Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 7, 2007
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 001-32514
 
DIAMONDROCK HOSPITALITY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
20-1180098
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
   
6903 Rockledge Drive, Suite 800, Bethesda, Maryland
 
20817
(Address of Principal Executive Offices)
 
(Zip Code)
     
 
(240) 744-1150
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) 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, and (2) has been subject to such filing requirements for the past 90 days. x Yes    ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  x                Accelerated filer  ¨                 Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes    x No

The registrant had 94,730,813 shares of its $0.01 par value common stock outstanding as of October 16, 2007.
 





 
Table of Contents
 
INDEX
 
 
  
 
  
Page No.
   
PART I. FINANCIAL INFORMATION 
   
         
Item 1.
  
Financial Statements (unaudited):
  
 
 
  
Condensed Consolidated Balance Sheets- September 7, 2007 and December 31, 2006
  
1
     
   
Condensed Consolidated Statements of Operations
   
 
  
For the Fiscal Quarters ended September 7, 2007 and September 8, 2006 and the Periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006
  
2
     
   
Condensed Consolidated Statements of Cash Flows
   
 
  
For the Periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006
  
3
     
 
  
Notes to Condensed Consolidated Financial Statements
  
5
     
Item 2.
  
Management’s Discussion and Analysis of Results of Operations and Financial Condition
  
13
     
Item 3.
  
Quantitative and Qualitative Disclosures about Market Risk
  
28
     
Item 4.
  
Controls and Procedures
  
28
         
   
PART II. OTHER INFORMATION AND SIGNATURE
   
         
Item 1.
 
Legal Proceedings
 
29
         
Item 1A.
 
Risk Factors
 
29
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
29
         
Item 3.
 
Defaults Upon Senior Securities
 
29
         
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
29
         
Item 5.
 
Other Information
 
29
         
Item 6.
 
Exhibits
 
29
 

 
Item I. Financial Statements
 
DIAMONDROCK HOSPITALITY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
September 7, 2007 and December 31, 2006
(in thousands, except share amounts)

   
September 7, 2007
 
December 31, 2006
 
   
(Unaudited)
 
 
 
ASSETS
         
Property and equipment, at cost
 
$
2,094,212
 
$
1,761,748
 
Less: accumulated depreciation
   
(126,620
)
 
(75,322
)
     
1,967,592
   
1,686,426
 
               
               
Deferred financing costs, net
   
4,267
   
3,764
 
Restricted cash
   
28,045
   
28,595
 
Due from hotel managers
   
66,156
   
57,753
 
Favorable lease assets, net
   
42,303
   
10,060
 
Prepaid and other assets
   
12,985
   
12,676
 
Cash and cash equivalents
   
25,702
   
19,691
 
 
             
Total assets
 
$
2,147,050
 
$
1,818,965
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
               
Liabilities:
             
               
Debt, at face amount
 
$
863,981
 
$
841,151
 
Debt premium
   
-
   
2,620
 
               
Total debt
   
863,981
   
843,771
 
               
Deferred income related to key money
   
16,250
   
11,495
 
Unfavorable contract liabilities, net
   
86,652
   
87,843
 
Due to hotel managers
   
34,681
   
34,545
 
Dividends declared and unpaid
   
22,920
   
13,871
 
Accounts payable and accrued expenses
   
45,345
   
42,512
 
 
             
Total other liabilities
   
205,848
   
190,266
 
 
             
Shareholders' Equity:
             
               
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding
   
-
   
-
 
Common stock, $.01 par value; 200,000,000 shares authorized; 94,730,813 and 76,191,632 shares issued and outstanding at September 7, 2007 and December 31, 2006, respectively
   
947
   
762
 
Additional paid-in capital
   
1,144,666
   
826,918
 
Accumulated deficit
   
(68,392
)
 
(42,752
)
 
             
Total shareholders’ equity
   
1,077,221
   
784,928
 
 
             
Total liabilities and shareholders’ equity
 
$
2,147,050
 
$
1,818,965
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-1-


DIAMONDROCK HOSPITALITY COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Quarters Ended September 7, 2007 and September 8, 2006 and
the Periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006
(in thousands, except per share amounts)
 
 
 
Fiscal Quarter Ended
September 7, 2007 
 
Fiscal Quarter Ended
September 8, 2006
 
Period from
January 1, 2007 to September 7, 2007
 
Period from
January 1, 2006 to September 8, 2006
 
   
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
                   
Rooms
 
$
110,818
 
$
76,805
 
$
312,615
 
$
212,593
 
Food and beverage
   
47,703
   
31,320
   
143,545
   
92,065
 
Other
   
9,490
   
6,774
   
25,130
   
18,330
 
 
                         
Total revenues
   
168,011
   
114,899
   
481,290
   
322,988
 
                           
Operating Expenses:
                         
                           
Rooms
   
26,059
   
18,324
   
71,895
   
49,293
 
Food and beverage
   
33,859
   
21,832
   
98,135
   
62,141
 
Management fees
   
6,807
   
4,427
   
19,973
   
12,124
 
Other hotel expenses
   
54,156
   
40,301
   
153,178
   
109,274
 
Depreciation and amortization
   
17,490
   
12,797
   
51,193
   
33,922
 
Corporate expenses
   
3,271
   
2,812
   
9,692
   
8,025
 
 
                         
Total operating expenses
   
141,642
   
100,493
   
404,066
   
274,779
 
 
                         
Operating profit
   
26,369
   
14,406
   
77,224
   
48,209
 
                           
Other Expenses (Income):
                         
                           
Interest income
   
(487
)
 
(1,296
)
 
(1,755
)
 
(2,687
)
Interest expense
   
11,704
   
9,058
   
35,084
   
24,190
 
Gain on early extinguishment of debt, net
   
(359
)
 
-
   
(359
)
 
-
 
 
                         
Total other expenses
   
10,858
   
7,762
   
32,970
   
21,503
 
                           
Income before income taxes
   
15,511
   
6,644
   
44,254
   
26,706
 
                           
Income tax benefit (expense)
   
357
   
(173
)
 
(1,083
)
 
(1,972
)
 
                       
Net income
 
$
15,868
 
$
6,471
 
$
43,171
 
$
24,734
 
 
                     
Earnings per share:
                     
                           
Basic and diluted
 
$
0.17
 
$
0.09
 
$
0.46
 
$
0.38
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-2-


DIAMONDROCK HOSPITALITY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006
(in thousands)
 
 
 
Period from
January 1, 2007 to September 7, 2007 
 
Period from
January 1, 2006 to September 8, 2006
 
Cash flows from operating activities:
 
(Unaudited)
 
(Unaudited)
 
Net income
 
$
43,171
 
$
24,734
 
Adjustments to reconcile net income to net cash provided by operating activities:
         
               
Real estate depreciation
   
51,193
   
33,922
 
Corporate asset depreciation as corporate expenses
   
119
   
108
 
Non-cash ground rent
   
5,422
   
5,113
 
Non-cash financing costs as interest
   
531
   
669
 
Gain on early extinguishment of debt, net
   
(359
)
 
-
 
Amortization of debt premium and unfavorable contract liabilities
   
(1,278
)
 
(938
)
Amortization of deferred income
   
(245
)
 
(207
)
Stock-based compensation
   
2,842
   
2,020
 
Yield support received
   
1,742
   
-
 
Non-cash yield support recognized
   
(601
)
 
(2,377
)
Changes in assets and liabilities:
             
Prepaid expenses and other assets
   
(808
)
 
(128
)
Restricted cash
   
(226
)
 
967
 
Due to/from hotel managers
   
(9,232
)
 
(1,389
)
Accounts payable and accrued expenses
   
582
   
401
 
 
             
Net cash provided by operating activities
   
92,853
   
62,895
 
 
             
               
Cash flows from investing activities:
             
Hotel acquisitions
   
(331,325
)
 
(145,566
)
Hotel capital expenditures
   
(36,245
)
 
(38,959
)
Receipt of deferred key money
   
5,000
   
1,500
 
Change in restricted cash
   
776
   
(2,712
)
Purchase deposits
   
-
   
(10,000
)
 
             
Net cash used in investing activities
   
(361,794
)
 
(195,737
)
 
             
               
Cash flows from financing activities:
             
Repayments of credit facilities
   
(52,500
)
 
(33,000
)
Draws on credit facilities
   
91,000
   
24,000
 
Proceeds from mortgage debt
   
5,000
   
271,000
 
Repayments of mortgage debt
   
(18,392
)
 
(325,500
)
Proceeds from short-term loan
   
-
   
79,500
 
Prepayment penalty on early extinguishment of debt
   
(1,972
)
 
-
 
Scheduled mortgage debt principal payments
   
(2,277
)
 
(2,247
)
Payment of financing costs
   
(1,236
)
 
(1,272
)
Proceeds from sale of common stock
   
317,935
   
239,230
 
Payment of costs related to sale of common stock
   
(380
)
 
(1,205
)
Repurchase of shares
   
(2,720
)
 
(3,077
)
Payment of dividends
   
(59,506
)
 
(30,937
)
 
             
Net cash provided by financing activities
 
$
274,952
 
$
216,492
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-3-


DIAMONDROCK HOSPITALITY COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006
(in thousands)

 
 
Period from
January 1, 2007 to September 7, 2007
 
Period from
January 1, 2006 to September 8, 2006
 
   
(Unaudited)
 
(Unaudited)
 
Net increase in cash and cash equivalents
 
$
6,011
 
$
83,650
 
Cash and cash equivalents, beginning of period
   
19,691
   
9,432
 
 
         
Cash and cash equivalents, end of period
 
$
25,702
 
$
93,082
 
           
               
Supplemental Disclosure of Cash Flow Information:
         
               
Cash paid for interest
 
$
34,180
 
$
21,443
 
Cash paid for income taxes
 
$
430
 
$
926
 
Capitalized interest
 
$
143
 
$
381
 
               
Non-Cash Financing Activities:
             
               
Assumption of mortgage debt
 
$
-
 
$
220,000
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-4-


DIAMONDROCK HOSPITALITY COMPANY
 
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
 
1.    Organization
 
DiamondRock Hospitality Company (the “Company”) is a lodging focused real estate company that commenced operations in July of 2004. As of September 7, 2007, the Company owned twenty-one hotels, comprising 9,806 rooms, located in the following markets: Atlanta, Georgia (4); Austin, Texas; Boston, Massachusetts; Chicago, Illinois (2); Fort Worth, Texas; Lexington, Kentucky; Los Angeles, California (2); New York, New York (2); Northern California; Oak Brook, Illinois; Orlando, Florida; Salt Lake City, Utah; Washington D.C.; St. Thomas, U.S. Virgin Islands; and Vail, Colorado.

