EXECUTIVE OVERVIEW
General

Following the recession that commenced in 2008, the lodging industry has experienced improvement in fundamentals, which has continued into 2012. Room rates, measured by the average daily rate, or ADR, which typically lags occupancy growth in the early stage of a recovery, have shown upward growth. We believe improvements in the economy will continue to positively impact the lodging industry and hotel operating results for several years to come, and we will continue to seek ways to benefit from the cyclical nature of the hotel industry. We believe that in the prior cycle, hotel values and cash flows, for the most part, peaked in 2007, and we believe the hotel industry may exceed these cash flows and values during the next cyclical peak.
As of December 31, 2012, we owned 90 hotel properties directly, and four hotel properties through majority-owned investments in joint ventures, which represents 20,034 total rooms, or 19,773 net rooms excluding those attributable to our joint venture partners. Currently, all of our hotel properties are located in the United States. In March 2011, we acquired 96 hotel condominium units at WorldQuest Resort in Orlando, Florida for $12.0 million. Also in March 2011, with an investment of $150.0 million, we converted our interest in a joint venture that held a mezzanine loan into a 71.74% common equity interest and a $25.0 million preferred equity interest in a new joint venture (the "PIM Highland JV") that holds 28 high quality full and select service hotel properties with 8,084 total rooms, or 5,800 net rooms excluding those attributable to our joint venture partner. At December 31, 2012, we also wholly owned one mezzanine loan with a net carrying value of $3.2 million and one note receivable of $8.1 million in connection with a joint venture restructuring.

Based on our primary business objectives and forecasted operating conditions, our current key priorities and financial strategies include, among other things:
• acquisition of hotel properties;

• disposition of hotel properties;

• investing in securities;

• pursuing capital market activities to enhance long-term shareholder value;

•         repurchasing capital stock subject to regulatory limitations and our
          Board of Directors' authorization;


•         preserving capital, enhancing liquidity, and continuing current cost
          saving measures;


•         implementing selective capital improvements designed to increase
          profitability;


•         implementing effective asset management strategies to minimize
          operating costs and increase revenues;

• financing or refinancing hotels on competitive terms;

• utilizing hedges and derivatives to mitigate risks; and

• making other investments or divestitures that our Board of Directors deems appropriate.

Our investment strategies continue to focus on the upscale and upper-upscale segments within the lodging industry. We believe that as supply, demand, and capital market cycles change, we will be able to shift our investment strategies to take advantage of new lodging-related investment opportunities as they may develop. Our Board of Directors may change our investment strategies at any time without shareholder approval or notice.
SIGNIFICANT TRANSACTIONS IN 2012 AND RECENT DEVELOPMENTS

Credit Facility Capacity Expansion and Modification - On February 21, 2012, we expanded our borrowing capacity under our $105.0 million senior credit facility to an aggregate $145.0 million and on September 24, 2012, we further expanded our borrowing capacity to an aggregate $165.0 million. We have an option, subject to lender approval, to further expand the facility to an aggregate size of $225.0 million. As part of these expansions two additional banks have been added to the participating banks in the senior credit facility. On December 21, 2012, we amended the senior credit facility to reduce the minimum fixed charge coverage ratio from 1.35x to 1.25x through expiration in September 2014. At-the-Market Preferred Stock Offering - In September 2011, we entered into an at-the-market ("ATM") program with an investment banking firm, pursuant to which we may issue up to 700,000 shares of 8.55% Series A Cumulative Preferred Stock and up to 700,000 shares of 8.45% Series D Cumulative Preferred Stock at market prices up to $30.0 million in total proceeds. The ATM program remains in effect until such time that either party elects to terminate or the share or dollar threshholds are reached. On March 2, 2012, we commenced issuances of preferred stock and during the first two quarters of the year ended December 31, 2012, we issued 169,306 shares of 8.55% Series A Cumulative Preferred Stock for gross proceeds of $4.2 million and 501,909 shares of 8.45% Series D Cumulative Preferred Stock for gross proceeds of $12.3 million. Such proceeds, net of commissions and other expenses, were $16.0 million for the year ended December 31, 2012.
Refinanced our $167.2 Million Mortgage Loan - On May 9, 2012, we refinanced our $167.2 million mortgage loan, due May 2012, and having an interest rate of LIBOR plus 1.65%, with a $135.0 million mortgage loan, due May 2014 with three one-year extension options and an interest rate of LIBOR plus 6.50%. As a result, our Doubletree Guest Suites hotel property in Columbus, Ohio, which was one of ten hotels securing our $167.2 million mortgage loan, was no longer encumbered and later sold as the nine remaining hotels secure our $135.0 million mortgage loan.
Disposition of Hotel Properties - During the second quarter of 2012 we determined that the Hilton El Conquistador in Tuscon, Arizona was not to be held long-term as operating cash flows were not anticipated to cover principal and interest payments of the related debt secured by this hotel. In addition, regarding this loan, we ceased making principal and interest

