taxes, insurance, and other increased $670,000, or 4.7%, for the current quarter compared to the prior year quarter. Property taxes increased $1.1 million in the current quarter compared to the prior year quarter due to appraised property values increasing significantly at certain hotels in California and a property tax rate increase of 28% in Virginia. Property insurance decreased $402,000 in the current quarter compared to the prior year quarter primarily due to a decline in insurance expense as new insurance policies were re-negotiated. The effect of the decline in re-negotiated insurance premium rates was partially offset by a $457,000 expense recognized for the insurance deductibles related to seven hotel properties that were damaged by Hurricanes Fay and Ike.
Depreciation and Amortization. Depreciation and amortization increased $11.3 million, or 34.0%, for the current quarter compared to the prior year quarter. The increase in depreciation expense is partially attributable to major capital improvements made at several comparable hotels since September 30, 2007. The increase is also attributable to recording depreciation related to a significant amount of assets previously included in construction in progress that were placed into service. In addition, during the fourth quarter of 2007, we adjusted the allocation of the purchase price of the CNL Acquisition which resulted in adjustments to asset values being depreciated.
Corporate General and Administrative. Corporate general and administrative expense increased $765,000 for the current quarter compared to the prior year quarter. These expenses include non-cash stock-based compensation expense of $1.7 million for both the current quarter and the prior year quarter. Excluding the non-cash stock-based compensation, these expenses increased $750,000 in the current quarter compared to the prior year quarter primarily due to the increase in accounting fees and headcount as a result of the CNL Acquisition and write-off of certain costs related to potential deals that were not consummated.
Equity in Earnings of Unconsolidated Joint Venture. Equity in earnings of the PREI JV of $491,000 represents our 25% of the earnings from the PREI JV. The earnings are primarily generated from the interest earned on the mezzanine notes. At September 30, 2008, the PREI JV owned $95.5 million of mezzanine notes.
Interest Income. Interest income decreased $79,000 for the current quarter compared to the prior year quarter primarily due to the decline in short-term interest rates.

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Other Income. Other income of $3.4 million represents the interest income on the non-designated interest rate swap transaction that we entered into in March 2008.
Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs decreased $972,000 to $39.9 million for the current quarter from $40.8 million for the prior year quarter. The decrease is primarily . . .