News Column

RLJ LODGING TRUST - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 6, 2014

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 27, 2014 (the "Annual Report"), which is accessible on the SEC's website at www.sec.gov.



Statement Regarding Forward-Looking Information

The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," "may" or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates. Given these uncertainties, undue reliance should not be placed on such statements. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Risk Factors," "Forward-Looking Statements," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.



Overview

We are a self-advised and self-administered Maryland real estate investment trust ("REIT") that acquires primarily premium-branded, focused-service and compact full-service hotels. We are one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our hotels are concentrated in markets that we believe exhibit multiple demand generators and high barriers to entry. Our strategy is to acquire primarily 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 and compact full-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve Revenue per Available Room ("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 are encouraged by recent improvements in the U.S. economy. Unemployment rates, corporate profits, and consumer confidence are showing signs of steady improvement. We expect that these improvements will bode well for the lodging sector. We recognize that geopolitical challenges remain and, if elevated, may deteriorate economic conditions. However, with growth in lodging supply expected to be below the historical average for the next few years and improvements in the economy we currently do not anticipate any significant slowdown in lodging fundamentals. Accordingly, we remain cautiously optimistic that we are in the midst of a multi-year lodging recovery. Furthermore, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market. We believe our cash on hand and expected access to capital (including availability under our unsecured revolving 21



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credit facility) along with our senior management team's experience, extensive industry relationships and asset management expertise, will enable us to compete effectively for such acquisitions and enable us to generate additional internal and external growth. As of June 30, 2014, we owned 148 properties, comprised of 146 hotels with approximately 22,900 rooms and two planned hotel conversions, located in 21 states and the District of Columbia, and an interest in a mortgage loan secured by a hotel. We own, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of one property in which we own a 98.1% controlling interest in a joint venture. We elected to be taxed as a REIT, for U.S. federal income tax purposes, when we filed our U.S. federal tax return for the taxable year ended December 31, 2011. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership RLJ Lodging Trust, L.P. (the "Operating Partnership"). We are the sole general partner of our operating partnership. As of June 30, 2014, we owned, through a combination of direct and indirect interests, 99.3% of the units of limited partnership interest in the Operating Partnership ("OP units").



Recent Significant Activities

Our recent significant activities reflect our commitment to maximizing shareholder value through selective acquisitions in markets with high barriers to entry, value-add renovations and conservative balance sheet management. During the three months ended June 30, 2014, the following significant activities took place:

Completed a follow-on public offering of 9,200,000 common



shares of

beneficial interest at a public offering price of $26.45 per



share,

for net proceeds of approximately $232.8 million, after



deducting

the underwriting discount and other estimated offering costs; Acquired three hotels for an aggregate purchase price of $191.7 million; Sold one hotel for $13.5 million and recorded a gain on sale of $1.3 million; and



Declared a cash dividend of $0.22 per share for the quarter.

Our Customers

Substantially all of our hotels consist of premium-branded, 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 hotels are located in business districts within major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our 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 hotels, group business that utilizes meeting space represents a small component of our customer base. A number of our 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 primarily derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consists 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 operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages 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 22



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administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Our 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 Financial 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 accounting principles generally accepted in the United States of America ("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 industry standard 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 the cash flow and its potential to provide attractive long-term total returns. These key indicators include: Occupancy



Average Daily Rate ("ADR")

RevPAR

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring revenue performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis, comparing the results to our budget and RevPAR for prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.



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

Critical Accounting Policies

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 consolidated financial statements included elsewhere in this filing. 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.



