Certain statements appearing in this Item 7 are forward-looking statements within the meaning of the federal securities laws. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. See "CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS" for additional information regarding our forward-looking statements.

BACKGROUND

As of December 31, 2012, we owned interests in 64 hotels in major urban gateway markets including New York, Washington, Boston, Philadelphia, Los Angeles and Miami, including 57 wholly-owned hotels and interests in seven hotels owned through unconsolidated joint ventures. We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. 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 TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of December 31, 2012, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, 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.

OVERVIEW

In 2012, lodging fundamentals in those markets on which we focus, and for our Company in particular, continued to stabilize following the economic recession that began in 2008 and 2009. Throughout 2009, the decrease in lodging demand accelerated, resulting in one of the largest RevPAR declines ever in the modern lodging industry. Early in 2010, fundamentals in the U.S. lodging industry began showing signs of improvement with demand for rooms increasing in many major markets, as general economic indicators began to experience improvement. As a result, the lodging industry experienced increases in occupancy in the early and middle parts of 2010, and with increasing demand, rates began to rebound in the middle and latter parts of 2010 and in 2011, particularly in major urban markets such as New York, Boston and Washington, D.C. These positive trends continued, strengthened and expanded to other markets during the latter part of the year, resulting in continued growth in ADR and RevPAR during 2012.

During this same period, we took steps to better position our portfolio and our Company to take advantage of the anticipated economic recovery. During 2012, we accessed the equity capital markets, raising approximately $128,558 in net proceeds from the sale of our common shares and also replaced our $250,000 secured credit facility with a new $400,000 unsecured credit facility. We believe these improvements to our overall capitalization improved our financial stability and flexibility coming out of the economic downturn.

We simultaneously repositioned our portfolio to focus more on high barrier to entry and major urban markets. In 2011 and 2012, we acquired nine hotels, including two in New York, one in Boston, one in Los Angeles, one in Miami, one in Philadelphia and one in Washington, D.C., bringing our New York City portfolio to 16 hotels comprising a substantial portion of our overall portfolio performance. In 2012 we closed on the sale of 18 hotels in secondary and tertiary markets that we determined to be non-core. During 2011 and continuing in 2012, we executed on renovations programs at a number of properties, accelerating those projects in our core markets in an effort to take advantage of what we expect to be stronger market conditions and operating fundamentals. These efforts to reposition our portfolio yielded positive results in 2012. As shown on the tables below under "Summary of Operating Results," in 2012, we grew occupancy by 180 basis points, ADR by 5.5% and RevPAR by 8.1% across our consolidated hotels. This 2012 growth follows our 2011 results, a year in which we grew occupancy by 40 basis points, ADR 6.5% and RevPAR by 7.1% across our consolidated hotels. Increases were similar across our joint venture portfolio.

In October of 2012, our hotels across the eastern seaboard experienced the effects of Hurricane Sandy. Most of our hotels in these markets were able to remain open and continued to serve our guests through the duration of the storm. Our Holiday Inn Express on Water Street in lower Manhattan experienced flooding and was forced to close. We anticipate this hotel will remain closed through the first and second quarters of 2013 while restoration is in process. Five of our other lower Manhattan properties lost power during the storm and were forced to operate on limited power from back-up generators while the properties were without power. All five of these hotels have had their power restored and resumed operations within days after the storm. Our hotel redevelopment project at 32 Pearl Street in lower Manhattan experienced some flooding at the job site and experienced some damage to the project. The development of Hyatt Union Square, for which we are under agreement to acquire, was not significantly damaged during the storm. Both projects have experienced delays due to time required to repair damage caused by the storm and the availability of resources in lower Manhattan to continue construction efforts. The continued strength in business transient and leisure transient customer demand in Manhattan has partially offset the losses from the storm. We are continuing to evaluate the financial impact of Hurricane Sandy and our ability to recover, through our Insurance policies, any loss due to interruption of business or damage to property. See Note 2, "Investment in Hotel Properties" of the consolidated financial statements for additional discussion of the impact of Hurricane Sandy on our properties.

