UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM           TO

COMMISSION FILE NUMBER: 001-31775

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland	86-1062192
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
14185 Dallas Parkway, Suite 1100, Dallas, TEXAS (Address of principal executive offices)	75254 (Zip Code)

(972) 490-9600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

COMMON STOCK, $0.01 PAR

PREFERRED STOCK, SERIES A, $0.01 PAR

Securities registered pursuant to Section 12(g) of the Act:

NONE

      Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the registrant’s common stock was last sold on the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $202.8 million. As of March 15, 2005, the registrant had issued and outstanding 36,160,447 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

      The Registrant’s definitive Proxy Statement pertaining to the 2005 Annual Meeting of Stockholders (the “Proxy Statement”), filed or to be filed not later than 120 days after the end of the fiscal year pursuant to Regulation 14A, is incorporated herein by reference into Part III.

FORM 10-K INDEX

		Page
PART I
Item 1.	Business		4
Item 2.	Properties		31
Item 3.	Legal Proceedings		32
Item 4.	Submission of Matters to a Vote of Security Holders		32
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		32
Item 6.	Selected Financial Data		34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		52
Item 8.	Financial Statements and Supplementary Data		53
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		53
Item 9A.	Controls and Procedures		53
PART III
Item 10.	Directors and Executive Officers of the Registrant		54
Item 11.	Executive Compensation		54
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		54
Item 13.	Certain Relationships and Related Transactions		54
Item 14.	Principal Accountant Fees and Services		54
PART IV
Item 15.	Financial Statement Schedules and Exhibits		54
	Index to Consolidated Financial Statements		60
Purchase and Sale Agreement
Amendment to Purchase and Sale Agreement
Amendment to Purchase and Sale Agreement
Registrants Subsidiaries Listing
Consent of Ernst & Young LLP
Certification of CEO
Certification of CFO
Certification of Chief Accounting Officer
Certification of CEO
Certification of CFO
Certification of Chief Accounting Officer

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FORWARD-LOOKING STATEMENTS

      We make forward-looking statements throughout this Form 10-K and documents incorporated herein by reference that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. Statements regarding the following subjects are forward-looking by their nature:

•  our business and investment strategy;

•  our projected operating results;

•  completion of any pending transactions;

•  our ability to obtain future financing arrangements;

•  our understanding of our competition;

•  market trends;

•  projected capital expenditures; and

•  the impact of technology on our operations and business.

      Such forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations, plans, and objectives may vary materially from those expressed in our forward-looking statements. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

•  the factors discussed in this Form 10-K, including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties;”

•  general volatility of the capital markets and the market price of our common stock;

•  changes in our business or investment strategy;

•  availability, terms, and deployment of capital;

•  availability of qualified personnel;

•  changes in our industry and the market in which we operate, interest rates, or the general economy; and

•  the degree and nature of our competition.

      When we use the words “will likely result,” “may,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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PART I

Item 1. Business

Our Company

      Ashford Hospitality Trust, Inc. and subsidiaries (the “Company” or “we” or “our”) is a self-advised real estate investment trust (“REIT”), which commenced operations on August 29, 2003 when it completed its initial public offering (“IPO”). We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of ours, serves as the sole general partner of our operating partnership.

      We have elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes. Because of limitations imposed on REITs in operating hotel properties, third-party managers manage each of our hotel properties. Remington Lodging & Hospitality, L.P., or Remington Lodging, is our primary property manager, managing 14 of our 33 existing hotel properties, as well as all of the 21 hotel properties in the portfolio acquired in March 2005. Our remaining 19 hotel properties are managed by management companies unaffiliated with us. Remington Lodging is wholly owned by Mr. Archie Bennett, our Chairman, and Mr. Montgomery J. Bennett, our President and Chief Executive Officer.

      During the year ended December 31, 2004, the Company completed the following transactions:

•  On March 15, 2004, the Company issued 70,400 shares of restricted common stock to its executives and certain employees.

•  On April 1, 2004, the Company issued 106,675 units of limited partnership interest in connection with the acquisition of a hotel property.

•  On May 19, 2004, the Company issued 10,000 shares of common stock to its directors as compensation for serving on the Board through May 2005.

•  On September 2, 2004, the Company issued 333,333 units of limited partnership interest in connection with the acquisition of nine hotel properties.

•  On September 22, 2004, the Company issued 2,300,000 shares of Series A Cumulative Preferred Stock in a public offering of such preferred shares.

•  On December 30, 2004, the Company issued 993,049 shares of Series B Cumulative Convertible Preferred Stock to a financial institution.

      As of December 31, 2004, the Company owned 33 hotel properties in fourteen states with 5,095 rooms, and had acquired or originated mezzanine or first-mortgage loans receivable with a balance at December 31, 2004 of approximately $79.7 million.

      We maintain a website at www.ahtreit.com. On our website, we make available free-of-charge all our annual reports on Form 10-K, quarterly reports on Form  10-Q, current reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission. In addition, our Code of Business Conduct and Ethics, Code of Ethics for the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, Corporate Governance Guidelines, and Board Committee Charters are also available free-of-charge on our website or can be made available in print upon request.

      All reports filed with the Securities and Exchange Commission may also be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Further information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. In addition, all of our filed reports can be obtained at the SEC’s website at www.sec.gov.

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Our Business Strategy

      Our current investment strategy is to target specific opportunities created by the current strengthening lodging market, while retaining the flexibility to invest in the most attractive risk-reward opportunities as they develop in the lodging business cycle. We believe that the U.S. economy is currently in an expansion phase and that the underlying cash flows of hotels will continue to improve due to favorable supply/demand dynamics. We believe that our current investment policies, particularly our current focus on the upscale and upper-upscale lodging segments, will allow us to participate in the continued improvement in performance within the lodging industry. However, we also believe that as supply, demand, and capital market cycles change, we will be able to shift our investment strategies to take advantage of newly-created lodging investment opportunities as they develop. Currently, we do not limit our acquisitions to any specific geographical market. While our current investment strategies are well defined, our board of directors may change our investment policies at any time without stockholder approval.

      We intend to continue to invest in a variety of lodging-related assets based upon our evaluation of diverse market conditions. These investments may include: (i) direct hotel investments; (ii) mezzanine financing through origination or through acquisition in secondary markets; (iii) first lien mortgage financing through origination or through acquisition in secondary markets; and (iv) sale-leaseback transactions.

      Our strategy is designed to take advantage of current lodging industry conditions and adjust to changes in market conditions over time. In the current market, we believe we can continue to purchase assets at discounts to previous trading ranges or replacement costs and acquire or originate debt positions with attractive relative yields. Over time, our assessment of market conditions will determine asset reallocation strategies. While we seek to capitalize on favorable market fundamentals, conditions beyond our control may have an impact on overall profitability and on the investment returns.

      Our business strategy of combining lodging-related equity and debt investments seeks, among other things, to:

•  capitalize on both current yield and appreciation, while simultaneously offering diversification of types of assets within the hospitality industry;

•  vary investments across an array of hospitality assets to take advantage of market cycles for each asset class; and

•  offer an attractive liquidity alternative to asset sales (through structure and tax deferral) and traditional financing (due to rate, structure, loan-to-value, and asset class).

      Our investment strategy primarily targets limited and full service hotels in primary, secondary, and resort markets throughout the United States. To take full advantage of current and future investment opportunities in the lodging industry, we will invest according to the asset allocation strategies described below. Due to ongoing changes in market conditions, we will continually evaluate the appropriateness of our investment strategies. Our board of directors may change any or all of these strategies at any time.

      Direct Hotel Investments — In selecting the hotels that we have acquired since our initial public offering, we have targeted hotels that either offer a high current return or have the opportunity to increase in value through repositioning, capital investments, market-based recovery, or improved management practices. We intend to continue to acquire existing hotels and, under appropriate market conditions, may develop new hotels. Our direct hotel acquisition strategy will follow similar investment criteria and will seek to achieve both current income and income from appreciation.

      Mezzanine Financing — The subordinated loans, also known as mezzanine loans, we have acquired or originated since our initial public offering relate to upscale or full-service hotels that we believe require no significant near-term capital expenditures, have reputable managers, and are located in good or emerging sub-markets. We intend to continue to acquire or originate mezzanine loans. Each of our mezzanine loans is secured by junior mortgages on hotels or pledges of equity interests in entities owning hotels and, in one instance, by a junior participation in a first mortgage. Mezzanine loans that we acquire in the future may be secured by individual assets as well as cross-collateralized portfolios of assets. Although these types of loans

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generally have greater repayment risks than first mortgages due to the subordinated nature of the loans, we have a disciplined approach in underwriting the value of the asset. We expect this asset class to provide us with attractive returns and potentially allow us to participate in the improving economics of the underlying hotel. In addition, subject to restrictions applicable to REITs, we may acquire or originate corporate-level mezzanine loans on an unsecured basis.

      First Mortgage Financing — We have originated one first mortgage which was subsequently sold and one junior participation in a first mortgage, which we refer to as a mezzanine loan. As interest rates increase and the dynamics in the hotel industry make first-mortgage investments more attractive, we intend to acquire, potentially at a discount to par, or originate loans secured by first priority mortgages on hotels. We may be subject to certain state-imposed licensing regulations related to commercial mortgage lenders, with which we intend to comply. However, because we are not a bank or a federally chartered lending institution, we are not subject to the state and federal regulatory constraints imposed on such entities. Also, because we do not intend to securitize our assets, we expect we will be able to offer more flexible terms than commercial lenders who contribute loans to securitized mortgage pools. We anticipate that this asset class will provide us with stable, attractive current yields.

      Sale-Leaseback Transactions — To date, we have not participated in any sale-leaseback transactions. However, if the lodging industry fundamentals shift such that sale-leaseback transactions become more attractive investments, we intend to purchase hotels and lease them back to their existing hotel owners.

Our Operating Procedures

      In implementing our business strategy through investments that satisfy the applicable investment policies described above, we consider each of the following:

      Asset Review. In making future hotel investment decisions, we consider several criteria, including:

•  Number of Rooms — We anticipate acquiring or investing in hotels with at least 70 rooms.

•  Ownership Structure — We prefer properties with a fee simple title.

•  Franchise Affiliations — We consider both major franchises as well as independents.

•  Competition — We intend to seek properties in areas that lack a substantial new supply of hotel rooms, appear resilient to down markets, and either have an existing broad demand or a growing demand base.

•  Physical Condition — The condition of the property that is acceptable to us will depend on the pricing structure. Major product improvement plans or renovations are acceptable if the pricing adequately reflects such renovations.

•  Available Financing — To the extent we utilize financing in our investments, we will seek non-recourse financing.

•  Amenities — We prefer properties that have amenities (food and beverage, meeting space, fitness equipment, parking, etc.) consistent with the needs of its targeted customer.

•  Operating Performance — We intend to seek hotels that have shown a solid operating performance or alternatively seek assets where strategic changes in operations or its market positioning will generate improved revenue and operating margins.

•  Room Demand Generators — We will seek hotels that have a diversified base of room demand generators or alternatively seek to reposition hotels to capitalize on shifting the hotel’s guest mix in ways to improve operating performance.

      However, none of these criteria alone is considered determinative.

      Underwriting Review. After we identify a potential investment, a due diligence team, consisting of in-house and third parties, will conduct detailed due diligence to assess the potential investment. This due

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diligence team will follow underwriting guidelines and review a list of property-level issues, including but not limited to:

•  property financials;

•  property condition;

•  environmental issues;

•  ADA compliance;

•  title surveys;

•  competitive position;

•  brand;

•  market assessment;

•  advance-booking reports; and

•  marketing plans.

      Market Assessments. Our market assessment analysis entails in-depth evaluation of macro and micro market forces affecting the lodging industry in a given market and the specific sub-market. We usually process data obtained from numerous industry sources that focus on new supply, changes in demand patterns, brand expansion plans, performance of key corporations, government initiatives, and essential hotel performance data (e.g., average daily rate (“ADR”), occupancy, and net revenue per available room (“RevPAR”)). We analyze this information to make near-term and long-term investment and sales decisions within each market and further within specific sub-markets.

      Capital Markets Evaluation. We monitor the capital markets to determine trends in lodging investment patterns and debt-to-equity pricing. We typically maintain a debt and equity transaction database encompassing recently closed transactions and suggested pricing for new transactions. This information assists us in the formulation of competitive pricing trends and may serve as a good indicator of when liquidity gaps or pricing inefficiencies may exist in the market. We use this pricing knowledge to optimally allocate our assets across our four targeted lodging-related investment classes to maximize our risk-adjusted returns.

      Value-Optimization Strategies. We regularly evaluate the incremental performance and resulting investment actions for each asset in our portfolio as part of our budget review process. Due to our fluid asset allocation strategy, it is imperative that the relative merits of holding a particular property or investment demonstrate benefits in terms of accretion and portfolio diversification. Our objective in such an evaluation is to confirm that an existing asset adds to stockholder value. The methodology consists of a “re-buy” analysis that determines if continuing to hold a particular investment, using forward-looking market growth assumptions, is a valid strategy. By consistently applying this policy across all investments, we seek to maximize our investment returns by reallocating funds into more productive asset classes.

Our Operating Segments

      As addressed in Item 15, Financial Statements Schedules, we currently operate in two business segments within the hotel lodging industry: direct hotel investments and hotel financing. These operating segments are described above along with additional operating segments where we anticipate future participation.

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Our Financing Strategy

      We utilize our borrowing power to leverage future investments. When evaluating our future level of indebtedness and when making decisions regarding the incurrence of indebtedness, our board of directors considers a number of factors, including:

•  the purchase price of our investments to be acquired with debt financing;

•  the estimated market value of our investments upon refinancing; and

•  the ability of particular investments, and our Company as a whole, to generate cash flow to cover expected debt service.

      We may incur debt in the form of purchase money obligations to the sellers of properties, or in the form of publicly or privately placed debt instruments or financing from banks, institutional investors, or other lenders. Any such indebtedness may be unsecured or secured by mortgages or other interests in our properties or mortgage loans. This indebtedness may be recourse, non-recourse, or cross-collateralized. If recourse, that recourse may include our general assets, and if non-recourse, such recourse may be limited to the particular investment to which the indebtedness relates. In addition, we may invest in properties or loans subject to existing loans secured by mortgages or similar liens on the properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings for working capital to:

•  purchase additional interests in partnerships or joint ventures in which we participate;

•  refinance existing indebtedness;

•  finance the origination or purchase of mortgage investments; or

•  finance acquisitions, expansion, or redevelopment of existing properties or development of new properties.

      We may also incur indebtedness for other purposes when, in the opinion of our board of directors, it is advisable for us to do so. In addition, we may need to borrow to meet the taxable income distribution requirements under the Internal Revenue Code if we do not have sufficient cash available to meet those distribution requirements.

      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 on our business strategy. In addition, we may selectively pursue mortgage financing on individual properties and our mortgage investments.

Our Distribution Policy

      To maintain our qualification as a REIT, we intend to make annual distributions to our stockholders of at least 90% of our taxable income (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). Distributions are authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our dividend policy will not change in the future. Our ability to pay distributions to our stockholders will depend, in part, upon our receipt of distributions from our operating partnership, which may depend upon receipt of lease payments with respect to our properties from the indirect, wholly-owned subsidiary of our operating partnership, Ashford TRS, and, in turn, upon the management of our properties by our property managers. Distributions to our stockholders are generally taxable to our stockholders as ordinary income. However, since a portion of our investments are equity ownership interests in hotels, which result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent that it’s not inconsistent with maintaining our REIT status, we may maintain accumulated earnings of Ashford TRS in that entity.

      Our charter allows us to issue preferred stock with a preference on distributions, which we did in 2004. The partnership agreement of our operating partnership also allows the operating partnership to issue units

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with a preference on distribution. Such issuance of preferred stock or preferred units, given the dividend preference on this stock or units, could limit our ability to make a dividend distribution to our common stockholders.

Our Recent Developments

      During the year ended December 31, 2004, we completed the following significant transactions:

      On January 23, 2004, we acquired a $15.0 million subordinated first-mortgage loan receivable related to a hotel property in Denver, Colorado. The loan bears interest at LIBOR plus 9%, matures in January 2006, and provides for three one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through maturity, with principal and interest paid through the extension periods based on a twenty-five-year amortization schedule. Prepayments of the loan require decreasing prepayment premiums through August 31, 2005, and require no prepayment premiums thereafter. We used proceeds from our IPO as well as proceeds from borrowings to fund this acquisition.

      On February 5, 2004, we executed a $60.0 million secured credit facility, at an interest rate of LIBOR plus 3.25%, of which approximately $49.8 million of the proceeds were funded March 24, 2004 and the remainder was funded May 17, 2004. The credit facility matures in three years, was initially collateralized by eight hotel properties, is subject to certain financial covenants, requires a commitment fee of 0.45% to 0.55% on the unused portion of the line, which is payable quarterly, and allows for an increase to $75.0 million subject to certain conditions of the lender. On August 17, 2004, we modified the terms of this credit facility, as discussed below.

      On March 4, 2004, we acquired a $25.0 million mezzanine loan receivable secured by 17 hotel properties. The mezzanine loan bears interest at LIBOR plus 8.7% with a 2.5% LIBOR floor, matures in July 2005, and provides for three one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive principal and interest payments through the extension periods based on a twenty-five-year amortization schedule. Prepayments of the loan are prohibited through maturity subject to certain provisions. We used proceeds from our IPO as well as proceeds from borrowings to fund this acquisition. Prior to December 31, 2004, we received payments of approximately $8.1 million related to the portion of this mezzanine loan that was secured by three hotel properties. As a result, the $25.0 million mezzanine loan, originally secured by 17 hotel properties, became a $16.9 million mezzanine loan, secured by 14 hotel properties.

      On March 15, 2004, we declared a cash dividend of approximately $1.9 million, or $0.06 per diluted share, for common shareholders and units of limited partnership of record on March 31, 2004, which was paid April 15, 2004.

      On March 19, 2004, we originated a $15.0 million mezzanine loan receivable related to a hotel property in Boston, Massachusetts. The mezzanine loan bears interest at LIBOR plus 10.25% with a 1.75% LIBOR floor and a 5% LIBOR cap, matures in March 2007, and provides for two one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through maturity. Prepayments of the loan are prohibited through September 1, 2005. We used proceeds from our IPO as well as proceeds from borrowings to fund this acquisition.

      On March 24, 2004, we acquired a $6.6 million mezzanine loan receivable related to a hotel property in Brooklyn Park, Minnesota. The mezzanine loan bears interest at LIBOR plus 10% with a 2% LIBOR floor and a 5% LIBOR cap and matures in January 2006. In accordance with the loan agreement, we will receive interest-only payments through maturity. In addition, we will receive an additional interest payment upon maturity based on an accrual rate of the greater of 15% or LIBOR plus 13% with a 2% LIBOR floor. We used proceeds from borrowings to fund this acquisition.

      On March 24, 2004, we acquired a hotel property in Lake Buena Vista, Florida, from JHM Ruby Lake Hotel, Ltd. for approximately $25.6 million in cash. Annualized revenue of the acquired hotel is approximately $5.8 million. We used proceeds from borrowings to fund this acquisition.

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      On April 1, 2004, we acquired a hotel property in Atlantic Beach, Florida, from Huron Jacksonville Limited Partnership for approximately $23.1 million, which consisted of approximately $6.3 million in cash, approximately $15.7 million in assumed mortgage debt, and approximately $1.1 million worth of limited partnership units, which equates to 106,675 units based on the market price of our common stock on the date of issuance. Annualized revenue of the acquired hotel is approximately $9.1 million. We used proceeds from borrowings to fund this acquisition.

      On May 17, 2004, we acquired a hotel property in Baltimore, Maryland, from The Buccini/ Pollin Group for approximately $15.9 million, which included approximately $9.1 million in cash and approximately $6.8 million in assumed mortgage debt, which matures April 1, 2011. On August 12, 2004, we increased this debt commitment by approximately $5.2 million and reduced the overall interest rate from the average weekly yield for 30-day commercial paper plus 3.5% to the average weekly yield for 30-day commercial paper plus 3.4%. Annualized revenue of the acquired hotel is approximately $3.9 million. We used proceeds from borrowings to fund this acquisition.

      On June 16, 2004, we declared a cash dividend of approximately $3.2 million, or $0.10 per diluted share, for common shareholders and units of limited partnership of record on June 30, 2004, which was paid July 15, 2004.

      On July 7, 2004, we acquired a hotel property and adjacent office building in Philadelphia, Pennsylvania, from Household OPEB I, Inc. for approximately $16.7 million in cash. Annualized revenue of the acquired hotel is approximately $9.0 million, while the adjacent office building has one tenant with nominal operations. We used proceeds from borrowings to fund this acquisition.

      On July 7, 2004, we executed a $14.8 million mortgage note payable, secured by one hotel property, at an interest rate of LIBOR plus 3.5%, with a 5% total floor. The mortgage note payable had a maturity date of July 31, 2007 with two one-year extension options, with interest-only payments due monthly plus principal payments of $20,000 due monthly beginning July 1, 2006. Upon completion of the $210.0 million term loan on September 2, 2004, as discussed below, this mortgage note payable was repaid. The balance outstanding at the time the loan was repaid was approximately $9.7 million.

      On July 14, 2004, we executed a $45.6 million credit facility, with an interest rate of LIBOR plus 6.25% with a 2% LIBOR floor, which matures July 13, 2007. Approximately $37.5 million of the proceeds were funded immediately. Prior to December 31, 2004, we paid down approximately $5.1 million of this credit facility in connection with partial payoffs of one of the mezzanine notes receivable securing the facility.

      On July 23, 2004, we acquired four hotel properties from Day Hospitality Group for approximately $25.9 million in cash plus approximately $86,000 in additional cash to be paid no later than April 30, 2005 pursuant to a post-acquisition contingency. Annualized revenues of these four hotel properties are approximately $7.8 million. We used proceeds from borrowings to fund the acquisition of these properties.

      On July 23, 2004, we executed a $19.6 million mortgage note payable, with an interest rate of LIBOR plus 3.5% with a 5% total floor, which matures July 31, 2007. Upon completion of the $210.0 million term loan on September 2, 2004, as discussed below, this mortgage note payable was paid down by approximately $12.6 million.

      On August 17, 2004, we modified our $60.0 million credit facility such that the interest rate was reduced from LIBOR plus 3.25% to LIBOR plus a range of 2.0% to 2.3% depending on the loan-to-value ratio, and maturity was extended from February 5, 2007 to August 17, 2007, with two one-year extension options.

      On August 20, 2004, we received an approximate $7.2 million payment related to the portion of our $25.0 million mezzanine loan that was secured by two hotel properties. As a result of this prepayment, the $25.0 million mezzanine loan, originally secured by 17 hotel properties, became a $17.8 million mezzanine loan, secured by 15 hotel properties.

      On September 2, 2004, we executed a $210.0 million term loan, at varying interest rates averaging LIBOR plus 1.95%, with interest-only payments due monthly. We used the proceeds to repay three mortgage notes payable totaling approximately $57.8 million (with interest rates ranging from LIBOR plus 3.25% to

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LIBOR plus 3.5%), pay down our $60.0 million secured credit facility (interest rate of LIBOR plus 3.25%) by approximately $57.2 million, and pay down another mortgage note payable by approximately $12.6 million (interest rate of LIBOR plus 3.5%).

      On September 2, 2004, we acquired nine hotel properties from Dunn Hospitality Group for approximately $62.0 million, which consisted of approximately $59.0 million in cash and approximately $3.0 million worth of limited partnership units, which equates to 333,333 units based on the market price of our common stock on the date of issuance. Annualized revenues of these nine hotel properties are approximately $20.1 million. We used proceeds from borrowings to fund the acquisition of these properties.

      On September 10, 2004, we acquired an $11.0 million mezzanine loan receivable related to a hotel property in Westminster, Colorado. The mezzanine loan bears interest at 14% and matures in September 2011. In accordance with the loan agreement, we will receive interest-only payments through maturity. We used proceeds from borrowings to fund this acquisition.

      On September 13, 2004, we declared a cash dividend of approximately $4.5 million, or $0.14 per diluted share, for common shareholders and units of limited partnership of record on September 30, 2004, which was paid October 15, 2004.

      On September 22, 2004, we issued 2,300,000 shares of 8.55% Series A Cumulative Preferred Stock at $25 per share, which generated gross proceeds of approximately $57.5 million. However, our aggregate proceeds, net of underwriters’ discount and offering costs, was approximately $55.0 million.

      On September 30, 2004, we originated a $10.0 million first-mortgage loan receivable related to a hotel property in Denver, Colorado, which bears interest at LIBOR plus 2.8%. Also on September 30, 2004, we originated a $5.0 million mezzanine loan receivable related to the same hotel property in Denver, Colorado, which bears interest at LIBOR plus 11.35%. Both loans mature October 2006. In accordance with the loan agreements, we will receive interest-only payments through maturity. We used proceeds from borrowings to fund these originations.

      On October 1, 2004, we acquired the Hyatt Orange County hotel in Anaheim, California, from Atrium Plaza, LLC for approximately $81.0 million in cash, inclusive of the seller’s commitment to fund a $6.0 million renovation, which was completed in December 2004. Annualized revenue of the acquired hotel is approximately $27.8 million. We used proceeds from borrowings to fund this acquisition.

      On October 1, 2004, in connection with the acquisition of a hotel property, we drew an additional $15.0 million on our $60.0 million credit facility.

      On December 9, 2004, we sold our $10 million first-mortgage loan receivable, secured by one hotel property, with an interest rate of LIBOR plus 2.8%, maturing in October 2006, at its par value.

      On December 15, 2004, we declared a cash dividend of approximately $4.8 million, or $0.15 per diluted share, for common shareholders and units of limited partnership of record on December 31, 2004, which was paid January 18, 2005.

      On December 17, 2004, we declared a cash dividend of approximately $1.4 million, or $0.5878 per diluted share, for Series A preferred shareholders of record on December 31, 2004, which was paid January 18, 2005.

      On December 30, 2004, we issued 993,049 shares of Series B-1 Preferred Stock at $10.07 per share, which generated proceeds of approximately $10.0 million.

Our Competition

      The hotel industry is highly competitive. Each of our hotels is located in a developed area that includes other hotel properties. Accordingly, our hotels compete for guests with other full-service or limited-service hotels in the immediate vicinity and, secondarily, with hotels in its geographic market. The future occupancy, ADR, and RevPAR of any hotel could be materially and adversely affected by an increase in the number or quality of the competitive hotel properties in its market area. We believe that brand recognition, location,

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quality of the hotel and the services provided, and price are the principal competitive factors affecting our hotels.

Our Employees

      At December 31, 2004, we had 27 full-time employees. The employees perform directly or through our operating partnership various acquisition, development, redevelopment, and corporate management functions. All persons employed in the day-to-day operation of our hotels are employees of the management companies engaged by our lessees, and are not our employees.

Environmental Matters

      Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal of a hazardous substance or transports a hazardous substance for disposal or treatment from property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell the affected property or to borrow using the affected property as collateral. In connection with the ownership and operation of our properties, we, our operating partnership, or Ashford TRS may be potentially liable for any such costs. In addition, the value of any lodging property loan we make or acquire would be adversely affected if the underlying property contained hazardous or toxic substances.

      Phase I environmental assessments, which are intended to identify potential environmental contamination for which our properties may be responsible, have been obtained on each of our properties. Phase I environmental assessments included:

•  historical reviews of the properties,

•  reviews of certain public records,

•  preliminary investigations of the sites and surrounding properties,

•  screening for the presence of hazardous substances, toxic substances, and underground storage tanks, and

•  the preparation and issuance of a written report.

      Phase I environmental assessments did not include invasive procedures, such as soil sampling or ground water analysis.

      Phase I environmental assessments have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations, or liquidity, and we are not aware of any such liability. To the extent that Phase I environmental assessments reveal facts that require further investigation, we would perform a Phase II environmental assessment. However, it is possible that these environmental assessments will not reveal all environmental liabilities. There may be material environmental liabilities of which we are unaware, including environmental liabilities that may have arisen since the environmental assessments were completed or updated. No assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, or (ii) the current environmental condition of our properties will not be affected by the condition of properties in the vicinity of our properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to the us.

      We believe that our properties are in compliance in all material respects with all federal, state, and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters. Neither we nor, to our knowledge, any of the former owners of our properties have been notified by any governmental

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authority of any material noncompliance, liability, or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties.

Our Insurance

      We maintain comprehensive insurance, including liability, fire, workers’ compensation, extended coverage, rental loss, environmental, terrorism, and, when available on reasonable commercial terms, flood and earthquake insurance, with policy specifications, limits, and deductibles customarily carried for similar properties. Certain types of losses (for example, matters of a catastrophic nature such as acts of war, earthquakes, or substantial known environmental liabilities) are either uninsurable or require such substantial premiums that the cost of maintaining such insurance is economically infeasible. Certain types of losses, such as those arising from subsidence activity, are insurable only to the extent that certain standard policy exceptions to insurability are waived by agreement with the insurer. We believe, however, that our properties are adequately insured, consistent with industry standards.

Risk Factors

      An investment in our securities involves various risks. You should carefully consider the following risk factors in conjunction with the other information contained herein before purchasing our securities. The risks discussed herein can adversely affect our business, liquidity, operating results, prospects, and financial condition. This could cause the market price of our securities to decline and could cause you to lose all or part of your investment. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects, and financial condition.

Risks Related to Our Business

Our business strategy depends on our continued growth. We may fail to integrate recent and additional investments into our operations or otherwise manage our planned growth, which may adversely affect our operating results.

      Our business plan contemplates a period of continued growth in the next several years. We cannot assure you that we will be able to adapt our management, administrative, accounting, and operational systems, or hire and retain sufficient operational staff to successfully integrate our recent investments into our portfolio and manage any future acquisitions of additional assets without operating disruptions or unanticipated costs. Acquisition of any additional portfolio of properties or mortgages would generate additional operating expenses that we will be required to pay. As we acquire additional assets, we will be subject to the operational risks associated with owning new lodging properties. Our failure to successfully integrate our recent acquisitions as well as any future acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.

We may be unable to identify additional real estate investments that meet our investment criteria or to acquire the properties we have under contract.

      We cannot assure you that we will be able to identify real estate investments that meet our investment criteria, that we will be successful in completing any investment we identify, or that any investment we complete will produce a return on our investment. Moreover, we will have broad authority to invest in any real estate investments that we may identify in the future. We also cannot assure you that we will acquire the properties we currently have under firm purchase contracts or that the acquisition terms we have negotiated will not change.

Conflicts of interest could result in our management acting other than in our stockholders’ best interest.

      Conflicts of interest relating to Remington Hotel Corporation and Remington Lodging may lead to management decisions that are not in the stockholders’ best interest. The Chairman of our board of directors,

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Mr. Archie Bennett, Jr., serves as the Chairman of the board of directors of Remington Hotel Corporation, and our Chief Executive Officer and President, Mr. Montgomery Bennett, serves as the Chief Executive Officer and President of Remington Hotel Corporation. Messrs. Archie and Montgomery Bennett own 100% of Remington Hotel Corporation. As of December 31, 2004, Remington Lodging, which is also 100% owned by Messrs. Archie and Montgomery Bennett, managed 14 of our 33 properties and provided related services, including property management services and project development services. Additionally, Messrs. Archie and Montgomery Bennett own minority interests in several lodging properties not transferred to our operating partnership in connection with our initial public offering.

      Messrs. Archie and Montgomery Bennett’s ownership interests in and management obligations to Remington Hotel Corporation and Remington Lodging present them with conflicts of interest in making management decisions related to the commercial arrangements between us and Remington Lodging and will reduce the time and effort they each spend managing us. Our board of directors has adopted a policy that requires all management decisions relating to the management agreements with Remington Lodging be approved by a majority or, in certain circumstances, all of our independent directors.

