Overview

We are a self-advised REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, upper-upscale, upscale and mid-scale segments of the hotel industry. We commenced operations in December 2004 when we completed our initial public offering ("IPO") and thereafter consummated the acquisition of six hotel properties ("initial properties").

Our hotel portfolio currently consists of nine full-service, upper-upscale, upscale and mid-scale hotels with 2,110 rooms, which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. We also own a 25% indirect non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with The Carlyle Group and we have a leasehold interest in a resort condominium facility in Wrightsville Beach, North Carolina.

As of March 31 2009, we owned the following hotel properties:

                                  Number
 Property                        of Rooms        Location        Date of Acquisition
 Crowne Plaza Hampton Marina          172   Hampton, VA          April 24, 2008
 Crowne Plaza Jacksonville            292   Jacksonville, FL     July 22, 2005
 Crowne Plaza Tampa Westshore         222   Tampa, FL            October 29, 2007
 Holiday Inn Brownstone               187   Raleigh, NC          December 21, 2004
 Holiday Inn Laurel West              207   Laurel, MD           December 21, 2004
 Hilton Philadelphia Airport          331   Philadelphia, PA     December 21, 2004
 Hilton Savannah DeSoto               246   Savannah, GA         December 21, 2004
 Hilton Wilmington Riverside          272   Wilmington, NC       December 21, 2004
 Sheraton Louisville Riverside        181   Jeffersonville, IN   September 20, 2006

 Total                              2,110

We conduct substantially all our business through our operating partnership, MHI Hospitality, L.P. We are the sole general partner of our operating partnership, and we own an approximate 65.0% interest in our operating partnership, with the remaining interest being held by the contributors of our initial properties as limited partners.

To qualify as a REIT, we cannot operate hotels. Therefore, our operating partnership leases our hotel properties to MHI Hospitality TRS, LLC, our TRS Lessee, which then engages a hotel management company to operate the hotels under a management contract. Our TRS Lessee has engaged MHI Hotels Services, LLC to manage our hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

Recent Portfolio Changes

On April 24, 2008, we completed the purchase of the 172-room Hampton Marina Hotel in Hampton, Virginia for approximately $7.8 million, including transfer costs. To facilitate the purchase, we assumed $5.75 million of existing indebtedness, which bore a rate of 6.50% and was set to mature on July 1, 2016. The remainder of the purchase price as well as closing costs was funded with borrowings on our credit facility. On June 30, 2008, we refinanced the indebtedness drawing approximately $5.5 million on a three-year $9.0 million mortgage loan from TowneBank with one 12-month extension. The loan requires monthly payments of interest and bears a rate of the greater of LIBOR plus 2.75% or 4.75%. The remainder of the proceeds, totaling approximately $3.5 million, funded a product improvement plan (or "PIP") for the hotel in connection with its Crowne Plaza licensing. In October 2008, the Company completed the hotel's conversion to the Crowne Plaza Hampton Marina.

On May 1, 2008, we re-opened the Sheraton Louisville Riverside after completing a $16.1 million renovation.

On March 6, 2009, we re-opened the Crowne Plaza Tampa Westshore after completing a $23.5 million renovation.

Key Operating Metrics

In the hotel industry, most categories of operating costs, with the exception of franchise, management, credit card fees and the costs of the food and beverage served, do not vary directly with revenues. This aspect of our operating costs creates operating leverage, whereby changes in sales volume disproportionately impact operating results. Room revenue is the most important category

of revenue and drives other revenue categories such as food, beverage and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

• Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

• Average daily rate or ADR, which is total room revenue divided by the number of rooms sold; and

• Revenue per available room or RevPAR, which is total room revenue divided by the total number of available rooms.

Results of Operations

The following table illustrates the actual key operating metrics for the three months ended March 31, 2009 and 2008 for the properties we owned during each respective reporting period ("actual" properties) as well as the six properties in our portfolio that were not under development and under our control during all of 2008 and the three months ended March 31, 2009 ("same-store" properties). Accordingly, the same store data does not reflect the performance of the Sheraton Louisville Riverside, the Crowne Plaza Tampa Westshore, or the Crowne Plaza Hampton Marina.