Investment in Hotels and Other Properties

Our acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. We may also acquire intangibles related to in-place leases, management agreements and franchise agreements when properties are acquired. We allocate the purchase price among the assets acquired and liabilities assumed based on their respective fair values. Our investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangibles arising from acquisitions are amortized using the straight-line method over the non-cancelable portion of the term of the agreement. Maintenance and repairs are expensed and major renewals or improvements are capitalized. Interest used to finance real estate under development is capitalized as an additional cost of development. Upon the sale or disposal of a property, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is recognized. 23



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In accordance with the guidance on impairment or disposal of long-lived assets, we do not consider "held for sale" classification until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. We do not depreciate properties so long as they are classified as held for sale. Upon designation as held for sale and quarterly thereafter, we review the realizability of the carrying value, less cost to sell, in accordance with the guidance. Any such adjustment in the carrying value is reflected as an impairment charge. We assess carrying value whenever events or changes in circumstances indicate that the carrying amounts may not be fully recoverable. Recoverability is measured by comparison of the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of properties. If our analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.



The use of projected future cash flows is based on assumptions that are consistent with a market participant's future expectations for the travel industry and economy in general and our plans to manage the underlying properties. However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions and our ultimate investment intent that occur subsequent to a current impairment analysis could impact these assumptions and result in future impairment charges of the properties.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which significantly changed the requirements for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on operations and final results should be presented as discontinued operations. The guidance also provides additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance applies to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We adopted the new guidance for the quarterly period ended March 31, 2014. Prior to January 1, 2014, properties disposed of were presented in discontinued operations for all periods presented. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is not permitted. We are currently evaluating whether this ASU will have a material impact on our financial position, results of operations or cash flows. 24



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Results of Operations

At June 30, 2014, we owned 148 properties. Based on when a property is acquired, disposed of or closed for renovation, operating results for certain properties are not comparable for the three and six months ended June 30, 2014 and 2013. The non-comparable properties include 20 acquisitions which took place between January 1, 2013 and June 30, 2014 and 14 dispositions which took place in 2014. The 20 acquisitions include three properties that are closed for renovation. There were three hotels disposed of during 2013 which are included in discontinued operations for the six months ended June 30, 2013, and therefore not included in the comparisons presented. Comparison of the three months ended June 30, 2014 to the three months ended June 30, 2013 For the three months ended June 30, 2014 2013 $ change % change (amounts in thousands) Revenue Operating revenue Room revenue $ 259,447$ 228,390$ 31,057 13.6 % Food and beverage revenue 27,481 25,088 2,393 9.5 % Other operating department revenue 8,119 7,345 774 10.5 % Total revenue 295,047 260,823 34,224 13.1 % Expense Operating expense Room expense 54,136 47,065 7,071 15.0 % Food and beverage expense 18,746 17,220 1,526 8.9 % Management fee expense 11,957 9,370 2,587 27.6 % Other operating expense 78,932 73,070 5,862 8.0 % Total property operating expense 163,771 146,725 17,046 11.6 % Depreciation and amortization 35,422 31,853 3,569 11.2 % Property tax, insurance and other 17,938 16,536 1,402 8.5 % General and administrative 10,135 9,084 1,051 11.6 % Transaction and pursuit costs 2,411 1,255 1,156 92.1 % Total operating expense 229,677 205,453 24,224 11.8 % Operating income 65,370 55,370 10,000 18.1 % Other income 405 91 314 345.1 % Interest income 962 240 722 300.8 % Interest expense (14,142 ) (16,785 ) 2,643 (15.7 )% Income from continuing operations before income taxes 52,595 38,916 13,679 35.2 % Income tax expense (494 ) (345 ) (149 ) 43.2 % Income from continuing operations 52,101 38,571 13,530 35.1 % Income from discontinued operations - 2,410 (2,410 ) - % Gain on disposal of hotel properties 1,260 - 1,260 - % Net income 53,361 40,981 12,380 30.2 % Net income attributable to non-controlling interests Noncontrolling interest in joint venture (79 ) (203 ) 124 (61.1 )% Noncontrolling interest in common units of Operating Partnership (378 ) (268 ) (110 ) 41.0 % Net income attributable to common shareholders $ 52,904 $ 40,510 $ 12,394 30.6 % 25



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Revenue

Total revenue increased $34.2 million, or 13.1%, to $295.0 million for the three months ended June 30, 2014 from $260.8 million for the three months ended June 30, 2013. The increase was a result of $19.4 million in revenue attributable to non-comparable properties and a 6.4% increase in RevPAR at the comparable properties.



