Chatham Lodging Trust Annual Report 2011

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2011 annual report

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Chatham Lodging Trust

2011 Annual Report

2011 Chairman’s Letter

Since our Initial Public Offering (IPO) in 2010, we have continued to deliver on our vision and the

commitment made to you at that time: to build the leading lodging real estate investment trust (REIT) focused on
premium-branded, upscale extended-stay and select-service hotels. In approximately 18 months, we have
assembled a portfolio of high-quality hotels with a strong emphasis on major east and west coast metropolitan
areas. We completed a number of key transactions during the year, more than doubling our investment in hotels
from approximately $210 million at the end of 2010 to $520 million by year-end 2011. We also built on our
record of paying an attractive dividend - every quarter since the first full quarter after our IPO.

We acquired five wholly-owned hotels last year for $195 million, a price well below replacement cost, that
are very much attuned with our market strategy of targeting hotels with strong upside potential. Our portfolio of
wholly-owned hotels today is concentrated in strong markets with high barriers to new competition: 77 percent of
our portfolio is located in the northeastern U.S. and along California’s west coast, with 65 percent of them
located in metropolitan Washington D.C., metropolitan New York City and southern California.

We also acquired 64 hotels from Innkeepers USA Trust for $1.02 billion in a joint venture (JV) with
Cerberus Capital Management LP. Our $37 million equity investment comprises a 10.3 percent ownership
interest in the JV, while our pro rata share of assets in the JV is approximately $105 million. The portfolio’s
average cost per key was approximately $118,000. We expect the JV to provide significant cash returns to its
partners, as well as create meaningful returns of capital in the first year, through the disposition of non-core
assets and portfolio financings.

Concurrently, we invested substantial capital, the equivalent of approximately $2 per share, to significantly

upgrade 13 of our wholly-owned hotels to peak competitive position. We accomplished this by completing
upgrades/renovations sooner rather than later. Our portfolio now is positioned to benefit from projected favorable
lodging fundamentals over the next several years as 72 percent of it will not require product improvements until
2017.

Today, we have an exceptional portfolio with an all-in cost of $174 thousand per key, well below

replacement cost. Our properties are market leaders in their segments, currently achieving a 17 percent RevPAR
premium, compared to their respective competitive sets, and we expect our market share to grow significantly in
2012 as a result of the improvements we made to the portfolio.

We are very bullish on the lodging industry in 2012 and beyond. The outlook for new hotel room supply is
forecast to remain at historically low levels at least until well into 2014. Long lead times to bring a project to the
construction phase and the current low lending support for development financing are contributing factors.
Although not as robust as we would like, the U.S. economy is expected to continue to expand. This bodes well
for select-service hotels, and we are optimistic that it will help produce solid, long-term operating results.

Our ownership model is based on our track record of owning premium-branded, select-service hotels

generating high profit margins, due to high RevPAR levels and lower operating costs. Our hotels already produce
industry-leading EBITDA margins. With the majority of our renovations complete, coupled with aggressive asset
management and rising hotel room rates, we expect our portfolio to generate strong revenue and operating profit
growth in 2012.

At year-end 2011, our leverage ratio of net debt to investment in hotels (at cost) was approximately 50
percent. Our long-term goal is to maintain a ratio of net debt to investment in hotels (at cost) at less than 35
percent. However, at this early stage of the lodging cycle recovery, we are comfortable stepping up our leverage
to take advantage of the opportunity to complete the Innkeepers acquisitions, which we believe will pay off
handsomely for our shareholders and partners. An important takeaway on our leverage is that at current levels,
our debt coverage ratios remain strong at more than two times, thus providing support for our ability to pay
meaningful dividends to our shareholders.

In 2011, we paid dividends of $0.70 per share, or approximately 75 percent of our adjusted funds from
operations (FFO) per share. Historically, dividends are the primary driver behind lodging REIT equity returns,
and Chatham is one of the lodging REIT leaders in dividends per share. With adjusted FFO per share projected to
grow approximately 50 percent from 2011 to 2012, our board has indicated support for increasing the dividend
on a reasoned and prudent basis.

Our superior results in 2011 are the results of exceptional efforts by the employees and senior management

of Chatham, who put in countless hours to complete these major acquisitions with minimal operational
disruption. I thank them for their hard work and dedication.

Our primary goal remains to provide meaningful returns to our shareholders, and we strongly believe that
our efforts in 2011 set the table for what will be excellent years ahead for Chatham. Our management team has
proven experience during all phases of the lodging cycle, and this experience gives us a competitive advantage to
deliver strong shareholder returns over time.

We believe that the quality of our assets and the strength of the markets in which they are located, together

with our aggressive asset management, will reap significant rewards for our shareholders. We know from
experience that buying hotels using our specific criteria and investing in appropriate upgrades/renovations are the
keys to generating consistent cash-flow over time. The ability to produce and grow cash-flow enables us to pay
and grow dividends which translates into increased net asset value, share price appreciation and multiple
expansion. This in turn, will provide the currency to support external growth and further enhance returns.

We are confident of the strength and quality of our portfolio and business plan and we look forward to the

continued execution of our growth plan. We are committed to maintaining open communications and will update
you on our progress on a regular basis.

I thank you for your confidence in Chatham and for your continued support.

Sincerely,

Jeffrey H. Fisher
Chairman, Chief Executive Officer and President

March 23, 2012

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

Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

Form 10-K

EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
For the transition period from

Commission File Number 001-34693

Chatham Lodging Trust

(Exact name of registrant as specified in its charter)

Maryland
(State or Other Jurisdiction of
Incorporation or Organization)

50 Cocoanut Row, Suite 216
Palm Beach, Florida
(Address of Principal Executive Offices)

27-1200777
(IRS Employer
Identification No.)

33480
(Zip Code)

(561) 802-4477
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Common Shares of Beneficial Interest, par value $0.01 per share

New York Stock Exchange

Title of Each Class

Name of Each Exchange on Which Registered

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ‘ Yes Í No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ‘ Yes Í No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Í Yes ‘ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Í Yes ‘ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to the Form 10-K. Í
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.:
Large accelerated filer ‘
Í
Accelerated filer
Smaller reporting company ‘
Non-accelerated filer ‘ (Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ‘ Yes Í No
The aggregate market value of the 13,819,939 common shares of beneficial interest held by non-affiliates of the registrant was $222,639,217.29
based on the closing sale price on the New York Stock Exchange for such common shares of beneficial interest as of June 30, 2011.

The number of common shares of beneficial interest outstanding as of March 01, 2012 was 13,847,531.

Portions of the registrant’s Definitive Proxy Statement for its 2012 Annual Meeting of Shareholders (to be filed with the Securities and Exchange
Commission on or before April 29, 2012) are incorporated by reference into this Annual Report on Form 10-K in response to Part III hereof.

DOCUMENTS INCORPORATED BY REFERENCE

Chatham Lodging Trust

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements

1.
1A.
1B.
2.
3.
4.

6.
7.
7A.
8.
9.
9A.
9B.

10.
11.
12.

13.
14.

15.

PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III
Trustees, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Trustee Independence . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

2
11
30
31
32
32

33
37
39
49
50
50
50
51

52
52

52
52
52

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of

1933 and Section 21E of the Securities Exchange Act of 1934, and as such may involve known and unknown
risks, uncertainties and other factors which may cause our actual results, performance or achievements to be
materially different from future results, performance or achievements expressed or implied by such forward-
looking statements. Forward-looking statements, which are based on certain assumptions and describe our future
plans, strategies and expectations, are generally identified by our use of words, such as “intend,” “plan,” “may,”
“should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,”
and similar expressions, whether in the negative or affirmative. All statements regarding our expected financial
position, business and financing plans are forward-looking statements. Factors which could have a material
adverse effect on our operations and future prospects include those discussed in “Business,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in
this Annual Report on Form 10-K. These risks and uncertainties should be considered in evaluating any forward-
looking statement contained in this report or incorporated by reference herein.

All forward-looking statements speak only as of the date of this report or, in the case of any document
incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We
undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect
events, circumstances or changes in expectations after the date of this report, except as required by law.

Item 1.

Business

Overview

PART I

Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment

trust (“REIT”) on October 26, 2009. The Company is internally-managed and was organized to invest primarily
in premium-branded upscale extended-stay and select-service hotels.

We completed our initial public offering (the “IPO”) on April 21, 2010. The IPO resulted in the sale of
8,625,000 common shares at $20.00 per share, generating $172.5 million in gross proceeds. Net proceeds, after
underwriters’ discounts and commissions and other offering costs, were approximately $158.7 million.
Concurrently with the closing of the IPO, in a separate private placement pursuant to Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”), we sold 500,000 of our common shares to Jeffrey H.
Fisher, our Chairman, President and Chief Executive Officer, at the public offering price of $20.00 per share, for
proceeds of $10.0 million.

On February 8, 2011, we completed a follow-on common share offering generating gross proceeds of $73.6
million and net proceeds of approximately $69.4 million, adding capital to our balance sheet. Using these funds
as well as borrowing capacity on our secured revolving credit facility, on July 14, 2011, we acquired five hotels
for an aggregate purchase price of $195 million, including the assumption of five individual mortgage loans
secured by the hotels totaling $134.2 million. Additionally, we invested $37.0 million for an approximate 10.3%
interest in a joint venture (the “JV”) with Cerberus Capital Management (“Cerberus”) that acquired 64 hotels
from Innkeepers USA Trust (“Innkeepers”) on October 27, 2011. The Company accounts for this investment
under the equity method.

We had no operations prior to the consummation of the IPO. Following the closing of the IPO, we
contributed the net proceeds from the IPO and the concurrent private placement, as well as the proceeds of our
February 2011 offering, to Chatham Lodging, L.P. (the “Operating Partnership”) in exchange for partnership
interests in the Operating Partnership. Substantially all of our assets are held by, and all of our operations are
conducted through, the Operating Partnership. Chatham Lodging Trust is the sole general partner of the
Operating Partnership and owns 100% of the common units of limited partnership interest in the Operating
Partnership. Certain of our executive officers hold vested and unvested long-term incentive plan units in the
Operating Partnership, which are presented as noncontrolling interests on our consolidated balance sheets.

As of December 31, 2011, we owned 18 hotels with an aggregate of 2,414 rooms located in 10 states and the

District of Columbia and we held a 10.3% minority interest in the JV, which owns 64 hotels comprising an
aggregate of 8,329 rooms. To qualify as a REIT, we cannot operate the hotels. Therefore, the Operating
Partnership and its subsidiaries lease our wholly owned hotels to taxable REIT subsidiary lessees (“TRS
Lessees”), which are wholly owned by one of our taxable REIT subsidiary (“TRS”) holding companies. We
indirectly own our interest in [51] of the 64 JV hotels through the Operating Partnership, and we own our interest
in the remaining [13] JV hotels through one of our TRS holding companies. All of the JV hotels are leased to
TRS Lessees in which we indirectly own a 10.3% minority interests through one of our TRS holding companies.
Each hotel is leased to a TRS Lessee under a percentage lease that provides for rental payments equal to the
greater of (i) a fixed base rent amount or (ii) a percentage rent based on hotel room revenue. The initial term of
each of the TRS leases is five years. Lease revenue from each TRS Lessee is eliminated in consolidation. The
TRS Lessees have entered into management agreements with third party management companies that provide
day-to-day management for the hotels. Island Hospitality Management Inc. (“IHM”), which is 90% owned by
Mr. Fisher, manages 10 of our wholly owned hotels; Homewood Suites Management LLC, a subsidiary of Hilton
Worldwide Inc. (“Hilton”) manages six of our wholly owned hotels; and Concord Hospitality Enterprises
Company (“Concord”) manages two of our wholly owned hotels. All but one of the JV hotels are managed by
IHM. One JV hotel is managed by Dimension Development Company.

Our wholly owned hotels includes upscale extended-stay hotels that operate under the Homewood Suites by

Hilton® brand (eight hotels) and Residence Inn by Marriott® brand (six hotels), as well as premium-branded
select-service hotels that operate under the Courtyard by Marriott® brand (one hotel), the Hampton Inn and
Suites by Hilton® brand (one hotel), the SpringHill Suites by Marriott® brand (one hotel) and the Doubletree
Suites by Hilton® brand (one hotel).

Upscale extended-stay hotels typically have the following characteristics:

•

principal customer base includes business travelers who are on extended assignments and corporate
relocations;

services and amenities include complimentary breakfast and evening hospitality hour, high-speed
internet access, in-room movie channels, limited meeting space, daily linen and room cleaning service,
24-hour front desk, guest grocery services, and an on-site maintenance staff; and

physical facilities include large suites, quality construction, full separate kitchens in each guest suite,
quality room furnishings, pool, and exercise facilities.

We also invest in premium-branded select-service hotels such as Courtyard by Marriott®, Hampton Inn and

Suites®, SpringHill Suites by Marriott® and Doubletree Suites®. The service and amenity offerings of these
hotels typically include complimentary breakfast, high-speed internet access, local calls, in-room movie
channels, and daily linen and room cleaning service.

The following sets forth certain information with respect to our 18 wholly-owned hotels at December 31, 2011:

Property

Location

Management
Company

Date of
Acquisition

Year
Opened

Homewood Suites by Hilton Boston-Billerica/

Bedford/Burlington . . . . . . . . . . . . . . . . . . . . . . . . . . Billerica, Massachusetts

Homewood Suites by Hilton . . . . . . . . . . . . . . . . . . . . . Bloomington,
Minneapolis-Mall of America . . . . . . . . . . . . . . . . . . . . Minnesota
Homewood Suites by Hilton Nashville-Brentwood . . . Brentwood, Tennessee
Homewood Suites by Hilton Dallas-Market Center . . . Dallas, Texas
Homewood Suites by Hilton Hartford-Farmington . . . . Farmington, Connecticut
Homewood Suites by Hilton Orlando-Maitland . . . . . . Maitland, Florida
Homewood Suites by Hilton Carlsbad (North San

Diego County) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carlsbad, California

Hampton Inn & Suites Houston-Medical Center . . . . . . Houston, Texas
Courtyard Altoona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Altoona, Pennsylvania
Springhill Suites Washington . . . . . . . . . . . . . . . . . . . . Washington, Pennsylvania
Residence Inn Long Island Holtsville . . . . . . . . . . . . . . Holtsville, New York
Residence Inn White Plains . . . . . . . . . . . . . . . . . . . . . . White Plains, New York
Residence Inn New Rochelle . . . . . . . . . . . . . . . . . . . . . New Rochelle, New York
Residence Inn Garden Grove . . . . . . . . . . . . . . . . . . . . . Garden Grove, CA
Residence Inn Mission Valley . . . . . . . . . . . . . . . . . . . . San Diego, CA
Homewood Suites by Hilton San Antonio River

Walk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Antonio, TX
Doubletree Suites by Hilton Washington DC . . . . . . . . Washington, DC
Residence Inn Tysons Corner . . . . . . . . . . . . . . . . . . . . Vienna, VA
Total/ Weighted Average . . . . . . . . . . . . . . . . . . . . . . .

