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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on February 2, 2011

Registration No. 333-          

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



FORM S-11

FOR REGISTRATION UNDER THE
SECURITIES ACT OF 1933 OF SECURITIES
OF CERTAIN REAL ESTATE COMPANIES



RLJ Lodging Trust
(Exact Name of Registrant as Specified in governing instruments)



3 Bethesda Metro Center
Suite 1000
Bethesda, MD 20814
(301) 280-7777
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)



Thomas J. Baltimore, Jr.
Chief Executive Officer and President
3 Bethesda Metro Center
Suite 1000
Bethesda, MD 20814
(301) 280-7777
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)



Copies to:

J. Warren Gorrell, Jr.
David W. Bonser
James E. Showen
Hogan Lovells US LLP
555 Thirteenth Street, NW
Washington, DC 20004
(202) 637-5600

 

Edward F. Petrosky
Bartholomew A. Sheehan, III
Sidley Austin
LLP
787 Seventh Avenue
New York, NY 10019
(212) 839-5300



Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

         If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:    o

         If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

CALCULATION OF REGISTRATION FEE

       
 
Title of Securities
to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee

 

Common shares of beneficial interest, $0.01 par value per share

  $550,000,000   $63,855

 

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

         The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated February 2, 2011

PROSPECTUS

                Shares

RLJ Lodging Trust

Common Shares



        We are a self-advised and self-administered Maryland real estate investment trust, which invests primarily in premium-branded, focused-service and compact full-service hotels. Upon completion of this offering and our formation transactions, we will own 140 hotels in 19 states and the District of Columbia comprising over 20,400 rooms.

        This is our initial public offering. We are selling                common shares of beneficial interest, or common shares, in this offering.

        We expect the public offering price to be between $            and $            per share. Currently, no public market exists for our common shares. After pricing of this offering, we expect that our common shares will trade on the New York Stock Exchange, or NYSE, under the symbol "RLJ."

        We intend to elect and to qualify to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2011. To assist us in qualifying as a REIT, shareholders generally are restricted from owning more than 9.8% of our outstanding common shares or our preferred shares of beneficial interest, in each case by value or number of shares, whichever is more restrictive. See "Description of Shares—Restrictions on Ownership and Transfer."

        Investing in our common shares involves risks. See "Risk Factors" beginning on page 16 of this prospectus for a description of various risks you should consider in evaluating an investment in our common shares.



 
  Per Share   Total  

Public offering price

  $     $    

Underwriting discount

  $     $    

Proceeds, before expenses, to us

  $     $    

        We have granted the underwriters an option to purchase up to                additional common shares from us at the public offering price, less the underwriting discount, within 30 days after the date of this prospectus solely to cover overallotments, if any.

        Neither the Securities and Exchange Commission nor any state or other securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

        The common shares sold in this offering will be ready for delivery on or about                        , 2011.



BofA Merrill Lynch   Barclays Capital   Wells Fargo Securities



The date of this prospectus is                        , 2011.


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TABLE OF CONTENTS

 
  Page

Prospectus Summary

  1

Risk Factors

  16

Forward-Looking Statements

  49

Use of Proceeds

  50

Distribution Policy

  51

Capitalization

  54

Dilution

  55

Selected Financial and Operating Data

  56

Management's Discussion and Analysis of Financial Condition and Results of Operations

  59

Our Business and Properties

  87

Our Principal Agreements

  112

Management

  117

Principal Shareholders

  132

Certain Relationships and Related Party Transactions

  133

Investment Policies and Policies With Respect to Certain Activities

  134

Structure and Formation of Our Company

  138

Description of Shares

  141

Shares Eligible for Future Sale

  146

Material Provisions of Maryland Law and of Our Declaration of Trust and Bylaws

  148

Description of Our Operating Partnership and Our Partnership Agreement

  154

Material U.S. Federal Income Tax Considerations

  160

Underwriting (Conflicts of Interest)

  187

Experts

  194

Legal Matters

  194

Where You Can Find More Information

  194

Index to Financial Statements

  F-1

        You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is current as of the date such information is presented. Our business, financial condition, liquidity, funds from operations, or FFO, earnings before interest, taxes, depreciation and amortization, or EBITDA, results of operations and prospects may have changed since those dates.

        This prospectus contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International, Inc., Hilton Worldwide, InterContinental Hotels Group, Hyatt Hotels Corporation and Choice Hotels International, Inc., or their respective parents, subsidiaries or affiliates. None of the owners of these trademarks, their respective parents, subsidiaries or affiliates or any of their respective officers, directors, members, managers, shareholders, owners, agents or employees, which we collectively refer to as the Trademark Owner Parties, is an issuer or underwriter of the common shares being offered hereby, plays (or will play) any role in the offer or sale of our common shares, has endorsed the offer of common shares hereby, or has any responsibility for the creation or contents of this prospectus. In addition, none of the Trademark Owner Parties has or will have any liability or responsibility whatsoever arising out of or related to the offer or sale of the common shares being offered hereby, including any liability or responsibility for any financial statements, projections or other financial information or other information contained in this prospectus or otherwise disseminated in connection with the offer or sale

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of the common shares offered hereby. You must understand that, if you purchase our common shares, your sole recourse for any alleged or actual impropriety relating to the offer and sale of such common shares and/or our operation of our business will be against us (and/or, as may be applicable, the seller of such common shares) and in no event may you seek to impose liability arising from or related to such activity, directly or indirectly, upon any of the Trademark Owner Parties.

        We use market data and industry forecasts and projections throughout this prospectus, including data from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there can be no assurance that any of the forecasts or projections will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently investigated or verified this information.

        Except where the context suggests otherwise, we define certain terms in this prospectus as follows:

        We refer to the "RevPAR penetration index" of our initial hotels to measure each hotel's revenue per available room, or RevPAR, in relation to the RevPAR for that hotel's competitive set. We use the measure as an indicator of a hotel's market share. The portfolio-wide RevPAR penetration index presented in this prospectus is based on 138 of our initial hotels weighted by room count and excludes two of our initial hotels that were not open for the entire nine month period ended September 30, 2010. Furthermore, other than RevPAR, RevPAR penetration index, average daily rate, or ADR, and occupancy rates (except as otherwise noted), historical and pro forma financial data presented for our initial hotels in this prospectus also includes the New York LaGuardia Airport Marriott, which is expected to be transferred to a third party prior to the completion of this offering.

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PROSPECTUS SUMMARY

        This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before making a decision to invest in our common shares. You should read carefully the more detailed information set forth under the heading "Risk Factors" and the other information included in this prospectus, including our historical and pro forma financial statements and related notes. Unless indicated otherwise, the information in this prospectus assumes (1) the common shares to be sold in this offering are sold at $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, (2) the underwriters do not exercise their overallotment option to purchase up to an additional                                    common shares and (3) the completion of our formation transactions described in this prospectus.


Our Company

        We are a self-advised and self-administered Maryland real estate investment trust, which invests primarily in premium-branded, focused-service and compact full-service hotels. Upon completion of this offering and our formation transactions, we will own 140 hotels in 19 states and the District of Columbia comprising over 20,400 rooms. We will be one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our initial hotels are concentrated in urban and dense suburban markets that we believe exhibit multiple demand generators and high barriers to entry. We believe focused-service and compact full-service hotels with these characteristics generate high levels of RevPAR, strong operating margins and attractive returns.

        Our strategy is to invest primarily in premium-branded, focused-service and compact full-service hotels. Focused-service and compact full-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve RevPAR levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows. We also may invest in compact full-service hotels, which have operating characteristics that resemble those of focused-service hotels. International lodging brands that are consistent with our premium-branded investment strategy include, among others, Courtyard by MarriottTM, Residence Inn by MarriottTM, Hilton Garden InnTM, Homewood Suites by HiltonTM, Hyatt PlaceTM and Embassy SuitesTM.

        We believe that the current market environment presents attractive opportunities for us to acquire additional hotels with significant upside potential that are compatible with our investment strategy. We also believe that current lodging market fundamentals provide significant opportunities for RevPAR and EBITDA growth at our initial hotels. We believe that our senior management team's experience, extensive industry relationships and asset management expertise, coupled with our expected access to capital, will enable us to compete effectively for acquisition opportunities and help us generate strong internal growth.

        We were formed to succeed to the hotel investment and ownership platform of RLJ Development and its two remaining lodging-focused private equity funds, Fund II and Fund III, which had total equity commitments of approximately $743.0 million and $1.2 billion, respectively. As part of our formation transactions, all of the existing investors in RLJ Development, Fund II and Fund III will receive common shares and will continue to be equity owners of our company. We believe that the ongoing equity ownership in us by investors in RLJ Development, Fund II and Fund III demonstrates their continued support of our senior management team, our investment and growth strategies and our operating model. We have in place an extensive investment and ownership platform, which is comprised of seasoned industry professionals and an efficient operating infrastructure that includes well-established systems and procedures.

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        Our senior management team, led by Robert L. Johnson, Executive Chairman of our board of trustees, and Thomas J. Baltimore, Jr., our Chief Executive Officer and President and a member of our board of trustees, has significant experience acquiring, financing, renovating, repositioning, redeveloping, asset managing and selling hotels. Prior to our formation, Messrs. Johnson and Baltimore founded RLJ Development, which sponsored and managed three lodging-focused private equity funds, including Fund II and Fund III. RLJ Development and the three funds collectively completed approximately $5.7 billion in hotel acquisitions and dispositions over the past decade. Prior to forming RLJ Development, Mr. Johnson served on the board of directors of Hilton Hotels Corporation (now known as Hilton Worldwide) from 1994 to 2006, and Mr. Baltimore held senior management positions at Hilton Hotels Corporation, Marriott Corporation and Host Marriott Services Corporation.


Our Initial Hotels

        Upon completion of this offering and our formation transactions, we will own a high-quality, geographically diverse portfolio of 140 hotels located in 19 states and the District of Columbia comprising over 20,400 rooms. No metropolitan statistical area, or MSA, and no individual hotel accounted for more than 13.5% or 8.1%, respectively, of our total pro forma revenue for the nine months ended September 30, 2010.

        Our initial hotels operate under strong, premium brands, with approximately 93% of our initial hotels operating under existing relationships with either Marriott International, Inc. or its affiliates, or Marriott, subsidiaries of Hilton Worldwide, or Hilton, or Hyatt Hotels Corporation or its affiliates, or Hyatt. The following table sets forth the brand affiliations of our initial hotels:

Brand Affiliations
  Number of
Hotels
  Percentage
of Total
Hotels
  Number of
Rooms
  Percentage
of Total
Rooms
 

Marriott

                         

Courtyard by Marriott

    32     22.9 %   4,223     20.6 %

Fairfield Inn & Suites by Marriott

    14     10.0 %   1,433     7.0 %

Marriott

    6     4.3 %   1,834     9.0 %

Renaissance

    3     2.1 %   782     3.8 %

Residence Inn by Marriott

    33     23.6 %   3,607     17.6 %

SpringHill Suites by Marriott

    11     7.9 %   1,354     6.6 %
                   
 

Subtotal

    99     70.7 %   13,233     64.6 %

Hilton

                         

Doubletree

    2     1.4 %   911     4.4 %

Embassy Suites

    4     2.9 %   950     4.6 %

Hampton Inn/Hampton Inn & Suites(1)

    9     6.4 %   1,115     5.4 %

Hilton

    2     1.4 %   462     2.3 %

Hilton Garden Inn

    6     4.3 %   1,174     5.7 %

Homewood Suites

    2     1.4 %   301     1.5 %
                   
 

Subtotal

    25     17.9 %   4,913     24.0 %

Hyatt

                         

Hyatt Summerfield Suites

    6     4.3 %   828     4.0 %
                   
 

Subtotal

    6     4.3 %   828     4.0 %

Other Brand Affiliation/Independent(2)

   
10
   
7.1

%
 
1,514
   
7.4

%
                   
 

Total

    140     100.0 %   20,488     100.0 %
                   

(1)
Total number of hotels includes the Hampton Inn Houston-Near The Galleria, which is under contract to be purchased by us.

(2)
Following the completion of this offering, we expect to brand or re-brand 5 of these 10 hotels into brands affiliated with Hilton or InterContinental.

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        For the nine month period ended September 30, 2010, the average occupancy rate for our initial hotels was 70.6%, and the ADR and RevPAR of our initial hotels was $117.34 and $82.82, respectively.


Competitive Strengths

        We believe we distinguish ourselves from other hotel owners through the following competitive strengths:

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Our Investment and Growth Strategies

        Our objective is to generate strong returns for our shareholders by investing primarily in premium-branded, focused-service hotels and compact full-service hotels at prices where we believe we can generate attractive returns on investment and generate long-term value appreciation through aggressive asset management. We intend to pursue this objective through the following investment and growth strategies:

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The U.S. Lodging Industry and Market Opportunity

        We believe that the current market environment presents an opportunity for us to acquire hotels at attractive prices with significant upside potential, as well as an opportunity for us to realize RevPAR and EBITDA growth at our initial hotels. We also believe that our senior management team's extensive network of relationships within the U.S. lodging industry will continue to provide us with access to an ongoing pipeline of attractive acquisition opportunities, many of which may not be available to our competitors.

        Operating performance of the U.S. lodging industry declined significantly from the peak in 2007 to 2009, as evidenced by a RevPAR decline of 18.3% during that period (as reported by Smith Travel Research), due to challenging economic conditions created by declining U.S. gross domestic product, or GDP, high levels of unemployment, a significant decline in home prices and a reduction in the availability of credit. While the U.S. lodging industry operating performance has started to improve from trough levels, performance remains significantly below the peak levels achieved in 2007. Hotel owners have been adversely impacted by a rapid decline in the availability of debt financing and the need to fund capital expenditures. We believe the combination of a decline in both hotel operating performance and the availability of debt financing has led to an increase in distressed hotel owners. We also believe these factors could create a number of opportunities for us to acquire high quality hotels at attractive prices and that our strong platform, experience, industry relationships, size and expected access to capital will provide us with advantages relative to many competing buyers. In addition, we believe that acquisition opportunities for focused-service hotels could be particularly attractive due to the combination of a large number of existing hotels in this category and the limited number of large, well-capitalized public REITs focused primarily on investing in focused-service hotels. In fact, according to Smith Travel Research, as of December 2010, there are an estimated four times as many focused-service hotels as full-service hotels within our targeted brand families operating in the United States.

        We believe that the operating performance of our initial hotels and of additional hotels that we may acquire will benefit significantly from the combination of an economic recovery and the slow expansion of lodging supply. We also believe that new hotel supply will likely remain low for several years due to the limited availability of hotel construction financing. The International Monetary Fund estimates that U.S. GDP will grow 2.3% in 2011, and we believe that this economic growth will lead to increased lodging demand. Furthermore, a number of lodging industry research analysts and forecasters project strong RevPAR growth over the next several years. For example, in the U.S. lodging industry as a whole, Colliers PKF Hospitality Research forecasts RevPAR growth of 6.2% in 2011, 10.4% in 2012, 10.0% in 2013 and 4.7% in 2014.

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Risk Factors

        You should carefully consider the matters discussed under the heading "Risk Factors" beginning on page 16 of this prospectus prior to deciding whether to invest in our common shares. Some of these risks include:


Our Financing Strategy

        We expect to maintain a prudent capital structure. Over time, we intend to finance our long-term growth with equity issuances and debt financing having staggered maturities. Our debt will include mortgage debt secured by our hotels and unsecured debt. Upon completion of this offering and our formation transactions, we will have a mix of fixed and floating rate debt, though initially the majority of our debt will either bear interest at fixed rates or effectively bear interest at fixed rates due to interest rate hedges on the debt. Concurrently with the completion of this offering and our formation transactions, we anticipate entering into a revolving credit facility with affiliates of certain of the underwriters to fund future acquisitions, as well as for hotel redevelopments, renovations, expansions and working capital requirements.

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Our Structure and Formation

        We were formed as a Maryland real estate investment trust in January 2011. We will conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT, in which our hotels are indirectly owned by our operating partnership, RLJ Lodging Trust, L.P., through limited partnerships, limited liability companies or other subsidiaries. We are the sole general partner of our operating partnership and, upon completion of this offering and our formation transactions, will own 100% of the limited partnership interests, or OP units, in our operating partnership. In the future, we may issue OP units from time to time in connection with acquisitions of hotels or for financing, compensation or other reasons.

        In order for the income from our hotel operations to constitute "rents from real property" for purposes of the gross income tests required for REIT qualification, we cannot directly or indirectly operate any of our hotels. Accordingly, we lease each of our initial hotels, and intend to lease any hotels we acquire in the future, to subsidiaries of our TRSs, or TRS lessees, which are wholly-owned by us, and our TRS lessees have engaged, or will engage, third-party hotel management companies to manage our initial hotels, and any hotels we acquire in the future, on market terms. Our TRS lessees pay rent to us that we intend to treat as "rents from real property," provided that the third-party hotel management companies engaged by our TRS lessees to manage our hotels are deemed to be "eligible independent contractors" and certain other requirements are met. Our TRSs are subject to U.S. federal, state and local income taxes applicable to corporations. See "Our Principal Agreements—Hotel Management Agreements."

        Prior to or concurrently with the completion of this offering, we will engage in certain formation transactions which are designed to: consolidate our management platform into our operating partnership; consolidate the ownership of our initial hotels into our operating partnership; facilitate this offering; enable us to raise necessary capital to repay existing indebtedness related to certain of our initial hotels; enable us to qualify as a REIT for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2011; and preserve the tax position of certain investors in our predecessor and its related entities that will receive common shares in connection with our formation transactions, whom we refer to as our continuing investors.

        The significant elements of our formation transactions include:

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        The following chart depicts our anticipated structure and ownership following (1) the completion of our formation transactions, and (2) the completion of this offering, assuming no exercise by the underwriters of their overallotment option:

CHART


(1)
Includes common shares to be issued to members of our senior management team in connection with our formation transactions as well as restricted common shares to be granted to our trustees, executive officers and other employees concurrently with the completion of this offering pursuant to our equity incentive plan.

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        In connection with this offering and our formation transactions, each of our executive officers and trustees will receive material benefits, including the following (amounts below are based on the midpoint of the price range set forth on the cover page of this prospectus):

        We intend to enter into an employment agreement with each of our executive officers that will be effective upon completion of this offering. These employment agreements will provide for base salary, bonus and other benefits, including accelerated vesting of equity awards upon a change in our control or termination of the executive's employment under certain circumstances. See "Management—Executive Compensation—Employment Agreements."

        We intend to enter into indemnification agreements with our trustees and executive officers that will be effective upon completion of this offering. These indemnification agreements will provide indemnification to these persons by us to the maximum extent permitted by Maryland law and certain procedures for indemnification, including advancement by us of certain expenses relating to claims brought against these persons under certain circumstances. See "Management—Limitation of Liability and Indemnification."

        We expect to enter into a registration rights agreement with the various entities and individuals receiving our common shares in connection with our formation transactions. See "Shares Eligible for Future Sale—Registration Rights Agreement."

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Distribution Policy

        To satisfy the requirements to qualify as a REIT, and to avoid paying tax on our income, we intend to make regular quarterly distributions of all, or substantially all, of our REIT taxable income (including net capital gains) to our shareholders. We intend to make a pro rata distribution with respect to the period commencing on completion of this offering and ending on                        , 2011, based on a distribution of $            per common share for a full quarter. On an annualized basis, this would be $            per common share, or an annualized distribution rate of approximately        % based on an assumed initial public offering price of $            per common share, which is the midpoint of the price range set forth on the cover page of this prospectus. We do not intend to reduce our initial distribution rate if the underwriters' overallotment option is exercised; however, this could require us to borrow funds to make the distributions or to make the distributions from net offering proceeds. We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless our actual results of operations, FFO, EBITDA, liquidity, cash flows, financial condition or prospects, economic conditions or other factors differ materially from the assumptions used in projecting our initial distribution rate.

        Our future distributions will be at the sole discretion of our board of trustees, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected financial condition, liquidity, EBITDA, FFO and results of operations, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law and such other factors as our board of trustees deems relevant. To the extent that our cash available for distribution is less than 90% of our REIT taxable income, we may consider various means to cover any such shortfall, including borrowing under our anticipated revolving credit facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from this offering or future offerings of equity, equity-related or debt securities or declaring taxable share dividends.


Our Tax Status

        We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2011. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended, or the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our common shares. We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

        So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our REIT taxable income that we distribute currently to our shareholders. If we fail to qualify for taxation as a REIT in any taxable year and the statutory relief provisions of the Code do not apply, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Distributions to shareholders in any year in which we are not a REIT would not be deductible by us, nor would they be required to be made. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property, and certain of our TRSs will be subject to U.S. federal, state and local income taxes.

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Restrictions on Ownership of our Common Shares

        The Code imposes limitations on the concentration of ownership of our shares. To assist us in qualifying as a REIT, our declaration of trust generally prohibits any person or entity (other than a person or entity who has been granted an exception) from directly or indirectly, beneficially or constructively, owning more than 9.8% of the aggregate of our outstanding common shares, by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding preferred shares of beneficial interest, or preferred shares, of any class or series, by value or by number of shares, whichever is more restrictive. Our declaration of trust also prohibits any person or entity from (1) beneficially owning shares of beneficial interest to the extent that such beneficial ownership would result in our being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of the taxable year), (2) transferring our shares of beneficial interest to the extent that such transfer would result in our shares of beneficial interest being beneficially owned by less than 100 persons (determined under the principles of Section 856(a)(5) of the Code), (3) beneficially or constructively owning our shares of beneficial interest to the extent such beneficial or constructive ownership would cause any of our income that would qualify as "rents from real property" for purposes of Section 856(d) of the Code to fail to qualify as such, including as a result of any hotel management company failing to qualify as an "eligible independent contractor" or (4) beneficially or constructively owning or transferring our shares of beneficial interest if such ownership or transfer would otherwise cause us to fail to qualify as a REIT under the Code.