The Company conducts its business through a traditional umbrella partnership REIT, or UPREIT, in which the Company’s hotel properties are owned by its operating partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of the Company’s operating partnership. The Company is the sole general partner of its operating partnership and currently owns, either directly or indirectly, all of the limited partnership units of the operating partnership.

2.    Summary of Significant Accounting Policies
 
Basis of Presentation

Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted in the accompanying unaudited condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K dated February 28, 2007.

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the Company’s financial position as of September 7, 2007, and the results of the Company’s operations for the fiscal quarters ended September 7, 2007 and September 8, 2006, and for the periods from January 1, 2007 to September 7, 2007, and January 1, 2006 to September 8, 2006, and cash flows for the periods from January 1, 2007 to September 7, 2007, and January 1, 2006 to September 8, 2006. Interim results are not necessarily indicative of full-year performance because of the impact of seasonal and short-term variations and the timing of the Company’s acquisitions.
 
The Company’s financial statements include all of the accounts of the Company and its subsidiaries in accordance with U.S. generally accepted accounting principles. All intercompany accounts and transactions have been eliminated in consolidation.

Reporting Periods
 
The results reported in the Company’s condensed consolidated statements of operations are based on results of its hotels reported by hotel managers. The Company’s hotel managers use different reporting periods. Marriott International, the manager of most of the Company’s properties, uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations for each of the first three quarters and sixteen or seventeen weeks for the fourth quarter of the year for its domestic managed hotels. In contrast, Marriott, for its non-domestic hotels (including Frenchman’s Reef), Vail Resorts, manager of the Vail Marriott, Noble Management Group, LLC, manager of the Westin Atlanta North at Perimeter, Hilton Hotels Corporation, manager of the Conrad Chicago, and Westin Hotel Management, L.P, manager of the Westin Boston Waterfront Hotel report results on a monthly basis. Additionally, the Company, as a REIT, is required by U.S. federal tax laws to report results on a calendar year basis. As a result, the Company has adopted the reporting periods used by Marriott International for its domestic hotels, except that the fiscal year always ends on December 31 to comply with REIT rules. The first three fiscal quarters end on the same day as Marriott International’s fiscal quarters but the fourth quarter ends on December 31 and the full year results, as reported in the statement of operations, always include the same number of days as the calendar year.
 
-5-


Two consequences of the reporting cycle the Company has adopted are: (1) quarterly start dates will usually differ between years, except for the first quarter which always commences on January 1, and (2) the first and fourth quarters of operations and year-to-date operations may not include the same number of days as reflected in prior years.

While the reporting calendar the Company adopted is more closely aligned with the reporting calendar used by the manager of most of its properties, one final consequence of the calendar is the Company is unable to report any results for Frenchman’s Reef, Vail Marriott, Westin Atlanta North at Perimeter, Conrad Chicago, or Westin Boston Waterfront Hotel for the month of operations that ends after its fiscal quarter-end because neither Westin Hotel Management, L.P., Hilton Hotels Corporation, Noble Management Group, LLC, Vail Resorts nor Marriott International make mid-month results available. As a result, the quarterly results of operations include results from Frenchman’s Reef, the Vail Marriott, the Westin Atlanta North at Perimeter, the Conrad Chicago, and the Westin Boston Waterfront Hotel as follows: first quarter (January, February), second quarter (March to May), third quarter (June to August) and fourth quarter (September to December). While this does not affect full-year results, it does affect the reporting of quarterly results.

Revenue Recognition
 
Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, golf sales, food and beverage sales, and other hotel department revenues, such as telephone and gift shop sales.

Earnings Per Share
 
Basic earnings per share is calculated by dividing net income, adjusted for dividends on unvested stock grants, by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income, adjusted for dividends on unvested stock grants, by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants or shares issuable in the event of conversion of operating partnership units. No adjustment is made for shares that are anti-dilutive during a period.
 
Stock-based Compensation
 
The Company accounts for stock-based employee compensation using the fair value based method of accounting under Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS 123R"), Share-Based Payment. The Company records the cost of awards with service conditions based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service.  No awards with performance-based or market-based conditions have been issued.

Key Money
 
Key money received in conjunction with entering into hotel management agreements is deferred and amortized over the term of the hotel management agreement. Key money is classified as deferred income on the accompanying condensed consolidated balance sheets and amortized against management fees on the accompanying condensed consolidated statements of operations.

Yield Support

Marriott has provided the Company with operating cash flow guarantees for certain hotels to fund shortfalls of actual hotel operating income compared to a negotiated target net operating income. The Company refers to these guarantees as "Yield Support." Yield Support received is recognized over the period earned if the Yield Support is not refundable and there is reasonable uncertainty of receipt at inception of the management agreement. Yield Support is recorded as an offset to base management fees.

Straight-Line Rent
 
The Company records rent expense on leases that provide for minimum rental payments that increase in pre-established amounts over the remaining term of the lease on a straight-line basis as required by U.S. generally accepted accounting principles.

-6-

 
Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. FIN 48 did not have a material impact on the Company’s results of operations, financial position or cash flows. The Company had no accruals for tax uncertainties as of September 7, 2007 and December 31, 2006. As of September 7, 2007, all of the Company’s federal income tax returns and state tax returns for the jurisdictions in which the Company’s hotels are located remain subject to examination by the respective jurisdiction tax authorities.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
3.    Property and Equipment
 
Property and equipment as of September 7, 2007 (unaudited) and December 31, 2006 consists of the following (in thousands):
 
 
 
September 7,
2007
 
December 31,
2006
 
Land
 
$
223,490
 
$
223,490
 
Land improvements
   
8,286
   
5,594
 
Buildings
   
1,652,615
   
1,375,143
 
Furniture, fixtures and equipment
   
206,233
   
149,842
 
Corporate office equipment and CIP
   
3,588
   
7,679
 
 
             
 
   
2,094,212
   
1,761,748
 
Less: accumulated depreciation
   
(126,620
)
 
(75,322
)
 
         
 
 
$
1,967,592
 
$
1,686,426
 
 
4.    Capital Stock
 
Common Shares
 
The Company is authorized to issue up to 200,000,000 shares of common stock, $.01 par value per share. The Company’s authorized number of shares of common stock increased from 100,000,000 to 200,000,000 in the first fiscal quarter of 2007. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive dividends out of assets legally available for the payment of dividends when authorized by the Company’s board of directors.
 
The Company completed an additional follow-on offering of its common stock during the first fiscal quarter of 2007. The Company sold 18,342,500 shares of common stock, including the underwriters’ over-allotment of 2,392,500 shares, at an offering price of $18.15 per share. The net proceeds to the Company, after deduction of offering costs, were $317.6 million. The Company used the net proceeds of this offering to complete the acquisition of the Westin Boston Waterfront Hotel.

Preferred Shares
 
The Company is authorized to issue up to 10,000,000 shares of preferred stock, $.01 par value per share. The Company’s board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of September 7, 2007 and December 31, 2006, there were no shares of preferred stock outstanding.

-7-


5.    Stock Incentive Plan

As of September 7, 2007, the Company has issued or committed to issue 1,303,024 shares of common stock under the 2004 Stock Option and Incentive Plan, as amended, including 346,625 shares of unvested restricted common stock and a commitment to issue 423,950 units of deferred common stock.

As of September 7, 2007, the Company’s officers and employees have been awarded 1,144,245 shares of restricted common stock. The aggregate fair value of these awards on the respective grant dates was approximately $14.2 million. The weighted-average grant-date fair value of these awards was $12.44 per share. As of September 7, 2007, 797,620 of these awards have vested. The remaining share awards will vest as follows: 147,582 shares during 2008, 132,415 shares during 2009 and 66,628 shares during 2010. None of the recipients was required to pay for such shares of common stock. The Company has awarded 199,885 shares of restricted common stock to the Company’s officers and employees since January 1, 2007. The aggregate fair value of these awards was $3.6 million, and the weighted average grant date fair value of these awards was $17.99 per share. As of September 7, 2007, the Company’s independent directors have been awarded 52,320 shares of common stock. Shares issued to the Company’s independent directors were fully vested upon issuance. Shares issued to the Company’s officers and employees vest over a three-year period from the date of the grant. As of September 7, 2007, the unrecognized compensation cost related to the share awards was $5.1 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 25 months.

At the time of its initial public offering in 2005, the Company made a commitment to issue 382,500 shares of deferred stock units to the Company’s senior executive officers. These deferred stock units are fully vested and represent the promise of the Company to issue a number of shares of the Company’s common stock to each senior executive officer upon the earlier of (i) a change of control or (ii) five years after the date of grant, which was the initial public offering completion date (the “Deferral Period”). However, if an executive’s service with the Company is terminated for “cause” prior to the expiration of the Deferral Period, all deferred stock unit awards will be forfeited. The executive officers are restricted from transferring these shares until the fifth anniversary of the initial public offering completion date. As of September 7, 2007, the Company has a commitment to issue 423,950 shares under this plan. The share commitment increased from 382,500 to 423,950 since the Company’s initial public offering because dividends are not paid out but instead are effectively reinvested at the dividend payment date’s closing price of our common stock. No expense has been recognized during the period from January 1, 2007 to September 7, 2007 for these awards.
 