Hilton

Hilton
Hilton
Hilton
Hilton
Hilton

April 23, 2010

April 23, 2010
April 23, 2010
April 23, 2010
April 23, 2010
April 23, 2010

Island Hospitality
Island Hospitality
Concord
Concord
Island Hospitality
Island Hospitality
Island Hospitality
Island Hospitality
Island Hospitality

Island Hospitality
Island Hospitality
Island Hospitality

November 3, 2010
July 2, 2010
August 24, 2010
August 24, 2010
August 3, 2010
September 23, 2010
October 5, 2010
July 14, 2011
July 14, 2011

July 14, 2011
July 14, 2011
July 14, 2011

1999

1998
1998
1998
1999
2000

2008
1997
2001
2000
2004
1982
2000
2003
2003

1996
1974
2001

Number
of
Rooms

Purchase
Price

Purchase
Price per
Room

(Unaudited)

Debt

147

$ 12.5 million

$ 85,714

144
121
137
121
143

145
120
105
86
124
133
124
200
192

$ 18.0 million
$ 11.3 million
$ 10.7 million
$ 11.5 million
9.5 million
$

$ 32.0 million
$ 16.5 million
$ 11.3 million
$ 12.0 million
$ 21.3 million
$ 21.2 million
$ 21.0 million
$ 43.6 million
$ 52.5 million

146
105
121
2,414

$ 32.5 million
$ 29.4 million
$ 37.0 million
$403.8 million

$125,000
$ 93,388
$ 78,102
$ 95,041
$ 66,433

$220,690
$137,500
$107,619
$139,535
$171,774
$159,398
$169,355
$218,000
$273,438

$222,603
$280,000
$305,785
$163,854

—

—
—
—
—
—

—
—

$
$

6.8 million
5.3 million

—
—

$ 15.7 million
$ 32.4 million
$ 40.0 million

$ 18.4 million
$ 19.9 million
$ 22.9 million
$161.4 million

Business Strategy

Our primary objective is to generate attractive returns for our shareholders through investing in hotel
properties (whether wholly owned or through a joint venture) at prices that provide strong returns on invested
capital, paying dividends and generating long-term value appreciation. We believe we can create long-term value
by pursuing the following strategies:

• Disciplined acquisition of hotel properties: We invest primarily in premium-branded upscale extended-
stay and select-service hotels with a focus on the 25 largest metropolitan markets in the United States.
We focus on acquiring hotel properties at prices below replacement cost in markets that have strong
demand generators and where we expect demand growth will outpace new supply. We also seek to
acquire properties that we believe are undermanaged or undercapitalized. We currently do not intend to
engage in new hotel development.

• Opportunistic hotel repositioning: We employ value-added strategies, such as re-branding, renovating,
or changing management, when we believe such strategies will increase the operating results and
values of the hotels we acquire.

• Aggressive asset management: Although as a REIT we cannot operate our hotels, we proactively

manage our third-party hotel managers in seeking to maximize hotel operating performance. Our asset
management activities seek to ensure that our third-party hotel managers effectively utilize franchise
brands’ marketing programs, develop effective sales management policies and plans, operate properties
efficiently, control costs, and develop operational initiatives for our hotels that increase guest
satisfaction. As part of our asset management activities, we regularly review opportunities to reinvest
in our hotels to maintain quality, increase long-term value and generate attractive returns on invested
capital.

• Flexible selection of hotel management companies: We are flexible in our selection of hotel

management companies and select managers that we believe will maximize the performance of our
hotels. We utilize both brand-affiliated management companies and independent management
companies, including IHM, a hotel management company 90% owned by Mr. Fisher that currently
manages ten of our hotels. We believe this strategy increases the universe of potential acquisition
opportunities we can consider because many hotel properties are encumbered by long-term
management contracts.

•

Selective investment in hotel debt: We may consider selectively investing in debt collateralized by hotel
property if we believe we can foreclose on or acquire ownership of the underlying hotel property in the
relative near term. We do not intend to invest in any debt where we do not expect to gain ownership of
the underlying property or to originate any debt financing.

We plan to maintain a prudent capital structure and intend to maintain our leverage over the long term at a
ratio of net debt to investment in hotels (at cost) (defined as our initial acquisition price plus the gross amount of
any subsequent capital investment and excluding any impairment charges) to less than 35 percent measured at the
time we incur debt, and a subsequent decrease in property values will require us to repay debt. In the 2011
second quarter, our Board of Trustees approved the temporary increase in our targeted leverage to not more than
55 percent, not including our share of assets and liabilities of the JV. Our Board of Trustees believes that
temporarily increasing our leverage limit at this stage of the lodging cycle recovery is prudent to take advantage
of the opportunity to buy hotels in the near term. Over time, we intend to finance our growth with issuances of
common and preferred shares and debt. Our debt may include mortgage debt collateralized by our hotel
properties and unsecured debt.

When purchasing hotel properties, we may issue limited partnership interests in our operating partnership as

full or partial consideration to sellers who may desire to take advantage of tax deferral on the sale of a hotel or
participate in the potential appreciation in value of our common shares.

Competition

We face competition for the acquisition and investment in hotel properties from institutional pension funds,
private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. Some
of these entities have substantially greater financial and operational resources than we have. This competition
may increase the bargaining power of property owners seeking to sell, reduce the number of suitable investment
opportunities available to us and increase the cost of acquiring our targeted hotel properties.

The lodging industry is highly competitive. Our hotels compete with other hotels for guests in each market
in which they operate. Competitive advantage is based on a number of factors, including location, convenience,
brand affiliation, room rates, range of services and guest amenities or accommodations offered and quality of
customer service. Competition is often specific to the individual markets in which our hotels are located and
includes competition from existing and new hotels. Competition could adversely affect our occupancy rates and
Revenue per Available Room (“RevPAR”), and may require us to provide additional amenities or make capital
improvements that we otherwise would not have to make, which may reduce our profitability.

Seasonality

Demand for our hotels is affected by recurring seasonal patterns. Generally, 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. These general trends are, however, influenced by overall
economic cycles and the geographic locations of our hotels. To the extent that cash flow from operations is
insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, we expect to utilize cash on
hand or borrowings under our credit facility to make distributions to our equity holders.

Regulation

Our properties are subject to various covenants, laws, ordinances and regulations, including regulations
relating to common areas and fire and safety requirements. We believe each of our hotels has the necessary
permits and approvals to operate its business, and each is adequately covered by insurance.

Americans with Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (“ADA”) to the

extent that such properties are “public accommodations” as defined by the ADA. Under the ADA, all public
accommodations must meet federal requirements related to access and use by disabled persons. The ADA may
require removal of structural barriers to access by persons with disabilities in certain public areas of our
properties where such removal is readily achievable. Although we believe that the properties in our portfolio
substantially comply with present requirements of the ADA, we have not conducted a comprehensive audit or
investigation of all of our properties to determine our compliance, and one or more properties may not be fully
compliant with the ADA.

In March 2012, a substantial number of changes to the Accessibility Guidelines under the ADA will take
effect. The new guidelines could cause some of our hotel properties to incur costly measures to become fully
compliant.

If we are required to make substantial modifications to our hotel properties, whether to comply with the

ADA or other changes in governmental rules and regulations, our financial condition, results of operations, the
market price of our common shares and our ability to make distributions to our shareholders could be adversely
affected. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to
assess our properties and to make alterations as appropriate.

Environmental Regulations

Under various federal, state and local laws, ordinances and regulations, an owner of real property may be
liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner knew of or was responsible for, the
presence of such hazardous or toxic substances. The cost of any required remediation and the owner’s liability
therefore as to any property are generally not limited under such laws and could exceed the value of the property
and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remediate
contamination from such substances, may adversely affect the owner’s ability to sell the real estate or to borrow
funds using such property as collateral, which could have an adverse effect on our return from such investment.

Furthermore, various court decisions have established that third parties may recover damages for injury
caused by release of hazardous substances and for property contamination. For instance, a person exposed to
asbestos while working at or staying in a hotel may seek to recover damages if he or she suffers injury from the
asbestos. Lastly, some of these environmental issues restrict the use of a property or place conditions on various
activities. One example is laws that require a business using chemicals to manage them carefully and to notify
local officials if regulated spills occur.

Although it is our policy to require an acceptable Phase I environmental survey for all real property in which

we invest, such surveys are limited in scope and there can be no assurance that there are no hazardous or toxic
substances on such property that we would purchase. We cannot assure you that:

•

future laws, ordinances or regulations will not impose material environmental liability; or

the current environmental condition of a hotel will not be affected by the condition of properties in the
vicinity of the hotel (such as the presence of leaking underground storage tanks) or by third parties
unrelated to us.

Employment Regulations

A number of members of the U.S. Congress and President Obama have stated that they support the

Employee Free Choice Act, which, if enacted, would discontinue the current practice of having an open process
where both the union and the employer are permitted to educate employees regarding the pros and cons of
joining a union before having an election by secret ballot. Under the Employee Free Choice Act, employees
would only hear the union’s side of the argument before making a commitment to join the union. The Employee
Free Choice Act would permit unions to quietly collect employee signatures supporting the union without
notifying the employer and permitting the employer to explain its views before a final decision is made by the
employees. Once a union has collected signatures from a majority of the employees, the employer would have to
recognize, and bargain with, the union. If the employer and the union fail to reach agreement on a collective
bargaining contract within a certain number of days, both sides would be forced to submit their respective
proposals to binding arbitration and a federal arbitrator would be permitted to create an employment contract
binding on the employer. If the Employee Free Choice Act is enacted, a number of the hotel properties we own
or seek to acquire could become unionized.

Generally, unionized hotel employees are subject to a number of work rules that could decrease operating
margins at the unionized hotels. If that is the case, we believe that the unionization of hotel employees at hotels
that we acquire may result in a significant decline in hotel profitability and value, which could adversely affect
our financial condition, results of operations, the market price of our common shares and our ability to make
distributions to our shareholders.

Tax Status

We elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year

ended December 31, 2010 under the Internal Revenue Code of 1986, as amended (the “Code”). 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 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
shares of beneficial interest. We believe that we are organized in conformity with the requirements for
qualification as a REIT under the Code and that our current and intended manner of operation will enable us to
meet the requirements for qualification and taxation as a REIT for federal income tax purposes.

As a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we
distribute currently to our shareholders. Under the Code, REITs are subject to numerous organizational and
operational requirements, including a requirement that they distribute each year at least 90% of their taxable
income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we
fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions,
our income for that year will be taxed at regular corporate rates, and we will be disqualified from taxation as a
REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even if we
qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income
and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned
by our TRS Lessees will be fully subject to federal, state and local corporate income tax. Moreover, our TRS
holding company that indirectly owns our interest in 13 of the JV hotels will be subject to federal, state and local
corporate income tax on its allocable share of all of the income from those hotels.

Hotel Management Agreements

We assumed the existing hotel management agreements in place at six of our hotels—the Boston-Billerica

Homewood Suites, Minneapolis-Bloomington Homewood Suites, Nashville-Brentwood Homewood Suites,
Dallas Homewood Suites, Hartford-Farmington Homewood Suites and Orlando-Maitland Homewood Suites—all
of which are managed by Promus Hotels, Inc., a subsidiary of Hilton Hotels Worldwide (“Hilton”). Each of these
hotel management agreements became effective on December 20, 2000, has an initial term of 15 years and may
be renewed for an additional five-year period at the manager’s option by written notice to us no later than
120 days prior to the expiration of the initial term.

Under these six hotel management agreements, the manager receives a base management fee equal to 2% of
the hotel’s gross room revenue and, if certain financial thresholds are met or exceeded, an incentive management
fee equal to 10% of the hotel’s net operating income, less fixed costs, base management fees, agreed-upon return
on the owner’s original investment and debt service payments. In addition to the management fee, a franchise
royalty fee equal to 4% of the hotel’s gross room revenue and program fees equal to 4% of the hotel’s gross room
revenue are also payable to Hilton. See “Hotel Franchise Agreements”. Prior to April 23, 2013, each of these six
management agreements may be terminated for cause, including the failure of the managed hotel to meet
specified performance levels, and may be terminated by the manager in the event we undergo a change in
control. If the new owner does not assume the existing management agreement and does not obtain a Homewood
Suites franchise license upon such a change of control, we will be required to pay a termination fee to the
manager. Beginning on April 23, 2013, we may terminate the six Hilton management agreements upon six
months notice to the manager without payment of a termination fee. If we were to terminate the management
agreements prior to the termination date, we may be responsible for paying termination fees to the manager.

Our management agreements with Concord, the manager of the Altoona, Pennsylvania Courtyard and the

Washington, Pennsylvania SpringHill Suites, provide for base management fees equal to 4% of the managed
hotel’s gross room revenue. The initial ten-year term of each management agreement expires on February 28,
2017 and will renew automatically for successive one-year terms unless terminated by our TRS lessee or the
manager by written notice to the other party no later than 90 days prior to the then current term’s expiration date.
The management agreements may be terminated for cause, including the failure of the managed hotel operating
performance to meet specified levels. If we were to terminate the management agreements during the first nine
years of the term other than for breach or default by the manager, we may be responsible for paying termination
fees to the manager.