The following are the quarter-to-date key hotel operating statistics for hotels owned at June 30, 2014 and 2013, respectively:

For the three months ended June



30,

2014



2013

Number of comparable properties (at end of period) 128 128 - % Occupancy 82.4 % 79.3 % 4.0 % ADR $ 152.49 $ 149.11 2.3 % RevPAR $ 125.71 $ 118.19 6.4 % Room Revenue Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales. Room revenue increased $31.1 million, or 13.6%, to $259.4 million for the three months ended June 30, 2014 from $228.4 million for the three months ended June 30, 2013. This increase was a result of $17.6 million of room revenue from non-comparable properties and a 6.4% increase in RevPAR at the comparable properties.



Food and Beverage Revenue

Food and beverage revenue increased $2.4 million, or 9.5%, to $27.5 million for the three months ended June 30, 2014 from $25.1 million for the three months ended June 30, 2013. The increase includes $1.2 million of food and beverage revenue from non-comparable properties. Food and beverage revenue for the remainder of the portfolio increased $1.2 million.



Other Operating Department Revenue

Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $0.8 million, or 10.5%, to $8.1 million for the three months ended June 30, 2014 from $7.3 million for the three months ended June 30, 2013. The majority of this increase was due to $0.6 million of other operating department revenue from non-comparable properties.



Property Operating Expense

Property operating expense increased $17.0 million, or 11.6%, to $163.8 million for the three months ended June 30, 2014 from $146.7 million for the three months ended June 30, 2013. This increase includes $9.7 million in property operating expense attributable to non-comparable properties. The remaining increase was primarily attributable to higher room expense, food and beverage expense, other operating department costs, and management and franchise fees at the comparable properties. Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including changes in occupancy, labor costs, utilities and insurance costs. Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.



Depreciation and Amortization

Depreciation and amortization expense increased $3.6 million, or 11.2%, to $35.4 million for the three months ended June 30, 2014 from $31.9 million for the three months ended June 30, 2013. The increase is a result of a $3.2 million increase in depreciation and amortization expense arising from non-comparable properties.



Property Tax, Insurance and Other

Property tax, insurance and other expense increased $1.4 million, or 8.5%, to $17.9 million for the three months ended June 30, 2014 from $16.5 million for the three months ended June 30, 2013. The increase includes $1.6 million in property tax, insurance and other expense attributable to non-comparable properties. The remaining decrease of $0.2 million represents the 26



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net impact of increasing property tax assessments, partially offset by favorable resolution of property tax appeals at the comparable properties.

General and Administrative

General and administrative expense increased $1.1 million, or 11.6%, to $10.1 million for the three months ended June 30, 2014 from $9.1 million for the three months ended June 30, 2013. The increase in general and administrative expense is primarily attributable to an increase in salary expense of $0.3 million and amortization of restricted share awards of $0.5 million.



Interest Expense

The components of our interest expense for the three months ended June 30, 2014 and 2013 were as follows (in thousands):