        Our declaration of trust, however, does permit waivers of the foregoing ownership restrictions that may be granted to shareholders if our board of trustees determines such waivers will not jeopardize our tax status as a REIT. We currently expect that our board of trustees will grant waivers of the ownership limit with respect to two shareholders who are expected to receive common shares in connection with our formation transactions.


Our Principal Office

        Our principal executive offices are located at 3 Bethesda Metro Center, Suite 1000, Bethesda, MD 20814. Our telephone number is (301) 280-7777. We have reserved the website located at www.                                    . The information that will be found on or accessible through our website is not incorporated into, and does not form a part of, this prospectus or any other report or document that we file with or furnish to the Securities and Exchange Commission, or the SEC. We have included our website address as an inactive textual reference and do not intend it to be an active link to our website.

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This Offering

Issuer

  RLJ Lodging Trust, a Maryland real estate investment trust

Common shares offered by us

 

             common shares, plus up to an additional            common shares that we may issue and sell upon the exercise of the underwriters' overallotment option.

Common shares to be outstanding after this offering

 

             shares(1)

Use of proceeds

 

We intend to use the net proceeds of this offering as follows:

 

•       approximately $             million will be used to repay approximately $             million of secured indebtedness and approximately $             million in associated prepayment penalties; and

 

•       any remaining net proceeds will be used for general business and working capital purposes.

Risk factors

 

Investing in our common shares involves risks. You should carefully read and consider the information set forth under "Risk Factors" and all other information in this prospectus before making a decision to invest in our common shares.

Proposed NYSE symbol

 

We intend to apply to have our common shares listed on the NYSE under the symbol "RLJ."

Conflicts of interest

 

An affiliate of Wells Fargo Securities, LLC, an underwriter in this offering, is a lender under two outstanding loans, each of which will be repaid with a portion of the net proceeds of this offering. As such, this affiliate will receive a portion of the net proceeds of this offering that are used to repay such indebtedness. Further, an affiliate of Wells Fargo Securities, LLC is a minority investor in each of Fund II and Fund III, and it will receive an aggregate of                common shares in connection with our formation transactions. See "Underwriting (Conflicts of Interest)—Conflicts of Interest."


(1)
Includes (a)                         common shares to be issued in this offering, (b)                          common shares to be issued in connection with our formation transactions and (c)                         restricted common shares to be granted to our trustees, executive officers and other employees concurrently with the completion of this offering pursuant to our equity incentive plan. Excludes (i)                         common shares issuable upon exercise of the underwriters' overallotment option and (ii)                          common shares available for future issuance under our equity incentive plan.

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Summary Historical and Pro Forma Combined Financial and Operating Data

        You should read the following summary historical and pro forma combined financial and operating data, together with "Selected Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical and pro forma combined consolidated financial statements and related notes included elsewhere in this prospectus.

        We present herein certain combined consolidated historical financial data for our predecessor, which is not a legal entity, but rather a combination of the real estate hospitality assets, liabilities and operations of Fund II and Fund III and the assets, liabilities and operations of RLJ Development. The historical combined consolidated financial data for our predecessor is not necessarily indicative of our results of operations, cash flows or financial position following the completion of this offering and our formation transactions.

        We have not presented our historical financial information because we have not had any corporate activity since our formation other than the issuance of common shares in connection with our initial capitalization and activity in connection with this offering and our formation transactions and because we believe that a discussion of the results would not be meaningful.

        The historical combined consolidated balance sheet information as of December 31, 2009 and 2008 of our predecessor and the combined consolidated statements of operations information for each of the years ended December 31, 2009, 2008 and 2007 of our predecessor have been derived from the historical audited combined consolidated financial statements included elsewhere in this prospectus. The historical combined consolidated balance sheet information as of September 30, 2010 of our predecessor and the combined consolidated statements of operations information for the nine months ended September 30, 2010 and 2009 of our predecessor have been derived from the historical unaudited combined consolidated financial statements included elsewhere in this prospectus and include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the historical financial statements for such periods. Results for the nine months ended September 30, 2010 are not necessarily indicative of our actual results for the year ending December 31, 2010.

        Our summary unaudited condensed pro forma combined consolidated financial and operating data for the year ended December 31, 2009 and as of and for the nine months ended September 30, 2010 assume (1) the common shares to be sold in this offering are sold at the midpoint of the price range set forth on the cover page of this prospectus, and (2) the completion of our formation transactions as of January 1, 2009 for the operating data and as of September 30, 2010 for the balance sheet data. Our pro forma financial information is not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.

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  Nine Months Ended
September 30,
  Year Ended December 31,  
 
  Pro Forma
Combined
Consolidated
  Historical
Combined
Consolidated
  Pro Forma
Combined
Consolidated
  Historical Combined Consolidated  
 
  2010   2010   2009   2009   2008   2007  
 
  (Unaudited)
  (Unaudited)
  (Unaudited)
   
   
   
 
 
  (In thousands, except share, per share and property data)
 

Statement of Operations Data

                                     
 

Room revenue

  $ 471,101   $ 341,907   $ 578,867   $ 408,667   $ 463,015   $ 395,939  
 

Other hotel revenue

    78,371     56,324     103,870     73,821     88,804     79,558  
                           
 

Total revenue

    549,472     398,231     682,737     482,488     551,819     475,497  
                           

Expenses:

                                     
 

Room expense

    108,680     75,108     133,590     90,663     97,407     84,414  
 

Other hotel expense

    232,360     168,323     297,652     210,810     235,391     202,788  
                           
 

Total hotel operating expense

    341,040     243,431     431,242     301,473     332,798     287,202  
                           
 

Real estate and personal property tax, ground rent and insurance

    39,669     29,046     49,221     35,349     33,513     30,073  
 

Depreciation and amortization

    90,748     73,335     120,586     96,154     84,390     59,651  
 

Impairment loss

            98,372     98,372     21,472      
 

General and administrative

    14,804     14,804     18,533     18,533     19,388     10,273  
 

Transaction, pursuit and organization costs

    1,537     7,438     8,665     8,665     2,100     500  
                           
   

Total operating expenses

    487,798     368,054     726,619     558,546     493,661     387,699  
                           
 

Operating income (loss)

    61,674     30,177     (43,882 )   (76,058 )   58,158     87,798  
 

Interest and other income

    3,308     3,303     2,653     1,579     2,357     3,016  
 

Interest expense

    (59,784 )   (67,014 )   (81,640 )   (92,175 )   (92,892 )   (77,440 )
                           
 

Income (loss) before provision for income tax (expense) benefit

    5,198     (33,534 )   (122,869 )   (166,654 )   (32,377 )   13,374  
 

Income tax (expense) benefit

    (898 )   (898 )   (1,794 )   (1,801 )   945     (1,317 )
                           
 

Income (loss) from continuing operations

    4,300     (34,432 )   (124,663 )   (168,455 )   (31,432 )   12,057  
 

Less: Net loss attributable to the noncontrolling interest

    (130 )       (122 )            
 

Distributions to preferred shareholders

        (48 )       (62 )   (61 )   (31 )
                           
 

Net income (loss) available to owners

  $ 4,430   $ (34,480 ) $ (124,541 ) $ (168,517 ) $ (31,493 ) $ 12,026  
                           

Balance Sheet Data (at period end):

                                     
 

Investment in hotels, net

  $ 2,849,687   $ 2,123,816         $ 1,877,583   $ 1,905,653   $ 1,801,189  
 

Total assets

    3,164,231     2,422,897           2,202,865     2,213,108     2,032,470  
 

Total debt

    1,327,065     1,613,638           1,598,991     1,448,872     1,340,574  
 

Total liabilities

    1,409,419     1,694,472           1,717,118     1,592,376     1,470,251  
 

Total owners' equity

    1,754,812     728,425           485,747     620,732     562,219  
 

Total liabilities and owners' equity

    3,164,231     2,422,897           2,202,865     2,213,108     2,032,470  

Per Share Data:

                                     
 

Pro forma basic earnings per share

                                     
 

Pro forma diluted earnings per share

                                     
 

Pro forma weighted average shares outstanding—basic

                                     
 

Pro forma weighted average shares outstanding—diluted

                                     

Other Data:

                                     
 

Number of properties at period end(1)

    141     122     141     117     115     106  
 

Pro forma Adjusted EBITDA

  $ 154,089         $ 183,863                    
 

Pro forma Adjusted FFO

    96,715           103,082                    
 

Cash flows from:

                                     
   

Operating activities

        $ 47,000         $ 28,852   $ 76,978   $ 93,999  
   

Investing activities

          (250,010 )         (198,025 )   (130,400 )   (204,795 )
   

Financing activities

          211,901           164,374     125,706     131,403  

(1)
Includes our initial hotels and the New York LaGuardia Airport Marriott, which is expected to be transferred to a third party prior to the completion of this offering.

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  Pro Forma  
 
  Nine Months Ended
September 30, 2010
  Year Ended
December 31, 2009
 
 
  (In thousands)
 

Reconciliation of FFO(1), Adjusted FFO(1), EBITDA(2) and Adjusted EBITDA(2) to Net Income

             
 

Net income (loss) available to owners

  $ 4,430   $ (124,541 )
 

Add (deduct):

             
   

Depreciation and amortization

    90,748     120,586  
           
 

FFO

    95,178     (3,955 )
 

Add (deduct):

             
   

Impairment loss

        98,372  
   

Transaction and pursuit costs

    1,537     8,665  
           
 

Adjusted FFO

  $ 96,715   $ 103,082  
           
 

Net income (loss) available to owners

 
$

4,430
 
$

(124,541

)
 

Add (deduct):

             
   

Interest expense, net

    59,784     81,640  
   

Interest and other income

    (3,308 )   (2,653 )
   

Income tax expense

    898     1,794  
   

Depreciation and amortization

    90,748     120,586  
           
 

EBITDA

    152,552     76,826  
 

Add (deduct):

             
   

Impairment loss

        98,372  
   

Transaction and pursuit costs

    1,537     8,665  
           
 

Adjusted EBITDA

  $ 154,089   $ 183,863  
           

(1)
We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income or loss (calculated in accordance with accounting principles generally accepted in the United States, or GAAP), excluding gains or losses from sales of real estate, items classified by GAAP as extraordinary and the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures.

We further adjusted FFO for certain additional items that are not in NAREIT's definition of FFO, such as impairment losses and hotel transaction and pursuit costs. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs.

(2)
EBITDA is defined as net income or loss excluding: (i) interest expense; (ii) provision for income taxes, including income taxes applicable to sale of assets; and (iii) depreciation and amortization (including amortization of non-cash share-based compensation). We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and certain non-cash items (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.

We further adjust EBITDA for certain additional recurring and non-recurring items such as impairment losses and hotel transaction and pursuit costs. We believe that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

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RISK FACTORS

        An investment in our common shares involves risks. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our business and an investment in our common shares, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus were to occur, our business, prospects, financial condition, liquidity, EBITDA, FFO and results of operation and our ability to service our debt and make distributions to our shareholders could be materially and adversely affected, the market price per common share could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements."


Risks Related to Our Business and Properties

We will be significantly influenced by the economies and other conditions in the specific markets in which we operate, particularly in the metropolitan areas where we have high concentrations of hotels.

        Our initial hotels located in the New York, New York, Chicago, Illinois, Austin, Texas, Denver-Boulder, Colorado, Louisville, Kentucky, and the Baltimore, Maryland-Washington, D.C. metropolitan areas accounted for approximately 13.5%, 13.4%, 10.6%, 9.8%, 6.9%, and 5.6%, respectively, of our total pro forma revenue for the nine months ended September 30, 2010. As a result, we are particularly susceptible to adverse market conditions in these areas, including industry downturns, relocation of businesses and the oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.

We are dependent on the performance of the third-party hotel management companies that manage the operations of each of our hotels and could be materially and adversely affected if such third-party managers do not manage our hotels in our best interests.

        Since federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, we do not operate or manage our hotels. Instead, we lease all of our hotels to subsidiaries of our TRSs, and our TRS lessees retain third-party managers to operate our hotels pursuant to management agreements. We will have entered into 140 hotel management agreements for our initial hotels, 104 of which will be with White Lodging Services, or WLS. We could be materially and adversely affected if any of our third-party managers fail to provide quality services and amenities, fail to maintain a quality brand name or otherwise fail to manage our hotels in our best interest. In addition, from time to time, disputes may arise between us and our third-party managers regarding their performance or compliance with the terms of the hotel management agreements, which in turn could adversely affect our results of operations. We generally will attempt to resolve any such disputes through discussions and negotiations; however, if we are unable to reach satisfactory results through discussions and negotiations, we may choose to terminate our management agreement, litigate the dispute or submit the matter to third-party dispute resolution, the outcome of which may be unfavorable to us.

        Under the terms of the hotel management agreements, our ability to participate in operating decisions regarding our hotels is limited to certain matters, including approval of the annual operating budget, and we do not have the authority to require any hotel to be operated in a particular manner (for instance, setting room rates). While our TRS lessees will closely monitor the performance of our third-party managers, our general recourse under the hotel management agreements is limited to termination upon sixty days' notice if we believe our third-party managers are not performing adequately. For example, we have a right to terminate a management agreement with WLS, our largest

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provider of management services, if WLS fails to achieve certain hotel performance criteria measured over any two consecutive fiscal years, as outlined in each WLS management agreement. However, even if WLS fails to perform under the terms of a management agreement, it has the option (exercisable a maximum of three times per hotel) to avoid a performance termination by paying a performance deficit fee as specified in the management agreement.

        In the event that we terminate any of our management agreements, we can provide no assurances that we could find a replacement manager or that our franchisors will consent to a replacement manager in a timely manner, or at all, or that any replacement manager will be successful in operating our initial hotels. Furthermore, if WLS, as our largest provider of management services, is financially unable or unwilling to perform its obligations pursuant to our management agreements, our ability to find a replacement manager or managers for our WLS-managed hotels could be challenging and time consuming, depending on the number of WLS-managed hotels affected, and could cause us to incur significant costs to obtain new management agreements for the affected hotels. Accordingly, if we lose a significant amount of our WLS management agreements, we could be materially and adversely affected. In addition, many of our existing franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. If any of the foregoing were to occur, it could have a material adverse effect on us.

Restrictive covenants in certain of our hotel management and franchise agreements contain provisions limiting or restricting the sale or financing of our hotels, which could have a material adverse effect on us.

        Hotel management and franchise agreements typically contain restrictive covenants that limit or restrict our ability to sell or refinance a hotel without the consent of the hotel management company or franchisor. Many of our existing franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we may not agree to sell, lease or otherwise transfer particular hotels unless the transferee is not a competitor of the hotel management company or franchisor and the transferee assumes the related hotel management and franchise agreements. For example, substantially all of our management agreements with WLS provide that any sale of a hotel to a purchaser who does not meet all of the requirements under the applicable franchise agreement associated with such hotel must be first approved by WLS. If the hotel management company or franchisor does not consent to the sale or financing of our hotels, we may be prohibited from taking actions that would otherwise be in our and our shareholders' best interests.

Substantially all of our initial hotels operate under either Marriott or Hilton brands; therefore, we are subject to risks associated with concentrating our portfolio in just two brand families.

        Upon completion of this offering and our formation transactions, 124 of the 140 of our initial hotels will utilize brands owned by Marriott or Hilton. As a result, our success is dependent in part on the continued success of Marriott and Hilton and their respective brands. We believe that building brand value is critical to increase demand and build customer loyalty. Consequently, if market recognition or the positive perception of Marriott and/or Hilton is reduced or compromised, the goodwill associated with the Marriott- and Hilton-branded hotels in our portfolio may be adversely affected. Furthermore, if our relationship with Marriott or Hilton were to deteriorate or terminate as a result of disputes regarding the management of our hotels or for other reasons, Marriott and/or Hilton could, under certain circumstances, terminate our current franchise licenses with them or decline to provide franchise licenses for hotels that we may acquire in the future. If any of the foregoing were to occur, it could have a material adverse effect on us.

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Our long-term growth depends in part on successfully identifying and consummating acquisitions of additional hotels and the failure to make such acquisitions could materially impede our growth.

        We can provide no assurances that we will be successful in identifying attractive hotels or that, once identified, we will be successful in consummating an acquisition. We face significant competition for attractive investment opportunities from other well-capitalized investors, some of which have greater financial resources and a greater access to debt and equity capital to acquire hotels than we do. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. As a result of such competition, we may be unable to acquire certain hotels that we deem attractive or the purchase price may be significantly elevated or other terms may be substantially more onerous. In addition, we expect to finance future acquisitions through a combination of borrowings under a revolving credit facility that we anticipate will be in place following the completion of this offering and our formation transactions, the use of retained cash flows, and offerings of equity and debt securities, which may not be available on advantageous terms, or at all. Any delay or failure on our part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede our growth.

The departure of any of our key personnel who have significant experience and relationships in the lodging industry, including Robert L. Johnson, Thomas J. Baltimore, Jr. and Ross H. Bierkan, could materially and adversely affect us.

        We depend on the experience and relationships of our senior management team, especially Robert L. Johnson, Executive Chairman of our board of trustees, Thomas J. Baltimore, Jr., our Chief Executive Officer, President and member of our board of trustees, and Ross H. Bierkan, our Chief Investment Officer, to manage our day-to-day operations and strategic business direction. Messrs. Johnson, Baltimore and Bierkan have 17, 22 and 25 years of experience in the lodging industry, respectively, during which time they have established an extensive network of lodging industry contacts and relationships, including relationships with global and national hotel brands, hotel owners, financiers, operators, commercial real estate brokers, developers and management companies. We can provide no assurances that any of our key personnel will continue their employment with us, even though all of the members of our senior management team are expected to enter into employment agreements with us upon completion of this offering. The loss of services of Messrs. Johnson, Baltimore or Bierkan, or of the services of other members of our senior management team, or any difficulty attracting and retaining other talented and experienced personnel, could adversely affect our ability to source potential investment opportunities, our relationship with global and national hotel brands and other industry participants and the execution of our business strategy. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our common shares.

Our business strategy depends on achieving revenue and net income growth from anticipated increases in demand for hotel rooms; accordingly, any delay or a weaker than anticipated economic recovery could materially and adversely affect us and our growth prospects.

        Our initial hotels have experienced declining operating performance across various U.S. markets during the most recent economic recession. Our business strategy depends on achieving revenue and net income growth from anticipated improvement in demand for hotel rooms as part of a future economic recovery. As a result, any delay or a weaker than anticipated economic recovery could materially and adversely affect us and our growth prospects. Furthermore, even if the economy recovers, we cannot provide any assurances that demand for hotel rooms will increase from current levels. If demand does not increase in the near future, or if demand weakens further, our future results of operations and our growth prospects could also be materially and adversely affected.

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The ongoing need for capital expenditures at our hotels could have a material adverse effect on us.

        Our hotels will have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also will require periodic capital improvements as a condition of maintaining the franchise licenses. In addition, our lenders will likely require that we set aside annual amounts for capital improvements to our hotels. The costs of all these capital improvements could materially and adversely affect us.

Any difficulties in obtaining capital necessary to make required periodic capital expenditures and renovation of our hotels could materially and adversely affect our financial condition and results of operations.

        Our hotels will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions or redevelopment of additional hotels will require significant capital expenditures. We may not be able to fund capital improvements on our initial hotels or acquisitions of new hotels solely from cash provided from our operating activities because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings is very limited. Consequently, we expect to rely upon the availability of debt or equity capital to fund capital improvements and acquisitions. In addition, our organizational documents do not limit the amount of debt that we can incur. If we are unable to obtain the capital necessary to make required periodic capital expenditures and renovate our hotels on favorable terms, or at all, our financial condition, liquidity and results of operations could be materially and adversely affected.

Adverse global market and economic conditions and dislocations in the markets could cause us to recognize impairment charges, which could materially and adversely affect our business, financial condition and results of operations.

        We continually monitor events and changes in circumstances, including those resulting from the recent economic downturn, that could indicate that the carrying value of the real estate and related intangible assets in which we have an ownership interest may not be recoverable. When circumstances indicate that the carrying value of real estate and related intangible assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we adjust the real estate and related intangible assets to the fair value and recognize an impairment loss. Because our predecessor acquired many of our initial hotels in the last five years, when prices for hotels in many markets were at or near their peaks, we may be particularly susceptible to future non-cash impairment charges as compared to companies that have carrying values well below current market values, which could materially and adversely affect our business, financial condition and results of operations. During 2008 and 2009, our predecessor recognized impairment charges on certain of our hotels of approximately $21 million and $98 million, respectively, in the aggregate.

        Projections of expected future cash flows require management to make assumptions to estimate future occupancy, hotel operating expenses, and the number of years the hotel is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the hotel's fair value and, therefore, could result in the misstatement of the carrying value of our real estate and related intangible assets on our balance sheet and our results of operations. Ongoing adverse market and economic conditions and market volatility will likely continue to make it difficult to value the hotels owned by us, as well as the value of our interests in any unconsolidated joint ventures and/or our goodwill and other intangible assets. As a result of current adverse market and economic conditions, there may be significant

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uncertainty in the valuation, or in the stability of, the cash flows, discount rates and other factors related to such assets that could result in a substantial decrease in their value.