As we enter 2013, we believe the improvements in our equity and debt capitalization and repositioning of our portfolio better enables us to capitalize on further stabilization in lodging fundamentals. During 2013, we expect continued improvements in ADR, RevPAR and operating margins, led by hotels in our core urban markets of New York, Boston, Philadelphia, Miami and Los Angeles. We will continue to seek acquisition opportunities in urban centers and central business districts. In addition, we will continue to look, for attractive opportunities to dispose of properties in tertiary markets at favorable prices, potentially redeploying that capital in our focus markets. We do not expect to actively pursue acquisitions made through joint ventures in the near term; however, we may seek to buy out, or sell our joint venture interest to, select existing joint venture partners. We do not expect to actively pursue additional development loans or land leases in the near term. While property joint ventures, development loans and land leases played an important role in our growth in the past, we do not expect them to play the same role in our near-term future.

Although we are planning for continued stabilization and improvement in consumer and commercial spending and lodging demand during 2013, the manner in which the economy will recover, if at all, is not predictable, and certain core economic metrics, including unemployment, are not rebounding as quickly as many had hoped. In addition, the availability for hotel level financing for the acquisition of new hotels is not recovering as quickly as the economy or broader financial markets. As a result, there can be no assurances that we will be able to grow hotel revenues, occupancy, ADR or RevPAR at our properties as we hope. Factors that might contribute to less than anticipated performance include those described under the heading "Item 1A. Risk Factors" and other documents that we may file with the SEC in the future. We will continue to cautiously monitor recovery in lodging demand and rates, our third party hotel managers, our remaining portfolio of hotel development loans and our performance generally.

SUMMARY OF OPERATING RESULTS

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 years ended December 31, 2012, 2011 and 2010.

CONSOLIDATED HOTELS:
                                                                2012                             2011
                            Year Ended       Year Ended       vs. 2011        Year Ended       vs. 2010
                               2012             2011         % Variance          2010         % Variance

Occupancy                          75.8 %           73.9 %           1.8 %           73.5 %           0.4 %
Average Daily Rate (ADR)   $     162.65     $     154.15             5.5 %   $     144.73             6.5 %
Revenue Per Available
Room (RevPAR)              $     123.22     $     113.96             8.1 %   $     106.36             7.1 %

Room Revenues              $    328,305     $    269,825            21.7 %   $    226,198            19.3 %
Hotel Operating Revenues   $    355,815     $    282,534            25.9 %   $    236,191            19.6 %

RevPAR for the year ended December 31, 2012 increased 8.1% for our consolidated hotels when compared to the same period in 2011. This represents a growth trend in RevPAR which is primarily due to the improving economic conditions in 2012 and the acquisition of hotel properties consummated in 2012 that are accretive to RevPAR.

The following table outlines operating results for the three years ended December 31, 2012, 2011 and 2010 for hotels we own through an unconsolidated joint venture interest (excluding those hotel assets which are currently held for sale). 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:
                                                                            2012                             2011
                                       Year Ended       Year Ended        vs. 2011        Year Ended       vs. 2010
                                          2012             2011          % Variance          2010         % Variance

Occupancy                                     57.0 %           67.6 %          -10.6 %           64.4 %           3.2 %
Average Daily Rate (ADR)              $     180.82     $     152.38             18.7 %   $     145.39             4.8 %
Revenue Per Available Room (RevPAR)   $     103.08     $     103.03              0.0 %   $      93.61            10.1 %

Room Revenues                         $     64,044     $     67,303             -4.8 %   $     59,707            12.7 %
Total Revenues                        $     86,571     $     89,849             -3.6 %   $     80,539            11.6 %