For the three months ended June 30, 2014 2013 Mortgage indebtedness $ 5,790 $ 13,578 Revolving credit facility and term loans 7,420 2,408 Amortization of deferred financing fees 1,074 799 Capitalized interest (142 ) - Total interest expense $ 14,142 $ 16,785 Interest expense decreased $2.6 million, or 15.7%, to $14.1 million for the three months ended June 30, 2014 from $16.8 million for the three months ended June 30, 2013. The decrease in interest expense from mortgage indebtedness was due to decreases in principal balances between June 30, 2013 and June 30, 2014 of $600.7 million as a result of mortgage amortization as well as mortgage principal balances that were paid down. The increase in interest expense from the revolving credit facility and term loans was due to increased borrowings on the revolving credit facility, the 2012 Five-Year Term Loan and the 2013 Five-Year Term Loan. The increase in capitalized interest was due to the three major redevelopment projects underway during the three months ended June 30, 2014. Income Taxes As part of our structure, we own taxable REIT subsidiaries ("TRSs") that are subject to federal and state income taxes. The effective tax rates were 1.62% and 3.81% for the three months ended June 30, 2014 and 2013, respectively. Our tax expense increased $0.1 million to $0.5 million for the three months ended June 30, 2014 from $0.3 million for the three months ended June 30, 2013. The increase in tax expense is primarily due to an increase in income recorded at our TRSs. 27



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Comparison of the six months ended June 30, 2014 to the six months ended June 30, 2013 For the six months ended June 30, 2014 2013 $ change % change (amounts in thousands) Revenue Operating revenue Room revenue $ 465,472$ 413,839$ 51,633 12.5 % Food and beverage revenue 50,848 48,299 2,549 5.3 % Other operating department revenue 15,100 13,555 1,545 11.4 % Total revenue 531,420 475,693 55,727 11.7 % Expense Operating expense Room 101,657 90,162 11,495 12.7 % Food and beverage 35,619 33,777 1,842 5.5 % Management fees 21,070 16,751 4,319 25.8 % Other operating expenses 151,008 139,437 11,571 8.3 % Total property operating expense 309,354 280,127 29,227 10.4 % Depreciation and amortization 68,298 63,197 5,101 8.1 % Property tax, insurance and other 35,190 31,245 3,945 12.6 % General and administrative 20,264 17,882 2,382 13.3 % Transaction and pursuit costs 3,895 2,344 1,551 66.2 % Total operating expense 437,001 394,795 42,206 10.7 % Operating income 94,419 80,898 13,521 16.7 % Other income 515 170 345 202.9 % Interest income 1,285 536 749 139.7 % Interest expense (28,788 ) (33,659 ) 4,871 (14.5 )% Income from continuing operations before income taxes 67,431 47,945 19,486 40.6 % Income tax expense (788 ) (571 ) (217 ) 38.0 % Income from continuing operations 66,643 47,374 19,269 40.7 % Loss from discontinued operations - 2,191 (2,191 ) - % Loss on disposal of hotel properties (1,297 ) - (1,297 ) - % Net income 65,346 49,565 15,781 31.8 % Net income attributable to non-controlling interests Noncontrolling interest in joint venture (45 ) (155 ) 110 (71.0 )% Noncontrolling interest in common units of Operating Partnership (465 ) (407 ) (58 ) 14.3 % Net income attributable to common shareholders $ 64,836 $ 49,003$ 15,833 32.3 % Revenue Total revenue increased $55.7 million, or 11.7%, to $531.4 million for the six months ended June 30, 2014 from $475.7 million for the six months ended June 30, 2013. The increase was a result of $30.2 million in revenue attributable to non-comparable properties and a 6.3% increase in RevPAR at the comparable properties. 28



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The following are the year-to-date key hotel operating statistics for hotels owned at June 30, 2014 and 2013, respectively:

For the six months ended June 30, 2014 2013 Number of comparable properties (at end of period) 128 128 - % Occupancy 78.1 % 75.3 % 3.7 % ADR $ 147.68 $ 144.08 2.5 % RevPAR $ 115.27 $ 108.43 6.3 % Room Revenue Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales. Room revenue increased $51.6 million, or 12.5%, to $465.5 million for the six months ended June 30, 2014 from $413.8 million for the six months ended June 30, 2013. This increase was a result of $27.5 million of room revenue from non-comparable properties and a 6.3% increase in RevPAR at the comparable properties.