payments after July 31, 2012. Based on our assessment, which included marketing this hotel for sale, we concluded that the carrying value of this asset would not be recoverable. Consequently, in the second quarter of 2012, we recognized an impairment charge of $4.1 million related to this hotel, which reduced its carrying value to $19.7 million and represented our estimate of its fair value. Effective August 15, 2012, via a consensual foreclosure with our lender, a receiver appointed by Pima County Superior Court in Arizona completed taking possession and full control of this hotel. The hotel was disposed of in December 2012 when title passed to the lender. Additionally we sold our Doubletree Guest Suites hotel in Columbus, Ohio in November 2012 for net proceeds of $7.7 million. The results of operations of these hotels will be included in discontinued operations in our consolidated statements of operations for all periods presented.
Refinanced our $153.9 Million Mortgage Loan - On November 7, 2012, we refinanced our $153.9 million non-recourse mortgage loan set to mature in December 2015, and having an interest rate of 12.72%, with a $211.0 million mortgage loan due November 2014 with three one-year extension options. The new loan is interest only and provides for a floating interest rate of LIBOR plus 6.15% with a 0.25% LIBOR Floor. The new loan remains secured by the same five hotels including: the Embassy Suites Crystal City, Embassy Suites Orlando Airport, Embassy Suites Santa Clara, Embassy Suites Portland and the Hilton Costa Mesa.

LIQUIDITY AND CAPITAL RESOURCES

Our cash position from operations is affected primarily by macro industry movements in occupancy and rate as well as our ability to control costs. Further, interest rates can greatly affect the cost of our debt service as well as the value of any financial hedges we may put in place. We monitor industry fundamentals and interest rates very closely. Capital expenditures above our reserves will affect cash flow as well.
Certain of our loan agreements contain cash trap provisions that may get triggered if the performance of our hotels decline. When these provisions are triggered, substantially all of the profit generated by our hotels is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. Cash is distributed to us only after certain items are paid, including deposits into ground leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and ground leasing expenses. This could affect our liquidity and our ability to make distributions to our stockholders. Also, we have entered into certain customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of our subsidiaries or joint ventures that may result from non-recourse carve-outs, which include, but are not limited to fraud, misrepresentation, willful misconduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities. Certain of these guarantees represent a guaranty of material amounts, and if we are required to make payments under those guarantees, our liquidity could be adversely affected.

On February 21, 2012, we expanded our borrowing capacity under our $105.0 million senior credit facility to an aggregate $145.0 million and on September 24, 2012, we further expanded our borrowing capacity to an aggregate $165.0 million. We have an option, subject to lender approval, to further expand the facility to an aggregate size of $225.0 million. As part of these expansions two additional banks have been added to the participating banks in the senior credit facility. We may use up to $10.0 million for standby letters of credit. On December 21, 2012, we amended the senior credit facility to reduce the minimum fixed charge coverage ratio from 1.35x to 1.25x through expiration in September 2014.

In September 2011, we entered into an at-the-market ("ATM") program with an investment banking firm, pursuant to which we may issue up to 700,000 shares of 8.55% Series A Cumulative Preferred Stock and up to 700,000 shares of 8.45% Series D Cumulative Preferred Stock at market prices up to $30.0 million in total proceeds. The ATM program remains in effect until such time that either party elects to terminate or the share or dollar threshholds are reached. On March 2, 2012, we commenced issuances of preferred stock and during the first two quarters of the year ended December 31, 2012, we issued 169,306 shares of 8.55% Series A Cumulative Preferred Stock for gross proceeds of $4.2 million and 501,909 shares of 8.45% Series D Cumulative Preferred Stock for gross proceeds of $12.3 million. The aggregate proceeds, net of commissions and other expenses, were $16.0 million for the year ended December 31, 2012.