In total, for the periods from January 1, 2007 to September 7, 2007, and January 1, 2006 to September 8, 2006, the Company recorded $2.8 million and $2.0 million, respectively, and $0.7 million and $0.8 million during the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively, of stock-based compensation expense, which is included in corporate expenses in the accompanying condensed consolidated statements of operations.
 
6. Earnings Per Share

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income available to common shareholders, that has been adjusted for dilutive securities, by the weighted-average number of common shares outstanding including dilutive securities. No effect is shown for securities that are anti-dilutive.

-8-


The following is a reconciliation of the calculation of basic and diluted earnings per share (in thousands, except share and per share data):

Basic Earnings per Share Calculation:
 
Fiscal Quarter Ended September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to
September 8, 2006
 
   
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
                   
Net income
 
$
15,868
 
$
6,471
 
$
43,171
 
$
24,734
 
Dividends on unvested restricted common stock
   
(83
)
 
(135
)
 
(324
)
 
(404
)
 
                         
Net income after dividends on unvested restricted common stock
 
$
15,785
 
$
6,336
 
$
42,847
 
$
24,330
 
 
                         
Weighted-average number of common shares outstanding—basic
   
95,086,709
   
70,686,905
   
93,760,776
   
63,809,323
 
 
                         
Basic earnings per share
 
$
0.17
 
$
0.09
 
$
0.46
 
$
0.38
 
 
Diluted Earnings per Share Calculation:
 
Fiscal Quarter Ended September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to
September 8, 2006
 
   
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
                   
Net income
 
$
15,868
 
$
6,471
 
$
43,171
 
$
24,734
 
Dividends on unvested restricted common stock
   
(83
)
 
(135
)
 
(324
)
 
(404
)
 
                         
Net income after dividends on unvested restricted common stock
 
$
15,785
 
$
6,336
 
$
42,847
 
$
24,330
 
 
                         
Weighted-average number of common shares outstanding—basic
   
95,086,709
   
70,686,905
   
93,760,776
   
63,809,323
 
Unvested restricted common stock
   
57,085
   
110,398
   
58,557
   
173,448
 
                           
Weighted-average number of common shares outstanding—diluted
   
95,143,794
   
70,797,303
   
93,819,333
   
63,982,771
 
 
                         
Diluted earnings per share
 
$
0.17
 
$
0.09
 
$
0.46
 
$
0.38
 
 
7.    Debt
 
The Company has incurred limited recourse, property specific mortgage debt in conjunction with certain of the Company’s hotels. In the event of default, the lender may only foreclose on the pledged assets; however, in the event of fraud, misapplication of funds and other customary recourse provisions, the lender may seek payment from the Company. As of September 7, 2007, twelve of our twenty-one hotel properties were secured by mortgage debt. The Company’s mortgage debt contains certain property specific covenants and restrictions, including minimum debt service coverage ratios that trigger cash management provisions as well as restrictions on incurring additional debt without lender consent. As of September 7, 2007, the Company was in compliance with the financial covenants of our mortgage debt.

-9-

 
The following table sets forth information regarding the Company’s debt as of September 7, 2007 (unaudited), in thousands:
 
Property
 
Principal
Balance 
 
Interest Rate
 
           
Courtyard Manhattan / Midtown East
 
$
42,575
   
5.195
%
Marriott Salt Lake City Downtown
   
36,099
   
5.50
%
Courtyard Manhattan / Fifth Avenue
   
51,000
   
6.48
%
Marriott Griffin Gate Resort
   
29,307
   
5.11
%
Renaissance Worthington
   
57,400
   
5.40
%
Frenchman’s Reef & Morning Star Marriott Beach Resort
   
62,500
   
5.44
%
Marriott Los Angeles Airport
   
82,600
   
5.30
%
Orlando Airport Marriott
   
59,000
   
5.68
%
Chicago Marriott Downtown Magnificent Mile
   
220,000
   
5.975
%
Renaissance Austin
   
83,000
   
5.507
%
Renaissance Waverly
   
97,000
   
5.503
%
Bethesda Marriott Suites
   
5,000
   
LIBOR + 0.95
(6.46% as of September 7, 2007)
 
 
Senior unsecured credit facility
   
38,500
   
LIBOR + 0.95
(6.46% as of September 7, 2007)
 
 
         
Total
 
$
863,981
     
 
         
Weighted-Average Interest Rate
           5.7 %

On July 31, 2007, the Company repaid its $18.4 million fixed-rate mortgage debt on the Bethesda Marriott Suites and replaced it with a $5.0 million variable-rate mortgage. In connection with this transaction, the Company recognized a gain on the early extinguishment of $0.4 million, which is comprised of the write-off of the related debt premium of $2.5 million offset by a prepayment penalty of $2.0 million and the write-off of deferred financing costs of $0.1 million. The new $5.0 million mortgage loan has a three-year term and bears a floating rate of interest based on LIBOR plus 95 basis points. The new mortgage loan can be repaid at any time during the three-year term with no prepayment penalty.

The Company was party to a three-year, $75.0 million senior secured revolving credit facility from Wachovia Bank, National Association, as administrative agent under the credit facility, and Citicorp North America, Inc. and Bank of America, N.A., as co-syndication agents under the credit facility (the “Former Facility”). On February 28, 2007, the Company amended and restated the Former Facility to expand it into a $200.0 million unsecured credit facility (the “New Facility”). Interest was paid on the periodic advances under the Former Facility at varying rates, based upon either LIBOR or the applicable prime rate, plus an agreed upon additional margin amount.
 
The New Facility has a term of 48 months. The Company may extend the maturity date of the New Facility for an additional year upon the payment of applicable fees and the satisfaction of certain other customary conditions. The Company also has the right to increase the amount of the New Facility to $500.0 million with the lenders’ approval.

Interest is paid on the periodic advances under the New Facility at varying rates, based upon either LIBOR or the alternate base rate, plus an agreed upon additional margin amount. The interest rate depends upon our level of outstanding indebtedness in relation to the value of our assets from time to time, as follows:  
 
   
 Leverage Ratio 
 
 
 
60% or greater 
 
55% to 60% 
 
50% to 55% 
 
less than 50% 
 
Alternate base rate margin
   
0.65
%
 
0.45
%
 
0.25
%
 
0.00
%
LIBOR margin
   
1.55
%
 
1.45
%
 
1.25
%
 
0.95
%
 
In addition to the interest payable on amounts outstanding under the New Facility, the Company is required to pay a fee equal to 0.20% of the unused portion of the New Facility if the unused portion of the New Facility is greater than 50% and 0.125% if the unused portion of the new Facility is less than 50%. As of September 7, 2007, the Company had $38.5 million outstanding under the New Facility with a capacity to borrow an additional $161.5 million. Subsequent to September 7, 2007, the Company drew an additional $17.0 million under the New Facility. As of September 7, 2007, the Company was in compliance with all financial covenants of the New Facility.

-10-


8.    Acquisition
  
On January 31, 2007, the Company acquired a leasehold interest in the 793-room Westin Boston Waterfront Hotel. In addition to the Westin Boston Waterfront Hotel, the acquisition, which closed on February 8, 2007, included a leasehold interest in 100,000 square feet of retail space, and an option to acquire a leasehold interest in a parcel of land with development rights to build a 320 to 350 room hotel. The contractual purchase price for the Westin Boston Waterfront Hotel, the leasehold interest in the retail space and the option to acquire a leasehold interest in a parcel of land was $330.3 million. The Company allotted purchase consideration to favorable lease assets related to the favorable lease terms of the hotel ground lease and the option to assume the current lease terms under the land option. The hotel and retail space are subject to a favorable ground lease that expires in 2099. The Company reviewed the terms of the ground leases in conjunction with the hotel purchase accounting and concluded that the terms of both ground leases were below current market and recorded a $20.0 million favorable lease asset for the ground lease related to the land under the existing hotel and a $12.8 million favorable lease asset for the ground lease related to the undeveloped parcel of land at the acquisition date. The hotel remains a Westin-branded property and continues to be managed by Starwood under a twenty-year management agreement. The management agreement provides for a base management fee of 2.5% of the hotel’s gross revenues and an incentive fee of 20% of hotel operating profits above an owner’s priority defined in the management agreement.

The preliminary purchase price allocation, including transaction costs, of the Westin Boston Waterfront Hotel to the acquired assets and liabilities, which may be adjusted if any of the assumptions underlying the purchase accounting change and when additional information is obtained, is as follows (in thousands):

Land improvements
 
$
2,706
 
Building
   
273,755
 
Furniture, fixtures and equipment
   
21,400
 
 
       
Total fixed assets
   
297,861
 
         
Favorable lease assets
   
32,750
 
Other assets, net
   
714
 
 
       
Purchase Price
 
$
331,325
 
 
Acquired properties are included in the Company’s results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s acquisitions as if they had occurred on the first day of the fiscal period presented. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made; however, a preliminary allocation of the purchase price to land improvements and buildings was made, and the Company will finalize the allocation after all information is obtained.