Food and Beverage Revenue

Food and beverage revenue increased $2.5 million, or 5.3%, to $50.8 million for the six months ended June 30, 2014 from $48.3 million for the six months ended June 30, 2013. The increase includes $1.4 million of food and beverage revenue from non-comparable properties. Food and beverage revenue for the remainder of the portfolio increased $1.1 million.



Other Operating Department Revenue

Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $1.5 million, or 11.4%, to $15.1 million for the six months ended June 30, 2014 from $13.6 million for the six months ended June 30, 2013. The majority of this increase was due to $1.3 million of other operating department revenue from non-comparable properties.



Property Operating Expense

Property operating expense increased $29.2 million, or 10.4%, to $309.4 million for the six months ended June 30, 2014 from $280.1 million for the six months ended June 30, 2013. This increase includes $15.6 million in property operating expense attributable to non-comparable properties. The remaining increase was primarily attributable to higher room expense, food and beverage expense, other operating department costs, and management and franchise fees at the comparable properties. Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including changes in occupancy, labor costs, utilities and insurance costs. Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.



Depreciation and Amortization

Depreciation and amortization expense increased $5.1 million, or 8.1%, to $68.3 million for the six months ended June 30, 2014 from $63.2 million for the six months ended June 30, 2013. The increase is a result of a $4.9 million increase in depreciation and amortization expense arising from non-comparable properties, partially offset by FF&E at hotel properties being fully depreciated during the periods.



Property Tax, Insurance and Other

Property tax, insurance and other expense increased $3.9 million, or 12.6%, to $35.2 million for the six months ended June 30, 2014 from $31.2 million for the six months ended June 30, 2013. The increase includes $3.1 million in property tax, insurance and other expense attributable to non-comparable properties.



The

remaining increase of $0.8 million represents the net impact of increasing property tax assessments, partially offset by favorable resolution of property tax appeals at the comparable properties.

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General and Administrative

General and administrative expense increased $2.4 million, or 13.3%, to $20.3 million for the six months ended June 30, 2014 from $17.9 million for the six months ended June 30, 2013. The increase in general and administrative expense is primarily attributable to an increase in salary expense of $0.9 million and amortization of restricted share awards of $1.0 million.



Interest Expense

The components of our interest expense for the six months ended June 30, 2014 and 2013 were as follows (in thousands):

For the six months ended June 30, 2014 2013 Mortgage indebtedness $ 11,593 $ 27,123 Revolving credit facility and term loans 14,272



4,948

Loss on defeasance 804



-

Amortization of deferred financing fees 2,261 1,588 Capitalized interest (142 ) - Total interest expense $ 28,788 $ 33,659 Interest expense decreased $4.9 million, or 14.5%, to $28.8 million for the six months ended June 30, 2014 from $33.7 million for the six months ended June 30, 2013. The decrease in interest expense from mortgage indebtedness was due to decreases in principal balances between June 30, 2013 and June 30, 2014 of $600.7 million as a result of mortgage amortization as well as mortgage principal balances that were paid down. The increase in interest expense from the revolving credit facility and term loans was due to increased borrowings on the revolving credit facility, the 2012 Five-Year Term Loan and the 2013 Five-Year Term Loan. The loss on defeasance related to the disposal of certain properties. The increase in amortization of deferred financing fees was related to the accelerated amortization of deferred financing costs. The increase in capitalized interest was due to the three major redevelopment projects underway during the six months ended June 30, 2014.



Income Taxes

As part of our structure, we own TRSs that are subject to federal and state income taxes. The effective tax rates were 2.43% and 303.43% for the six months ended June 30, 2014 and 2013, respectively. Our tax expense increased $0.2 million to $0.8 million for the six months ended June 30, 2014 from $0.6 million for the six months ended June 30, 2013. The increase in tax expense is primarily due to an increase in income recorded at our TRSs.