All of our remaining hotels are managed by IHM, which is 90% owned by Mr. Fisher. Our management
agreements with IHM have an initial term of five years and may be renewed for two five-year periods at IHM’s
option by written notice to us no later than 90 days prior to the then current term’s expiration date. The IHM
management agreements provide for early termination at our option upon sale of any IHM-managed hotel for no
termination fee, with six months advance notice. The IHM management agreements may be terminated for cause,
including the failure of the managed hotel to meet specified performance levels. Management agreements with
IHM provide for a base management fee of 3% of the managed hotel’s gross revenues for the Hampton Inn
Houston, TX, Residence Inn Holtsville, NY, Residence Inn White Plains, NY, Residence Inn New Rochelle, NY
and Homewood Suites Carlsbad, CA and 2.5% of the managed hotel’s gross revenues for the Residence Inn
Garden Grove, CA, Residence Inn San Diego, CA, Homewood Suites San Antonio, TX, Doubletree Suites
Washington, DC and Residence Inn Tysons Corner, VA and an accounting fee of $1,000 per month per hotel
and, if certain financial thresholds are met or exceeded, an incentive management fee equal to 10% of the hotel’s
net operating income less fixed costs, base management fees and a specified return threshold. The incentive
management fee is capped at 1% of gross hotel revenues for the applicable calculation.

Hotel Franchise Agreements

One of the Company’s TRS Lessees has entered into hotel franchise agreements with Promus Hotels, Inc., a

subsidiary of Hilton, for our eight Homewood Suites by Hilton® hotels. Each of the hotel franchise agreements
has an initial term ranging from 15-18 years. These Hilton hotel franchise agreements provide for a franchise
royalty fee equal to 4% of the hotel’s gross room revenue and a program fee equal to 4% of the hotel’s gross
room revenue. The Hilton franchise agreements provide that the franchisor may terminate the franchise
agreement in the event that the applicable franchisee fails to cure an event of default, or in certain circumstances
such as the franchisee’s bankruptcy or insolvency, are terminable by Hilton at will.

One of the Company’s TRS Lessees has entered into franchise agreements with Marriott International, Inc.,
(“Marriott”), relating to our Residence Inn properties in Holtsville, New York, New Rochelle, New York, White
Plains, New York, Garden Grove, CA, San Diego, CA and Vienna, VA, our Courtyard property in Altoona,
Pennsylvania and our SpringHill Suites property in Washington, Pennsylvania. These franchise agreements have
initial terms ranging from 15 to 20 years and will expire between 2025 and 2031. None of the agreements has a
renewal option. The Marriott franchise agreements provide for franchise fees ranging from 5.0% to 5.5% of the
hotel’s gross room sales and marketing fees ranging from 2.0% to 2.5% of the hotel’s gross room sales. The
Marriott franchise agreements are terminable by Marriott in the event that the applicable franchisee fails to cure
an event of default or, in certain circumstances such as the franchisee’s bankruptcy or insolvency, are terminable
by Marriott at will. The Marriott franchise agreements provide that, in the event of a proposed transfer of the
hotel, our TRS Lessee’s interest in the agreement or more than a specified amount of the TRS Lessee to a
competitor of Marriott, Marriott has the right to purchase or lease the hotel under terms consistent with those
contained in the respective offer and may terminate if our TRS Lessee elects to proceed with such a transfer.

One of the Company’s TRS Lessees has entered into a franchise agreement with Hampton Inns Franchise

LLC, (“Hampton Inns”), relating to the Hampton Inn & Suites® Houston-Medical Center. The franchise
agreement has an initial term of approximately 10 years and expires on July 31, 2020. There is no renewal
option. The Hampton Inns franchise agreement provides for a monthly program fee equal to 4% of the hotel’s
gross rooms revenue and a monthly royalty fee equal to 5% of the hotel’s gross rooms revenue. Hampton Inns
may terminate the franchise agreement in the event that the franchisee fails to cure an event of default or, in
certain circumstances such as the franchisee’s bankruptcy or insolvency, Hampton Inns may terminate the
agreement at will.

One of the Company’s TRS Lessees has entered into a franchise agreement with Doubletree Franchise LLC

(“Doubletree”), relating to the Doubletree Guest Suites by Hilton in Washington, DC. The franchise agreement
has an initial term of 10 years and will expire on July 31, 2021. The franchise agreement is non-renewable. The
Doubletree hotel franchise agreement provides for a franchise royalty fee equal to 5% of the hotel’s gross room

revenue and a program fee equal to 4% of the hotel’s gross room revenue. The Doubletree franchise agreement
generally has no termination rights unless the franchisee fails to cure an event of default in accordance with the
franchise agreements.

Ground Leases

The Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 with an option of up

to 12 additional terms of five years each. Monthly payments are determined by the quarterly average room
occupancy of the hotel. Rent is equal to approximately $7,000 per month when monthly occupancy is less than
85% and can increase up to approximately $20,000 per month if occupancy is 100%, with minimum rent
increased on an annual basis by two and one-half percent (2.5%).

At the New Rochelle Residence Inn, there is an air rights lease and garage lease that each expire on
December 1, 2104. The lease agreements with the City of New Rochelle cover the space above the parking
garage that is occupied by the hotel as well as 128 parking spaces in a parking garage that is attached to the hotel.
The annual base rent for the garage lease is the hotel’s proportionate share of the city’s adopted budget for the
operations, management and maintenance of the garage and established reserves fund for the cost of capital
repairs.

The following is a schedule of the minimum future obligation payments required under the ground, air

rights and garage leases (in thousands):

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount

203
205
207
210
212
11,660

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,697

Condominium Leases

The Residence Inn White Plains hotel is part of a condominium known as La Reserva Condominium (the

“Condominium”). The Condominium is comprised of 143 residential units and four commercial units. The four
commercial units are owned by us and are part of the White Plains hotel. The White Plains hotel is comprised of
129 of the residential units owned by us and four residential units leased by us from unaffiliated third party
owners. The remaining 10 residential units are owned and occupied by unaffiliated third party owners.

We lease 4 residential units in the White Plains hotel from individual owners (the “Condo Owner”). The
lease agreements are for 6 years with a one-time 5 year renewal option. The White Plains hotel has the right to
sublease the unit to any third party, including hotel guests, for such rent and on such terms as the White Plains
hotel may determine. Each Condo Owner may reserve the unit for seven days in any calendar quarter or two
weeks in any calendar year. In the event of such a reservation by the Condo Owner, the White Plains hotel will
have no obligation to pay rent during such period. Each Condo Owner is also obligated to reimburse the White
Plains hotel for renovations that were completed in 2008. Minimum annual rents payable to the Condo Owner are
approximately $70 thousand per year and amounts receivable from the Condo Owner for its renovation
reimbursements are approximately $11 thousand per year, subject to a balloon repayment at the end of the lease
term of any remaining reimbursements. The White Plains hotel is responsible for paying assessments to the
Condominium association on a monthly basis for all residential units owned and leased. The White Plains hotel
provides certain services to the Condominium association for housekeeping, maintenance and certain other
services and receives compensation from the Condominium association for these services.

Employees

As of March 5, 2012, we had six employees. All persons employed in the day to day operations of our hotels

are employees of the management companies engaged by our TRS Lessees to operate such hotels. None of our
employees are represented by a collective bargaining agreement.

Available Information

Our Internet website is www.chathamlodgingtrust.com. We make available free of charge through our

website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
Section 16 reports on Forms 3,4 and 5 and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15 (d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission
(“SEC”). In addition, our website includes corporate governance information, including the charters for
committees of the Board of Trustees, our Corporate Governance Guidelines, Conflict of Interest Policy and our
Code of Business Conduct. This information is available in print to any shareholder who requests it by writing to
Investor Relations, Chatham Lodging Trust, 50 Cocoanut Row, Suite 216, Palm Beach, FL 33480. The
information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any
other filings that we make with the SEC.

Item 1A. Risk Factors

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks

that we do not yet know of or that we currently believe are immaterial may also impair our business operations.
If any of the events or circumstances described in the following risk factors actually occurs, our business,
financial condition or results of operations could suffer, our ability to make cash distributions to our
shareholders could be impaired and the trading price of our common shares could decline. You should know that
many of the risks described may apply to more than just the subsection in which we grouped them for the purpose
of this presentation.

Risks Related to Our Business

We have limited operating history, which may affect our ability to generate sufficient operating cash flows to
make or sustain distributions to our shareholders.

We were organized in October 2009 and have limited operating history. Our ability to make or sustain
distributions to our shareholders depends on many factors, including the availability of acquisition opportunities
that satisfy our investment strategies and our success in identifying and consummating them on favorable terms,
readily accessible short-term and long-term financing on favorable terms and conditions in the financial markets,
the real estate market, the hotel industry and the economy. We cannot assure you that we will be able to acquire
properties with attractive returns or will not seek properties with greater risk to obtain the same level of returns or
that the value of our properties in the future will not decline substantially.

Our investment policies are subject to revision from time to time at our board’s discretion, which could
diminish shareholder returns below expectations.

Our investment policies may be amended or revised from time to time at the discretion of our Board of
Trustees, without a vote of our shareholders. Such discretion could result in investments that may not yield
returns consistent with investors’ expectations.

We depend on the efforts and expertise of our key executive officers whose continued service is not
guaranteed.

We depend on the efforts and expertise of our chief executive officer, as well as our other senior executives,
to execute our business strategy. The loss of their services, and our inability to find suitable replacements, could
have an adverse effect on our business.

If we are unable to successfully manage our growth, our operating results and financial condition could be
adversely affected.

Our ability to grow our business depends upon our senior executive officers’ business contacts and their
ability to successfully hire, train, supervise and manage additional personnel. We may not be able to hire and
train sufficient personnel or develop management, information and operating systems suitable for our expected
growth. If we are unable to manage any future growth effectively, our operating results and financial condition
could be adversely affected.

Our future growth depends on obtaining new financing and if we cannot secure financing in the future, our
growth will be limited.

The success of our growth strategy depends on access to capital through use of excess cash flow,

borrowings or subsequent issuances of common shares or other securities. Acquisitions of new hotel properties
will require significant additional capital and existing hotels require periodic capital improvement initiatives to
remain competitive. We may not be able to fund acquisitions or capital improvements solely from cash provided
from our operating activities because we must distribute at least 90% of our REIT taxable income (determined
before the deduction for dividends paid and excluding any net capital gains) each year to satisfy the requirements
for qualification as a REIT for federal income tax purposes. As a result, our ability to fund capital expenditures
for acquisitions through retained earnings is very limited. Our ability to grow through acquisitions of hotels will
be limited if we cannot obtain satisfactory debt or equity financing, which will depend on capital markets
conditions. We cannot assure you that we will be able to obtain additional equity or debt financing or that we will
be able to obtain such financing on favorable terms.

We may be unable to invest proceeds from offerings of our securities.

We will have broad authority to invest the net proceeds of any offering of our securities in any real estate

investments that we may identify in the future, and we may use those proceeds to make investments with which
you may not agree. In addition, our investment policies may be amended or revised from time to time at the
discretion of our Board of Trustees, without a vote of our shareholders. These factors will increase the
uncertainty, and thus the risk, of investing in our common shares. Our failure to apply the net proceeds of any
offering effectively or to find suitable hotel properties to acquire in a timely manner or on acceptable terms could
result in returns that are substantially below expectations or result in losses.

Until appropriate investments can be identified, we may invest the net proceeds of any offering of our

securities in interest-bearing short-term securities or money-market accounts that are consistent with our
intention to qualify as a REIT. These investments are expected to provide a lower net return than we seek to
achieve from our hotel properties. We may be unable to invest the net proceeds on acceptable terms, or at all,
which could delay shareholders from receiving an appropriate return on their investment. We cannot assure you
that we will be able to identify properties that meet our investment criteria, that we will successfully consummate
any investment opportunities we identify, or that investments we may make will generate income or cash flow.

We must rely on third-party management companies to operate our hotels in order to qualify as a REIT under
the Code and, as a result, we have less control than if we were operating the hotels directly.

In order for us to qualify as a REIT, third parties must operate our hotels. We lease each of our hotels to our
TRS Lessees. The TRS Lessees, in turn, have entered into management agreements with third party management
companies to operate our hotels. While we expect to have some input into operating decisions for those hotels
leased by our TRS Lessees and operated under management agreements, we have less control than if we were
managing the hotels ourselves. Even if we believe that our hotels are not being operated efficiently, we may not
be able to require an operator to change the way it operates our hotels. If this is the case, we may decide to
terminate the management agreement and potentially incur costs associated with the termination. Jeffrey H.
Fisher, our chief executive officer, controls IHM, a hotel management company that currently manages ten of our

hotels and all but one of the 64 hotels acquired by the JV, and may manage additional hotels that we acquire in
the future. See “Conflicts of interest could result in future business transactions between us and affiliates owned
by our Chief Executive Officer” below.

Our management agreements could adversely affect the sale or financing of hotel properties and, as a result,
our operating results and ability to make distributions to our shareholders could suffer.

While we would prefer to enter into flexible management contracts that will provide us with the ability to
replace hotel managers on relatively short notice and with limited cost, we may enter into, or acquire properties
subject to, management contracts that contain more restrictive covenants. For example, the terms of some
management agreements may restrict our ability to sell a property unless the purchaser is not a competitor of the
manager and assumes the related management agreement and meets specified other conditions. Also, the terms of
a long-term management agreement encumbering our properties may reduce the value of the property. If we
enter into or acquire properties subject to any such management agreements, we may be precluded from taking
actions that would otherwise be in our best interest or could cause us to incur substantial expense, which could
adversely affect our operating results and our ability to make distributions to shareholders. Moreover, the
management agreements that we use in connection with hotels managed by IHM were not negotiated on an
arm’s-length basis due to Mr. Fisher’s control of IHM and therefore may not contain terms as favorable to us as
we could obtain in an arm’s-length transaction with a third party. See “Conflicts of interest could result in future
business transactions between us and affiliates owned by our Chief Executive Officer” below.

Our franchisors could cause us to expend additional funds on upgraded operating standards, which may
reduce cash available for distribution to shareholders.

Our hotels operate under franchise agreements, and we may become subject to the risks that are found in

concentrating our hotel properties in one or several franchise brands. Our hotel operators must comply with
operating standards and terms and conditions imposed by the franchisors of the hotel brands under which our
hotels operate. Pursuant to certain of the franchise agreements, certain upgrades are required every five to six
years, and the franchisors may also impose upgraded or new brand standards, such as substantially upgrading the
bedding, enhancing the complimentary breakfast or increasing the value of guest awards under its ‘frequent
guest’ program, which can add substantial expense for the hotel. The franchisors also may require us to make
certain capital improvements to maintain the hotel in accordance with system standards, the cost of which can be
substantial and may reduce cash available for distribution to our shareholders.

Our franchisors may cancel or fail to renew our existing franchise licenses, which could adversely affect our
operating results and our ability to make distributions to shareholders.

