Cautionary Statement Regarding Forward Looking Statements

All statements contained in this section that are not historical facts are based on current expectations. Words such as "believes", "expects", "anticipate", "intends", "plans" and "estimates" and variations of such words and similar words also identify forward-looking statements. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.

General

As of June 30, 2009, we owned interests in 77 hotels, located primarily in the eastern United States, including interests in 18 hotels owned through joint ventures. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a taxable REIT subsidiary ("TRS"), provided that the TRS engages an eligible independent contractor to manage the hotels. As of June 30, 2009, we have leased all of our hotels to a wholly-owned TRS, a joint venture-owned TRS, or an entity owned in part by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with eligible independent contractors, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS.

The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to hotel operations. The TRS is also subject to income tax on its earnings.

Outlook

During the six months ended June 30, 2009, the U.S. economy has been influenced by financial market turmoil, growing unemployment and declining consumer sentiment. The recessionary environment in 2009 has and will continue to negatively impact overall lodging demand and our results of operations and financial condition. For the three and six months ended June 30, 2009, we have seen decreases in Average Daily Rate ("ADR"), occupancy, and Revenue Per Available Room ("RevPAR") due to these economic factors as compared to the three and six months ended June 30, 2008.

The turmoil in the financial markets has caused credit to significantly tighten making it more difficult for hotel developers to obtain financing for development projects or for hotels with limited operating history. This could have a negative impact on the collectability of our portfolio of development loans receivable. We monitor this portfolio to determine the collectability of the loan principal and interest accrued. We will continue to monitor this portfolio on an on-going basis.

In addition, the tightening credit markets have made it more difficult to finance the acquisition of new hotel properties or refinance existing hotel properties that do not have a history of profitable operations. We monitor the maturity dates of our debt obligations and take steps in advance of the debt becoming due to extend or refinance the obligations. Please refer to "Item
3. Quantitative and Qualitative Disclosures About Market Risk" for a discussion of our debt maturities.

We believe that consumer and commercial spending and lodging demand will continue to decline in 2009. We do not anticipate an improvement in lodging demand until the current economic trends reverse course, particularly the expected continued weakness in the overall economy and the lack of liquidity in the credit markets. The general economic trends discussed above make it difficult to predict our future operating results; however, there can be no assurances that we will not experience further declines in hotel revenues, occupancy, ADR or RevPAR at our properties or experience defaults under our development loans for any number of reasons, including, but not limited to, greater than anticipated weakness in the economy, changes in travel patterns, the continued impact of the trends identified above and the limited availability of permanent financing to refinance or repay existing development loans, as well as other factors identified under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and other documents that we may file with the SEC in the future.

The following table outlines operating results for the Company's portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the three and six months ended June 30, 2009 and 2008:

CONSOLIDATED HOTELS:
                             Three Months Ended June 30,                            Six Months Ended June 30,
                                2009               2008          % Variance          2009              2008           % Variance

Rooms Available                    599,012          545,896              9.7 %       1,182,392         1,083,025              9.2 %
Rooms Occupied                     439,598          426,881              3.0 %         770,973           779,023             -1.0 %
Occupancy                            73.39 %          78.20 %           -4.8 %           65.20 %           71.93 %           -6.7 %
Average Daily Rate (ADR)   $        126.01     $     143.17            -12.0 %   $      124.50     $      138.92            -10.4 %
Revenue Per Available
Room (RevPAR)              $         92.48     $     111.96            -17.4 %   $       81.18     $       99.93            -18.8 %

Room Revenues              $    55,395,814     $ 61,118,556             -9.4 %   $  95,987,832     $ 108,223,779            -11.3 %
Hotel Operating Revenues   $    57,972,622     $ 63,709,401             -9.0 %   $ 100,543,815     $ 112,942,860            -11.0 %

The following table outlines operating results for the three months and six months ended June 30, 2009 and 2008, for hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and other noncontrolling interest holders.