 
 
Fiscal Quarter Ended September 7, 2007
 
 
Fiscal Quarter Ended September 8, 2006
 
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to
September 8, 2006
 
                   
   
(in thousands)
 
                   
Revenues 
 
$
168,011
 
$
145,495
 
$
484,377
 
$
416,431
 
Net income
   
15,868
   
6,468
   
42,145
   
23,689
 
 
                         
Earnings per share - Basic and Diluted
 
$
0.17
 
$
0.07
 
$
0.45
 
$
0.25
 
 
9.    Dividends
 
During the first fiscal quarter of 2007, the Company’s board of directors declared a cash dividend of $0.24 per share of the Company common stock. The dividend was paid on April 2, 2007 to all stockholders of record as of March 23, 2007. During the second fiscal quarter of 2007, the Company’s board of directors declared a cash dividend of $0.24 per share of the Company common stock. The dividend was paid on June 22, 2007 to all stockholders of record as of June 15, 2007. During the third fiscal quarter of 2007, the Company’s board of directors declared a cash dividend of $0.24 per share of the Company common stock. The dividend was paid on September 18, 2007 to all stockholders of record as of September 7, 2007.

-11-

 
10.    Transactions with Hotel Managers

Key Money

In connection with the renovation project in process at the Chicago Marriott Downtown, Marriott, the manager of the hotel, will contribute $10.0 million towards the project costs. A subsidiary of the Company received $5.0 million during the third fiscal quarter of 2007 and expects to receive the remaining $5.0 million in the first fiscal quarter of 2008. These contributions are recorded as key money when received and amortized over the remaining term of the management agreement.

On September 27, 2007, the Company and Hilton Hotels Corporation, the manager of the Conrad Chicago, amended the management agreement of the hotel to allow an exception to the territorial restriction to permit a new Chicago suburban airport Conrad hotel. In connection with this amendment, the Company will receive up to $1.8 million over a period of time. These payments will be accounted for as key money when received and amortized over the remaining term of the management agreement.
 
11.    Commitments and Contingencies
 
Litigation
 
The Company is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company. The Company is involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance and none of which is expected to have a material impact on its financial condition or results of operations.

-12-


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risk factors discussed herein and other factors discussed from time to time in our periodic filings with the Securities and Exchange Commission. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.

Overview

We are a lodging focused real estate company. We are committed to maximizing shareholder value through investing in premium full-service hotels and, to a lesser extent, premium urban select-service hotels. As of September 7, 2007, we owned twenty-one hotels comprising 9,806 rooms. These hotels are geographically diversified across major markets in the United States.

We adhere to three basic principles:

 
·
high quality urban and resort focused real estate;
 
 
·
conservative capital structure; and
 
 
·
thoughtful asset management.

High Quality Urban and Resort Focused Real Estate

We own and seek to acquire premium hotels and resorts in North America. Since our formation in May 2004, we have acquired 21 properties, with purchase prices aggregating over $2 billion. These hotels and resorts are all categorized as upper upscale as defined by Smith Travel Research and are generally located in high barrier to entry markets with multiple demand generators.
 
Our properties are concentrated in five key gateway cities (New York City, Los Angeles, Chicago, Boston and Atlanta) and in destination resorts (such as the U.S. Virgin Islands and Vail, Colorado). We believe that these gateway cities and destination resorts are high growth markets because they are attractive business and leisure destinations. We also believe that these locations are better insulated from new supply due to relatively high barriers to entry and expensive construction costs.

We believe that the higher quality lodging assets create more dynamic cash flow growth and superior long-term capital appreciation.
 
Conservative Capital Structure
 
We are committed to maintaining a conservative and flexible capital structure with prudent leverage levels. We have taken advantage of the historical low interest rate environment by fixing our debt rates for an extended period of time. Depending on the outlook for interest rates in the future we maintain the flexibility to modify these strategies.
 
As of September 7, 2007, 95.0% of our debt carried fixed interest rates, with a weighted-average interest rate of 5.7%, and a weighted-average maturity of 7.7 years. As of September 7, 2007, we had $864.0 million of debt outstanding, representing a net debt-to-enterprise value ratio of 34.0%. Enterprise value is calculated as our market capitalization plus net debt.
 
-13-

 
We prefer a relatively simple but efficient capital structure. We have not invested in joint ventures and have not issued any operating partnership units or preferred stock. We endeavor to structure our hotel acquisitions so that they will not overly complicate our capital structure; however, we will consider a more complex transaction if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.
 
Thoughtful Asset Management
 
We believe that we are able to create significant value in our portfolio by utilizing our management’s extensive experience and our innovative asset management strategies.
 
Our senior management team has established a broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, project managers and contractors and other key industry participants.
 
Our philosophy is to negotiate management agreements that give us the right to exert significant influence over the management of our properties, annual budgets and all capital expenditures, and then to use those rights to continually monitor and improve the performance of our properties. We cooperatively partner with the managers of our hotels in an attempt to increase operating results and long-term asset values at our hotels. In addition to working directly with the personnel at our hotels, our senior management team also has long-standing professional relationships with our hotel managers’ senior executives, and we work directly with these senior executives to improve the performance of our portfolio.
 
We believe we can create significant value in our portfolio through innovative asset management strategies such as rebranding, renovating and repositioning. We are committed to regularly evaluating our portfolio to determine if we can employ these value-added strategies at our hotels. During 2006 and the period from January 1, 2007 to September 7, 2007, we completed a significant amount of capital reinvestment in our hotels - completing projects that ranged from room renovations (Courtyard Manhattan/Midtown East, Los Angeles Airport Marriott, Bethesda Marriott Suites, Orlando Airport Marriott and Frenchman’s Reef & Morning Star Marriott Beach Resort) to total renovation and repositioning of the hotel (Torrance Marriott and the Oak Brook Hills Marriott Resort). In connection with our planned renovations and repositionings, our senior management team and our asset managers are committed to completing our renovations on time, on budget and with minimum disruption at our hotels. We are optimistic that our renovations enable us to achieve higher rates and greater demand for our hotels.

A core of our asset management strategy is to leverage national hotel brands. We strongly believe in the value of powerful national brands because we believe that they are able to produce incremental revenue and profits compared to similar unbranded hotels. Dominant national hotel brands typically have very strong reservation and reward systems and sales organizations, as a result, all of our hotels are operated under a brand owned by one of the top three national brand companies (Marriott, Starwood or Hilton) and all but two of the hotels are operated by the brand company directly. Generally, we are interested in acquiring only those hotels that are operated under a nationally recognized brand or can be converted into a branded hotel.
 
Key Indicators of Financial Condition and Operating Performance

We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:
 
·
Occupancy percentage;
 
·
ADR;
 
·
RevPAR;
 
·
EBITDA and
 
·
FFO.

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 66% of our total revenues for the fiscal quarter ended September 7, 2007, and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.
 
-14-


Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction and the pricing strategies of competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of Marriott and its brands as well as the Westin and Conrad brands.

We also use EBITDA and FFO as measures of the financial performance of our business. See "Non-GAAP Financial Matters."

Our Hotels

The following table sets forth certain operating information for each of our hotels for the period from January 1, 2007 to September 7, 2007. This information includes periods prior to our acquisition of theses hotels unless otherwise indicated:

Property
 
Location
 
Number of
Rooms
 
Occupancy (%)
   
ADR($)
 
RevPAR($)
 
% Change
from 2006
RevPAR (3)
 
Chicago Marriott
   
Chicago, Illinois
   
1,198
   
80.4
%
 
$
201.69
 
$
162.20
   
7.5
%
Los Angeles Airport Marriott
   
Los Angeles, California
   
1,004
   
81.1
     
117.98
   
95.70
   
7.8
 
Westin Boston Waterfront Hotel (2)
   
Boston, Massachusetts
   
793
   
73.8
     
203.38
   
150.17
   
12.2
 
Renaissance Waverly Hotel
   
Atlanta, Georgia
   
521
   
69.9
     
143.01
   
100.00
   
(0.1
)
Salt Lake City Marriott Downtown
   
Salt Lake City, Utah
   
510
   
71.6
     
137.88
   
98.72
   
8.0
 
Renaissance Worthington
   
Fort Worth, Texas
   
504
   
76.2
     
171.22
   
130.54
   
3.2
 
Frenchman's Reef & Morning Star Marriott Beach Resort (1)
   
St. Thomas, U.S. Virgin Islands
   
502
   
87.2
     
243.47
   
212.22
   
10.0
 
Renaissance Austin Hotel
   
Austin, Texas
   
492
   
77.2
     
155.17
   
119.75
   
17.8
 
Torrance Marriott
   
Los Angeles County, California
   
487
   
80.9
     
118.27
   
95.63
   
5.8
 
Orlando Airport Marriott
   
Orlando, Florida
   
486
   
78.3
     
122.49
   
95.93
   
13.3
 
Marriott Griffin Gate Resort
   
Lexington, Kentucky
   
408
   
66.0
     
133.68
   
88.27
   
10.5
 
Oak Brook Hills Marriott Resort
   
Oak Brook, Illinois
   
386
   
57.3
     
137.33
   
78.66
   
5.9
 
Westin Atlanta North at Perimeter (1)
   
Atlanta, Georgia
   
369
   
68.2
     
138.63
   
94.59
   
0.6
 
Vail Marriott Mountain Resort & Spa (1)
   
Vail, Colorado
   
346
   
66.7
     
253.39
   
169.10
   
9.7
 
Marriott Atlanta Alpharetta
   
Atlanta, Georgia
   
318
   
60.9
     
154.87
   
94.38
   
3.3
 
Courtyard Manhattan/Midtown East
   
New York, New York
   
312
   
89.8
     
267.70
   
240.29
   
25.6
 
Conrad Chicago (1)
   
Chicago, Illinois
   
311
   
75.0
     
233.33
   
174.96
   
31.6
 
Bethesda Marriott Suites
   
Bethesda, Maryland
   
272
   
73.6
     
183.67
   
135.15
   
7.3
 
SpringHill Suites Atlanta Buckhead
   
Atlanta, Georgia
   
220
   
64.8
     
115.80
   
75.01
   
(4.9
)
Courtyard Manhattan/Fifth Avenue
   
New York, New York
   
185
   
91.7
     
260.25
   
238.65
   
17.0
 
The Lodge at Sonoma, a Renaissance Resort & Spa
   
Sonoma, California
   
182
   
69.2
     
223.15
   
154.51
   
0.3
 
                                         
TOTAL/WEIGHTED AVERAGE (3)
   
 
   
9,806
   
75.6
%
 
$
171.36
 
$
129.48
   
10.0
%
 

 
(1)
The Frenchman's Reef & Morning Star Marriott Beach Resort, Vail Marriott Mountain Resort & Spa, Westin Atlanta North at Perimeter and Conrad Chicago report operations on a calendar month and year basis. The period from January 1, 2007 to September 7, 2007 includes the operations for the period from January 1, 2007 to August 31, 2007 for these four hotels.
 