For our unconsolidated hotels, RevPAR for the year ended December 31, 2012 was consistent with RevPAR achieved during the year ended December 31, 2011. The relatively stable results in RevPAR during the year of 2012 when compared to the year of 2011 is primarily the result of joint venture assets that have been sold or those that are now consolidated for financial reporting purposes and therefore no longer contribute to the operating results of our portfolio of unconsolidated hotels. Properties such as the Holiday Inn Express 29th Street, New York, NY, which, as of June 18, 2012, is no longer included in our unconsolidated joint ventures, tended to have higher occupancy and ADR than the remaining hotels in our unconsolidated joint venture hotel portfolio, resulting in the lower room revenues and revenues in the above table. When compared to the same period in 2011, the remaining unconsolidated joint venture hotels follow the same growth trend for RevPAR as experienced in our same store consolidated hotels reported below during the year ended December 31, 2012.

On January 1, 2010, we acquired our joint venture partner's membership interest in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT, and this hotel became one of our wholly-owned hotels. As a result of this transaction, our joint venture partner acquired our membership interest in PRA Suites at Glastonbury, LLC, the owner of the Homewood Suites, Glastonbury, CT. In addition, this table excludes the operations of the Courtyard South Boston, MA for the period between April 13, 2010 and July 1, 2011. On April 13, 2010, this hotel became one of our consolidated joint venture properties due to our acquisition of the mortgage note secured by Courtyard South Boston, MA. The acquisition of this mortgage note caused us to be the primary beneficiary of the joint venture that owns the Courtyard South Boston, MA. On July 1, 2011, Courtyard South Boston, MA transferred back to an unconsolidated joint venture property and is represented for six months worth of activity in the table above.

We define a same store hotel as one that is currently consolidated and that we have owned in whole or part for the entire period being reported and the comparable period in the prior year. Based on this definition, for the years ended December 31, 2012 and 2011, there are 48 same store consolidated hotels and 40 same store consolidated hotels for the years ended December 31, 2011 and 2010. The following table outlines operating results for the years ended December 31, 2012, 2011, and 2010, for our same store consolidated hotels:

SAME STORE CONSOLIDATED HOTELS:

SAME STORE CONSOLIDATED HOTELS
                                               (includes 48 hotels in both years)                        (includes 40 hotels in both years)
                                       Year Ended          Year Ended        2012 vs. 2011       Year Ended          Year Ended        2011 vs. 2010
                                          2012                2011             Variance             2011                2010            % Variance

Occupancy                                      76.3 %              74.3 %               2.0 %            72.6 %              72.4 %               0.2 %
Average Daily Rate (ADR)              $      161.27       $      155.73                 3.6 %   $      144.55       $      137.95                 4.8 %
Revenue Per Available Room (RevPAR)   $      123.03       $      115.72                 6.3 %   $      104.87       $       99.85                 5.0 %

Room Revenues                         $     283,174       $     265,753                 6.6 %   $     186,802       $     177,739                 5.1 %
Total Revenues                        $     295,487       $     276,876                 6.7 %   $     195,631       $     186,526                 4.9 %

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2012 TO DECEMBER 31, 2011
(dollars in thousands, except per share data)

Revenue

Our total revenues for the year ended December 31, 2012 consisted of hotel operating revenues, interest income from our development loan program and other revenue. Hotel operating revenues were approximately 99.4% and 98.7% of total revenues for the years ended December 31, 2012 and 2011, respectively. 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 were consolidated in our financial statements during the period. Hotel operating revenues increased $73,471, or 26.0%, from $282,534 for the year ended December 31, 2011 to $356,005 for the same period in 2012. This increase in hotel operating revenues was primarily attributable to the acquisitions consummated in 2012 and 2011 and increases in hotel operating revenues for our 48 same store consolidated hotels.We acquired interests in the following four consolidated hotels that contributed the following operating revenues for the year ended December 31, 2012.