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. 30



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Funds From Operations

We calculate funds from operations ("FFO") in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT") which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment, items classified by GAAP as extraordinary, 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 and 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 present FFO attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for common shares. We believe it is meaningful for the investor to understand FFO attributable to all common shares and OP units. We further adjust FFO for certain additional items that are not in NAREIT's definition of FFO, such as hotel transaction and pursuit costs, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of business. We believe that Adjusted FFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and FFO, is beneficial to an investor's understanding of our operating performance.



The following is a reconciliation of our GAAP net income to FFO and Adjusted FFO for the three and six months ended June 30, 2014 and 2013 (in thousands):

For the three months ended June 30,



For the six months ended June 30,

2014 2013 2014 2013 Net income $ 53,361 $ 40,981 $ 65,346 $ 49,565 Depreciation and amortization 35,422 31,853 68,298 63,197 (Gain) Loss on disposal of hotel properties (1,260 ) - 1,297 - Gain on extinguishment of indebtedness - (2,425 ) - (2,425 ) Noncontrolling interest in joint venture (79 ) (203 ) (45 ) (155 ) Adjustments related to discontinued operations (1) - 65 - 156 Adjustments related to joint venture (2) (46 ) (121 ) (93 ) (242 ) FFO attributable to common shareholders 87,398 70,150 134,803 110,096 Transaction and pursuit costs 2,411 1,255 3,895 2,344 Amortization of share based compensation 3,820 3,334 7,393 6,348 Loan related costs (3) - - 1,073 - Other expenses (4) - 11 - 24 Adjusted FFO $ 93,629 $ 74,750 $ 147,164$ 118,812



(1) Includes depreciation and amortization expense from discontinued operations.

(2) Includes depreciation and amortization expense allocated to the noncontrolling interest in joint venture.



(3) Represents loss on defeasance and accelerated amortization of deferred

financing fees.

(4) Represents legal expenses outside the normal course of operations.

Earnings Before Interest, Taxes, Depreciation and Amortization

EBITDA is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sales of assets; and (3) depreciation and amortization. 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 disposals. We present EBITDA attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for 31



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common shares. We believe it is meaningful for the investor to understand EBITDA attributable to all common shares and OP units.

We further adjust EBITDA for certain additional items such as gains or losses on disposals, hotel transaction and pursuit costs, impairment, the amortization of share-based compensation and certain other expenses that we consider outside the normal course of business. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and EBITDA, is beneficial to an investor's understanding of our operating performance.



The following is a reconciliation of our GAAP net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013 (in thousands):

For the three months ended June 30,



For the six months ended June 30,

2014 2013 2014 2013 Net income $ 53,361 $ 40,981 $ 65,346 $ 49,565 Depreciation and amortization 35,422 31,853 68,298 63,197 Interest expense, net (1) 13,502 16,779 28,140 33,646 Income tax expense 494 345 788 571 Noncontrolling interest in joint venture (79 ) (203 ) (45 ) (155 ) Adjustments related to discontinued operations (2) - 247 - 498 Adjustments related to joint venture (3) (46 ) (121 ) (93 ) (242 ) EBITDA 102,654 89,881 162,434 147,080 Transaction and pursuit costs 2,411 1,255 3,895 2,344 Gain on extinguishment of indebtedness - (2,425 ) - (2,425 ) (Gain) loss on disposal of hotel properties (1,260 ) - 1,297 - Amortization of share based compensation 3,820 3,334 7,393 6,348 Other expenses (4) - 11 - 24 Adjusted EBITDA $ 107,625 $ 92,056$ 175,019$ 153,371 (1) Interest expense is net of interest income, excluding amounts



attributable to investment in loans of $0.3 million and $0.6 million for

the three and six months ended June 30, 2014, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2013, respectively. (2) Includes depreciation, amortization and interest expense from discontinued operations.



(3) Includes depreciation, amortization and interest expense allocated to the

noncontrolling interest in joint venture.