On May 9, 2012, we refinanced our $167.2 million mortgage loan, due May 2012, and having an interest rate of LIBOR plus 1.65%, with a $135.0 million mortgage loan, due May 2014 and three one-year extension options and an interest rate of LIBOR plus 6.50%. As a result, the Doubletree Guest Suites hotel property in Columbus, Ohio, which was one of ten hotels securing our $167.2 million mortgage loan, was no longer encumbered and was later sold, with the nine remaining hotels securing our $135.0 million mortgage loan.

On November 7, 2012, we refinanced our $153.9 million non-recourse mortgage loan set to mature in December 2015, and having an interest rate of 12.72%, with a $211.0 million mortgage loan due November 2014 with three one-year extension options. The new loan is interest only and provides for a floating interest rate of LIBOR plus 6.15% with a 0.25% LIBOR Floor. The new loan remains secured by the same five hotels including: the Embassy Suites Crystal City, Embassy Suites Orlando Airport, Embassy Suites Santa Clara, Embassy Suites Portland and the Hilton Costa Mesa.

In September 2010, we entered into an ATM program with an investment banking firm to offer for sale from time to time up to $50.0 million of our common stock at market prices. No shares have been sold under this ATM program since its inception. The ATM program remains in effect until such time that either party elects to terminate or the $50.0 million cap is reached.

Our principal sources of funds to meet our cash requirements include: cash on hand, positive cash flow from operations, capital market activities, property refinancing proceeds, asset sales, and net cash derived from interest-rate derivatives. Additionally, our principal uses of funds are expected to include possible operating shortfalls, owner-funded capital expenditures, new investments, and debt interest and principal payments. Items that impacted our cash flow and liquidity during the periods indicated are summarized as follows:

Net Cash Flows Provided by Operating Activities. Net cash flows provided by operating activities were $130.6 million and $74.6 million for the year ended December 31, 2012 and 2011, respectively. The increase in cash flows from operating activities was primarily due to increased hotel EBITDA, the timing of collecting receivables from hotel guests, paying vendors, and settling with hotel managers and a decrease in restricted cash due to the release of cash deposits for certain loans and capital expenditures.

Net Cash Flows Used in Investing Activities. For the year ended December 31, 2012, investing activities used net cash flows of $68.4 million, which primarily consisted of $81.4 million of capital improvements made to various hotel properties offset by cash inflows of $5.2 million attributable to cash payments received on previously impaired mezzanine loans and net proceeds of $7.7 million attributable to the sale of our Douletree Guest Suites hotel in Columbus, Ohio. For the year ended December 31, 2011, investing activities used net cash flows of $47.8 million. Cash outlays consisted of $145.4 million for the acquisition of a 71.74% interest in PIM Highland JV, $12.0 million for the acquisition of hotel condominiums, and $67.8 million for capital improvements made to various hotel properties. Cash inflows consisted of $154.0 million from the sale of four hotel properties and two condominium properties, $22.6 million from repayment of mezzanine loans, and $748,000 of insurance proceeds from settlement of insurance claims.

Net Cash Flows Used in Financing Activities. For the year ended December 31, 2012, net cash flows used in financing activities were $43.9 million. Cash outlays primarily consisted of $353.4 million for repayments of indebtedness, $71.6 million for dividend payments to common and preferred stockholders and unit holders, $10.4 million for payments of deferred loan costs and $1.9 million for distributions to noncontrolling interests in joint ventures. These cash outlays were partially offset by cash inflows of $346.0 million in borrowings on indebtedness, $32.0 million in proceeds from the counterparties of our interest rate derivatives and $16.0 million from issuances of our Series A and Series E preferred stock under our ATM program. For the year ended December 31, 2011, net cash flows used in financing activities were $76.9 million. Cash outlays consisted of $73.0 million for the repurchase of our Series B-1 preferred stock, $53.3 million for dividend payments to common and preferred stockholders and unit holders, $6.0 million for loan modification and extension fees, $235.8 million for repayments of indebtedness and capital leases, $3.2 million for distributions to noncontrolling interests in joint ventures and payments of $97,000 for entering into interest rate caps. These cash outlays were partially offset by cash inflows of $109.8 million from issuance of Series E preferred stock, $25.0 million from borrowings on our senior credit facility, $86.0 million from issuance of 7.3 million shares of common stock, $72.7 million from the counterparties of our interest rate derivatives, and $970,000 from a) recovery of a short-swing profit from a large shareholder (greater than 10% of a class of equity securities) and b) buy-in payments from executives in connection with the issuance of operating partnership units.