      Holders of units in our operating partnership, including members of our management team, may suffer adverse tax consequences upon our sale of certain properties. Therefore, holders of units, either directly or indirectly, including Messrs. Archie and Montgomery Bennett, Mr. David Brooks, our Chief Legal Officer, Mr. Mark Nunneley, our Chief Accounting Officer, and Mr. Martin L. Edelman (or his family members), one of our directors, may have different objectives regarding the appropriate pricing and timing of a particular property’s sale. These officers and directors of ours may influence us not to sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

      In addition, we agreed to indemnify the contributors of the properties contributed to us in exchange for operating partnership units in connection with our initial public offering, including (indirectly) Messrs. Archie and Montgomery Bennett, Brooks, Nunneley, and Edelman (or his family members), against the income tax they may incur if we dispose of any of these properties. Because of this indemnification, our indemnified management team members may make decisions about selling any of these properties that are not in our stockholders’ best interest.

      We are a party to a master hotel management agreement and an exclusivity agreement with Remington Lodging. Of the 33 hotels we owned at December 31, 2004, 14 were managed by Remington Lodging. Additionally, Remington Lodging will manage the 21 hotel portfolio acquired in March 2005. The management agreement describes the terms of Remington Lodging’s management of the 14 hotels we owned at December 31, 2004 and the 21 hotels acquired in March 2005, as well as any future hotels we may acquire that will be managed by Remington Lodging. If we terminate the management agreement as to any of our hotels that are subject to the management agreement, we will be required to pay Remington Lodging a substantial termination fee. For example, if we were to terminate the management agreement with respect to all 14 of our hotels that were managed by Remington Lodging at December 31, 2004 because we elected to sell those hotels, the fee would be approximately $9.9 million. The exclusivity agreement requires us to engage Remington Lodging, unless our independent directors either (i) unanimously vote to hire a different manager or developer, or (ii) by a majority vote, elect not to engage Remington Lodging because they have determined that special circumstances exist or that, based on Remington Lodging’s prior performance, another manager or developer could perform the duties materially better. As the sole owners of Remington Lodging, which would receive any development, management, and management termination fees payable by us under the management agreement, Messrs. Archie and Montgomery Bennett may influence our decisions to sell a hotel or acquire or develop a hotel when it is not in the best interests of our stockholders to do so.

      In addition, Ashford Financial Corporation, an affiliate, contributed to us asset management and consulting agreements that relate to management and consulting services that Ashford Financial Corporation agreed to perform for hotel property managers with respect to 27 identified hotel properties. Ashford Financial Corporation is 100% owned by Messrs. Archie and Montgomery Bennett. Messrs. Archie and Montgomery

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Bennett also have a minority interest in the 27 hotels for which the asset management and consulting services are provided. The agreements provide for annual payments to us, as the assignee of Ashford Financial Corporation, in consideration for our performance of certain asset management and consulting services. The exact amount of the consideration due to us is contingent upon the revenue generated by the hotels underlying the asset management and consulting agreements. Ashford Financial Corporation has guaranteed a minimum payment to us of $1.2 million per year, subject to adjustments based on the consumer price index, for five years beginning on the date of our initial public offering. If any property underlying any asset management and consulting agreement is sold at any time, we will no longer derive any income from such property, and the amount of income we receive under the applicable asset management and consulting agreement will be decreased.

      We recently completed the acquisition of 21 of the 27 hotel properties for which we previously provided the asset management and consulting services. In connection with the acquisition, the asset management and consulting agreements for these properties were terminated, and we will no longer receive any fees under the terminated agreements. We do not expect the remaining six hotel properties for which we provide asset management and consulting services to generate sufficient revenue to result in at least $1.2 million in fees to us per year of the agreement. However, pursuant to the written guaranty agreement executed by Ashford Financial Corporation for our benefit, Ashford Financial Corporation will continue to guarantee a minimum fee of $1.2 million per year for five years from our initial public offering.

      Each of the eight management companies is either owned 100% by Messrs. Archie and Montgomery Bennett, or is a wholly-owned subsidiary of Remington Hotel Corporation, which is owned 100% by Messrs. Archie and Montgomery Bennett. Messrs. Archie and Montgomery Bennett also have a minority ownership interest in the hotel properties benefiting from the services provided pursuant to the asset management and consulting agreements. Although they do not own a controlling interest in such properties, Messrs. Archie and Montgomery Bennett may benefit from a future sale of the properties.

Tax indemnification obligations that apply in the event that we sell certain properties could limit our operating flexibility.

      If we dispose of any of the five properties that were contributed to us in exchange for units in our operating partnership in connection with our initial public offering, we may be obligated to indemnify the contributors, including Messrs. Archie and Monty Bennett whom have substantial ownership interests, against the tax consequences of the sale. We have agreed to pay a contributor’s tax liability if we dispose of a property contributed by a contributor in a taxable transaction before the earlier of:

•  10 years after the contribution of such property, and

•  the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of property to our operating partnership.

      This tax indemnity will be equal to the amount of the federal and state income tax liability the contributor incurs with respect to the gain allocated to the contributor. The terms of the contribution agreements also require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment. While the tax indemnities do not contractually limit our ability to conduct our business in the way we desire, we are less likely to sell any of the contributed properties in a taxable transaction during the indemnity period. Instead, we would either hold the property for the entire indemnity period or seek to transfer the property in a tax-deferred like-kind exchange. In addition, a condemnation of one of our properties could trigger our tax indemnification obligations.

      In addition, under the tax indemnification agreements, we have agreed for a period of 10 years to use commercially reasonable efforts to maintain non-recourse mortgage indebtedness in the amount of at least $16.0 million, which will allow the contributors to defer recognition of gain in connection with the contribution of the Las Vegas hotel property as part of our formation.

      Additionally, we are prohibited from selling or transferring the Sea Turtle Inn in Atlantic Beach, Florida, until April 1, 2007 if, as a result, the entity from whom we acquired the property would recognize gain for

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federal tax purposes. If we sell or transfer this property after April 1, 2007, but prior to April 1, 2009, and the sale or transfer results in the entity that sold us the property having to recognize gain for federal tax purposes, we must pay $180,000 to that entity. However, this amount will be reduced by $7,500 for each passing month from April 1, 2007 until April 1, 2009.

Hotel franchise requirements could adversely affect distributions to our stockholders.

      We must comply with operating standards, terms, and conditions imposed by the franchisors of the hotel brands under which our hotels operate. The franchisors periodically inspect their licensed hotels to confirm adherence to their operating standards. The failure of a hotel to maintain such standards could result in the loss or cancellation of a franchise license. With respect to operational standards, we rely on our property managers to conform to such standards. The franchisors may also require us to make certain capital improvements to maintain the hotel in accordance with system standards, the cost of which can be substantial. It is possible that a franchisor could condition the continuation of a franchise based on the completion of capital improvements that our management or board of directors determines are too expensive or otherwise not economically feasible in light of general economic conditions or the operating results or prospects of the affected hotel. In that event, our management or board of directors may elect to allow the franchise to lapse or be terminated, which could result in a change in brand franchising or operation of the hotel as an independent hotel.

      In addition, when the term of a franchise expires, the franchisor has no obligation to issue a new franchise. The loss of a franchise could have a material adverse effect on the operations or the underlying value of the affected hotel because of the loss of associated name recognition, marketing support, and centralized reservation systems provided by the franchisor. The loss of a franchise could also have a material adverse effect on cash available for distribution to stockholders.

Future terrorist attacks similar in nature to the events of September 11, 2001 may negatively affect the performance of our properties and the hotel industry and may negatively affect our future results of operations and financial condition.

      The terrorist attacks of September 11, 2001, their after-effects, and the resulting U.S.-led military action in Iraq substantially reduced business and leisure travel throughout the United States and hotel industry revenue per available room, or RevPAR, generally during the period following September 11, 2001. We cannot predict the extent to which additional terrorist attacks, acts of war, or similar events may occur in the future or how such events would directly or indirectly impact the hotel industry or our operating results. Future terrorist attacks, acts of war, or similar events could have further material adverse effects on the hotel industry at large and our operations in particular.

Our investments will be concentrated in particular segments of a single industry.

      Our entire business is hotel related. Our current investment strategy is to acquire or develop mid to upscale hotels, acquire first mortgages on hotel properties, invest in other mortgage-related instruments such as mezzanine loans to hotel owners and operators, and participate in hotel sale-leaseback transactions. Adverse conditions in the hotel industry will have a material adverse effect on our operating and investment revenues and cash available for distribution to our stockholders.

We rely on third party property managers, especially Remington Lodging, to operate our hotels and for a significant majority of our cash flow.

      For us to continue to qualify as a REIT, third parties must operate our hotels. A REIT may lease its hotels to taxable REIT subsidiaries in which the REIT can own up to a 100% interest. A taxable REIT subsidiary, or TRS, pays corporate level income tax and may retain any after-tax income. A REIT must satisfy certain conditions to use the TRS structure. One of those conditions is that the TRS must hire, to manage the hotels, an “eligible independent contractor” (“EIC”) that is actively engaged in the trade or business of managing hotels for parties other than the REIT. An EIC cannot (i) own more than 35% of the REIT, (ii) be

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owned more than 35% by persons owning more than 35% of the REIT, or (iii) provide any income to the REIT (i.e., the EIC cannot pay fees to the REIT, and the REIT cannot own any debt or equity securities of the EIC).

      Accordingly, while we may lease hotels to a TRS that we own, the TRS must engage a third-party operator to manage the hotels and our ability to direct and control how our hotels are operated is less than if we were able to manage our hotels directly. We have entered into a management agreement with Remington Lodging, which is owned 100% by Messrs. Archie and Montgomery Bennett, to manage 14 of the 33 lodging properties we owned at December 31, 2004, and we have hired unaffiliated third party property managers to manage the remaining 19 properties we owned at that time. Remington Lodging will also manage each of the 21 hotels acquired in March 2005. We do not supervise any of the property managers or their respective personnel on a day-to-day basis, and we cannot assure you that the property managers will manage our properties in a manner that is consistent with their respective obligations under the applicable management agreement or our obligations under our hotel franchise agreements. We also cannot assure you that our property managers will not be negligent in their performance, will not engage in other criminal or fraudulent activity, or will not otherwise default on their respective management obligations to us. If any of the foregoing occurs, our relationships with the franchisors may be damaged, we may be in breach of the franchise agreement, and we could incur liabilities resulting from loss or injury to our property or to persons at our properties. Any of these circumstances could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

If we cannot obtain additional financing, our growth will be limited.

      We are required to distribute to our stockholders at least 90% of our taxable income, excluding net capital gains, each year to continue to qualify as a REIT. As a result, our retained earnings available to fund acquisitions, development, or other capital expenditures are nominal. Eventually, we will rely upon the availability of additional debt or equity capital to fund these activities. Our long-term ability to grow through acquisitions or development of hotel-related assets will be limited if we cannot obtain additional financing. Market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.

We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay dividends to our stockholders.

      As a REIT, we are required to distribute at least 90% of our taxable income each year to our stockholders. We intend to distribute to our stockholders all or substantially all of our taxable income each year so as to qualify for the tax benefits accorded to REITs, but our ability to make distributions may be adversely affected by the risk factors described herein. We cannot assure you that we will be able to make distributions in the future. In the event of continued or future downturns in our operating results and financial performance or unanticipated capital improvements to our hotels or declines in the value of our mortgage portfolio, we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our financial performance, debt service obligations, applicable debt covenants, and capital expenditure requirements.

We are subject to various risks related to our use of, and dependence on, debt.

      The amount we have to pay on variable-rate debt increases as interest rates increase, which may decrease cash available for distribution to stockholders. We cannot assure you that we will be able to meet our debt service obligations. If we do not meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure. Changes in economic conditions or our financial results or prospects could (i) result in higher interest rates on variable rate debt, (ii) reduce the availability of debt financing generally or debt financing at favorable rates, (iii) reduce cash available for distribution to stockholders, and (iv) increase the risk that we could be forced to liquidate assets to repay debt, any of which could have a material adverse affect on us.

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      If we violate covenants in any debt agreements, 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 our line of credit, even if repayment of some or all the 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 beyond certain amounts or for certain purposes. Our governing instruments do not contain any limitation on our ability to incur indebtedness.

An interest rate mismatch could occur between asset yields and borrowing rates, resulting in decreased yields on our investment portfolio.

      Our operating results will depend in part on differences between the income from our assets (net of credit losses) and our borrowing costs. We intend to fund the origination and acquisition of a portion of our assets with borrowings that have interest rates that reset relatively rapidly, such as monthly or quarterly. We anticipate that, in many cases, the income from our assets will respond more slowly to interest rate fluctuations than the cost of our borrowings, creating a mismatch between asset yields and borrowing rates. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Increases in these rates will tend to decrease our net income and market value of our mortgage assets. We will incur operating losses if interest rate fluctuations result in our interest expense exceeding interest income.

We compete with other hotels for guests. We will also face competition for acquisitions of lodging properties and of desirable mortgage investments.

      The mid to upscale segments of the hotel business are competitive. Our hotels compete on the basis of location, room rates, quality, service levels, reputation, and reservation systems, among many other factors. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash available for distribution to stockholders.

      We compete for hotel acquisitions with entities that have similar investment objectives as we do. This competition could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms or on the terms contemplated in our business plan.

      We also compete for mortgage asset investments with numerous public and private real estate investment vehicles, such as mortgage banks, pension funds, other REITs, institutional investors, and individuals. Mortgages and other investments are often obtained through a competitive bidding process. In addition, competitors may seek to establish relationships with the financial institutions and other firms from which we intend to purchase such assets. Competition may result in higher prices for mortgage assets, lower yields, and a narrower spread of yields over our borrowing costs.

      Many of our competitors are larger than us, may have access to greater capital, marketing, and other resources, may have personnel with more experience than our officers, may be able to accept higher levels of debt or otherwise may tolerate more risk than us, may have better relations with hotel franchisors, sellers, or lenders, and may have other advantages over us in conducting certain business and providing certain services.

We may engage in hedging transactions, which can limit our gains and increase exposure to losses.

      We may enter into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt and also to protect our portfolio of mortgage assets from interest rate and prepayment rate fluctuations. Our hedging transactions may include entering into interest rate swap agreements or interest rate cap or floor agreements, purchasing or selling futures contracts, purchasing put and call options on securities or securities underlying futures contracts, or entering into forward rate agreements. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition. No hedging activity can

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completely insulate us from the risks associated with changes in interest rates and prepayment rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

•  Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought.

•  The duration of the hedge may not match the duration of the related liability.

•  The party owing money in the hedging transaction may default on its obligation to pay.

•  The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction.

•  The value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity.

      Hedging involves risk and typically involves costs, including transaction costs, which may reduce our overall returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distributions to stockholders. We generally intend to hedge as much of the interest rate risk as management determines is in our best interests given the cost of such hedging transactions. The REIT qualification rules may limit our ability to enter into hedging transactions by requiring us to limit our income from hedges. If we are unable to hedge effectively because of the REIT rules, we will face greater interest rate exposure than may be commercially prudent.

We may not be able to sell our investments on favorable terms.

      We may decide to sell investments for a variety of reasons. We cannot assure you that we will be able to sell any of our investments on favorable terms, or that our investments will not be sold for a loss.

Risks Related to Hotel Investments

We are subject to general risks associated with operating hotels.

      Our hotels (and the hotels underlying our mortgage and mezzanine loans) are subject to various operating risks common to the hotel industry, many of which are beyond our control, including the following:

•  our hotels compete with other hotel properties in their geographic markets and many of our competitors have substantial marketing and financial resources;

•  over-building in our markets, which adversely affects occupancy and revenues at our hotels;

•  dependence on business and commercial travelers and tourism; and

•  adverse effects of general, regional and local economic conditions and increases in energy costs or labor costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists.

      These factors could adversely affect our hotel revenues and expenses, as well as the hotels underlying our mortgage and mezzanine loans, which in turn would adversely affect our ability to make distributions to our stockholders.

We may have to make significant capital expenditures to maintain our lodging properties.

      Our hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. The franchisors of our hotels may also require periodic capital

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improvements as a condition of keeping the franchise licenses. Generally, we are responsible for the cost of these capital improvements, which gives rise to the following risks:

•  cost overruns and delays;

•  renovations can be disruptive to operations and can displace revenue at the hotels, including revenue lost while rooms under renovation are out of service;

•  the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and

•  the risk that the return on our investment in these capital improvements will not be what we expect.

      If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow to fund future capital improvements.

The hotel business is seasonal, which will affect our results of operations from quarter to quarter.

      The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can cause quarterly fluctuations in our revenues.

Our development activities may be more costly than we have anticipated.

      As part of our growth strategy, we may develop additional hotels. Hotel development involves substantial risks, including that:

•  actual development costs may exceed our budgeted or contracted amounts;

•  construction delays may prevent us from opening hotels on schedule;

•  we may not be able to obtain all necessary zoning, land use, building, occupancy, and construction permits;

•  our developed properties may not achieve our desired revenue or profit goals; and

•  we may incur substantial development costs and then have to abandon a development project before completion

Risks Relating to Investments in Mortgages and Mezzanine Loans

Mortgage investments that are not United States government insured and non-investment grade mortgage assets involve risk of loss.

      As part of our business strategy, we originate and acquire lodging-related uninsured and non-investment grade mortgage loans and mortgage assets, including mezzanine loans. While holding these interests, we are subject to risks of borrower defaults, bankruptcies, fraud and related losses, and special hazard losses that are not covered by standard hazard insurance. Also, the costs of financing the mortgage loans could exceed the return on the mortgage loans. In the event of any default under mortgage loans held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan. To the extent we suffer such losses with respect to our investments in mortgage loans, our value and the price of our securities may be adversely affected.

We invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.

      Our mortgage loan assets are generally non-recourse. With respect to our non-recourse mortgage loan assets, in the event of a borrower default, the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan may be less than the amount owed under the mortgage loan. As to those

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mortgage loan assets that provide for recourse against the borrower and its assets, generally we cannot assure you that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.

Interest rate fluctuations affect the value of our mortgage assets, net income and securities.

      Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Interest rate fluctuations can adversely affect our income and value of our securities in many ways and present a variety of risks, including the risk of variances in the yield curve, a mismatch between asset yields and borrowing rates, and changing prepayment rates.

      Variances in the yield curve may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Short-term interest rates are ordinarily lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested in mortgage loans, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.

Prepayment rates on our mortgage loans may adversely affect our yields.

      The value of our mortgage loan assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. To the extent we originate mortgage loans, we expect that such mortgage loans will have a measure of protection from prepayment in the form of prepayment lock-out periods or prepayment penalties. However, this protection may not be available with respect to investments that we acquire but do not originate. The majority of the mortgage loans assets we currently have in our investment portfolio have some combination of prepayment lock-out periods or prepayment penalties; however, we cannot assure you that these lock-out periods or penalties will sufficiently protect us from prepayment risk or that future mortgage loans we acquire will have prepayment protection mechanisms.

      In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios, we may fail to fully recoup our cost of acquisition of certain investments.

      In making any investment, we consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment. These considerations affect our decision whether to originate or purchase an investment and the price offered for that investment. No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions, and the quality of management of the underlying property. Our inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may adversely affect the price of our securities.

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Volatility of values of mortgaged properties may adversely affect our mortgage loans.

      Lodging property values and net operating income derived from lodging properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described herein relating to general economic conditions, operating lodging properties, and owning real estate investments. In the event its net operating income decreases, a borrower may have difficulty paying our mortgage loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could also cause us to suffer losses.

Mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

      We make and acquire mezzanine loans. These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.

Risks Related to the Real Estate Industry

Mortgage debt obligations expose us to increased risk of property losses, which could harm our financial condition, cash flow, and ability to satisfy our other debt obligations and pay dividends.

      Incurring mortgage debt increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders of that income.

      In addition, our default under any one of our mortgage debt obligations may result in a default on our other indebtedness. If this occurs, our financial condition, cash flow, and ability to satisfy our other debt obligations or ability to pay dividends may be harmed.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

      Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties or mortgage loans in our portfolio in response to changing economic, financial, and investment conditions is limited. The real estate market is affected by many factors that are beyond our control, including:

•  adverse changes in national and local economic and market conditions;

•  changes in interest rates and in the availability, cost, and terms of debt financing;

•  changes in governmental laws and regulations, fiscal policies, and zoning and other ordinances, and costs of compliance with laws and regulations;

•  the ongoing need for capital improvements, particularly in older structures;

•  changes in operating expenses; and

•  civil unrest, acts of war, and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

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      We cannot predict whether we will be able to sell any property or loan for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property or loan. Because we intend to offer more flexible terms on our mortgage loans than some providers of commercial mortgage loans, we may have more difficulty selling or participating our loans to secondary purchasers than would these more traditional lenders.

      We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

The costs of compliance with or liabilities under environmental laws may harm our operating results.

      Our properties and the properties underlying our loan assets may be subject to environmental liabilities. An owner of real property, or a lender with respect to a property that exercises control over the property, can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

•  our knowledge of the contamination;

•  the timing of the contamination;

•  the cause of the contamination; or

•  the party responsible for the contamination of the property.

      There may be environmental problems associated with our properties or properties underlying our loan assets of which we are unaware. Some of our properties or the properties underlying our loan assets use, or may have used in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on a property, we could become subject to strict, joint, and several liability for the contamination if we own the property or if we foreclose on the property or otherwise have control over the property.

      The presence of hazardous substances on a property we own or have made a loan with respect to may adversely affect our ability to sell or foreclose on the property, and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties or the properties underlying our loan assets could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.

      We have environmental insurance policies on each of our owned properties, and we intend to obtain environmental insurance for any other properties that we may acquire. However, if environmental liabilities are discovered during the underwriting of the insurance policies for any property that we may acquire in the future, we may be unable to obtain insurance coverage for the liabilities at commercially reasonable rates or at all, and we may experience losses. In addition, we generally do not require our borrowers to obtain environmental insurance on the properties they own that secure their loans from us.

Our properties and the properties underlying our mortgage loans may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

      When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties or the properties underlying our

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loan assets could require us or our borrowers to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us or our borrowers to liability from guests, employees, and others if property damage or health concerns arise.

Compliance with the Americans with Disabilities Act and fire, safety, and other regulations may require us or our borrowers to make unintended expenditures that adversely impact our operating results.

      All of our properties and the properties underlying our mortgage loans are required to comply with the Americans with Disabilities Act, or the ADA. The ADA requires that “public accommodations” such as hotels be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. We or our borrowers may be required to expend funds to comply with the provisions of the ADA at our hotels or the hotels underlying our loan assets, which could adversely affect our results of operations and financial condition and our ability to make distributions to stockholders. In addition, we and our borrowers are required to operate our properties in compliance with fire and safety regulations, building codes, and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We and our borrowers may be required to make substantial capital expenditures to comply with those requirements, and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

We may experience uninsured or underinsured losses.

      We have property and casualty insurance with respect to our properties and other insurance, in each case, with loss limits and coverage thresholds deemed reasonable by our management (and with the intent to satisfy the requirements of lenders and franchisors). In doing so, we have made decisions with respect to what deductibles, policy limits, and terms are reasonable based on management’s experience, our risk profile, the loss history of our property managers and our properties, the nature of our properties and our businesses, our loss prevention efforts, and the cost of insurance.

      Various types of catastrophic losses may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed. Accordingly, there can be no assurance (i) that the insurance coverage thresholds that we have obtained will fully protect us against insurable losses (i.e., losses may exceed coverage limits); (ii) that we will not incur large deductibles that will adversely affect our earnings; (iii) that we will not incur losses from risks that are not insurable or that are not economically insurable; or (iv) that current coverage thresholds will continue to be available at reasonable rates. We do not intend to maintain terrorism insurance on any of our properties. As a result, one or more large uninsured or underinsured losses could have a material adverse affect on us.

      Each of our current lenders requires us to maintain certain insurance coverage thresholds, and we anticipate that future lenders will have similar requirements. We believe that we have complied with the insurance maintenance requirements under the current governing loan documents and we intend to comply with any such requirements in any future loan documents. However, a lender may disagree, in which case the lender could obtain additional coverage thresholds and seek payment from us, or declare us in default under the loan documents. In the former case, we could spend more for insurance than we otherwise deem reasonable or necessary, or, in the latter case, subject us to a foreclosure on hotels collateralizing one or more loans. In addition, a material casualty to one or more hotels collateralizing loans may result in (i) the insurance company applying to the outstanding loan balance insurance proceeds that otherwise would be available to repair the damage caused by the casualty, which would require us to fund the repairs through other sources, or (ii) the lender foreclosing on the hotels if there is a material loss that is not insured.

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Risks Related to Our Status as a REIT

If we do not qualify as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.

      We operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance, or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

•  we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;

•  we would also be subject to federal alternative minimum tax and, possibly, increased state and local taxes;

•  any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and

•  unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and, thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT.

      If we fail to qualify as a REIT, we will not be required to make distributions to stockholders to maintain our tax status. As a result of all of these factors, our failure to qualify as a REIT would impair our ability to raise capital, expand our business, and make distributions to our stockholders and would adversely affect the value of our securities.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

      Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state, and local taxes on our income and assets. For example:

•  We will be required to pay tax on undistributed REIT taxable income.

•  We may be required to pay the “alternative minimum tax” on our items of tax preference.

•  If we have net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay tax on that income at the highest corporate rate.

•  If we sell a property in a “prohibited transaction,” our gain from the sale would be subject to a 100% penalty tax. A “prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business.

•  Our taxable REIT subsidiary, Ashford TRS, is a fully taxable corporation and will be required to pay federal and state taxes on its income.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

      To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders, and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus,

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compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may limit our ability to hedge effectively.

      The REIT provisions of the Internal Revenue Code may limit our ability to hedge mortgage securities and related borrowings by requiring us to limit our income in each year from qualified hedges, together with any other income not generated from qualified real estate assets, to no more than 25% of our gross income. In addition, we must limit our aggregate income from nonqualified hedging transactions, from our provision of services and from other non-qualifying sources to no more than 5% of our annual gross income. As a result, we may have to limit our use of advantageous hedging techniques. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the amount of income in excess of those limitations, multiplied by a fraction intended to reflect our profitability. If we fail to satisfy the REIT gross income tests, unless our failure was due to reasonable cause and not due to willful neglect, we could lose our REIT status for federal income tax purposes.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

      To qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities, and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

      As a REIT, we must distribute at least 90% of our annual taxable income (subject to certain adjustments) to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

      From time to time, we may generate taxable income greater than our net income for financial reporting purposes due to, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices, or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.

      At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. On May 28, 2003, the President signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which we refer to as the Jobs and Growth Tax Act. Effective for taxable years beginning after December 31, 2002, the Jobs and Growth Tax Act reduced the maximum rate of tax

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applicable to individuals on dividend income from regular C corporations from 38.6% to 15.0%. This reduced substantially the so-called “double taxation” (that is, taxation at both the corporate and stockholder levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs will not qualify for the dividend tax reduction. The implementation of the Jobs and Growth Tax Act could cause individual investors to view stocks of non-REIT corporations as more attractive relative to shares of REITs than was the case previously because the dividends paid by non-REIT corporations would be subject to lower tax rates for the individual. We cannot predict whether in fact this will occur or whether, if it occurs, what the impact will be on the value of our securities.

Your investment in our securities has various federal, state and local income tax risks that could affect the value of your investment.

      Although the provisions of the Internal Revenue Code relevant to your investment in our securities are generally described elsewhere herein, we strongly urge you to consult your own tax advisor concerning the effects of federal, state, and local income tax law on an investment in our securities, because of the complex nature of the tax rules applicable to REITs and their stockholders.

Risk Factors Related to Our Corporate Structure

There are no assurances of our ability to make distributions in the future.

      We intend to continue paying quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. However, our ability to pay dividends may be adversely affected by the risk factors described herein. All distributions will be made at the discretion of our board of directors and will depend upon our earnings, our financial condition, maintenance of our REIT status, and such other factors as our board of directors may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future. In addition, some of our distributions may include a return of capital.

Failure to maintain an exemption from the Investment Company Act would adversely affect our results of operations.

      We believe that we will conduct our business in a manner that allows us to avoid registration as an investment company under the Investment Company Act of 1940, or the 1940 Act. Under Section 3(c)(5)(C) of the 1940 Act, entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate” are not treated as investment companies. The SEC staff’s position generally requires us to maintain at least 55% of our assets directly in qualifying real estate interests to be able to rely on this exemption. To constitute a qualifying real estate interest under this 55% requirement, a real estate interest must meet various criteria. Mortgage securities that do not represent all of the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and, thus, may not qualify for purposes of the 55% requirement. Our ownership of these mortgage securities, therefore, is limited by the provisions of the 1940 Act and SEC staff interpretive positions. There are no assurances that efforts to pursue our intended investment program will not be adversely affected by operation of these rules.

Our charter does not permit ownership in excess of 9.8% of our capital stock, and attempts to acquire our capital stock in excess of the 9.8% limit without approval from our board of directors are void.

      For the purpose of preserving our REIT qualification, our charter prohibits direct or constructive ownership by any person of more than 9.8% of the lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the lesser of the total number or value of the outstanding shares of our preferred stock. Our charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one

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individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding stock, and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the board of directors will be void, and could result in the shares being automatically transferred to a charitable trust.

Because provisions contained in Maryland law and our charter may have an anti-takeover effect, investors may be prevented from receiving a “control premium” for their shares.

      Provisions contained in our charter and Maryland general corporation law may have effects that delay, defer, or prevent a takeover attempt, which may prevent stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the following:

•  Ownership limit: The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock without our permission.

•  Classification of preferred stock: Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.

      Maryland statutory law provides that an act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director. Hence, directors of a Maryland corporation are not required to act in takeover situations under the same standards as apply in Delaware and other corporate jurisdictions.

Offerings of debt securities, which would be senior to our common stock and any preferred stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend distributions, may adversely affect the market price of our common stock and any preferred stock.

      We have offered preferred stock and may offer debt securities. Additionally, in the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, and classes of preferred stock or common stock or classes of preferred units. Upon liquidation, holders of our debt securities or preferred units and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of shares of preferred stock or common stock, and holders of our debt securities and shares of preferred stock or preferred units and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common or preferred stock, or both. Our preferred stock or preferred units, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our securities and diluting their securities holdings in us.

Securities eligible for future sale may have adverse effects on the market price of our securities.

      We cannot predict the effect, if any, of future sales of securities, or the availability of securities for future sales, on the market price of our outstanding securities. Sales of substantial amounts of common stock (including (i) 6,097,925 shares of common stock which can be issued, at our option, in exchange for

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outstanding units in our operating partnership, (ii) 288,239 shares of common stock which were issued to certain of our directors, executive officers, and employees of the company and its affiliates and are now fully vested and unrestricted, (iii) 506,478 restricted shares, issued to certain of our directors, executive officers, and employees of the company and its affiliates, which, in the case of the executive officers and employees, are subject to continued employment by such officer or employee, and (iv) restricted shares issuable to executive officers only if specified performance criteria are satisfied) or the perception that such sales could occur, may adversely affect prevailing market prices for our securities.

      We also may issue from time to time additional shares of securities or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of our securities or the perception that these sales could occur may adversely affect the prevailing market price for our securities or may impair our ability to raise capital through a sale of additional debt or equity securities.