Competition from other hotels in the markets in which we operate could adversely affect occupancy levels and/or ADRs, which could have a material adverse effect on us.

        We face significant competition at our hotels from owners and operators of other hotels. These competitors may have an operating model that enables them to offer rooms at lower rates than we can, which, particularly in the current economic environment, could result in those competitors increasing their occupancy at our expense and adversely affecting our ADRs. Given the importance of occupancy and ADR at focused-service and compact full-service hotels, this competition could adversely affect our ability to attract prospective guests, which could materially and adversely affect our results of operations.

Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.

        Our business strategy contemplates the use of both non-recourse secured and unsecured debt to finance long-term growth. In addition, our organizational documents contain no limitations on the amount of debt that we may incur, and our board of trustees may change our financing policy at any time without shareholder notice or approval. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:

        If we violate covenants in future agreements relating to indebtedness that we may incur, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. In addition, future indebtedness agreements may require that we meet certain covenant tests in order to make distributions to our shareholders.

Disruptions in the financial markets could adversely affect our ability to obtain sufficient third-party financing for our capital needs, including expansion, acquisition and other activities, on favorable terms or at all, which could materially and adversely affect us.

        The U.S. stock and credit markets recently have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in

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some cases have resulted in the unavailability of financing, even for companies which otherwise are qualified to obtain financing. In addition, several banks and other institutions that historically have been reliable sources of financing have gone out of business, which has reduced significantly the number of lending institutions and the availability of credit. Continued volatility and uncertainty in the stock and credit markets may negatively impact our ability to access additional financing for our capital needs, including expansion, acquisition activities and other purposes, on favorable terms or at all, which may negatively affect our business. Additionally, due to this uncertainty, we may in the future be unable to refinance or extend our debt, or the terms of any refinancing may not be as favorable as the terms of our existing debt. If we are not successful in refinancing our debt when it becomes due, we may be forced to dispose of hotels on disadvantageous terms, which might adversely affect our ability to service other debt and to meet our other obligations. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of new equity capital or the incurrence of additional secured or unsecured debt, which could materially and adversely affect us.

Upon completion of this offering and our formation transactions, we expect to have approximately $1.3 billion of debt outstanding, which may materially and adversely affect our operating performance and put us at a competitive disadvantage.

        Required repayments of debt and related interest may materially and adversely affect our operating performance. Upon completion of this offering and our formation transactions, we expect to have approximately $1.3 billion of outstanding debt. Increases in interest rates on any variable rate debt would increase our interest expense, which could harm our cash flows and our ability to pay distributions to shareholders.

        Because we anticipate that our internally generated cash will be adequate to repay only a portion of our debt at maturity, we expect that we will be required to repay debt through debt refinancings and/or equity offerings. In particular, approximately $216.3 million of our outstanding debt matures in 2011 (assuming we do not exercise any available extension options). The amount of our outstanding debt may adversely affect our ability to refinance our debt.

        If we are unable to refinance our debt on acceptable terms, or at all, we may be forced to dispose of one or more of our hotels on disadvantageous terms, which may result in losses to us and may adversely affect cash available for distributions to our shareholders. In addition, if then prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, our interest expense would increase, which would adversely affect our future operating results and liquidity.

        Our substantial outstanding debt may harm our business, financial condition, liquidity, EBITDA, FFO and results of operations, including:

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The use of debt to finance future acquisitions could restrict operations, inhibit our ability to grow our business and revenues, and negatively affect our business and financial results.

        We intend to incur additional debt in connection with future hotel acquisitions. We may, in some instances, borrow under our anticipated revolving credit facility or borrow new funds to acquire hotels. In addition, we may incur mortgage debt by obtaining loans secured by a portfolio of some or all of the hotels that we own or acquire. If necessary or advisable, we also may borrow funds to make distributions to our shareholders in order to maintain our qualification as a REIT for U.S. federal income tax purposes. To the extent that we incur debt in the future and do not have sufficient funds to repay such debt at maturity, it may be necessary to refinance the debt through debt or equity financings, which may not be available on acceptable terms or at all and which could be dilutive to our shareholders. If we are unable to refinance our debt on acceptable terms or at all, we may be forced to dispose of hotels at inopportune times or on disadvantageous terms, which could result in losses. To the extent we cannot meet our future debt service obligations, we will risk losing to foreclosure some or all of our hotels that may be pledged to secure our obligations.

        For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code. In addition, we may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any of our hotels are foreclosed on due to a default, our ability to pay cash distributions to our shareholders will be limited.

Hedging against interest rate exposure may adversely affect us.

        Historically, Fund II and Fund III have used interest rate swaps to hedge against interest rate fluctuations. Subject to maintaining our qualification as a REIT, we intend to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things:

        As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, could have a material adverse effect on us.

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Our failure to comply with all covenants in our existing or future debt agreements could materially and adversely affect us.

        The mortgages on our initial hotels, and hotels that we may acquire in the future likely will, contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable hotel or to discontinue insurance coverage. In addition, our term loan contains negative covenants that restrict, among other things, our ability to incur additional indebtedness or, under certain circumstances, to make distributions to our shareholders. Any credit facility or secured loans that we enter into, including the anticipated revolving credit facility that we expect to enter into concurrently with the completion of this offering and our formation transactions, likely will contain customary financial covenants, restrictions, requirements and other limitations with which we must comply. Our continued ability to borrow under the anticipated revolving credit facility that we expect to enter into concurrently with the completion of this offering and any other credit facility that we may obtain will be subject to compliance with our financial and other covenants, including covenants relating to debt service coverage ratios and leverage ratios, and our ability to meet these covenants will be adversely affected if U.S. lodging fundamentals do not improve when and to the extent that we expect. In addition, our failure to comply with these covenants, as well as our inability to make required payments, could cause a default under the applicable debt agreement, which could result in the acceleration of the debt and require us to repay such debt with capital obtained from other sources, which may not be available to us or may be available only on unattractive terms. Furthermore, if we default on secured debt, lenders can take possession of the hotel or hotels securing such debt. In addition, debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default on its debt and to enforce remedies, including acceleration of the maturity of such debt upon the occurrence of a default under such other indebtedness. If we default on several of our debt agreements or any significant debt agreement, we could be materially and adversely affected.

Covenants applicable to future debt could restrict our ability to make distributions to our shareholders and, as a result, we may be unable to make distributions necessary to qualify as a REIT, which could materially and adversely affect us and the market price of our common shares.

        We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gain, each year to our shareholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified under the Code. If, as a result of covenants applicable to our future debt, we are restricted from making distributions to our shareholders, we may be unable to make distributions necessary for us to avoid U.S. federal corporate income and excise taxes and maintain our qualification as a REIT, which could materially and adversely affect us.

Costs associated with, or failure to maintain, franchisor operating standards may materially and adversely affect us.

        Under the terms of our franchise license agreements, we are required to meet specified operating standards and other terms and conditions. We expect that our franchisors will periodically inspect our hotels to ensure that we and the hotel management companies follow brand standards. Failure by us, or any hotel management company that we engage, to maintain these standards or other terms and conditions could result in a franchise license being canceled or the franchisor requiring us to undertake a costly property improvement program. If a franchise license is terminated due to our failure to make

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required improvements or to otherwise comply with its terms, we also may be liable to the franchisor for a termination payment, which will vary by franchisor and by hotel. Furthermore, under certain circumstances, a franchisor may require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. If the funds required to maintain franchisor operating standards are significant, or if a franchise license is terminated, we could be materially and adversely affected.

If we were to lose a franchise license at one or more of our hotels, the value of the affected hotels could decline significantly and we could incur significant costs to obtain new franchise licenses, which could have a material adverse effect on us.

        If we were to lose a franchise license, we would be required to re-brand the affected hotel(s). As a result, the underlying value of a particular hotel could decline significantly from the loss of associated name recognition, marketing support, participation in guest loyalty programs and the centralized reservation system provided by the franchisor. Furthermore, the loss of a franchise license at a particular hotel could harm our relationship with the franchisor, which could impede our ability to operate other hotels under the same brand, limit our ability to obtain new franchise licenses from the franchisor in the future on favorable terms, or at all, and cause us to incur significant costs to obtain a new franchise license for the particular hotel. Accordingly, if we lose one or more franchise licenses, we could be materially and adversely affected.

There can be no assurance that we will complete the acquisition of the Hampton Inn Houston-Near The Galleria, which we currently have under contract to acquire.

        The acquisition of the Hampton Inn Houston-Near The Galleria is incorporated into our pro forma combined consolidated financial statements and other pro forma information included herein. There can be no assurance that we will complete the acquisition of the Hampton Inn Houston-Near The Galleria on the terms of the applicable acquisition contract, or at all. The acquisition of the Hampton Inn Houston-Near The Galleria remains subject to us satisfactorily completing all due diligence activities and the satisfaction of all conditions precedent to the closing. There can be no assurance that our due diligence will be satisfactory or that the conditions to closing will be satisfied.

Applicable REIT laws may restrict certain business activities.

        As a REIT, we are subject to various restrictions on our income, assets and activities. Business activities that could be impacted by applicable REIT laws include, but are not limited to, activities such as developing alternative uses of real estate, including the development and/or sale of timeshare or condominium units. Due to these restrictions, we anticipate that we will conduct certain business activities, including those mentioned above, in one or more of our TRSs. Our TRSs are taxable as regular C corporations and are subject to federal, state, local, and, if applicable, foreign taxation on their taxable income. In addition, neither we, nor our TRSs can directly manage or operate hotels, making us entirely dependent on unrelated third-party operators/managers.

Federal income tax provisions applicable to REITs may restrict our business decisions regarding the potential sale of a hotel.

        The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a "prohibited transaction" that is subject to a 100% excise tax. Under existing law, whether property, including hotels, is held as inventory or primarily for sale to customers in the ordinary course of business is a question of fact that depends upon all of the facts and circumstances with respect to the particular transaction. We intend to hold our hotels for investment with a view to long-term appreciation, to engage in the business of acquiring

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and owning hotels and to make occasional sales of hotels consistent with our investment objectives. There can be no assurance, however, that the Internal Revenue Service, or the IRS, might not contend that one or more of these sales are subject to the 100% excise tax. Moreover, the potential application of this penalty tax could deter us from selling one or more hotels even though it otherwise would be in the best interests of us and our shareholders for us to do so. There is a statutory safe harbor available for a limited number of sales in a single taxable year of properties that have been owned by a REIT for at least two years, but that safe harbor likely would not apply to all sales transactions that we might otherwise consider. As a result, we may not be able to vary our portfolio promptly in response to economic or other conditions or on favorable terms, which may adversely affect us.

The RevPAR penetration index may not accurately reflect our initial hotels' respective market shares.

        We use the RevPAR penetration index, which measures a hotel's RevPAR in relation to the RevPAR for that hotel's competitive set, as an indicator of a hotel's market share. However, as a particular hotel's competitive set is selected by us and the manager of such hotel, no assurance can be given that another competitive set consisting of different hotels would not lead to a more accurate measure of such hotel's market share. As such, the RevPAR penetration index may not accurately reflect our initial hotels' respective market shares.

Joint venture investments that we make could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners' financial condition and liquidity and disputes between us and our joint venture partners.

        We own the Doubletree Metropolitan Hotel New York City through a joint venture with an affiliate of the hotel's property manager. In addition, we may enter into joint ventures in the future to acquire, develop, improve or dispose of hotels, thereby reducing the amount of capital required by us to make investments and diversifying our capital sources for growth. Such joint venture investments involve risks not otherwise present in a wholly-owned hotel or a redevelopment project, including the following:

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        Any of the above might subject a hotel to liabilities in excess of those contemplated and adversely affect the value of our current and future joint venture investments.

The past performance of Fund I is not necessarily indicative of our future results of operations.

        This prospectus includes data relating to the past performance of Fund I. Although Fund I was sponsored and managed by members of our senior management team, including Messrs. Johnson and Baltimore, Fund I's investment portfolio operated in a different economic environment than our initial hotels and, therefore, the past performance of Fund I is not necessarily indicative of our future results, and we can provide no assurances that we will be able to replicate or improve upon Fund I's performance.


Risks Related to the Lodging Industry

Our ability to make distributions to our shareholders may be adversely affected by various operating risks common to the lodging industry, including competition, over-building and dependence on business travel and tourism.

        We plan to own hotels that have different economic characteristics than many other real estate assets. A typical office property, for example, has long-term leases with third-party tenants, which provides a relatively stable long-term stream of revenue. Hotels, on the other hand, generate revenue from guests that typically stay at the hotel for only a few nights, which causes the room rate and occupancy levels at each of our hotels to change every day, and results in earnings that can be highly volatile.

        In addition, our hotels will be subject to various operating risks common to the lodging industry, many of which are beyond our control, including, among others, the following:

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The occurrence of any of the foregoing could materially and adversely affect us.

The seasonality of the lodging industry could have a material adverse effect on us.

        The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors in certain markets in which we operate. For example, our initial hotels in the Chicago, Illinois metropolitan area experience lower revenues and profits during the winter months of December through March while our initial hotels in Florida generally have higher revenues in the months of January through April. This seasonality can be expected to cause periodic fluctuations in a hotel's room revenues, occupancy levels, room rates and operating expenses. We can provide no assurances that our cash flows will be sufficient to offset any shortfalls that occur as a result of these fluctuations. As a result, we may have to enter into short-term borrowings in certain quarters in order to make distributions to our shareholders, and we can provide no assurances that such borrowings will be available on favorable terms, if at all. Consequently, volatility in our financial performance resulting from the seasonality of the lodging industry could have a material adverse effect on us.

The cyclical nature of the lodging industry may cause fluctuations in our operating performance, which could have a material adverse effect on us.

        The lodging industry historically has been highly cyclical in nature. Fluctuations in lodging demand and, therefore, operating performance, are caused largely by general economic and local market conditions, which subsequently affect levels of business and leisure travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry's performance, and overbuilding has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. We can provide no assurances regarding whether, or the extent to which, lodging demand will rebound or whether any such rebound will be sustained. An adverse change in lodging fundamentals could result in returns that are substantially below our expectations or result in losses, which could have a material adverse effect on us.

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Our acquisition, redevelopment, repositioning, renovation and re-branding activities are subject to various risks, any of which could, among other things, result in disruptions to our hotel operations, strain management resources and materially and adversely affect our business.

        We intend to acquire, redevelop, reposition, renovate and re-brand hotels, subject to the availability of attractive hotels or projects and our ability to undertake such activities on satisfactory terms. In deciding whether to undertake such activities, we will make certain assumptions regarding the expected future performance of the hotel or project. However, newly acquired, redeveloped, renovated, repositioned or re-branded hotels may fail to perform as expected and the costs necessary to bring such hotels up to franchise standards may exceed our expectations, which may result in the hotels' failure to achieve projected returns.

        In particular, to the extent that we engage in the activities described above, they could pose the following risks to our ongoing operations:

The occurrence of any of the foregoing events, among others, could materially and adversely affect our business.

Six of our initial hotels will be subject to ground leases; if we are found to be in breach of a ground lease or are unable to renew a ground lease, we could be materially and adversely affected.

        Six of our initial hotels are on land subject to ground leases. Accordingly, we only own a long-term leasehold or similar interest in those six hotels. If we are found to be in breach of a ground lease, we could lose the right to use the hotel. In addition, unless we can purchase a fee interest in the underlying land and improvements or extend the terms of these leases before their expiration, as to which no assurance can be given, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. Our ability to exercise any extension options relating to our ground leases is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options, and we can provide no assurances that we will be able to exercise any available options at such time. Furthermore, we can provide no assurances that we will be able to renew any ground lease upon its expiration. If we were to lose the right to use a hotel due to a breach or non-renewal of the ground lease, we would be unable to derive income from such hotel and would be required to purchase an interest in another hotel to attempt to replace that income, which could materially and adversely affect us.

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We will not recognize any increase in the value of the land or improvements subject to our ground leases and may only receive a portion of compensation paid in any eminent domain proceeding with respect to the hotel.

        Unless we purchase a fee interest in the land and improvements subject to our ground leases, we will not have any economic interest in the land or improvements at the expiration of our ground leases and therefore we will not share in any increase in value of the land or improvements beyond the term of a ground lease, notwithstanding our capital outlay to purchase our interest in the hotel or fund improvements thereon, and will lose our right to use the hotel. Furthermore, if the state or federal government seizes a hotel subject to a ground lease under its eminent domain power, we may only be entitled to a portion of any compensation awarded for the seizure.

The increasing use of Internet travel intermediaries by consumers may materially and adversely affect our profitability.

        Although a majority of rooms sold on the Internet are sold through websites maintained by the hotel franchisors and managers, including Marriott and Hilton, some of our hotel rooms will be booked through Internet travel intermediaries. Typically, these Internet travel intermediaries purchase rooms at a negotiated discount from participating hotels, which could result in lower room rates than the franchisor or manager otherwise could have obtained. As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us and any hotel management companies that we engage. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality, such as "three-star downtown hotel," at the expense of brand identification or quality of product or service. If consumers develop brand loyalties to Internet reservations systems rather than to the brands under which our hotels are franchised, the value of our hotels could deteriorate and our business could be materially and adversely affected. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be materially and adversely affected.

The need for business-related travel and, thus, demand for rooms in our hotels may be materially and adversely affected by the increased use of business-related technology.

        The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, demand for our hotel rooms may decrease and we could be materially and adversely affected.

Future terrorist attacks or changes in terror alert levels could materially and adversely affect us.

        Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries over the past several years, often disproportionately to the effect on the overall economy. The extent of the impact that actual or threatened terrorist attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be determined, but any such attacks or the threat of such attacks could have a material adverse effect on travel and hotel demand and our ability to insure our hotels, which could materially and adversely affect us.

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The outbreak of influenza or other widespread contagious disease could reduce travel and adversely affect hotel demand, which would have a material adverse effect on us.

        The widespread outbreak of an infectious or contagious disease in the U.S., such as the H1N1 virus, could reduce travel and adversely affect demand within the lodging industry. If demand at our hotels decreases significantly or for a prolonged period of time as a result of an outbreak of an infectious or contagious disease, our revenue would be adversely affected, which could have a material adverse effect on us.


Risks Related to Our Organization and Structure

Our management has limited experience operating a public company, which may impede their ability to successfully manage our business.

        Our management has limited experience operating a public company. Upon completion of this offering, we will be required to develop and implement control systems and procedures to assist us in qualifying and maintaining our qualification as a public REIT, satisfying our periodic and current reporting requirements under applicable SEC regulations and complying with NYSE listing standards. As a result, substantial work on our part will be required to implement and execute appropriate reporting and compliance processes and assess their design, remediate any deficiencies identified and test the operation of such processes. We have limited experience implementing and executing such processes in a public company, and this process is expected to be both costly and challenging. We cannot assure you that our management's past experience will be sufficient to develop and implement these systems and procedures and to operate our company successfully. Failure to effectively develop and implement such systems, policies and procedures could hinder our ability to operate as a public company and adversely affect our results of operations, cash flows and ability to make distributions to our shareholders.

The share ownership limits imposed by the Code for REITs and our declaration of trust may restrict share transfers and/or business combination opportunities, particularly if our management and board of trustees do not favor a combination proposal.

        In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following our first year. Our declaration of trust, with certain exceptions, authorizes our board of trustees to take the actions that are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of trustees, no person or entity (other than a person or entity who has been granted an exception) may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of our outstanding common shares, by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding preferred shares of any class or series, by value or by number of shares, whichever is more restrictive.

        Our board may, in its sole discretion, grant an exemption to the share ownership limits, subject to certain conditions and the receipt by our board of certain representations and undertakings. Our board of trustees currently expects to grant an exemption from our ownership limits to two shareholders who will receive common shares in our formation transactions. During the time that such waiver is effective, the excepted holders will be subject to an increased ownership limit. As a condition to granting such excepted holder limit, the excepted holders will be required to make representations and warranties to us, which are intended to ensure that we will continue to meet the REIT ownership requirements. The excepted holders must inform us if any of these representations becomes untrue or is violated, in which case such excepted holder will lose its exemption from the ownership limit.

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        In addition, our board of trustees may change the share ownership limits. Our declaration of trust also prohibits any person from (1) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, our shares if that would result in us being "closely held" under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT, including, but not limited to, as a result of any "eligible independent contractor" that operates a "qualified lodging facility" (each as defined in the Code) on behalf of a TRS failing to qualify as such, or us having significant non-qualifying income from "related" parties, or (2) transferring shares if such transfer would result in our shares being owned by fewer than 100 persons. The share ownership limits contained in our declaration of trust key off the ownership at any time by any "person," which term includes entities, and take into account direct and indirect ownership as determined under various ownership attribution rules in the Code. The share ownership limits also might delay or prevent a transaction or a change in our control that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.

Our authorized but unissued common shares and preferred shares may prevent a change in our control that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.

        Our declaration of trust authorizes us to issue additional authorized but unissued common or preferred shares. In addition, our board of trustees may, without shareholder approval, amend our declaration of trust to increase the aggregate number of our common shares or the number of shares of any class or series of preferred shares that we have authority to issue and classify or reclassify any unissued common shares or preferred shares and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of trustees may establish a series of common shares or preferred shares that could delay or prevent a transaction or a change in our control that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.