Our franchisors periodically inspect our hotels to confirm adherence to the franchisors’ operating standards.
The failure of a hotel to maintain standards could result in the loss or cancellation of a franchise license. We rely
on our operators to conform to operational standards. In addition, when the term of a franchise expires, the
franchisor has no obligation to issue a new franchise. The loss of a franchise could have a material adverse effect
on the operations or the underlying value of the affected hotel because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the franchisor. The loss of a franchise or
adverse developments with respect to a franchise brand under which our hotels operate could also have a material
adverse effect on our financial condition, results of operations and cash available for distribution to shareholders.

Fluctuations in our financial performance, capital expenditure requirements and excess cash flow could
adversely affect our ability to make and maintain distributions to our shareholders.

As a REIT, we are required to distribute at least 90% of our REIT taxable income each year to our
shareholders (determined before the deduction for dividends paid and excluding any net capital gains). In the
event of downturns in our operating results and financial performance or unanticipated capital improvements to

our hotels (including capital improvements that may be required by franchisors), we may be unable to declare or
pay distributions to our shareholders, or maintain our then-current dividend rate. The timing and amount of
distributions are in the sole discretion of our Board of Trustees, which considers, among other factors, our
financial performance, debt service obligations and applicable debt covenants (if any), and capital expenditure
requirements. We cannot assure you we will generate sufficient cash in order to continue to fund distributions.

Among the factors which could adversely affect our results of operations and distributions to shareholders

are reductions in hotel revenues; increases in operating expenses at the hotels leased to our TRS Lessees;
increased debt service requirements, including those resulting from higher interest rates on variable rate
indebtedness; cash demands from the joint venture and capital expenditures at our hotels, including capital
expenditures required by the franchisors of our hotels. Hotel revenue can decrease for a number of reasons,
including increased competition from new hotels and decreased demand for hotel rooms. These factors can
reduce both occupancy and room rates at hotels and could directly affect us negatively by:

•

reducing the hotel revenue that we recognize with respect to hotels leased to our TRS Lessees; and

correspondingly reducing the profits (or increasing the loss) of hotels leased to our TRS Lessees. We
may be unable to reduce many of our expenses in tandem with revenue declines, (or we may choose
not to reduce them for competitive reasons), and certain expenses may increase while our revenue
declines.

Future debt service obligations could adversely affect our overall operating results or cash flow and may
require us to liquidate our properties, which could adversely affect our ability to make distributions to our
shareholders and our share price.

We intend to use secured and unsecured debt to finance long-term growth. While we intend to target overall
debt levels of less than 35% of our investment in hotels (at cost) (defined as our initial acquisition price plus the
gross amount of any subsequent capital investment and excluding any impairment charges), our Board of
Trustees may change this financing policy at any time without shareholder approval. As a result, we may be able
to incur substantial additional debt, including secured debt, in the future. In fact, during 2011, our Board of
Trustees approved the increase in our targeted leverage to not more than 55 percent, excluding our pro rata share
of assets and liabilities of the JV. Incurring additional debt could subject us to many risks, including the risks
that:

•

operating cash flow will be insufficient to make required payments of principal and interest;

our leverage may increase our vulnerability to adverse economic and industry conditions;

• we may be required to dedicate a substantial portion of our cash flow from operations to payments on
our debt, thereby reducing cash available for distribution to our shareholders, funds available for
operations and capital expenditures, future business opportunities or other purposes;

•

the terms of any refinancing will not be as favorable as the terms of the debt being refinanced; and

the terms of our debt may limit our ability to make distributions to our shareholders.

If we violate covenants in our debt agreements, we could be required to repay all or a portion of our
indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on
attractive terms, if at all.

If we are unable to repay our debt obligations in the future, we may be forced to refinance debt or dispose of
or encumber our assets, which could adversely affect distributions to shareholders.

If we do not have sufficient funds to repay our outstanding debt at maturity or before maturity in the event
we breach our debt agreements and our lenders exercise their right to accelerate repayment, we may be required
to refinance the debt through additional debt or additional equity financings. Covenants applicable to our existing

and future debt could impair our planned investment strategy and, if violated, result in a default. If we are unable
to refinance our debt on acceptable terms, we may be forced to dispose of hotel properties on disadvantageous
terms, potentially resulting in losses. We have placed mortgages on certain of our hotel properties to secure our
credit facility, have assumed mortgages on seven other hotels we acquired, placed a mortgage on one other hotel
and may place additional mortgages on certain of our hotels to secure other debt. To the extent we cannot meet
any future debt service obligations, we will risk losing some or all of our hotel properties that are pledged to
secure our obligations to foreclosure.

Interest expense on our debt may limit our cash available to fund our growth strategies and shareholder
distributions.

Higher interest rates could increase debt service requirements on debt under our credit facility and any

floating rate debt that we incur in the future and could reduce the amounts available for distribution to our
shareholders, as well as reduce funds available for our operations, future business opportunities, or other
purposes. Interest expense on our credit facility is based on floating interest rates.

Failure to hedge effectively against interest rate changes may adversely affect our results of operations and
our ability to make shareholder distributions.

We may obtain in the future one or more forms of interest rate protection—in the form of swap agreements,

interest rate cap contracts or similar agreements—to hedge against the possible negative effects of interest rate
fluctuations. However, such hedging implies costs and we cannot assure you that any hedging will adequately
relieve the adverse effects of interest rate increases or that counterparties under these agreement will honor their
obligations there under. Furthermore, any such hedge agreements would subject us to the risk of incurring
significant non-cash losses on our hedges due to declines in interest rates if our hedges were not considered
effective under applicable accounting standards.

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 disputes between us and our joint
venture partners.

We are co-investors with Cerberus in the JV, which owns 64 hotels, and we may invest in additional joint

ventures in the future. We may not be in a position to exercise sole decision-making authority regarding the
properties owned through the JV or other joint ventures. Investments in joint ventures may, under certain
circumstances, involve risks not present when a third party is not involved, including reliance on our joint
venture partners and the possibility that joint venture partners might become bankrupt or fail to fund their share
of required capital contributions, thus exposing us to liabilities in excess of our share of the investment. Joint
venture partners may have business interests or goals that are inconsistent with our business interests or goals,
and may be in a position to take actions contrary to our policies or objectives. Such investments may also have
the potential risk of impasses on decisions, such as a sale, because neither we nor the partner would have full
control over the partnership or joint venture. Any disputes that may arise between us and our joint venture
partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or
trustees from focusing their time and effort on our business. Consequently, actions by, or disputes with, our joint
venture partners might result in subjecting properties owned by the partnership or joint venture to additional risk.
In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

It may be difficult for us to exit a joint venture after an impasse with our co-venturer.

In our joint ventures, there will be a potential risk of impasse in some joint venture decisions because our
approval and the approval of each co-venturer will be required for some decisions. The types of decisions that
would require the approval of each co-venturer would be determined under the joint venture agreement between
the parties, but those types of decisions are likely to include borrowing above a certain level or disposing of

assets. In any joint venture, we may have the right to buy our co-venturer’s interest or to sell our own interest on
specified terms and conditions in the event of an impasse regarding a sale. However, it is possible that neither
party will have the funds necessary to complete such a buy-out. In addition, we may experience difficulty in
locating a third-party purchaser for our joint venture interest and in obtaining a favorable sale price for the
interest. As a result, it is possible that we may not be able to exit the relationship if an impasse develops. In
addition, there is no limitation under our declaration of trust and bylaws as to the amount of funds that we may
invest in joint ventures. Accordingly, we may invest a substantial amount of our funds in joint ventures which
ultimately may not be profitable as a result of disagreements with or among our co-venturers.

Our Operating Partnership act as guarantor under certain debt obligations of the JV.

In connection with certain non-recourse JV mortgage loans, our Operating Partnership could be required to

repay portions of the indebtedness, up to an amount commensurate with our 10.3% interest in the JV, in
connection with certain customary non-recourse carve-out provisions such as environmental conditions, misuse
of funds, and material misrepresentations.

We may from time to time make distributions to our shareholders in the form of our common shares, which
could result in shareholders incurring tax liability without receiving sufficient cash to pay such tax.

Although we have no current intention to do so, we may, if possible, in the future distribute taxable
dividends that are payable in cash or 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 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 shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders, we
may be required to withhold 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, if a significant number of our
shareholders determine to sell common shares in order to pay taxes owed on dividends, it may put downward
pressure on the trading price of our common shares.

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.

We have adopted a policy that any transaction, agreement or relationship in which any of our trustees,

officers or employees has a direct or indirect pecuniary interest must be approved by a majority of our
disinterested trustees. Other than this policy, however, we have not adopted and 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.

Conflicts of interest could result in future business transactions between us and affiliates owned by our Chief
Executive Officer.

Our chief executive officer, Mr. Fisher, owns 90% of IHM, a hotel management company that currently
manages ten of our hotels and all but one of the 64 hotels acquired by the JV, and may manage additional hotels
that we acquire or own in the future. Because Mr. Fisher is our Chief Executive Officer and controls IHM,
conflicts of interest may arise between us and Mr. Fisher as to whether and on what terms new management
contracts will be awarded to IHM, whether and on what terms management agreements will be renewed upon
expiration of their terms, enforcement of the terms of the management agreements and whether hotels managed
by IHM will be sold.

Risks Related to the Lodging Industry

The lodging industry has experienced significant declines in the past and failure of the lodging industry to
exhibit improvement may adversely affect our ability to execute our business strategy.

The performance of the lodging industry has historically been closely linked to the performance of the
general economy and, specifically, growth in U.S. GDP. It is also sensitive to business and personal discretionary
spending levels. Declines in corporate budgets and consumer demand due to adverse general economic
conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions
can lower the revenues and profitability of our future hotel properties and therefore the net operating profits of
our TRSs.

A substantial part of our business strategy is based on the belief that the lodging markets in which we invest

will continue to experience improving economic fundamentals in the future. We cannot predict the extent to
which lodging industry fundamentals will continue to improve. In the event conditions in the industry do not
continue to improve, or deteriorate, our ability to execute our business strategy would be adversely affected,
which could adversely affect our financial condition, results of operations, the market price of our common
shares and our ability to make distributions to our shareholders.

Our ability to make distributions to our shareholders may be affected by various operating risks common in
the lodging industry.

Hotel properties are subject to various operating risks common to the hotel industry, many of which are

beyond our control, including:

•

competition from other hotel properties in our prospective markets, some of which may have greater
marketing and financial resources;

an over-supply or over-building of hotel properties in our prospective markets, which could adversely
affect occupancy rates and revenues;

dependence on business and commercial travelers and tourism;

increases in energy costs and other expenses affecting travel, which may affect travel patterns and
reduce the number of business and commercial travelers and tourists;

increases in operating costs due to inflation and other factors that may not be offset by increased room
rates;

necessity for periodic capital reinvestment to repair and upgrade hotel properties;

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

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

unforeseen events beyond our control, such as terrorist attacks, travel related health concerns including
pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS, political
instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel
related accidents and unusual weather patterns, including natural disasters such as hurricanes, tsunamis
or earthquakes;

adverse effects of a downturn in the economy or in the hotel industry; and

risk generally associated with the ownership of hotel properties and real estate, as we discuss in detail
below.

These factors could reduce the net operating profits of our TRSs and the rental income we receive from our

TRS Lessees, which in turn could adversely affect our ability to make distributions to our shareholders.

Competition for acquisitions may reduce the number of properties we can acquire.

We compete for hotel investment opportunities with competitors that may have a different tolerance for risk
or have substantially greater financial resources than are available to us. This competition may generally limit the
number of hotel properties that we are able to acquire and may also increase the bargaining power of hotel
owners seeking to sell, making it more difficult for us to acquire hotel properties on attractive terms, or at all.

Competition for guests may lower our hotels’ revenues and profitability.

The upscale extended-stay and mid-price segments of the hotel business are highly competitive. Our hotels

compete on the basis of location, room rates and quality, service levels, reputation, and reservation systems,
among many other factors. Many competitors have substantially greater marketing and financial resources than
our operators or us. New hotels create new competitors, in some cases without corresponding increases in
demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash
available for distribution to shareholders.

The seasonality of the hotel industry may cause fluctuations in our quarterly revenues that cause us to borrow
money to fund distributions to shareholders.

Some hotel properties have business that is seasonal in nature. This seasonality can be expected to cause

quarterly fluctuations in revenues. Quarterly earnings may be adversely affected by factors outside our control,
including weather conditions and poor economic factors. As a result, we may have to enter into short-term
borrowings in order to offset these fluctuations in revenue and to make distributions to shareholders.

The cyclical nature of the lodging industry may cause the return on our investments to be substantially less
than we expect.

The lodging industry is highly cyclical in nature. Fluctuations in lodging demand and, therefore, operating

performance, are caused largely by general economic and local market conditions, which subsequently affects
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. Decline in lodging demand, or a continued growth in
lodging supply, could result in returns that are substantially below expectations or result in losses, which could
have a material adverse effect on our business, financial condition, results of operations and our ability to make
distributions to our shareholders.

Due to our concentration in hotel investments, a downturn in the lodging industry would adversely affect our
operations and financial condition.

Our entire business is related to the hotel industry. Therefore, a downturn in the hotel industry, in general,

will have a material adverse effect on our revenues, net operating profits and cash available to distribute to
shareholders.

The ongoing need for capital expenditures at our hotel properties may adversely affect our financial condition
and limit our ability to make distributions to our shareholders.

Hotel properties 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 require
periodic capital improvements as a condition of keeping the franchise licenses. In addition, our lenders require us
to set aside amounts for capital improvements to our hotel properties. These capital improvements may give rise
to the following risks:

•

possible environmental problems;

•

construction cost overruns and delays;

possibility that revenues will be reduced temporarily while rooms or restaurants offered are out of
service due to capital improvement projects;

a possible shortage of available cash to fund capital improvements and the related possibility that
financing for these capital improvements may not be available on affordable terms;

uncertainties as to market demand or a loss of market demand after capital improvements have
begun; and

disputes with franchisors/managers regarding compliance with relevant management/franchise
agreements.

The costs of all these capital improvements could adversely affect our financial condition and amounts

available for distribution to our shareholders.