 
(2)
The Westin Boston Waterfront Hotel reports operations on a calendar month and year basis. The period from January 1, 2007 to September 7, 2007 includes the operations for the period from January 31, 2007 (date of acquisition) to August 31, 2007.
 
 
(3)
Total hotel statistics only include the Westin Boston Waterfront Hotel for the period from June 21, 2007 to August 31, 2007. This hotel was newly built in 2006 and commenced operations on June 21, 2006.

Results of Operations

As of September 7, 2007, we owned twenty-one hotels. Our total assets were $2.1 billion as of September 7, 2007. Total liabilities were $1.1 billion as of September 7, 2007, including $864.0 million of debt. Shareholders' equity was approximately $1.1 billion as of September 7, 2007. Our total assets were $1.8 billion as of December 31, 2006. Total liabilities were $1.0 billion as of December 31, 2006, including $843.8 million of debt. Shareholders’ equity was approximately $784.9 million as of December 31, 2006.

-15-


Comparison of the Fiscal Quarter Ended September 7, 2007 to the Fiscal Quarter Ended September 8, 2006

Our net income for the fiscal quarter ended September 8, 2007 was $15.9 million compared to $6.5 million for the fiscal quarter ended September 8, 2006. We acquired four of our twenty-one hotels after the third fiscal quarter of 2006. Accordingly, the current period results are not comparable to the results for the corresponding period in 2006.

Revenue.    Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels. Revenues for the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively, consist of the following (in thousands):

   
Fiscal Quarter Ended September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
Rooms
 
$
110,818
 
$
76,805
 
Food and beverage
   
47,703
   
31,320
 
Other
   
9,490
   
6,774
 
Total revenues
 
$
168,011
 
$
114,899
 

Our total revenues increased $53.1 million, from $114.9 million for the fiscal quarter ended September 8, 2006 to $168.0 million for the fiscal quarter ended September 7, 2007. This increase includes amounts that are not comparable year-over-year as follows:

·
$19.6 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
·
$8.7 million increase from the Conrad Chicago, which was purchased in November 2006;
 
·
$7.5 million increase from the Renaissance Waverly Hotel, which was purchased in December 2006;
 
·
$7.2 million increase from the Renaissance Austin Hotel, which was purchased in December 2006.

The remaining increase of $10.1 million is attributable to a $6.7 million increase in room revenue and a $3.4 million increase in food and beverage and other operating revenue at the comparable hotels. The increase in room revenue was the result of an 8.6% increase in comparable hotel RevPAR, which was primarily due to a 5.5% increase in ADR and a 2.2% increase in occupancy at the comparable hotels.

Individual hotel revenues for the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively, consist of the following (in millions):

   
Fiscal Quarter Ended September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
           
Chicago Marriott
 
$
25.6
 
$
24.4
 
Westin Boston Waterfront Hotel (2) (3)
   
19.6
   
-
 
Los Angeles Airport Marriott
   
13.4
   
11.5
 
Frenchman's Reef & Morning Star Marriott Beach Resort (1)
   
12.6
   
10.9
 
Conrad Chicago (1)(3)
   
8.7
   
-
 
Oak Brook Hills Marriott Resort
   
8.0
   
7.2
 
Renaissance Waverly Hotel (3)
   
7.5
   
-
 
Renaissance Austin Hotel (3)
   
7.2
   
-
 
Renaissance Worthington
   
7.0
   
7.5
 
Courtyard Manhattan/Midtown East
   
6.8
   
5.7
 
Marriott Griffin Gate Resort
   
6.5
   
5.8
 
Salt Lake City Marriott Downtown
   
6.3
   
5.7
 
Torrance Marriott
   
6.0
   
5.2
 
Vail Marriott Mountain Resort & Spa (1)
   
5.9
   
5.1
 
The Lodge at Sonoma, a Renaissance Resort & Spa
   
5.1
   
5.0
 
Orlando Airport Marriott
   
4.8
   
4.0
 
Westin Atlanta North at Perimeter (1)
   
4.2
   
4.8
 
Bethesda Marriott Suites
   
3.9
   
3.7
 
Courtyard Manhattan/Fifth Avenue
   
3.9
   
3.4
 
Marriott Atlanta Alpharetta
   
3.5
   
3.5
 
SpringHill Suites Atlanta Buckhead
   
1.5
   
1.5
 
Total
 
$
168.0
 
$
114.9
 

 
(1)
The Frenchman's Reef & Morning Star Marriott Beach Resort, Vail Marriott Mountain Resort & Spa, Westin Atlanta North at Perimeter and Conrad Chicago report operations on a calendar month and year basis. The fiscal quarters ended September 7, 2007 and September 8, 2006 include the operations for the period from June 1, 2007 to August 31, 2007 and June 1, 2006 to August 31, 2006, respectively, for these four hotels.
 
-16-

 
 
(2)
The Westin Boston Waterfront Hotel reports operations on a calendar month and year basis. The fiscal quarter ended September 7, 2007, includes the operations for the period from June 1, 2007 to August 31, 2007.
 
 
(3)
The Company acquired this hotel subsequent to September 8, 2006. Accordingly, there are no revenues recorded for the fiscal quarter ended September 8, 2006.

The following are the pro forma key hotel operating statistics for our hotels for the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively. The pro forma hotel operating statistics presented below include the results of operations of the hotels under previous ownership for the comparable period to our ownership periods. The operating statistics for the fiscal quarters ended September 7, 2007 and September 8, 2006 only include the Westin Boston Waterfront Hotel for the periods from June 21, 2007 to August 31, 2007 and June 21, 2006 to August 31, 2006, respectively. This hotel was newly built in 2006 and commenced operations on June 21, 2006.

   
Fiscal Quarter Ended
September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
% Change
 
Occupancy %
   
77.9
%
 
74.3
%
 
3.6 percentage points
 
ADR
 
$
167.82
 
$
157.74
   
6.4
%
RevPAR
 
$
130.68
 
$
117.23
   
11.5
%

Hotel operating expenses.    Hotel operating expenses consist primarily of operating expenses of our hotels, including non-cash ground rent expense. The operating expenses for the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively, consist of the following (in millions):

   
Fiscal Quarter Ended
September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
Rooms departmental expenses
 
$
26.1
 
$
18.3
 
Food and beverage departmental expenses
   
33.9
   
21.8
 
Other hotel expenses
   
46.1
   
34.3
 
Base management fees
   
4.6
   
3.2
 
Yield support
   
(0.4
)
 
(0.8
)
Incentive management fees
   
2.6
   
2.0
 
Property taxes
   
5.8
   
4.0
 
Ground rent—Contractual
   
0.4
   
0.4
 
Ground rent—Non-cash
   
1.8
   
1.7
 
Total hotel operating expenses
 
$
120.9
 
$
84.9
 

Our hotel operating expenses increased $36.0 million from $84.9 million for the fiscal quarter ended September 8, 2006 to $120.9 million for the fiscal quarter ended September 7, 2007. This increase includes amounts that are not comparable year-over-year as follows:

·
$13.2 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
·
$5.7 million increase from the Renaissance Waverly Hotel, which was purchased in December 2006;
 
·
$5.6 million increase from the Renaissance Austin Hotel, which was purchased in December 2006;
 
·
$5.2 million increase from the Conrad Chicago, which was purchased in November 2006.

The remaining increase of $6.3 million is attributable to increases in departmental expenses and other operating expenses at the comparable hotels as well as lower yield support recognized in the fiscal quarter ended September 7, 2007 compared to the corresponding period in 2006.

-17-

 
In connection with entering into certain management agreements with Marriott, Marriott provided the Company with limited operating cash flow guarantees (“yield support”) for those hotels. The yield support is designed to protect us from the disruption often associated with changing the hotel’s brand or manager or undergoing significant renovations. Across our portfolio, we are entitled to up to $0.8 million of yield support in 2007 for the Oak Brook Hills Marriott and $100,000 in 2007 for the Buckhead SpringHill Suites. We currently anticipate that we will recognize all of our entitled yield support in 2007. We recorded yield support of $0.4 million during the fiscal quarter ended September 7, 2007. We recorded $0.8 million of yield support during the fiscal quarter ended September 8, 2006. Also during the quarter, in connection with the Bethesda Marriott refinancing, we reversed $0.4 million of incentive management fees previously recognized as it is no longer probable of payment.

Depreciation and amortization.    Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $4.7 million from $12.8 million for the fiscal quarter ended September 8, 2006 to $17.5 million for the fiscal quarter ended September 7, 2007. This increase includes amounts that are not comparable year-over-year as follows:

·
$2.4 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
·
$0.9 million increase from the Renaissance Waverly Hotel, which was purchased in December 2006;
 
·
$0.9 million increase from the Conrad Chicago, which was purchased in November 2006;
 
·
$0.8 million increase from the Renaissance Austin Hotel, which was purchased in December 2006.