Certain provisions of Maryland law could inhibit changes in control.

        Certain provisions of the Maryland General Corporation Law, or MGCL, that are applicable to Maryland real estate investment trusts may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then-prevailing market price of our common shares, including:

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        As permitted by Maryland law, we have elected, by resolution of our board of trustees, to opt out of the business combination provisions of the MGCL and, pursuant to a provision in our bylaws, to exempt any acquisition of our shares from the control share provisions of the MGCL. However, our board of trustees may by resolution elect to repeal the exemption from the business combination provisions of the MGCL and may by amendment to our bylaws opt into the control share provisions of the MGCL at any time in the future.

        Certain provisions of the MGCL applicable to Maryland real estate investment trusts permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to adopt certain mechanisms, some of which (for example, a classified board) we do not have. These provisions may have the effect of limiting or precluding a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then current market price. Our declaration of trust contains a provision whereby we will elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of trustees. See "Material Provisions of Maryland Law and of Our Declaration of Trust and Bylaws."

Conflicts of interest could arise in the future between the interests of our shareholders and the interests of any holders of OP units in our operating partnership, which may impede business decisions that could benefit our shareholders.

        If in the future we have unaffiliated owners of OP units, conflicts of interest could arise as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our trustees and officers have duties to us and our shareholders under applicable Maryland law in connection with their management of our company. At the same time, we, as general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. Our duties as general partner to our operating partnership and its partners may come into conflict with the duties of our trustees and officers to our company and our shareholders. These conflicts may be resolved in a manner that is not in the best interests of our shareholders.

Our conflict of interest policy may not be successful in eliminating the influence of future conflicts of interest that may arise between us and our trustees, officers and employees.

        Effective upon completion of this offering, we intend to adopt a policy that any transaction, agreement or relationship in which any of our trustees, officers or employees has a material direct or indirect pecuniary interest must be approved by a majority of our disinterested trustees. Other than this policy, however, we may not adopt additional formal procedures for the review and approval of conflict of interest transactions generally. As such, our policies and procedures may not be successful in eliminating the influence of conflicts of interest. See "Investment Policies and Policies with Respect to Certain Activities—Conflict of Interest Policies."

We may pursue less vigorous enforcement of terms of the merger and other agreements entered into in connection with our formation transactions because of conflicts of interest with certain of our officers and related parties.

        Pursuant to the merger and other agreements entered into in connection with our formation transactions, Fund II, Fund III, the general partners of each of Fund II and Fund III and RLJ Development made limited representations and warranties to us regarding potential material adverse impacts on the hotels and other assets to be acquired by us in our formation transactions and agreed to a $25.0 million holdback of the total consideration paid in the form of common shares to such parties

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in our formation transactions to indemnify us for breaches of such representations and warranties. In addition, we will enter into an employment agreement with each of our executive officers. Because of our desire to maintain ongoing relationships with our executive officers and other contributors, we may choose not to enforce, or to enforce less vigorously, our rights under these agreements.

The consideration paid by us in exchange for the contribution of our initial hotels to us in our formation transactions may exceed the fair market value of these assets.

        The amount of consideration we will pay for our initial hotels was not negotiated on an arm's-length basis. Further, the value of the common shares that we will issue as consideration for the hotels that we will acquire in our formation transactions will increase or decrease if the market price of our common shares increases or decreases. The initial public offering price of our common shares will be determined in consultation with the underwriters. Among the factors that will be considered are our record of operations, our management, our historical and projected net income, FFO, EBITDA and cash available for distribution, our anticipated dividend yield, our growth prospects, the quality of our portfolio, current market valuations, financial performance and dividend yields of publicly-traded companies considered by us and the underwriters to be comparable to us and the current state of the lodging industry and the economy as a whole. The initial public offering price will not necessarily bear any relationship to the book value or fair market value of our initial hotels. As a result, the fair market value of the common shares we issue in our formation transactions may exceed the fair market value of our initial hotels.

Certain of our executive officers exercised significant influence with respect to the terms of our formation transactions.

        We did not conduct arm's-length negotiations with certain of our executive officers with respect to the terms of our formation transactions, including the terms of the merger agreements, contribution agreement and the employment agreements with each of our executive officers. Therefore, the terms of these agreements may not be as favorable to us as if they were so negotiated. In structuring our formation transactions, certain of our executive officers exercised significant influence on the type and level of benefits that they and other members of our senior management team will receive from us, including the number of common shares that they will receive in connection with our formation transactions and the benefits our senior management team will receive from us for their services.

Certain provisions in the partnership agreement for our operating partnership may delay or prevent unsolicited acquisitions of us.

        If in the future we have unaffiliated owners of OP units, provisions in the partnership agreement for our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or a change in our control, although some shareholders might consider such proposals, if made, desirable.

Termination of the employment agreements with our executive officers could be costly and prevent a change in our control.

        The employment agreements that we intend to enter into with each of our executive officers are expected to provide that, if their employment with us terminates under certain circumstances (including upon a change in our control), we may be required to pay them significant amounts of severance compensation, including accelerated vesting of equity awards, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in our control that might involve a premium paid for our common shares or otherwise be in the best interests of our shareholders.

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Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.

        Our declaration of trust provides that, subject to the rights of holders of one or more classes or series of preferred shares to elect or remove one or more trustees, a trustee may be removed only for cause and only by the affirmative vote of holders of at least two-thirds of the votes entitled to be cast in the election of trustees and that our board of trustees has the exclusive power to fill vacant trusteeships, even if the remaining trustees do not constitute a quorum. These provisions make it more difficult to change our management by removing and replacing trustees and may delay or prevent a change in our control that is in the best interests of our shareholders.

Our board of trustees is expected to approve very broad investment guidelines for us and will not review or approve each investment decision made by our senior management team.

        Our senior management team will be authorized by our board of trustees to follow broad investment guidelines and, therefore, has great latitude in determining the assets that are proper investments for us, as well as the individual investment decisions. Our senior management team may make investments with lower rates of return than those anticipated under current market conditions and/or may make investments with greater risks to achieve those anticipated returns. Our board of trustees will not review or approve each proposed investment by our senior management team.

We may change our operational policies, investment guidelines and our investment and growth strategies without shareholder consent, which may subject us to different and more significant risks in the future, which could materially and adversely affect us.

        Our board of trustees will determine our operational policies, investment guidelines and our investment and growth strategies. Our board of trustees may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our shareholders. This could result in us conducting operational matters, making investments or pursuing different investment or growth strategies than those contemplated in this prospectus. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could materially and adversely affect us.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit our shareholders' recourse in the event of actions not in our shareholders' best interests.

        Under Maryland law generally, a trustee is required to perform his or her duties in good faith, in a manner he or she reasonably believes to be in our best interest and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Under Maryland law, trustees are presumed to have acted with this standard of care. In addition, our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:

        Our declaration of trust and bylaws obligate us, to the fullest extent permitted by Maryland law in effect from time to time, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any present or former trustee or officer who is made or threatened to be made a party to the proceeding by reason of his or her service to us in that capacity. In addition, we may be obligated to advance the defense costs incurred by our trustees and officers. As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise

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exist absent the current provisions in our declaration of trust and bylaws or that might exist with other companies.

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.

        In connection with operating as a public company, we will be required to provide reliable financial statements and reports to our shareholders. To monitor the accuracy and reliability of our financial reporting, we will establish an internal audit function that will oversee our internal controls. Our predecessor has documented and developed an initial accounting policy framework and accounting procedures manual for our use, but we can provide no assurances that such procedures will be adequate to provide reasonable assurance to our shareholders regarding the reliability of our financial reporting and the preparation of our financial statements. In addition, we are developing and documenting current policies and procedures with respect to company-wide business processes and cycles in order to implement effective internal control over financial reporting. We will establish, or cause our third-party hotel management companies to establish, controls and procedures designed to ensure that hotel revenues and expenses are properly recorded at our hotels. While we intend to undertake substantial work to comply with Section 404 of the Sarbanes-Oxley Act of 2002, we cannot be certain that we will be successful in implementing or maintaining effective internal control over our financial reporting and may determine in the future that our existing internal controls need improvement. If we fail to implement and comply with proper overall controls, we could be materially harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits and cause investors to lose confidence in our reported financial information, leading to a substantial decline in the market price of our common shares.


Risks Related to the Real Estate Industry

The illiquidity of real estate investments could significantly impede our ability to respond to changing economic, financial, and investment conditions or changes in the operating performance of our properties, which could adversely affect our cash flows and results of operations.

        Real estate investments, including the focused-service and compact full-service hotels in our portfolio, are relatively illiquid. As a result, we may not be able to sell a hotel or hotels quickly or on favorable terms in response to changing economic, financial and investment conditions or changes in the hotel's operating performance when it otherwise may be prudent to do so. Current conditions in the U.S. economy and stock and credit markets have made it difficult to sell hotels at attractive prices. We cannot predict whether we will be able to sell any hotel we desire to sell for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel. We may be required to expend funds to correct defects or to make improvements before a hotel can be sold, and we cannot provide any assurances that we will have funds available to correct such defects or to make such improvements. Our inability to dispose of assets at opportune times or on favorable terms could adversely affect our cash flows and results of operations.

        Moreover, the Code imposes restrictions on a REIT's ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs require that we hold our hotels for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of hotels that otherwise would be in our best interests. Therefore, we may not be able to vary our portfolio promptly in response to economic or other conditions or on favorable terms, which may adversely affect our cash flows, our ability to make distributions to shareholders and the market price of our common shares.

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        In addition, our ability to dispose of some of our hotels could be constrained by their tax attributes. Hotels which we own for a significant period of time or which we acquire through tax deferred contribution transactions in exchange for OP units in our operating partnership may have low tax bases. If we dispose of these hotels outright in taxable transactions, we may be required to distribute the taxable gain to our shareholders under the requirements of the Code applicable to REITs or to pay tax on that gain, either of which, in turn, would impact our cash flow and increase our leverage. In some cases, we may be restricted from disposing of properties contributed to us in the future in exchange for our OP units under tax protection agreements with contributors unless we incur additional costs related to indemnifying those contributors. To dispose of low basis or tax-protected hotels efficiently, we may from time to time use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the hotel for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes.

Many real estate costs are fixed, even if revenue from our hotels decreases.

        Many costs, such as real estate taxes, insurance premiums and maintenance costs, generally are not reduced even when a hotel is not fully occupied, room rates decrease or other circumstances cause a reduction in revenues. In addition, newly acquired hotels may not produce the revenues we anticipate immediately, or at all, and the hotel's operating cash flow may be insufficient to pay the operating expenses and debt service associated with these new hotels. If we are unable to offset real estate costs with sufficient revenues across our portfolio, our financial performance and liquidity could be materially and adversely affected.

Uninsured and underinsured losses at our hotels could materially and adversely affect us.

        We intend to maintain comprehensive insurance on each of our initial hotels and any hotels that we acquire, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that coverage will be available at reasonable rates. Various types of catastrophic losses, like windstorms, earthquakes and floods, losses from foreign terrorist activities such as those on September 11, 2001, or losses from domestic terrorist activities such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Even when insurable, these policies may have high deductibles and/or high premiums. Lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements, which could have a material adverse effect on us.

        In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotel, which could have a material adverse effect on us.

        In addition, insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. With the enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007, United States insurers cannot exclude conventional chemical, biological, nuclear and radiation terrorism losses. These insurers must make terrorism insurance available under their property and casualty insurance policies; however, this legislation does not regulate the pricing of such insurance. In many cases, mortgage lenders have begun to insist that commercial property owners purchase coverage against terrorism as a condition of providing mortgage loans. Such insurance policies may not be available at a reasonable cost, which

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could inhibit our ability to finance or refinance our hotels. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses, which could have a material adverse effect on us.

We may be subject to unknown or contingent liabilities related to recently acquired hotels and the hotels that we may acquire in the future, which could have a material adverse effect on us.

        Our recently acquired hotels, and the hotels that we may acquire in the future, may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to purchase of the hotels we acquire may not survive the completion of the transactions. Furthermore, indemnification under such agreements may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may materially and adversely affect us.

Compliance or failure to comply with the Americans with Disabilities Act and other safety regulations and requirements could result in substantial costs.

        Under the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder, which we refer to collectively as the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA's requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. In July 2010, the Department of Justice proposed a substantial number of changes to the ADA, which were published in September 2010. The new guidelines could cause some of our hotels to incur costly measures to become fully compliant. If we are required to make substantial modifications to the hotels that we acquire, whether to comply with the ADA or other changes in governmental rules and regulations, we could be materially and adversely affected.

        Our hotels also are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements would require significant unanticipated expenditures that would affect our cash flow and results of operations. If we incur substantial costs to comply with the ADA or other safety regulations and requirements, our financial condition, results of operations, the market price of our common shares, cash flows and our ability to satisfy our debt obligations and to make distributions to our shareholders could be adversely affected.

We could incur significant, material costs related to government regulation and litigation with respect to environmental matters, which could have a material adverse effect on us.

        Our hotels are subject to various U.S. federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as the current owner of a hotel, to perform or pay for the clean up of contamination (including hazardous substances, asbestos and asbestos-containing materials, waste or petroleum products) at, on, under or emanating from the hotel and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned a property at the time it became contaminated, it is

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possible we could incur cleanup costs or other environmental liabilities even after we sell hotels. Contamination at, on, under or emanating from our hotels also may expose us to liability to private parties for costs of remediation and/or personal injury or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on our properties, environmental laws also may impose restrictions on the manner in which the properties may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner's ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.

        In addition, our hotels are subject to various federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew, and waste management. Some of our hotels routinely handle and use hazardous or regulated substances and wastes as part of their operations, which substances and wastes are subject to regulation (e.g., swimming pool chemicals). Our hotels incur costs to comply with these environmental, health and safety laws and regulations and could be subject to fines and penalties for non-compliance with applicable requirements.

        Certain of our initial hotels contain, and those that we acquire in the future may contain, or may have contained, asbestos-containing material, or ACM. Federal, state and local environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation or demolition of a building. Such laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with these requirements. In addition, third parties may seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

        When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our hotels could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability to third parties if property damage or personal injury occurs.

        Liabilities and costs associated with environmental contamination at, on, under or emanating from our properties, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws could be material and could materially and adversely affect us. We can make no assurances that changes in current laws or regulations or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of our hotels will not be affected by our operations, the condition of the properties in the vicinity of our hotels, or by third parties unrelated to us. The discovery of material environmental liabilities at our properties could subject us to unanticipated significant costs, which could significantly reduce or eliminate our profitability and the cash available for distribution to our shareholders.

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We face possible risks associated with the physical effects of climate change.

        We cannot predict with certainty whether climate change is occurring and, if so, at what rate. However, the physical effects of climate change could have a material adverse effect on us. For example, many of our properties are located along the Gulf and East coasts. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity and rising sea-levels. Over time, these conditions could result in declining hotel demand or our inability to operate the affected hotels at all. Climate change also may have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy and increasing the cost of snow removal at our properties. There can be no assurance that climate change will not have a material adverse effect on us.

Legislative or regulatory tax changes related to REITs could materially and adversely affect us.

        There are a number of issues associated with an investment in a REIT that are related to the federal income tax laws, including, but not limited to, the consequences of a company's failing to qualify or to continue to qualify as a REIT and the tax rates applicable to REITs and their shareholders. At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended or modified. Any new laws or interpretations may take effect retroactively and could materially and adversely affect us.

We may incur significant costs complying with various regulatory requirements, which could materially and adversely affect us.

        Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we could incur governmental fines or private damage awards. In addition, existing requirements could change and future requirements might require us to make significant unanticipated expenditures, which could materially and adversely affect us.


Risks Related to Our Status as a REIT

Qualifying as a REIT involves highly technical and complex provisions of the Code.

        Our qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the REIT income and asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we will not obtain independent appraisals, and upon our ability to successfully manage the composition of our income and assets on an ongoing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

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If we do not qualify as a REIT or if we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax and potentially state and local taxes, which would reduce our earnings and the amount of cash available for distribution to our shareholders.

        We have been organized and we intend to operate in a manner that will enable us to qualify as a REIT for U.S. federal income tax purposes commencing with the taxable year commencing at the time of this offering and ending December 31, 2011. Although we do not intend to request a ruling from the IRS as to our REIT qualification, we expect to receive, as a condition to the completion of this offering and our formation transactions, an opinion of Hogan Lovells US LLP with respect to our qualification as a REIT. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinion of Hogan Lovells US LLP represents only the view of our counsel based on our counsel's review and analysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of our assets and the sources of our income. The opinion is expressed as of the date issued. Hogan Lovells US LLP will have no obligation to advise us or our common shareholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of Hogan Lovells US LLP and our qualification as a REIT depend on our satisfaction of the requirements described above under "—Qualifying as a REIT involves highly technical and complex provisions of the Code," the results of which will not be monitored by Hogan Lovells US LLP.

        If we were to fail to qualify as a REIT in any taxable year and any available relief provisions do not apply, we would be subject to U.S. federal and state corporate income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable income. Unless we were entitled to statutory relief under certain Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

        Any determination that we do not qualify as a REIT would have a material adverse effect on our results of operations and could materially reduce the value of our common shares. Our additional tax liability could be substantial and would reduce our net earnings available for investment, debt service or distributions to shareholders. Furthermore, we would no longer be required to make any distributions to shareholders as a condition to REIT qualification and all of our distributions to shareholders would be taxable as ordinary C corporation dividends to the extent of our current and accumulated earnings and profits. This means that our shareholders currently taxed as individuals would be taxed on those dividends at capital gain rates (through 2012, in the absence of legislative action) and our corporate shareholders generally would be entitled to the dividends received deduction with respect to such dividends, subject in each case, to applicable limitations under the Code. Our failure to qualify as a REIT also could cause an event of default under loan documents governing our debt.

REIT distribution requirements could adversely affect our ability to execute our business plan or cause us to finance our needs during unfavorable market conditions.

        We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code.

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        From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP. In addition, differences in timing between the recognition of taxable income and the actual receipt of cash may occur. As a result, we may find it difficult or impossible to meet distribution requirements in certain circumstances. In particular, where we experience differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income could cause us to: (1) sell assets in adverse market conditions; (2) incur debt or issue additional equity on unfavorable terms; (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (4) make a taxable distribution of our common shares as part of a distribution in which shareholders may elect to receive our common shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements. These alternatives could increase our costs or dilute our equity. In addition, because the REIT distribution requirement prevents us from retaining earnings, we generally will be required to refinance debt at its maturity with additional debt or equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the market price of our common shares.

We may in the future choose to pay dividends in the form of our own common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends they receive.

        We may seek in the future to distribute taxable dividends that are payable in cash and our common shares, at the election of each shareholder. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. shareholder sells the common shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common shares at the time of the sale. In addition, in such case, a U.S. shareholder could have a capital loss with respect to the common shares sold that could not be used to offset such dividend income. Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common shares. In addition, such a taxable share dividend could be viewed as equivalent to a reduction in our cash distributions, and that factor, as well as the possibility that a significant number of our shareholders determine to sell our common shares in order to pay taxes owed on dividends, may put downward pressure on the market price of our common shares.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

        The maximum tax rate applicable to income from "qualified dividends" payable to U.S. shareholders that are individuals, trusts and estates has been reduced by legislation to 15% (through 2012, after which time, in the absence of legislative action, they will be taxed at ordinary income rates). Dividends payable by REITs, however, generally are not eligible for the reduced rates and will continue to be subject to tax at rates applicable to ordinary income, which will be as high as 35% through 2012 (and in the absence of legislative action, as high as 39.6% starting in 2013). Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common shares.

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

        Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes, including payroll taxes, taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, a 100% excise tax on any transactions with a TRS that are not conducted on an arm's-length basis, and state or local income, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. In addition, our TRSs will be subject to U.S. federal, state and local corporate income tax on their net taxable income, if any. To the extent that we conduct operations outside of the United States, our operations would subject us to applicable foreign taxes, as well. Any of these taxes would decrease cash available for the payment of our debt obligations and distributions to shareholders.

If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.

        To qualify as a REIT, we must satisfy two gross income tests, pursuant to which specified percentages of our gross income must be passive income, such as rent. For the rent paid pursuant to the hotel leases with our TRSs, which we currently expect will constitute substantially all of our gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. We believe that the leases will be respected as true leases for federal income tax purposes. There can be no assurance, however, that the IRS will agree with this characterization. If the leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests applicable to REITs and would likely lose our REIT status.

        Rents paid to us by each of our TRSs may not be based on the net income or profits of any person, or they would not be treated as "rents from real property," in which case we would likely fail to qualify for taxation as a REIT. We receive "percentage rents" calculated based on the gross revenues of the hotels subject to leases to our TRSs, but not on net income or profits. We believe our leases have customary terms and rents and reflect normal business practices in this regard and do not provide for rent based on net income or profits, but there can be no assurance the IRS will agree.

        In addition, if such rents are excessive, their deductibility may be challenged at the TRS level, and we could be subject to a 100% excise tax on "redetermined rent" or "redetermined deductions" to the extent rents exceed an arm's-length amount. We believe our rents reflect normal business practices, but there can be no assurance that the IRS will agree.

If our TRSs fail to qualify as "taxable REIT subsidiaries" under the Code, we would fail to qualify as a REIT.