We are required to maintain certain financial ratios under various debt and derivative agreements. If we violate covenants in any debt or derivative agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. In any event, financial covenants under our current or future debt obligations could impair our planned business strategies by limiting our ability to borrow (i) beyond certain amounts or (ii) for certain purposes. Presently, our existing financial debt covenants primarily relate to maintaining minimum debt coverage ratios, maintaining an overall minimum net worth, maintaining a maximum loan-to-value ratio, and maintaining an overall minimum total assets. As of December 31, 2012, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended.

Mortgage and mezzanine loans are nonrecourse to the borrowers, except for customary exceptions or carve-outs that trigger recourse liability to the borrowers in certain limited instances. Recourse obligations typically include only the payment of costs and liabilities suffered by lenders as a result of the occurrence of certain bad acts on the part of the borrower. However, in certain cases, carve-outs could trigger recourse obligations on the part of the borrower with respect to repayment of all or a portion of the outstanding principal amount of the loans. We have entered into customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of the borrowers that result from non-recourse carve-outs (which include, but are not limited to, fraud, misrepresentation, willful conduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities). In the opinion of management, none of these guaranty agreements, either individually or in the aggregate, are likely to have a material adverse effect on our business, results of operations, or financial condition.

At December 31, 2012, our only recourse obligation is our $165.0 million senior credit facility held by six banks, which expires in September 2014. Currently, there is no outstanding balance on this credit facility. The primary covenants of this senior credit facility include (i) the minimum fixed charge coverage ratio, as defined, of 1.25x through expiration (ours was 1.36x at December 31, 2012); and (ii) the maximum leverage ratio, as defined, of 65% (ours was 58.86% at December 31, 2012). In the event we borrow on this credit facility, we may be unable to refinance a portion or all of this senior credit facility before maturity. However, if it becomes necessary to pay down the principal balance, if any, at maturity, we believe we will be able to accomplish that with cash on hand, cash flows from operations, equity raises, or, to the extent necessary, asset sales.

Based on our current level of operations, management believes that our cash flow from operations, our existing cash balances, and availability under our senior credit facility ($165.0 million at December 31, 2012) will be adequate to meet upcoming anticipated requirements for interest and principal payments on debt, working capital, and capital expenditures for the next 12 months. With respect to upcoming maturities, we will continue to proactively address our 2014 maturities. No assurances can be given that we will obtain additional financings or, if we do, what the amount and terms will be. Our failure to obtain future financing under favorable terms could adversely impact our ability to execute our business strategy. In addition, we may selectively pursue debt financing on individual properties.

We are committed to an investment strategy where we will opportunistically pursue hotel-related investments as suitable situations arise. Funds for future hotel-related investments are expected to be derived, in whole or in part, from cash on hand, future borrowings under a credit facility or other loans, or proceeds from additional issuances of common stock, preferred stock, or other securities, asset sales, and joint ventures. However, we have no formal commitment or understanding to invest in additional assets, and there can be no assurance that we will successfully make additional investments. We may, when conditions are suitable, consider additional capital raising opportunities.

Our existing hotels are mostly located in developed areas with competing hotel properties. Future occupancy, ADR, and RevPAR of any individual hotel could be materially and adversely affected by an increase in the number or quality of competitive hotel properties in its market area. Competition could also affect the quality and quantity of future investment opportunities.

Dividend Policy. During the years ended December 31, 2012 and 2011, the Board of Directors declared quarterly dividends of $0.11 and $0.10 per share of outstanding common stock, respectively. In December 2012, the Board of Directors approved our 2013 dividend policy which anticipates a quarterly dividend payment of $0.12 per share for 2013. However, the adoption of a dividend policy does not commit our Board of Directors to declare future dividends. The Board of Directors will continue to review our dividend policy on a quarterly basis. We may incur indebtedness to meet distribution requirements imposed on REITs under the Internal Revenue Code to the extent that working capital and cash flow from our investments are insufficient to fund required distributions. Alternatively, we may elect to pay dividends on our common stock in cash or a combination of cash and shares of securities as permitted under federal income tax laws governing REIT distribution requirements. We may pay dividends in excess of our cash flow.