We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

      Our future success depends, to a significant extent, upon the continued services of our management team. In particular, the lodging industry experience of Messrs. Archie and Montgomery Bennett, Kessler, Brooks, Kimichik, and Nunneley and the extent and nature of the relationships they have developed with hotel franchisors, operators, and owners and hotel lending and other financial institutions are critically important to the success of our business. We do not maintain key person life insurance on any of our officers. Although these officers currently have employment agreements with us through 2006 (2007 for Mr. Montgomery Bennett), we cannot assure you of the continued employment of all of our officers. The loss of services of one or more members of our corporate management team could harm our business and our prospects.

An increase in market interest rates may have an adverse effect on the market price of our securities.

      One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our securities likely will be based primarily on the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to stockholders, and not from the market value or underlying appraised value of the properties or investments themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our securities. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common or preferred stock could decrease because potential investors may require a higher dividend yield on our common or preferred stock as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification, and distributions, are determined by our board of directors. Although we have no present intention to do so, our board of directors may amend or revise these and other policies from time to time without a vote of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and the changes could harm our business, results of operations, and share price.

      Changes in our strategy or investment or leverage policy could expose us to greater credit risk and interest rate risk or could result in a more leveraged balance sheet. We cannot predict the effect any changes to our current operating policies and strategies may have on our business, operating results, and stock price. However, the effects may be adverse.

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Our Franchise Licenses

      We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity, and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards, and centralized reservation systems. As of December 31, 2004, the Company owned 33 hotels, 32 of which operated under the following franchise licenses:

      Embassy Suites is a registered trademark of Hilton Hospitality, Inc.

      Radisson is a registered trademark of Radisson Hotels International, Inc.

      Doubletree is a registered trademark of Hilton Hospitality, Inc.

      Hilton Garden Inn is a registered trademark of Hilton Hospitality, Inc.

      SpringHill Suites is a registered trademark of Marriott International, Inc.

      Homewood Suites by Hilton is a registered trademark of Hilton Hospitality, Inc.

      Hampton Inn is a registered trademark of Hilton Hospitality, Inc.

      Residence Inn by Marriott is a trademark of Marriott International, Inc.

      Courtyard by Marriott is a trademark of Marriott International, Inc.

      Fairfield Inn by Marriott is a trademark of Marriott International, Inc.

      Hyatt Regency is a trademark of Hyatt Corporation.

      Sheraton is a trademark of Sheraton Hotels and Resorts, a division of Starwood Hotels and Resorts Worldwide, Inc.

      Our management companies, including Remington Lodging, must operate each hotel pursuant to the terms of the related franchise agreement, and must use their best efforts to maintain the right to operate each hotel as such. In the event of termination of a particular franchise agreement, our management companies must operate the effected hotels under such other franchise agreement, if any, as we enter into or obtain as franchisee. We anticipate that most of the additional hotels we acquire will be operated under franchise licenses as well.

      Our franchise licenses generally specify certain management, operational, recordkeeping, accounting, reporting, and marketing standards and procedures with which the franchisee must comply, including requirements related to:

•  training of operational personnel;

•  safety;

•  maintaining specified insurance;

•  the types of services and products ancillary to guestroom services that may be provided;

•  display of signage; and

•  the type, quality, and age of furniture, fixtures, and equipment included in guestrooms, lobbies, and other common areas.

Seasonality

      Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. We anticipate that our cash flow from the operation of the properties will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal

30

fluctuations in lease revenue, we expect to utilize other cash on hand or borrowings to make required distributions. However, we cannot make any assurances that we will make distributions in the future.

Item 2. Properties

      As of December 31, 2004, we owned 33 hotel properties located in fourteen states with 5,095 rooms. We own our hotels in fee simple except for the Radisson Hotel in Covington, Kentucky, which we own partially in fee simple and partially pursuant to a ground lease that expires in 2070 (including all extensions), and the Doubletree Guest Suites in Columbus, Ohio, which was built on an air rights lease above the parking garage that expires in 2045. These hotel properties are held for investment purposes and operated by our managers. The following table sets forth certain descriptive information regarding these hotels as of December 31, 2004:

Hotel Property		Location		Rooms
Embassy Suites			Austin, TX		150
Embassy Suites			Dallas, TX		150
Embassy Suites			Herndon, VA		150
Embassy Suites			Las Vegas, NV		220
Embassy Suites			Phoenix, AZ		229
Embassy Suites			Syracuse, NY		215
Embassy Suites			Flagstaff, AZ		119
Radisson Hotel			Covington, KY		236
Radisson Hotel			Holtsville, NY		188
Doubletree Guest Suites			Columbus, OH		194
Doubletree Guest Suites			Dayton, OH		137
Hilton Garden Inn			Jacksonville, FL		119
Homewood Suites			Mobile, AL		86
Hampton Inn			Lawrenceville, GA		86
Hampton Inn			Evansville, IN		141
Hampton Inn			Terre Haute, IN		112
Hampton Inn			Horse Cave, KY		101
Hampton Inn			Buford, GA		92
SpringHill Suites by Marriott			Jacksonville, FL		102
SpringHill Suites by Marriott			Baltimore, MD		133
SpringHill Suites by Marriott			Kennesaw, GA		90
SpringHill Suites by Marriott			Buford, GA		96
Fairfield Inn & Suites			Kennesaw, GA		87
Fairfield Inn by Marriott			Evansville, IN		110
Fairfield Inn by Marriott			Princeton, IN		73
Courtyard by Marriott			Bloomington, IN		117
Courtyard by Marriott			Columbus, IN		90
Courtyard by Marriott			Louisville, KY		150
Marriott Residence Inn			Lake Buena Vista, FL		210
Marriott Residence Inn			Evansville, IN		78
Sea Turtle			Altantic Beach, FL		193
Sheraton Bucks County			Langhorne, PA		187
Hyatt Regency Orange County			Anaheim, CA		654
	Total				5,095

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Item 3. Legal Proceedings

      We are currently subject to litigation arising in the normal course of its business. In the opinion of management, none of these lawsuits or claims against the Company, either individually or in the aggregate, is likely to have a material adverse effect on our business, results of operations, or financial condition. In addition, we believe we have adequate insurance in place to cover such litigation.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2004.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

      Our common stock is traded on the New York Stock Exchange under the symbol “AHT.” The following table sets forth for the indicated periods the high and low sales prices for our common stock, as traded on that exchange, since our inception:

	Price Range
	High		Low
2003
August 29, 2003 (inception) through September 30, 2003	$	9.50	$	8.85
Fourth quarter	$	9.80	$	8.97
2004
First quarter	$	10.52	$	9.10
Second quarter	$	10.50	$	8.10
Third quarter	$	9.55	$	8.35
Fourth quarter	$	11.09	$	9.25

Recent Sales of Unregistered Securities

      On December 27, 2004, the Company entered into a Series B Cumulative Convertible Redeemable Preferred Stock Purchase Agreement with Security Capital Secured Growth Incorporated (“Security Capital”) for the sale of up to $75.0 million in Series B cumulative convertible redeemable preferred stock. Pursuant to the purchase agreement, Security Capital may purchase up to 5,162,000 shares of Series B-1 Preferred Stock of the Company and up to 2,285,865 shares of Series B-2 Preferred Stock of the Company, in each case at a per-share price of $10.07, which was determined using a 20-day average closing price calculated five business days prior to execution of the agreement. The two series of preferred stock are identical except with respect to voting rights and convertibility features and are referred to herein collectively as the Series B Preferred Stock. Each share of Series B-1 Preferred Stock is convertible, at the option of the holder, at any time into the number of shares of common stock of the Company obtained by dividing $10.07 by the conversion price then in effect. The initial conversion price of the Class B-1 Preferred Stock is $10.07, subject to certain adjustments, as set forth in the purchase agreement. Additionally, all holders of Series B-1 Preferred Stock are entitled to vote, on an as-converted basis voting as a single class together with the holders of common stock, on all matters to be voted on by the Company’s stockholders. The Series B-2 Preferred Stock will automatically convert into Series B-1 Preferred Stock on a share-for-share basis immediately upon the earliest to occur of (i) approval of the stockholders of the Company as required by the applicable rules of the New York Stock Exchange or (ii) a determination by the board of directors of the Company that such stockholder vote is not required. The holders of Series B-2 Preferred Stock have no voting rights.

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      The Series B Preferred Stock is redeemable for cash at the option of the Company at the liquidation preference, which is set at $10.07, after three years (or two years if certain criteria, as set forth in the purchase agreement, are met). The Series B Preferred Stock is redeemable for cash at the option of the holder at a specified redemption price, as defined, if certain events occur.

      The Series B preferred dividend for all such shares issued is set at the greater of $0.14 per share, or the prevailing common stock dividend plus, in the case of the Series B-2 Preferred Stock, an additional dividend of $0.05015 per share beginning January 1, 2009, if (i) the conversion of the Series B-2 Preferred Stock into Series B-1 Preferred Stock has not been completed and (ii) the price at which the common stock of the Company is then trading exceeds $10.07 per share.

      The $75.0 million preferred stock private placement is a two-stage transaction. The first tranche is for the sale of $20.0 million in Series B Preferred Stock. The initial $10.0 million funded on December 30, 2004, representing 993,049 shares of Series B-1 Preferred Stock. The issuance of the Series B-1 Preferred Stock on December 30, 2004 was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended. The remaining $10.0 million of the first tranche will be available for disbursement by June 30, 2005. The second tranche is for the sale of $55.0 million in Series B Preferred Stock. Of the second tranche, $34.7 million can be funded, at the financial institution’s election, on June 30, 2005 if the Company has not given notice to the financial institution of its intent to sell $34.7 million of the second tranche by June 15, 2005. The remainder of the second tranche will be available for disbursement by December 23, 2005. Proceeds from the issuance of the initial 993,049 shares of Series B-1 Preferred Stock were used to partially fund a 21-property acquisition, which closed on March 16, 2005, and the Company will continue to sell preferred stock under this purchase agreement over time to fund general corporate purposes, new acquisitions, or debt repayment.

      Pursuant to the terms of the purchase agreement, Security Capital has certain participation rights with respect to any sale of equity securities by us for consideration consisting solely of cash. Pursuant to this participation right and a result of the public common stock offering the Company completed in January 2005, the financial institution has the right to acquire up to 2,070,000 shares of our common stock at $9.139 per share. Security Capital may exercise its option to purchase these shares of common stock by delivering a written notice indicating such exercise no later than October 12, 2005, with the closing to occur on November 1, 2005. The shares of common stock to be sold to Security Capital upon the exercise of the option will be issued in a private placement transaction or, if certain conditions are satisfied, pursuant to the terms of a registration statement.

Stockholder Information

      As of March 14, 2005, we had approximately 9,300 holders of record of our common stock. In order to comply with certain requirements related to our qualification as a REIT, our charter limits the number of shares of capital stock that may be owned by any single person or affiliated group without our permission to 9.8% of the outstanding shares of any class of our capital stock. The Company’s Board of Directors has granted waivers to three stockholders allowing for such stockholders to exceed the ownership limitation.

Dividend Information

      To maintain our qualification as a REIT, we intend to make annual distributions to our stockholders of at least 90% of our taxable income (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). Distributions will be authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our dividend policy will not change in the future. Our ability to pay distributions to our stockholders will depend, in part, upon our receipt of distributions from our operating partnership, which may depend upon receipt of lease payments with respect to our properties from the indirect, wholly-owned subsidiary of our operating partnership, Ashford TRS, and, in turn, upon the management of our properties by Remington Lodging or other management companies.

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      On March 15, 2004, the Company declared a cash dividend of approximately $0.06 per diluted share, for stockholders of record on March 31, 2004, to be paid on April 15, 2004. On June 16, 2004, the Company declared a cash dividend of approximately $3.2 million, or $0.10 per diluted share, for common shareholders and units of limited partnership of record on June 30, 2004, which was paid July 15, 2004. On September 13, 2004, the Company declared a cash dividend of approximately $4.5 million, or $0.14 per diluted share, for common shareholders and units of limited partnership of record on September 30, 2004, which was paid October 15, 2004. On December 15, 2004, the Company declared a cash dividend of approximately $4.8 million, or $0.15 per diluted share, for common shareholders and units of limited partnership of record on December 31, 2004, which was paid January 18, 2005.

Equity Compensation Plans Information

      The following table sets forth the number of securities to be issued upon exercise of outstanding options, warrants, and rights; weighted-average exercise price of outstanding options, warrants, and rights; and the number of securities remaining available for future issuance as of December 31, 2004:

		Number of Securities		Weighted-Average
		to be Issued Upon		Exercise Price of
		Exercise of Outstanding		Outstanding		Number of Securities
		Options, Warrants,		Options, Warrants,		Remaining Available
		and Rights		and Rights		for Future Issuance
Equity compensation plans approved by security holders:
	Restricted stock		794,717		NA		736,964
Equity compensation plans not approved by security holders			None		None		None

Item 6. Selected Financial Data

      The following table sets forth consolidated selected historical operating and financial data for the Company beginning with its commencement of operations on August 29, 2003. Prior to that time, this table includes the combined selected historical operating and financial data of certain affiliates of Remington Hotel Corporation (the “Predecessor”).

      The selected historical consolidated and combined financial information as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 were derived from audited financial statements contained elsewhere herein. The selected historical combined financial information as of December 31, 2002 and for the year ended December 31, 2001 were derived from the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2003, which are included in the Company’s Form 10-K, filed March 29, 2004. The selected historical combined financial information as of December 31, 2001 and for the year ended December 31, 2000 were derived from the Company’s Post-Effective Amendment #1 to Form S-11 (file number 001-31775) as filed with the Securities and Exchange Commission on August 26, 2003. The selected historical combined balance sheet data as of December 31, 2000 was derived from unaudited financial statements. The unaudited historical combined financial statements include all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition as of such date under accounting principles generally accepted in the United States.

      The information below should be read along with all other financial information and analysis presented elsewhere herein, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated and combined financial statements and related notes thereto.

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ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

SECLECTED HISTORICAL FINANCIAL AND OTHER DATA

			Year Ended December 31,
			2004			2003			2002			2001			2000
			(Company)			(Company &			(Predecessor)			(Predecessor)			(Predecessor)
						Predecessor)
Operating Data:
Revenue:
	Hotel revenues
		Rooms	$	89,798,311		$	34,682,916		$	28,529,640		$	29,165,515		$	24,654,910
		Food and beverage		14,336,531			6,158,916			5,698,029			5,691,902			3,178,314
		Interest income from notes receivable		7,549,445			110,000			—			—			—
		Other		5,240,775			1,326,769			1,130,112			1,358,229			1,470,000
	Total Operating Revenue			116,925,062			42,278,601			35,357,781			36,215,646			29,303,224
Expenses:
	Hotel operating expenses
		Rooms		20,907,848			8,113,097			6,461,721			6,260,660			5,763,985
		Food and beverage		10,859,032			4,702,780			4,183,371			4,477,315			2,473,295
		Other direct		2,150,404			900,621			621,693			608,350			661,351
		Indirect		35,560,902			14,823,432			12,370,304			12,373,861			8,721,893
		Management fees, including related parties		3,395,106			1,369,888			1,059,867			1,463,900			1,308,966
	Property taxes, insurance, and other			6,654,858			2,858,050			2,437,482			2,197,404			1,558,545
	Depreciation & amortization			10,767,785			4,932,676			4,833,551			4,446,486			3,249,308
	Corporate general and administrative:
		Stock-based compensation		2,397,130			864,452			—			—			—
		Other corporate general and administrative		9,457,814			3,138,498			—			—			—
	Total Operating Expenses			102,150,879			41,703,494			31,967,989			31,827,976			23,737,343
	Operating income			14,774,183			575,107			3,389,792			4,387,670			5,565,881
	Interest income			335,495			289,133			53,485			226,531			161,004
	Interest expense and amortization of loan costs			(11,101,218	)		(5,000,206	)		(6,536,195	)		(7,520,694	)		(5,014,163	)
	Write-off of loan costs			(1,633,369	)		—			—			—			—
	Income (loss) before provision for income taxes and minority interest			2,375,091			(4,135,966	)		(3,092,918	)		(2,906,493	)		712,722
	Provision for income taxes			(658,273	)		(142,178	)		—			—			—
	Minority interest			(297,611	)		357,943			—			—			—
	Net Income (Loss)			1,419,207			(3,920,201	)		(3,092,918	)		(2,906,493	)		712,722
	Preferred dividends			(1,355,250	)		—			—			—			—
	Net Income (Loss) Available To Common Shareholders		$	63,957		$	(3,920,201	)	$	(3,092,918	)	$	(2,906,493	)	$	712,722
	Net Income (Loss) Per Share Available To Common Shareholders for the year ended December 31, 2004, and from inception through December 31, 2003, respectively:
		Basic and Diluted	$	0.00		$	(0.07	)
	Weighted Average Shares Outstanding for the year ended December 31, 2004, and from inception through December 31, 2003, respectively:
		Basic and Diluted		25,120,653			24,627,298

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					Year Ended December 31,
					2004			2003			2002			2001			2000
					(Company)			(Company &			(Predecessor)			(Predecessor)			(Predecessor)
								Predecessor)
Balance Sheet Data (2000 unaudited):
		Investments in hotel properties, net			$	427,005,476		$	173,723,998		$	85,246,801		$	88,874,078		$	68,292,242
		Cash, cash equivalents, and restricted cash				61,167,733			77,627,643			6,322,368			8,329,486			5,991,418
		Notes receivable				79,661,549			10,000,000			—			—			—
		Total assets				595,944,837			267,882,417			95,416,446			100,001,305			77,046,232
		Indebtedness				300,754,194			50,201,779			82,126,150			80,410,792			49,355,734
		Capital leases payable				312,584			456,869			621,351			277,810			92,370
		Total liabilities				327,925,885			57,943,496			86,105,492			84,684,368			53,836,084
		Total liabilities and owners’ equity				595,944,837			267,882,417			95,416,446			100,001,305			77,046,232
Other Data:
		Cash Flow:
			Provided by operating activities		$	6,651,442		$	5,734,806		$	622,734		$	1,108,150		$	4,870,739
			Used in investing activities			(310,623,644	)		(89,188,930	)		(1,079,824	)		(24,899,286	)		(12,778,381	)
			Provided by (used in) financing activities			274,827,107			161,718,791			(1,726,457	)		24,921,233			8,315,129
		Unaudited:
			Total number of rooms at December 31			5,095			2,381			1,094			1,094			906
			Total number of hotels at December 31			33			15			6			6			5
			EBITDA(1)		$	19,490,290		$	5,449,268		$	8,223,343		$	8,834,156		$	8,815,189
			FFO(2)		$	9,028,433		$	647,287		$	1,740,633		$	1,539,993		$	3,962,030
	(1) EBITDA Reconciliation (unaudited):
			Net income (loss)		$	1,419,207		$	(3,920,201	)	$	(3,092,918	)	$	(2,906,493	)	$	712,722
			Plus depreciation and amortization			10,767,785			4,932,676			4,833,551			4,446,486			3,249,308
			Plus interest expense & amotization of loan costs			11,101,218			5,000,206			6,536,195			7,520,694			5,014,163
			Less interest income			(335,495	)		(289,133	)		(53,485	)		(226,531	)		(161,004	)
			Plus provision for income taxes			658,273			142,178			—			—			—
			Remove minority interest			297,611			(357,943	)		—			—			—
				Gross EBITDA		23,908,599			5,507,783			8,223,343			8,834,156			8,815,189
			EBITDA related to minority interest			4,418,309			58,515			—			—			—
				EBITDA	$	19,490,290		$	5,449,268		$	8,223,343		$	8,834,156		$	8,815,189
	(2) FFO Reconciliation (unaudited):
			Net income (loss) available to common shareholders		$	63,957		$	(3,920,201	)	$	(3,092,918	)	$	(2,906,493	)	$	712,722
		(a) Plus real estate depreciation and amortization				10,713,546			4,930,796			4,833,551			4,446,486			3,249,308
			Remove minority interest			297,611			(357,943	)		—			—			—
				Gross FFO	$	11,075,114			652,652			1,740,633			1,539,993			3,962,030
			FFO related to minority interest			2,046,681			5,365			—			—			—
				FFO	$	9,028,433		$	647,287		$	1,740,633		$	1,539,993		$	3,962,030

(a)	Includes property-level furniture, fixtures, and equipment.
(1)	EBITDA is defined as operating income (loss) or income (loss) before net gain on sale of properties, interest expense, interest income (excluding interest income from mezzanine loans), income taxes, and

36

depreciation and amortization. We believe EBITDA is useful to investors as an indicator of our ability to service debt and pay cash distributions. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. EBITDA does not represent cash generated from operating activities determined in accordance with generally accepted accounting principles (“GAAP”), and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

(2)

The White Paper on Funds From Operations (“FFO”) approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002 defines FFO as net income (loss) computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains (or losses) from sales of properties and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets, and net of adjustments for the portion of these items related to unconsolidated entities and joint ventures. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered an alternative to a) GAAP net income (loss) as an indication of our financial performance or b) GAAP cash flows from operating activities as a measure of our liquidity, nor is it indicative of cash available to fund our cash needs, including our ability to make cash distributions. We believe that to facilitate a clear understanding of our historical operating results, FFO should be considered along with our net income (loss) and cash flows reported in the consolidated financial statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

      The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein. This report contains forward-looking statements within the meaning of the federal securities laws. Ashford Hospitality Trust, Inc. (the “Company” or “we” or “our”) cautions investors that any forward-looking statements presented herein, or which management may make orally or in writing from time to time, are based on management’s beliefs and assumptions at that time. Throughout this report, words such as “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result,” and other similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution investors that while forward-looking statements reflect our good-faith beliefs at the time such statements are made, said statements are not guarantees of future performance and are impacted by actual events that occur after such statements are made. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time those statements were made, to anticipate future results or trends.

      Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, those discussed herein under the heading “Rick Factors.” These risks and uncertainties continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment where new risk factors emerge from time to time. It is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any

37

forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Executive Overview

      We are a real estate investment trust (“REIT”) that commenced operations upon completion of our initial public offering (“IPO”) and related formation transactions on August 29, 2003. As of December 31, 2004, we owned 33 hotels, approximately $79.7 million of mezzanine loans receivable, and eight asset management and consulting contracts. Six of these hotels were contributed upon our formation, nine of these hotels were acquired in the fourth quarter of 2003, and 18 of these hotels were acquired at various times throughout 2004. All of the loans receivable were originated or acquired since November 26, 2003. The 27 hotel properties acquired since our formation contributed approximately $70.4 million and $11.6 million to our total revenue and operating income, respectively, for the year ended December 31, 2004, and approximately $6.1 million and $459,000 to our total revenue and operating income, respectively, for the year ended December 31, 2003.

      Based on our primary business objectives and forecasted operating conditions, our key priorities or financial strategies include, among other things:

•  acquiring hotels with a favorable current yield with an opportunity for appreciation,

•  implementing selective capital improvements designed to increase profitability and directing our managers to minimize operating costs and increase revenues,

•  originating or acquiring mezzanine loans, and

•  other investments that our Board deems appropriate.

      We believe the lodging industry was negatively affected in 2003 by low levels of business travel resulting from a weak economy (predominantly in the first half of the year), the war in Iraq, continued changes in terrorist threat levels, and travel reductions and restrictions related to severe acute respiratory syndrome, or SARS. However, in 2004, strong economic growth in the United States economy combined with improved business demand led to the strong RevPar growth throughout the lodging industry.

      In 2005, forecasts for the lodging industry continue to be favorable as U.S. Gross Domestic Product (“GDP”) is forecast to continue to expand. We feel there will be some final “unwinding” of suppressed business travel from the low levels experienced in 2002 and 2003 that will generate increases in business demand.

Results of Operations

      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. Increases in RevPAR attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. Increases in RevPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

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      The following table illustrates the key performance indicators for the years ended December 31, 2004, 2003, and 2002, for our initial properties (“comparable hotels”), which represents the six hotels we’ve owned throughout the three years presented:

		Year Ended December 31,
		2004			2003			2002
Consolidated (initial properties)
	Room revenues	$	31,025,537		$	29,391,266		$	28,529,640
	RevPAR	$	77.49		$	73.61		$	71.45
	Occupancy		70.15	%		70.87	%		65.98	%
	ADR	$	110.46		$	103.86		$	108.29
Embassy Suites (initial properties)
	Room revenues	$	23,302,327		$	21,596,051		$	21,404,050
	RevPAR	$	95.03		$	88.31		$	87.52
	Occupancy		76.03	%		76.31	%		73.55	%
	ADR	$	124.99		$	115.73		$	119.00
Radisson Hotels (initial properties)
	Room revenues	$	7,723,210		$	7,795,215		$	7,125,590
	RevPAR	$	49.77		$	50.37		$	46.04
	Occupancy		60.86	%		62.28	%		54.01	%
	ADR	$	81.78		$	80.87		$	85.24

      The consolidated and combined financial information presented herein includes all of the accounts of the Company beginning with its commencement of operations on August 29, 2003. Prior to that time, this report includes the combined financial information of certain affiliates of Remington Hotel Corporation (the “Predecessor”).

      The following table reflects key line items from our consolidated and combined statements of operations for the years ended December 31, 2004, 2003, and 2002:

				Company &						Company &
	The Company			Predecessor						Predecessor
							Favorable						Favorable
	Year Ended			Year Ended			(Unfavorable)			Year Ended			(Unfavorable)
	December 31,			December 31,			Change 2003 to			December 31,			Change 2002
	2004			2003			2004			2002			to 2003
Total revenue	$	116,925,062		$	42,278,601		$	74,646,461		$	35,357,781		$	6,920,820
Total hotel expenses		72,873,292			29,909,818			(42,963,474	)		24,696,956			5,212,862
Property taxes, insurance, and other		6,654,858			2,858,050			(3,796,808	)		2,437,482			420,568
Depreciation and amortization		10,767,785			4,932,676			(5,835,109	)		4,833,551			99,125
Corporate general and administrative		11,854,944			4,002,950			(7,851,994	)		—			4,002,950
Operating income		14,774,183			575,107			14,199,076			3,389,792			(2,814,685	)
Interest income		335,495			289,133			46,362			53,485			235,648
Interest expense		(9,217,377	)		(4,599,512	)		(4,617,865	)		(5,715,229	)		1,115,717
Amortization of loan costs		(1,883,841	)		(400,694	)		(1,483,147	)		(820,966	)		420,272
Write-off of loan costs		(1,633,369	)		—			(1,633,369	)		—			—
Provision for income taxes		(658,273	)		(142,178	)		(516,095	)		—			(142,178	)
Minority interest		(297,611	)		357,943			(655,554	)		—			357,943
Net income (loss)	$	1,419,207		$	(3,920,201	)	$	5,339,408		$	(3,092,918	)	$	(827,283	)

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Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003

      Revenue. Total revenue for the year ended December 31, 2004 increased to approximately $116.9 million, an increase of approximately $74.6 million or 176.6% from total revenue for the year ended December 31, 2003 of approximately $42.3 million. The increase was primarily due to approximately $64.3 million of incremental revenues attributable to the acquisitions of nine hotel properties in the fourth quarter of 2003 and 18 hotel properties at various times throughout 2004, as well as approximately $7.5 million of interest income earned on the Company’s $79.7 million mezzanine loans receivable portfolio, all of which was acquired or originated since November 26, 2003. In addition, revenues for comparable hotels increased due to increases in both room revenues and food and beverage revenues.

      Room revenues at comparable hotels for the year ended December 31, 2004 increased approximately $1.6 million or 5.6% compared to 2003 due to an increase in RevPAR from $73.61 to $77.49, which consisted of a 6.4% increase in ADR offset slightly by a 1.0% decrease in occupancy. Due to the continued recovery in the economy and consistent with industry trends, several hotels experienced increases in ADR. In particular, the Las Vegas and Dulles markets recovered significantly, and the two Embassy Suites at these locations performed accordingly. However, occupancy decreased significantly at the Holtsville Radisson due to substantial group sales related to certain customers during 2003 that did not recur in 2004 and new area competition, which primarily generated the overall slight decline in occupancy at comparable hotels.

      Food and beverage revenues at comparable hotels for the year ended December 31, 2004 increased approximately $115,000 or 2.1% compared to 2003. Although occupancy declined slightly overall, food and beverage revenues increased as certain hotels experienced an increase in banquets or group sales, which generated higher food and beverage revenues.

      Other revenues at comparable hotels for the year ended December 31, 2004 were virtually flat compared to 2003.

      Interest income from notes receivable increased to approximately $7.5 million for the year ended December 31, 2004 compared to approximately $110,000 for 2003 due to substantial growth in the mezzanine loans receivable portfolio to approximately $79.7 million at December 31, 2004, all of which was acquired or originated since November 2003.

      Asset management fees increased to approximately $1.3 million for the year ended December 31, 2004 compared to approximately $137,000 for 2003 due to the eight asset management and consulting contracts acquired from an affiliate upon formation of the Company on August 29, 2003.

      Hotel Operating Expenses. Hotel operating expenses, which consist of room expense, food and beverage expense, other direct expenses, indirect expenses, and management fees, increased approximately $43.0 million or 143.6% for the year ended December 31, 2004 compared to 2003, primarily due to approximately $42.2 million of incremental expenses associated with the 27 hotel properties acquired since the third quarter of 2003. In addition, hotel operating expenses at comparable hotels experienced an increase of approximately $723,000 or 2.8% for the year ended December 31, 2004 compared to 2003, primarily due to increases in rooms expense and indirect expense, partially offset by a decrease in food and beverage expense.

      Rooms expense at comparable hotels increased approximately $478,000 or 7.1% for the year ended December 31, 2004 compared to 2003 primarily due to increased occupancy at certain hotels and virtually flat costs at hotels experiencing comparable or decreased occupancy due to the fixed nature of maintaining staff. Food and beverage expense at comparable hotels for the year ended December 31, 2004 compared to 2003 decreased slightly, which is consistent with the overall decrease in occupancy. Indirect expenses at comparable hotels increased approximately $301,000 or 2.4% for the year ended December 31, 2004 compared to 2003. Indirect expenses increased as a result of:

•  increased sales and marketing expenses due to increased headcount and marketing budget at certain hotels,

•  increased repairs and maintenance expenses due to miscellaneous repairs incurred at certain hotels,

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•  increased franchise fees due to increased room revenues at certain hotels, and

•  increased energy costs due to increased utility rates.

      Property Taxes, Insurance, and Other. Property taxes, insurance, and other increased approximately $3.8 million or 132.8% for the year ended December 31, 2004 compared to 2003, due to approximately $4.1 million of incremental expenses associated with the 27 hotel properties acquired since the third quarter of 2003, which includes approximately $160,000 of uninsured losses related to hurricane and fire damage experienced at certain of these hotels. Aside from costs incurred at the additional hotels acquired, property taxes, insurance, and other decreased during the year ended December 31, 2004 compared to 2003, primarily due to decreased insurance rates.

      Depreciation and Amortization. Depreciation and amortization increased approximately $5.8 million or 118.3% for the year ended December 31, 2004 compared to 2003, due to approximately $6.8 million of incremental depreciation associated with the 27 hotel properties acquired since the third quarter of 2003. Aside from the additional hotels acquired, depreciation and amortization decreased for the year ended December 31, 2004 compared to 2003 as a result of certain assets becoming fully depreciated.

      Corporate General and Administrative. Corporate general and administrative expense increased to approximately $11.9 million for the year ended December 31, 2004 compared to approximately $4.0 for 2003 as a result of the annual impact of ongoing expenses associated with becoming a publicly-traded company on August 29, 2003, including salaries, payroll taxes, benefits, insurance, stock-based compensation related to employee stock grants, audit fees, and directors fees. For the year ended December 31, 2004, the total includes approximately $2.4 million of non-cash expenses associated with the amortization of employee stock grants, approximately $210,000 of offering costs associated with a public offering that was subsequently postponed, and approximately $596,000 of nonrecurring implementation costs associated with Sarbanes-Oxley internal controls documentation requirements. For the year ended December 31, 2003, the total includes approximately $864,000 of non-cash expenses associated with the amortization of employee stock grants.