UNCONSOLIDATED JOINT
VENTURES:
                             Three Months Ended June 30,                           Six Months Ended June 30,
                                2009               2008          % Variance          2009              2008          % Variance

Rooms Available                    239,670          239,694              0.0 %         476,730          479,388             -0.6 %
Rooms Occupied                     162,475          181,654            -10.6 %         297,473          344,889            -13.7 %
Occupancy                            67.79 %          75.79 %           -8.0 %           62.40 %          71.94 %           -9.5 %
Average Daily Rate (ADR)   $        132.28     $     150.59            -12.2 %   $      129.87     $     144.51            -10.1 %
Revenue Per Available
Room (RevPAR)              $         89.68     $     114.12            -21.4 %   $       81.04     $     103.96            -22.1 %

Room Revenues              $    21,492,644     $ 27,354,813            -21.4 %   $  38,633,616     $ 49,839,014            -22.5 %
Total Revenues             $    27,575,096     $ 35,516,710            -22.4 %   $  50,028,757     $ 65,324,156            -23.4 %

RevPAR for the three and six months ended June 30, 2009 decreased 17.4% and 18.8%, respectively, for our consolidated hotels and decreased 21.4% and 22.1% for the three and six months ended June 30, 2009, respectively, for our unconsolidated hotels when compared to the same period in 2008. This decrease in RevPAR has been caused by decreases in both occupancy and ADR and is primarily due to deteriorating economic conditions in 2009, as discussed above.

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2009 TO JUNE 30, 2008
(dollars in thousands, except per room and per share data)

Revenue

Our total revenues for three months ended June 30, 2009 consisted of hotel operating revenues, interest income from our development loan program, land lease revenue, and other revenue. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly-owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating revenues decreased $5,736 or 9.0%, from $63,709 for the three months ended June 30, 2008 to $57,973 for the same period in 2009. This decrease resulted from decreases in both ADR and occupancy. ADR decreased 12.0% decrease in ADR from $143.17 per room for the three months ended June 30, 2008 to $126.01 per room during the same period in 2009. Our occupancy rate decreased from approximately 78.2% during the three months ended June 30, 2008 to approximately 73.4% for the same period in 2009.

The decrease in hotel operating revenues was only partially offset by the additional hotel operating revenues attributed to the acquisitions consummated since June 30, 2008. We acquired interests in the following three consolidated hotels since June 30, 2008:

                                                     Acquisition
             Brand                Location               Date          Rooms

      nu Hotel               Brooklyn, NY             7/7/2008*              93
      Hampton Inn &
      Suites                 Smithfield, RI            8/1/2008             101
                             TriBeCa, New York,
      Hilton Garden Inn      NY                        5/1/2009             151

*The property was purchased on 1/14/2008, but did not open for business until 7/7/2008.

We invest in hotel development projects by providing secured first mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Interest income is earned on our development loans at rates ranging between 10.0% and 20.0%. Interest income from development loans receivable was $2,166 for the three months ended June 30, 2009 compared to $2,153 for the same period in 2008.

As hotel developers are engaged in constructing new hotels or renovating existing hotels the hotel properties are typically not generating revenue. It is common for the developers to require construction type loans to finance the projects whereby interest incurred on the loan is not paid currently; rather it is added to the principal borrowed and repaid at maturity. On June 30, 2009, we amended four development loans, with an aggregate principal balance of $40,000 prior to the amendment, to allow the borrower to elect, quarterly, to pay accrued interest in-kind by adding the accrued interest to the principal balance of the loan. As a result, $3,310 in accrued interest on these loans was added to principal.

Of the $68,810 in development loans receivable outstanding as of June 30, 2009, $15,000, or 21.8%, is invested in hotels that are operating and generating revenue; $32,402, or 47.1%, is invested in hotel construction projects with significant progress made toward completion; and $21,408, or 31.1%, is invested in hotel development projects that are in the early phase of development that includes land acquisition and site preparation. We monitor our development loan portfolio for indications of impairment considering the current economic environment, the borrowers' access to other sources of financing to complete their hotel development projects, and the borrowers ability to repay amounts owed to us through the operation or eventual sale of the properties being financed by our loans receivable. Based on our reviews of each of the development loans receivable, we have concluded, as of June 30, 2009, that no impairment exists, as we believe that all amounts due under each loan will be fully realized.