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

Some of our hotel rooms are booked through Internet travel intermediaries, including, but not limited to,
Travelocity.com, Expedia.com and Priceline.com. As Internet bookings increase, these intermediaries may be
able to obtain higher commissions, reduced room rates or other significant contract concessions from us and our
management companies. 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. These agencies hope that consumers will eventually
develop brand loyalties to their reservations system rather than to the brands under which our properties are
franchised. 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 adversely affected.

We and our hotel managers rely on information technology in our operations, and any material failure,
inadequacy, interruption or security failure of that technology could harm our business.

We and our hotel managers rely on information technology networks and systems, including the Internet, to

process, transmit and store electronic information, and to manage or support a variety of business processes,
including financial transactions and records, personal identifying information, reservations, billing and operating
data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on
commercially available systems, software, tools and monitoring to provide security for processing, transmission
and storage of confidential customer information, such as individually identifiable information, including
information relating to financial accounts. Although we have taken steps to protect the security of our
information systems and the data maintained in those systems, it is possible that our safety and security measures
will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of
personally identifiable information such as in the event of cyber attacks. Security breaches, including physical or
electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions,
shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function,
security and availability of our information systems could interrupt our operations, damage our reputation,
subject us to liability claims or regulatory penalties and could have a material adverse effect on our business,
financial condition and results of operations.

Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.

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 impact that 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 our business, our ability to finance our business, our ability to insure our properties
and our results of operations and financial condition.

Potential future outbreaks of contagious diseases, such as H1N1, could have a material adverse effect on our
revenues and results of operations due to decreased travel, especially in areas significantly affected by the
disease.

The widespread outbreak of infectious or contagious disease in the United States, such as the H1N1
influenza, could reduce travel and adversely affect the hotel industry generally and our business in particular.

Uninsured and underinsured losses could adversely affect our operating results and our ability to make
distributions to our shareholders.

We maintain comprehensive insurance on each of our hotel properties, including liability, terrorism, fire and

extended coverage, of the type and amount customarily obtained for or by hotel property owners. There can be
no assurance that such coverage will continue to be available at reasonable rates. Various types of catastrophic
losses, like earthquakes and floods and losses from foreign terrorist activities such as those on September 11,
2001 or losses from domestic terrorist activities such as the Oklahoma City bombing may not be insurable or
may not be insurable on reasonable economic terms. Lenders may require such insurance and failure to obtain
such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity
and the value of the properties securing the affected loan in relation to the balance of the loan, a default could
have a material adverse effect on our results of operations and ability to obtain future financing.

In the event of a substantial loss, insurance coverage may not be sufficient to cover the full current market

value or replacement cost of the 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 invested in a hotel property, as well as the anticipated
future revenue from that particular hotel. In that event, we might nevertheless remain obligated for any mortgage
debt or other financial obligations related to the property. 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 property.

Noncompliance with environmental laws and governmental regulations could adversely affect our operating
results and our ability to make distributions to shareholders.

Although it is our policy to require an acceptable Phase I environmental survey for all real property in which

we invest, such surveys are limited in scope and there can be no assurance that there are no hazardous or toxic
substances on such property that we would purchase. We cannot assure you:

•

that future laws, ordinances or regulations will not impose material environmental liability; or

that the current environmental condition of a hotel will not be affected by the condition of properties in
the vicinity of the hotel (such as the presence of leaking underground storage tanks) or by third parties
unrelated to us.

Compliance with the ADA and other changes in governmental rules and regulations could substantially
increase our cost of doing business and adversely affect our operating results and our ability to make
distributions to our shareholders.

Our hotel properties are subject to the ADA. Under the ADA, all places of public accommodation are
required to meet certain federal requirements related to access and use by disabled persons. Although we intend
to continue to acquire assets that are substantially in compliance with the ADA, we may incur additional costs of
complying with the ADA at the time of acquisition and from time-to-time in the future to stay in compliance with
any changes in the ADA. A number of additional federal, state and local laws exist that also may require
modifications to our investments, or restrict certain further renovations thereof, with respect to access thereto by
disabled persons. Additional legislation may impose further burdens or restrictions on owners with respect to
access by disabled persons. If we were required to make substantial modifications at our properties to comply
with the ADA or other changes in governmental rules and regulations, our ability to make expected distributions
to our shareholders could be adversely affected.

If we are required to make substantial modifications to our hotel properties, whether to comply with the

General Risks Related to Real Estate Industry

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

Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel

properties in our portfolio in response to changing economic, financial and investment conditions may be limited.
The real estate market is affected by many factors that are beyond our control, including:

•

adverse changes in international, national, regional and local economic and market conditions;

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

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

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

changes in operating expenses; and

civil unrest, acts of God, including earthquakes, floods and other natural disasters, which may result in
uninsured losses, and acts of war or terrorism, such as those that occurred on September 11, 2001.

We may seek to sell hotel properties in the future. There can be no assurance that we will be able to sell any

hotel property on acceptable terms.

Currently, limited credit is available to purchasers of hotel properties and financing structures such as
CMBS, which have been used to finance hotel acquisitions in recent years, have been reduced. If financing for
hotel properties is not available or is not available on attractive terms, it will adversely impact the ability of third
parties to buy our hotels. As a result, we may hold our hotel properties for a longer period than we would
otherwise desire and may sell hotels at a loss.

We may be required to expend funds to correct defects or to make improvements before a hotel property can

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

Increases in our property taxes would adversely affect our ability to make distributions to our shareholders.

Hotel properties are subject to real and personal property taxes. These taxes may increase as tax rates
change and as the properties are assessed or reassessed by taxing authorities. In particular, our property taxes
could increase following our hotel purchases as the acquired hotels are reassessed. If property taxes increase, our
financial condition, results of operations and our ability to make distributions to our shareholders could be
materially and adversely affected and the market price of our common shares could decline.

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

When excessive moisture accumulates in buildings or on building materials, mold growth may occur,
particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds
may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as
exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other
reactions. As a result, the presence of mold to which hotel guests or employees could be exposed at any of our
properties could require us to undertake a costly remediation program to contain or remove the mold from the
affected property, which could be costly. In addition, exposure to mold by guests or employees, management
company employees or others could expose us to liability if property damage or health concerns arise.

Risks Related to Our Organization and Structure

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

•

actual receipt of an improper benefit or profit in money, property or services; or

active and deliberate dishonesty by the trustee or officer that was established by a final judgment as
being material to the cause of action adjudicated

Our bylaws obligate us to indemnify our trustees and officers for actions taken by them in those capacities

to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each trustee or officer, to

the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or
threatened to be made, a party by reason of his or her service to us. 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 exist absent the current provisions in our
declaration of trust and bylaws or that might exist with other companies.

Provisions of Maryland law may limit the ability of a third party to acquire control of our Company and may
result in entrenchment of management and diminish the value of our common shares.

Certain provisions of the Maryland General Corporation Law (“MGCL”) applicable to Maryland real estate

investment trusts may have the effect of inhibiting a third party from making a proposal to acquire us or of
impeding a change of control under circumstances that otherwise could provide our common shareholders with
the opportunity to realize a premium over the then-prevailing market price of such shares, including:

•

“Business combination” provisions that, subject to limitations, prohibit certain business combinations
between us and an “interested shareholder” (defined generally as any person who beneficially owns
10% or more of the voting power of our shares) or an affiliate of any interested shareholder for five
years after the most recent date on which the shareholder becomes an interested shareholder, and
thereafter imposes special appraisal rights and special shareholder voting requirements on these
combinations; and

“Control share” provisions that provide that our “control shares” (defined as shares which, when
aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of
three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition”
(defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting
rights except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of
all the votes entitled to be cast on the matter, excluding all interested shares.

Additionally, Title 8, Subtitle 3 of the MGCL permits our Board of Trustees, without shareholder approval
and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain takeover
defenses, such as a classified board, some of which we do not yet have. These provisions may have the effect of
inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a
change in control of us under the circumstances that otherwise could provide our common shareholders with the
opportunity to realize a premium over the then current market price.

Provisions of our declaration of trust may limit the ability of a third party to acquire control of our Company
and may result in entrenchment of management and diminish the value of our common shares.

Our declaration of trust authorizes our Board of Trustees to issue up to 500,000,000 common shares and up

to 100,000,000 preferred shares. In addition, our Board of Trustees may, without shareholder approval, amend
our declaration of trust to increase the aggregate number of our shares or the number of shares of any class or
series that we have the authority to issue and to classify or reclassify any unissued common shares or preferred
shares and to set the preferences, rights and other terms of the classified or reclassified shares. As a result, our
Board of Trustees may authorize the issuance of additional shares or establish a series of common or preferred
shares that may have the effect of delaying or preventing a change in control of our company, including
transactions at a premium over the market price of our shares, even if shareholders believe that a change of
control is in their interest.

Failure to make required distributions would subject us to tax.

In order for federal corporate income tax not to apply to earnings that we distribute, each year we must
distribute to our shareholders at least 90% of our REIT taxable income, determined before the deductions for
dividends paid and excluding any net capital gain. To the extent that we satisfy this distribution requirement, but

distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our
undistributed REIT 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 the
Code. Our only source of funds to make these distributions comes from distributions that we will receive from
our operating partnership. Accordingly, we may be required to borrow money, sell assets or make taxable
distributions of our capital shares or debt securities, to enable us to pay out enough of our REIT taxable income
to satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise
tax in a particular year.

Failure to qualify as a REIT, or failure to remain qualified as a REIT, would subject us to federal income tax
and potentially to state and local taxes.

We elected to be taxed as a REIT for federal income tax purposes. However, qualification as a REIT

involves the application of highly technical and complex provisions of the Code, for which only a limited number
of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our
REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income,
organizational, distribution, shareholder ownership and other requirements on a continuing basis.

Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially
applicable with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we
were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to
shareholders would not be deductible by us in computing our taxable income. We may also be subject to state
and local taxes if we fail to qualify as a REIT. Any such corporate tax liability could be substantial and would
reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse
impact on the value of our shares of beneficial interest. If, for any reason, we failed to qualify as a REIT and we
were not entitled to relief under certain Code provisions, we would be unable to elect REIT status for the four
taxable years following the year during which we ceased to so qualify, which would negatively impact the value
of our common shares.

Our TRS Lessee structure subjects us to the risk of increased hotel operating expenses that could adversely
affect our operating results and our ability to make distributions to shareholders.

Our leases with our TRS Lessees require our TRS Lessees to pay us rent based in part on revenues from our

hotels. Our operating risks include decreases in hotel revenues and increases in hotel operating expenses, which
would adversely affect our TRS Lessees’ ability to pay us rent due under the leases, including but not limited to
the increases in wage and benefit costs, repair and maintenance expenses, energy costs, property taxes, insurance
costs and other operating expenses.

Increases in these operating expenses can have a significant adverse impact on our financial condition, results

of operations, the market price of our common shares and our ability to make distributions to our shareholders.

Our TRS structure increases our overall tax liability.

Our TRS Lessees are subject to federal, state and local income tax on their taxable income, which consists

of the revenues from the hotel properties leased by our TRS Lessees, net of the operating expenses for such hotel
properties and rent payments to us. Accordingly, although our ownership of our TRS Lessees allows us to
participate in the operating income from our hotel properties in addition to receiving rent, that operating income
is fully subject to income tax. The after-tax net income of our TRS Lessees is available for distribution to us.

Additionally, we own our interest in 13 of the JV hotels through one of our TRS holding companies. With

respect to those hotels the TRS holding company will pay federal, state and local income tax on its allocable
share of all of the income from those hotels.

Our ownership of TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100%
penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income

that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating
income from hotels that are operated by eligible independent contractors pursuant to hotel management
agreements. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation
of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will
automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s gross assets may consist
of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or
accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate
taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that
are not conducted on an arm’s-length basis.

Our TRSs are subject to federal, foreign, state and local income tax on their taxable income, and their
after-tax net income is available for distribution to us but is not required to be distributed to us. We believe that
the aggregate value of the stock and securities of our TRSs is and will continue to be less than 25% of the value
of our total gross assets (including our TRS stock and securities). Furthermore, we will monitor the value of our
respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In
addition, we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm’s-
length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that
we will be able to comply with the 25% limitation discussed above or to avoid application of the 100% excise tax
discussed above.

If our leases with our TRS Lessees 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 are required to 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 TRS Lessees, which should 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 have
structured our leases, and intend to structure any future leases, so that the leases will be respected as true leases
for federal income tax purposes, but there can be no assurance that the IRS will agree with this characterization,
not challenge this treatment or that a court would not sustain such a challenge. 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 likely would fail to qualify for REIT status.

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% currently (through the end of 2012).
Dividends payable by REITs, however, generally are not eligible for the reduced rates. 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 stocks of non-REIT
corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our
common shares.

If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of
the two gross income tests applicable to REITs. We lease substantially all of our hotels to our TRS Lessees. A

TRS Lessee will not be treated as a “related party tenant,” and will not be treated as directly operating a lodging
facility to the extent the TRS Lessee leases properties from us that are managed by an “eligible independent
contractor.” In addition, our TRS holding companies will fail to qualify as “taxable REIT subsidiaries” if they
lease or own a lodging facility that is not managed by an “eligible independent contractor.”

If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a

REIT. Each of the hotel management companies that enters into a management contract with our TRS Lessees
must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our
TRS Lessees to be qualifying income for our REIT income test requirements and for our TRS holding companies
to qualify as “taxable REIT subsidiaries”. Among other requirements, in order to qualify as an eligible
independent contractor a manager must not own more than 35% of our outstanding shares (by value) and no
person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the
manager, taking into account only owners of more than 5% of our shares and, with respect to ownership interests
in such managers that are publicly traded, only holders of more than 5% of such ownership interests. Complex
ownership attribution rules apply for purposes of these 35% thresholds. Although we intend to monitor
ownership of our shares by our property managers and their owners, there can be no assurance that these
ownership levels will not be exceeded.

Our ownership limitations may restrict or prevent you from engaging in certain transfers of our common
shares.

In order to satisfy the requirements for REIT qualification, no 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 beginning with our 2011 taxable year. To
assist us to satisfy the requirements for our REIT qualification, our declaration of trust contains an ownership
limit on each class and series of our shares. Under applicable constructive ownership rules, any common shares
owned by certain affiliated owners generally will be added together for purposes of the common share ownership
limit, and any shares of a given class or series of preferred shares owned by certain affiliated owners generally
will be added together for purposes of the ownership limit on such class or series.