        Rent paid by a lessee that is a "related party tenant" will not be qualifying income for purposes of the two gross income tests applicable to REITs. We expect to lease substantially all of our hotels to our TRSs, which will not be treated as "related party tenants" so long as they qualify as "taxable REIT subsidiaries" under the Code. To qualify as such, most significantly, a taxable REIT subsidiary cannot engage in the operation or management of hotels or health care properties. We believe that our TRSs will qualify to be treated as taxable REIT subsidiaries for federal income tax purposes. There can be no assurance, however, that the IRS will not challenge the status of a TRS for federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in disqualifying any of our TRSs from treatment as a taxable REIT subsidiary, it is likely that we would fail to meet the asset tests applicable to REITs and substantially all of our income would fail to qualify for the gross

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income tests. If we failed to meet either the asset tests or the gross income tests, we would likely lose our REIT status.

If any hotel management companies that we engage do not qualify as "eligible independent contractors," or if our hotels are not "qualified lodging facilities," we will fail to qualify as a REIT.

        Rent paid by a lessee that is a "related party tenant" of ours generally will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of "qualified lodging facilities" to a TRS so long as the hotels are managed by an "eligible independent contractor" and certain other requirements are satisfied. We intend to take advantage of this exception. We expect to lease all or substantially all of our hotels to TRS lessees, which are disregarded subsidiaries of the TRSs, and to engage hotel management companies that are intended to qualify as "eligible independent contractors." Among other requirements, in order to qualify as an eligible independent contractor, the hotel management company must not own, directly or through its shareholders, more than 35% of our outstanding shares, and no person or group of persons can own more than 35% of our outstanding shares and the shares (or ownership interest) of the hotel management company, taking into account certain ownership attribution rules and, with respect to our shares and the outstanding shares of any publicly traded hotel management company, only the shares owned by persons who own, directly or indirectly, more than 5% of a publicly traded class of shares. The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of our shares by the hotel management companies and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded.

        In addition, in order for a hotel management company to qualify as an eligible independent contractor, such company or a related person must be actively engaged in the trade or business of operating "qualified lodging facilities" (as defined below) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS or its TRS lessee. As of the date hereof, we believe the hotel management companies operate qualified lodging facilities for certain persons who are not related to us or our TRS. However, no assurances can be provided that this will continue to be the case or that any other hotel management companies that we may engage in the future will in fact comply with this requirement in the future. Failure to comply with this requirement would require us to find other managers for future contracts, and, if we hired a management company without knowledge of the failure, it could jeopardize our status as a REIT.

        Finally, each hotel with respect to which our TRS lessees pay rent must be a "qualified lodging facility." A "qualified lodging facility" is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. As of the date hereof, we believe that all of the hotels leased to our TRS lessees will be qualified lodging facilities. Although we intend to monitor future acquisitions and improvements of hotels, the REIT provisions of the Code provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied in all cases.

Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.

        To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than

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10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a taxable REIT subsidiary, otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders. In addition, we may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of, certain attractive investments.

If the IRS were to challenge successfully our operating partnership's status as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

        If we have holders of OP units other than our company, our operating partnership will be treated as a separate entity for federal income tax purposes, rather than as an entity that is disregarded as separate from us. We believe, and will take steps to structure any such ownership of OP units so that, our operating partnership will be treated as a partnership for federal income tax purposes, rather than as a corporation. As a partnership, it will not be subject to federal income tax on its income. Instead, each of its partners, including our company, will be required to pay tax on such partner's allocable share of its income. No assurance can be provided, however, that the IRS will not challenge our operating partnership's status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for federal income tax purposes, our company would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, would cease to qualify as a REIT.

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Risks Related to this Offering

Our cash available for distribution to shareholders may not be sufficient to pay distributions at expected or required levels, and we may need external sources in order to make such distributions, or we may not be able to make such distributions at all, which could cause the market price of our common shares to decline significantly.

        We intend to pay regular quarterly distributions to holders of our common shares. We will establish our initial distribution rate based upon our estimate of the annualized cash flow that will be available for distributions after this offering. All distributions will be made at the discretion of our board of trustees and will depend on our historical and projected results of operations, EBITDA, FFO, liquidity and financial condition, REIT qualification, debt service requirements, capital expenditures and operating expenses, prohibitions and other restrictions under financing arrangements and applicable law and other factors as our board of trustees may deem relevant from time to time. No assurance can be given that our projections will prove accurate or that any level of distributions will be made or sustained or achieve a market yield. We may not be able to make distributions in the future or may need to fund such distributions from external financing sources, which may be available only at commercially unattractive terms, if at all. Any of the foregoing could cause the market price of our common shares to decline significantly.

Future issuances of debt securities, which would rank senior to our common shares upon our liquidation, and future issuances of equity securities (including OP units), which would dilute the holdings of our existing common shareholders and may be senior to our common shares for the purposes of making distributions, periodically or upon liquidation, may negatively affect the market price of our common shares.

        In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred shares will receive a distribution of our available assets before common shareholders. If we incur debt in the future, our future interest costs could increase, and adversely affect our liquidity, FFO and results of operations. We are not required to offer any additional equity securities to existing common shareholders on a preemptive basis. Therefore, additional common share issuances, directly or through convertible or exchangeable securities (including OP units), warrants or options, will dilute the holdings of our existing common shareholders and such issuances or the perception of such issuances may reduce the market price of our common shares. Our preferred shares, if issued, would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common shareholders. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common shareholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common shares.

Future issuances and resales of our common shares may negatively affect the market price of our common shares. You should not rely upon lock-up agreements in connection with this offering to limit the amount of common shares sold into the market.

        We cannot predict the effect, if any, of our future issuances of our common shares, or future resales of our common shares by shareholders, or the perception of such issuances or resales, on the market price of our common shares. Any such future issuances or resales, or the perception that such issuances or resales might occur, could negatively affect the market price of our common shares and may also make it more difficult for us to sell equity or equity-related securities in the future at a time and upon terms that we deem appropriate.

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        Subject to applicable law, our board of trustees has the authority, without further shareholder approval, to issue additional common shares and preferred shares on the terms and for the consideration it deems appropriate.

        Upon completion of this offering and our formation transactions, we will have                        common shares outstanding on a fully-diluted basis, including                                    common shares issued in our formation transactions and an aggregate of                        restricted common shares granted to our trustees, executive officers and other employees under the RLJ Lodging Trust 2011 Equity Incentive Plan, or our equity incentive plan, or                        common shares outstanding on a fully-diluted basis if the underwriters' overallotment option is exercised in full. We, our executive officers, trustees and trustee nominees and certain of the existing investors in Fund II and Fund III have agreed not to sell or transfer any common shares or securities convertible into, exchangeable or exercisable for (including OP units) or repayable with, common shares, subject to certain exceptions, without first obtaining the written consent of the representatives, for        days after the date of this prospectus. If the restrictions under the lock-up arrangements expire or are waived, the related common shares will be available for resale and such resales, or the perception of such resales, could negatively affect the market price for our common shares.

        In addition, we expect to grant certain parties registration rights with respect to an aggregate of                common shares to be received by such parties in connection with our formation transactions. In addition to the restricted common shares granted to our trustees, executive officers and other employees under our equity incentive plan in connection with this offering, in the future we may issue common shares and securities convertible into, or exchangeable or exercisable for, our common shares under our equity incentive plan. We intend to file with the SEC a registration statement on Form S-8 covering the common shares issuable under our equity incentive plan. Common shares covered by such registration statement will be eligible for transfer or resale without restriction under the Securities Act of 1933, as amended, or the Securities Act, unless held by affiliates. We also may issue from time to time additional common shares or OP units in connection with hotel acquisitions and may grant additional registration rights in connection with such issuances, pursuant to which we would agree to register the resale of such securities under the Securities Act. The market price of our common shares may decline significantly upon the registration of additional common shares pursuant to registration rights granted in connection with our formation transactions or future issuances of equity in connection with hotel acquisitions.

There is currently no public market for our common shares and an active trading market for our common shares may not develop and be sustained following this offering.

        There has not been any public market for our common shares prior to this offering. Although we intend to list our common shares on the NYSE, we cannot assure you that an active trading market for our common shares will develop after this offering or, if one develops, that it will be sustained. In the absence of an active trading market, you may be unable to resell your common shares at the time and for the price you desire. In addition, the initial public offering price of our common shares will be determined by agreement among us and the underwriters, and we can provide no assurances that our common shares will not subsequently trade below the initial public offering price.

The trading volume and market price of our common shares may be volatile and could decline substantially following this offering.

        Even if an active trading market develops and is sustained for our common shares, the market price of our common shares may be volatile. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, you may be unable to resell your shares at or above the initial public offering price. We cannot assure you that the market price of our common shares will not fluctuate or decline

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significantly in the future, including as a result of factors unrelated to our operating performance or prospects. In particular, the market price of our common shares could be subject to wide fluctuations in response to a number of factors, including, among others, the following:

        In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their common shares. If the market price of our common shares is volatile and this type of litigation is brought against us, it could result in substantial costs and divert our management's attention and resources, which could have a material adverse effect on us.

Increases in market interest rates may reduce demand for our common shares and result in a decline in the market price of our common shares.

        The market price of our common shares may be influenced by the distribution yield on our common shares (i.e., the amount of our annual distributions as a percentage of the market price of our common shares) relative to market interest rates. An increase in market interest rates, which are currently low compared to historical levels, may lead prospective purchasers of our common shares to expect a higher distribution yield, which we may not be able, or may choose not, to provide. Higher interest rates would also likely increase our borrowing costs and decrease our operating results and cash available for distribution. Thus, higher market interest rates could cause the market price of our common shares to decline.

You will experience immediate and substantial dilution from the purchase of common shares sold in this offering.

        The initial public offering price of our common shares is substantially higher than what our net tangible book value per share will be immediately after this offering. Accordingly, purchasers of our common shares in this offering will incur immediate dilution of approximately $            in net tangible book value per share, based on the midpoint of the price range set forth on the cover page of this prospectus.

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In addition to the underwriting discount to be received by Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and Wells Fargo Securities, LLC, they may receive other benefits from this offering.

        In addition to the underwriting discount to be received by Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and Wells Fargo Securities, LLC, we expect that affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and Wells Fargo Securities, LLC will be lenders under our revolving credit facility that we expect to enter into upon completion of this offering. This transaction creates a potential conflict of interest because Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and Wells Fargo Securities, LLC have an interest in the successful completion of this offering beyond the underwriting discount they will receive.

        An affiliate of Wells Fargo Securities, LLC, an underwriter in this offering, is a lender under two outstanding loans, each of which will be repaid with a portion of the net proceeds of this offering. As such, this affiliate will receive a portion of the net proceeds of this offering that are used to repay such indebtedness. Further, an affiliate of Wells Fargo Securities, LLC is a minority investor in each of Fund II and Fund III, and it will receive an aggregate of                common shares in connection with our formation transactions. See "Underwriting (Conflicts of Interest)—Conflicts of Interest."

        The underwriters, including Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and Wells Fargo Securities, LLC, and/or their affiliates may engage in commercial and investment banking transactions with us and/or our affiliates in the ordinary course of their business. They expect to receive customary compensation and expense reimbursement for these commercial and investment banking transactions.

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FORWARD-LOOKING STATEMENTS

        We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, cash flows, EBITDA, FFO, results of operations, and plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

        The forward-looking statements are based on our beliefs, assumptions and expectations of our future events, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described in this prospectus under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Our Business and Properties." If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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USE OF PROCEEDS

        We estimate that the net proceeds to us from our sale of                        common shares in this offering will be approximately $             million, or $             million if the underwriters exercise their overallotment option in full, after deducting the underwriting discount and other estimated offering expenses payable by us of approximately $             million, based on the midpoint of the price range set forth on the cover page of this prospectus. We will contribute the net proceeds of this offering to our operating partnership in exchange for OP units.

        We intend to use substantially all of the net proceeds of this offering to repay approximately $             million of secured indebtedness and to pay approximately $             million in associated prepayment penalties (as described below). Any remaining net proceeds will be used for general business and working capital purposes.

        If the underwriters exercise their overallotment option in full, we expect to use the additional net proceeds to us, which will be approximately $             million in the aggregate, for general business and working capital purposes, including potential future acquisitions.

        Pending the permanent use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, short-term investment-grade securities, money-market accounts or other investments that are consistent with our intention to elect and qualify to be taxed as a REIT.

        The following table sets forth information, as of September 30, 2010, with respect to the indebtedness that we intend to repay, in whole or in part, with the net proceeds of this offering:

Property
  Amount to be
Repaid(1)
(in thousands)
  Interest
Rate
  Effective
Rate(2)
  Maturity
Date
 

Hyatt Summerfield Suites Portfolio—Senior (6 hotels)

  $ 4,941 (3) L+1.24%     4.57 %   April 2011 (4)

Hyatt Summerfield Suites Portfolio—Mezzanine (6 hotels)

    3,808 (3) L+2.75%     6.08 %   April 2011 (4)

Louisville Marriott Downtown

    72,712   L+1.75%     2.10 %   June 2011  

Multi-property loan (10 hotels)

    92,000   L+1.60%     1.95 %   July 2011  

Embassy Suites Los Angeles-Downey (5)

    24,153   L+2.50%     5.59 %   Jan 2012 (4)

Multi-property loan (13 hotels) (5)

    189,767   L+4.00%     7.12 %   Feb 2012 (4)

Hilton Garden Inn St. George

    10,920   L+4.00%     5.50 %   May 2012 (6)

SpringHill Suites Bakersfield

    10,073   L+4.00%     5.50 %   May 2012 (6)

SpringHill Suites Gainesville

    12,471   L+4.00%     5.50 %   May 2012 (6)

Hampton Inn & Suites Clearwater/St. Petersburg Ulmerton Road, FL

    10,436   L+4.00%     5.50 %   May 2012 (6)

Hampton Inn Garden City

    23,157   L+4.00%     5.50 %   May 2012 (6)

Hampton Inn & Suites Las Vegas-Red Rock/Summerlin

    11,187   L+4.00%     5.50 %   May 2012 (6)

Hampton Inn Ft. Walton Beach

    11,470   L+4.00%     5.50 %   May 2012 (6)

Hilton Mystic

    13,479   L+4.00%     8.76 %   May 2012 (6)
                       

  $ 490,574                  
                       

(1)
Amounts based on outstanding balances at September 30, 2010.

(2)
Effective rate gives effect to interest rate swaps and LIBOR floors, as applicable.

(3)
Amount represents partial paydown. The Hyatt Summerfield Suites Portfolio is subject to senior and mezzanine loans, which as of September 30, 2010, had outstanding balances of $48 million and $37 million, respectively.

(4)
Maturity date may be extended for one additional year at our option (subject to our prior satisfaction of certain conditions, including, among others, maintenance of a specified debt service coverage ratio and advance notice of the exercise of our option).

(5)
An affiliate of Wells Fargo Securities, LLC, an underwriter in this offering, is a lender under these loans, each of which will be repaid with a portion of the net proceeds of this offering. As such, this affiliate will receive a portion of the net proceeds of this offering that are used to repay such indebtedness.

(6)
Maturity date may be extended for up to two one-year periods at our option (subject to our prior satisfaction of certain conditions, including, among others, a principal pay down for the first extension, maintenance of a specified debt service coverage ratio for the second extension, and advance notice of the exercise of our option).

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DISTRIBUTION POLICY

        To satisfy the requirements to qualify as a REIT, and to avoid paying tax on our income, we intend to make regular quarterly distributions of all, or substantially all, of our REIT taxable income (including net capital gains) to our shareholders. We intend to make a pro rata distribution with respect to the period commencing on completion of this offering and ending on                        , 2011, based on a distribution of $            per common share for a full quarter. On an annualized basis, this would be $            per common share, or an annualized distribution rate of approximately        % based on an assumed initial public offering price of $            per common share, which is the midpoint of the price range set forth on the cover page of this prospectus. We estimate that this initial annual distribution rate will represent approximately        % of estimated cash available for distribution to our common shareholders for the 12-month period ending December 31, 2011. We do not intend to reduce the annualized distribution rate per common share if the underwriters exercise their overallotment option; however, this could require us to borrow funds to make the distributions or to make the distributions from net offering proceeds. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the 12-month period ending December 31, 2011, which we have calculated based on adjustments to our pro forma net income for the 12-month period ended December 31, 2010 (after giving effect to this offering and our formation transactions). This estimate was based on our pro forma operating results and does not take into account our business and growth strategies, nor does it take into account any unanticipated expenditures we may have to make or any financings for such expenditures. In estimating our cash available for distribution for the 12-month period ending December 31, 2011, we have made certain assumptions as reflected in the table and footnotes below.

        Our estimate of cash available for distribution does not include the effect of any changes in our working capital resulting from changes in our working capital accounts. Our estimate also does not reflect the amount of cash estimated to be used for investing activities for acquisition and other activities, other than recurring capital expenditures. It also does not reflect the amount of cash estimated to be used for financing activities, other than scheduled loan principal payments on mortgage and other indebtedness that will be outstanding upon completion of this offering. Any such investing and/or financing activities may have a material adverse effect on our estimate of cash available for distribution. Because we have made the assumptions set forth above in estimating cash available for distribution, we do not intend this estimate to be a projection or forecast of our actual results of operations, EBITDA, FFO, liquidity or financial condition and have estimated cash available for distribution for the sole purpose of determining our estimated initial annual distribution amount. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to make distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future distributions.

        We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless our results of operations, EBITDA, FFO, liquidity, cash flows, financial condition or prospects, economic conditions or other factors differ materially from the assumptions used in projecting our initial distribution rate. We believe that our estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution rate; however, we cannot assure you that our estimate will prove accurate, and actual distributions may therefore be significantly below the expected distributions. Our actual results of operations will be affected by a number of factors, including the revenue received from our hotels, performance of our property managers, our operating expenses, interest expense (including the effect of variable rate debt), and unanticipated capital expenditures. We may, from time to time, be required, or elect, to borrow under our anticipated revolving credit facility or otherwise to pay distributions.

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        We cannot assure you that our estimated distributions will be made or sustained or that our board of trustees will not change our distribution policy in the future. Our future distributions will be at the sole discretion of our board of trustees, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, EBITDA, FFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law and such other factors as our board of trustees deems relevant. For more information regarding risk factors that could materially and adversely affect us, please see "Risk Factors." If our operations do not generate sufficient cash flow to enable us to pay our intended or required distributions, we may be required either to fund distributions from working capital, borrow or raise equity or to reduce such distributions. In addition, our charter allows us to issue preferred shares that could have a preference on distributions. We also may elect to pay all or a portion of any distribution in the form of a taxable distribution of our common shares or distribution of debt securities. We currently have no intention to issue any preferred shares, but if we do, the distribution preference on the preferred shares could limit our ability to make distributions to the holders of our common shares.

        Distributions in excess of our current and accumulated earnings and profits will not be taxable to a taxable U.S. shareholder under current U.S. federal income tax law to the extent those distributions do not exceed the shareholder's adjusted tax basis in his or her common shares, but rather will reduce the adjusted basis of the shares. In that case, the gain (or loss) recognized on the sale of those shares or upon our liquidation will be increased (or decreased) accordingly. To the extent those distributions exceed a taxable U.S. shareholder's adjusted tax basis in his or her shares, they generally will be treated as a gain realized from the taxable disposition of those shares. The percentage of distributions to our shareholders that exceeds our current and accumulated earnings and profits may vary substantially from year to year. For a more complete discussion of the tax treatment of distributions to holders of our common shares, see "Material U.S. Federal Income Tax Considerations."

        U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income, including capital gains. For more information, please see "Material U.S. Federal Income Tax Considerations." We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs and the amount necessary to avoid the payment of tax on undistributed income. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to borrow funds to make certain distributions.

        The following table sets forth calculations relating to the intended initial distribution based on our pro forma financial data, and we cannot assure you that the intended initial distribution will be made or sustained. The calculations are being made solely for the purpose of illustrating the initial distribution and are not necessarily intended to be a basis for determining future distributions. The calculations include the following material assumptions:

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        These calculations do not assume any changes to our operations or any acquisitions or dispositions other than recurring capital expenditures, which would affect our cash flows, or changes in our outstanding common shares. We cannot assure you that our actual results will be as indicated in the calculations below. All dollar amounts are in thousands.

Pro forma net income for the year ended December 31, 2010

  $    
 

Add: Depreciation and amortization

       
 

Add: Amortization of deferred financing costs(1)

       
 

Less: Non-cash amortization of restricted common shares(2)

       

Estimated cash flows from operating activities for the twelve months ending December 31, 2011

       

Estimated cash flows used in investing activities—required capital expenditure reserve contributions(3)

       

Estimated cash flows used in financing activities—scheduled principal payments on debt payable(4)

       

Estimated cash available for distribution for the twelve months ending December 31, 2011

  $    

Intended initial distribution(5)

  $    

Ratio of intended initial distribution to estimated cash available for distribution

      %

(1)
Represents non-cash item recorded as an operating expense.

(2)
Represents non-cash compensation recorded as an administrative and general corporate expense.

(3)
Estimated amount includes the amount of reserves required to be funded in 2011 pursuant to management, franchise and loan agreements, which range from 2.0% to 5.0% of the 2010 revenues of each hotel.

(4)
Estimated amount based on pro forma indebtedness to be outstanding following the completion of this offering.

(5)
Represents the aggregate amount of the intended annual distribution multiplied by the common shares that will be outstanding upon completion of this offering. Excludes the common shares that may be issued by us upon exercise of the underwriters' overallotment option.