                                                                              2012
                                                                         Hotel Operating
 Brand                 Location       Acquisition Date     Rooms            Revenues

 The Rittenhouse
 Hotel             Philadelphia, PA    March 1, 2012            111                16,809
 Bulfinch Hotel    Boston, MA           May 7, 2012              80                 2,791
 Holiday Inn
 Express           New York, NY        June 18, 2012            228                10,170
 Courtyard by
 Marriott          Ewing, NJ          August 13, 2012           130                 1,620
                                                                549     $          31,390

Revenues for all hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the year ended December 31, 2012 included revenues for a full year related to five hotels that were purchased during the year ended December 31, 2011. Hotels acquired during the year ended December 31, 2011 would have a full year of results included in the year ended December 31, 2012 but not necessarily a full year of results during the same period in 2011. We acquired interests in the following five consolidated hotels during the year ended December 31, 2011:

                                                                        2012                   2011
                                    Acquisition                    Hotel Operating        Hotel Operating
     Brand           Location          Date         Rooms             Revenues               Revenues
Holiday Inn       Water Street,       March 25,
Express           NY                       2011          112                  5,847                  5,580
Capitol Hill                          April 15,
Suites            Washington, DC           2011          152                  7,570                  5,319
Courtyard by      Westside, Los         May 19,
Marriott          Angeles, CA              2011          260                 11,871                  6,760
Courtyard by                           November
Marriott          Miami, FL            16, 2011          263                 15,952                  1,694
                                       December
Sheraton          New Castle, DE       28, 2010          192                  6,844                     68
                                                         979     $           48,084     $           19,421

In addition, our existing portfolio experienced improvement in ADR and occupancy during the year ended December 31, 2012 when compared to the same period in 2011. Occupancy in our consolidated hotels increased 180 basis points from approximately 73.9% during the year ended December 31, 2011 to approximately 75.8% for the same period in 2012. ADR improved 5.5%, increasing from $154.15 for the year ended December 31, 2011 to $162.65 during the same period in 2012. These improvements were due to improvements in lodging trends in the markets in which our hotels are located.

We have invested in hotel development projects by providing mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Effective June 1, 2012, we amended the interest rates on two of our development loans from 11.0% to 9.0%. Prior to this interest income was earned on our development loans at rates ranging between 10.0% and 11.0%. Interest income from development loans receivable was $1,998 for the year ended December 31, 2012 compared to $3,427 for the same period in 2011.

Of the $28,425 in development loans receivable outstanding as of December 31, 2012, $15,122, or 53.2%, is invested in hotels that are currently operating and generating revenue and $13,303, or 46.8%, is invested in a hotel construction project to develop the Hyatt Union Square in New York, NY, which has made significant progress toward completion. On June 14, 2011, in connection with entering into a purchase and sale agreement to acquire the Hyatt Union Square project, we ceased accruing interest for this development loan. On February 1, 2013 we received payments of principal and accrued interest on the development loan with 44 Lexington Holding, LLC in the amount of $13,143, leaving the development loan with a principal balance of $1,979 as of February 1, 2013.

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. Prior to June 1, 2012, one of our development loans, which is a loan to an entity affiliated with certain of our non-independent trustees and executive officers allowed the borrower to elect, quarterly, to pay accrued interest in-kind by adding the accrued interest to the principal balance of the loan. Effective June 1, 2012, we amended the development loan to cease the buyer's election to pay accrued interest in-kind. As a result, a total of $678 and $2,094 in accrued interest on these development loans was added to principal for the year ended December 31, 2012 and 2011, respectively.

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 were $212 and $333 for the years ended December 31, 2012 and 2011.

Expenses

Total hotel operating expenses increased 28.0% to approximately $196,119 for the year ended December 31, 2012 from $153,227 for the year ended December 31, 2011. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since the comparable period in 2011, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization to $57,364 for the year ended December 31, 2012 from $50,780 for the year ended December 31, 2011. Similarly, real estate and personal property tax and property insurance increased $3,465, or 18.2%, in the year ended December 31, 2012 when compared to the same period in 2011 due to our acquisitions along with a general overall increase in tax assessments and tax rates as the economy improves.