      Operating Income. Operating income increased approximately $14.2 million to approximately $14.8 million for the year ended December 31, 2004 from approximately $575,000 million for 2003 as a result of the aforementioned operating results.

      Interest Income. Interest income increased approximately $46,000 to approximately $335,000 for the year ended December 31, 2004 from approximately $289,000 for 2003, primarily due to interest earned on funds remaining from the Company’s IPO and funds received from subsequent borrowings during 2004 in excess of interest earned on IPO funds held between August 29, 2003 and December 31, 2003.

      Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs increased approximately $6.1 million to approximately $11.1 million for the year ended December 31, 2004 from approximately $5.0 million for 2003. The increase in interest expense and amortization of loan costs is associated with the significantly higher average debt balance during 2004 compared to 2003.

      Write-off of Loan Costs. On September 2, 2004, the Company executed a $210.0 million term loan, and used the proceeds to repay three mortgage notes payable totaling approximately $57.8 million, pay down its $60.0 million secured credit facility by approximately $57.2 million, and pay down another mortgage note payable by approximately $12.6 million. Unamortized loan costs associated with the repaid mortgage notes was approximately $1.6 million, which was expensed.

      Provision for Income Taxes. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that does not relate to taxable REIT subsidiaries. However, the Company leases each of its hotel properties to Ashford TRS, which is treated as a taxable REIT subsidiary for federal income tax purposes. For the year ended December 31, 2004, the Company recognized a provision for income taxes related to Ashford TRS of approximately $658,000 compared to approximately $142,000 recognized for 2003.

      Minority Interest. Minority interest was a reduction to net income (loss) of approximately $298,000 for the year ended December 31, 2004 compared to an increase to net income (loss) of approximately $358,000 in

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2003. Upon formation of the Company on August 29, 2003, minority interest in the operating partnership was established to represent the limited partners’ proportionate share of the equity in the operating partnership. Net income (loss) is allocated to minority interest based on the weighted-average limited partnership percentage ownership throughout the period.

      Net Income (Loss). Net income (loss) was approximately $1.4 million of net income for the year ended December 31, 2004 and approximately $3.9 million of net loss for the year ended December 31, 2003, which represents a net income increase of approximately $5.3 million as a result of the aforementioned operating results.

      Preferred Dividends. On December 17, 2004, the Company declared a cash dividend of approximately $1.4 million, or $0.5878 per diluted share, for Series A preferred shareholders of record on December 31, 2004, which was paid January 18, 2005. In addition, the Company recognized Series B preferred stock dividends of approximately $3,300 related to its Series B preferred stock issued on December 30, 2004. In 2003, no preferred stock existed.

      Net Income (Loss) Available to Common Shareholders. Net income (loss) available to common shareholders was approximately $64,000 of net income for the year ended December 31, 2004 and approximately $3.9 million of net loss for the year ended December 31, 2003, which represents a net income increase of approximately $4.0 million as a result of the aforementioned operating results.

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002

      Revenue. Total revenue for the year ended December 31, 2003 increased approximately $6.9 million or 19.6% from total revenue for the year ended December 31, 2002, primarily due to approximately $6.1 million in revenues attributable to the acquisitions of five hotel properties on October 8, 2003 and four hotel properties on November 25, 2003, as well as approximately $110,000 of interest earned on the Company’s $10 million mezzanine loan receivable, which was acquired November 26, 2003. In addition, revenues for comparable hotels increased due to increased room revenues, partially offset by decreased food and beverage revenues and decreased other revenues. Room revenues at comparable hotels increased 3.0% due to an increase in RevPAR to $73.61 for the year ended December 31, 2003 compared to $71.45 for 2002, which consisted of a 7.4% increase in occupancy and a 4.1% decrease in ADR.

      Room revenues at comparable hotels for the year ended December 31, 2003 increased approximately $862,000 or 3.0% compared to 2002, primarily due to the aforementioned increase in occupancy offset somewhat by a decrease in ADR. Both the Covington Radisson and Las Vegas Embassy Suites experienced increases in occupancy due to an enhanced focus on weekend group sales. In addition, occupancy increased at the Dulles Embassy Suites due to a recovery in that marketplace, which had suffered a downturn following the September 11, 2001 terrorist events. The Holtsville Radisson also experienced an increase in occupancy, somewhat offset by a decrease in ADR, as a result of significant military business utilizing discounted rates in the latter half of the year. These occupancy increases were offset by a decrease in occupancy and ADR at both the Dallas and Austin Embassy Suites due to a downturn in the Texas economy, which is heavily dependent on business in the high-tech and telecom sectors.

      Food and beverage revenues at comparable hotels for the year ended December 31, 2003 decreased approximately $130,000 or 2.3% compared to 2002. Food and beverage revenues decreased at both the Dulles Embassy Suites and Dallas Embassy Suites due to higher than usual banquet revenues experienced in 2002 that did not recur in 2003. In addition, food and beverage revenues were down at both the Dallas and Austin Embassy Suites due to the aforementioned decreases in occupancy. Food and beverage revenues also decreased at the Covington Radisson due to a shift in customer mix toward airline crews, who utilize food and beverage facilities to a lesser extent than other business travelers.

      Other revenues at comparable hotels for the year ended December 31, 2003 decreased approximately $175,000 or 15.5% compared to 2002, primarily due to a decrease in telephone revenues as customers shifted from in-room phones to cellular phones.

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      Asset management fees increased to approximately $137,000 for the year ended December 31, 2003, compared to zero for 2002 due to the eight asset management and consulting contracts acquired from an affiliate upon formation of the Company on August 29, 2003. On October 16, 2003, the Company exercised its option to reassign its rights under its eight asset management and consulting contracts back to the affiliate until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003. As a result, the Company did not collect related asset management fee income in 2003 of approximately $250,000. However, the related guarantee of payment associated with these fees was extended for a like period.

      Hotel Operating Expenses. Hotel operating expenses, which consist of room expense, food and beverage expense, other direct expenses, indirect expenses, and management fees, increased approximately $5.2 million or 21.1% for the year ended December 31, 2003 compared to 2002, primarily due to approximately $4.5 million of expenses associated with the nine hotel properties acquired in the fourth quarter of 2003. In addition, hotel operating expenses at comparable hotels experienced increases in room expense, food and beverage expense, other direct expenses, and indirect expenses for the year ended December 31, 2003 compared to 2002.

      Room expense at comparable hotels increased approximately 4.8% for the year ended December 31, 2003 compared to 2002 primarily due to variable costs associated with the aforementioned overall increase in occupancy as well as increased payroll costs. Over the same comparative period, food and beverage expense at comparable hotels increased approximately 1.0% due to rising food and payroll costs. Other direct expenses at comparable hotels increased approximately 25.8% for the year ended December 31, 2003 compared to 2002 primarily due to increased payroll and telephone usage rates. Indirect expenses at comparable hotels increased approximately $155,000 or 1.3% for the year ended December 31, 2003 compared to 2002. Indirect expenses increased due to:

•  increased repairs and maintenance expense at the Dallas Embassy Suites and Austin Embassy Suites due to improvements in 2003 that did not occur in 2002, offset by decreased repairs and maintenance expense at the Las Vegas Embassy Suites, Covington Radisson, and Holtsville Radisson due to improvement programs in effect in 2002 that did not recur in 2003;

•  increased energy costs due to the air conditioning system running inefficiently during a portion of 2003 at the Austin Embassy Suites, increased usage at the Covington Radisson due to increased occupancy, and a colder 2003 winter at the Holtsville Radisson;

•  increased general and administrative fees due to increased payroll in 2003; and

•  increased franchise fees due to increased room revenues at the Dulles Embassy Suites, Las Vegas Embassy Suites, Covington Radisson, and Holtsville Radisson, as well as increased rates at certain hotels.

      Property taxes, insurance, and other. Property taxes, insurance, and other increased approximately $421,000 or 17.3% for the year ended December 31, 2003 compared to 2002, due to approximately $461,000 of expenses associated with the nine hotel properties acquired in the fourth quarter of 2003. Aside from the additional hotels acquired, property taxes, insurance, and other incurred in 2003 was consistent with 2002.

      Depreciation and amortization. Depreciation and amortization increased approximately $99,000 or 2.1% for the year ended December 31, 2003 compared to 2002, due to approximately $593,000 of depreciation associated with the nine hotel properties acquired in the fourth quarter of 2003. Aside from the additional hotels acquired, depreciation and amortization decreased in 2003 compared to 2002 as a result of certain assets becoming fully depreciated.

      Corporate general and administrative. Corporate general and administrative expense increased to approximately $4.0 million for the year ended December 31, 2003 compared to zero for 2002 as a result of expenses associated with being a newly-formed, publicly-traded company, including salaries, payroll taxes, benefits, insurance, stock-based compensation related to employee stock grants, audit fees, and directors fees. For 2003, the total includes approximately $864,000 of non-cash expenses associated with the amortization of employee stock grants.

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      Operating Income. Operating income decreased approximately $2.8 million from $3.4 million for the year ended December 31, 2002 to approximately $575,000 for the year ended December 31, 2003 as a result of the aforementioned operating results.

      Interest Income. Interest income increased approximately $236,000 from approximately $53,000 for the year ended December 31, 2002 to approximately $289,000 for the year ended December 31, 2003, primarily due to interest earned on funds received from the Company’s initial public offering.

      Interest Expense. Interest expense decreased approximately $1.5 million from approximately $6.5 million for the year ended December 31, 2002 to approximately $5.0 million for the year ended December 31, 2003. Upon completion of the Company’s initial public offering and related formation transactions on August 29, 2003, the Company repaid the majority of its mortgage notes payable. The decrease in interest expense is associated with the lower debt balance.

      Provision for income taxes. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that does not relate to taxable REIT subsidiaries. However, the Company leases each of its hotel properties to Ashford TRS, which is treated as a taxable REIT subsidiary for federal income tax purposes. For the period from inception through December 31, 2003, we recognized a provision for income taxes of approximately $142,000 related to Ashford TRS.

      Minority Interest. Minority interest increased to approximately $358,000 for the year ended December 31, 2003 compared to zero for 2002. Upon formation of the Company on August 29, 2003, minority interest in the operating partnership was established to represent the limited partners’ proportionate share of the equity in the operating partnership. Net income (loss) is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period.

      Net Loss. Net loss was approximately $3.9 million for the year ended December 31, 2003 and approximately $3.1 million for the year ended December 31, 2002, which represents a net loss increase of approximately $827,000 or 26.7% as a result of the aforementioned operating results.

Liquidity and Capital Resources

      Our principal source of funds to meet our cash requirements, including distributions to stockholders, will be our share of the operating partnership’s cash flow. The operating partnership’s principal sources of revenue include: (i) cash flow from hotel operations, (ii) interest income from our mezzanine loans receivable portfolio, and (iii) management fees related to our eight asset management and consulting contracts with an affiliate.

      Cash flow from hotel operations is subject to all operating risks common to the hotel industry, including:

•  Competition for guests from other hotels;

•  Adverse effects of general and local economic conditions;

•  Dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;

•  Increases in energy costs, airline fares, and other expenses related to travel, which may deter traveling;

•  Increases in operating costs related to inflation and other factors, including wages, benefits, insurance, and energy;

•  Overbuilding in the hotel industry, especially in particular markets; and

•  Actual or threatened acts of terrorism and actions taken against terrorists, which often cause public concern about travel safety.

      During the year ended December 31, 2004, we completed the following significant transactions, which impacted or will impact our cash flow and liquidity:

      On January 23, 2004, we acquired a $15.0 million subordinated first-mortgage loan receivable related to a hotel property in Denver, Colorado. The loan bears interest at LIBOR plus 9%, matures in

44

January 2006, and provides for three one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through maturity, with principal and interest paid through the extension periods based on a twenty-five-year amortization schedule. Prepayments of the loan require decreasing prepayment premiums through August 31, 2005, and require no prepayment premiums thereafter. We used proceeds from our IPO as well as proceeds from borrowings to fund this acquisition.

      On February 5, 2004, we executed a $60.0 million secured credit facility, at an interest rate of LIBOR plus 3.25%, of which approximately $49.8 million of the proceeds were funded March 24, 2004 and the remainder was funded May 17, 2004. The credit facility matures in three years, was initially collateralized by eight hotel properties, is subject to certain financial covenants, requires a commitment fee of 0.45% to 0.55% on the unused portion of the line, which is payable quarterly, and allows for an increase to $75.0 million subject to certain conditions of the lender. On August 17, 2004, we modified the terms of this credit facility, as discussed below.

      On March 4, 2004, we acquired a $25.0 million mezzanine loan receivable secured by 17 hotel properties. The mezzanine loan bears interest at LIBOR plus 8.7% with a 2.5% LIBOR floor, matures in July 2005, and provides for three one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive principal and interest payments through the extension periods based on a twenty-five-year amortization schedule. Prepayments of the loan are prohibited through maturity subject to certain provisions. We used proceeds from our IPO as well as proceeds from borrowings to fund this acquisition. Prior to December 31, 2004, we received payments of approximately $8.1 million related to the portion of this mezzanine loan that was secured by three hotel properties. As a result, the $25.0 million mezzanine loan, originally secured by 17 hotel properties, became a $16.9 million mezzanine loan, secured by 14 hotel properties.

      On March 15, 2004, we declared a cash dividend of approximately $1.9 million, or $0.06 per diluted share, for common shareholders and units of limited partnership of record on March 31, 2004, which was paid April 15, 2004.

      On March 19, 2004, we originated a $15.0 million mezzanine loan receivable related to a hotel property in Boston, Massachusetts. The mezzanine loan bears interest at LIBOR plus 10.25% with a 1.75% LIBOR floor and a 5% LIBOR cap, matures in March 2007, and provides for two one-year extension options subject to certain conditions. In accordance with the loan agreement, we will receive interest-only payments through maturity. Prepayments of the loan are prohibited through September 1, 2005. We used proceeds from our IPO as well as proceeds from borrowings to fund this acquisition.

      On March 24, 2004, we acquired a $6.6 million mezzanine loan receivable related to a hotel property in Brooklyn Park, Minnesota. The mezzanine loan bears interest at LIBOR plus 10% with a 2% LIBOR floor and a 5% LIBOR cap and matures in January 2006. In accordance with the loan agreement, we will receive interest-only payments through maturity. In addition, we will receive an additional interest payment upon maturity based on an accrual rate of the greater of 15% or LIBOR plus 13% with a 2% LIBOR floor. We used proceeds from borrowings to fund this acquisition.

      On March 24, 2004, we acquired a hotel property in Lake Buena Vista, Florida, from JHM Ruby Lake Hotel, Ltd. for approximately $25.6 million in cash. Annualized revenue of the acquired hotel is approximately $5.8 million. We used proceeds from borrowings to fund this acquisition.

      On April 1, 2004, we acquired a hotel property in Atlantic Beach, Florida, from Huron Jacksonville Limited Partnership for approximately $23.1 million, which consisted of approximately $6.3 million in cash, approximately $15.7 million in assumed mortgage debt, and approximately $1.1 million worth of limited partnership units, which equates to 106,675 units based on the market price of our common stock on the date of issuance. Annualized revenue of the acquired hotel is approximately $9.1 million. We used proceeds from borrowings to fund this acquisition.

      On May 17, 2004, we acquired a hotel property in Baltimore, Maryland, from The Buccini/ Pollin Group for approximately $15.9 million, which included approximately $9.1 million in cash and

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approximately $6.8 million in assumed mortgage debt, which matures April 1, 2011. On August 12, 2004, we increased this debt commitment by approximately $5.2 million and reduced the overall interest rate from the average weekly yield for 30-day commercial paper plus 3.5% to the average weekly yield for 30-day commercial paper plus 3.4%. Annualized revenue of the acquired hotel is approximately $3.9 million. We used proceeds from borrowings to fund this acquisition.

      On June 16, 2004, we declared a cash dividend of approximately $3.2 million, or $0.10 per diluted share, for common shareholders and units of limited partnership of record on June 30, 2004, which was paid July 15, 2004.

      On July 7, 2004, we acquired a hotel property and adjacent office building in Philadelphia, Pennsylvania, from Household OPEB I, Inc. for approximately $16.7 million in cash. Annualized revenue of the acquired hotel is approximately $9.0 million, while the adjacent office building has one tenant with nominal operations. We used proceeds from borrowings to fund this acquisition.

      On July 7, 2004, we executed a $14.8 million mortgage note payable, secured by one hotel property, at an interest rate of LIBOR plus 3.5%, with a 5% total floor. The mortgage note payable had a maturity date of July 31, 2007 with two one-year extension options, with interest-only payments due monthly plus principal payments of $20,000 due monthly beginning July 1, 2006. Upon completion of the $210.0 million term loan on September 2, 2004, as discussed below, this mortgage note payable was repaid. The balance outstanding at the time the loan was repaid was approximately $9.7 million.

      On July 14, 2004, we executed a $45.6 million credit facility, with an interest rate of LIBOR plus 6.25% with a 2% LIBOR floor, which matures July 13, 2007. Approximately $37.5 million of the proceeds were funded immediately. Prior to December 31, 2004, we paid down approximately $5.1 million of this credit facility in connection with partial payoffs of one of the mezzanine notes receivable securing the facility.

      On July 23, 2004, we acquired four hotel properties from Day Hospitality Group for approximately $25.9 million in cash plus approximately $86,000 in additional cash to be paid no later than April 30, 2005 pursuant to a post-acquisition contingency. Annualized revenues of these four hotel properties are approximately $7.8 million. We used proceeds from borrowings to fund the acquisition of these properties.

      On July 23, 2004, we executed a $19.6 million mortgage note payable, with an interest rate of LIBOR plus 3.5% with a 5% total floor, which matures July 31, 2007. Upon completion of the $210.0 million term loan on September 2, 2004, as discussed below, this mortgage note payable was paid down by approximately $12.6 million.

      On August 17, 2004, we modified our $60.0 million credit facility such that the interest rate was reduced from LIBOR plus 3.25% to LIBOR plus a range of 2.0% to 2.3% depending on the loan-to-value ratio, and maturity was extended from February 5, 2007 to August 17, 2007, with two one-year extension options.

      On August 20, 2004, we received an approximate $7.2 million payment related to the portion of our $25.0 million mezzanine loan that was secured by two hotel properties. As a result of this prepayment, the $25.0 million mezzanine loan, originally secured by 17 hotel properties, became a $17.8 million mezzanine loan, secured by 15 hotel properties.

      On September 2, 2004, we executed a $210.0 million term loan, at varying interest rates averaging LIBOR plus 1.95%, with interest-only payments due monthly. We used the proceeds to repay three mortgage notes payable totaling approximately $57.8 million (with interest rates ranging from LIBOR plus 3.25% to LIBOR plus 3.5%), pay down our $60.0 million secured credit facility (interest rate of LIBOR plus 3.25%) by approximately $57.2 million, and pay down another mortgage note payable by approximately $12.6 million (interest rate of LIBOR plus 3.5%).

      On September 2, 2004, we acquired nine hotel properties from Dunn Hospitality Group for approximately $62.0 million, which consisted of approximately $59.0 million in cash and approximately

46

$3.0 million worth of limited partnership units, which equates to 333,333 units based on the market price of our common stock on the date of issuance. Annualized revenues of these nine hotel properties are approximately $20.1 million. We used proceeds from borrowings to fund the acquisition of these properties.

      On September 10, 2004, we acquired an $11.0 million mezzanine loan receivable related to a hotel property in Westminster, Colorado. The mezzanine loan bears interest at 14% and matures in September 2011. In accordance with the loan agreement, we will receive interest-only payments through maturity. We used proceeds from borrowings to fund this acquisition.

      On September 13, 2004, we declared a cash dividend of approximately $4.5 million, or $0.14 per diluted share, for common shareholders and units of limited partnership of record on September 30, 2004, which was paid October 15, 2004.

      On September 22, 2004, we issued 2,300,000 shares of 8.55% Series A Cumulative Preferred Stock at $25 per share, which generated gross proceeds of approximately $57.5 million. However, our aggregate proceeds, net of underwriters’ discount and offering costs, was approximately $55.0 million.

      On September 30, 2004, we originated a $10.0 million first-mortgage loan receivable related to a hotel property in Denver, Colorado, which bears interest at LIBOR plus 2.8%. Also on September 30, 2004, we originated a $5.0 million mezzanine loan receivable related to the same hotel property in Denver, Colorado, which bears interest at LIBOR plus 11.35%. Both loans mature October 2006. In accordance with the loan agreements, we will receive interest-only payments through maturity. We used proceeds from borrowings to fund these originations.

      On October 1, 2004, we acquired the Hyatt Orange County hotel in Anaheim, California, from Atrium Plaza, LLC for approximately $81.0 million in cash, inclusive of the seller’s commitment to fund a $6.0 million renovation, which was completed in December 2004. Annualized revenue of the acquired hotel is approximately $27.8 million. We used proceeds from borrowings to fund this acquisition.

      On October 1, 2004, in connection with the acquisition of a hotel property, we drew an additional $15.0 million on our $60.0 million credit facility.

      On December 9, 2004, we sold our $10 million first-mortgage loan receivable, secured by one hotel property, with an interest rate of LIBOR plus 2.8%, maturing in October 2006, at its par value.

      On December 15, 2004, we declared a cash dividend of approximately $4.8 million, or $0.15 per diluted share, for common shareholders and units of limited partnership of record on December 31, 2004, which was paid January 18, 2005.

      On December 17, 2004, we declared a cash dividend of approximately $1.4 million, or $0.5878 per diluted share, for Series A preferred shareholders of record on December 31, 2004, which was paid January 18, 2005.

      On December 30, 2004, we issued 993,049 shares of Series B-1 Preferred Stock at $10.07 per share, which generated proceeds of approximately $10.0 million.

      Net Cash Flow Provided By Operating Activities. For the year ended December 31, 2004, net cash flow provided by operating activities increased approximately $1.0 million from cash flow provided of approximately $5.7 million for 2003 to cash flow provided of approximately $6.7 million for 2004. The increase in net cash flow provided by operating activities was primarily attributable to an increase in net income experienced in 2004, which resulted from improved operations at the six comparable hotels as well as the 27 hotels acquired since October 2003. These increases were partially offset by the timing of operational payments.

      Net Cash Flow Used In Investing Activities. For the year ended December 31, 2004, net cash flow used in investing activities was approximately $310.6 million, which consisted of approximately $87.8 million of acquisitions or originations of mezzanine and first-mortgage loans receivable, approximately $226.7 million related to the acquisitions of 18 hotel properties, and approximately $14.2 million of improvements to various hotel properties, which is consistent with capital improvements anticipated for such properties upon

47

acquisition, offset by approximately $18.1 million of payments on notes receivable. For the year ended December 31, 2003, net cash flow used in investing activities was approximately $89.2 million, which consisted of $10.0 million related to the acquisition of a mezzanine loan receivable, approximately $78.6 million related to the acquisitions of nine hotel properties, and approximately $411,000 of improvements to various hotel properties.

      Net Cash Flow Provided By (Used In) Financing Activities. For the year ended December 31, 2004, net cash flow provided by financing activities was approximately $274.8 million, the majority of which relates to approximately $361.3 million of borrowings on indebtedness, including the $210.0 million term loan executed on September 2, 2004, approximately $55.0 million of proceeds received related to the Series A preferred stock offering on September 22, 2004, and approximately $10.0 million of proceeds received related to the Series B preferred stock issuance on December 30, 2004, offset by repayments of three mortgage notes payable totaling approximately $57.8 million, pay down of the $60.0 million secured credit facility by approximately $57.2 million, pay down of another mortgage note payable by approximately $12.6 million, pay down of the $45.6 million credit facility by approximately $5.1 million, dividend payments of approximately $9.5 million, and payments of deferred financing costs of approximately $8.5 million. For the year ended December 31, 2003, net cash provided by financing activities of approximately $161.7 million primarily relates to net cash received associated with our IPO and related formation transactions on August 29, 2003 and approximately $27.8 million of borrowings on indebtedness on December 24, 2003. Proceeds from the IPO and subsequent sale of over-allotment shares to our underwriters was approximately $218.0 million, and proceeds from the sale of shares to our Chief Executive Officer and our Chairman was approximately $4.2 million. These proceeds were offset by cash paid upon our formation of approximately $4.9 million, payments of indebtedness of approximately $62.8 million, and payments of offering costs of approximately $18.2 million. Prior to the IPO, net cash distributions to the Predecessor’s owners were approximately $1.1 million.

      In general, we are focused exclusively on investing in the hospitality industry across all segments, including direct hotel investments, first mortgages, mezzanine loans, and sale-leaseback transactions. We intend to acquire and, in the appropriate market conditions, develop additional hotels and provide structured financings to owners of lodging properties. We may incur indebtedness to fund any such acquisitions, developments, or financings. We may also 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 make the required distributions.

      However, 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 on our business strategy. In addition, we may selectively pursue mortgage financing on individual properties and our mortgage investments.

      We will acquire or develop additional hotels and invest in structured financings only as suitable opportunities arise, and we will not undertake such investments unless adequate sources of financing are available. Funds for future hotel-related investments are expected to be derived, in whole or in part, from future borrowings under a credit facility or other borrowings or from the proceeds of additional issuances of common stock, preferred stock, or other securities. However, other than the aforementioned acquisitions and those mentioned in subsequent events discussion below, 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.

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

Inflation

      We rely entirely on the performance of our properties and the ability of the properties’ managers to increase revenues to keep pace with inflation. Hotel operators can generally increase room rates rather quickly,

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but competitive pressures may limit their ability to raise rates faster than inflation. Our general and administrative costs, such as real estate and personal property taxes, property and casualty insurance, and utilities, are subject to inflation as well.

Seasonality

      Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. We anticipate that our cash flow from the operation of the properties will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize other cash on hand or borrowings to make required distributions. However, we cannot make any assurances that we will make distributions in the future.

Critical Accounting Policies

      Our accounting policies are more fully described in note 3 to our consolidated financial statements. As disclosed in note 3, the preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective, and complex judgments.

      Investment in Hotel Properties — The initial six hotel properties are stated at the Predecessor’s historical cost, net of any impairment charges, plus an approximate $8.1 million minority interest partial step-up recorded upon formation of the Company on August 29, 2003, related to the acquisition of minority interest from unaffiliated parties associated with four of the initial properties. Hotel properties acquired subsequent to the Company’s formation are stated at cost. All improvements and additions which extend the useful life of hotel properties are capitalized.

      Impairment of Investment in Hotel Properties — Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. The Company tests for impairment in several situations, including when current or projected cash flows are less than historical cash flows, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, and when events or changes in circumstances indicate that a hotel’s net book value may not be recoverable. In the evaluation of the impairment of hotel properties, the Company makes many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures, and fair values, including consideration of capitalization rates, discount rates, and comparable selling prices. To date, no such impairment charges have been recognized. If an asset were deemed to be impaired, the Company would record an impairment charge for the amount that the property’s net book value exceeds its fair value.

      Depreciation and Amortization Expense — Depreciation expense is based on the estimated useful life of the Company’s assets, while amortization expense for leasehold improvements is the shorter of the lease term or the estimated useful life of the related assets. Presently, hotel properties are depreciated using the straight-line method over lives which range from 15 to 39 years for buildings and improvements and 3 to 5 years for furniture, fixtures, and equipment. While the Company believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income (loss) as well as the gain or loss on the potential sale of any of the Company’s hotels.

      Notes Receivable — The Company provides mezzanine and first-mortgage financing in the form of loans. Loans receivable are recorded at cost, adjusted for net origination fees and costs. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method. Loans receivable are reviewed for potential impairment at each balance sheet date. A loan receivable

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is considered impaired when, based on current information, it becomes probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or fair value of collateral. If a loan were deemed to be impaired, the Company would record a reserve for loan losses through a charge to income for any shortfall. To date, no such impairment charges have been recognized.

      In accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” as revised (“FIN No. 46”), variable interest entities, as defined, are required to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. The Company’s mezzanine and first-mortgage loans receivable are each secured by various hotel properties or partnership interests in hotel properties and are subordinate to primary loans related to the secured hotels. All of these loans receivable are considered to be variable interests in the entities that own the related hotels, which are variable interest entities. However, the Company is not considered to be the primary beneficiary of these hotel properties as a result of holding these loans. Therefore, the Company does not consolidate the hotels for which it has provided financing. Interests in entities acquired or created in the future will be evaluated based on FIN No. 46 criteria, and such entities will be consolidated, if required. The analysis utilized by the Company in evaluating FIN No. 46 criteria involves considerable management judgment and assumptions.

Contractual Obligations and Commitments

      As of December 31, 2004, our contractual obligations and commitments are as follows:

		Payments due by Period
		<1 Year		2-3 Years		4-5 Years		>5 Years		Total
Indebtedness payments		$	16,093,979	$	274,371,524	$	1,163,947	$	9,124,744	$	300,754,194
Capital leases payments			132,337		180,247		—		—		312,584
Operating leases payments			591,591		956,076		822,997		13,343,864		15,714,528
Interest payments			14,250,452		13,193,601		1,129,004		632,850		29,205,907
	Total contractual obligations	$	31,068,359	$	288,701,448	$	3,115,948	$	23,101,458	$	345,987,213

      At December 31, 2004, our capital commitments were approximately $2.6 million, which relate to general capital improvements.

      In addition, the Company has entered into employment agreements with certain executive officers, which provide for minimum annual base salaries, other fringe benefits, and non-compete clauses as determined by the board of directors. The agreements have varying terms expiring between December 31, 2006 and December 31, 2007, with automatic one-year renewals, unless terminated by either party upon six months’ notice, subject to severance provisions.

Subsequent Events

      On July 7, 2004, the Company acquired a hotel property and adjacent office building in Philadelphia, Pennsylvania, from Household OPEB I, Inc. for approximately $16.7 million in cash. At the time of the acquisition, the Company planned to sell the office building, which had one tenant and nominal operations. The Company allocated approximately $2.9 million of the purchase price to the office building. On January 19, 2005, the Company sold the office building for approximately $2.9 million, which is net of nominal closing costs.

      On January 20, 2005, in a follow-on public offering, the Company issued 10,350,000 shares of its common stock at $9.62 per share, which generated gross proceeds of approximately $99.6 million. However, the aggregate proceeds to the Company, net of underwriters’ discount and offering costs, was approximately $94.3 million. The 10,350,000 shares issued include 1,350,000 shares sold pursuant to an over-allotment option granted to the underwriters. Of the net proceeds, a portion was used to partially fund the $35.0 million cash

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portion of the purchase price associated with the acquisition of twenty-one hotel properties, which was closed on March 16, 2005. The net proceeds were also used for the repayment of approximately $14.7 million of the mortgage debt assumed in the acquisition, repayment of the outstanding $17.8 million balance on the $60.0 million credit facility, due August 17, 2007, repayment of the $15.5 million mortgage note payable, due December 31, 2005, repayment of the $7.0 mortgage note payable, due July 31, 2007, and general corporate purposes.

      Pursuant to the Company’s Series B Cumulative Convertible Redeemable Preferred Stock Purchase Agreement and subsequent amendment, a financial institution has certain participation rights with respect to any sale of equity securities by the Company. Based on these participation rights and the follow-on public offering discussed above, the financial institution has the option to purchase up to 2,070,000 shares of the Company’s common stock for $9.139 per share, the issuance of which would occur on November 1, 2005. If the financial institution has not exercised its option, the Company, at its option, may cause the financial institution to purchase the 2,070,000 shares for $9.139 per share on November 1, 2005, or on an earlier date provided the Company has sold all of the Series B preferred stock to the financial institution in accordance with the terms of the purchase agreement.