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CAPITALIZATION

        The following table sets forth the historical capitalization of our predecessor at September 30, 2010, and our pro forma consolidated capitalization at September 30, 2010, as adjusted to give effect to our formation transactions, this offering and the use of proceeds of this offering as described in "Use of Proceeds." You should read this table together with "Use of Proceeds," "Selected Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our predecessor's consolidated historical and our pro forma financial statements and notes thereto included elsewhere in this prospectus.

 
  At September 30, 2010  
 
  Historical   Pro Forma(1)  
 
  (in thousands, except per
share data)

 

Mortgage and other secured loans

  $ 1,613,638   $    

Term loan

           

Non-controlling interest(2)

           

Equity:

             
 

Common shares, par value $0.01 per share; 100,000 shares authorized, 1,000 shares issued and outstanding, historical; and 450,000,000 shares authorized,                 shares issued and outstanding, on a pro forma basis(3)

          (4)
 

Preferred shares, par value $0.01 per share; 10,000 shares authorized and 0 shares issued and outstanding, historical; and 50,000,000 shares authorized and 0 shares issued and outstanding, on a pro forma basis

         
 

Additional paid-in capital

          (4)

Owners' equity (deficit):

             

Controlling owners' equity

    728,425        
           
 

Total equity

    728,425        
           

Total capitalization

  $ 2,342,063   $    
           

(1)
We also expect to enter into a $             million revolving credit facility, which we expect will be undrawn upon completion of this offering.

(2)
On December 23, 2010, we entered into a joint venture agreement with an unrelated third party to acquire the Doubletree Metropolitan Hotel New York City. We have a 95% economic interest in this joint venture.

(3)
The outstanding common shares on a pro forma basis include (a)             common shares to be issued in connection with our formation transactions, (b)             common shares to be sold in this offering and (c)             restricted common shares to be granted to our our trustees, executive officers and other employees upon completion of this offering pursuant to our equity incentive plan, but excludes (i)             common shares issuable upon the exercise of the underwriters' overallotment option in full and (ii)             common shares reserved for future issuance under our equity incentive plan.

(4)
This dollar amount assumes that            of our common shares will be sold in this offering and will increase or decrease depending upon whether such common shares are sold above or below $            per share (the midpoint of the price range set forth on the cover page of this prospectus).

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DILUTION

        Purchasers of our common shares offered by this prospectus will experience an immediate and substantial dilution of the net tangible book value per common share from the assumed initial public offering price based on the midpoint of the price range set forth on the cover page of this prospectus of $            per share. As of September 30, 2010, our predecessor had a net tangible book value of approximately $         million, or $            per common share held by continuing investors. After giving effect to the sale of our common shares in this offering, the application of the aggregate net proceeds of this offering and the completion of our formation transactions, the pro forma net tangible book value at September 30, 2010 attributable to common shareholders would have been $         million, or $            per common share. This amount represents an immediate increase in net tangible book value of $            per share to our continuing investors and an immediate dilution in pro forma net tangible book value of $        per share to investors in this offering. The following table illustrates this per share dilution.

Assumed initial public offering price per share based on the midpoint of the price range set forth on the cover page of this prospectus

  $    
 

Net tangible book value per share at September 30, 2010, before this offering and our formation transactions(1)

       
 

Net increase in pro forma net tangible book value per share attributable to this offering and our formation transactions

       

Pro forma net tangible book value per share after this offering and our formation transactions(2)

       

Dilution in pro forma net tangible book value per share to investors in this offering(3)

  $    

(1)
"Net tangible book value" is defined as total shareholders' equity less intangible assets. Net tangible book value per common share at September 30, 2010 before this offering and our formation transactions was determined by dividing the net tangible book value of our predecessor at September 30, 2010 by the number of our common shares held by continuing investors after this offering.

(2)
The pro forma net tangible book value per share after this offering and our formation transactions was determined by dividing net tangible book value of approximately $             million by            common shares to be outstanding after this offering, which amount excludes the common shares that may be issued by us upon exercise of the underwriters' overallotment option and            of our common shares available for issuance in the future under our equity incentive plan.

(3)
Dilution is determined by subtracting pro forma net tangible book value per common share after giving effect to this offering and our formation transactions from the assumed initial public offering price paid by a new investor for our common shares.

        Assuming the underwriters' over-allotment option is exercised in full, our net tangible book value as of September 30, 2010 would have been $             million, or $            per common share. This represents an immediate dilution in pro forma net tangible book value of $            per common share to investors in this offering.

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SELECTED FINANCIAL AND OPERATING DATA

        You should read the following selected historical and pro forma combined financial and operating data, together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical and pro forma combined consolidated financial statements and related notes included elsewhere in this prospectus.

        We present herein certain combined consolidated historical financial data for our predecessor, which is not a legal entity, but rather a combination of the real estate hospitality assets, liabilities and operations of Fund II and Fund III and the assets, liabilities and operations of RLJ Development. The historical combined consolidated financial data for our predecessor is not necessarily indicative of our results of operations, cash flows or financial position following the completion of this offering and our formation transactions.

        We have not presented our historical financial information because we have not had any corporate activity since our formation other than the issuance of common shares in connection with our initial capitalization and activity in connection with this offering and our formation transactions and because we believe that a discussion of the results would not be meaningful.

        The historical combined consolidated balance sheet information as of December 31, 2009 and 2008 of our predecessor and the combined consolidated statements of operations information for each of the years ended December 31, 2009, 2008 and 2007 of our predecessor have been derived from the historical audited combined consolidated financial statements included elsewhere in this prospectus. The historical combined consolidated balance sheet information as of September 30, 2010 of our predecessor and the combined consolidated statements of operations information for the nine months ended September 30, 2010 and 2009 of our predecessor have been derived from the historical unaudited combined consolidated financial statements included elsewhere in this prospectus and include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the historical financial statements for such periods. Results for the nine months ended September 30, 2010 are not necessarily indicative of our actual results for the year ending December 31, 2010.

        The selected historical financial information at December 31, 2006 and 2005, and for the years ended December 31, 2006 and 2005, have been derived from the unaudited financial statements of our predecessor.

        Our summary unaudited condensed pro forma combined consolidated financial and operating data as of and for the year ended December 31, 2009 and as of and for the nine months ended September 30, 2010 assume (1) the common shares to be sold in this offering are sold at the midpoint of the price range set forth on the cover page of this prospectus, and (2) the completion of our formation transactions as of January 1, 2009 for the operating data and as of September 30, 2010 for the balance sheet data. Our pro forma financial information is not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.

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  Nine Months Ended
September 30,
  Year Ended December 31,  
 
  Pro Forma
Combined
Consolidated
  Historical
Combined
Consolidated
  Pro Forma
Combined
Consolidated
  Historical Combined Consolidated  
 
  2010   2010   2009   2009   2008   2007   2006   2005  
 
  (Unaudited)
  (Unaudited)
  (Unaudited)
   
   
   
  (Unaudited)
  (Unaudited)
 
 
  (In thousands, except share, per share and property data)
 

Statement of Operations Data

                                                 
 

Room revenue

  $ 471,101   $ 341,907   $ 578,867   $ 408,667   $ 463,015   $ 395,939   $ 171,213   $  
 

Other hotel revenue

    78,371     56,324     103,870     73,821     88,804     79,558     33,997      
                                   
 

Total revenue

    549,472     398,231     682,737     482,488     551,819     475,497     205,210      
                                   

Expenses:

                                                 
 

Room expense

    108,680     75,108     133,590     90,663     97,407     84,414     36,006      
 

Other hotel expense

    232,360     168,323     297,652     210,810     235,391     202,788     86,948      
                                   
 

Total hotel operating expense

    341,040     243,431     431,242     301,473     332,798     287,202     122,954      
                                   
 

Real estate and personal property tax, ground rent and insurance

    39,669     29,046     49,221     35,349     33,513     30,073     10,924      
 

Depreciation and amortization

    90,748     73,335     120,586     96,154     84,390     59,651     23,244     112  
 

Impairment loss

            98,372     98,372     21,472              
 

General and administrative

    14,804     14,804     18,533     18,533     19,388     10,273     5,806     2,110  
 

Transaction, pursuit and organization costs

    1,537     7,438     8,665     8,665     2,100     500     675      
                                   
   

Total operating expenses

    487,798     368,054     726,619     558,546     493,661     387,699     163,603     2,222  
                                   
 

Operating income (loss)

    61,674     30,177     (43,882 )   (76,058 )   58,158     87,798     41,607     (2,222 )
 

Interest and other income

    3,308     3,303     2,653     1,579     2,357     3,016     1,161     387  
 

Interest expense

    (59,784 )   (67,014 )   (81,640 )   (92,175 )   (92,892 )   (77,440 )   (35,225 )    
                                   
 

Income (loss) before provision for income tax (expense) benefit

    5,198     (33,534 )   (122,869 )   (166,654 )   (32,377 )   13,374     7,543     (1,835 )
 

Income tax (expense) benefit

    (898 )   (898 )   (1,794 )   (1,801 )   945     (1,317 )   (658 )    
                                   
 

Income (loss) from continuing operations

    4,300     (34,432 )   (124,663 )   (168,455 )   (31,432 )   12,057     6,885     (1,835 )
 

Less: Net loss attributable to the noncontrolling interest

    (130 )       (122 )                    
 

Distributions to preferred shareholders

        (48 )       (62 )   (61 )   (31 )   (6 )    
                                   
 

Net income (loss) available to owners

  $ 4,430   $ (34,480 ) $ (124,541 ) $ (168,517 ) $ (31,493 ) $ 12,026   $ 6,879   $ (1,835 )
                                   

Balance Sheet Data (at period end):

                                                 
 

Investment in hotels, net

  $ 2,849,687   $ 2,123,816         $ 1,877,583   $ 1,905,653   $ 1,801,189   $ 1,404,900   $  
 

Total assets

    3,164,231     2,422,897           2,202,865     2,213,108     2,032,470     1,704,618     191,478  
 

Total debt

    1,327,065     1,613,638           1,598,991     1,448,872     1,340,574     1,009,680      
 

Total liabilities

    1,409,419     1,694,472           1,717,118     1,592,376     1,470,251     1,213,745     156,838  
 

Total owners' equity

    1,754,812     728,425           485,747     620,732     562,219     490,873     34,640  
 

Total liabilities and owners' equity

    3,164,231     2,422,897           2,202,865     2,213,108     2,032,470     1,704,618     191,478  

Per Share Data:

                                                 
 

Pro forma basic earnings per share

                                                 
 

Pro forma diluted earnings per share

                                                 
 

Pro forma weighted average shares outstanding—basic

                                                 
 

Pro forma weighted average shares outstanding—diluted

                                                 

Other Data:

                                                 
 

Number of properties at period end(1)

    141     122     141     117     115     106     88      
 

Pro forma Adjusted EBITDA

  $ 154,089         $ 183,863                                
 

Pro forma Adjusted FFO

    96,715           103,082                                
 

Cash flows from:

                                                 
   

Operating activities

        $ 47,000         $ 28,852   $ 76,978   $ 93,999   $ 43,752   $ 17,038  
   

Investing activities

          (250,010 )         (198,025 )   (130,400 )   (204,795 )   (1,208,658 )   (3,416 )
   

Financing activities

          211,901           164,374     125,706     131,403     1,217,569     (12,956 )

(1)
Includes our initial hotels and the New York LaGuardia Airport Marriott, which is expected to be transferred to a third party prior to the completion of this offering.

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  Pro Forma  
 
  Nine Months Ended
September 30, 2010
  Year Ended
December 31, 2009
 
 
  (In thousands)
 

Reconciliation of FFO(1), Adjusted FFO(1), EBITDA(2) and Adjusted EBITDA(2) to Net Income

             
 

Net income (loss) available to owners

  $ 4,430   $ (124,541 )
 

Add (deduct):

             
   

Depreciation and amortization

    90,748     120,586  
           
 

FFO

    95,178     (3,955 )
 

Add (deduct):

             
   

Impairment loss

        98,372  
   

Transaction and pursuit costs

    1,537     8,665  
           
 

Adjusted FFO

  $ 96,715   $ 103,082  
           
 

Net income (loss) available to owners

 
$

4,430
 
$

(124,541

)
 

Add (deduct):

             
   

Interest expense, net

    59,784     81,640  
   

Interest and other income

    (3,308 )   (2,653 )
   

Income tax expense

    898     1,794  
   

Depreciation and amortization

    90,748     120,586  
           
 

EBITDA

    152,552     76,826  
 

Add (deduct):

             
   

Impairment loss

        98,372  
   

Transaction and pursuit costs

    1,537     8,665  
           
 

Adjusted EBITDA

  $ 154,089   $ 183,863  
           

(1)
We calculate FFO in accordance with standards established by NAREIT, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, items classified by GAAP as extraordinary and the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures.

We further adjusted FFO for certain additional items that are not in NAREIT's definition of FFO, such as impairment losses and hotel transaction and pursuit costs. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs.

(2)
EBITDA is defined as net income or loss excluding: (i) interest expense; (ii) provision for income taxes, including income taxes applicable to sale of assets; and (iii) depreciation and amortization (including amortization of non-cash share-based compensation). We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and certain non-cash items (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.

We further adjust EBITDA for certain additional recurring and non-recurring items such as impairment losses and hotel transaction and pursuit costs. We believe that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

        You should read the following discussion in conjunction with the "Selected Financial and Operating Data," the historical combined consolidated financial statements and related notes of our predecessor, "Risk Factors," and "Our Business and Properties" included elsewhere in this prospectus. Where appropriate, the following discussion includes the effects of this offering and our formation transactions on a pro forma basis. These effects are reflected in our pro forma combined consolidated financial statements located elsewhere in this prospectus. As used in this section, unless the context otherwise requires, "we," "us," "our" and "our company" mean our predecessor for the periods presented and RLJ Lodging Trust and its consolidated subsidiaries upon completion of this offering and our formation transactions.

Overview

        We are a self-advised and self-administered Maryland real estate investment trust, which invests primarily in premium-branded, focused-service and compact full-service hotels. Upon completion of this offering and our formation transactions, we will own 140 hotels in 19 states and the District of Columbia comprising over 20,400 rooms. We will be one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our initial hotels are concentrated in urban and dense suburban markets that we believe exhibit multiple demand generators and high barriers to entry.

        Our strategy is to invest primarily in premium-branded, focused-service and compact full-service hotels. Focused-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve RevPAR levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.

        We believe that the current market environment presents attractive opportunities for us to acquire additional hotels with significant upside potential that are compatible with our investment strategy. We also believe that current lodging market fundamentals provide significant opportunities for RevPAR and EBITDA growth at our initial hotels. We believe that our senior management team's experience, extensive industry relationships and asset management expertise, coupled with our expected access to capital, will enable us to compete effectively for acquisition opportunities and help us generate strong internal and external growth.

Our Customers

        Substantially all of our initial hotels consist of focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our initial hotels are located in the business districts and suburban markets of major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our initial hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.

        Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our initial hotels, this group of business represents a smaller component of our customer base.

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        A number of our initial hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer. Reasons for extended-stays may include, but are not limited to, training and/or special project business, relocation, litigation and insurance claims.

Our Revenues and Expenses

        Our revenue is derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consist of telephone, parking and other guest services.

        Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other hotel expenses. Room expense includes housekeeping, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expense primarily includes food, beverage and associated labor costs. Other hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Our initial hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

Key Indicators of Operating Performance

        We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. 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 operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel's contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include:

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        Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 85.9% of our total revenue for the nine months ended September 30, 2010 and is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.

        We refer to the RevPAR penetration index of our hotels to measure each hotel's RevPAR in relation to the RevPAR for that hotel's competitive set. We use the RevPAR penetration index as an indicator of a hotel's market share. For the nine months ended September 30, 2010, the portfolio-wide RevPAR penetration index of our initial hotels was 115.5.

        For example, a RevPAR penetration index of 100 would indicate that a hotel is capturing its fair market share so that the RevPAR is, on average, the same as its competitors. A RevPAR penetration index exceeding 100 would indicate that a hotel maintains a RevPAR premium (and, therefore, a market share premium) in relation to its competitive set, while a RevPAR penetration index below 100 would be an indicator that a hotel is underperforming its competitive set. One critical component in this calculation is the determination of a hotel's competitive set. A hotel's competitive set is mutually agreed upon by us and the hotel's management company. Factors that we consider when establishing a competitive set include geographic proximity, brand affiliations and rate structure, as well as the level of service provided at the hotel. Competitive set determinations are highly subjective, however, and our methodology for determining a hotel's competitive set may differ materially from those used by other hotel owners and/or management companies.

        We also use FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as measures of the operating performance of our business. See "—Non-GAAP Financial Measures."

Principal Factors Affecting Our Results of Operations

        The principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms, and the ability of our third-party management companies to increase or maintain revenues while controlling expenses.

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Year
  RevPAR Growth   Supply Growth  

2011

    6.2 %   1.0 %

2012

    10.4 %   0.7 %

2013

    10.0 %   1.2 %

2014

    4.7 %   2.4 %

        We expect that our ADR, occupancy and RevPAR performance will 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 and RevPAR performance are dependent on the continued success of the Marriott, Hilton and Hyatt brands.

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        Most categories of variable operating expenses, including labor costs such as housekeeping, fluctuate with changes in occupancy. Increases in occupancy are accompanied by increases in most categories of variable operating expenses, while increases in ADR typically only result in increases in limited categories of operating costs and expenses, such as franchise fees, management fees and credit card processing fee expenses which are based on hotel revenues. Thus, changes in ADR have a more significant impact on operating margins than changes in occupancy.

Critical Accounting Policies

        Our discussion and analysis of the historical financial condition and results of operations of our predecessor is based on our predecessor's combined consolidated financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the historical combined consolidated financial statements of our predecessor included elsewhere in this prospectus. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.

        Hotel acquisitions consist almost exclusively of land, building, furniture, fixtures and equipment and inventory. We allocate the purchase price among these asset classes based on their respective fair values. When we acquire hotels, we acquire them for use. In making estimates of fair value for purposes of allocating the purchase price, we utilize a number of sources of information that are obtained in connection with the acquisition of a hotel, including valuations performed by independent third parties and information obtained about each hotel resulting from pre-acquisition due diligence. Effective January 1, 2009, hotel acquisition costs, such as transfer taxes, title insurance, environmental and property condition reviews, and legal and accounting fees, are expensed in the period incurred. Prior to January 1, 2009, these costs were capitalized and included in investment in hotels at the time of acquisition. The only intangible assets that would typically be acquired consist of miscellaneous operating agreements, such as service contracts or equipment leases. We do not generally acquire any significant in-place leases or other intangible assets (e.g., management agreements, franchise

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agreements or trademarks) when hotels are acquired. In conjunction with the acquisition of a hotel, we typically negotiate new franchise and management agreements with the selected brand and manager.

        Our investments in hotels are carried at cost and are depreciated using the straight-line method over estimated useful lives of 40 years for buildings and improvements and three to five years for furniture, fixtures and equipment. Maintenance and repairs are expensed as incurred and major renewals or improvements are capitalized and depreciated over their useful lives. Our assessments as to the useful lives and classification of costs are subjective and will impact the amount of depreciation expense on an annual basis. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from our combined consolidated balance sheet and the related gain or loss is included in our combined consolidated statement of operations.

        We review the carrying value of each hotel whenever events or changes in circumstances indicate that a hotel's carrying value may not be recoverable. If facts or circumstances support the possibility of impairment, we will estimate the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party appraisals, where considered necessary. We do not believe that there are currently any facts or circumstances indicating impairment in the carrying value of any of our initial hotels as of September 30, 2010.

        Our revenue comprises hotel operating revenue, such as room revenue, food and beverage revenue and revenue from other hotel operating departments (such as telephone, parking and other guest services). These revenues are recorded net of any sales and occupancy taxes collected from guests. All rebates or discounts are recorded as a reduction in revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotels. All revenues are recorded on an accrual basis as earned. Appropriate allowances are made for doubtful accounts and are recorded as bad debt expense. The allowances are calculated as a percentage of aged accounts receivable, based on individual hotel management company policy. Cash received prior to guest arrival is recorded as an advance from the guest and recognized as revenue at the time of occupancy.

        We intend to operate and be taxed as a REIT under the Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our shareholders (which is computed without regard to the dividends paid deduction or net capital gain) and which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax to the extent we currently distribute our REIT taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which the qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially and adversely affect our net income, FFO, liquidity, net cash available for distribution to shareholders and financial condition. However, we intend to organize and operate in such a manner as to qualify for treatment as a REIT.

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        Prior to the completion of this offering, we intend to adopt an equity incentive plan that provides for the grant of options to purchase our common shares and share awards (including restricted common shares and restricted share units), share appreciation rights, performance shares, performance units and other equity-based awards, including long-term incentive plan units in our operating partnership, or LTIP units, or any combination of the foregoing. Equity-based compensation will be recognized as an expense in the financial statements over the vesting period and measured at the fair value of the award on the date of grant. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the equity-based award and the application of the accounting guidance.

Recent Accounting Pronouncements

        In September 2009, the Financial Accounting Standards Board, or the FASB, issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities, or VIEs. This amendment requires an enterprise to perform a qualitative analysis to determine whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for annual periods beginning after November 15, 2009, and for interim periods within the first annual period. The adoption of this amendment did not have a material impact on our results of operations, cash flows or financial position.