General and administrative expense increased by approximately $4,895 from $18,532 in 2011 to $23,427 in 2012. Incentive compensation of $2,349 earned for the year ended December 31, 2012 was accrued in the fourth quarter of 2012. Incentive compensation of $1,747 earned for the year ended December 31, 2011 was accrued in the fourth quarter of 2011. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the Company's trustees, executives, and employees. Expense related to share based compensation increased $2,088 when compared to expense of December 31, 2012 and the same period of 2011. This increase in share based compensation expense is due primarily from the vesting of shares and restricted share issuances. The Compensation Committee adopted the 2012 Annual LTIP which included $1,785 of stock based compensation expense for year ended December 31, 2012. In addition, on April 18, 2012, the Compensation Committee entered into amended and restated employment agreements with the Company's executive officers therefore having $822 of stock based compensation for the year ended December 31, 2012. Please refer to "Note 9 - Share Based Payments" of the notes to the consolidated financial statements for more information about our stock based compensation. Increases in other general and administrative expenses resulted primarily from increases in employee headcount and base compensation.

Amounts recorded on our consolidated statement of operations for acquisition and terminated costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs decreased $1,555 from $2,742 for the year ended December 31, 2011 to $1,187 for the year ended December 31, 2012 due to fewer acquisitions consummated during the year ended December 31, 2012. The costs incurred in 2012 were related to the following hotels: $963 related to our acquisition of The Rittenhouse Hotel, Philadelphia, PA; $61 related to acquisition of Bulfinch, Boston, MA; $67 related to our acquisition of Holiday Inn Express Manhattan, NY; $8 related to our acquisition of Courtyard Ewing, NJ. The costs incurred in 2011 were related to following hotels: Holiday Inn Express, Water Street, NY; Capitol Hill Suites Washington, DC; Courtyard Westside LA, CA; Courtyard Miami, FL. Acquisition costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property. The remaining costs related to transactions that were terminated during the year.

Operating Income

Operating income for the year ended December 31, 2012 was $56,756 compared to operating income of $41,074 during the same period in 2011. The increase in operating income resulted primarily from improved performance of our portfolio and acquisitions that have occurred in 2021.

Interest Expense

Interest expense increased $3,489 from $40,478 for the year ended December 31, 2011 to $43,967 for the year ended December 31, 2012. The increase in interest expense is due primarily to the new debt and associated interest expense for the acquired properties during 2012 offset partially by lower borrowing costs on our outstanding debt.

Unconsolidated Joint Venture Investments

We incurred a loss from the operations of our unconsolidated joint ventures of $232 for the year ended December 31, 2012 compared to income of $210 for 2011. In addition, during the year ended December 31, 2012, we recorded a loss of $1,668 as a result of the remeasurement of our interest in the Inn America Hospitality at Ewing, LLC joint venture, the owner of the Courtyard by Marriott, in Ewing, NJ, and a loss of $224 recorded as a result of the remeasurement of our interest in the Metro 29th Street Associates, LLC joint venture, the owner of the Holiday Inn Express, in New York, NY.

During the year ended December 31, 2011, as a result of the remeasurement of our interest in the Hiren Boston, LLC joint venture, the owner of the Courtyard by Marriott, in South Boston, MA, we recorded gains of $2,757. Also, as noted above, we entered into two purchase and sale agreements to dispose of 18 non-core hotel properties, four of which are owned in part by the Company through an unconsolidated joint venture. As a result of entering into these purchase and sale agreements, during the year ended December 31, 2011, we recorded an impairment loss of approximately $1,677 for those assets where our investment in the joint venture exceeds the anticipated net proceeds distributable to us based on the purchase price in year-end 2011. Income Tax Benefit

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