Corporate expenses.    Our corporate expenses increased from $2.8 million for the fiscal quarter ended September 8, 2006 to $3.3 million for the fiscal quarter ended September 7, 2007, due primarily to an increase in stock-based compensation expense and increased dead deal costs. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors' fees.

Interest expense.    Our interest expense totaled $11.7 million and $9.1 million for the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively. The 2007 interest expense is related to mortgage debt ($10.8 million), amortization of deferred financing costs ($0.2 million) and interest and unused facility fees on our credit facility ($0.7 million). The 2006 interest expense is related to mortgage debt ($8.8 million), amortization and write off of deferred financing costs ($0.2 million) and interest and unused facility fees on our credit facility ($0.1 million). As of September 7, 2007, we had property-specific mortgage debt outstanding on twelve of our hotels. On all but one of the hotels, we have fixed-rate secured debt, which bears interest at rates ranging from 5.11% to 6.48% per year. Amounts drawn under the credit facility bear interest at a variable rate that fluctuates based on the level of outstanding indebtedness in relation to the value of our assets from time to time. The interest rate as of September 7, 2007 on the credit facility was 6.46%. The Company had $38.5 million drawn on the credit facility as of September 7, 2007. Our weighted-average interest rate on all debt as of September 7, 2007 was 5.7%.

Interest income. Interest income decreased $0.8 million from $1.3 million for the fiscal quarter ended September 8, 2006 to $0.5 million for the fiscal quarter ended September 7, 2007. The decrease is a result of interest income earned on higher levels of corporate cash in the corresponding period of 2006 related to our April 2006 equity offering.

Gain on early extinguishment of debt. During the fiscal quarter ended September 7, 2007, we repaid our $18.4 million fixed-rate mortgage debt on the Bethesda Marriott Suites and replaced it with a $5.0 million variable-rate mortgage. In connection with this transaction, we recognized a gain on the early extinguishment of $0.4 million, which is comprised of the write-off of the related debt premium of $2.5 million offset by a prepayment penalty of $2.0 million and the write-off of deferred financing costs of $0.1 million.

Income taxes.    We recorded an income tax benefit of 0.4 million and an income tax expense of $0.2 million for the fiscal quarters ended September 7, 2007 and September 8, 2006, respectively. The third quarter 2007 income tax benefit was incurred on the $1.1 million pre-tax loss of our TRS for the fiscal quarter ended September 7, 2007, together with foreign income tax expense of $0.1 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort. The 2006 income tax expense was incurred on the $0.1 million pre-tax loss of our TRS for the fiscal quarter ended September 8, 2006, together with foreign income tax expense of $0.2 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort.

-18-


Comparison of the Period from January 1, 2007 to September 7, 2007 to the Period from January 1, 2006 to September 8, 2006

Our net income for the period from January 1, 2007 to September 7, 2007 was $43.2 million compared to $24.7 million for the period from January 1, 2006 to September 8, 2006. We acquired six of our twenty-one hotels after January 1, 2006. Accordingly, the current period results are not comparable to the results for the corresponding period in 2006.

Revenue.     Revenue consists primarily of the room, food and beverage and other revenues from our hotels.
Revenues for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively, consist of the following (in thousands):

   
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to
September 8, 2006
 
Rooms
 
$
312,615
 
$
212,593
 
Food and beverage
   
143,545
   
92,065
 
Other
   
25,130
   
18,330
 
Total revenues
 
$
481,290
 
$
322,988
 

Our total revenues increased $158.3 million, from $323.0 million for the period from January 1, 2006 to September 8, 2006 to $481.3 million for the period from January 1, 2007 to September 7, 2007. This increase includes amounts that are not comparable year-over-year as follows:

·
$43.2 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
·
$25.0 million increase from the Renaissance Waverly Hotel, which was purchased in December 2006;
 
·
$24.9 million increase from the Renaissance Austin Hotel, which was purchased in December 2006;
 
·
$21.1 million increase from the Chicago Marriott, which was purchased in March 2006;
 
·
$17.7 million increase from the Conrad Chicago, which was purchased in November 2006;
 
·
$6.6 million increase from the Westin Atlanta North at Perimeter, which was purchased in May 2006.

The remaining increase of $19.8 million is attributable to a $15.6 million increase in room revenue and a $4.2 million increase in food and beverage and other operating revenue at the comparable hotels. The increase in room revenue was a result of the 9.3% increase in comparable hotel RevPAR which was primarily due to a 7.9% increase in ADR at the comparable hotels.

Individual hotel revenues for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively, consist of the following (in millions):

   
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to
September 8, 2006
 
           
Chicago Marriott
 
$
69.9
 
$
48.8
 
Westin Boston Waterfront Hotel (2) (3)
   
43.2
   
-
 
Los Angeles Airport Marriott
   
40.6
   
38.2
 
Frenchman's Reef & Morning Star Marriott Beach Resort (1)
   
39.7
   
37.2
 
Renaissance Worthington
   
26.2
   
26.4
 
Renaissance Waverly Hotel (3)
   
25.0
   
-
 
Renaissance Austin Hotel (3)
   
24.9
   
-
 
Vail Marriott Mountain Resort & Spa (1)
   
20.5
   
18.6
 
Courtyard Manhattan/Midtown East
   
19.6
   
15.5
 
Salt Lake City Marriott Downtown
   
18.6
   
17.5
 
Oak Brook Hills Marriott Resort
   
18.5
   
17.3
 
Orlando Airport Marriott
   
18.0
   
16.0
 
Marriott Griffin Gate Resort
   
18.0
   
16.5
 
Conrad Chicago (1)(3)
   
17.7
   
-
 
Torrance Marriott
   
16.8
   
15.5
 
Westin Atlanta North at Perimeter (1)
   
12.9
   
6.3
 
The Lodge at Sonoma, a Renaissance Resort & Spa
   
12.4
   
12.5
 
Bethesda Marriott Suites
   
12.1
   
11.4
 
Courtyard Manhattan/Fifth Avenue
   
11.2
   
9.6
 
Marriott Atlanta Alpharetta
   
10.9
   
10.9
 
SpringHill Suites Atlanta Buckhead
   
4.6
   
4.8
 
Total
 
$
481.3
 
$
323.0
 

 
(1)
The Frenchman's Reef & Morning Star Marriott Beach Resort, Vail Marriott Mountain Resort & Spa, Westin Atlanta North at Perimeter and Conrad Chicago report operations on a calendar month and year basis. The period from January 1, 2007 to September 7, 2007 includes the operations for the period from January 1, 2007 to August 31, 2007 for these four hotels. The period from January 1, 2006 to September 8, 2006 includes the operations for the period from January 1, 2006 to August 31, 2006 for the Frenchman’s Reef & Morning Star Marriott Beach Resort and Vail Marriott Mountain Resort & Spa and the period from May 3, 2006 (date of acquisition) to August 31, 2006 for the Westin Atlanta North at Perimeter.
 
-19-

 
 
(2)
The Westin Boston Waterfront Hotel reports operations on a calendar month and year basis. The period from January 1, 2007 to September 7, 2007, includes the operations for the period from January 31, 2007 (date of acquisition) to August 31, 2007.
 
 
(3)
The Company acquired this hotel subsequent to September 8, 2006. Accordingly, there are no revenues recorded for the period from January 1, 2006 to September 8, 2006.

The following are the pro forma key hotel operating statistics for our hotels for the period from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006. The pro forma hotel operating statistics presented below include the results of operations of the hotels under previous ownership for the comparable period to our ownership period. The operating statistics for the period from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006 only include the Westin Boston Waterfront Hotel for the periods from June 21, 2007 to August 31, 2007 and June 21, 2006 to August 31, 2006, respectively. This hotel was newly built in 2006 and commenced operations on June 21, 2006.

   
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to
September 8, 2006
 
% Change
 
Occupancy %
   
75.6
%
 
73.6
%
 
2.0 percentage points
 
ADR
 
$
171.36
 
$
160.08
   
7.0
%
RevPAR
 
$
129.48
 
$
117.76
   
10.0
%

Hotel operating expenses.    Hotel operating expenses consist primarily of operating expenses of our hotels, including non-cash ground rent expense. The operating expenses for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively, consist of the following (in millions):

   
Period from
January 1, 2007 to
September 7, 2007
 
Period from
January 1, 2006 to September 8, 2006
 
Rooms departmental expenses
 
$
71.9
 
$
49.3
 
Food and beverage departmental expenses
   
98.1
   
62.1
 
Other hotel expenses
   
130.2
   
92.1
 
Base management fees
   
13.3
   
9.3
 
Yield support
   
(0.6
)
 
(2.4
)
Incentive management fees
   
7.3
   
5.2
 
Property taxes
   
16.3
   
10.8
 
Ground rent—Contractual
   
1.3
   
1.3
 
Ground rent—Non-cash
   
5.4
   
5.1
 
Total hotel operating expenses
 
$
343.2
 
$
232.8
 

Our hotel operating expenses increased $110.4 million from $232.8 million for the period from January 1, 2006 to September 8, 2006 to $343.2 million for the period from January 1, 2007 to September 7, 2007. This increase includes amounts that are not comparable year-over-year as follows:

·
$29.8 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
·
$18.1 million increase from the Renaissance Waverly Hotel, which was purchased in December 2006;
 
·
$17.9 million increase from the Renaissance Austin Hotel, which was purchased in December 2006;
 
·
$17.3 million increase from the Chicago Marriott, which was purchased in March 2006;
 
·
$12.3 million increase from the Conrad Chicago, which was purchased in November 2006;
 
·
$4.7 million increase from the Westin Atlanta North at Perimeter, which was purchased in May 2006.
 
-20-

 
The remaining increase of $10.3 million is attributable to increases in departmental expenses and other operating expenses at the comparable hotels as well as lower yield support recognized for the period from January 1, 2007 to September 7, 2007 compared to the corresponding period in 2006.