                                                Three           Three
                                               months          months
                                                ended           ended
                                              March 31,       March 31,
                                                2009            2008
              Actual Portfolio Metrics
              Occupancy %                           54.1 %          64.7 %
              ADR                            $    109.98     $    118.80
              RevPAR                         $     59.47     $     76.90
              Same-Store Portfolio Metrics
              Occupancy %                           59.7 %          64.7 %
              ADR                            $    111.01     $    118.80
              RevPAR                         $     66.24     $     76.90

Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended March 31, 2008

Revenue. Total revenue for the three months ended March 31, 2009 was approximately $15.5 million, approximately the same amount of total revenue for the three months ended March 31, 2008. Incremental revenue of approximately $1.8 million from our properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana, which were either not open or not in our portfolio during the three months ended March 31, 2008, offset losses in revenue at several of our established properties which have been severely affected by the economic downturn.

For the three months ended March 31, 2009, the six same-store properties experienced a 14.8% decrease in room revenue through a combination of a 6.6% decrease in ADR and a 7.8% decrease in occupancy as compared to the same period in 2008. Revenue increases at our properties in Wilmington, North Carolina and Laurel, Maryland were offset by decreases at our other properties, which have been adversely affected by the weakened economy.

Food and beverage revenues increased approximately $0.1 million to approximately $3.9 million for the three months ended March 31, 2009 compared to food and beverage revenues of approximately $3.8 million for the three months ended March 31, 2008. Contributions to food and beverage revenues from our newly-opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana were offset by decreases at our properties in Savannah, Georgia; Raleigh, North Carolina; and Philadelphia, Pennsylvania which have been adversely affected by the effects of the weakened economy.

Revenue from other operating departments for the three months ended March 31, 2009 increased approximately $0.2 million or 18.9% to approximately $1.1 million compared to other operating revenue of approximately $0.9 million for the three months ended March 31, 2008. Lease revenue from new restaurant tenants at the Hilton Wilmington Riverside and the Sheraton Louisville Riverside as well as other revenue from our newly opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana constituted most of the increase.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, and management fees, were approximately $12.9 million, an increase of approximately $0.3 million or 2.5% for the three months ended March 31, 2009 compared to approximately $12.6 million for the three months ended March 31, 2008. If not for our newly opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana, hotel operating expenses would have decreased approximately $2.0 million, or 16.2%, to approximately $10.5 million.

Rooms expense for the three months ended March 31, 2009 remained at the same level of rooms expense for the three months ended March 31, 2008, or approximately $3.1 million. Rooms expense for our newly opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana offset decreases in rooms expense at our established properties.

Food and beverage expenses for the three months ended March 31, 2009 decreased approximately $0.3 million to approximately $2.7 million compared to food and beverage expenses of approximately $3.0 million for the three months ended March 31, 2008.

Lower volumes of food and beverage sales as well as cost-cutting at our established properties more than offset the additional cost of food and beverage sales at our newly-opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana.

Indirect expenses at our properties for the three months ended March 31, 2009 increased approximately $0.6 million or 10.8% to approximately $6.9 million compared to indirect expenses of approximately $6.3 million for the three months ended March 31, 2008. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Indirect expenses related to our newly opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana were partially offset by cost-cutting measures at our established properties.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2009 increased approximately $0.5 million or 37.4% to approximately $1.9 million compared to depreciation and amortization expense of approximately $1.4 million for the three months ended March 31, 2008. The increase in depreciation and amortization was attributable to the renovations placed in service at the Hilton Wilmington Riverside, the Hilton Savannah DeSoto and the Sheraton Louisville Riverside, as well as the acquisition and renovation of the Crowne Plaza Hampton Marina and the opening of the Crowne Plaza Tampa Westshore.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended March 31, 2009 decreased approximately $0.1 million to approximately $0.9 million or 6.6% compared to corporate general and administrative expense of approximately $1.0 million for the three months ended March 31, 2008 due mostly to cost-cutting initiatives.

Interest Expense. Interest expense for the three months ended March 31, 2009 increased approximately $0.8 million or 72.9% to approximately $2.0 million compared to interest expense of approximately $1.2 million for the three months ended March 31, 2008, primarily due to higher levels of borrowings on the credit facility and higher levels of mortgage debt. The increased interest expense relates to borrowing used to fund the purchase and renovations of our newly-opened or recently acquired properties in Tampa, Florida; Hampton, Virginia; and Jeffersonville, Indiana as well as renovations at the Hilton Savannah DeSoto.