(4) Represents legal expenses outside the normal course of 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 properties, including:



recurring maintenance and capital expenditures necessary to maintain our

properties in accordance with brand standards;

interest expense and scheduled principal payments on outstanding indebtedness;

distributions necessary to qualify for taxation as a REIT; and

capital expenditures to improve our properties, including capital

expenditures required by our franchisors in connection with our formation

transactions and recent property acquisitions.

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 unsecured revolving credit facility.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional properties and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with

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respect to our properties and scheduled debt payments, at maturity or otherwise. We expect to meet our long-term liquidity requirements through various sources of capital, including our unsecured revolving credit facility and future equity (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 these capital sources, including the current state of overall equity and credit markets, our degree of leverage, the value of our unencumbered assets and 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 properties will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of properties 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 gain, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gain. As a result, our ability to fund capital expenditures, acquisitions or property 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. Credit Facilities We have in place a credit agreement that provides for (i) an unsecured revolving credit facility of up to $300 million with a scheduled maturity date of November 20, 2016 with a one-year extension option if certain conditions are satisfied (the "Revolver"), (ii) an unsecured term loan of $400 million with a scheduled maturity date of March 20, 2019 (which originally was scheduled to mature in 2017) (the "2012 Five-Year Term Loan"), (iii) an unsecured term loan of $225 million with a scheduled maturity date of November 20, 2019 (the "Seven-Year Term Loan"), and (iv) an unsecured term loan of $400 million with a scheduled maturity date of August 27, 2018 (the "2013 Five-Year Term Loan").



The Revolver and Term Loans are subject to customary financial covenants. As of June 30, 2014, we were in compliance with all financial covenants.

As of and for the three and six months ended June 30, 2014, details of the Revolver and Term Loans are as follows (in thousands):

Interest expense for the

three months



ended June 30, six months ended June 30,

Interest Outstanding Rate at Borrowings at June 30, June 30, 2014 Maturity Date 2014 (1) 2014 2013 2014 2013 Revolver (2) $ - 11/2016 n/a $ 296 263 $ 619 $ 619 2013 Five-Year Term Loan (3) 400,000 08/2018 3.07% 3,102 - 5,953 - 2012 Five-Year Term Loan 400,000 03/2019 1.71% 1,728 1,391 3,150 2,807 Seven-Year Term Loan (4) 225,000 11/2019 4.04% 2,294 754 4,550 1,522 Total $ 1,025,000 $ 7,420 $ 2,408$ 14,272$ 4,948



(1) Interest rate at June 30, 2014 gives effect to interest rate hedges and

LIBOR floors, as applicable. (2) Includes the unused facility fee of $0.3 million and $0.5 million for the three and six months ended June 30, 2014, respectively and $0.3 million and $0.5 million for the three and six months ended June 30, 2013, respectively. (3) Includes interest expense related to an interest rate hedge of $1.3 million and $2.5 million for the three and six months ended June 30, 2014, respectively. (4) Includes interest expense related to an interest rate hedge of $1.0 million and $2.0 million for the three and six months ended June 30, 2014, respectively. 33



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Sources and Uses of Cash

As of June 30, 2014, we had $373.7 million of cash and cash equivalents compared to $332.2 million at December 31, 2013.

Cash flows from Operating Activities

Net cash flow provided by operating activities totaled $132.0 million for the six months ended June 30, 2014. Net income of $65.3 million included significant non-cash expenses, including $68.3 million of depreciation and amortization, $2.3 million of amortization of deferred financing costs, $0.5 million of amortization of deferred management fees, $7.4 million of amortization of share based compensation, $0.8 million of loss on defeasance and a $1.3 million loss on disposal of hotel properties. These amounts were partially offset by $0.1 million of accretion of interest income on investment in loans and $0.8 million of deferred income taxes. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our properties resulted in net cash outflow of $13.0 million. Net cash flow provided by operating activities totaled $99.7 million for the six months ended June 30, 2013. Net income of $49.6 million included significant non-cash expenses, including $63.4 million of depreciation and amortization, $1.6 million of amortization of deferred financing costs, $0.5 million of amortization of deferred management fees and $6.3 million of amortization of share based compensation. These amounts were partially offset by $2.4 million of gain on extinguishment of indebtedness and $0.2 million of deferred income taxes. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our hotels resulted in net cash outflow of $19.1 million.