If anyone transfers shares in a way that would violate the ownership limit, or prevent us from qualifying as a

REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a
charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will
not violate the ownership limit. If this transfer to a trust fails to prevent such a violation or our continued
qualification as a REIT, then the initial intended transfer shall be null and void from the outset. The intended
transferee of those shares will be deemed never to have owned the shares. Anyone who acquires shares in
violation of the ownership limit or the other restrictions on transfer in our declaration of trust bears the risk of
suffering a financial loss when the shares are redeemed or sold if the market price of our shares falls between the
date of purchase and the date of redemption or sale.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax
liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a
hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to
be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% or 95%
gross income tests applicable to REITs. To the extent that we enter into other types of hedging transactions, the
income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross
income tests. As a result of these rules, we intend to limit our use of advantageous hedging techniques or
implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs
would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we
would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except
for being carried forward against future taxable income in the TRSs.

The ability of our Board of Trustees to revoke our REIT qualification without shareholder approval may
cause adverse consequences to our shareholders.

Our declaration of trust provides that our Board of Trustees may revoke or otherwise terminate our REIT

election, without the approval of our shareholders, if it determines that it is no longer in our best interest to
continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to federal income tax
on our taxable income and would no longer be required to distribute most of our taxable income to our
shareholders, which may have adverse consequences on our total return to our shareholders.

The ability of our Board of Trustees to change our major policies may not be in your interest.

Our Board of Trustees determines our major policies, including policies and guidelines relating to our

acquisitions, leverage, financing, growth, operations and distributions to shareholders and our continued
qualification as a REIT. Our board may amend or revise these and other policies and guidelines from time to time
without the vote or consent of our shareholders. Accordingly, our shareholders will have limited control over
changes in our policies and those changes could adversely affect our financial condition, results of operations, the
market price of our common shares and our ability to make distributions to our shareholders.

If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately
determine our financial results or prevent fraud. As a result, our investors could lose confidence in our
reported financial information, which could harm our business and the market value of our common shares.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent

fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting
and have our independent auditors annually issue their opinion on our internal control over financial reporting.
As we rapidly grow our business and acquire new hotel properties with existing internal controls that may not be
consistent with our own, our internal controls will become more complex, and we will require significantly more
resources to ensure our internal controls remain effective. If we or our independent auditors discover a material
weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of our common
shares. In particular, we will need to establish, or cause our third party hotel managers to establish, controls and
procedures to ensure that hotel revenues and expenses are properly recorded at our hotels. The existence of any
material weakness or significant deficiency would require management to devote significant time and incur
significant expense to remediate any such material weaknesses or significant deficiencies and management may
not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. Any such
failure could cause investors to lose confidence in our reported financial information and adversely affect the
market value of our common shares or limit our access to the capital markets and other sources of liquidity.

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

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among
other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to
our shareholders and the ownership of our shares of beneficial interest. In order to meet these tests, we may be
required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may
hinder our performance.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our gross

assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our
investment in securities (other than government securities, securities that constitute qualified real estate assets
and securities of our TRSs) generally cannot include more than 10% of the outstanding voting securities of any
one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in

general, no more than 5% of the value of our gross assets (other than government securities, securities that
constitute qualified real estate assets and securities of our TRSs) can consist of the securities of any one issuer,
and no more than 25% of the value of our total gross assets can be represented by the securities of one or more
TRSs. 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 otherwise attractive investments. These actions could have the effect of reducing our income and
amounts available for distribution to our shareholders.

We have not established a minimum distribution payment level and we may be unable to generate sufficient
cash flows from our operations to make distributions to our shareholders at any time in the future.

We are generally required to distribute to our shareholders at least 90% of our REIT taxable income each

year for us to qualify as a REIT under the Code, which requirement we currently intend to satisfy. To the extent
we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will
be subject to federal corporate income tax on our undistributed taxable income. We have not established a
minimum distribution payment level, and our ability to make distributions to our shareholders may be adversely
affected by the risk factors described in this prospectus. Subject to satisfying the requirements for REIT
qualification, we intend over time to make regular quarterly distributions to our shareholders. Our Board of
Trustees has the sole discretion to determine the timing, form and amount of any distributions to our
shareholders. Our Board of Trustees makes determinations regarding distributions based upon, among other
factors, our historical and projected results of operations, financial condition, cash flows and liquidity,
satisfaction of the requirements for REIT qualification and other tax considerations, capital expenditure and other
expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such
other matters as our Board of Trustees may deem relevant from time to time. Among the factors that could impair
our ability to make distributions to our shareholders are:

•

our inability to realize attractive returns on our investments;

unanticipated expenses that reduce our cash flow or non-cash earnings;

decreases in the value of the underlying assets; and

the fact that anticipated operating expense levels may not prove accurate, as actual results may vary
from estimates.

As a result, no assurance can be given that we will be able to continue to make distributions to our

shareholders or that the level of any distributions we do make to our shareholders will achieve a market yield or
increase or even be maintained over time, any of which could materially and adversely affect the market price of
our common shares. Distributions could be dilutive to our financial results and may constitute a return of capital
to our investors, which would have the effect of reducing each shareholder’s basis in its common shares. We also
could use borrowed funds or proceeds from the sale of assets to fund distributions.

In addition, distributions that we make to our shareholders are generally taxable to our shareholders as
ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains to
the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital
to the extent that they exceed our earnings and profits as determined for tax purposes. A return of capital is not
taxable, but has the effect of reducing the basis of a shareholder’s investment in our common shares.

The market price of our equity securities may vary substantially, which may limit your ability to liquidate your
investment.

The trading prices of equity securities issued by REITs have historically been affected by changes in market
interest rates. One of the factors that may influence the price of our shares in public trading markets is the annual
yield from distributions on our common or preferred shares as compared to yields on other financial instruments.
An increase in market interest rates, or a decrease in our distributions to shareholders, may lead prospective
purchasers of our shares to demand a higher annual yield, which could reduce the market price of our equity
securities.

Other factors that could affect the market price of our equity securities include the following:

•

actual or anticipated variations in our quarterly results of operations;

changes in market valuations of companies in the hotel or real estate industries;

changes in expectations of future financial performance or changes in estimates of securities analysts;

fluctuations in stock market prices and volumes;

issuances of common shares or other securities in the future;

the addition or departure of key personnel;

announcements by us or our competitors of acquisitions, investments or strategic alliances; and

unforeseen events beyond our control, such as terrorist attacks, travel related health concerns including
pandemics and epidemics such as H1N1 influenza, avian bird flu and SARS, political instability,
regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities,
travel related accidents and unusual weather patterns, including natural disasters such as hurricanes,
tsunamis or earthquakes.

Because we have a limited equity market capitalization and our common shares are traded in low volumes,
the stock market price of our common shares is susceptible to fluctuation to a greater extent than companies with
larger market capitalization. As a result, your ability to liquidate your investment may be limited and the sale of
common shares in this offering could cause the stock market price of our common shares to decline.

The number of shares available for future sale could adversely affect the market price of our common shares.

We cannot predict the effect, if any, of future sales of common shares, or the availability of common shares

for future sale, on the market price of our common shares. Sales of substantial amounts of common shares
(including shares issued to our trustees and officers), or the perception that these sales could occur, may
adversely affect prevailing market prices for our common shares.

We also may issue from time to time additional common shares or limited partnership interests in our
operating partnership in connection with the acquisition of properties and we may grant demand or piggyback
registration rights in connection with these issuances. Sales of substantial amounts of our common shares or the
perception that these sales could occur may adversely affect the prevailing market price for our common shares
or may impair our ability to raise capital through a sale of additional equity securities. Our Equity Incentive Plan
provides for grants of equity based awards up to an aggregate of 565,359 common shares and we may seek to
increase shares available under our Equity Incentive Plan in the future.

Future offerings of debt or equity securities ranking senior to our common shares or incurrence of debt
(including under our credit facility) may adversely affect the market price of our common shares.

If we decide to issue debt or equity securities in the future ranking senior to our common shares or

otherwise incur indebtedness (including under our credit facility), it is possible that these securities or

indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating
flexibility and limiting our ability to make distributions to our shareholders. Additionally, any convertible or
exchangeable securities that we issue in the future may have rights, preferences and privileges, including with
respect to distributions, more favorable than those of our common shares and may result in dilution to owners of
our common shares. Because our decision to issue debt or equity securities in any future offering or otherwise
incur indebtedness will depend on market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings or financings, any of which could reduce the market
price of our common shares and dilute the value of our common shares.

Item 1B. Unresolved Staff Comments

None

Item 2.

Properties

The following table sets forth certain operating information for our hotels as of December 31, 2011:

Property

Location

Management
Company

Date of Acquisition

Year
Opened

Number
of

Rooms Purchase Price

Purchase
Price per
Room

(Unaudited)

Debt

Homewood Suites by Hilton Boston-Billerica/ Bedford/

Burlington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Billerica, Massachusetts
Homewood Suites by Hilton Minneapolis-Mall of America . . . . . Bloomington, Minnesota
Homewood Suites by Hilton Nashville-Brentwood . . . . . . . . . . . . Brentwood, Tennessee
Homewood Suites by Hilton Dallas-Market Center
Homewood Suites by Hilton Hartford-Farmington . . . . . . . . . . . . Farmington, Connecticut
Homewood Suites by Hilton Orlando-Maitland . . . . . . . . . . . . . . Maitland, Florida
Homewood Suites by Hilton Carlsbad (North San Diego

. . . . . . . . . . . Dallas, Texas

County) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carlsbad, California

Hilton
Hilton
Hilton
Hilton
Hilton
Hilton

April 23, 2010
April 23, 2010
April 23, 2010
April 23, 2010
April 23, 2010
April 23, 2010

1999
1998
1998
1998
1999
2000

147 $ 12.5 million $ 85,714
144 $ 18.0 million $125,000
121 $ 11.3 million $ 93,388
137 $ 10.7 million $ 78,102
121 $ 11.5 million $ 95,041
9.5 million $ 66,433
143 $

Hampton Inn & Suites Houston-Medical Center . . . . . . . . . . . . . . Houston, Texas
Courtyard Altoona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Altoona, Pennsylvania
Springhill Suites Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Washington, Pennsylvania
Residence Inn Long Island Holtsville . . . . . . . . . . . . . . . . . . . . . . Holtsville, New York
Residence Inn White Plains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . White Plains, New York
Residence Inn New Rochelle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Rochelle, New York Island Hospitality October 5, 2010
Residence Inn Garden Grove . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Garden Grove, CA
Residence Inn Mission Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Diego, CA
Homewood Suites by Hilton San Antonio River Walk . . . . . . . . . San Antonio, TX
Doubletree Suites by Hilton Washington DC . . . . . . . . . . . . . . . . Washington, DC
Residence Inn Tysons Corner
Total/Weighted Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008
July 2, 2010
1997
August 24, 2010
2001
August 24, 2010
2000
2004
Island Hospitality August 3, 2010
Island Hospitality September 23, 2010 1982
2000
2003
2003
1996
1974
2001

Island Hospitality November 3, 2010
Island Hospitality
Concord
Concord

Island Hospitality
Island Hospitality
Island Hospitality
Island Hospitality
Island Hospitality

July 14, 2011
July 14, 2011
July 14, 2011
July 14, 2011
July 14, 2011

. . . . . . . . . . . . . . . . . . . . . . . . . . . . Vienna, VA

145 $ 32.0 million $220,690
120 $ 16.5 million $137,500
105 $ 11.3 million $107,619 $
86 $ 12.0 million $139,535 $

—
—

124 $ 21.3 million $171,774
133 $ 21.2 million $159,398
124 $ 21.0 million $169,355 $ 15.7 million
200 $ 43.6 million $218,000 $ 32.4 million
192 $ 52.5 million $273,438 $ 40.0 million
146 $ 32.5 million $222,603 $ 18.4 million
105 $ 29.4 million $280,000 $ 19.9 million
121 $ 37.0 million $305,785 $ 22.9 million
2,414 $403.8 million $163,854 $161.4 million

3
1

—
—
—
—
—
—

—
—

6.8 million
5.3 million

We lease our headquarters located at 50 Cocoanut Row, Suite 216, Palm Beach, FL 33480. The Altoona
hotel is subject to a ground lease with an expiration of April 30, 2029 with an option of up to 12 additional terms
of five years each. In connection with the New Rochelle hotel, there is an air rights lease and garage lease that
each expire on December 1, 2104.

Item 3.

Legal Proceedings

We are not presently subject to any material litigation nor, to our knowledge, is any material litigation
threatened against us or our properties, other than routine litigation arising in the ordinary course of business and
which is expected to pose no material financial risk to the Company and/or is expected to be covered by
insurance policies.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Market Information

Our common shares began trading on the New York Stock Exchange, (the “NYSE”), on April 16, 2010

under the symbol “CLDT”. The closing price of our common shares on the NYSE on December 30, 2011 was
$10.78 per share. The following table sets forth, for the periods indicated, the high and low closing sales prices
per share reported on the New York Stock Exchange as traded and the cash dividends declared per share:

2011

2010

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter

$17.50
17.09
16.44
11.62

$16.00
15.47
9.34
9.20

$0.175
0.175
0.175
0.175

High

Low

Dividends

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter (From April 16, 2010)
. . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter

$ —
20.70
18.92
19.46

$ —
17.45
14.25
16.11

$ —
—
0.175
0.175

High

Low

Dividends

Shareholder Information

On March 5, 2012, there were 13 registered holders of record of our common shares. This figure does not

include beneficial owners who hold shares in nominee name. However, because many of our common shares are
held by brokers and other institutions, we believe that there are more beneficial holders of our common shares
than record holders. In order to comply with certain requirements related to our qualification as a REIT, our
charter, subject to certain exceptions, limits the number of common shares that may be owned by any single
person or affiliated group to 9.8% of the outstanding common shares.

Initial
investment at
April 21, 2010

Value of initial
investment at
December 31, 2010

Value of initial
investment at
December 31, 2011

Chatham Lodging Trust . . . . . . . . . . . . . . . . . . .
Russell 2000 Index . . . . . . . . . . . . . . . . . . . . . . .
FTSE NAREIT All Equity REIT Index . . . . . . .
FTSE NAREIT Lodging/Resorts Index . . . . . . .