        In January 2010, the FASB issued Accounting Standards Update, or ASU, 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements," which adds disclosure requirements for transfers in and out of Levels 1 and 2, requires separate disclosures for activity relating to Level 3 measurements, and clarifies input and valuation techniques. The ASU was effective for interim and annual periods beginning after December 15, 2009, except for Level 3 disclosures, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The adoption of the revised guidance in FASB Accounting Standards Codification Topic 820 did not affect our financial position, results of operations or cash flows.

Results of Operations

        At September 30, 2010 and September 30, 2009, we owned 122 and 117 hotels, respectively (excluding six hotels carried as discontinued operations in the nine month period then ended). At December 31, 2009, 2008 and 2007, we owned 117, 115 and 106 hotels, respectively (excluding six hotels carried as discontinued operations in the annual period then ended). All of the hotels owned during these periods, excluding discontinued operations, are consolidated in our results of operations during those respective periods. For purposes of this presentation, with respect to RevPAR, ADR and occupancy rates, the New York LaGuardia Airport Marriott is included in the financial and operating data presented.

        Net loss from continuing operations for the nine months ended September 30, 2010 was $34.4 million compared to a net loss from continuing operations of $153.3 million for the nine months ended September 30, 2009, representing a decrease of $118.8 million. This improved performance was primarily due to a $33.0 million, or 9.0%, increase in total revenue during the nine months ended September 30, 2010, an increase in interest income of $2.4 million, a decrease in interest expense of $2.7 million and a decrease in impairment charges of $98.4 million, which were partially offset by a $15.0 million, or 6.6%, increase in operating expenses.

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  For the Nine Months Ended September 30,    
   
 
 
  2010   2009   $ Change   % Change  
 
  (unaudited)
  (unaudited)
   
   
 
 

Hotel operating revenue

                         
   

Room revenue

  $ 341,907   $ 311,156     30,751     9.9 %
   

Food and beverage revenue

    46,149     44,790     1,359     3.0 %
   

Other operating department revenue

    10,175     9,246     929     10.0 %
                   
 

Total revenue

    398,231     365,192     33,039     9.0 %
                   

Expense

                         
 

Hotel operating expense

                         
   

Room

    75,108     68,781     6,327     9.2 %
   

Food and beverage

    32,521     31,040     1,481     4.8 %
   

Management fees

    14,017     13,212     805     6.1 %
   

Other hotel expenses

    121,785     115,421     6,364     5.5 %
                   
       

Total hotel operating expense

    243,431     228,454     14,977     6.6 %
 

Depreciation

    73,335     71,902     1,433     2.0 %
 

Impairment loss

        98,372     (98,372 )    
 

Real estate and personal property tax, ground rent and insurance

    29,046     28,544     502     1.8 %
 

General and administrative

    22,242     22,080     162     0.7 %
                   
       

Total operating expense

    368,054     449,352     (81,298 )   (18.1 )%
                   
 

Operating income

    30,177     (84,160 )   114,337     (135.9 )%
   

Other income

    411     757     (346 )   (45.7 )%
   

Interest income

    2,892     474     2,418     510.1 %
   

Interest expense

    (67,014 )   (69,754 )   2,740     (3.9 )%
                   

Net loss from continuing operations before income taxes

    (33,534 )   (152,683 )   119,149     (78.0 )%
   

Income tax expense

    (898 )   (591 )   (307 )   51.9 %
                   

Net loss from continuing operations

    (34,432 )   (153,274 )   118,842        
   

Income from discontinued operations

    22,317     549     21,768     3965.0 %
                   

Net loss

    (12,115 )   (152,725 )   140,610     (92.1 )%
                   

Distributions to preferred unitholders

    (48 )   (48 )        
                   

Net loss available to owners

  $ (12,163 ) $ (152,773 ) $ 140,610     (92.0 )%
                   

        Total revenue increased $33.0 million, or 9.0%, to $398.2 million for the nine months ended September 30, 2010 from $365.2 million for the nine months ended September 30, 2009, reflecting improvement in U.S. lodging fundamentals. Comparability of the nine-month periods was impacted by an increase of $19.5 million in revenues arising from the net impact of acquisitions during the periods.

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        The following are the key hotel operating statistics for hotels owned at September 30, 2010 and 2009, respectively:

 
  For the Nine Months Ended September 30,    
 
 
  2010   2009   % Change  
 
  (unaudited)
  (unaudited)
   
 

Number of Hotels (at end of period)

    122     117     4.3 %

Occupancy %

    69.4 %   65.0 %   6.8 %

ADR

  $ 111.12   $ 111.54     (0.4 )%

RevPAR

  $ 77.17   $ 72.45     6.5 %

        Growth in RevPAR was driven by gains in occupancy as business transient demand, specifically special corporate accounts, increased significantly period over period. Group trends also improved due to increased demand from small corporate accounts.

        Room Revenue.    Room revenue increased $30.7 million, or 9.9%, to $341.9 million for the nine months ended September 30, 2010 from $311.2 million for the nine months ended September 30, 2009. The increase in room revenue was primarily due to a 6.5% increase in RevPAR, driven by a 6.8% increase in occupancy, which was partially offset by a 0.4% decrease in ADR. Comparability of the nine-month periods is impacted by an increase of $17.1 million in room revenue arising from the net impact of acquisitions during the periods.

        Food and Beverage Revenue.    Food and beverage revenue increased $1.3 million, or 3.0%, to $46.1 million for the nine months ended September 30, 2010 from $44.8 million for the nine months ended September 30, 2009. However, comparability of the nine-month periods was impacted by an increase of $1.5 million in food and beverage revenue arising from the net impact of acquisitions during the periods.

        Other Operating Department Revenue.    Other operating department revenue, which includes revenue derived from ancillary sources, increased $0.9 million, or 10.0%, to $10.2 million for the nine months ended September 30, 2010 from $9.2 million for the nine months ended September 30, 2009, primarily as a result of increased parking revenue. Comparability of the nine-month periods is impacted by an increase of $0.8 million in revenues arising from the net impact of acquisitions during the periods. The majority of the remaining increase was a result of portfolio-wide increases in parking revenue of $0.3 million, which was partially offset by continuing declines in telephone revenue of $0.3 million as guests reduced their usage of in-room telephone equipment.

        Hotel operating expense increased $14.9 million, or 6.6%, to $243.4 million for the nine months ended September 30, 2010 from $228.5 million for the nine months ended September 30, 2009. Comparability of the nine-month periods was impacted by an increase of $11.6 million in hotel operating expense arising from the net impact of acquisitions during the periods. The remaining increase was primarily attributable to increases in occupancy as a result of the improving economy.

        Depreciation expense increased $1.4 million, or 2.0%, to $73.3 million for the nine months ended September 30, 2010 from $71.9 million for the nine months ended September 30, 2009. Comparability of the nine-month periods was impacted by a $2.5 million increase in depreciation expense arising from the net impact of acquisitions during the periods. The remaining decrease was primarily due to a reduction in fixed asset bases at certain hotels due to impairment charges in prior years, partially offset

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by a $1.4 million increase in depreciation on building and furniture, fixtures and equipment for capital expenditures made during 2010.

        At September 30, 2010, all of our initial hotels were deemed to have carrying values that were fully recoverable. During the nine months ended September 30, 2009, 17 of our hotels were deemed to have carrying values that were not fully recoverable based on changes in the capital markets and the overall decline in lodging demand, and, as a result, we recognized an impairment loss of $98.4 million.

        Real estate and personal property tax, ground rent and insurance expenses increased $0.5 million, or 1.8%, to $29.0 million for the nine months ended September 30, 2010 from $28.5 million for the nine months ended September 30, 2009. Comparability of the nine-month periods was impacted by an increase of $1.9 million in real estate and personal property tax, ground rent and insurance expense arising from the net impact of acquisitions during the periods. Real estate and personal property tax, ground rent and insurance expense for the remainder of the portfolio decreased $1.4 million due to a combination of declines in assessed property values due to the recession and our efforts to aggressively challenge real estate tax assessments and manage our insurance premiums.

        General and administrative expense increased $0.2 million, or 0.7%, to $22.2 million for the nine months ended September 30, 2010 from $22.1 million for the nine months ended September 30, 2009. Comparability of the nine-month periods was impacted by an increase of $3.3 million in transaction costs arising from the net impact of acquisitions during the periods. The period-over-period increase in transaction costs was partially offset by a net decrease of $3.1 million of costs associated with unsuccessful acquisition efforts during the periods, including a $5.6 million fee paid in 2009 in order to terminate an obligation to purchase two hotels under a purchase and sale agreement, net of costs incurred during 2010.

        Interest income increased $2.4 million to $2.9 million for the nine months ended September 30, 2010 from $0.5 million for the nine months ended September 30, 2009. This increase was primarily due to $2.6 million of interest income recognized for the nine months ended September 30, 2010 arising from our investment in loans that were acquired at the end of 2009. This was partially offset by a decrease in interest income earned on escrowed monies received in 2009 of $0.2 million.

        Interest expense decreased $2.7 million, or 3.9%, to $67.0 million for the nine months ended September 30, 2010 from $69.8 million for the nine months ended September 30, 2009. Comparability of the nine-month periods was impacted by an increase of $0.7 million in interest expense arising from the net impact of acquisitions during the periods. This decrease was primarily due to the expiration of unfavorable interest rate hedges resulting in a decrease in hedge interest expense of $7.2 million and a $0.5 million decrease in amortization of deferred financing fees, partially offset by an increase in mortgage interest expense of $4.8 million arising from rising interest rates and less favorable terms on $303.6 million of debt obligations that were modified and extended.

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        Income tax expense increased $0.3 million, or 51.9%, to $0.9 million for the nine months ended September 30, 2010 from $0.6 million for the nine months ended September 30, 2009. The increase in income tax expense was due to higher state taxes resulting from higher gross profit in 2010. As part of our structure, we own TRSs that are subject to federal and state income taxes. The TRSs' 2010 and 2009 income tax expense were calculated using an effective tax rate of 38.0% and 37.8%, respectively.

        Net income from discontinued operations increased $21.8 million to $22.3 million for the nine months ended September 30, 2010 from $0.5 million for the nine months ended September 30, 2009. The increase in net income from discontinued operations primarily arose from a gain of $23.7 million on the sale of six hotels in April 2010.

        Net loss from continuing operations for the year ended December 31, 2009 was $168.5 million compared to a net loss from continuing operations of $31.4 million for the year ended December 31, 2008, representing a decline of $137.1 million. This decline was primarily due to a $69.3 million, or 12.6%, decrease in total revenue as a result of weakness in the U.S. lodging market caused by the economic recession and an increase in impairment loss of $76.9 million arising from the write down of 17 hotels to fair value.

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  For the Year Ended December 31,    
   
 
 
  2009   2008   $ Change   % Change  

Hotel operating revenue

                         
   

Room revenue

  $ 408,667   $ 463,015     (54,348 )   (11.7 )%
   

Food and beverage revenue

    61,327     71,766     (10,439 )   (14.5 )%
   

Other operating department revenue

    12,494     17,038     (4,544 )   (26.7 )%
                   

Total revenue

    482,488     551,819     (69,331 )   (12.6 )%
                   

Expense

                         
 

Hotel operating expense

                         
   

Room

    90,663     97,407     (6,744 )   (6.9 )%
   

Food and beverage

    41,758     48,934     (7,176 )   (14.7 )%
   

Management fees

    17,203     21,365     (4,162 )   (19.5 )%
   

Other hotel expenses

    151,849     165,092     (13,243 )   (8.0 )%
                   
     

Total hotel operating expense

    301,473     332,798     (31,325 )   (9.4 )%
 

Depreciation

    96,154     84,390     11,764     13.9 %
 

Impairment loss

    98,372     21,472     76,900     358.1 %
 

Real estate and personal property tax, ground rent and insurance

    35,349     33,513     1,836     5.5 %
 

General and administrative

    27,198     21,343     5,855     27.4 %
 

Organization costs

        145     (145 )    
                   
     

Total operating expense

    558,546     493,661     64,885     13.1 %
                   
 

Operating (loss)/income

    (76,058 )   58,158     (134,216 )   (230.8 )%
   

Other income

    955     745     210     28.2 %
   

Interest income

    624     1,612     (988 )   (61.3 )%
   

Interest expense

    (92,175 )   (92,892 )   717     (0.8 )%
                   

(Loss) income from continuing operations before income taxes

    (166,654 )   (32,377 )   (134,277 )   414.7 %
   

Income tax (expense)/benefit

    (1,801 )   945     (2,746 )   (290.6 )%
                   

(Loss) income from continuing operations

    (168,455 )   (31,432 )   (137,023 )   435.9 %
                   
   

Income from discontinued operations

    457     2,111     (1,654 )   (78.4 )%

Net (loss) income

    (167,998 )   (29,321 )   (138,677 )   473.0 %
                   

Distributions to preferred unitholders

    (62 )   (61 )   (1 )   1.6 %
                   

Net (loss) income available to owners

  $ (168,060 ) $ (29,382 ) $ (138,678 )   472.0 %
                   

        Total revenue declined $69.3 million, or 12.6%, to $482.5 million for the year ended December 31, 2009 from $551.8 million for the year ended December 31, 2008, reflecting the continued weakness in U.S. lodging fundamentals and impact of the economic recession in all of our markets. Comparability of the annual periods was impacted by an increase of $35.9 million in total revenue arising from the net impact of acquisitions during the periods. When excluding non-comparable hotels, total revenue from hotels owned for the duration of both periods declined $105.0 million. The continued decline in group bookings, as both businesses and associations cancelled non-essential meetings, adversely affected ADR and food and beverage revenue.

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        The following were the key hotel operating statistics for the hotels owned at December 31, 2009 and 2008, respectively:

 
  For the Year Ended December 31,    
 
 
  2009   2008   % Change  

Number of Hotels (at end of period)

    117     115     1.7 %

Occupancy %

    63.8 %   67.8 %   (5.9 )%

ADR

  $ 111.18   $ 125.34     (11.3 )%

RevPAR

  $ 70.92   $ 84.92     (16.5 )%

Most of the decline in RevPAR reflected a number of negative trends within primary customer segments, including decreases in demand, length of stay, booking pace, and business travel, as well as declines in ADR reflecting discounted pricing.

        Room Revenue.    Room revenue decreased $54.3 million, or 11.7%, to $408.7 million for the year ended December 31, 2009 from $463.0 million for the year ended December 31, 2008. The decrease in room revenue was due to a 16.0% decline in RevPAR, driven by a 10.4% decrease in ADR and a 6.2% decrease in occupancy. Comparability of the annual periods was impacted by a $33.5 million increase in revenues arising from the net impact of acquisitions during the periods.

        Food and Beverage Revenue.    Food and beverage revenue decreased $10.4 million, or 14.5%, to $61.3 million for the year ended December 31, 2009 from $71.8 million for the year ended December 31, 2008. Comparability of the annual periods was impacted by an increase of $1.7 million in food and beverage revenues arising from the net impact of acquisitions during the periods. The primary driver of the decreases in food and beverage revenue for the remainder of the portfolio was an $8.2 million decline in event catering revenues at the hotels. The remaining $3.9 million decline in food and beverage revenue was the result of guests limiting their expenditures as a result of the recession.

        Other Operating Department Revenue.    Other operating department revenue, which includes revenue derived from ancillary sources, decreased $4.5 million, or 26.7%, to $12.5 million for the year ended December 31, 2009 from $17.0 million for the year ended December 31, 2008, primarily as a result of guests continuing to limit expenditures in all areas, including these ancillary sources. Comparability of the annual periods was impacted by an increase of $0.6 million in other operating department revenue arising from the net impact of acquisitions during the periods.

        Hotel operating expense decreased $31.3 million, or 9.4%, to $301.5 million for the year ended December 31, 2009 from $332.8 million for the year ended December 31, 2008. Comparability of the annual periods was impacted by an increase of $18.6 million in hotel operating expense arising from the net impact of acquisitions during the periods. Excluding the impact of acquisitions during the periods, hotel operating expense decreased $48.9 million primarily as a result of lower occupancy across our portfolio.

        Depreciation expense increased $11.8 million, or 13.9%, to $96.2 million for the year ended December 31, 2009 from $84.4 million for the year ended December 31, 2008. Comparability of the annual periods was impacted by an increase of $7.2 million in depreciation expense arising from the net impact of acquisitions during the periods. The remaining increase was primarily due to depreciation on building and furniture, fixtures and equipment related to $17.2 million of capital expenditures made during 2009, partially offset by a reduction of the furniture, fixtures and equipment basis at certain hotels due to impairment charges of $21.5 million in 2008.

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        Impairment loss increased $76.9 million to $98.4 million for the year ended December 31, 2009 from $21.5 million for the year ended December 31, 2008. The increase was due to our determination that the carrying values for 17 of our hotels were not fully recoverable, which resulted in us recording impairment charges related to such hotels in 2009. At December 31, 2008, five of our hotels were deemed to have carrying values that were not fully recoverable. For both 2009 and 2008, the determination that carrying values for certain of our initial hotels were not fully recoverable was made based on changes in the capital markets and the overall decline in lodging demand.

        Real estate and personal property tax, ground rent and insurance expense increased $1.8 million, or 5.5%, to $35.3 million for the year ended December 31, 2009 from $33.5 million for the year ended December 31, 2008. Comparability of the annual periods was impacted by an increase of $2.0 million in real estate and personal property tax, ground rent and insurance expense arising from the net impact of acquisitions during the periods. Real estate and personal property tax, ground rent and insurance expense for the remainder of the portfolio decreased $0.2 million mainly due to a combination of declines in assessed property values due to the recession and our efforts to aggressively challenge real estate tax assessments and manage our insurance premiums.

        General and administrative expense increased $5.8 million, or 27.4%, to $27.2 million for the year ended December 31, 2009 from $21.3 million for the year ended December 31, 2008, primarily as a result of a $5.6 million fee paid in 2009 in order to terminate an obligation to purchase two hotels under a purchase and sale agreement. The purchase and sale agreement was terminated due to an overall decline in the economy, which resulted in our deciding not to continue to pursue this acquisition opportunity. This payment resulted in a year-over-year increase in costs associated with unsuccessful acquisition efforts of $4.6 million. Additionally, transaction costs increased $1.7 million year-over-year due to the size and complexity of the transactions that occurred during 2009 versus 2008. These increases in expense were offset by cost containment strategies implemented to counter the negative impact of the overall economy, particularly those involving discretionary spending such as consulting fees, other professional fees, training and annual employee bonus expense.

        Interest income decreased $1.0 million, or 61.3%, to $0.6 million for the year ended December 31, 2009 from $1.6 million for the year ended December 31, 2008. This decrease was primarily due to declines in interest rates on demand deposits.

        Interest expense decreased $0.7 million, or 0.8%, to $92.2 million for the year ended December 31, 2009 from $92.9 million for the year ended December 31, 2008. Comparability of the annual periods was impacted by an increase of $5.2 million in interest expense arising from the net impact of acquisitions during the periods. Excluding the impact of acquisitions during the periods, interest expense decreased $4.3 million. This $4.3 million decrease was primarily due to a decline in interest rates as a result of the downturn in the economy, which caused mortgage interest expense to decrease $4.1 million with the remaining reduction resulting from a decrease in average outstanding balances.

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        Income tax expense increased $2.7 million to $1.8 million for the year ended December 31, 2009 from a $0.9 million income tax benefit for the year ended December 31, 2008. The increase in income tax expense was due to an immaterial out-of-period adjustment for previously unrecorded state taxes in the State of Texas. As part of our structure, we own TRSs that are subject to federal and state income taxes. The TRSs' combined effective tax rates of 37.8% did not change significantly for the year ended December 31, 2009.

        Net income from discontinued operations decreased $1.7 million to $0.5 million for the year ended December 31, 2009 from $2.1 million for the year ended December 31, 2008. The decrease in net income from discontinued operations is primarily the result of the downturn in the overall economy, which resulted in an 8.7% decline in occupancy and a 3.4% decline in ADR for the six hotels sold in 2010.

        Net loss from continuing operations for the year ended December 31, 2008 was $31.4 million compared to net income from continuing operations of $12.1 million for the year ended December 31, 2007, representing a decline of $43.5 million. This decline in net income was primarily due to weakened hotel performance as a result of the recession, which began in the fourth quarter of 2008. In addition, net loss from continuing operations increased year-over-year due to an increase in impairment loss of $21.5 million as a result of the write down of five of our hotels in the fourth quarter of 2008 to their fair value.