Cash flows from Investing Activities

Net cash flow used in investing activities totaled $410.6 million for the six months ended June 30, 2014 primarily due to $504.1 million used for the purchase of 13 properties, $35.4 million in routine capital improvements and additions to hotels and other properties and $3.2 million related to three major redevelopment projects. This was partially offset by $124.1 million of proceeds from the sale of 14 properties, the application of purchase deposits of $6.2 million and the net releases from restricted cash reserves of $1.8 million. For the three major redevelopment projects we have underway, we have incurred $3.2 million of costs for the six months ended June 30, 2014, total costs to date of $6.1 million and expect to incur additional costs of between $40.0 million and $45.0 million. The three projects are expected to be completed between late-2014 and mid-2015. Net cash flow used in investing activities totaled $207.8 million for the six months ended June 30, 2013 primarily due to $184.2 million used for the purchase of three hotels, $26.0 million in routine capital improvements and additions to hotels and other properties and the net funding of restricted cash reserves of $0.3 million, partially offset by the application of purchase deposits of $2.7 million.



Cash flows from Financing Activities

Net cash flow provided by financing activities totaled $320.0 million for the six months ended June 30, 2014 primarily due to $232.8 million provided from the issuance and sale of common shares, $175.0 million in borrowings on the Term Loans and $258.5 million in borrowings on the Revolver. This was partially offset by $258.5 million of repayments on the Revolver, $25.6 million in payments of mortgage principal, $2.6 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan, $1.6 million paid for deferred financing fees, $1.2 million distribution related to the joint venture noncontrolling interest and $56.9 million of distributions on common shares and OP units. Net cash flow provided by financing activities totaled $255.0 million for the six months ended June 30, 2013 primarily due to $327.5 million provided from the issuance and sale of common shares and $83.0 million of borrowings under the prior credit facility. This was partially offset by $99.0 million of repayments on the Revolver, $7.3 million of mortgage loan repayments, $1.8 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan, $47.4 million of distributions on common shares and OP units and $0.1 million paid for deferred financing fees. 34



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Capital Expenditures and Reserve Funds

We maintain each of our properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. The cost of such routine improvements and alterations are typically paid out of FF&E reserves, which are funded by a portion of each property's gross revenues. Routine capital expenditures are administered by the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our properties. From time to time, certain of our hotels may be undergoing renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels in our markets. In addition, upon acquisition of a hotel we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor's standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or adequate to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with cash and cash equivalents on hand, our Revolver and/or other sources of available liquidity. With respect to some of our hotels that are operated under franchise agreements with major national hotel brands and for some of our hotels subject to first mortgage liens, we are obligated to maintain FF&E reserve accounts for future capital expenditures at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels, and typically ranges between 1.0% and 5.0% of the respective hotel's total gross revenue. As of June 30, 2014, approximately $57.4 million was held in FF&E reserve accounts for future capital expenditures.



Off-Balance Sheet Arrangements

As of June 30, 2014, we had no off-balance sheet arrangements.

Inflation

We rely entirely on the performance of the properties and their ability to increase revenues to keep pace with inflation. Increases in the costs of operating our hotels due to inflation would adversely affect the operating performance of our TRSs, which in turn, could inhibit the ability of our TRSs to make required rent payments to us. Hotel management companies, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our hotel management companies to raise room rates.



Seasonality

Depending on a hotel's location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. Demand is generally lower in the winter months for hotels located in non-resort markets due to decreased travel and higher in the spring and summer months during the peak travel season. Accordingly, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.


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