We own parcels of land which are being leased to hotel developers, some of which are owned in part by certain executives and affiliated trustees of the Company. Our net investment in these parcels is approximately $23,366. Each land parcel is leased at a minimum rental rate of 10% of our net investment in the land. Additional rents are paid by the lessee for the principal and interest on the mortgage, real estate taxes and insurance. During the three months ended June 30, 2009, we recorded $1,328 in land lease revenue from these parcels. We incurred $732 in expense related to these land leases resulting in a contribution of $596 to our operating income during the three months ended June 30, 2009. These leases contributed $645 to our operating income during the three months ended June 30, 2008. The land in which we had a net investment of $9,882 is to be transferred to its lessee as part of the consideration for our acquisition of the Hilton Garden Inn, TriBeCa, New York, NY. This will decrease our net investment in land leases to $13,484 going forward.

Other revenue consists primarily of fees earned for asset management services provided to properties owned by certain of our unconsolidated joint ventures. These fees are earned as a percentage of the revenues of the unconsolidated joint ventures' hotels. Other revenues decreased $193, from $342 for the three months ended June 30, 2008 to $149 during the three months ended June 30, 2009. The decrease in other revenue was due primarily to decreases in asset management fees as a result of declining revenues at the hotels owned by certain of our unconsolidated joint ventures.

Expenses

Total hotel operating expenses decreased $2,185, or 6.4%, to approximately $31,791 for the three months ended June 30, 2009 from $33,976 for the three months ended June 30, 2008. As a result of declining hotel operating revenues, our hotel operators implemented cost reduction and cost containment initiatives to reduce hotel operating expenses. Decreases in our hotel operating expenses resulting from lower occupancies and our operators cost reduction initiatives were partially offset by increases in hotel operating expenses due to the acquisitions consummated since June 30, 2008, as mentioned above. The acquisitions also resulted in a $1,395, or 14.7%, increase in depreciation and amortization from $9,505 for the three months ended June 30, 2008 to $10,900 for the three months ended June 30, 2009. Real estate and personal property tax and property insurance increased $574, or 20.4%, in the three months ended June 30, 2009 when compared to the same period in 2008 primarily from increases in assessments and rates at certain of the hotel properties. Insurance expense remained flat for the two periods.

As a result of cost reduction and cost containment initiatives put in place at a corporate level, general and administrative expense decreased $104, or 7.0%, from $1,478, for the three months ended June 30, 2008 to $1,374 for the three months ended June 30, 2009. Non-cash stock based compensation expense increased $186 when comparing the three months ended June 30, 2009 to the same period in 2008 due to the vesting of a larger number of restricted shares in 2009 when compared to 2008.

Unconsolidated Joint Venture Investments

Loss from unconsolidated joint venture investments for the three months ended June 30, 2009 was approximately $395 compared to income of $1,360 for the same period in 2008. The loss from unconsolidated joint venture investments was the result of deteriorating revenues in the hotels owned by our unconsolidated joint ventures. The operating factors impacting the results of our hotels owned by our unconsolidated joint ventures are consistent with those described above in the discussion of our consolidated hotels, and include declining ADR, occupancy and RevPAR.

Net Loss

Net loss applicable to common shareholders for the three months ended June 30, 2009 was $167 compared to net income applicable to common shareholders of $7,025 for the same period in 2008.

Operating income for the three months ended June 30, 2009 was $12,598 compared to operating income of $18,492 during the same period in 2008. The $5,894, or 31.9%, decrease in operating income was primarily the result of declining hotel operating revenues which were only partially offset by decreases in hotel operating expenses.