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  For the Year Ended December 31,    
   
 
 
  2008   2007   $ Change   % Change  
 

Hotel operating revenue

                         
   

Room revenue

  $ 463,015   $ 395,939   $ 67,076     16.9 %
   

Food and beverage revenue

    71,766     65,572     6,194     9.4 %
   

Other operating department revenue

    17,038     13,986     3,052     21.8 %
                   
 

Total revenue

    551,819     475,497     76,322     16.1 %
                   

Expense

                         
 

Hotel operating expense

                         
   

Room

    97,407     84,414     12,993     15.4 %
   

Food and beverage

    48,934     45,457     3,477     7.6 %
   

Management fees

    21,365     18,902     2,463     13.0 %
   

Other hotel expenses

    165,092     138,429     26,663     19.3 %
                   
     

Total hotel operating expense

    332,798     287,202     45,596     15.9 %
 

Depreciation

    84,390     59,651     24,739     41.5 %
 

Impairment loss

    21,472         21,472      
 

Real estate and personal property tax, ground rent and insurance

    33,513     30,073     3,440     11.4 %
 

General and administrative

    21,343     10,273     11,070     107.8 %
 

Organization costs

    145     500     (355 )   (71.0 )%
                   
     

Total operating expense

    493,661     387,699     105,962     27.3 %
                   
 

Operating (loss)/income

    58,158     87,798     (29,640 )   (33.8 )%
   

Other income

    745     4     741     18525.0 %
   

Interest income

    1,612     3,012     (1,400 )   (46.5 )%
   

Interest expense

    (92,892 )   (77,440 )   (15,452 )   20.0 %
                   

(Loss) income from continuing operations before income taxes

    (32,377 )   13,374     (45,751 )   (342.1 )%
   

Income tax (expense)/benefit

    945     (1,317 )   2,262     (171.8 )%
                   

(Loss) income from continuing operations

    (31,432 )   12,057     (43,489 )   (360.7 )%
                   
   

Income from discontinued operations

    2,111     165,640     (163,529 )   (98.7 )%

Net (loss) income

    (29,321 )   177,697     (207,018 )   (116.5 )%
                   

Distributions to preferred unitholders

    (61 )   (31 )   (30 )   96.8 %
                   

Net (loss) income available to owners

  $ (29,382 ) $ 177,666   $ (207,048 )   (116.5 )%
                   

        Total revenue increased $76.3 million, or 16.1%, to $551.8 million for the year ended December 31, 2008 from $475.5 million for the year ended December 31, 2007. Comparability of the annual periods was impacted by an increase of $80.5 million in total revenue arising from the net impact of acquisitions during the periods. When excluding non-comparable hotels, total revenues from hotels owned for the duration of both periods declined $4.2 million. The $4.2 million decrease in total revenue was primarily due to a 1.2% decline in RevPAR, which was driven by a 3.7% decrease in occupancy offset by a 2.7% increase in ADR.

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        The following were the key hotel operating statistics for the hotels owned at December 31, 2008 and 2007, respectively:

 
  For the Year Ended December 31,    
 
 
  2008   2007   % Change  

Number of Hotels (at the end of period)

    115     106     8.5 %

Occupancy %

    67.8 %   70.4 %   (3.7 )%

ADR

  $ 125.34   $ 122.07     2.7 %

RevPAR

  $ 84.92   $ 85.92     (1.2 )%

        Most of the decline in RevPAR reflected the onset of the deterioration of the overall economy in the fourth quarter of 2008, as indicated by a significant decline in occupancy.

        Room Revenue.    Room revenue increased $67.1 million, or 16.9%, to $463.0 million for the year ended December 31, 2008 from $395.9 million for the year ended December 31, 2007. However, comparability of the annual periods was impacted by an increase of $71.0 million in room revenue arising from the net impact of acquisitions during the periods. When excluding non-comparable hotels, total room revenue declined $3.9 million, due to declining RevPAR as a result of the onset of the recession in the fourth quarter of 2008.

        Food and Beverage Revenue.    Food and beverage revenue increased $6.2 million, or 9.4%, to $71.8 million for the year ended December 31, 2008 from $65.6 million for the year ended December 31, 2007. Comparability of the annual periods is impacted by an increase of $6.6 million in food and beverage revenues arising from the net impact of acquisitions during the periods. When excluding non-comparable hotels, total food and beverage revenue declined $0.4 million as a result of lower occupancy and guests beginning to limit their expenditures because of the recession.

        Other Operating Department Revenue.    Other operating department revenue, which includes revenue derived from ancillary sources, increased $3.0 million, or 21.8%, to $17.0 million for the year ended December 31, 2008 from $14.0 million for the year ended December 31, 2007. Comparability of the annual periods was impacted by an increase of $2.9 million in other operating department revenue arising from the net impact of acquisitions during the periods.

        Hotel operating expenses increased $45.6 million, or 15.9%, to $332.8 million for the year ended December 31, 2008 from $287.2 million for the year ended December 31, 2007. Comparability of the annual periods was impacted by an increase of $45.3 million in hotel operating expense arising from the net impact of acquisitions during the periods.

        Depreciation expense increased $24.7 million, or 41.5%, to $84.4 million for the year ended December 31, 2008 from $59.7 million for the year ended December 31, 2007. Comparability of the annual periods was impacted by an increase of $14.5 million in depreciation expense arising from the net impact of acquisitions during the periods. The remaining increase was primarily due to depreciation on building and furniture, fixtures and equipment related to capital expenditures of $27.1 million made during 2008, as well as a full year's depreciation on $32.8 million of capital expenditures in 2007, which totaled $6.2 million.

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        Impairment loss totaled $21.5 million for the year ended December 31, 2008 as compared to $0 for the year ended December 31, 2007. The increase was due to our determination that the carrying values for five of our hotels were not fully recoverable, which resulted in us recording an impairment charge related to such hotels. The 2008 impairment determination was made based on changes in capital markets and the decline in travel demand due to the onset of the recession.

        Real estate and personal property tax, ground rent and insurance expense increased $3.4 million, or 11.4%, to $33.5 million for the year ended December 31, 2008 from $30.1 million for the year ended December 31, 2007. Comparability of the annual periods was impacted by an increase of $5.1 million in real estate and personal property tax, ground rent and insurance expenses arising from the net impact of acquisitions during the periods. Real estate and personal property tax, ground rent and insurance expense for the remainder of the portfolio decreased $1.7 million due to a combination of declines in assessed property values due to the recession and our efforts to aggressively challenge real estate tax assessments and manage our insurance premiums.

        General and administrative expense increased $11.0 million to $21.3 million for the year ended December 31, 2008 from $10.3 million for the year ended December 31, 2007, primarily as a result of an increase of $2.6 million in salaries, wages and related benefits associated with increased staffing, an increase of $2.5 million in professional fees incurred and a $0.4 million increase in costs associated with unsuccessful acquisition efforts. Additionally in 2008, $1.2 million of transaction costs were incurred. Prior to December 31, 2008, transaction costs were permitted to be capitalized as investment in hotels. The entire increase in expense is due to the change in accounting for transaction costs due to the implementation of the provisions of SFAS 141(R). Additionally, our predecessor's administrative expenses were partially reimbursed by an affiliated entity that shared in general and administrative costs. That entity was subsequently sold, and, as a result, those expenses were no longer shared or reimbursed in 2008. This accounted for an increase in general and administrative expense of $3.8 million.

        Other income increased $0.7 million to $0.7 million for the year ended December 31, 2008 from $0.0 million for the year ended December 31, 2007. This increase was primarily a result of income related to interest rate hedges that were only partially effective.

        Interest income decreased $1.4 million, or 46.5%, to $1.6 million for the year ended December 31, 2008 from $3.0 million for the year ended December 31, 2007. This decrease was primarily due to decreases in interest rates on demand deposits.

        Interest expense increased $15.5 million, or 20.0%, to $92.9 million for the year ended December 31, 2008 from $77.4 million for the year ended December 31, 2007. Comparability of the annual periods was impacted by an increase of $15.3 million in interest expense arising from the net impact of additional debt incurred to fund acquisitions during the periods. The remaining increase was primarily due to an increase in interest expense related to interest rate hedges of $6.3 million, an increase in unused fee of $0.1 million and an increase in amortization of deferred financing fee expense

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of $0.4 million. These increases were offset by a decrease in mortgage interest expense of $4.9 million and a decrease in interest charged on line of credit borrowings of $1.9 million because of a decrease in borrowings on the line of credit.

        Income tax expense decreased $2.3 million to a $0.9 million income tax benefit for the year ended December 31, 2008 from a $1.3 million income tax expense for the year ended December 31, 2007. The decrease in income tax expense was primarily due to the results of operations, including losses at our taxable REIT subsidiaries. As part of our structure, we own TRSs that are subject to federal and state income taxes. The TRSs' combined effective tax rate of 37.8% did not change significantly for the year ended December 31, 2008.

        Net income from discontinued operations decreased $163.5 million to $2.1 million in 2008 from $165.6 million in 2007. Net income from discontinued operations is primarily the result of a gain of $163.7 million on the sale of four hotels in January 2007.

Non-GAAP Financial Measures

        We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, and (4) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as a measure of our operating performance. FFO, Adjusted FFO, EBITDA and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as reported by other companies that do not define such terms exactly as we define such terms.

        We calculate FFO in accordance with standards established by NAREIT, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, items classified by GAAP as extraordinary and the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company's operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance by excluding the effect of depreciation and amortization, gains or losses from sales for real estate, extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting, and that FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

        We further adjust FFO for certain additional items that are not in NAREIT's definition of FFO, such as hotel acquisition costs. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs.

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        The following is a reconciliation of our GAAP net loss to FFO and Adjusted FFO for the nine months ended September 30, 2010 and 2009 and for the years ended December 31, 2009, 2008 and 2007 (in thousands):

Funds From Operations

 
  For the Nine Months Ended September 30,   For the Year Ended December 31,  
 
  2010   2009   2009   2008   2007  

Net (loss) income available to owners(1)

  $ (34,480 ) $ (153,322 ) $ (168,517 ) $ (31,493 ) $ 12,026  

Depreciation and amortization(1)

    73,335     71,902     96,154     84,390     59,651  
                       
 

FFO

    38,855     (81,420 )   (72,363 )   52,897     71,677  

Impairment loss

        98,372     98,372     21,472      

Transaction and pursuit costs

    7,438     9,118     8,665     1,955      

Organization costs

                145     500  
                       
 

Adjusted FFO

  $ 46,293   $ 26,070   $ 34,674   $ 76,469   $ 72,177  
                       

(1)
Excludes amount from discontinued operations.

        EBITDA is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization (including amortization of non-cash share-based compensation). We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.

        We further adjust EBITDA for certain additional items such as impairment losses and hotel acquisition costs. We believe that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

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        The following is a reconciliation of our GAAP net loss to EBITDA and Adjusted EBITDA for the nine months ended September 30, 2010 and 2009 and for the years ended December 31, 2009, 2008 and 2007 (in thousands):

Earnings Before Interest, Taxes, Depreciation and Amortization

 
  For the Nine Months
Ended September 30,
  For the Year Ended December 31,  
 
  2010   2009   2009   2008   2007  

Net (loss) income available to owners(1)

  $ (34,480 ) $ (153,322 ) $ (168,517 ) $ (31,493 ) $ 12,026  

Interest expense(1)

    67,014     69,754     92,175     92,892     77,440  

Interest income(1)

    (2,892 )   (474 )   (624 )   (1,612 )   (3,012 )

Income tax expense (benefit)(1)

    898     591     1,801     (945 )   1,317  

Depreciation and amortization(1)

    73,335     71,902     96,154     84,390     59,651  
                       
 

EBITDA

    103,875     (11,549 )   20,989     143,232     147,422  

Impairment loss

   
   
98,372
   
98,372
   
21,472
   
 

Transaction and pursuit costs

    7,438     9,118     8,665     1,955      

Organization costs

                145     500  
                       
 

Adjusted EBITDA

  $ 111,313   $ 95,941   $ 128,026   $ 166,804   $ 147,922  
                       

(1)
Excludes amount from discontinued operations.

Liquidity and Capital Resources

        Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our initial hotels, including:

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 anticipated revolving credit facility.

        Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotels and scheduled debt payments. We expect to meet our long-term liquidity requirements through various sources of capital, including our anticipated revolving credit facility and future equity issuances (including OP units) or debt offerings, existing working capital, net cash provided by operations, long-term hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access to these capital sources, including the current state of overall equity and credit markets, our degree of leverage, the value of our unencumbered assets and

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borrowing restrictions imposed by lenders, general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

        Our hotels will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of hotels will require significant capital outlays. We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.

        Upon completion of this offering, we expect to enter into a $             million revolving credit facility, which we believe will provide us with significant financial flexibility to fund future acquisitions and hotel redevelopments. We intend to repay indebtedness incurred under our anticipated revolving credit facility from time to time out of net cash provided by operations and from the net proceeds of issuances of additional equity and debt securities, as market conditions permit.

        Upon completion of this offering, we anticipate having approximately $1.3 billion in outstanding indebtedness, in addition to the new revolving credit facility described above. We intend to use substantially all of the net proceeds of this offering to repay approximately $             million of secured indebtedness that was outstanding as of September 30, 2010. The following table sets forth the indebtedness that we expect to assume upon completion of this offering and our formation transactions after application of the net proceeds of this offering, as discussed under "Use of Proceeds."

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Property(ies)/Loan
  Number of
Assets
Encumbered
  Outstanding
Principal
Balance at
September 30,
2010
  Effective
Interest
Rate(1)
  Amortization
Period
  Maturity
Date
 

Hyatt Summerfield Suites Portfolio:

    6                          
 

Senior

        $ 43,059 (2)   4.57 %   Interest Only     April 2011 (3)
 

Mezzanine

          33,192 (2)   6.08 %   Interest Only     April 2011 (3)

Term Loan Facility(4)

    0     140,000     5.25 %   Interest Only     Sept 2011  

Hilton Garden Inn New York/West 35th Street

    1     60,000     5.50 %   Interest Only     June 2013 (5)

Homewood Suites by Hilton Washington(6)

    1     31,000     5.50 %   Interest Only     Oct 2013 (5)

Embassy Suites Tampa-Downtown Convention Center(6)

    1     40,000     5.50 %   Interest Only     Oct 2013 (5)

Doubletree Metropolitan Hotel New York City:

    1                          
 

Senior(7)

          150,000     4.90 %   Interest Only     Dec 2013 (5)
 

Mezzanine(7)

          50,000     10.75 %   Interest Only     Dec 2013 (5)

Courtyard Grand Rapids Airport

    1     4,474     6.12 %   25     April 2015  

SpringHill Suites Detroit Southfield

    1     5,157     5.50 %   25     May 2015  

Courtyard Chicago Midway Airport

    1     12,078     5.55 %   25     May 2015  

Fairfield Inn & Suites Chicago Midway Airport

    1     5,240     5.55 %   25     June 2015  

Courtyard Denver Southwest/Lakewood

    1     2,737     5.55 %   25     June 2015  

Residence Inn Denver Southwest/Lakewood

    1     4,492     5.55 %   25     June 2015  

SpringHill Suites Denver North/Westminster

    1     10,470     5.55 %   25     June 2015  

Courtyard Boulder Louisville

    1     9,344     5.55 %   25     June 2015  

SpringHill Suites Louisville Hurstbourne/North

    1     8,372     5.55 %   25     June 2015  

SpringHill Suites South Bend Mishawaka

    1     5,790     5.60 %   25     June 2015  

SpringHill Suites Indianapolis Carmel

    1     9,015     5.60 %   25     June 2015  

Courtyard Austin South

    1     5,486     5.55 %   25     June 2015  

Courtyard Chicago Downtown/Magnificent Mile

    1     36,377     5.55 %   25     June 2015  

Courtyard Denver West/Golden

    1     6,907     5.60 %   25     June 2015  

Courtyard Boulder Longmont

    1     6,157     5.55 %   25     June 2015  

SpringHill Suites Austin North/Parmer Lane

    1     7,075     5.55 %   25     June 2015  

Residence Inn Indianapolis Carmel

    1     9,012     5.60 %   25     June 2015  

Residence Inn Denver West/Golden

    1     7,064     5.55 %   25     June 2015  

Residence Inn Louisville Northeast

    1     7,775     5.55 %   25     June 2015  

Residence Inn Boulder Longmont

    1     7,075     5.55 %   25     June 2015  

Residence Inn Austin North/Parmer Lane

    1     8,076     5.55 %   25     June 2015  

Residence Inn Chicago Naperville/Warrenville

    1     10,135     5.55 %   25     June 2015  

Residence Inn Detroit Novi

    1     7,130     5.50 %   25     July 2015  

Residence Inn Chicago Oak Brook

    1     11,624     5.44 %   25     Sept 2015  

Residence Inn Salt Lake City Airport

    1     9,428     6.29 %   30     July 2016  

Courtyard Goshen

    1     5,621     6.29 %   30     July 2016  

Courtyard Chicago Southeast/Hammond, IN

    1     7,891     6.29 %   30     July 2016  

Fairfield Inn & Suites San Antonio Airport/North Star Mall

    1     9,442     6.29 %   30     July 2016  

Wachovia Loans

    43     500,452     6.29 %   30     July 2016  

Fairfield Inn & Suites Chicago Southeast/Hammond, IN

    1     6,760     6.29 %   30     July 2016  

Residence Inn and Courtyard Indianapolis

    2     35,763     6.29 %   30     July 2016  

Residence Inn Chicago Southeast/Hammond, IN

    1     6,935     6.29 %   30     July 2016  

Courtyard San Antonio Airport/North Star Mall

    1     9,875     6.29 %   30     July 2016  
                           
 

Total/Weighted Average

    86   $ 1,346,480     5.94 %            
                           

(1)
Effective interest rate gives effect to interest rate swaps and LIBOR floors, as applicable.

(2)
Outstanding principal balances at September 30, 2010 reflect an aggregate $8.7 million prepayment expected to be made on the senior and mezzanine loans with a portion of the net proceeds of this offering.

(3)
Maturity date may be extended for one year at our option (subject to our prior satisfaction of certain conditions, including, among others, maintenance of specified debt service coverage ratio and advance notice of our intention to exercise the extension).

(4)
Loan originated on January 14, 2011. Ten unencumbered properties are subject to negative pledges related to this facility.

(5)
May be extended by us for up to two one-year periods at our option (subject to our prior satisfaction of certain conditions, including, among others, maintenance of specified debt service coverage ratio and advance notice of our intention to exercise the extensions).

(6)
Loan originated on October 6, 2010.

(7)
Loan originated on December 23, 2010.

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Sources and Uses of Cash

        As of September 30, 2010, we had $159.8 million of cash and cash equivalents. As of December 31, 2009, we had $150.3 million of cash and cash equivalents, compared to $155.0 million at December 31, 2008 and $83.9 million at December 31, 2007.

        Net cash flow provided by operating activities totaled $47.0 million for the nine months ended September 30, 2010. Net loss of $12.1 million was due in significant part to non-cash expenses, including $73.3 million of depreciation and $2.3 million of amortization of deferred financing costs, partially offset by a $23.7 million gain on the sale of six hotels. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our initial hotels resulted in net cash inflow of $6.5 million.

        Net cash flow provided by operating activities totaled $28.9 million for the year ended December 31, 2009. Net loss of $168.0 million was due in significant part to non-cash expenses, including $98.9 million of depreciation, $98.4 million of impairment charges and $3.8 million of amortization. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our initial hotels resulted in net cash outflow of $5.9 million.

        Net cash flow provided by operating activities totaled $77.0 million for the year ended December 31, 2008. Net loss of $29.3 million was due in significant part to non-cash expenses, including $86.9 million of depreciation, $21.5 million of impairment charges and $3.8 million of amortization. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our initial hotels resulted in net cash outflow of $5.2 million.

        Net cash flow provided by operating activities totaled $94.0 million for the year ended December 31, 2007. Net gain of $177.7 million was primarily the result of gain on sale of hotels of $163.7 million. This was offset by $61.9 million of depreciation and $3.0 million of amortization expense. Additionally, changes in operating assets and liabilities due to the timing of cash receipts and payments from our initial hotels resulted in net cash inflow of $15.0 million.

        Net cash flow used in investing activities totaled $250.0 million for nine months ended September 30, 2010 primarily due to $310.2 million used for the purchase of five hotels, $8.5 million in improvements and additions to hotels and the net funding of restricted cash reserves of $9.8 million, partially offset by $73.1 million from the sale of six hotels.

        Net cash flow used in investing activities totaled $198.0 million for the year ended December 31, 2009 primarily due to $145.3 million used for the purchase of two hotels, $12.9 million used to purchase two loans, $20.6 million in improvements and additions to hotels and $8.6 million of net funding of restricted cash reserves.

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        Net cash flow used in investing activities totaled $130.4 million for the year ended December 31, 2008 primarily due to $87.8 million used for the purchase of nine hotels, net of assumed mortgage indebtedness. Additionally, $38.5 million was used to purchase improvements and additions to hotels and $9.4 million was the net funding to restricted cash reserves.

        Net cash flow used in investing activities totaled $204.8 million for the year ended December 31, 2007 primarily due to $438.0 million used for the purchase of 18 hotels offset by the receipt of $264.8 million of proceeds related to the sale of six hotels. Additionally, $25.4 million was used to fund improvements and additions to hotels and $8.9 million was the net funding of restricted cash reserves.

        Net cash flow provided by financing activities totaled $211.9 million for nine months ended September 30, 2010 primarily due to $383.5 million of borrowing under our credit facility, $60.0 million in proceeds from mortgage loans, $295.9 million in net contributions from partners, offset by $399.9 million of repayments under our credit facility, $71.7 million of mortgage loan repayments, $28.5 million in payment of member distributions and $23.2 million in payment of partners distributions.

        Net cash flow provided by financing activities totaled $164.4 million for year ended December 31, 2009 primarily due to $151.0 million of borrowing under our credit facility, $14.8 million in proceeds from mortgage loans, $48.9 million in net contributions from partners, offset by $6.0 million of repayments under our credit facility, $10.8 million of mortgage loan repayments, $33.0 million in payment of partners distributions.

        Net cash flow provided by financing activities totaled $125.7 million for year ended December 31, 2008 primarily due to $57.8 million of borrowing under our credit facility, $70.6 million in proceeds from mortgage loans, $204.3 million in net contributions from partners, offset by $99.8 million of repayments under our credit facility, $6.3 million of mortgage loan repayments, $2.0 million of deferred financing costs paid, $6.4 million in payment of member distributions and $92.5 million in payment of partners distributions.