RESULTS OF OPERATIONS
Marriott International, Inc. ("Marriott") currently manages 40 of our properties. For these Marriott-managed hotels, the fiscal year reflects twelve weeks of operations for each of the first three quarters of the year and sixteen weeks for the fourth quarter of the year. Therefore, in any given quarterly period, period-over-period results will have different ending dates. For Marriott-managed hotels, the fourth quarters of 2012, 2011 and 2010 ended December 28, 2012, December 30, 2011 and December 31, 2010, respectively. RevPAR is a commonly used measure within the hotel industry to evaluate hotel operations. RevPAR is defined as the product of the average daily room rate ("ADR") charged and the average daily occupancy achieved. RevPAR does not include revenues from food and beverage or parking, telephone, or other guest services generated by the property. Although RevPAR does

not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire year). RevPAR improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. RevPAR improvements attributable to increases in ADR are generally accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

The following table summarizes the changes in key line items from our consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 (in thousands):

                                                                                   Favorable (Unfavorable)
                                          Year Ended December 31,                          Change
                                     2012           2011           2010        2012 to 2011      2011 to 2010
Total revenue                    $  922,606     $  859,978     $  808,928     $     62,628      $      51,050
Total hotel expenses             $ (590,340 )   $ (552,933 )   $ (527,186 )   $    (37,407 )    $     (25,747 )
Property taxes, insurance and
other                            $  (44,903 )   $  (45,085 )   $  (46,931 )   $        182      $       1,846
Depreciation and amortization    $ (133,979 )   $ (131,243 )   $ (128,917 )   $     (2,736 )    $      (2,326 )
Impairment charges               $    5,349     $    4,841     $   (6,501 )   $        508      $      11,342
Gain on insurance settlements    $       91     $    2,035     $        -     $     (1,944 )    $       2,035
Transaction acquisition and
contract termination costs       $        -     $      793     $   (7,001 )   $       (793 )    $       7,794
Corporate general and
administrative                   $  (44,050 )   $  (44,522 )   $  (30,619 )   $        472      $     (13,903 )
Operating income                 $  114,774     $   93,864     $   61,773     $     20,910      $      32,091
Equity in earnings (loss) of
unconsolidated joint ventures    $  (20,833 )   $   14,528     $  (20,265 )   $    (35,361 )    $      34,793
Interest income                  $      125     $       85     $      283     $         40      $        (198 )
Other income                     $   31,700     $  109,524     $   62,826     $    (77,824 )    $      46,698
Interest expense and
amortization of loan costs       $ (144,796 )   $ (137,212 )   $ (139,288 )   $     (7,584 )    $       2,076
Write-off of premiums, loan
costs and exit fees              $   (3,998 )   $     (729 )   $   (3,893 )   $     (3,269 )    $       3,164
Unrealized gain (loss) on
investments                      $    2,502     $     (391 )   $        -     $      2,893      $        (391 )
Unrealized gain (loss) on
derivatives                      $  (35,657 )   $  (70,286 )   $   12,284     $     34,629      $     (82,570 )
Income tax (expense) benefit     $   (2,375 )   $   (1,620 )   $      155     $       (755 )    $      (1,775 )
Income (loss) from continuing
operations                       $  (58,558 )   $    7,763     $  (26,125 )   $    (66,321 )    $      33,888
Loss from discontinued
operations                       $   (3,650 )   $   (7,880 )   $  (35,667 )   $      4,230      $      27,787
Net loss                         $  (62,208 )   $     (117 )   $  (61,792 )   $    (62,091 )    $      61,675
(Income) loss from consolidated
joint ventures attributable to
noncontrolling interests         $     (868 )   $     (610 )   $    1,683     $       (258 )    $      (2,293 )
Net loss attributable to
redeemable noncontrolling
interests in operating
partnership                      $    9,296     $    2,836     $    8,369     $      6,460      $      (5,533 )
Net income (loss) attributable
to the Company                   $  (53,780 )   $    2,109     $  (51,740 )   $    (55,889 )    $      53,849

Comparison of Year Ended December 31, 2012 with Year Ended December 31, 2011 Income from continuing operations represents the operating results of 94 hotel properties ("comparable hotels") and Worldquest included in continuing operations for the years ended December 31, 2012 and 2011. The results of . . .