Interest expense increased $893 from $10,058 for the three months ended June 30, 2008 to $10,951 for the three months ended June 30, 2009. The increase in interest expense is due primarily to the increase in weighted average balance outstanding on our line of credit for the three months ended June 30, 2009 when compared to the same period in 2008. The increase in interest expense due to larger weighted average balances on our line of credit has only been partially offset by declines in the prevailing interest rates on our variable rate debt.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2009 TO JUNE 30, 2008
(dollars in thousands, except per room and per share data)

Revenue

Hotel operating revenues decreased $12,399, or 11.0%, from $112,943 for the six months ended June 30, 2008 to $100,544 for the same period in 2009. This decrease was primarily the result of a 10.4% decrease in ADR from $138.92 per room for the six months ended June 30, 2008 to $124.50 per room during the same period in 2009. In addition, our occupancy rate decreased from 71.93% during the six months ended June 30, 2008 to 65.20% for the same period in 2009. The decrease in hotel operating revenues was only partially offset by additional hotel operating revenues attributed to the acquisitions consummated since June 30, 2008 noted above.

Interest income from development loans receivable was $4,563 for the six months ended June 30, 2009 compared to $4,173 for the same period in 2008. The average balance of development loans receivable outstanding during the six months ended June 30, 2009 was higher than the average balance outstanding during the same period in 2008. This resulted in a $390, or a 9.3%, increase in interest income.

During the six months ended June 30, 2009, we recorded $2,649 in land lease revenue from these parcels. We incurred $1,456 in expense related to these land leases resulting in a contribution of $1,193 to our operating income during the six months ended June 30, 2009. These leases contributed $1,230 to our operating income during the six months ended June 30, 2008.

Other revenues decreased $229, from $594 for the six months ended June 30, 2008 to $365 during the six months ended June 30, 2009. The decrease in other revenue was due primarily to decreases in asset management fees as a result of declining revenues at the hotels owned by certain of our unconsolidated joint ventures.

Expenses

Total hotel operating expenses decreased $3,870, or 6.0%, to approximately $60,141 for the six months ended June 30, 2009 from $64,011 for the six months ended June 30, 2008. As a result of declining hotel operating revenues, our hotel operators implemented cost reduction and cost containment initiatives to reduce hotel operating expenses. Decreases in our hotel operating expenses resulting from lower occupancies and cost reduction initiatives implemented by our operators were partially offset by increases in hotel operating expenses due to the acquisitions consummated since June 30, 2008 mentioned above. The acquisitions also resulted in a $2,882, or 15.5%, increase in depreciation and amortization from $18,596 for the six months ended June 30, 2008 to $21,478 for the six months ended June 30, 2009. Real estate and personal property tax and property insurance increased $751, or 12.8%, in the six months ended June 30, 2009 when compared to the same period in 2008 primarily from increases in assessments and rates at certain of the hotel properties. Insurance expense remained flat for the two periods.

As a result of cost reduction and cost containment initiatives put in place at a corporate level, general and administrative expense decreased $183, or 6.0%, from $3,036 for the six months ended June 30, 2008 to $2,853 for the six months ended June 30, 2009. Non-cash stock based compensation expense increased $294 when comparing the three months ended June 30, 2009 to the same period in 2008 due the vesting of a larger number of restricted shares in 2009 when compared to 2008.

Unconsolidated Joint Venture Investments

Loss from unconsolidated joint venture investments for the six months ended June 30, 2009 was approximately $1,724 compared to income of $622 for the same period in 2008. The loss from unconsolidated joint venture investments was the result of deteriorating revenues in the hotels owned by our unconsolidated joint ventures. The operating factors impacting the results of our hotels owned by our unconsolidated joint ventures are consistent with those described above in our discussion of our consolidated hotel, and include declining ADR, occupancy and RevPAR.

Net Loss

Net loss applicable to common shareholders for six months ended June 30, 2009 was $9,997 compared to net income applicable to common shareholders of $2,947 for the same period in 2008.

Operating income for the six months ended June 30, 2009 was $14,036 compared to operating income of $26,321 during the same period in 2008. The $12,285, or 46.7%, decrease in operating income was primarily the result of declining hotel operating revenues which were only partially offset by decreases in hotel operating expenses.