      On January 30, 2005, the Company’s Sheraton hotel in Philadelphia, Pennsylvania, experienced a fire that resulted in extensive water damage to several of its floors. The entire hotel was subsequently closed for two weeks, and approximately half of the hotel remains temporarily closed. Although the Company’s insurance covers both physical damage and business-interruption losses, the Company is still assessing the impact of this fire. The Company currently estimates its property damage and business-interruption losses at approximately $1.0 million and $250,000, respectively. The Company’s insurance deductible related to this incident is $25,000.

      On February 8, 2005, the Company originated a mezzanine loan receivable of approximately $8.0 million, with an interest rate of LIBOR plus 9.13%, maturing February 2007 with three one-year extension options, with interest-only payments through maturity, prepayment prohibited through September 2006, and a prepayment penalty imposed between September 2006 and maturity.

      On March 9, 2005, the Company announced it will be acquiring the Hilton Santa Fe hotel in Santa Fe, New Mexico, from Santa Fe Hotel Joint Venture for approximately $18.2 million in cash. In addition, the Company plans an additional $2.5 million for future capital improvements. The purchase price was the result of an arms’ length negotiation. Annualized revenues of this hotel property are approximately $7.7 million. The Company plans to utilize cash from borrowings or cash from its follow-on public offering to fund this acquisition. The acquisition is expected to close in late March 2005.

      On March 9, 2005, the Company declared a cash dividend of $0.16 per diluted share for common shareholders and units of limited partnership of record on March 31, 2005, payable April 15, 2005.

      On March 15, 2005, the Company declared a cash dividend of $0.53 per diluted share for Series A preferred shareholders of record on March 31, 2005, payable April 15, 2005.

      On March 16, 2005, the Company acquired twenty-one hotel properties from selling entities controlled by affiliates of Fisher Brothers, Gordon Getty Trust, and George Soros, which collectively owned approximately 78% of the acquired hotels, and certain members of the Company’s senior management, which collectively owned approximately 22% of the acquired hotels, for approximately $250.0 million plus certain closing costs. The selling entities are collectively referred to as FGSB. The $250 million purchase price consisted of approximately $35.0 million in cash, approximately $164.7 million in assumed mortgage debt, and approximately $50.3 million worth of limited partnership units, which equates to 4,994,150 units based on the average market price of the Company’s common stock for the 20-day period ending five business days before signing a definitive agreement to acquire these properties on December 23, 2004. Company management received their net consideration for the acquisition in the form of limited partnership units, whereas the third parties received 50% of their consideration in limited partnership units and 50% in cash. Annualized revenues of these twenty-one hotel properties are approximately $114.9 million. When the Company entered into the agreement to acquire these 21 properties, it began assessing various strategic alternatives related to eight of the relatively

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smaller hotel properties, including possible sales of these properties. Since that time, the Company has secured contracts for the sale of two of the properties and letters of intent related to the sale of the other six properties. The Company used proceeds from its sale of Series B cumulative convertible redeemable preferred stock, from its follow-on public offering, and from a $15.0 million draw on its $60.0 million credit facility on March 16, 2005 to fund the acquisition of these properties. Regarding this acquisition, the Company’s Board of Directors formed a Special Committee solely comprised of independent directors to evaluate this transaction. The Special Committee retained independent advisors and to review, evaluate, and negotiate the transaction, which the Special Committee unanimously approved. The Special Committee will be paid $195,000 related to their services.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

      As of December 31, 2004, our $300.8 million debt portfolio consisted of approximately $279.0 million of outstanding variable-rate debt and approximately $21.8 million of outstanding of fixed-rate debt, with interest rates ranging from 7.08% to 7.25%. As discussed below, $105.0 million of the variable-rate debt was converted to fixed-rate debt via an interest rate swap.

      On September 2, 2004, we purchased a 6.0% LIBOR interest rate cap with a $210.0 million notional amount to limit our exposure to rising interest rates on $210.0 million of our floating-rate debt. To partially offset the cost of the purchased cap, we sold a 6.0% LIBOR interest rate cap with a $105.0 million notional amount with identical terms to the purchased cap. Hence, we own a net interest rate cap with a $105.0 million notional amount. Both the purchased and sold interest rate caps mature October 2, 2006.

      On September 7, 2004, we entered into a $105.0 million stair-stepped interest rate swap agreement, at an average interest rate of 4.9% over the term of the swap, which matures March 1, 2007. The interest rate swap effectively converts the interest payments on $105.0 million of our floating-rate debt to a fixed rate.

      Our objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps and caps as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Purchased interest rate caps provide us with interest rate protection above the strike rate on the cap and result in us receiving interest payments when rates are above the cap strike.

      For the year ended December 31, 2004, the impact to our results of operations of a one-point change in interest rate on the outstanding balance of variable-rate debt as of December 31, 2004, net of the $105.0 million notional amount protected by an interest rate swap as of that date, would be approximately $1.7 million.

      As of December 31, 2004, we owned approximately $79.7 million of variable-rate loans receivable. For the year ended December 31, 2004, the impact to our results of operations of a one-point change in interest rate on the outstanding balance of variable-rate loans receivable as of December 31, 2004, would be approximately $797,000. We had no other outstanding loans receivable as of December 31, 2004.

      As of December 31, 2003, we had approximately $43.8 million of outstanding variable-rate debt. The impact to our annual results of operations of a one-point change in interest rate on the outstanding balance of variable-rate debt as of December 31, 2003, would be approximately $438,000. We also had approximately $6.4 million of 7.08% fixed-rate debt outstanding at December 31, 2003. We had no other outstanding debt as of December 31, 2003.

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      As of December 31, 2003, we owned a $10 million mezzanine variable-rate loan receivable. The impact to our annual results of operations of a one-point change in interest rate on the outstanding balance of variable-rate loans receivable as of December 31, 2003, would be approximately $100,000. We had no other outstanding loans receivable as of December 31, 2003.

      The above amounts were determined based on the impact of hypothetical interest rates on our borrowing cost, and assume no changes in our capital structure. As the information presented above includes only those exposures that exist as of December 31, 2004, it does not consider those exposures or positions which could arise after that date. Hence, the information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

Item 8. Financial Statements and Supplementary Data

      The required financial statements are filed herein as listed in Item 15.

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

      None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Director and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Management’s Report on Internal Control over Financial Reporting

      Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Director and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

      Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of certain acquired businesses, which were excluded from the scope of our assessment, but are included in our 2004 consolidated financial statements. Such acquired businesses are listed below:

SpringHill Suites hotel in Baltimore, Maryland.

Four hotel properties acquired from Day Hospitality Group.

Nine hotel properties acquired from Dunn Hospitality Group.

Hyatt Orange County hotel in Anaheim, California.

      These businesses constituted approximately $188.6 million and $179.0 million of total and net assets, respectively, as of December 31, 2004 and approximately $19.3 million and $3.7 million of revenues and operating income, respectively, for the year then ended.

      Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

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Changes in Internal Control over Financial Reporting

      There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

      The required information is incorporated by reference from our Proxy Statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 3, 2005.

Item 11. Executive Compensation

      The required information is incorporated by reference from our Proxy Statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 3, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The required information is incorporated by reference from our Proxy Statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 3, 2005.

Item 13. Certain Relationships and Related Transactions

      The required information is incorporated by reference from our Proxy Statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 3, 2005.

Item 14. Principal Accountant Fees and Services

      The required information is incorporated by reference from our Proxy Statement to be filed with respect to the Annual Meeting of Shareholders to be held on May 3, 2005.

PART IV

Item 15. Financial Statement Schedules and Exhibits

      (a) Financial Statements and Schedules

Reports of Independent Auditors		61
Consolidated and Combined Financial Statements:
	Consolidated Balance Sheets for the Company as of December 31, 2004 and December 31, 2003	64
	Consolidated and Combined Statements of Operations for the Company for the year ended December 31, 2004, and for the period from August 29, 2003 through December 31, 2003, and for the Predecessor for the period from January 1, 2003 through August 28, 2003, and the year ended December 31, 2002	65
	Consolidated and Combined Statement of Owners’ Equity for the Company for the year ended December 31, 2004, and the period from August 29, 2003 through December 31, 2003, and for the Predecessor for the period from January 1, 2003 through August 28, 2003, and the year ended December 31, 2002	66
	Consolidated and Combined Statements of Cash Flows for the Company for the year ended December 31, 2004, and for the period from August 29, 2003 through December 31, 2003, and for the Predecessor for the period from January 1, 2003 through August 28, 2003, and the year ended December 31, 2002	67
	Notes to Consolidated and Combined Financial Statements	68
	Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2004	98

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      All other financial statement schedules are either not required under the related instructions, have been omitted because such financial statement schedules are not significant, or have been omitted because the required information has been disclosed elsewhere in the consolidated and combined financial statements and related notes thereto.

      (b) Exhibits

Exhibit
Number			Description of Exhibit
	3	.1	Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 of Form S-11/ A, filed on July 31,2003)
	3	.2.1	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of Form S-11/ A, filed on July 31, 2003)
	3	.2.2	Amendment No. 1 to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2.2 to the Registrant’s Form 10-K for the year ended December 31, 2003)
	4	.1	Form of Certificate for Common Stock (incorporated by reference to Exhibit 4.1 of Form S-11/ A, filed on August 20, 2003)
	4	.2	Articles Supplementary for Series B-1 Convertible Preferred Stock, dated December 28, 2004 (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K, dated January 4, 2005, for the event dated December 28, 2004)
	4	.3	Articles Supplementary for Series B-2 Convertible Preferred Stock, dated December 28, 2004 (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-K, dated January 4, 2005, for the event dated December 28, 2004)
	10	.1.1	Amended and Restated Agreement of Limited Partnership of Ashford Hospitality Limited Partnership (incorporated by reference to Exhibit 10.1 of Form 10-Q, filed on November 14, 2003)
	10	.1.2	Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Ashford Hospitality Limited Partnership, dated October 16, 2003 (incorporated by reference to Exhibit 10.3 of Form 10-Q, filed on November 14, 2003)
	10	.1.3	Amended and Restated Exhibit A to Agreement of Limited Partnership of Ashford Hospitality Limited Partnership, dated September 26, 2003 (incorporated by reference to Exhibit 10.2 of Form 10-Q, filed on November 14, 2003)
	10	.2	Registration Rights Agreement among Ashford Hospitality Trust, Inc. and the persons named therein (incorporated by reference to Exhibit 10.2 of Form S-11/ A, filed on July 31, 2003)
	10	.3	2003 Stock Plan of Ashford Hospitality Trust, Inc. (incorporated by reference to Exhibit 10.3 of Form S-11/ A, filed on July 31, 2003)
	10	.4	Non-Compete Agreement between Ashford Hospitality Trust, Inc. and Archie Bennett, Jr. (incorporated by reference to Exhibit 10.4 of Form S-11/ A, filed on July 31, 2003)
	10	.5.1	Employment Agreement between Ashford Hospitality Trust, Inc. and Montgomery J, Bennett (incorporated by reference to Exhibit 10.5 of Form S-11/ A, filed on July 31, 2003)
	10	.5.2	Employment Agreement between Ashford Hospitality Trust, Inc. and Douglas Kessler (incorporated by reference to Exhibit 10.6 of Form S-11/ A, filed on July 31, 2003)
	10	.5.3	Employment Agreement between Ashford Hospitality Trust, Inc. and David A, Brooks (incorporated by reference 10 Exhibit 10.7 of Form S-11/ A, filed on July 31, 2003)
	10	.5.4	Employment Agreement between Ashford Hospitality Trust, Inc. and David Kimichik (incorporated by reference to Exhibit 10.8 of Form S-11/ A, filed on July 31, 2003)
	10	.5.6	Employment Agreement between Ashford Hospitality Trust, Inc. and Mark Nunneley (incorporated by reference to Exhibit 10.9 of Form S-11/ A, filed On July 31, 2003)
	10	.6	Form of Management Agreement between Remington Lodging and Ashford TRS Corporation (incorporated by reference to Exhibit 10.10 of Form S-11/ A, filed on July 31, 2003)
	10	.7	Form of Lease Agreement between Ashford Hospitality Limited Partnership and Ashford TRS Corporation (incorporated by reference to Exhibit 10.11 of Form S-11/ A, filed on July 31, 2003)

55

Exhibit
Number			Description of Exhibit
	10	.8.1	Omnibus Option Agreement between Ashford Hospitality Limited Partnership, Remington Suites Austin, L.P., Remington Suites Dallas, L.P., Remington Suites Dulles, L.P., Remington Suites Las Vegas, L.P., Chicago Illinois Hotel Limited Partnership and Remington Long Island Hotel, L.P., dated as of May 15, 2003 (incorporated by reference to Exhibit 10.12 of Form S-11, filed on May 15, 2003)
	10	.8.2	Option Agreement between Ashford Hospitality Limited Partnership and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.13 of Form S-11, filed on May 15, 2003)
	10	.9.1	Asset Management and Consulting Agreement by and between Remington Hospitality, Inc. and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.14 of Form S-11/ A, filed on July 2, 2003)
	10	.9.2	Asset Management and Consulting Agreement by and between Remington Indianapolis Employers Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.15 of Form S-11/ A, filed on July 2, 2003)
	10	.9.3	Asset Management and Consulting Agreement by and between, Remington Milford Hotel Employers Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.16 of Form S-11/ A, filed on July 2, 2003)
	10	.9.4	Asset Management and Consulting Agreement by and between Remington Suites Hotel Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.17 of Form S-11/ A, filed on July 2, 2003)
	10	.9.5	Asset Management and Consulting Agreement by and between Remington Employers Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.18 of Form S-11/ A, filed on July 2, 2003)
	10	.9.6	Asset Management and Consulting Agreement by and between Remington Employers Management Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.19 of Form S-11/ A, filed on July 2, 2003)
	10	.9.7	Asset Management and Consulting Agreement by and between Remington Orlando Management Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.20 of Form S-11/ A, filed on July 2, 2003)
	10	.9.8	Asset Management and Consulting Agreement by and between Remington Ventura Employers Corporation and Ashford Financial Corporation, dated as of May 15, 2003 (incorporated by reference to Exhibit 10.21 of Form S-11/ A, filed on July 2, 2003)
	10	.10.1	Assignment and Assumption of Contract and Contract Rights between Ashford Hospitality Limited Partnership and Ashford Financial Corporation, dated October 7, 2003 (incorporated by reference to Exhibit 10.4 of Form 10-Q, filed on November 14, 2003)
	10	.10.2	Assignment and Assumption of Contract and Contract Rights between Ashford Hospitality Limited Partnership and Ashford Financial Corporation, dated January 4, 2004 Bylaws (incorporated by reference to Exhibit 10.10.2 to the Registrant’s Form 10-K for the year ended December 31, 2003)
	10	.11	Guaranty by Ashford Financial Corporation in favor of Ashford Hospitality Trust Limited Partnership (incorporated by reference to Exhibit 10.26 of Form S-11/ A, filed on July 31, 2003)
	10	.12	Mutual Exclusivity Agreement by and between Ashford Hospitality Limited Partnership, Ashford Hospitality Trust, Inc., Remington Hotel Corporation and Remington Lodging and Hospitality, L.P. (incorporated by reference to Exhibit 1 0.22 of Form S-11/ A, filed on July 31, 2003)
	10	.13	Tax Indemnification Agreement between Ashford Hospitality Trust, Inc. and the persons named therein (incorporated by reference to Exhibit 10.25 of Form S-11/ A, filed on July 31, 2003)
	10	.14	Hotel Loan Agreement, dated December 24, 2003, among the Registrant and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc. (incorporated by reference to Exhibit 10.14 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004)

56

Exhibit
Number			Description of Exhibit
	10	.15	Secured Revolving Credit Facility Agreement, dated February 5, 2004, among the Registrant and Credit Lyonnais New York Branch, as Administrative Agent and Sole Lead Arranger and Book Manager, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., as Syndication Agent (incorporated by reference to Exhibit 10.15 to the Registrant’s Form 10-Q tor the quarter ended March 31, 2004)
	10	.15.1	First Amendment to Credit Agreement, dated August 17, 2004, among the Registrant, Calyon New York Branch, and Merrill Lynch Capital (incorporated by reference to Exhibit 10.15.1 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.16	Loan and Security Agreement, dated July 13, 2004, among the Registrant and Capital Source Finance LLC Capital (incorporated by reference to Exhibit 10.16 the Registrant’s Form 10-Q for the quarter ended September 30,2004)
	10	.17	Loan Agreement, dated September 2, 2004, among the Registrant, Merrill Lynch Mortgage Lending, Inc., and Merrill Lynch Capital (incorporated by reference to Exhibit 10.17 the Registrant’s Form  10-Q for the quarter ended September 30, 2004)
	10	.17.1	Mezzanine Loan Agreement, dated September 2, 2004, among the Registrant and Merrill Lynch Capital (incorporated by reference to Exhibit 10.17.1 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.17.2	Broker Agreement, dated May 10, 2004, among the Registrant and Secured Capital Corp (incorporated by reference to Exhibit 10.17.2 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.18	Agreement of Purchase and Sale, dated May 19, 2004, among the Registrant, Dunn Hospitality Group, and entities related to Dunn Hospitality Group Corp (incorporated by reference to Exhibit 10-18 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.18.1	First Amendment to Agreement of Purchase and Sale, dated July 1, 2004, among the Registrant, Dunn Hospitality Group, and entities related to Dunn Hospitality Group-Corp (incorporated by reference to Exhibit 10.18.1 the Registrant’s Form 10-Q for me quarter ended September 30, 2004)
	10	.18.2	Second Amendment to Agreement of Purchase and Sale, dated July 23, 2004, among the Registrant, Dunn Hospitality Group (incorporated by reference to Exhibit 10.18.2 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.18.3	Third Amendment to Agreement of Purchase and Sale, dated August 4, 2004, among the Registrant, Dunn Hospitality Group, and entities related to Dunn Hospitality Group (incorporated by reference to Exhibit 10,18.3 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.18.4	Fourth Amendment to Agreement of Purchase and Sale, dated September 2, 2004, among the Registrant, Dunn Hospitality Group, and entities related to Dunn Hospitality Group (incorporated by reference to Exhibit 10.18.4 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.19	International Swap Dealers Association, Inc. Master Agreement, dated September 2, 2004, among the Registrant and Calyon New York Branch (incorporated by reference to Exhibit 10.19 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.19.1	International Swap Dealers Association, Inc. Master Agreement, dated September 2, 2004, among the Registrant and SMBC Derivative Products Limited Branch (incorporated by reference to Exhibit 10.19.1 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.19.2	International Swap Dealers Association, Inc. Master Agreement, dated September 2, 2004, among this Registrant and SMBC Derivative Products Limited (incorporated by reference to Exhibit 10.19.2 the Registrant’s Form 10-Q for the quarter ended September 30, 2004)
	10	.20	Contribution and Purchase and Sale Agreement, dated December 27, 2004, between the Registrant and FGSB Master Corp. (incorporated by reference to Exhibit 10.20 to the Registrant’s Form 8-K, dated December 28, 2004, for the event dated December 27, 2004)

57

Exhibit
Number			Description of Exhibit
	10	.21	Purchase Agreement, dated December 27, 2004, between the Registrant and Security Capital Preferred Growth Incorporated (incorporated by reference to Exhibit 10.21 to the Registrant’s Form 8-K, dated December 23, 2004, for the event dated December 27. 2004)
	10	.21.1	Form of Registration Rights Agreement, dated December 27, 2004, between the Registrant and Security Capital Preferred Growth Incorporated (incorporated by reference to Exhibit 10.21.1 to the Registrant’s Form 8-K, dated December 28, 2004, for the event dated December 27, 2004)
	10	.21.2	Amendment #1 to Purchase Agreement, dated February 8, 2005, between the Registrant and Security Capital Preferred Growth Incorporated (incorporated by reference to Exhibit 10.21.2 to the Registrant’s Form 8-K, dated February 9, 2005, for the event dated February 8, 2005)
	*10	.22	Purchase and Sale Agreement, dated July 28, 2004, between the Registrant and Atrium Plaza, LLC.
	*10	.22.1	Amendment #1 to Purchase and Sale Agreement, dated August 26, 2004, between the Registrant and Atrium Plaza, LLC.
	*10	.22.2	Amendment #2 to Purchase and Sale Agreement, dated September 28, 2004, between the Registrant and Atrium Plaza, LLC.
	*21	.1	Registrant’s Subsidiaries Listing as of December 31, 2004
	*23	.1	Consent of Ernst & Young LLP
	*31	.1	Certification of the Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
	*31	.2	Certification of the Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
	*31	.3	Certification of the Chief Accounting Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
	*32	.1	Certification of the Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (In accordance with Sec Release 33-8212, this exhibit is being furnished, and is not being filed as part of this report or as a separate disclosure document, and is not being incorporated by reference into any Securities Act of 1933 registration statement.)
	*32	.2	Certification of the Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (In accordance with Sec Release 33-8212, this exhibit is being furnished, and is not being filed as part of this report or as a separate disclosure document, and is not being incorporated by reference into any Securities Act of 1933 registration statement.)
	*32	.3	Certification of the Chief Accounting Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (In accordance with Sec Release 33-8212, this exhibit is being furnished, and is not being filed as part of this report or as a separate disclosure document, and is not being incorporated by reference into any Securities Act of 1933 registration statement.)

*  Filed herewith.

58

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 16, 2005.

ASHFORD HOSPITALITY TRUST, INC.

By:  /s/ MONTGOMERY J. BENNETT

Montgomery J. Bennett

Chief Executive Officer

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ ARCHIE BENNETT, JR. Archie Bennett, Jr.	Chairman of the Board of Directors	March 16, 2005
/s/ MONTGOMERY J. BENNETT Montgomery J. Bennett	President, Chief Executive Officer, and Director (Principal Executive Officer)	March 16, 2005
/s/ DAVID J. KIMICHIK David J. Kimichik	Chief Financial Officer (Principal Financial Officer)	March 16, 2005
/s/ MARK L. NUNNELEY Mark L. Nunneley	Chief Accounting Officer (Principal Accounting Officer)	March 16, 2005
/s/ MARTIN L. EDELMAN Martin L. Edelman	Director	March 16, 2005
/s/ W. D. MINAMI W. D. Minami	Director	March 16, 2005
/s/ W. MICHAEL MURPHY W. Michael Murphy	Director	March 16, 2005
/s/ PHILIP S. PAYNE Philip S. Payne	Director	March 16, 2005
/s/ CHARLES P. TOPPINO Charles P. Toppino	Director	March 16, 2005

59

ASHFORD HOSPITALITY TRUST, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Auditors		61
Consolidated and Combined Financial Statements:
	Consolidated Balance Sheets for the Company as of December 31, 2004 and December 31, 2003	64
	Consolidated and Combined Statements of Operations for the Company for the year ended December 31, 2004, and for the period from August 29, 2003 through December 31, 2003, and for the Predecessor for the period from January 1, 2003 through August 28, 2003, and the year ended December 31, 2002	65
	Consolidated and Combined Statement of Owners’ Equity for the Company for the year ended December 31, 2004, and the period from August 29, 2003 through December 31, 2003, and for the Predecessor for the period from January 1, 2003 through August 28, 2003, and the year ended December 31, 2002	66
	Consolidated and Combined Statements of Cash Flows for the Company for the year ended December 31, 2004, and for the period from August 29, 2003 through December 31, 2003, and for the Predecessor for the period from January 1, 2003 through August 28, 2003, and the year ended December 31, 2002	67
	Notes to Consolidated and Combined Financial Statements	68
	Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2004	98

      All other financial statement schedules are either not required under the related instructions, have been omitted because such financial statement schedules are not significant, or have been omitted because the required information has been disclosed elsewhere in the consolidated and combined financial statements and related notes thereto.

60

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Ashford Hospitality Trust, Inc.

      We have audited the accompanying consolidated balance sheets of Ashford Hospitality Trust, Inc. (the “Company”) as of December 31, 2004 and 2003, and the Company’s consolidated statements of operations, owners’ equity, and cash flows for the year ended December 31, 2004 and for the period from August 29, 2003 (inception) to December 31, 2003, and the combined statements of operations, owners’ equity, and cash flows of the Predecessor, as defined in Note 1, for the period from January 1, 2003 to August 28, 2003, and the year ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15 (a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2004 and 2003, and the Company’s consolidated results of operations and cash flows for the year ended December 31, 2004 and for the period from August 29, 2003 (inception) to December 31, 2003, and the Predecessor’s combined results of operations and cash flows for the period from January 1, 2003 to August 28, 2003, and the year ended December 31, 2002 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      We also have audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report, dated March 15, 2005, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas

March 15, 2005

61

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Ashford Hospitality Trust, Inc.

      We have audited Management’s Report on Internal Control over Financial Reporting, which concludes that Ashford Hospitality Trust, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Ashford Hospitality Trust, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of certain acquired businesses, which are included in the 2004 consolidated financial statements of the Ashford Hospitality Trust, Inc. and constituted approximately $188.6 million and $179.0 million of total and net assets, respectively, as of December 31, 2004 and approximately $19.3 million and $3.7 million of revenues and operating income, respectively, for the year then ended. Such acquired businesses include the following: SpringHill Suites hotel in Baltimore, Maryland, four hotel properties acquired from Day Hospitality Group, nine hotel properties acquired from Dunn Hospitality Group, and Hyatt Orange County hotel in Anaheim, California. Our audit of internal control over financial reporting of Ashford Hospitality Trust, Inc. also did not include an evaluation of the internal control over financial reporting of these acquired businesses.

      In our opinion, management’s assessment that Ashford Hospitality Trust, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Ashford Hospitality Trust, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

62

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 consolidated financial statements of Ashford Hospitality Trust, Inc., and our report dated March 15, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas

March 15, 2005

63

ASHFORD HOSPITALITY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

		December 31,			December 31,
		2004			2003
ASSETS
Investment in hotel properties, net		$	427,005,476		$	173,723,998
Cash and cash equivalents			47,108,957			76,254,052
Restricted cash			14,058,776			1,373,591
Accounts receivable, net of allowance of $61,479 and $19,408, respectively			5,463,452			1,534,843
Inventories			611,807			262,619
Assets held for sale			2,881,912			—
Notes receivable			79,661,549			10,000,000
Deferred costs, net			9,389,506			2,386,937
Prepaid expenses			2,638,842			1,577,628
Other assets			6,676,776			550,636
Due from affiliates			447,784			218,113
	Total assets	$	595,944,837		$	267,882,417
LIABILITIES AND OWNERS’ EQUITY
Indebtedness		$	300,754,194		$	50,201,779
Capital leases payable			312,584			456,869
Accounts payable			8,979,635			2,127,611
Accrued expenses			9,339,656			4,572,594
Other liabilities			90,334			—
Dividends payable			6,141,506			—
Deferred income			400,919			—
Due to affiliates			1,907,057			584,643
	Total liabilities		327,925,885			57,943,496
Commitments and contingencies (see Note 15)			—			—
Minority interest			39,346,641			37,646,673
Preferred stock, $0.01 par value:
	Series B Cumulative Convertible Redeemable Preferred Stock, 993,049 issued and outstanding at December 31, 2004		9,980,529			—
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
	Series A Cumulative Preferred Stock, 2,300,000 issued and outstanding at December 31, 2004		23,000			—
Common stock, $0.01 par value, 200,000,000 shares authorized, 25,810,447 and 25,730,047 shares issued and outstanding at December 31, 2004 and 2003, respectively			258,104			257,300
Additional paid-in capital			234,993,015			179,226,668
Unearned compensation			(3,959,468	)		(5,564,401	)
Accumulated other comprehensive income			554,592			—
Accumulated deficit			(13,177,461	)		(1,627,319	)
	Total owners’ equity		218,691,782			172,292,248
Total liabilities and owners’ equity		$	595,944,837		$	267,882,417

See notes to consolidated financial statements.

64

ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

				The Company			The Company			The Predecessor			The Predecessor
							Period from			Period from
				Year Ended			August 29, 2003 to			January 1, 2003 to			Year Ended
				December 31, 2004			December 31, 2003			August 28, 2003			December 31, 2002
REVENUE
		Rooms		$	89,798,311		$	14,994,567		$	19,688,349		$	28,529,640
		Food and beverage			14,336,531			2,529,109			3,629,807			5,698,029
		Other			3,922,621			507,794			681,656			1,130,112
			Total hotel revenue		108,057,463			18,031,470			23,999,812			35,357,781
		Interest income from notes receivable			7,549,445			110,000			—			—
		Asset management fees from related parties (see Note 14)			1,318,154			137,319			—			—
	Total Revenue				116,925,062			18,278,789			23,999,812			35,357,781
EXPENSES
	Hotel operating expenses
		Rooms			20,907,848			3,601,465			4,511,632			6,461,721
		Food and beverage			10,859,032			1,901,778			2,801,002			4,183,371
		Other direct			2,150,404			402,536			498,085			621,693
		Indirect			35,560,902			6,136,070			8,687,362			12,370,304
		Management fees, including related parties (see Note 14)			3,395,106			651,480			718,408			1,059,867
			Total hotel expenses		72,873,292			12,693,329			17,216,489			24,696,956
	Property taxes, insurance, and other				6,654,858			1,257,968			1,600,082			2,437,482
	Depreciation and amortization				10,767,785			2,016,899			2,915,777			4,833,551
	Corporate general and administrative:
		Stock-based compensation			2,397,130			864,452			—			—
		Other corporate and administrative			9,457,814			3,138,498			—			—
	Total Operating Expenses				102,150,879			19,971,146			21,732,348			31,967,989
	OPERATING INCOME (LOSS)				14,774,183			(1,692,357	)		2,267,464			3,389,792
	Interest income				335,495			266,333			22,800			53,485
	Interest expense				(9,217,377	)		(374,223	)		(4,225,289	)		(5,715,229	)
	Amortization of loan costs				(1,883,841	)		(42,837	)		(357,857	)		(820,966	)
	Write-off of loan costs				(1,633,369	)		—			—			—
	INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST				2,375,091			(1,843,084	)		(2,292,882	)		(3,092,918	)
	Provision for income taxes				(658,273	)		(142,178	)		—			—
	Minority interest				(297,611	)		357,943			—			—
	NET INCOME (LOSS)				1,419,207			(1,627,319	)		(2,292,882	)		(3,092,918	)
	Preferred dividends				1,355,250			—			—			—
	NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS			$	63,957		$	(1,627,319	)	$	(2,292,882	)	$	(3,092,918	)
	Net Income (Loss) Per Share Available To Common Shareholders:
		Basic and Diluted		$	0.00		$	(0.07	)
	Weighted Average Common Shares Outstanding:
		Basic and Diluted			25,120,653			24,627,298

See notes to consolidated and combined financial statements.

65

ASHFORD HOSPITALITY TRUST, INC.