In connection with entering into certain management agreements with Marriott, Marriott provided the Company with limited operating cash flow guarantees (“yield support”) for those hotels. The yield support is designed to protect us from the disruption often associated with changing the hotel’s brand or manager or undergoing significant renovations. Across our portfolio, we are entitled to up to $0.8 million of yield support in 2007 for the Oak Brook Hills Marriott and $100,000 in 2007 for the Buckhead SpringHill Suites. We currently anticipate that we will recognize all of our entitled yield support in 2007. We recorded yield support of $0.6 million for the period from January 1, 2007 to September 7, 2007. We recorded $2.4 million of yield support for the period from January 1, 2006 to September 8, 2006. Also during the quarter, in connection with the Bethesda Marriott refinancing, we reversed $0.4 million of incentive management fees previously recognized as it is no longer probable of payment.

Depreciation and amortization.    Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $17.3 million from $33.9 million for the period from January 1, 2006 to September 8, 2006 to $51.2 million for the period from January 1, 2007 to September 7, 2007. This increase includes amounts that are not comparable year-over-year as follows:

·
$6.8 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
     
·
$2.7 million increase from the Renaissance Waverly Hotel, which was purchased in December 2006;
     
·
$2.6 million increase from the Conrad Chicago, which was purchased in November 2006;
     
·
$2.4 million increase from the Chicago Marriott, which was purchased in March 2006;
     
·
$2.2 million increase from the Renaissance Austin Hotel, which was purchased in December 2006;
     
·
$0.9 million increase from the Westin Atlanta North at Perimeter, which was purchased in May 2006.

Corporate expenses.    Our corporate expenses increased $1.7 million from $8.0 million for the period from January 1, 2006 to September 8, 2006 to $9.7 million for the period from January 1, 2007 to September 7, 2007. The increase is primarily due to a $0.8 million increase in stock-based compensation expense, a $0.6 million increase in other corporate operating and dead deal costs, and a $0.3 million increase in other employee-related costs. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors' fees.

Interest expense.    Our interest expense totaled $35.1 million and $24.2 million for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively. The 2007 interest expense is related to mortgage debt ($32.9 million), amortization of deferred financing costs ($0.5 million) and interest and unused facility fees on our credit facility ($1.7 million). The 2006 interest expense is related to mortgage debt ($22.8 million), amortization and write off of deferred financing costs ($0.7 million) and interest and unused facility fees on our credit facility ($0.7 million). As of September 7, 2007, we had property-specific mortgage debt outstanding on twelve of our hotels. On all but one of the hotels, we have fixed-rate secured debt, which bears interest at rates ranging from 5.11% to 6.48% per year. Amounts drawn under the credit facility bear interest at a variable rate that fluctuates based on the level of outstanding indebtedness in relation to the value of our assets from time to time. The interest rate as of September 7, 2007 on the credit facility was 6.46%. The Company had $38.5 million drawn on the credit facility as of September 7, 2007. Our weighted-average interest rate on all debt as of September 7, 2007 was 5.7%.

Interest income. We recorded interest income of $1.8 million and $2.7 million for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively. The decrease is a result of interest income earned on higher levels of corporate cash in the corresponding period of 2006 related to our April 2006 equity offering.

Gain on early extinguishment of debt. During the fiscal quarter ended September 7, 2007, we repaid our $18.4 million fixed-rate mortgage debt on the Bethesda Marriott Suites and replaced it with a $5.0 million variable-rate mortgage. In connection with this transaction, we recognized a gain on the early extinguishment of $0.4 million, which is comprised of the write-off of the related debt premium of $2.5 million offset by a prepayment penalty of $2.0 million and the write-off of deferred financing costs of $0.1 million.
 
-21-


Income taxes.    We recorded income tax expense of $1.1 million and $2.0 million for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively. The 2007 income tax expense was incurred on the $1.7 million pre-tax income of our TRS for the period from January 1, 2007 to September 7, 2007, and foreign income tax expense of $0.4 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort. The 2006 income tax expense was incurred on the $3.7 million pre-tax income of our TRS for the period from January 1, 2006 to September 8, 2006, and foreign income tax expense of $0.5 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to fund future distributions to our stockholders to maintain our REIT status as well as to pay for operating expenses and other expenditures directly associated with our hotels, including maintenance and recurring capital expenditures as well as payments of interest and principal. We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our credit facility.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, expansions and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, cash provided by operations, existing cash balances, and borrowings as well as through the issuances of additional equity or debt securities. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us.

Our Financing Strategy

We are committed to maintaining a conservative capital structure with aggregate leverage weighted towards long-term fixed-rate debt. However, we maintain the flexibility to modify these strategies if we believe fundamental changes have occurred in the capital or lodging markets.

As of September 7, 2007, 95.0% of our debt carries fixed interest rates, with a weighted-average interest rate of 5.7%, and a weighted-average maturity of 7.7 years. As of September 7, 2007, we had $864.0 million of debt outstanding.

In the current market, we have a preference towards fixed-rate, long-term, limited recourse, single property specific debt. When possible and desirable, we will seek to replace short-term sources of capital with long-term financing. In addition to property-specific debt and our credit facility, we intend to use other financing methods as necessary, including obtaining funds from banks, institutional investors or other lenders, bridge loans, letters of credit and other arrangements, any of which may be unsecured or may be secured by mortgages or other interests in our investments. In addition, we may issue publicly or privately placed debt instruments.

Credit Facilities

On July 8, 2005, the Company entered into a three-year, $75.0 million senior secured revolving credit facility from Wachovia Bank, National Association, as administrative agent under the credit facility, and Citicorp North America, Inc. and Bank of America, N.A., as co-syndication agents under the credit facility (the “Former Facility”). The Company amended and restated the Former Facility to expand it into a $200.0 million unsecured credit facility on February 28, 2007 (the “New Facility”).

The New Facility has a term of 48 months. The Company may extend the maturity date of the New Facility for an additional year upon the payment of applicable fees and the satisfaction of certain other customary conditions. The Company also has the right to increase the amount of the New Facility to $500.0 million with the lenders’ approval.
 
-22-

 
Interest is paid on the periodic advances under the New Facility at varying rates, based upon either LIBOR or the alternate base rate, plus an agreed upon additional margin amount. The interest rate depends upon our level of outstanding indebtedness in relation to the value of our assets from time to time, as follows:
 
   
Leverage Ratio 
 
 
 
60% or greater
 
55% to 60%
 
50% to 55%
 
less than 50%
 
Alternate base rate margin
   
0.65
%
 
0.45
%
 
0.25
%
 
0.00
%
LIBOR margin
   
1.55
%
 
1.45
%
 
1.25
%
 
0.95
%
 
Our New Facility contains various corporate financial covenants. A summary of the most restrictive covenants is as follows:

       
Value at
   
Covenant
 
September 7, 2007
         
Maximum leverage ratio
 
65%
 
36.0%
Minimum fixed charge coverage ratio
 
1.6x
 
3.28x
Minimum tangible net worth
 
$738.4 million
 
$1.2 billion
Unhedged floating rate debt as a percentage of total indebtedness
 
35%
 
4.5%

Our New Facility requires that the Company maintain a specific pool of unencumbered borrowing base properties. The unencumbered borrowing base assets are subject to the following limitations and covenants:

·
A minimum of four properties with an unencumbered borrowing base value, as defined, of not less than $150 million.
     
·
No single borrowing base asset shall contribute more than 40% of the adjusted net operating income, as defined, of the unencumbered borrowing base.
     
·
Not more than 40% of the adjusted net operating income, as defined, of the unencumbered borrowing base shall be located in one MSA.
     
·
The minimum implied debt service ratio of the unencumbered borrowing base assets shall be greater than 1.50x.
     
·
Total unsecured indebtedness shall not exceed 65% of the unencumbered borrowing base asset value, as defined.

In addition to the interest payable on amounts outstanding under the New Facility, the Company is required to pay an amount equal to 0.20% of the unused portion of the New Facility if the unused portion of the New Facility is greater than 50% and 0.125% if the unused portion of the new Facility is less than 50%. The Company incurred interest and unused credit facility fees of $1.7 million for the period from January 1, 2007 to September 7, 2007 on the credit facilities. As of September 7, 2007, the Company had $38.5 million outstanding on the New Facility with a capacity to borrow an additional $161.5 million. Subsequent to September 7, 2007, the Company drew an additional $17.0 million under the New Facility. As of September 7, 2007, the Company was in compliance with all financial covenants of the New Facility.

Mortgage Financings

On July 31, 2007, the Company repaid its $18.4 million fixed-rate mortgage debt on the Bethesda Marriott Suites and replaced it with a $5.0 million variable-rate mortgage. In connection with this transaction, the Company recognized a gain on the early extinguishment of $0.4 million, which is comprised of the write-off of the related debt premium of $2.5 million offset by a prepayment penalty of $2.0 million and the write-off of deferred financing costs of $0.1 million. The new $5.0 million mortgage loan has a three-year term and bears a floating rate of interest based on LIBOR plus 95 basis points. The new mortgage loan can be repaid at any time during the three-year term with no prepayment penalty.

Sources and Uses of Cash

Our principal sources of cash are revenues from operations, borrowing under mortgage financings, draws on our credit facility and the proceeds from our equity offerings. Our principal uses of cash are debt service, asset acquisitions, capital expenditures, operating costs, corporate expenses and dividends.