$100.00
$100.00
$100.00
$100.00

$ 87.13
$109.57
$110.50
$106.10

$ 54.78
$102.91
$119.69
$ 90.95

I
F
H
B

$120.00
$115.00
$110.00
$105.00
$100.00
$95.00
$90.00
$85.00
$80.00
$75.00
$70.00
$65.00
$60.00
$55.00
$50.00

H
B
I

April 21, 2010

December 31, 2010

December 31, 2011

Chatham

Russell 2000

NAREIT All Equity

NAREIT Lodging

The graph provides a comparison of the cumulative total return on our common shares from April 21, 2010,
the date on which our shares began trading, to the NYSE closing price per share on December 30, 2011 with the
cumulative total return on the Russell 2000 Index (the “Russell 2000”), the FTSE NAREIT All Equity REIT
Index (the “NAREIT All Equity”) and the NAREIT Lodging/Resorts Index (the “NAREIT Lodging”). The total
return values were calculated assuming a $100 investment on April 21, 2010 with reinvestment of all dividends
in (i) our common shares, (ii) the Russell 2000, (iii) the NAREIT All Equity and (iv) the NAREIT Lodging. The
total return values include any dividends paid during the period.

Distribution Information

In order to maintain our qualification as a REIT, we must make distributions to our stockholders each year

in an amount equal to at least:

•

90% of our REIT taxable income determined without regard to the dividends paid deduction and
excluding net capital gains, plus;

90% of the excess of our net income from foreclosure property over the tax imposed on such income
by the Code, minus

• Any excess non-cash income (as defined in the Code).

The following table sets forth information regarding the declaration, payment and income tax

characterization of our distributions by the Company on our common shares for the year ended December 31,
2011 and the period ended December 31, 2010:

2010

Quarter to which distribution relates

Record Date

Payment Date

Common
share
distribution
amount

Ordinary
income

Return of
capital

Second quarter (From April 16, 2010) . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10/15/2010
12/31/2010

10/29/2010
1/14/2011

0.175
0.175

$ —

$0.350

$—
$—
$—

$—

2011

Quarter to which distribution relates

Record Date

Payment Date

First quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3/31/2011
6/30/2011
9/30/2011
12/30/2011

4/15/2011
7/15/2011
10/14/2011
1/27/2012

Common
share
distribution
amount

$0.175
0.175
0.175
0.175

$0.700

Ordinary
income

Return of
capital

$0.01
$0.01
$0.01
$0.01

$0.04

$0.165
0.165
0.165
0.165

$0.660

Equity Compensation Plan Information

The following table provides information, as of December 31, 2011, relating to our Equity Incentive Plan
pursuant to which grants of common share options, share awards, share appreciation rights, performance units
and other equity-based awards options may be granted from time to time.

Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Securities
Remaining Available
for Future Issuance under
Equity Compensation
Plans

Equity compensation plans approved by

security holders (1) . . . . . . . . . . . . . . . .

Equity compensation plans not approved

by security holders . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

211,730

—
211,730

(1) Our Equity Incentive Plan was approved by our company’s sole trustee and our company’s sole shareholder

prior to completion of our IPO.

Securities Sold

Concurrent with the closing of our IPO on April 21, 2010, we issued and sold an aggregate of 500,000
common shares to Jeffrey H. Fisher, our Chairman, President and Chief Executive Officer, in a private placement
exempt from registration pursuant to Regulation D under the Securities Act. The aggregate price for these shares
was $10,000,000, and there were no underwriting discounts or commissions. Mr. Fisher represented to us that he
is an “accredited investor” (as that term is defined in Rule 501(a) of Regulation D under the Securities Act).

Issuer Purchases of Equity Securities

We do not currently have a repurchase plan or program in place. However, we do provide employees, who

have been issued restricted common shares, the option of selling shares to us to satisfy the minimum statutory tax
withholding requirements on the date their shares vest. There were 915 common shares purchased in the year
ended December 31, 2011 related to such repurchases.

Item 6.

Selected Financial Data

The following tables present selected historical financial information as of and for the years ended
December 31, 2011 and 2010. The selected historical financial information as of and for the years ended
December 31, 2011 and 2010 have been derived from our audited consolidated financial statements. The results
are not necessarily indicative of the results we expect when our investment strategy has been fully implemented.
The selected historical financial data should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and the financial statements and notes thereto, both included
herein this Annual Report on Form 10-K.

Statements of Operations Data:
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotel operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotel property acquisition costs . . . . . . . . . . . . . . . . . . . . . . . .
Property taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, including amortization of deferred financing
fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss in unconsolidated entity . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss before income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net loss attributable to common shareholders . . . . . . . . . . . . .

Loss per common share, basic and diluted . . . . . . . . . . . . . . . .
Weighted average number of common shares, basic and

Year Ended
December 31,
2011

Year Ended
December 31,
2010

(In thousands, except share and
per-share data)

73,096

25,470

42,167
5,802
7,706
5,321
11,971

72,967

129

(8,190)
(997)
22

(9,036)
(69)

(9,105)

(0.69)

15,025
3,547
3,189
1,606
2,564

25,931

(461)

(932)
—
193

(1,200)
(17)

(1,217)

(0.20)

diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,280,149

6,377,333

Other Data:
Cash provided by operating activities . . . . . . . . . . . . . . . . . . .
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by financing activities . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . . . . .

8,946
(112,523)
103,489
0.70

5,274
(201,511)
200,981
0.35

As of December 31,
2011

As of December 31,
2010

(Audited)
(In thousands)

Balance Sheet Data:

Investment in hotel properties, net . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated real estate entities . . . . . . . .
Hotel receivables (net of allowance for doubtful

accounts) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred costs, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . .

$402,815
4,680
5,299
36,003

2,057
6,350
1,502

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$458,706

Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . .
Distributions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .

Noncontrolling interest in operating partnership . . . . . . . .

$228,940
10,184
2,464

241,588

216,090

1,028

$208,080
4,768
3,018
—

891
4,710
735

$222,202

$ 50,133
5,248
1,657

57,038

164,739

425

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . .

$458,706

$222,202

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

Overview

Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment

trust (“REIT”) on October 26, 2009. The Company is internally-managed and was organized to invest primarily
in premium-branded upscale extended-stay and select-service hotels.

On February 8, 2011, we completed a follow-on common share offering generating gross proceeds of $73.6
million and net proceeds of approximately $69.4 million, adding capital to our balance sheet. Using these funds
as well as borrowing capacity on our line of credit, on July 14, 2011, we acquired five hotels for an aggregate
purchase price of $195 million, including the assumption of five individual mortgage loans secured by the hotels
totaling $134.2 million. Additionally, we invested $37.0 million for an approximate 10.3% interest in a joint
venture (“JV”) with Cerberus Capital Management (“Cerberus”) that acquired 64 hotels from Innkeepers USA
Trust (“Innkeepers”) on October 27, 2011. The Company accounts for this investment under the equity method.

As of December 31, 2011, we owned 18 hotels with an aggregate of 2,414 rooms located in 10 states and the

District of Columbia and we held a 10.3% minority interest in the JV, which owns 64 hotels comprising an
aggregate of 8,329 rooms.

Financial Condition and Operating Performance Metrics

We measure financial condition and hotel operating performance by evaluating financial and operating

metrics such as:

• Revenue per Available Room (“RevPAR”),

• Average Daily Rate (“ADR”),

• Occupancy percentage,

•

Funds From Operations (“FFO”),

• Adjusted FFO,

• Earnings before interest, taxes, depreciation and amortization (“EBITDA”), and

• Adjusted EBITDA.

We evaluate the hotels in our portfolio and potential acquisitions using these metrics to determine each

hotel’s contribution towards providing income to our shareholders through increases in distributable cash flow
and increasing long-term total returns through appreciation in the value of our common shares. RevPAR, ADR
and Occupancy are hotel industry measures commonly used to evaluate operating performance. RevPAR, which
is calculated as total room revenue divided by total number of available rooms, is an important metric for
monitoring hotel operating performance.

“Non-GAAP Financial Measures” provides a detailed discussion of our use of FFO, Adjusted FFO,

EBITDA and Adjusted EBITDA and a reconciliation of FFO, Adjusted FFO, EBITDA and Adjusted EBITDA to
net income or loss, measurements recognized by generally accepted accounting principles in the United States
(“GAAP”).

Results of Operations

Industry outlook

We believe that the hotel industry’s performance is correlated to the performance of the economy overall,

and with key economic indicators such as GDP growth, employment trends, corporate profits improving, we
expect a continuing improvement in the performance of the hotel industry. As reported by Smith Travel
Research, monthly RevPAR has been higher year over year since March 2010. As reported by Smith Travel
Research, RevPar in 2011 was up 8.2%. Industry experts such as Smith Travel Research, PKF Hospitality and
PricewaterhouseCoopers are projecting industry RevPar to grow 4-7% in 2012 based on sustained economic
growth, lack of new supply and increased business travel spending. We are currently projecting RevPar at our
hotels to grow 6-8% in 2012. 13 of our 18 hotels were renovated in 2011 so we expect our growth to outperform
industry projections.

Comparison Year ended December 31, 2011 to the Year ended December 31, 2010

Results of operations for the years ended December 31, 2011 and 2010 include the operating activities of the

18 hotels owned at December 31, 2011, which includes the 5 Sister hotels acquired in the third quarter of 2011
compared to the results of operations for the 13 hotels that we owned for all or part of the year ended
December 31, 2010. The Company completed its IPO on April 21, 2010 and acquired the 13 hotels at varying
times during the second, third and fourth quarters of 2010.

As reported by Smith Travel Research, industry RevPar for the years ended December 31, 2011 and 2010

was up 8.2% and up 5.5% respectively. RevPar at our hotels was up 2.8% and 3.3% in 2011 and 2010, which
includes periods prior to our ownership. Our RevPar growth was adversely impacted because 13 of our 18 hotels
were undergoing renovations in 2011.

Revenue

Total revenue was $73.1 million for the year ended December 31, 2011 compared to total revenue of $25.4
million for the 2010 period due to the increase in the number of hotels owned in 2011 from 13 to 18. We owned
13 hotels for all of 2011 compared to owning zero hotels for all of 2010. Since all of our hotels are premium
branded upscale extended-stay hotels and select service, room revenue is the primary revenue source as these
hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue was
$70.4 and $24.7 million for the years ended December 31, 2011 and 2010, respectively.

Since room revenue is the primary component of total revenue, our revenue results are dependent on
maintaining and improving occupancy, ADR and RevPAR at our hotels. Occupancy, ADR, and RevPAR results
are presented in the following table in each period to reflect operations of the hotels regardless of ownership:

For the year ended
December 31, 2011

For the year ended
December 31, 2010

Portfolio
ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . .
RevPar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$126.26

78.5%

$ 99.08

$124.19

77.6%

$ 96.37

Other operating revenue, comprised of meeting room, gift shop, in-room movie and other ancillary
amenities revenue, was $2.7 and $0.7 million, respectively, for the years ended December 31, 2011 and 2010.

Hotel Operating Expenses

Hotel operating expenses increased $27.2 million from $15.0 million for the year ended December 31, 2010
to $42.2 million for the year ended December 31, 2011 due to the increased number of hotels owned in the 2011
period and owning 13 hotels for all of 2011 compared to owning no hotels for all of 2010. As a percentage of

total revenue, hotel operating expenses were 58% for 2011 and 59% for 2010, a downward trend we hope will
continue as ADR growth comprises a larger component of RevPar increases in 2012. Room expenses, which are
the most significant component of hotel operating expenses, increased $10.0 million from $6.0 million in 2010 to
$16.0 million in 2011. Other direct expenses, which include management and franchise fees, insurance, utilities,
repairs and maintenance, advertising and sales, and hotel general and administrative expenses increased $17.1
million from $9.0 million in 2010 to $26.1 million in 2011.

Depreciation and Amortization

Depreciation and amortization expense increased $9.4 million from $2.6 million for the year ended

December 31, 2010 to $12.0 million for the year ended December 31, 2011. The increase is due to the increased
number of hotels owned during the 2011 period and the disposition and replacement of furniture and fixtures at
six hotels where major property improvement plans were completed during the year ended December 30, 2011.
Depreciation is recorded on our hotel buildings over 40 years from the date of acquisition. Depreciable lives of
hotel furniture, fixtures and equipment are generally three to ten years between the date of acquisition and the
date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded over
the term of the respective franchise agreement.

Real Estate and Personal Property Taxes

Total property tax and insurance expenses increased $3.7 million from $1.6 million for the year ended
December 31, 2010 to $5.3 million for the year ended December 31, 2011. The increase is due primarily to
increased number of hotels owned during the 2011 period and due to the fact the 2010 period comprised only 253
days. As a percentage of revenue, property tax and insurance expense increased from 6.3% in 2010 to 7.3% in
2011 as a result of the higher valued assets acquired during 2011 at a higher purchase price per room than the 13
hotels owned at December 31, 2010.

Corporate General and Administrative

Corporate general and administrative expenses principally consist of employee-related costs, including base

payroll and amortization of restricted stock and awards of long-term incentive plan (“LTIP”) units. These
expenses also include corporate operating costs, professional fees and trustees’ fees. Total corporate general and
administrative expenses (excluding stock based compensation of $1.6 and $1.1 million for the year ended
December 31, 2011 and for the year ended December 31, 2010, respectively) increased $1.8 million to
$4.2 million in 2011 from $2.4 million in 2010. This increase was primarily due to the fact the 2010 period
comprised only 253 days.

Hotel Property Acquisition Costs

Hotel property acquisition costs increased $4.6 million from $3.1 million for the year ended December 31,

2010 to $7.7 million for the year ended December 31, 2011. The 2011 expenses relate to the acquisition of hotels
formerly owned by Innkeepers described in Note 3, Acquisition of Hotel Properties and Note 6, Investment in
Unconsolidated Entities, in the notes to our consolidated financial statements. The 2010 expenses represent costs
associated with the purchase of the 13 hotels owned at December 31, 2010. These acquisition-related costs are
expensed when incurred in accordance with GAAP.

Interest and Other Income

Interest income on cash and cash equivalents decreased $171 thousand from $193 thousand for the year
ended December 31, 2010 to $22 thousand for the year ended December 31, 2011. This decrease was due to the
decrease in cash and cash equivalents in 2011. The Company had not fully invested the cash from its IPO in the
2010 period and the excess cash was held in an interest bearing account.