Consolidated And Combined Statement of Owners’ Equity

Predecessor from January 1, 2002 through August 28, 2003, and

Company from August 29, 2003 (Inception) to December 31, 2004

			Preferred Stock				Common Stock										Accumulated
											Additional						Other
			Number of		$0.01 Par		Number of		$0.01 Par		Paid-In			Unearned			Comprehensive		Accumulated
			Shares		Value		Shares		Value		Capital			Compensation			Income		Deficit			Total
Balance at January 1, 2002				—	$	—		—	$	—	$	—		$	—		$	—	$	15,316,967		$	15,316,967
	Contributions			—		—		—		—		—			—			—		2,191,675			2,191,675
	Distributions			—		—		—		—		—			—			—		(2,629,740	)		(2,629,740	)
	Owner Redemption			—		—		—		—		—			—			—		(2,475,000	)		(2,475,000	)
	Net Loss			—		—		—		—		—			—			—		(3,092,918	)		(3,092,918	)
Balance at December 31, 2002				—		—		—		—		—			—			—		9,310,984			9,310,984
	Contributions			—		—		—		—		—			—			—		765,000			765,000
	Distributions			—		—		—		—		—			—			—		(1,850,750	)		(1,850,750	)
	Net Loss			—		—		—		—		—			—			—		(2,292,882	)		(2,292,882	)
Balance at August 28, 2003				—	$	—		—	$	—	$	—		$	—		$	—	$	5,932,352		$	5,932,352
Formation Transactions on August 29, 2003:
	Issuance of Shares in Connection with Initial Public Offering			—	$	—		22,500,000	$	225,000	$	202,171,981		$	—		$	—	$	—		$	202,396,981
	Underwriters’ Fees and Offering Expenses			—		—		—		—		(16,925,000	)		—			—		—			(16,925,000	)
	Issuance of Restricted Shares to Employees & Directors			—		—		675,300		6,753		6,070,947			(6,077,700	)		—		—			—
	Issuance of Shares to Underwriters			—		—		65,024		650		(650	)		—			—		—			—
	Issuance of Shares Sold to CEO & Chairman			—		—		500,000		5,000		4,180,000			—			—		—			4,185,000
	Contribution of Initial Properties			—		—		—		—		7,063,690			—			—		—			7,063,690
	Issuance of Shares for Initial Properties			—		—		216,634		2,167		(2,167	)		—			—		—			—
	Over-allotment Option Exercised on September 26, 2003:
		Issuance of Shares		—		—		1,734,072		17,340		15,589,307			—			—		—			15,606,647
		Underwriters’ Fees		—		—		—		—		(1,092,465	)		—			—		—			(1,092,465	)
		Issuance of Restricted Shares to Employees		—		—		39,017		390		350,763			(351,153	)		—		—			—
	Establish Minority Interest in Operating Partnership			—		—		—		—		(38,004,615	)		—			—		—			(38,004,615	)
	Additional Offering Expenses			—		—		—		—		(175,123	)		—			—		—			(175,123	)
	Amortization of Unearned Compensation			—		—		—		—		—			864,452			—		—			864,452
	Net Loss			—		—		—		—		—			—			—		(1,627,319	)		(1,627,319	)
Balance at December 31, 2003				—	$	—		25,730,047	$	257,300	$	179,226,668		$	(5,564,401	)	$	—	$	(1,627,319	)	$	172,292,248
	Amortization of Unearned Compensation			—		—		—		—		—			2,337,796			—		—			2,337,796
	Issuance of Restricted Common Shares to Employees			—		—		70,400		704		732,159			(732,863	)		—		—			—
	Issuance of Common Shares to Directors			—		—		10,000		100		88,900			—			—		—			89,000
	Dividends Declared — Common Shares			—		—		—		—		—			—			—		(11,614,099	)		(11,614,099	)
	Issuance of Preferred Shares — Series A			2,300,000		23,000		—		—		54,945,288			—			—		—			54,968,288
	Dividends Declared — Preferred Shares — Series A			—		—		—		—		—			—			—		(1,351,940	)		(1,351,940	)
	Dividends Declared — Preferred Shares — Series B			—		—		—		—		—			—			—		(3,310	)		(3,310	)
	Net Unrealized Gain on Derivative Instruments			—		—		—		—		—			—			554,592		—			554,592
	Net Income			—		—		—		—		—			—			—		1,419,207			1,419,207
Balance at December 31, 2004				2,300,000	$	23,000		25,810,447	$	258,104	$	234,993,015		$	(3,959,468	)	$	554,592	$	(13,177,461	)	$	218,691,782
		Net Income for the year ended December 31, 2004																1,419,207
		Comprehensive Income for the year ended December 31, 2004															$	1,973,799

See notes to consolidated and combined financial statements.

66

ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

				The Company			The Company			The Predecessor			The Predecessor
							Period from			Period from
				Year Ended			August 29, 2003 to			January 1, 2003 to			Year Ended
				December 31, 2004			December 31, 2003			August 28, 2003			December 31, 2002
Cash flows from operating activities:
	Net income (loss)			$	1,419,207		$	(1,627,319	)	$	(2,292,882	)	$	(3,092,918	)
	Adjustments to reconcile net income (loss) to net cash flow provided by operations:
		Depreciation and amortization			10,767,785			2,016,899			2,915,777			4,833,551
		Amortization of deferred financing costs			1,883,841			42,837			357,857			820,966
		Write-off of loan costs			1,633,369			—			—			—
		Amortization of stock-based compensation			2,397,130			864,452			—			—
		Minority interest			297,611			(357,943	)		—			—
		Changes in assets and liabilities:
			Accounts receivable and inventories		(3,333,833	)		39,962			(117,443	)		(382,040	)
			Prepaids, other assets, and due from affiliates		(6,867,495	)		(1,641,777	)		642,805			(742,621	)
			Restricted cash		(11,717,962	)		92,806			2,113,441			(176,429	)
			Other liabilities		10,171,789			2,828,881			(143,547	)		(637,775	)
	Net cash flow provided by operating activities				6,651,442			2,258,798			3,476,008			622,734
Cash flows from investing activities:
	Acquisitions or originations of notes receivable				(87,824,342	)		(10,000,000	)		—			—
	Proceeds from payments of notes receivable				18,085,993			—			—			—
	Acquisitions of hotel properties				(226,714,821	)		(78,587,180	)		—			—
	Improvements and additions to hotel properties				(14,170,474	)		(411,148	)		(190,602	)		(1,079,824	)
	Net cash flow used in investing activities				(310,623,644	)		(88,998,328	)		(190,602	)		(1,079,824	)
Cash flows from financing activities:
	Distributions paid to owners				—			—			(1,850,750	)		(5,104,740	)
	Contributions received from owners				—			—			765,000			2,191,675
	Dividends paid				(9,512,175	)		—			—			—
	Borrowings on indebtedness and capital leases				361,298,933			27,800,000			—			17,754,012
	Payments on indebtedness and capital leases				(133,386,016	)		(62,843,451	)		(189,041	)		(15,695,113	)
	Payments of deferred financing costs				(8,522,452	)		(1,016,365	)		—			(872,291	)
	Proceeds received from Series A preferred stock public offering				54,968,288			—			—			—
	Proceeds received from Series B preferred stock sale				9,980,529			—			—			—
	Proceeds received from initial public offering				—			202,396,981			—			—
	Proceeds from sale of stock to CEO & Chairman				—			4,185,000			—			—
	Cash paid upon the Company’s formation				—			(4,942,642	)		—			—
	Proceeds received from over-allotment option				—			15,606,647			—			—
	Payment of offering costs				—			(18,192,588	)		—			—
	Net cash flow provided by (used in) financing activities				274,827,107			162,993,582			(1,274,791	)		(1,726,457	)
	Net change in cash and cash equivalents				(29,145,095	)		76,254,052			2,010,615			(2,183,547	)
	Cash and cash equivalents, beginning balance				76,254,052			—			2,968,814			5,152,361
	Cash and cash equivalents, ending balance			$	47,108,957		$	76,254,052		$	4,979,429		$	2,968,814

See notes to consolidated and combined financial statements.

67

ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

For the Years Ended December 31, 2004, 2003, and 2002

1. Organization and Description of Business

      Ashford Hospitality Trust, Inc. and subsidiaries (the “Company”) is a self-advised real estate investment trust (“REIT”), which commenced operations on August 29, 2003 (“inception”) when it completed its initial public offering (“IPO”) and concurrently consummated certain other formation transactions, including the acquisition of six hotels (“initial properties”) and eight asset management and consulting contracts, all previously owned by affiliates of Remington Hotel Corporation (the “Predecessor”).

      The IPO consisted of the sale of 22,500,000 shares of common stock (“initial shares”), which included 22,336,478 shares sold to the public at a price of $9 per share and 163,522 shares sold to affiliates at a price of $8.37 a share. The IPO generated gross proceeds of approximately $202.4 million. However, the aggregate proceeds to the Company, net of underwriters’ discount and offering costs, was approximately $185.3 million. In addition to the initial shares, 500,000 shares of common stock were sold to Messrs. Archie and Montgomery Bennett, the Company’s Chairman and Chief Executive Officer, respectively, 216,634 shares of common stock were conveyed to a limited partnership owned by Messrs. Archie and Montgomery Bennett, 25,000 shares of restricted common stock were issued to Company directors, 65,024 shares of common stock were issued to the underwriters, and 650,300 shares of restricted common stock were issued to Company executives and certain employees of the Company and its affiliates. In total, 23,956,958 shares of common stock were issued in connection with the Company’s formation. In addition, 5,657,917 units of limited partnership interest, valued at $9 per unit, were issued to Company executives and certain employees of the Company and its affiliates.

      On September 26, 2003, the Company issued an additional 1,734,072 shares of common stock at a price of $9 per share pursuant to the exercise of the underwriters’ over-allotment option. This generated additional gross proceeds of approximately $15.6 million, or net proceeds of approximately $14.5 million after considering the underwriters’ fees of approximately $1.1 million. Concurrent with this, the Company issued an additional 39,017 shares of restricted common stock to its executives and certain employees of the Company and its affiliates.

      During the year ended December 31, 2004, the Company completed the following transactions:

•  On March 15, 2004, the Company issued an additional 70,400 shares of restricted common stock to its executives and certain employees.

•  On April 1, 2004, the Company issued an additional 106,675 units of limited partnership interest in connection with the acquisition of a hotel property.

•  On May 19, 2004, the Company issued an additional 10,000 shares of common stock to its directors as compensation for serving on the Board through May 2005.

•  On September 2, 2004, the Company issued an additional 333,333 units of limited partnership interest in connection with the acquisition of nine hotel properties.

•  On September 22, 2004, the Company issued 2,300,000 shares of Series A Cumulative Preferred Stock in a public offering of such preferred shares.

•  On December 30, 2004, the Company issued 993,049 shares of Series B Cumulative Convertible Redeemable Preferred Stock to a financial institution.

      As of December 31, 2004, the Company owned 33 hotel properties in fourteen states with 5,095 rooms, and had acquired or originated mezzanine or first-mortgage loans receivable with a balance of approximately $79.7 million at December 31, 2004.

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ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

      For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Company’s operating partnership leases its hotels to Ashford TRS Corporation (“Ashford TRS”), which is a wholly-owned subsidiary of the operating partnership. Ashford TRS then engages hotel management companies to operate the hotels under management contracts. Ashford TRS is treated as a taxable REIT subsidiary for federal income tax purposes. Therefore, the Company’s operating partnership and principal source of funds is dependent on Ashford TRS’s ability to generate cash flow from the operation of the Company’s hotels.

2. Basis of Presentation

      These consolidated financial statements presented herein include all of the accounts of the Company beginning with its commencement of operations on August 29, 2003. Prior to that time, this report includes the combined financial statements of the Predecessor. Certain previously reported amounts have been reclassified to conform to the current presentation.

3. Significant Accounting Policies Summary

      Principles of Consolidation — The Company’s consolidated financial statements include the Company and its majority-owned subsidiaries. The Predecessor’s financials statements are presented on a combined basis as a result of common ownership and control. All significant intercompany accounts and transactions among the consolidated and combined entities have been eliminated in the consolidated and combined financial statements.

      Revenue Recognition — Hotel revenues include room, food, beverage, and other hotel revenues such as long-distance telephone service, laundry, and space rentals. Interest income from notes receivable represents interest earned on the Company’s mezzanine and first-mortgage loans receivable portfolio. Asset management fees relate to asset management services performed on behalf of an affiliate, including risk management and insurance procurement, assistance with taxes, negotiating franchise agreements and equipment leases, monitoring compliance with loan covenants, preparation of capital and operating budgets, and property litigation management. Revenues are recognized as the related services are delivered.

      Use of Estimates — The preparation of these consolidated and combined financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

      Investment in Hotel Properties — The initial six hotel properties are stated at the Predecessor’s historical cost, net of any impairment charges, plus an approximate $8.1 million minority interest partial step-up recorded upon formation of the Company on August 29, 2003, related to the acquisition of minority interest from unaffiliated parties associated with four of the initial properties. Hotel properties acquired subsequent to the Company’s formation are stated at cost. All improvements and additions which extend the useful life of hotel properties are capitalized.

      Impairment of Investment in Hotel Properties — Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. The Company tests for impairment in several situations, including when current or projected cash flows are less than historical cash flows, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, and when events or changes in circumstances indicate that a hotel’s net book value may not be recoverable. In the evaluation of the impairment of hotel properties, the Company makes many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures, and fair values, including consideration of capitalization rates, discount rates, and comparable selling prices. To date, no such impairment charges have been recognized. If an asset were

69

ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

deemed to be impaired, the Company would record an impairment charge for the amount that the property’s net book value exceeds its fair value.

      Depreciation and Amortization Expense — Depreciation expense is based on the estimated useful life of the Company’s assets, while amortization expense for leasehold improvements is the shorter of the lease term or the estimated useful life of the related assets. Presently, hotel properties are depreciated using the straight-line method over lives which range from 15 to 39 years for buildings and improvements and 3 to 5 years for furniture, fixtures, and equipment. While the Company believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income (loss) as well as the gain or loss on the potential sale of any of the Company’s hotels.

      Cash and Cash Equivalents — Cash and cash equivalents represent cash on hand and in banks plus short-term investments with an initial maturity of three months or less when purchased.

      Restricted Cash — Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of approximately 4% of property revenue for certain hotels, as required by certain mortgage debt agreement restrictions and provisions.

      Accounts Receivable — Accounts receivable consists primarily of meeting and banquet room rental and hotel guest receivables. The Company generally does not require collateral. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

      Inventories — Inventories consist primarily of food, beverages, and gift store merchandise, and are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

      Notes Receivable — The Company provides mezzanine and first-mortgage financing in the form of loans. Loans receivable are recorded at cost, adjusted for net origination fees and costs. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method. Loans receivable are reviewed for potential impairment at each balance sheet date. A loan receivable is considered impaired when, based on current information, it becomes probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or fair value of collateral. If a loan were deemed to be impaired, the Company would record a reserve for loan losses through a charge to income for any shortfall. To date, no such impairment charges have been recognized.

      In accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” as revised (“FIN No. 46”), variable interest entities, as defined, are required to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among parties involved. The Company’s mezzanine and first-mortgage loans receivable are each secured by various hotel properties or partnership interests in hotel properties and are subordinate to primary loans related to the secured hotels. All of these loans receivable are considered to be variable interests in the entities that own the related hotels, which are variable interest entities. However, the Company is not considered to be the primary beneficiary of these hotel properties as a result of holding these loans. Therefore, the Company does not consolidate the hotels for which it has provided financing. Interests in entities acquired or created in the future will be evaluated based on FIN No. 46 criteria, and such entities will be consolidated, if required. The analysis utilized by the Company in evaluating FIN No. 46 criteria involves considerable management judgment and assumptions.

      Deferred Costs, Net — Deferred loan costs are recorded at cost and amortized using the straight-line method over the terms of the related indebtedness, which approximates the effective interest method.

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ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

Deferred franchise fees are amortized on a straight-line basis over the terms of the related franchise agreements.

      Due to/from Affiliates — Due to/from affiliates represents current receivables and payables resulting from transactions related to hotel management and project management with affiliated entities. Due from affiliates results primarily from advances of management fees. Due to affiliates results primarily from accrual of hotel management and project management fees. Both due to and due from affiliates are generally settled within a period not to exceed one year.

      Advertising Costs — Advertising costs are expensed as incurred. For the year ended December 31, 2004 and the period from inception to December 31, 2003, the Company incurred advertising costs of approximately $425,000 and $30,000, respectively. For the period from January 1, 2003 to August 28, 2003 and for the year ended December 31, 2002, the Predecessor incurred advertising costs of approximately $48,000 and $143,000, respectively. Advertising costs are included in indirect expenses in the accompanying consolidated and combined statements of operations.

      Indirect Expenses — Indirect expenses primarily include hotel-level general and administrative fees, sales and marketing expenses, repairs and maintenance expenses, franchise fees, and utility costs.

      Derivative Instruments and Hedging Activities — Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (“SFAS No. 133”), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

      For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

      The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges provide the Company with interest rate protection above the strike rate on the cap and result in the Company receiving interest payments when rates are above the cap strike.

      Income Taxes — As a REIT, the Company generally will not be subject to federal corporate income tax on the portion of its net income (loss) that does not relate to taxable REIT subsidiaries. However, Ashford TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

      Stock-based Compensation — The Company accounts for stock-based compensation using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued

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ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

to Employees.” In connection with the Company’s formation, the Company established an Employee Stock Plan (the “Stock Plan”). Under the Stock Plan, the Company has issued 784,717 shares of restricted common stock to its executives, directors, and certain employees of the Company and its affiliates and 10,000 shares of non-restricted common stock to its directors. Of the 784,717 restricted shares issued, 759,717 vest over three years and 25,000 vested over six months. Although the 10,000 non-restricted shares issued are immediately vested, these shares represent compensation for the subsequent year of service. All such shares are charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of issuance. Under the Stock Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of December 31, 2004, no performance-based stock awards have been issued other than the restricted shares discussed above. Consequently, stock-based compensation as determined under the intrinsic-value method is the same under the fair-value method.

      Earnings (Loss) Per Share — Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Dilutive earnings (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower earnings per share.

      For the year ended December 31, 2004, the Company reported nominal net income available to common shareholders. For the period from the Company’s inception to December 31, 2003, the Company reported a net loss. Consequently, the effects of the restricted shares of common stock, convertible preferred stock, and units of limited partnership interest outstanding during both of the aforementioned periods were anti-dilutive. Therefore, basic and dilutive earnings (loss) per common share were the same for those periods.

      Segments — The Company presently operates in two business segments within the hotel lodging industry: direct hotel investments and hotel financing. Direct hotel investments refers to owning hotels through either acquisition or new development. Hotel financing refers to owning subordinate hotel-related mortgage receivables through acquisition or origination. The Predecessor only operated within the direct hotel investments segment.

4. Concentrations of Risk

      The Company’s investments are all concentrated within the hotel industry. The Company’s current investment strategy is to acquire or develop mid to upscale hotels, acquire first mortgages on hotel properties, invest in other mortgage-related instruments such as mezzanine loans to hotel owners and operators, and participate in hotel sale-leaseback transactions. At present, all of the Company’s owned hotels or hotels securing the Company’s loans receivable are domestically located. Accordingly, adverse conditions in the hotel industry will have a material adverse effect on the Company’s operating and investment revenues and cash available for distribution to stockholders.

      In addition, the Company expects to originate or acquire additional mezzanine loans receivable. These types of mortgage loans involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. The Company may not recover some or all of its investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.

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ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

5. Investment in Hotel Properties

      Investment in hotel properties consists of the following as of December 31, 2004 and 2003:

		December 31,
		2004			2003
Land		$	67,047,057		$	28,652,386
Buildings and improvements			344,471,273			143,811,837
Furniture, fixtures, and equipment			46,885,000			22,002,543
	Total cost		458,403,330			194,466,766
Accumulated depreciation			(31,397,854	)		(20,742,768	)
	Investment in hotel properties, net	$	427,005,476		$	173,723,998

      On August 29, 2003, in connection with the Company’s formation, the Company recorded a minority interest partial step-up of approximately $8.1 million to the historical net carrying values of four of its hotel properties as a result of the Company acquiring minority interest from unaffiliated parties.

      On October 8, 2003, the Company acquired five hotel properties from FelCor Lodging Limited Partnership (“FelCor”) for approximately $50.0 million in cash. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $50.4 million.

      On November 24, 2003, the Company acquired four hotel properties from Noble Investment Group (“Noble”) for approximately $33.9 million, which included approximately $27.5 million in cash and approximately $6.4 million in assumed mortgage debt. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $34.2 million.

      On March 24, 2004, the Company acquired a hotel property in Lake Buena Vista, Florida, from JHM Ruby Lake Hotel, Ltd. for approximately $25.6 million in cash. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $25.4 million with the remainder of the purchase price related to working capital.

      On April 1, 2004, the Company acquired a hotel property in Atlantic Beach, Florida, from Huron Jacksonville Limited Partnership for approximately $23.1 million, which consisted of approximately $6.3 million in cash, approximately $15.7 million in assumed mortgage debt, and approximately $1.1 million worth of limited partnership units, which equates to 106,675 units based on the market price of the Company’s common stock on the date of issuance. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $23.3 million.

      On May 17, 2004, the Company acquired a hotel property in Baltimore, Maryland, from The Buccini/ Pollin Group for approximately $15.9 million, which included approximately $9.1 million in cash and approximately $6.8 million in assumed mortgage debt. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $16.2 million.

      On July 7, 2004, the Company acquired a hotel property and adjacent office building in Philadelphia, Pennsylvania, from Household OPEB I, Inc. for approximately $16.7 million in cash. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $14.7 million, with the remainder of the purchase price related to working capital or the office building, which is classified in assets held for sale at December 31, 2004.

      On July 23, 2004, the Company acquired four hotel properties from Day Hospitality Group for approximately $25.9 million in cash plus approximately $86,000 in additional cash to be paid no later than April 30, 2005 pursuant to a post-acquisition contingency. Considering closing costs, this acquisition generated

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an increase in Investment in Hotel Properties of approximately $25.7 million with the remainder of the purchase price related to working capital.

      On September 2, 2004, the Company acquired nine hotel properties from Dunn Hospitality Group for approximately $62.0 million, which consisted of approximately $59.0 million in cash and approximately $3.0 million worth of limited partnership units, which equates to 333,333 units based on the market price of the Company’s common stock on the date of issuance. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $63.0 million.

      On October 1, 2004, the Company acquired the Hyatt Orange County hotel in Anaheim, California, from Atrium Plaza, LLC for approximately $81.0 million in cash, inclusive of the seller’s commitment to fund a $6.0 million renovation, which was completed in December 2004. Considering closing costs, this acquisition generated an increase in Investment in Hotel Properties of approximately $81.6 million.

      For the year ended December 31, 2004 and the period from inception through December 31, 2003, the Company recognized depreciation expense of approximately $10.7 million and $2.0 million, respectively. For the period from January 1, 2003 to August 28, 2003 and for the year ended December 31, 2002, the Predecessor recognized depreciation expense of approximately $2.9 million and $4.7 million, respectively.

6. Notes Receivable

      Notes receivable consists of the following as of December 31, 2004 and 2003:

	December 31,
	2004		2003
$10 million mezzanine loan secured by one hotel property, matures August 2006, at an interest rate of LIBOR plus 9% with a 2% LIBOR floor, with interest-only payments through August 2004 plus principal payments thereafter based on a twenty-five year amortization schedule	$	9,936,033	$	10,000,000
$15 million mezzanine loan secured by one hotel property, matures January 2006, at an interest rate of LIBOR plus 9%, with interest-only payments through maturity		15,000,000		—
$16.9 million mezzanine loan secured by 14 hotel properties, matures July 2005, at an interest rate of LIBOR plus 8.7% with a 2.5% LIBOR floor, with principal and interest payments due monthly based on a twenty-five year amortization schedule		16,914,007		—
$15 million mezzanine loan secured by one hotel property, matures April 2007, at an interest rate of LIBOR plus 10.25% with a 1.75% LIBOR floor and 5% LIBOR cap, with interest-only payments through maturity		15,000,000		—
$6.8 million mezzanine loan secured by one hotel property, matures January 2006, at an interest rate of the greater of 15% or LIBOR plus 13% with a 2% LIBOR floor (LIBOR plus 10% with 2% LIBOR floor pay rate with deferred interest through maturity), with interest-only payments through maturity		6,811,509		—
$11 million mezzanine loan secured by one hotel property, matures September 2011, at an interest rate of 14% (12% pay rate with deferred interest through the first two years), with interest only payments through maturity		11,000,000		—

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		December 31,
		2004		2003
$5 million mezzanine loan secured by one hotel property, matures October 2006, at an interest rate of LIBOR plus 11.35%, with interest-only payments through maturity			5,000,000		—
	Total	$	79,661,549	$	10,000,000

      Since November 26, 2003, the Company acquired or originated the $9.9 million, $15.0 million, $16.9 million, $15.0 million, $6.8 million, $11.0 million, and $5.0 million notes receivable, as described sequentially in the above table, on November 26, 2003, January 23, 2004, March 4, 2004, March 19, 2004, March 24, 2004, September 10, 2004, and September 30, 2004, respectively. In general, the Company’s notes receivable have extension options, prohibit prepayment through a certain period, and require decreasing prepayment penalties through maturity.

      During 2004, the Company received payments of approximately $8.1 million related to the portion of its $25.0 million mezzanine loan that was secured by three hotel properties. As a result of these prepayments, the $25.0 million mezzanine loan, originally secured by 17 hotel properties, became the aforementioned $16.9 million mezzanine loan, secured by 14 hotel properties.

      On September 30, 2004, the Company acquired a $10 million first-mortgage loan receivable, secured by one hotel property, with an interest rate of LIBOR plus 2.8%, maturing in October 2006, with interest-only payments through maturity. On December 9, 2004, the Company sold this note receivable at its par value.

      As of December 31, 2004, all notes receivable balances were current, and no reserve for loan losses has been recorded. For the year ended December 31, 2004 and the period from inception to December 31, 2003, the Company recognized interest income related to notes receivable of approximately $7.5 million and $110,000, respectively. The Predecessor did not maintain such notes receivable.

7. Deferred Costs

      Deferred costs consist of the following as of December 31, 2004 and 2003:

		December 31,
		2004			2003
Deferred loan costs		$	10,017,471		$	1,429,634
Deferred franchise fees			2,103,800			1,205,000
	Total cost		12,121,271			2,634,634
Accumulated amortization			(2,731,765	)		(247,697	)
	Deferred costs, net	$	9,389,506		$	2,386,937

8. Indebtedness

      Indebtedness consists of the following as of December 31, 2004 and 2003:

	December 31,
	2004		2003
$210 million term loan secured by 25 hotel properties, matures October 10, 2006, at varying interest rates averaging LIBOR plus 1.95%, with interest-only payments due monthly, with three one-year extension options	$	210,000,000	$	—

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		December 31,
		2004		2003
$60 million secured credit facility secured by two hotel properties, matures August 17, 2007, at an interest rate of LIBOR plus a range of 2.0% to 2.3% depending on the loan-to-value ratio, with interest-only payments due monthly, with a commitment fee of 0.25% to 0.5% on the unused portion of the line payable quarterly, with two one-year extension options			17,764,045		—
$45.6 million secured credit facility secured by four mezzanine notes receivable totaling approximately $48.7 million, matures July 13, 2007, with no additional advances permitted in the final year, at an interest rate of LIBOR plus 6.25% with a 2% LIBOR floor, with interest-only payments due monthly through maturity, a commitment fee of 0.5% on the unused portion of the line after 180 days payable monthly, and an option to extend the revolving period by one year			32,401,671		—
Mortgage note payable secured by one hotel property, matures December 31, 2006, at an interest rate of the greater of LIBOR plus 3.5% or 5.5%, with interest-only payments due monthly plus principal payments of $20,000 due monthly beginning January 1, 2005, with a 1% mandatory exit fee and a 0.5% one-year extension fee			—		16,000,000
Mortgage note payable secured by five hotel properties, matures December 31, 2007, at an interest rate of LIBOR plus 3.25% with a 4.75% total floor, with interest-only payments due monthly plus principal payments of $57,000 due monthly beginning January 1, 2006, with a $180,000 mandatory exit fee and a 0.5% one-year extension fee			—		27,800,000
Mortgage note payable secured by one hotel property, matures January 1, 2006, at an interest rate of 7.08%, with principal and interest payments due monthly of approximately $46,000 and a 1% mandatory exit fee			6,296,373		6,401,779
Mortgage note payable secured by one hotel property, matures December 31, 2005, at an interest rate of 7.25%, with principal and interest payments due monthly of approximately $114,000			15,498,080		—
Mortgage note payable secured by one hotel property, matures April 1, 2011, at an interest rate of the average weekly yield for 30-day commercial paper plus 3.4%, with principal and interest payments due monthly, with the principal portion escalating from approximately $15,000 to approximately $53,000 by maturity			11,839,025		—
Mortgage note payable secured by two hotel properties, matures July 31, 2007, at an interest rate of LIBOR plus 3.5% with a 5% total floor, with interest-only payments due monthly plus principal payments of $25,000 due monthly beginning August 1, 2006, with two one-year extension options			6,955,000		—
	Total	$	300,754,194	$	50,201,779

      At December 31, 2004 and 2003, LIBOR was 2.40% and 1.12%, respectively.

      On September 2, 2004, the Company executed a $210.0 million term loan, as discussed in the above table, and used the proceeds to repay three mortgage notes payable totaling approximately $57.8 million, pay down its $60.0 million secured credit facility by approximately $57.2 million, and pay down another mortgage note payable by approximately $12.6 million. These reductions in debt are discussed more specifically below. Unamortized loan costs associated with the repaid mortgage notes were approximately $1.6 million, which were expensed.

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      On August 29, 2003, in connection with the Company’s formation, the Company used a portion of the proceeds from its IPO to repay approximately $65.7 million of mortgage indebtedness secured by the initial properties.

      The $16.0 million mortgage note payable outstanding at December 31, 2003, was repaid upon completion of the aforementioned $210.0 million term loan. The balance outstanding at the time the loan was repaid was $16.0 million.

      On November 24, 2003, the Company acquired four hotel properties from Noble for approximately $33.9 million, which included approximately $27.5 million in cash and approximately $6.4 million in assumed mortgage debt. As of December 31, 2004, this mortgage note payable had an outstanding balance of approximately $6.3 million.

      On December 24, 2003, the Company executed a $36.0 million non-recourse loan secured by the five hotel properties it acquired from FelCor on October 8, 2003, of which approximately $27.8 million was outstanding as of December 31, 2003 due to a holdback provision of approximately $8.2 million earmarked for targeted capital expenditures related to these properties. Upon completion of the aforementioned $210.0 million term loan, this $36.0 million non-recourse loan had an outstanding balance of approximately $32.1 million, and was repaid.

      On February 5, 2004, the Company executed the $60.0 million secured credit facility, of which approximately $49.8 million of the proceeds were funded March 24, 2004 and the remainder was funded May 17, 2004. The credit facility allows for an increase to $75.0 million subject to certain conditions. Upon completion of the aforementioned $210.0 million term loan, the credit facility was paid down by approximately $57.2 million. On August 17, 2004, the Company modified this credit facility such that the interest rate was reduced from LIBOR plus 3.25% to LIBOR plus a range of 2.0% to 2.3% depending on the loan-to-value ratio, and maturity was extended from February 5, 2007 to August 17, 2007, with two one-year extension options. On October 1, 2004, in connection with the acquisition of a hotel property, the Company drew an additional $15.0 million on this credit facility.

      On April 1, 2004, in connection with the acquisition of a hotel property, the Company assumed a mortgage note payable of approximately $15.7 million, which matures December 31, 2005, as shown in the above table. As of December 31, 2004, this mortgage note payable had an outstanding balance of approximately $15.5 million.

      On May 17, 2004, in connection with the acquisition of a hotel property, the Company assumed a mortgage note payable of approximately $6.8 million, which matures April 1, 2011, as shown in the above table. On August 12, 2004, the Company increased this commitment by approximately $5.2 million and reduced the overall interest rate from the average weekly yield for 30-day commercial paper plus 3.5% to the average weekly yield for 30-day commercial paper plus 3.4%. As of December 31, 2004, this mortgage note payable had an outstanding balance of approximately $11.8 million.