Cash Provided by Operating Activities.    Our cash provided by operating activities was $92.9 million for the period from January 1, 2007 to September 7, 2007, which is the result of our $43.2 million net income and $1.7 million of cash received from yield support, adjusted for the impact of several non-cash charges, including $51.2 million of depreciation, $5.4 million of non-cash straight line ground rent, $0.5 million of amortization of deferred financing costs, and $2.8 million of stock compensation, offset by $1.3 million of amortization of debt premium and unfavorable agreements and unfavorable working capital changes of $9.7 million. Our cash provided by operating activities was $62.9 million for the period from January 1, 2006 to September 8, 2006, which is the result of our $24.7 million net income, adjusted for the impact of several non-cash charges, including $33.9 million of depreciation, $5.1 million of non-cash straight line ground rent, $0.7 million of amortization of deferred financing costs and loan repayment losses, $2.0 million of stock compensation, offset by $2.4 million of non-cash yield support recognized, $0.9 million of amortization of debt premium and unfavorable agreements, and unfavorable working capital changes of $0.2 million.
 
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Cash Used In Investing Activities.    Our cash used in investing activities was $361.8 million and $195.7 million for the periods from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively. During the period from January 1, 2007 to September 7, 2007, we utilized $331.3 million for the acquisition of the Westin Boston Waterfront Hotel and incurred capital expenditures at our other hotels of $36.2 million, which was offset by the receipt of $5.0 million of key money related to the Chicago Marriott Downtown. During the period from January 1, 2006 to September 8, 2006, we utilized $145.6 million of cash for the acquisitions of the Chicago Marriott Downtown Magnificent Mile and Westin Atlanta North at Perimeter, made a $10.0 million cash deposit on the Conrad Chicago acquisition, and incurred capital expenditures at our other hotels of $39.0 million.

Cash Provided by Financing Activities.    Our cash provided by financing activities was $275.0 million and $216.5 million for the period from January 1, 2007 to September 7, 2007 and January 1, 2006 to September 8, 2006, respectively. The cash provided by financing activities for the period from January 1, 2007 to September 7, 2007, primarily consists of $317.6 million of net proceeds from sale of our common stock, $91.0 million in draws under our credit facilities, and $5.0 million of proceeds from the new mortgage debt of the Bethesda Marriott Suites. The cash provided by financing activities for the period from January 1, 2007 to September 7, 2007 was offset by the $52.5 million in repayments of the credit facilities, $20.4 million for the early extinguishment of the Bethesda Marriott Suites mortgage ($18.4 million in principal repayment and a $2.0 million prepayment penalty), $2.3 million of scheduled debt principal payments, $1.2 million payment of financing costs, $2.7 million of share repurchases, and $59.5 million of dividend payments. The cash provided by financing activities for the period from January 1, 2006 to September 8, 2006, primarily consists of $79.5 million of proceeds from a short-term loan in conjunction with the acquisition of the Chicago Marriott Downtown Magnificent Mile, $271.0 million of proceeds from the mortgage debt of the Chicago Marriott ($220.0 million) and the Courtyard Manhattan/Fifth Avenue ($51.0 million), $238.0 million of net proceeds from our secondary offering of our common stock, and $24.0 million in draws under our senior secured credit facility. The cash provided by financing activities for the period from January 1, 2006 to September 8, 2006 was offset by the $325.5 repayment of debt, including the $220.0 variable-rate mortgage assumed in the acquisition of the Chicago Marriott, the $23.0 million variable-rate mortgage debt on the Courtyard Manhattan/Fifth Avenue, and the $79.5 million short-term loan incurred in conjunction with the acquisition of the Chicago Marriott, a $33.0 million repayment of our senior secured credit facility, $2.2 million of scheduled debt principal payments, $1.3 million payment of financing costs, $3.1 of share repurchases, and $30.9 million of dividend payments.

The following table summarizes our significant financing activities since the beginning of 2007:

Transaction Date
 
Description of Transaction
 
Amount
 
January 3, 2007
 
Draw under Former Facility
  $
5.0 million
 
January 4, 2007
 
Payment of fourth quarter dividends
   
(13.8 million
) 
January 9, 2007
 
Draw under Former Facility
   
15.0 million
 
January 23, 2007
 
Proceeds from follow-on offering
   
317.9 million
 
February 28, 2007
 
Repayment of Former Facility
   
(20.0 million
) 
February 28, 2007
 
Draw under New Facility
   
21.5 million
 
March 29, 2007
 
Draw under New Facility
   
20.0 million
 
April 2, 2007
 
Payment of first quarter dividends
   
(22.9 million
) 
April 30, 2007
 
Repayment of New Facility
   
(12.0 million
) 
May 30, 2007
 
Repayment of New Facility
   
(3.0 million
) 
June 21, 2007
 
Draw under New Facility
   
11.5 million
 
June 22, 2007
 
Payment of second quarter dividends
   
(22.8 million
) 
July 23, 2007
 
Repayment of New Facility
   
(3.0 million
) 
July 30, 2007
 
Draw under New Facility
   
18.0 million
 
July 31, 2007
 
Repayment of the existing Bethesda Marriott Suites mortgage
   
(18.4 million
) 
July 31, 2007
 
Prepayment penalty on the early extinguishment of debt
   
(2.0 million
) 
July 31, 2007
 
Proceeds from the new Bethesda Marriott Suites mortgage
   
5.0 million
 
August 23, 2007
 
Repayment of New Facility
   
(8.5 million
) 
August 30, 2007
 
Repayment of New Facility
   
(6.0 million
) 
September 14, 2007
 
Draw under New Facility
   
12.0 million
 
September 18, 2007
 
Payment of third quarter dividends
   
(22.8 million
) 
October 4, 2007
 
Draw under New Facility
   
5.0 million
 

-24-

 
Dividend Policy

Generally, we intend to continue to distribute to our stockholders each year on a regular quarterly basis sufficient amounts of our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our TRS and TRS lessees, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Internal Revenue Code of 1986, as amended (the “Code”). In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

·
90% of our REIT taxable income determined without regard to the dividends paid deduction, plus
     
·
90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus
     
·
any excess non-cash income.

During the first fiscal quarter of 2007, the Company’s board of directors declared a cash dividend of $0.24 per share of common stock. The dividend was paid on April 2, 2007 to all stockholders of record as of March 23, 2007. During the second fiscal quarter of 2007, the Company’s board of directors declared a cash dividend of $0.24 per share of common stock. The dividend was paid on June 22, 2007 to all stockholders of record as of June 15, 2007. During the third fiscal quarter of 2007, the Company’s board of directors declared a cash dividend of $0.24 per share of common stock. The dividend was paid on September 18, 2007 to all stockholders of record as of September 7, 2007.

Capital Expenditures

The management agreements for each of our hotels provide for the establishment of separate property improvement funds to cover, among other things, the cost of replacing and repairing furniture and fixtures at our hotels. Contributions to the property improvement fund are calculated as a percentage of hotel sales. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement fund under the applicable management agreement. As of September 7, 2007, the Company had set aside $28.0 million for capital projects in property improvement funds ($24.3 million) and lender held restricted cash ($3.7 million). Funds held in property improvement funds for one hotel are typically not permitted to be applied to any other property.

The Company has and continues to make significant capital investments in the Company’s hotels. In 2007, the Company expects to incur approximately $70 to $80 million of capital improvements at the Company’s hotels. The Company incurred $13.7 million of capital projects in the fiscal quarter ended September 7, 2007. The most significant projects are as follows:

·
Chicago Marriott Downtown: The Company is currently completing a $35 million renovation of the hotel. The renovation includes a complete redo of all the meeting and ballrooms, adding 17,000 square feet of new meeting space, reconcepting and relocating the restaurant, expanding the lobby bar and creating a Marriott “great room” in the lobby. The work began during the third quarter of 2007 and will be completed in the first half of 2008.  The estimated disruption of approximately $1.5 million to hotel Adjusted EBITDA, mainly associated with the ballroom renovations, will occur primarily in the first quarter of 2008.

·
Westin Boston Waterfront: The Company is currently planning the construction of approximately $18 million of tenant improvements to the unfinished shell space attached to the hotel. The improvements include the creation of over 37,000 square feet to meeting/exhibit space. The meeting/exhibit space project will be completed in the first quarter of 2008.

·
Oak Brook Hills Marriott Resort: The Company completed the significant renovation of the hotel in early 2007. The renovation included the guestrooms and bathrooms, the main ballroom and meeting rooms and the lobby.

·
Los Angeles Airport Marriott: The Company renovated 19 suites during the second quarter of 2007 and plans to renovate certain breakout meeting rooms during the fourth quarter of 2007.
 
-25-

 
·
Griffin Gate Marriott Resort: The Company added a spa, repositioned and reconcepted the hotel restaurants as well as added meeting space to the hotel. These projects were completed during the second quarter of 2007.

·
Westin Atlanta North: The Company completed the renovation of the guestrooms during the third quarter of 2007.
 
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Non-GAAP Financial Measures

We use the following two non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) EBITDA and (2) FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP.

EBITDA represents net income excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. In addition, covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.

   
Fiscal Quarter Ended
September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
Period from January 1, 2007 to September 7, 2007
 
Period from January 1, 2006 to September 8, 2006
 
   
(in thousands)
 
Net income
 
$
15,868
 
$
6,471
 
$
43,171
 
$
24,734
 
Interest expense
   
11,704
   
9,058
   
35,084
   
24,190
 
Income tax (benefit) expense
   
(357
)
 
173
   
1,083
   
1,972
 
Real estate related depreciation and amortization
   
17,490
   
12,797
   
51,193
   
33,922
 
EBITDA
 
$
44,705
 
$
28,499
 
$
130,531
 
$
84,818
 

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, which defines FFO as net income (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We also use FFO as one measure in assessing our results.

   
Fiscal Quarter Ended
September 7, 2007
 
Fiscal Quarter Ended
September 8, 2006
 
Period from January 1, 2007 to September 7, 2007
 
Period from January 1, 2006 to September 8, 2006
 
   
(in thousands)
 
                   
Net income
 
$
15,868
 
$
6,471
 
$
43,171
 
$
24,734
 
Real estate