Equity in Joint Venture. Equity in joint venture for the three months ended March 31, 2009 represents our 25.0% share of the net loss from operations of the Crowne Plaza Hollywood Beach Resort. For the three months ended March 31, 2009, the hotel reported occupancy of 72.8%, ADR of $156.48 and RevPAR of $113.95.

Income Taxes. The income tax benefit for the three months ended March 31, 2009 increased approximately $0.4 million or 77.3% to approximately $0.9 million. The income tax benefit is primarily derived from the operations of our TRS Lessee. The net operating loss of our TRS Lessee for the three months ended March 31, 2009 was greater than the net operating loss for the three months ended March 31, 2008.

Net Loss. The net loss for the Company for the three months ended March 31, 2009 increased approximately $0.1 million or 28.1% to approximately $0.6 million as compared to the net loss of approximately $0.5 million for the three months ended March 31, 2008 as a result of the operating results discussed above.

Funds From Operations

Funds from Operations ("FFO") is used by industry analysts and investors as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income.

Management believes that the use of FFO, combined with the required GAAP presentations, has improved the understanding of the operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted net income for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company's real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies

may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

The following table reconciles net income to FFO for the three months ended March 31, 2009 and 2008 (unaudited):

                                                     Three Months      Three Months
                                                         Ended             Ended
                                                       March 31,         March 31,
                                                         2009              2008
  Net loss attributable to the Company               $    (619,071 )   $    (483,417 )
  Less noncontrolling interest                            (322,549 )        (260,724 )
  Add depreciation and amortization                      1,910,598         1,390,923
  Add equity in depreciation of joint venture              136,178           135,768
  Add/(Subtract) loss/(gain) on disposal of assets              -             (8,478 )

  FFO                                                $   1,095,156     $     774,072

  Weighted average shares outstanding                    6,957,915         6,930,045
  Weighted average units outstanding                     3,737,607         3,737,607

  Weighted average shares and units                     10,695,522        10,667,652

  FFO per share and unit                             $        0.10     $        0.07

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as repayments of indebtedness, is the operations of our hotels. Cash flow used in operating activities for the three months ended March 31, 2009 was approximately $2.3 million. Approximately $0.5 million of the cash used in operating activities related to working capital for and pre-opening expenses associated with the opening of the Crowne Plaza Tampa Westshore. We expect that the net cash provided by operations will be adequate to fund our continuing operations, debt service and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to our stockholders of at least 90% of our REIT taxable income, excluding net capital gains.

Investing Activities. Approximately $5.8 million was spent during the three months ended March 31, 2009 on renovations and capital improvements. Approximately $1.3 million was spent on renovations at the Hilton Savannah DeSoto and the Crowne Plaza Hampton Marina in order to bring those projects to completion. Approximately $4.2 million was spent on renovations at the Crowne Plaza Tampa Westshore, which opened in March 2009. In early 2009, we received reimbursements from our restricted reserves for replacement of furniture, fixtures and equipment of approximately $1.8 million.

Financing Activities. During the three months ended March 31, 2009, we borrowed $5.6 million on our credit facility and $0.8 on the mortgage on the Crowne Plaza Hampton Marina in order to fund the investing activities discussed above, as well as provide working capital. We also borrowed $4.75 million from the Carlyle Affiliate Lender for the purpose of improving liquidity.

Capital Expenditures

Since mid-2004, we have completed product improvement plans ("PIP"s) in connection with the licensing or re-licensing at eight of our nine properties. With the exception of a product improvement plan in connection with the re-licensing of the Holiday Inn Brownstone, whose franchise license expires in March 2011, we anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be lower than historical norms for our properties and the industry. Historically, we have aimed to maintain overall capital expenditures at 4.0% of gross revenue. However, in light of the current slowdown of the economy and in the interest of preserving capital, we aim to restrict capital expenditures to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations. We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to a product improvement plan should total 1.5% to 2.0% of gross revenues during the next 12 to 24 months.

During the next 12 months, we expect capital expenditures will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. With respect to three of our hotels, the reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures. We deposit an amount equal to 4.0% of gross revenue for both the Hilton Savannah DeSoto and Hilton Wilmington Riverside and 4.0% of room revenues for the Crowne Plaza Jacksonville Riverfront. Our intent for the capital expenditures at all hotels is to maintain overall capital expenditures at 4% of gross revenue.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of approximately $6.4 million, of which $0.8 million was in restricted reserve accounts and real estate tax escrows. As of March 31, 2009, our revolving credit facility, under which we may borrow up to $80.0 million, had an outstanding balance of approximately $78.8 million. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, as well as scheduled payments of principal and interest. We estimate that the final aspects of the renovations of our properties in Hampton, Virginia; Savannah, Georgia; and Tampa, Florida will require capital ranging from approximately $0.5 million to $2.0 million, which we expect will be funded by operations and by additional borrowings on our credit facility.