      On July 7, 2004, the Company executed a $14.8 million mortgage note payable, secured by one hotel property, at an interest rate of LIBOR plus 3.5%, with a 5% total floor. The mortgage note payable had a maturity date of July 31, 2007 with two one-year extension options, with interest-only payments due monthly plus principal payments of $20,000 due monthly beginning July 1, 2006. Upon completion of the aforementioned $210.0 million term loan, this mortgage note payable was repaid. The balance outstanding at the time the loan was repaid was approximately $9.7 million.

      On July 14, 2004, the Company executed a $45.6 million credit facility, which matures July 13, 2007, as shown in the above table. Approximately $37.5 million of the proceeds were funded immediately. On August 26, 2004, the Company paid down approximately $4.6 million of this credit facility in connection with the partial payoff of one of the mezzanine notes receivable securing the facility.

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      On July 23, 2004, the Company executed a $19.6 million mortgage note payable, which matures July 31, 2007, as shown in the above table. Upon completion of the aforementioned $210.0 million term loan, this mortgage note payable was paid down approximately $12.6 million. As of December 31, 2004, this mortgage note payable had an outstanding balance of approximately $7.0 million.

      In addition, the Company’s $6.3 million, $15.5 million, and $11.8 million mortgage notes payable agreements generally require decreasing prepayment penalties through maturity.

      Maturities of indebtedness as of December 31, 2004 are as follows:

2005		$	16,093,979
2006			216,834,260
2007			57,537,264
2008			568,066
2009			595,881
Thereafter			9,124,744
	Total	$	300,754,194

      The carrying values of assets collateralizing indebtedness as of December 31, 2004 and 2003 are as follows:

			December 31,
Hotel Property	Location		2004			2003
Embassy Suites		Austin, TX	$	11,283,780	(d)		—
Embassy Suites		Dallas, TX		10,953,253	(d)		—
Embassy Suites		Herndon, VA		12,279,983	(d)		—
Embassy Suites		Las Vegas, NV		20,460,665	(d)	$	20,923,229	(a)
Embassy Suites		Phoenix, AZ		16,466,927	(d)		14,901,437	(b)
Embassy Suites		Syracuse, NY		15,815,003	(d)		13,671,727	(b)
Embassy Suites		Flagstaff, AZ		6,773,919	(d)		6,080,686	(b)
Radisson Hotel		Holtsville, NY		22,234,750	(d)		—
Doubletree Guest Suites		Columbus, OH		10,010,276	(d)		9,536,429	(b)
Doubletree Guest Suites		Dayton, OH		6,546,075	(d)		5,776,567	(b)
Hilton Garden Inn		Jacksonville, FL		11,399,662	(c)		11,630,909	(c)
Homewood Suites		Mobile, AL		8,931,144	(d)		—
Hampton Inn		Lawrenceville, GA		4,754,430	(e)		—
Hampton Inn		Evansville, IN		7,272,816	(d)		—
Hampton Inn		Terre Haute, IN		8,473,747	(d)		—
Hampton Inn		Horse Cave, KY		2,462,621	(d)		—
Hampton Inn		Buford, GA		6,449,379	(d)		—
SpringHill Suites by Marriott		Jacksonville, FL		8,817,918	(d)		—
SpringHill Suites by Marriott		Baltimore, MD		15,928,083	(g)		—
SpringHill Suites by Marriott		Kennesaw, GA		6,405,777	(h)		—
SpringHill Suites by Marriott		Buford, GA		7,459,871	(d)		—
Fairfield Inn & Suites		Kennesaw, GA		5,138,528	(h)		—
Fairfield Inn by Marriott		Evansville, IN		4,244,755	(d)		—

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

				December 31,
Hotel Property		Location		2004			2003
Fairfield Inn by Marriott			Princeton, IN		1,221,324	(d)		—
Courtyard by Marriott			Bloomington, IN		11,949,273	(d)		—
Courtyard by Marriott			Columbus, IN		5,794,094	(d)		—
Courtyard by Marriott			Louisville, KY		14,601,371	(d)		—
Marriott Residence Inn			Lake Buena Vista, FL		24,781,165	(d)		—
Marriott Residence Inn			Evansville, IN		7,219,031	(d)		—
Sea Turtle			Altantic Beach, FL		22,762,048	(f)		—
Sheraton Bucks County			Langhorne, PA		15,754,515	(d)		—
Hyatt Regency Orange County			Anaheim, CA		80,986,928	(e)		—
	Total			$	415,633,111		$	82,520,984

(a)  Represents collateral for the $16.0 million mortgage note payable outstanding at December 31, 2003.

(b)	Represents collateral for the $27.8 million mortgage note payable outstanding at December 31, 2003.
(c)	Represents collateral for the $6.4 million mortgage note payable outstanding at December 31, 2003.
(d)	Represents collateral for the $210.0 million term loan outstanding at December 31, 2004.
(e)	Represents collateral for the $60.0 million credit facility outstanding at December 31, 2004.
(f)	Represents collateral for the $15.5 million mortgage note payable outstanding at December 31, 2004.
(g)	Represents collateral for the $11.8 million mortgage note payable outstanding at December 31, 2004.
(h)	Represents collateral for the $7.0 million mortgage note payable outstanding at December 31, 2004.

      In addition to the above, the $45.6 million secured credit facility is secured by four mezzanine notes receivable totaling approximately $48.7 million as of December 31, 2004.

      If the Company violates covenants in any debt agreements, the Company could be required to repay all or a portion of its indebtedness before maturity at a time when the Company might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in the Company 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 the Company’s current or future debt obligations could impair the Company’s planned business strategies by limiting the Company’s ability to borrow (i) beyond certain amounts or (ii) for certain purposes. Presently, the Company’s existing financial debt covenants primarily relate to maintaining a minimum debt coverage ratio at a certain property, maintaining an overall minimum net worth, and maintaining an overall minimum total assets.

9. Derivative Instruments and Hedging Activities

      On September 2, 2004, the Company purchased a 6.0% LIBOR interest rate cap with a $210.0 million notional amount to limit its exposure to rising interest rates on $210.0 million of its floating-rate debt. To partially offset the cost of the purchased cap, the Company sold a 6.0% LIBOR interest rate cap with a $105.0 million notional amount with identical terms to the purchased cap. Both interest rate caps mature October 2, 2006. The Company has designated the net purchased option of $105.0 million as a cash flow hedge of its exposure to changes in interest rates on a corresponding amount of variable-rate debt.

      On September 7, 2004, the Company entered into a $105.0 million stair-stepped interest rate swap agreement, at an average interest rate of 4.9% over the term of the swap, which matures March 1, 2007. The

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interest rate swap effectively converts the interest payments on $105.0 million of the Company’s floating-rate debt to a fixed rate and has been designated as a cash flow hedge.

      As of December 31, 2004, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes, and currently does not have any derivatives that are not designated as hedges.

      At December 31, 2004, derivatives with a fair value of approximately $712,000 were included in other assets, and derivatives with a fair value of approximately $90,000 were included in other liabilities. During the year ended December 31, 2004, the change in net unrealized gains/losses of approximately $555,000 for derivatives designated as cash flow hedges is separately disclosed as accumulated other comprehensive income in the consolidated statement of owners’ equity. During the year ended December 31, 2004, no hedge ineffectiveness was recognized.

      Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the year ended December 31, 2004, the change in net unrealized gains/losses on cash flow hedges reflects a reclassification of approximately $100,000 from accumulated other comprehensive income to an increase in interest expense. During the next twelve months, the Company estimates that approximately $421,000 will be reclassified from other comprehensive income existing at December 31, 2004, to a reduction to interest expense.

10. Employee Stock Grants

      Upon consummation of the IPO and subsequent exercise of the underwriters’ over-allotment, the Company issued 714,317 shares of restricted common stock to its executives, directors, and certain employees of the Company and its affiliates. Of the 714,317 shares issued, 689,317 vest over three years and 25,000 vested over six months. The value of the shares is charged to compensation expense on a straight-line basis based on the IPO price of $9 per share.

      On March 15, 2004, the Company issued an additional 70,400 shares of restricted common stock to its executives and certain employees. These shares vest over three years, and the value of the shares is charged to compensation expense on a straight-line basis based on the closing price on the date of issuance of $10.41 per share.

      On May 19, 2004, the Company issued 10,000 shares of common stock to its directors as compensation for serving on the Board through May 2005. These shares are immediately vested, and the value of these shares is charged to compensation expense over the year of service on a straight-line basis based on the closing price on the date of issuance of $8.90 per share.

      For the year ended December 31, 2004 and the period from inception through December 31, 2003, the Company recognized compensation expense of approximately $2.4 million and $864,000, respectively, related to these shares.

11. Preferred Stock

      In accordance with the Company’s charter, the Company is authorized to issue a total of 50 million shares of preferred stock, which includes both Series A cumulative preferred stock and Series B cumulative convertible redeemable preferred stock.

      Series A Cumulative Preferred Stock — On September 22, 2004, the Company issued 2,300,000 shares of 8.55% Series A Cumulative Preferred Stock at $25 per share, which generated gross proceeds of approximately $57.5 million. However, the aggregate proceeds to the Company, net of underwriters’ discount and offering costs, was approximately $55.0 million.

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      Series A preferred stock has no maturity date, and the Company is not required to redeem the shares at any time. Prior to September 22, 2009, Series A preferred stock is not redeemable, except in certain limited circumstances relating to the ownership limitation necessary to preserve the Company’s qualification as a REIT. However, on and after September 22, 2009, Series A preferred stock will be redeemable at the Company’s option for cash, in whole or from time to time in part, at a redemption price of $25 per share plus accrued and unpaid dividends, if any, at the redemption date. In general, the holders of Series A preferred stock have no voting rights.

      Series A preferred stock dividends are cumulative from the date of original issuance and are payable quarterly, when and as declared, commencing on January 18, 2005 at the rate of 8.55% per annum of the $25 liquidation preference (equivalent to an annual dividend rate of $2.1375 per share). Dividends are payable on the 15th day of January, April, July, and October of each year, or if such day is not a business day, the next succeeding business day. For the year ended December 31, 2004, the Company accrued Series A preferred stock dividends payable of approximately $1.4 million.

      Series B Cumulative Convertible Redeemable Preferred Stock — On December 27, 2004, the Company entered into a Series B Cumulative Convertible Redeemable Preferred Stock Purchase Agreement for the sale of up to $75.0 million in Series B cumulative convertible redeemable preferred stock of the Company to a financial institution. Pursuant to the purchase agreement, the financial institution may purchase up to 5,162,000 shares of Series B-1 Preferred Stock of the Company and up to 2,285,865 shares of Series B-2 Preferred Stock of the Company, in each case at a per-share price of $10.07, which was determined using a 20-day average closing price calculated five business days prior to execution of the agreement. The two series of preferred stock are identical except with respect to voting rights and convertibility features and are referred to herein collectively as Series B Preferred Stock.

      Each share of Series B-1 Preferred Stock is convertible, at the option of the holder, at any time into the number of shares of common stock of the Company obtained by dividing $10.07 by the conversion price then in effect. The initial conversion price of the Class B-1 Preferred Stock is $10.07, subject to certain adjustments, as defined. Series B-2 Preferred Stock will automatically convert into Series B-1 Preferred Stock on a share-for-share basis immediately upon the earliest to occur of (i) approval of the stockholders of the Company as required by the applicable rules of the New York Stock Exchange or (ii) a determination by the board of directors of the Company that such stockholder vote is not required.

      Series B-1 Preferred Stock holders are entitled to vote, on an as-converted basis voting as a single class together with the holders of common stock, on all matters to be voted on by the Company’s stockholders. Series B-2 Preferred Stock holders have no voting rights.

      Series B Preferred Stock is redeemable for cash at the option of the Company at the liquidation preference, which is set at $10.07, after three years (or two years if certain criteria, as defined, are met). Series B Preferred Stock is redeemable for cash at the option of the holder at a specified redemption price, as defined, if certain events occur.

      The Series B preferred dividend for all such shares issued is set at the greater of $0.14 per share, or the prevailing common stock dividend plus, in the case of Series B-2 Preferred Stock, an additional dividend of $0.05015 per share beginning January 1, 2009, if (i) the conversion of Series B-2 Preferred Stock into Series B-1 Preferred Stock has not been completed and (ii) the price at which the common stock of the Company is then trading exceeds $10.07 per share.

      The $75.0 million preferred stock private placement is a two-stage transaction. The first tranche is for the sale of $20.0 million in Series B Preferred Stock. The initial $10.0 million funded on December 30, 2004, representing 993,049 shares of Series B-1 Preferred Stock, and the remaining $10.0 million will be available for disbursement by June 30, 2005. The second tranche is for the sale of $55.0 million in Series B Preferred Stock. Of the second tranche, $34.7 million can be funded, at the financial institution’s election, on June 30,

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2005 if the Company has not given notice to the financial institution of its intent to sell $34.7 million of the second tranche by June 15, 2005. The remainder of the second tranche will be available for disbursement by December 23, 2005. Proceeds from the issuance of the initial 993,049 shares of Series B-1 Preferred Stock were used to partially fund a 21-property acquisition, which closed on March 16, 2005, and the Company will continue to sell preferred stock under this purchase agreement over time to fund general corporate purposes, new acquisitions, or debt repayment.

      For the year ended December 31, 2004, the Company accrued Series B preferred stock dividends payable of approximately $3,300.

12. Income Taxes

      The Company has elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute at least 90% its taxable income to its stockholders. The Company currently intends to adhere to these requirements and maintain its REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income as well as to federal income and excise taxes on its undistributed taxable income.

      For the year ended December 31, 2004 and the period from inception to December 31, 2003, the Company’s taxable REIT subsidiary recognized net book income of approximately $1.7 million and $83,000, respectively, and a provision for income taxes of approximately $658,000 and $142,000, respectively.

      The following table reconciles the provision for income taxes at statutory rates to the actual provision for income taxes recorded for the year ended December 31, 2004 and the period from inception to December 31, 2003:

		Year Ended			Period from
		December 31,			August 29, 2003 to
		2004			December 31, 2003
Provision for income taxes at 35% statutory rate		$	584,099		$	29,050
State income taxes, net of Federal benefit			96,543			5,007
Valuation allowance			(108,121	)		108,121
Other			85,752			—
	Provision for income taxes	$	658,273		$	142,178

      For the Predecessor, no provision for income taxes was recognized as each partner was individually responsible for reporting its respective share of partnership taxable income or loss.

      For the year ended December 31, 2004 and the period from inception to December 31, 2003, taxable loss for the REIT is projected to be approximately $970,000 and $818,000, respectively. The REIT is not subject to the distribution requirement for years with taxable losses.

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      At December 31, 2004 and 2003, the Company’s deferred tax asset and related valuation allowance consisted of the following:

		December 31,
		2004		2003
Allowance for doubtful accounts		$	24,116	$	9,523
Accrued expenses			376,817		98,598
	Gross deferred tax asset		400,933		108,121
	Valuation allowance		—		(108,121	)
	Net deferred tax asset	$	400,933	$	—

      At December 31, 2004, deferred tax assets are included in other assets. As of December 31, 2003, the Company had fully reserved its deferred tax asset due to its limited operational history.

      For the year ended December 31, 2004 and the period from inception through December 31, 2003, components of the provision for income taxes are as follows:

			Year Ended			Period from
			December 31,			August 29, 2003 to
			2004			December 31, 2003
Current:
	Federal		$	931,128		$	137,171
	State			128,078			5,007
		Total current		1,059,206			142,178
Deferred:
	Federal			(369,398	)		—
	State			(31,535	)		—
		Total deferred		(400,933	)		—
		Provision for income taxes	$	658,273		$	142,178

13. Minority Interest

      Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Net income (loss) is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period. Upon formation of the Company on August 29, 2003, and subsequent exercise of the underwriters’ over-allotment option on September 26, 2003, the Company issued 5,657,917 units of limited partnership interest to affiliates. On April 1, 2004, the Company issued an additional 106,675 units of limited partnership interest in connection with the acquisition of a hotel property. On September 2, 2004, the Company issued an additional 333,333 units of limited partnership interest in connection with the acquisition of nine hotel properties.

      As of December 31, 2004 and 2003, these units of limited partnership interest represent a 19.11% and 18.03% minority interest ownership, respectively. Beginning one year after issuance, each unit of limited partnership interest may be redeemed for either cash or one share of the Company’s common stock at the Company’s discretion. To date, no units of limited partnership interest have been redeemed.

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14. Related Party Transactions

      Under previous agreements with affiliates owned by the Company’s Chairman and the Company’s Chief Executive Officer and Director, the Predecessor was obligated to pay such affiliates management fees of 3%-4.5% of gross revenues, as defined by the agreements, and to reimburse such affiliates for certain accounting and administrative expenses. Under related management agreements, the Predecessor was obligated to pay a fee equal to 8% of all invoiced third-party expenditures necessary for the replacement of furniture, fixtures, and equipment, and for building repairs.

      Upon formation of the Company on August 29, 2003, the Company became obligated to pay such affiliates a) monthly management fees equal to the greater of $10,000 or 3% of gross revenues as well as an annual incentive management fee, if certain operational criteria are met, b) market service fees on the approved capital improvements, including project management fees of up to 4% of project costs, and c) other reimbursements as approved by the Company’s independent directors.

      Under these agreements, the Company or its Predecessor incurred the following amounts during the year ended December 31, 2004, the period from inception to December 31, 2003, the period from January 1, 2003 to August 28, 2003, and the year ended December 31, 2002:

		The Company		The Company		The Predecessor		The Predecessor
				Period from		Period from
		Year Ended		August 29, 2003 to		January 1, 2003 to		Year Ended
		December 31, 2004		December 31, 2003		August 28, 2003		December 31, 2002
Management fees(a)		$	3,395,106	$	651,480	$	718,408	$	1,059,867
Market service and project management fees			1,237,358		—		55,266		122,734
Special Limited Partner fees(b)			—		—		506,307		658,925
Other reimbursements			799,837		217,298		356,612		491,032
	Total	$	5,432,301	$	868,778	$	1,636,593	$	2,332,558

(a)  For year ended December 31, 2004 and the period from inception to December 31, 2003, the above table includes management fees of approximately $975,000 and $25,000, respectively, related to third party managers who are not related parties. As of December 31, 2004, these third parties manage 19 of the Company’s 33 hotels. For the year ended December 31, 2004 and the period from inception to December 31, 2003, the Company also incurred incentive fees to related parties of approximately $438,000 and $0, respectively, which are included in indirect hotel operating expenses.

(b) Upon formation of the Company on August 29, 2003 and related redemption of the Company’s interest in its Special Limited Partner, the Special Limited Partner fee ceased to exist.

      The management agreement with an affiliate includes an exclusivity clause that requires the Company to engage the affiliate, unless the Company’s independent directors either (i) unanimously vote to hire a different manager or developer, or (ii) by a majority vote, elect not to engage the affiliate because special circumstances exist or, based on the affiliate’s prior performance, it is believed that another manager or developer could materially improve the performance of the duties.

      In addition to the above, these affiliates also pay for certain corporate general and administrative expenses on behalf of the Company, including rent, payroll, office supplies, and travel. Such charges are allocated to the Company based on various methodologies, including headcount, office space, usage, and actual amounts incurred. For the year ended December 31, 2004 and the period from inception to December 31, 2003, such

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costs were approximately $809,000 and $833,000, respectively, which are reimbursed by the Company monthly.

      During the period from inception to December 31, 2003, these affiliates also paid approximately $55,000 in fees associated with the Company’s initial public offering and $500,000 related to an earnest money deposit on an acquisition, which were reimbursed by the Company prior to December 31, 2003.

      In addition, the Company agreed to indemnify certain affiliates, including the Company’s Chief Executive Officer and Director and the Company’s Chairman, who contributed properties in connection with the Company’s initial public offering in exchange for operating partnership units against the income tax that such affiliates may incur if the Company disposes of one of these properties.

      On October 16, 2003, the Company exercised its option to reassign its rights under its eight asset management and consulting contracts back to one of these affiliates until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003. As a result, the Company forewent related asset management fee income over this period of approximately $250,000. However, the related guarantee of payment associated with these fees, which are $1.2 million annually for five years, was extended for a like period.

      In May 2004, the Company engaged a financial services firm to act as a financial advisor in obtaining permanent financing related to various hotel properties. A Company board member is an employee and principal of this firm, and the engagement of such firm was approved by the Company’s board of directors. In September 2004, the Company paid the financial services firm approximately $707,000 related to this agreement.

15. Commitments and Contingencies

      Restricted Cash — Under existing mortgage loan agreements, the Company is obligated to escrow payments for insurance, real estate taxes, and debt service. In addition, for certain properties with debt, the Company is obligated to escrow 4% of gross revenue for capital improvements.

      Franchise Fees — Under the existing franchise agreements, the Company is obligated to pay the franchisors royalty fees between 2.5% and 5% of gross room revenue, and fees for marketing, reservations, and other related activities aggregating between 1% and 3.75% of gross room revenue. These franchise agreements expire beginning in 2011 through 2024. When a franchise term expires, the franchisor has no obligation to issue a new franchise. The loss of a franchise could have a material adverse effect on the operations or the underlying value of the affected hotel because of the loss of associated name recognition, marketing support, and centralized reservation systems provided by the franchisor. The loss of a franchise could also have a material adverse effect on cash available for distribution to stockholders. In addition, if the Company terminates a franchise prior to its expiration date, the Company may be required to pay up to three times the average annual franchise fees incurred for that property.

      For the year ended December 31, 2004 and for the period from inception to December 31, 2003, the Company incurred franchise fees of approximately $6.7 million and $1.3 million, respectively. For the period from January 1, 2003 to August 28, 2003 and for the year ended December 31, 2002, the Predecessor incurred franchise fees of approximately $1.6 million and $2.2 million, respectively. Franchise fees are included in indirect operating expenses in the accompanying consolidated and combined statements of operations.

      Management Fees — Under the existing management agreements, the Company is obligated to pay a) monthly management fees equal to the greater of $10,000 or 3% of gross revenues, or in some cases just 3% of gross revenues, as well as an annual incentive management fee, if applicable, b) market service fees on the approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by the Company’s independent directors. These management agreements expire beginning in 2006 through 2022, with renewal options on those related

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to affiliates of up to twenty-five additional years. In addition, if the Company terminates a management agreement on one of the initial properties prior to its expiration due to sale of the property, the Company may be required to pay all estimated management fees due under the management agreement’s remaining term. This termination fee may be avoided in certain circumstances by substitution of a similar property. If the Company terminates a management agreement on one of the hotels acquired after the Company’s formation, or on one of the initial properties for reasons other than sale of the property, the Company may be required to pay estimated management fees ranging from one to six years from the termination date or substitute a new management agreement related to a different hotel.

      Leases — The Company has entered into noncancelable operating leases related to certain equipment, land, and facilities, which expire between 2005 and 2020, including a land lease and an air lease, each related to one hotel property. The air lease is subject to base rent plus contingent rent based on the related property’s net operating income. For the year ended December 31, 2004 and for the period from inception to December 31, 2003, the Company recognized total rent expense of approximately $615,000 and $164,000, respectively. For the period from January 1, 2003 to August 28, 2003 and for the year ended December 31, 2002, the Predecessor recognized total rent expense of approximately $150,000 and $203,000, respectively. The Company also owns equipment acquired under capital leases, included in Investment in Hotel Properties, which expire between 2006 and 2007, and have interest rates ranging between 10.0% and 10.3%.

      As of December 31, 2004, future minimum annual commitments for noncancelable lease agreements are as follows:

		Operating		Capital
		Leases		Leases
2005		$	591,591	$	156,197
2006			499,593		153,481
2007			456,483		38,756
2008			413,891		—
2009			409,106		—
Thereafter			13,343,864		—
	Total future minimum lease payments	$	15,714,528	$	348,434
	Less amounts representing interest				35,850
	Present value of future minimum lease payments			$	312,584

      As of December 31, 2004 and 2003, assets acquired under capital leases consist of the following:

		December 31,
		2004			2003
Assets under capital leases		$	694,179		$	832,839
Accumulated depreciation			(378,764	)		(299,278	)
	Assets under capital leases, net	$	315,415		$	533,561

      At December 31, 2004 and 2003, the Company also had capital commitments of approximately $2.6 million and $355,000, respectively, related to general capital improvements.

      Common Stock Dividends — On March 15, 2004, the Company declared a cash dividend of approximately $1.9 million, or $0.06 per diluted share, for common shareholders and units of limited partnership of record on March 31, 2004, which was paid April 15, 2004. On June 16, 2004, the Company declared a cash dividend of approximately $3.2 million, or $0.10 per diluted share, for common shareholders and units of

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limited partnership of record on June 30, 2004, which was paid July 15, 2004. On September 13, 2004, the Company declared a cash dividend of approximately $4.5 million, or $0.14 per diluted share, for common shareholders and units of limited partnership of record on September 30, 2004, which was paid October 15, 2004. On December 15, 2004, the Company declared a cash dividend of approximately $4.8 million, or $0.15 per diluted share, for common shareholders and units of limited partnership of record on December 31, 2004, which was paid January 18, 2005.

      Series A Preferred Stock Dividends — On December 17, 2004, the Company declared a cash dividend of approximately $1.4 million, or $0.5878 per diluted share, for Series A preferred shareholders of record on December 31, 2004, which was paid January 18, 2005.

      Series B Preferred Stock Dividends — The dividend is set at the greater of $0.14 per share or the prevailing common stock dividend, plus, in the case of the Series B-2 Preferred Stock, an additional dividend of $0.05015 per share beginning January 1, 2009, if (i) the conversion of the Series B-2 Preferred Stock into Series B-1 Preferred Stock has not been completed and (ii) the price at which the common stock of the Company is then trading exceeds $10.07 per share.

      Future Equity Issuances — On December 27, 2004, the Company executed a Series B Cumulative Convertible Redeemable Preferred Stock Purchase Agreement for the sale of Series B cumulative convertible redeemable preferred stock of the Company to a financial institution. Pursuant to the purchase agreement and subsequent amendment, this financial institution has certain participation rights with respect to any sale of equity securities by the Company.

      Insurance Losses — During August and September of 2004, four hurricanes caused significant damage throughout Florida and neighboring states. As a result, the Company’s four properties in that region experienced varying levels of property damage and business interruption. On July 20, 2004, the Company’s Radisson Hotel in Covington, Kentucky, experienced a fire on one of its hotel floors. As a result, this hotel was subsequently closed for approximately three days due to lack of electrical power. Although the Company’s insurance covers both property damage and business-interruption losses, the Company is liable for uninsured losses below its deductibles. During the year ended December 31, 2004, the Company accrued approximately $160,000 related to property damage associated with these events, and estimates that it lost an additional $340,000 related to business interruption.

      Employment Agreements — The Company has entered into employment agreements with certain executive officers, which provide for minimum annual base salaries, other fringe benefits, and non-compete clauses as determined by the board of directors. The agreements have varying terms expiring between December 31, 2006 and December 31, 2007, with automatic one-year renewals, unless terminated by either party upon six months’ notice, subject to severance provisions.

      Employee Incentive Plan — Effective December 2003, the Company created an Employee Savings and Incentive Plan (“ESIP”), a nonqualified compensation plan that covers all employees who work at least 25 hours per week. The ESIP allows employees to contribute up to 100% of their compensation to various investment funds. The Company matches 25% of the first 10% each employee contributes. Employee contributions vest immediately, whereas Company contributions vest 25% annually. As of December 31, 2004 and 2003, the Company’s matching fund had investment assets and a related liability to participating employees of approximately $51,000 and $3,000, respectively. During the year ended December 31 2004, the Company incurred administrative fees associated with maintaining the ESIP of approximately $7,000. During the year ended December 31, 2003, the Company incurred nominal administrative fees associated with maintaining the ESIP.

      Acquisition Contingency — On July 23, 2004, the Company acquired four hotel properties from Day Hospitality Group for approximately $25.9 million in cash plus a contingent component based on the 2004 performance of the four acquired hotels to be paid, if earned, no later than April 30, 2005. As of December 31,

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2004, the Company had accrued approximately $86,000 related to this contingent payment based on its interpretation of the acquisition agreement. However, Day Hospitality Group has disputed this amount. Presently, the ultimate outcome of this dispute is not determinable.

      Litigation — The Company is currently subject to litigation arising in the normal course of its business. In the opinion of management, none of these lawsuits or claims against the Company, either individually or in the aggregate, is likely to have a material adverse effect on the Company’s business, results of operations, or financial condition. In addition, management believes the Company has adequate insurance in place to cover such litigation.

      Taxes — Under tax indemnification agreements, the Company agreed for a period of ten years to use commercially reasonable efforts to maintain non-recourse mortgage indebtedness in the amount of at least $16.0 million, which will allow the contributors of the initial properties to defer recognition of gain in connection with the contribution of the Las Vegas Embassy Suites hotel property as part of the Company’s formation. Additionally, the Company is prohibited from selling or transferring the Sea Turtle Inn hotel property in Atlantic Beach, Florida, until April 1, 2007 if, as a result, the former owner of the property would recognize gain for federal tax purposes. If the Company sells or transfers this property after April 1, 2007, but prior to April 1, 2009, and the sale or transfer results in the former owner having to recognize gain for federal tax purposes, the Company must pay $180,000 to the former owner. However, this amount will be reduced by $7,500 for each passing month from April 1, 2007 until April 1, 2009.

16. Fair Value of Financial Instruments

      As of December 31, 2004 and 2003, the carrying values of cash and cash equivalents, restricted cash, accounts receivable, amounts due from or to affiliates, accounts payable, and accrued expenses approximate their fair values due to the short-term nature of these financial instruments. As of December 31, 2004 and 2003, the carrying values of notes receivable, indebtedness, and capital leases payable approximates their fair values because the interest rates on these on these financial instruments are variable or approximate current interest rates charged on similar financial instruments.

      As of December 31, 2004, the Company’s $300.8 million debt portfolio consisted of approximately $279.0 million of outstanding variable-rate debt and approximately $21.8 million of outstanding of fixed-rate debt, with interest rates ranging from 7.08% to 7.25%. As discussed below, $105.0 million of the variable-rate debt was converted to fixed-rate debt via an interest rate swap. As of December 31, 2004, the Company owned approximately $79.7 million of variable-rate loans receivable.

      On September 2, 2004, the Company purchased a 6.0% LIBOR interest rate cap with a $210.0 million notional amount to limit its exposure to rising interest rates on $210.0 million of its floating-rate debt. To partially offset the cost of the purchased cap, the Company sold a 6.0% LIBOR interest rate cap with a $105.0 million notional amount with identical terms to the purchased cap. Hence, the Company owns a net interest rate cap with a $105.0 million notional amount. Both the purchased and sold interest rate caps mature October 2, 2006.

      On September 7, 2004, the Company entered into a $105.0 million stair-stepped interest rate swap agreement, at an average interest rate of 4.9% over the term of the swap, which matures March 1, 2007. The interest rate swap effectively converts the interest payments on $105.0 million of floating-rate debt to a fixed rate.

      At December 31, 2004, derivatives with a fair value of approximately $712,000 were included in other assets, and derivatives with a fair value of approximately $90,000 were included in other liabilities.

      Considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize

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in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

17. Supplemental Cash Flow Information

      For the year ended December 31, 2004 and for the period from inception to December 31, 2003, interest paid by the Company was approximately $9.6 million and $568,000, respectively. For the period from January 1, 2003 to August 28, 2003, and for the year ended December 31, 2002, interest paid by the Predecessor was approximately $4.1 million and $5.7 million, respectively.