Interest expense increased $1,018 from $20,308 for the six months ended June 30, 2008 to $21,326 for the six months ended June 30, 2009. The increase in interest expense is due primarily to the increase in weighted average balance outstanding on our line of credit for the six months ended June 30, 2009 when compared to the same period in 2008. The increase in interest expense due to larger weighted average balances on our line of credit has only been partially offset by declines in the prevailing interest rates on our variable rate debt.

LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)

Debt and Equity Offerings

The current recession and related financial crisis has resulted in deleveraging attempts throughout the global financial system. As banks and other financial intermediaries reduce their leverage and incur losses on their existing portfolio of loans, the ability to originate or refinance existing loans has become very restrictive for all borrowers, regardless of balance sheet strength. As a result, it is a very difficult borrowing environment, even for those borrowers that have strong balance sheets. While we maintain a portfolio of what we believe to be high quality assets and we believe our leverage to be at acceptable levels, the market for new debt origination and refinancing of existing debt remains very challenging and there is little visibility on the length of debt terms, the loan to value parameters and loan pricing on new debt originations.

We have a debt policy that limits our indebtedness at the time of acquisition to less than 67% of the fair market value for the hotels in which we have invested. However, our organizational documents do not limit the amount of indebtedness that we may incur and our Board of Trustees may modify our debt policy at any time without shareholder approval. We intend to repay indebtedness incurred under the line of credit from time to time, for acquisitions or otherwise, out of cash flow and from the proceeds of issuances of additional common shares and other securities.

Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company's ability to generate cash flow and positive returns on its investments.

Subsequent to June 30, 2009, we completed the refinancing of mortgage loans with an aggregate principal balance of $19,750 that was originally scheduled to mature in 2009. In connection with this refinancing activity, we repaid principal of $1,750 and the remaining $18,000 principal balance was refinanced at favorable terms when compared to the original loans. These loans will now mature in 2011. See "Note 13 - Subsequent Events" for more information regarding the refinancing of these loans. In addition to refinancing mortgage loans, we sold four hotel properties subsequent to June 30, 2009. As a result of these dispositions we have been relieved of $18,708 in mortgage loan obligations; $12,732 of which was due in 2009. See "Note 12 - Discontinued Operations" for more information regarding the disposition of these properties. Finally as part of the consideration for our acquisition of the Hilton Garden Inn, TriBeCa, New York, NY, we are transferring a parcel of land to the seller, who will assume a $12,100 mortgage loan encumbering the parcel. This mortgage loan matures in 2009 and upon assumption of this mortgage loan, we will have no further obligations with respect to this debt. The refinancing, the sale of properties, and the transfer of land has the aggregate effect of eliminating our 2009 maturities, leaving only principal amortization due for the remainder of the year. Also, subsequent to June 30, 2009, we have leveraged some of our existing unencumbered assets as an additional source of funds and used $13,000 in proceeds to pay down our line of credit. See "Note 13 - Subsequent Events" for more information regarding the mortgage loans we have entered into with respect to certain properties.

We will continue to monitor our debt maturities to manage our liquidity needs. However, no assurances can be given that we will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms. We currently expect that cash requirements for all debt coming due on or before December 31, 2009 that is not refinanced by our existing lenders will be met through a combination of refinancing the existing debt with new lenders and draws on the remaining capacity on our existing credit facility.

During the quarter ended June 30, 2009, we entered into a sales agreement with an investment bank which allows us to sell Class A common shares in "at the market" offerings and in privately negotiated transactions. The sales agreement allows us to instruct the investment bank to solicit sales of our common shares in quantities and at prices we determine. The agreement also allows us discretion to suspend the solicitation of sales of our common shares. During the three months ended June 30, 2009, we sold 72,500 shares and subsequent to June 30, 2009 we have sold an additional 133,000 shares. Net proceeds from these sales have been $517 after the payment of fees but before expenses of the program.

On August 4, 2009, we sold 5,700,000 Class A common shares of beneficial interest at a price of $2.50 per share and granted the option to buy up to an additional 5,700,000 common shares at a price of $3.00 per share. The option is exercisable through August 4, 2014. If at any time after August 4, 2011 the . . .