In light of the current weak economy and current market conditions, we recently undertook several measures to enhance our liquidity position. On February 9, 2009, we borrowed $4.75 million from the Carlyle Affiliate Lender. We have also amended our credit agreement with BB&T, as administrative agent and lender. We amended our agreement in February 2009 to, among other things, ease our total leverage ratio test by increasing our total maximum permitted leverage from 55.0% to 62.5% of the total value of our assets and establish new methodologies for valuing certain of our hotel properties through April 2010. We also sought to improve our liquidity position by adding our hotel property in Laurel, Maryland to the credit agreement's collateral pool against which we may borrow. The amendment also resulted in a modification of our dividend policy limiting our annual dividend distribution level to 90% of taxable income, consistent with the level necessary to maintain our REIT status until certain liquidity thresholds within the credit agreement are met. We entered into a subsequent amendment in May 2009 which modified the tangible net worth covenant with which we must comply. This amendment permits us to pay with respect to a given fiscal year a dividend in an amount minimally necessary to maintain our REIT status; provided that no dividend may be paid during the first three quarters of such fiscal year. We anticipate the amount of such a dividend will remain at 90% of taxable income. Notwithstanding this limitation, we will be permitted to pay the dividend declared on or about April 20, 2009. If certain liquidity thresholds and other conditions are met, we may be able to declare and pay additional cash dividends in any fiscal year.

Our ability to maintain existing levels of debt on our credit facility is dependent on our ability to comply with various financial covenants in our credit agreement. These covenants contemplate, among others, minimum levels of cash flow that ensure our ability to pay the interest due under the credit facility as well as sufficient levels of financial performance to support the valuations of the properties upon which we depend to comply with the leverage covenant and loan-to-value requirements of the credit agreement. In addition, our credit agreement imposes limitations on our ability to incur additional debt.

The general economic slowdown has significantly affected both our cash flows and operating profits and curtailed the margins by which we satisfy these and other financial covenants. Should the current economic slowdown and weakness in the lodging industry intensify and reduce our operating cash flows, financial performance or our financial condition below the levels necessary to comply with the financial covenants in our credit agreement, we would not have access to additional funding under the credit facility and may be required to make significant payments on all or a portion of the outstanding debt. Any inability to access our credit facility would severely constrain our operating flexibility and cash management options.

Our ability to make significant payment on our credit facility is dependent on our ability to raise additional capital. Current sources of capital are severely constrained and we may not be able to raise capital to replace or repay our credit facility if necessary. Sources of additional capital to fund any required reductions in the amount outstanding on the credit facility may include a combination of some or all of the following:

• The issuance of additional shares of our common stock;

• The issuance of additional units in the operating partnership;

• The disposition of core or non-core assets; and

• The sale or contribution of some of our wholly owned properties, development projects or development land to strategic joint ventures to be formed with unrelated investors, which would have the net effect of generating additional capital through such sale or contribution.

Insofar as the weakness in the economy has curtailed the margins by which we satisfy some of our loan covenants, our ability to fund acquisitions through additional borrowing also is reduced. Any significant acquisition of hotel properties in the short-term would require us to raise additional capital. Without additional capital, we currently have to forego additional acquisitions.

Beyond the funding of any required principal reduction on our existing credit facility, future acquisitions or development activity, our medium and long-term capital needs will generally include the retirement of maturing mortgage debt, amounts outstanding under our secured credit facility, and obligations under our tax indemnity agreements, if any. We remain committed to maintaining a flexible capital structure. Accordingly, in addition to the sources described above with respect to our short-term liquidity, we expect to meet our long-term liquidity needs through a combination of some or all of the following:

• The issuance by the operating partnership of the Company and/or their subsidiary entities of secured and unsecured debt securities to the extent permitted by our credit agreement;

• The issuance of additional shares of our common stock or preferred stock;

• The issuance of additional units in the operating partnership;

• The selective disposition of non-core assets; and

• The sale or contribution of some of our wholly owned properties, development projects or development land to strategic joint ventures to be formed with unrelated investors, which would have the net effect of . . .