      During the year ended December 31, 2004, the Company recorded the following non-cash transactions: a) on March 15, 2004, the Company issued 70,400 shares of restricted common stock to its executives and certain employees, b) on April 1, 2004, the Company assumed approximately $15.7 million in mortgage debt related to the acquisition of a hotel property, c) on April 1, 2004, the Company issued 106,675 units of limited partnership interest related to the acquisition of a hotel property, d) on May 17, 2004, the Company assumed approximately $6.8 million in mortgage debt related to the acquisition of a hotel property, e) on May 19, 2004, the Company issued 10,000 shares of common stock to its directors, f) on September 2, 2004, the Company issued 333,333 units of limited partnership interest related to the acquisition of nine hotel properties, g) on December 15, 2004, the Company declared a cash dividend of approximately $4.8 million, or $0.15 per diluted share, for common shareholders and units of limited partnership of record on December 31, 2004, which was paid January 18, 2005, and h) on December 17, 2004, the Company declared a cash dividend of approximately $1.4 million, or $0.5878 per diluted share, for Series A preferred shareholders of record on December 31, 2004, which was paid January 18, 2005.

      During the year ended December 31, 2003, in connection with the Company’s formation on August 29, 2003 and subsequent exercise of the underwriters’ over-allotment, the Company recorded non-cash transactions as follows: a) contribution of initial properties with an historical net book value of approximately $82.6 million, b) an approximate $8.1 million minority interest partial step-up to the historical net carrying values of its hotel properties resulting from the acquisition of unaffiliated minority interest partners, c) an approximate $3.3 million forgiveness of debt, d) an approximate $16.0 million assumption of debt from the Predecessor, and e) the issuance of 714,317 shares of restricted stock to Company executives, employees, affiliates, and directors. In connection with the Company’s acquisition of four hotel properties from Noble on November 24, 2003, the Company recorded a non-cash assumption of approximately $6.4 million in mortgage debt.

18. Segments Reporting

      The Company presently operates in two business segments within the hotel lodging industry: direct hotel investments and hotel financing. Direct hotel investments refers to owning hotels through either acquisition or new development. Hotel financing refers to owning subordinate hotel-related mortgages through acquisition or origination. The Predecessor only operated within the direct hotel investments segment.

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      The Company does not allocate certain corporate-level accounts to its operating segments, including corporate general and administrative expenses, interest income, interest expense, provision for income taxes, and minority interest. For the year ended December 31, 2004, financial information related to the Company’s reportable segments was as follows:

For the Year Ended December 31, 2004:

			Direct Hotel		Hotel
			Investments		Financing		Corporate			Consolidated
Total revenues			$	109,375,617	$	7,549,445	$	—		$	116,925,062
Operating expenses				79,528,150		—		—			79,528,150
Depreciation and amortization				10,767,785		—		—			10,767,785
Corporate general and administrative				—		—		11,854,944			11,854,944
		Operating income (loss)		19,079,682		7,549,445		(11,854,944	)		14,774,183
Interest income				—		—		335,495			335,495
Interest expense				—		—		(9,217,377	)		(9,217,377	)
Amortization of loan costs				—		—		(1,883,841	)		(1,883,841	)
Write-off of loan costs				—		—		(1,633,369	)		(1,633,369	)
	Income (loss) before minority interest and provision for income taxes			19,079,682		7,549,445		(24,254,036	)		2,375,091
Provision for income taxes				—		—		(658,273	)		(658,273	)
Minority interest				—		—		(297,611	)		(297,611	)
	Net income (loss)		$	19,079,682	$	7,549,445	$	(25,209,920	)	$	1,419,207

      For the year ended December 31, 2003, financial information related to the Company’s reportable segments was as follows:

For the Year Ended December 31, 2003:

			Direct Hotel		Hotel
			Investments		Financing		Corporate			Consolidated
Total revenues			$	42,168,601	$	110,000	$	—		$	42,278,601
Operating expenses				32,767,868		—		—			32,767,868
Depreciation and amortization				4,932,676		—		—			4,932,676
Corporate general and administrative				—		—		4,002,950			4,002,950
		Operating income (loss)		4,468,057		110,000		(4,002,950	)		575,107
Interest income				—		—		289,133			289,133
Interest expense				—		—		(4,599,512	)		(4,599,512	)
Amortization of loan costs				—		—		(400,694	)		(400,694	)
	Income (loss) before minority interest and provision for income taxes			4,468,057		110,000		(8,714,023	)		(4,135,966	)
Provision for income taxes				—		—		(142,178	)		(142,178	)
Minority interest				—		—		357,943			357,943
	Net income (loss)		$	4,468,057	$	110,000	$	(8,498,258	)	$	(3,920,201	)

      As of December 31, 2004 and 2003, aside from the Company’s portfolio of mezzanine notes receivable of approximately $79.7 million and $10.0 million, respectively, all assets of the Company primarily relate to the

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

direct hotel investments segment. In addition, for the years ended December 31, 2004 and 2003, all capital expenditures incurred by the Company relate to the direct hotel investments segment.

19. Business Combinations

      On October 8, 2003, the Company acquired five hotel properties from FelCor for approximately $50.0 million in cash. The accompanying consolidated financial statements include the results of FelCor since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenues of these five hotel properties are approximately $26.0 million. The Company used a portion of the proceeds from its IPO to fund the acquisition of these properties.

      On November 24, 2003, the Company acquired four hotel properties from Noble for approximately $33.9 million, which included approximately $27.5 million in cash and approximately $6.4 million in assumed mortgage debt. The accompanying consolidated financial statements include the results of Noble since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenues of these four hotel properties are approximately $9.1 million. The Company used a portion of the proceeds from its IPO to fund the acquisition of these properties.

      On March 24, 2004, the Company acquired a hotel property in Lake Buena Vista, Florida, from JHM Ruby Lake Hotel, Ltd. (“Marriott Residence Inn”) for approximately $25.6 million in cash. The accompanying consolidated financial statements include the results of the acquired hotel since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenue of the acquired hotel is approximately $5.8 million. The Company used proceeds from borrowings to fund this acquisition.

      On April 1, 2004, the Company acquired a hotel property in Atlantic Beach, Florida, from Huron Jacksonville Limited Partnership (“Sea Turtle Inn”) for approximately $23.1 million, which consisted of approximately $6.3 million in cash, approximately $15.7 million in assumed mortgage debt, and approximately $1.1 million worth of limited partnership units, which equates to 106,675 units based on the market price of the Company’s common stock on the date of issuance. The accompanying consolidated financial statements include the results of the acquired hotel since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenue of the acquired hotel is approximately $9.1 million. The Company used proceeds from borrowings to fund this acquisition.

      On May 17, 2004, the Company acquired a hotel property in Baltimore, Maryland, from The Buccini/ Pollin Group (“SpringHill Suites”) for approximately $15.9 million, which consisted of approximately $9.1 million in cash and approximately $6.8 million in assumed mortgage debt. The accompanying consolidated financial statements include the results of the acquired hotel since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenue of the acquired hotel is approximately $3.9 million. The Company used proceeds from borrowings to fund this acquisition.

      On July 7, 2004, the Company acquired a hotel property and adjacent office building in Philadelphia, Pennsylvania, from Household OPEB I, Inc. (“Sheraton Bucks County”) for approximately $16.7 million in cash. The accompanying consolidated financial statements include the results of the acquired property since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenue of the acquired hotel is approximately $9.0 million, while the adjacent office building has one tenant with nominal operations. The Company used proceeds from borrowings to fund this acquisition.

      On July 23, 2004, the Company acquired four hotel properties from Day Hospitality Group (“Day”) for approximately $25.9 million in cash plus approximately $86,000 in additional cash to be paid no later than April 30, 2005 pursuant to a post-acquisition contingency. The accompanying consolidated financial statements include the results of the acquired hotels since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenues of these four hotel properties are approximately $7.8 million. The Company used proceeds from borrowings to fund the acquisition of these properties.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

      On September 2, 2004, the Company acquired nine hotel properties from Dunn Hospitality Group (“Dunn”) for approximately $62.0 million, which consisted of approximately $59.0 million in cash and approximately $3.0 million worth of limited partnership units, which equates to 333,333 units based on the market price of the Company’s common stock on the date of issuance. The accompanying consolidated financial statements include the results of the acquired hotels since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenues of these nine hotel properties are approximately $20.1 million. The Company used proceeds from borrowings to fund the acquisition of these properties.

      On October 1, 2004, the Company acquired the Hyatt Orange County hotel in Anaheim, California, from Atrium Plaza, LLC (“Hyatt Orange County”) for approximately $81.0 million in cash, inclusive of the seller’s commitment to fund a $6.0 million renovation, which was completed in December 2004. The accompanying consolidated financial statements include the results of the acquired hotels since the date of acquisition. The purchase price was the result of an arms’ length negotiation. Annualized revenue of the acquired hotel is approximately $27.8 million. The Company used proceeds from borrowings and from the issuance of Series A preferred stock to fund this acquisition.

      In connection with these acquisitions, the Company did not assign any value to goodwill or other intangible assets. In addition, purchase price allocations related to certain 2004 acquisitions are preliminary subject to further internal review and third-party appraisals.

      For acquisitions completed during the year ended December 31, 2004, a condensed balance sheet showing the amounts assigned to each major asset or liability caption related to these acquisitions follows:

For Acquisitions Completed in 2004:

		Marriott				Spring Hill		Sheraton						Hyatt
		Residence Inn		Sea Turtle Inn		Suites		Bucks County		Day		Dunn		Orange County		Total
Investment in hotel properties		$	25,441,897	$	23,259,276	$	16,167,608	$	14,676,331	$	25,668,508	$	62,957,761	$	81,594,713	$	249,766,094
Restricted cash			—		300,398		—		332,185		334,641		—		—		967,224
Assets held for sale			—		—		—		2,881,912		—		—		—		2,881,912
Other assets			198,627		375,973		254,483		433,054		481,529		809,809		298,649		2,852,124
	Total assets acquired	$	25,640,524	$	23,935,647	$	16,422,091	$	18,323,482	$	26,484,678	$	63,767,570	$	81,893,362	$	256,467,354
Indebtedness		$	—	$	15,674,577	$	6,820,636	$	—	$	—	$	—	$	—	$	22,495,213
Other liabilities			49,521		256,631		47,506		141,325		226,744		1,110,081		1,338,823		3,170,631
	Total liabilities assumed		49,521		15,931,208		6,868,142		141,325		226,744		1,110,081		1,338,823		25,665,844
Minority interest			—		1,073,359		—		—		—		3,013,330		—		4,086,689
Cash paid, including closing costs			25,591,003		6,931,080		9,553,949		18,182,157		26,257,934		59,644,159		80,554,539		226,714,821
	Total cash paid, liabilities assumed, and operating partnership units issued	$	25,640,524	$	23,935,647	$	16,422,091	$	18,323,482	$	26,484,678	$	63,767,570	$	81,893,362	$	256,467,354

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

      For acquisitions completed during the year ended December 31, 2003, a condensed balance sheet showing the amounts assigned to each major asset or liability caption related to these acquisitions follows:

For Acquisitions Completed in 2003:

		FelCor		Noble		Total
Investment in hotel properties		$	50,428,838	$	34,195,857	$	84,624,695
Cash and cash equivalents			36,755		—		36,755
Restricted cash			—		226,284		226,284
Other assets			933,895		302,464		1,236,359
	Total assets acquired	$	51,399,488	$	34,724,605	$	86,124,093
Indebtedness		$	—	$	6,418,634		6,418,634
Other liabilities			1,070,266		11,258		1,081,524
	Total liabilities assumed		1,070,266		6,429,892		7,500,158
Cash paid, including closing costs			50,329,222		28,294,713		78,623,935
	Total cash paid and liabilities assumed	$	51,399,488	$	34,724,605	$	86,124,093

      The following unaudited pro forma statements of operations for the years ended December 31, 2004 and 2003 are based on the historical consolidated and combined financial statements of the Company and/or its Predecessor and adjusted to give effect to a) the completion of the Company’s formation transactions and its initial public offering on August 29, 2003, b) the acquisition of FelCor on October 8, 2003, c) the acquisition of Noble on November 24, 2003, d) the acquisitions of Marriott Residence Inn, Sea Turtle Inn, SpringHill Suites, and Sheraton Bucks County, which closed on March 24, 2004, April 2, 2004, May 17, 2004, and July 7, 2004, respectively, e) the acquisition of Day on July 23, 2004, f) the acquisition of Dunn on September 2, 2004, and the related interest expense associated with the $210.0 million term loan, net of debt reductions, which also closed September 2, 2004, g) the acquisition of Hyatt Orange County on October 1, 2004, h) additional interest expense associated with the $6.4 million mortgage note payable assumed on November 24, 2003, the $27.8 million mortgage note payable executed on December 24, 2003, the $60.0 million credit facility executed on February 5, 2004, the $15.7 million mortgage note payable assumed on April 1, 2004, the $6.8 million mortgage note payable assumed on May 17, 2004, the $9.7 million mortgage note payable executed on July 7, 2004, the $19.6 million mortgage note payable executed on July 23, 2004, and the $15.0 million credit facility draw executed on October 1, 2004, and i) the issuance of Series A

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

preferred stock on September 22, 2004, and the related dividends associated with such preferred stock, as if these transactions occurred at the beginning of the periods presented.

						The
						Company &
			The Company			Predecessor
			Year Ended			Year Ended
			December 31,			December 31,
			2004			2003
			(Unaudited)			(Unaudited)
Total revenues			$	166,171,798		$	152,530,803
Operating expenses				144,254,147			140,633,141
		Operating income		21,917,651			11,897,662
Interest income				335,495			289,133
Interest expense and amortization of loan costs				(17,944,973	)		(13,871,090	)
Write-off of loan costs				(1,633,369	)		—
	Income (loss) before minority interest and benefit from income taxes			2,674,804			(1,684,295	)
Benefit from income taxes				3,221,706			—
Minority interest				(1,126,823	)		321,869
	Net income (loss)			4,769,687			(1,362,426	)
Preferred dividends				(4,916,250	)		(4,916,250	)
Net loss available to common shareholders			$	(146,563	)	$	(6,278,676	)
Net loss per share available to common shareholders:
	Basic and Diluted		$	(0.01	)	$	(0.25	)
Weighted average shares outstanding:
	Basic and Diluted			25,293,969			25,293,969

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

20. Selected Quarterly Financial Data (Unaudited)

      Selected quarterly financial data for the Company and/or its Predecessor for the years ended December 31, 2004 and 2003 is below:

		First			Second			Third			Fourth
		Quarter			Quarter			Quarter			Quarter			Total
Total revenue
	2004	$	19,311,622		$	25,833,777		$	31,336,422		$	40,443,241		$	116,925,062
	2003	$	8,532,756		$	9,325,645		$	9,550,555		$	14,869,645		$	42,278,601
Total operating expenses
	2004	$	17,864,774		$	21,746,609		$	27,457,738		$	35,081,758		$	102,150,879
	2003	$	7,854,209		$	8,401,970		$	9,264,492		$	16,182,823		$	41,703,494
Operating income (loss)
	2004	$	1,446,848		$	4,087,168		$	3,878,684		$	5,361,483		$	14,774,183
	2003	$	678,547		$	923,675		$	286,063		$	(1,313,178	)	$	575,107
Net income (loss)
	2004	$	554,378		$	1,694,188		$	(1,390,527	)	$	561,168		$	1,419,207
	2003	$	(816,253	)	$	(580,542	)	$	(1,194,245	)	$	(1,329,161	)	$	(3,920,201	)
Net income (loss) available to common shareholders
	2004	$	554,378		$	1,694,188		$	(1,390,527	)	$	(794,082	)	$	63,957
	2003	$	(816,253	)	$	(580,542	)	$	(1,194,245	)	$	(1,329,161	)	$	(3,920,201	)
2004 net income (loss) per share available to common shareholders
	Basic and Diluted	$	0.02		$	0.07		$	(0.06	)	$	(0.03	)	$	—
2003 net loss per share applicable to common shareholders — basic and diluted:
	For the period from inception through September 30, 2003										$	(0.01	)
	For the quarter ended December 31, 2003										$	(0.05	)

21. Subsequent Events (unaudited)

      On July 7, 2004, the Company acquired a hotel property and adjacent office building in Philadelphia, Pennsylvania, from Household OPEB I, Inc. for approximately $16.7 million in cash. At the time of the acquisition, the Company planned to sell the office building, which had one tenant and nominal operations. The Company allocated approximately $2.9 million of the purchase price to the office building. On January 19, 2005, the Company sold the office building for approximately $2.9 million, which is net of nominal closing costs.

      On January 20, 2005, in a follow-on public offering, the Company issued 10,350,000 shares of its common stock at $9.62 per share, which generated gross proceeds of approximately $99.6 million. However, the

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

aggregate proceeds to the Company, net of underwriters’ discount and offering costs, was approximately $94.3 million. The 10,350,000 shares issued include 1,350,000 shares sold pursuant to an over-allotment option granted to the underwriters. Of the net proceeds, a portion was used to partially fund the $35.0 million cash portion of the purchase price associated with the acquisition of twenty-one hotel properties, which was closed on March 16, 2005. The net proceeds were also used for the repayment of approximately $14.7 million of the mortgage debt assumed in the acquisition, repayment of the outstanding $17.8 million balance on the $60.0 million credit facility, due August 17, 2007, repayment of the $15.5 million mortgage note payable, due December 31, 2005, repayment of the $7.0 mortgage note payable, due July 31, 2007, and general corporate purposes.

      Pursuant to the Company’s Series B Cumulative Convertible Redeemable Preferred Stock Purchase Agreement and subsequent amendment, a financial institution has certain participation rights with respect to any sale of equity securities by the Company. Based on these participation rights and the follow-on offering discussed above, the financial institution has the option to purchase up to 2,070,000 shares of the Company’s common stock for $9.139 per share, the issuance of which would occur on November 1, 2005. If the financial institution has not exercised its option, the Company, at its option, may cause the financial institution to purchase the 2,070,000 shares for $9.139 per share on November 1, 2005, or on an earlier date provided the Company has sold all of the Series B preferred stock to the financial institution in accordance with the terms of the purchase agreement.

      On January 30, 2005, the Company’s Sheraton hotel in Philadelphia, Pennsylvania, experienced a fire that resulted in extensive water damage to several of its floors. The entire hotel was subsequently closed for two weeks, and approximately half of the hotel remains temporarily closed. Although the Company’s insurance covers both physical damage and business-interruption losses, the Company is still assessing the impact of this fire. The Company currently estimates its property damage and business-interruption losses at approximately $1.0 million and $250,000, respectively. The Company’s insurance deductible related to this incident is $25,000.

      On February 8, 2005, the Company originated a mezzanine loan receivable of approximately $8.0 million, with an interest rate of LIBOR plus 9.13%, maturing February 2007 with three one-year extension options, with interest-only payments through maturity, prepayment prohibited through September 2006, and a prepayment penalty imposed between September 2006 and maturity.

      On March 9, 2005, the Company announced it will be acquiring the Hilton Santa Fe hotel in Santa Fe, New Mexico, from Santa Fe Hotel Joint Venture for approximately $18.2 million in cash. In addition, the Company plans an additional $2.5 million for future capital improvements. The purchase price was the result of an arms’ length negotiation. Annualized revenues of this hotel property are approximately $7.7 million. The Company plans to utilize cash from borrowings or cash from its follow-on public offering to fund this acquisition. The acquisition is expected to close in late March 2005.

      On March 9, 2005, the Company declared a cash dividend of $0.16 per diluted share for common shareholders and units of limited partnership of record on March 31, 2005, payable April 15, 2005.

      On March 15, 2005, the Company declared a cash dividend of $0.53 per diluted share for Series A preferred shareholders of record on March 31, 2005, payable April 15, 2005.

      On March 16, 2005, the Company acquired twenty-one hotel properties from selling entities controlled by affiliates of Fisher Brothers, Gordon Getty Trust, and George Soros, which collectively owned approximately 78% of the acquired hotels, and certain members of the Company’s senior management, which collectively owned approximately 22% of the acquired hotels, for approximately $250.0 million plus certain closing costs. The selling entities are collectively referred to as FGSB. The $250 million purchase price consisted of approximately $35.0 million in cash, approximately $164.7 million in assumed mortgage debt, and approximately $50.3 million worth of limited partnership units, which equates to 4,994,150 units based on the average

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

market price of the Company’s common stock for the 20-day period ending five business days before signing a definitive agreement to acquire these properties on December 23, 2004. Company management received their net consideration for the acquisition in the form of limited partnership units, whereas the third parties received 50% of their consideration in limited partnership units and 50% in cash. Annualized revenues of these twenty-one hotel properties are approximately $114.9 million. When the Company entered into the agreement to acquire these 21 properties, it began assessing various strategic alternatives related to eight of the relatively smaller hotel properties, including possible sales of these properties. Since that time, the Company has secured contracts for the sale of two of the properties and letters of intent related to the sale of the other six properties. The Company used proceeds from its sale of Series B cumulative convertible redeemable preferred stock, from its follow-on public offering, and from a $15.0 million draw on its $60.0 million credit facility on March 16, 2005 to fund the acquisition of these properties. Regarding this acquisition, the Company’s Board of Directors formed a Special Committee solely comprised of independent directors to evaluate this transaction. The Special Committee retained independent advisors and to review, evaluate, and negotiate the transaction, which the Special Committee unanimously approved. The Special Committee will be paid $195,000 related to their services.

97

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

COLUMN A				COLUMN B		COLUMN C				COLUMN D
										Costs Capitalized Since
						Initial Cost				Acquisition
								FF&E,				FF&E,
								Buildings and				Buildings and
Hotel Property		Location		Encumbrances		Land		Improvements		Land		Improvements
Embassy Suites			Austin, TX	$	8,694,000	$	1,200,000	$	11,530,843		200,966		2,234,801
Embassy Suites			Dallas, TX		8,403,000		1,871,445		10,960,080		244,145		1,980,351
Embassy Suites			Herndon, VA		17,400,000		1,298,023		11,774,941		281,556		2,833,067
Embassy Suites			Las Vegas, NV		23,000,000		3,299,935		20,055,302		403,814		2,811,277
Embassy Suites			Phoenix, AZ		12,000,000		1,790,609		13,206,621		—		2,236,256
Embassy Suites			Syracuse, NY		12,225,000		2,839,268		10,958,507		—		2,797,661
Embassy Suites			Flagstaff, AZ		5,402,000		1,267,216		4,872,590		—		959,813
Radisson Hotel			Covington, KY		—		2,095,200		10,019,994		1,686		1,054,562
Radisson Hotel			Holtsville, NY		6,987,000		5,744,752		17,013,635		12,774		2,742,104
Doubletree Guest Suites			Columbus, OH		4,773,000		—		9,662,645		—		925,600
Doubletree Guest Suites			Dayton, OH		2,782,000		968,278		4,869,570		—		1,036,168
Hilton Garden Inn			Jacksonville, FL		6,296,373		1,750,671		9,920,469		—		172,953
Homewood Suites			Mobile, AL		6,675,000		1,333,977		7,559,205		—		334,110
Hampton Inn			Lawrenceville, GA		2,764,045		697,198		3,950,791		—		267,147
Hampton Inn			Evansville, IN		5,175,000		815,291		6,079,731		—		462,543
Hampton Inn			Terre Haute, IN		6,525,000		279,412		8,160,484		—		144,292
Hampton Inn			Horse Cave, KY		1,650,000		152,059		2,232,131		—		116,297
Hampton Inn			Buford, GA		5,250,000		1,142,307		5,379,612		—		—
SpringHill Suites by Marriott			Jacksonville, FL		6,734,000		1,347,532		7,636,014		—		162,685
SpringHill Suites by Marriott			Baltimore, MD		11,839,025		2,501,627		13,665,981		—		32,996
SpringHill Suites by Marriott			Kennesaw, GA		3,853,853		1,129,103		5,312,142		—		45,015
SpringHill Suites by Marriott			Buford, GA		5,325,000		1,122,224		6,422,506		—		16,715
Fairfield Inn & Suites			Kennesaw, GA		3,101,147		818,903		4,375,495		—		—
Fairfield Inn by Marriott			Evansville, IN		3,300,000		681,296		3,532,076		—		71,535
Fairfield Inn by Marriott			Princeton, IN		1,050,000		62,351		1,148,482		—		30,475
Courtyard by Marriott			Bloomington, IN		9,225,000		409,916		11,521,021		—		134,161
Courtyard by Marriott			Columbus, IN		4,875,000		898,132		4,934,204		—		24,924
Courtyard by Marriott			Louisville, KY		11,850,000		1,113,974		13,694,019		42		15,026
Marriott Residence Inn			Lake Buena Vista, FL		18,425,000		2,554,913		22,886,984		—		137,060
Marriott Residence Inn			Evansville, IN		5,175,000		553,519		6,687,099		—		58,240
Sea Turtle			Altantic Beach, FL		15,498,080		5,814,819		17,440,245		—		192,903
Sheraton Bucks County			Langhorne, PA		17,100,000		2,033,180		12,599,966		—		1,304,230
Hyatt Regency Orange County			Anaheim, CA		15,000,000		16,318,943		65,275,770		—		75,686
	Totals			$	268,352,523	$	65,906,073	$	365,339,155	$	1,144,983	$	25,410,650

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SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION — (Continued)

				COLUMN E						COLUMN F		COLUMN G		COLUMN H		COLUMN I
				Gross Carrying Amount at Close of Period
																Depreciable Life
						FF&E, Buildings				Accumulated		Construction		Acquisition		in Latest
Hotel Property		Location		Land		and Improvements		Total		Depreciation		Date		Date		Income Statement
Embassy Suites			Austin, TX	$	1,400,966	$	13,765,644	$	15,166,610	$	3,882,830		August 1998				(1),(2),(3),(4)
Embassy Suites			Dallas, TX		2,115,590		12,940,431		15,056,021		4,102,768		December  1998				(1),(2),(3),(4)
Embassy Suites			Herndon, VA		1,579,579		14,608,008		16,187,587		3,907,604		December  1998				(1),(2),(3),(4)
Embassy Suites			Las Vegas, NV		3,703,749		22,866,579		26,570,328		6,109,663		May 1999				(1),(2),(3),(4)
Embassy Suites			Phoenix, AZ		1,790,609		15,442,877		17,233,486		766,559				October 2003		(1),(2),(3),(4)
Embassy Suites			Syracuse, NY		2,839,268		13,756,168		16,595,436		780,433				October 2003		(1),(2),(3),(4)
Embassy Suites			Flagstaff, AZ		1,267,216		5,832,403		7,099,619		325,700				October 2003		(1),(2),(3),(4)
Radisson Hotel			Covington, KY		2,096,886		11,074,556		13,171,442		2,345,428				November 2000		(1),(2),(3),(4)
Radisson Hotel			Holtsville, NY		5,757,526		19,755,739		25,513,265		3,278,515				January 2001		(1),(2),(3),(4)
Doubletree Guest Suites			Columbus, OH		—		10,588,245		10,588,245		577,969				October 2003		(1),(2),(3),(4)
Doubletree Guest Suites			Dayton, OH		968,278		5,905,738		6,874,016		327,941				October 2003		(1),(2),(3),(4)
Hilton Garden Inn			Jacksonville, FL		1,750,671		10,093,422		11,844,093		444,431				November 2003		(1),(2),(3),(4)
Homewood Suites			Mobile, AL		1,333,977		7,893,315		9,227,292		296,148				November 2003		(1),(2),(3),(4)
Hampton Inn			Lawrenceville, GA		697,198		4,217,938		4,915,136		160,706				November 2003		(1),(2),(3),(4)
Hampton Inn			Evansville, IN		815,291		6,542,274		7,357,565		84,750				September  2004		(1),(2),(3),(4)
Hampton Inn			Terre Haute, IN		279,412		8,304,776		8,584,187		110,440				September  2004		(1),(2),(3),(4)
Hampton Inn			Horse Cave, KY		152,059		2,348,428		2,500,487		37,866				September  2004		(1),(2),(3),(4)
Hampton Inn			Buford, GA		1,142,307		5,379,612		6,521,919		72,540				July 2004		(1),(2),(3),(4)
SpringHill Suites by Marriott			Jacksonville, FL		1,347,532		7,798,699		9,146,231		328,313				November 2003		(1),(2),(3),(4)
SpringHill Suites by Marriott			Baltimore, MD		2,501,627		13,698,976		16,200,603		272,520				May 2004		(1),(2),(3),(4)
SpringHill Suites by Marriott			Kennesaw, GA		1,129,103		5,357,157		6,486,260		80,482				July 2004		(1),(2),(3),(4)
SpringHill Suites by Marriott			Buford, GA		1,122,224		6,439,220		7,561,444		101,574				July 2004		(1),(2),(3),(4)
Fairfield Inn & Suites			Kennesaw, GA		818,903		4,375,495		5,194,398		55,870				July 2004		(1),(2),(3),(4)
Fairfield Inn by Marriott			Evansville, IN		681,296		3,603,611		4,284,908		40,152				September  2004		(1),(2),(3),(4)
Fairfield Inn by Marriott			Princeton, IN		62,351		1,178,957		1,241,308		19,984				September  2004		(1),(2),(3),(4)
Courtyard by Marriott			Bloomington, IN		409,916		11,655,182		12,065,098		115,826				September  2004		(1),(2),(3),(4)
Courtyard by Marriott			Columbus, IN		898,132		4,959,128		5,857,260		63,166				September  2004		(1),(2),(3),(4)
Courtyard by Marriott			Louisville, KY		1,114,015		13,709,045		14,823,060		221,689				September  2004		(1),(2),(3),(4)
Marriott Residence Inn			Lake Buena Vista, FL		2,554,913		23,024,044		25,578,957		797,792				March 2004		(1),(2),(3),(4)
Marriott Residence Inn			Evansville, IN		553,519		6,745,339		7,298,857		79,826				September  2004		(1),(2),(3),(4)
Sea Turtle			Altantic Beach, FL		5,814,819		17,633,148		23,447,967		685,919				April 2004		(1),(2),(3),(4)
Sheraton Bucks County			Langhorne, PA		2,033,180		13,904,196		15,937,376		182,861				July 2004		(1),(2),(3),(4)
Hyatt Regency Orange County			Anaheim, CA		16,318,943		65,351,456		81,670,399		683,471				October 2004		(1),(2),(3),(4)
	Totals			$	67,051,056	$	390,749,805	$	457,800,861	$	31,341,735

(1)	Estimated useful life for buildings is 39 years.
(2)	Estimated useful life for building improvements is 15 years.
(3)	Estimated useful life for furniture and fixtures is 5 years.
(4)	Estimated useful life for computer hardware and software is 3 years.

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SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION — (Continued)

		Year Ended December 31,
		2004		2003		2002
		(The Company)		(Company &		(The Predecessor)
				Predecessor)
Investment in Real Estate:
	Beginning Balance	$	194,421,063	$	101,137,138	$	100,057,314
	Additions(a)		263,379,798		93,283,925		1,079,824
	Disposals		—		—		—
	Ending Balance	$	457,800,861	$	194,421,063	$	101,137,138
Accumulated Depreciation:
	Beginning Balance	$	20,741,036	$	15,890,337	$	11,183,236
	Depreciation expense		10,600,699		4,850,699		4,707,101
	Disposals		—		—		—
	Ending Balance	$	31,341,735	$	20,741,036	$	15,890,337
Investment in Real Estate, net		$	426,459,126	$	173,680,027	$	85,246,801

(a)  In 2003, additions include a minority interest partial step-up of approximately $8.1 million to the historical net carrying values of four hotel properties as a result of the Company acquiring minority interest from unaffiliated parties.

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