Interest Expense

Interest expense increased $7.3 million from $0.9 million for the year ended December 31, 2010 to $8.2

million for the year ended December 31, 2011. The increase is due primarily to the following: 1) assumption of
$134.2 million of loans on the five hotels acquired in July 2011 bearing interest at a rate of approximately 6%; 2)
increase in weighted average borrowings on our credit facility of $22.6 million from $7.1 million in 2010 to
$29.7 million in 2011; and debt issued in August 2011 on our New Rochelle hotel of $15.8 million at a rate of
5.75%. The interest rate on the senior secured revolving credit facility was 4.5% in 2010 and increased to
5.25% November 14, 2011.

Income Tax Expense

Income tax expense increased $52 thousand in 2011 from $17 thousand for the year ended December 31,

2010 to $69 thousand for the year ended December 31, 2011. We are subject to income taxes based on the
taxable income of our TRS holding companies at a tax rate of approximately 40%.

Net loss applicable to Common Shareholders

Net loss applicable to common shareholders increased $7.9 million in 2011 from a loss of $1.2 million, or

$0.20 per diluted share for the year ended December 31, 2010 to a loss of $9.1 million, or $0.69 per diluted share
for the year ended December 31, 2011. This increase was due to the factors discussed above.

Material Trends or Uncertainties

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably

anticipated to have a material impact on either the capital resources or the revenues or income to be derived from
the acquisition and operation of properties, loans and other permitted investments, other than those referred to in
the risk factors identified in the “Risk Factors” section of this Annual Report on Form 10-K.

Non-GAAP Financial Measures

We consider the following non-GAAP financial measures useful to investors as key supplemental measures

of our operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, and (4) Adjusted EBITDA. These
non-GAAP financial measures could be considered along with, but not as alternatives to, net income or loss as a
measure of our operating performance prescribed by GAAP.

FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not represent cash generated from operating
activities under GAAP and should not be considered as alternatives to net income or loss, cash flows from
operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA and
Adjusted EBITDA are not measures of our liquidity, nor are FFO, Adjusted FFO, EBITDA or Adjusted EBITDA
indicative of funds available to fund our cash needs, including our ability to make cash distributions. These
measurements do not reflect cash expenditures for long-term assets and other items that have been and will be
incurred. FFO, Adjusted FFO, EBITDA and Adjusted EBITDA may include funds that may not be available for
management’s discretionary use due to functional requirements to conserve funds for capital expenditures,
property acquisitions, and other commitments and uncertainties.

We calculate 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 write-downs, items classified by GAAP as
extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization
(excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and
joint ventures. We believe that the presentation of FFO provides useful information to investors regarding our
operating performance because it measures our performance without regard to specified non-cash items such as

real estate depreciation and amortization, gain or loss on sale of real estate assets and certain other items that we
believe are not indicative of the performance of our underlying hotel properties. We believe that these items are
more representative of our asset base and our acquisition and disposition activities than our ongoing operations,
and that by excluding the effects of the items, FFO is useful to investors in comparing our operating performance
between periods and between REITs that report FFO using the NAREIT definition.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including
hotel property acquisition costs, costs associated with the departure of the Company’s former Chief Financial
Officer which are referred to as “other charges” below and acquisition costs related to the joint venture. We
believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of
operating performance between periods and between REITs that make similar adjustments to FFO.

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31,

2011 and 2010 (in thousands, except share data):

Funds From Operations (“FFO”):
Net loss attributable to common shareholders . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for joint venture items . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FFO attributable to common shareholders . . . . . . . . . . . . . . . . .
Hotel property acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other charges included in general and administrative expenses . . . . . . . .
Adjustments for joint venture items . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31

2011

2010

(9,105)
11,909
900

(1,217)
2,537
—

3,704
7,706
—
473

1,320
3,189
345
—

4,854

Adjusted FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,883

Weighted average number of common shares

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,280,149
13,280,149

6,377,333
6,377,333

We calculate EBITDA as net income or loss excluding: (1) interest expense; (2) provision for income taxes,
including income taxes applicable to sale of assets; (3) depreciation and amortization; and (4) joint venture items
including interest, depreciation and amortization . We believe EBITDA is useful to investors in evaluating our
operating performance because it helps investors compare 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, we use EBITDA as one
measure in determining the value of hotel acquisitions and dispositions.

We further adjust EBITDA for certain additional items, including hotel property acquisition costs, costs

associated with the departure of the former Chief Financial Officer which are referred to as “other charges”
below, amortization of non-cash share-based compensation which we believe are not indicative of the
performance of our underlying hotel properties and acquisition costs related to the joint venture. We believe that
Adjusted EBITDA provides investors with another financial measure that may facilitate comparisons of
operating performance between periods and between REITs that report similar measures.

The following is reconciliation of net loss to EBITDA and Adjusted EBITDA for the years ended

December 31, 2011 and 2010 (in thousands):

For the years ended
December 31

2011

2010

Earnings Before Interest, Taxes, Depreciation and Amortization

(“EBITDA”):

Net loss attributable to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for joint venture items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (9,105)
8,190
69
11,971
1,773

$(1,217)
932
17
2,564
—

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotel property acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for joint venture items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other charges included in general and administrative expenses . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,125
7,706
473
—
1,571

2,296
3,189
—
345
1,070

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,648

$ 6,900

Although we present FFO, Adjusted FFO, EBITDA and Adjusted EBITDA because we believe they are

useful to investors in comparing our operating performance between periods and between REITs that report
similar measures, these measures have limitations as analytical tools. Some of these limitations are:

•

FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;

FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements
for, our working capital needs;

FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not reflect funds available to make cash
distributions;

• EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash

requirements necessary to service interest or principal payments, on our debts;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and

amortized may need to be replaced in the future, and FFO, Adjusted FFO, EBITDA and Adjusted
EBITDA do not reflect any cash requirements for such replacements;

• Non-cash compensation is and will remain a key element of our overall long-term incentive

compensation package, although we exclude it as an expense when evaluating our ongoing operating
performance for a particular period using Adjusted EBITDA;

• Adjusted FFO and Adjusted EBITDA do not reflect the impact of certain cash charges (including
acquisition transaction costs or costs associated with the departure of the former Chief Financial
Officer which are referred to as “other charges”) that result from matters we consider not to be
indicative of the underlying performance of our hotel properties; and

• Other companies in our industry may calculate FFO, Adjusted FFO, EBITDA and Adjusted EBITDA

differently than we do, limiting their usefulness as a comparative measure.

In addition, FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not represent cash generated from

operating activities as determined by GAAP and should not be considered as alternatives to net income or loss,
cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted

FFO, EBITDA and Adjusted EBITDA are not measures of our liquidity. Because of these limitations, FFO,
Adjusted FFO, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for
performance measures calculated in accordance with GAAP. We compensate for these limitations by relying
primarily on our GAAP results and using FFO, Adjusted FFO, EBITDA and Adjusted EBITDA only
supplementally. Our consolidated financial statements and the notes to those statements included elsewhere are
prepared in accordance with GAAP.

Sources and Uses of Cash

Our principal sources of cash include net cash from operations and proceeds from debt and equity issuances.

Our principal uses of cash include acquisitions, capital expenditures, operating costs, corporate expenditures,
interest costs and debt repayments and distributions to equity holders.

As of December 31, 2011 and 2010, we had cash and cash equivalents of approximately $4.7 and $4.8

million, respectively. Additionally, we had $17.5 million available under our $85.0 million senior secured
revolving credit facility as of December 31, 2011.

For the year ended December 31, 2011, net cash flows provided by operations were $8.9 million, as our net
loss of $9.1 million was due in significant part to non-cash expenses, including $13.5 million of depreciation and
amortization, $1.6 million of share-based compensation expense and a $1.0 million loss from unconsolidated
entities. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments
from our hotels resulted in net cash inflow of $1.9 million. Net cash flows used in investing activities were
$112.5 million, primarily related to the acquisition of the 5 Sisters of $62.0 million, investment in unconsolidated
entities of $37.0 million, additional capital improvements to the eighteen hotels of $12.7 million and $0.8 million
of funds placed into escrows for lender or manager required escrows. Net cash flows provided by financing
activities were $103.5 million, comprised primarily of proceeds generated from the February 2011 common share
offering, net of underwriting fees and offering costs paid or payable to third parties, of $69.4 million, proceeds
from the issuance of a mortgage loan on our New Rochelle Residence Inn hotel of $15.8 million, net borrowings
on our secured credit facility of $29.7 million, offset by principal payments on mortgage debt of $0.9 million,
payment of financing costs associated with our amended secured revolving credit facility and the six new loans
acquired or assumed of $1.5 million and distributions to shareholders of $9.0 million.

For the year ended December 31, 2010, net cash flows provided by operations were $5.3 million, as our net
loss of $1.2 million was due in significant part to non-cash expenses, including $2.8 million of depreciation and
amortization and $1.2 million of share-based compensation expense. In addition, changes in operating assets and
liabilities due to the timing of cash receipts and payments from our hotels resulted in net cash inflow of $2.5
million. Net cash flows used in investing activities were $201.5 million, which represents the acquisition price
for thirteen hotels of $197.5 million as well as additional capital improvements to those hotels of $3.6 million
and $0.4 million of funds placed into escrows for lender or manager required escrows. Net cash flows provided
by financing activities were $201.0 million, comprised primarily of proceeds generated from the initial public
offering, net of underwriting fees and offering costs paid or payable to third parties, of $168.7 million and
borrowings on our secured credit facility of $37.8 million, offset by costs paid to issue debt of $3.8 million and
distributions to shareholders of $1.7 million.

We have paid regular quarterly dividends and distributions on common shares and LTIP units since the third

quarter of 2010. Dividends and distributions for each quarter of 2011 were $0.175 per common share and LTIP
unit. On January 27, 2012, we paid an aggregate of $2.5 million in fourth quarter dividends on our common
shares and distributions on our LTIP units.

Liquidity and Capital Resources

We intend to maintain our leverage over the long term at a ratio of net debt to investment in hotels (at cost)

(defined as our initial acquisition price plus the gross amount of any subsequent capital investment and excluding

any impairment charges) to less than 35 percent measured at the time we incur debt, and a subsequent decrease in
hotel property values will not necessarily cause us to repay debt to comply with this limitation. In the 2011
second quarter, our Board of Trustees approved the temporary increase in our targeted leverage to not more than
55 percent, not including our share of assets and liabilities of the JV. Our Board of Trustees believes that
temporarily increasing our leverage limit at this stage of the lodging cycle recovery is prudent to take advantage
of the opportunity to buy the 5 Sisters and invest in the JV.

On October 12, 2010, we entered into an $85 million senior secured revolving credit facility. At

December 31, 2011 and December 31, 2010, we had $67.5 million and $37.8 million, respectively, in borrowings
under this credit facility. At December 31, 2011, there were ten properties in the borrowing base under the credit
agreement and the maximum borrowing availability under the revolving credit facility was $75.0 million.
Subsequent to December 31, 2011, we repaid $5.5 million on the credit facility.

We amended our $85 million senior secured revolving credit facility effective May 2011. The amendment
provides for an increase in the allowable consolidated leverage ratio to 60 percent through 2012, reducing to 55
percent in 2013; and a decrease in the consolidated fixed charge coverage ratio from 2.3x to 1.7x through March
2012, increasing to 1.75x through December 2012 and 2.0x in 2013. Subject to certain conditions, the credit
facility still has an accordion feature that provides us with the ability to increase the facility to $110 million.

The credit facility contains representations, warranties, covenants, terms and conditions customary for
transactions of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and
minimum net worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments,
(iv) distributions, and (v) mergers and asset dispositions, covenants to preserve corporate existence and comply
with laws, covenants on the use of proceeds of the credit facility and default provisions, including defaults for
non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-
defaults and guarantor defaults. The five mortgage loans we assumed in connection with the acquisition of the 5
Sisters as well as the New Rochelle Residence Inn loan do not contain any financial covenants. We were in
compliance with these financial covenants at December 31, 2011.

On February 8, 2011, we completed a public offering of 4.6 million common shares, raising net proceeds of
$69.4 million. We used $42.8 million to pay down debt outstanding on the revolving credit facility. We used the
remaining funds to fund a portion of our acquisition of the 5 Sisters, described under Note 4, Acquisition of Hotel
Properties, in the notes to our consolidated financial statements above.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations,
existing cash balances and, if necessary, short-term borrowings under our credit facility. We believe that our net
cash provided by operations will be adequate to fund operating obligations, pay interest on any borrowings and
fund dividends in accordance with the requirements for qualification as a REIT under the Code. We expect to
meet our long-term liquidity requirements, such as hotel property acquisitions and debt maturities or repayments
through additional long-term secured and unsecured borrowings and the issuance of additional equity or debt
securities.

We intend to continue to invest in hotel properties only as suitable opportunities arise. We intend to finance

our future investments with the net proceeds from additional issuances of common and preferred shares,
issuances of units of limited partnership interest in our operating partnership or other securities or borrowings.
The success of our acquisition strategy depends, in part, on our ability to access additional capital through
issuances of equity securities and borrowings. There can be no assurance that we will continue to make
investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain
hotels that do not meet our long-term investment objectives as a means to provide liquidity.

Capital Expenditures

We intend to maintain each hotel property in good repair and condition and in conformity with applicable

laws and regulations in accordance with the franchisor’s standards and any agreed-upon requirements in our
management and loan agreements. After we acquire a hotel property, in certain instances, we may be required to
complete a property improvement plan (“PIP”) in order to be granted a new franchise license for that particular
hotel property. PIPs are intended to bring the hotel property up to the franchisor’s standards. Certain of our loans
require that we make available for such purposes, at the hotels collateralizing these loans, amounts up to 5% of
gross revenue from such hotels. We intend to cause the expenditure of amounts in excess of such obligated
amounts, if necessary, to comply with any reasonable requirements and otherwise to the extent that we deem
such expenditures to be in the best interests of the hotel. To the extent that we spend more on capital
expenditures than is available from our operations, we intend to fund those capital expenditures with available
cash and borrowings under the revolving credit facility.

Related Party Transactions

We have entered into transactions and arrangements with related parties that could result in potential
conflicts of interest. See “Risk Factors” and Note 14, “Related Party Transactions” to our consolidated financial
statements included in this Annual Report on Form 10-K.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2011, and the effect these
obligations are expected to have on our liquidity and cash flow in future periods (in thousands). We had no other
material off-balance sheet arrangements at December 31, 2011.

Contractual Obligations

Corporate office lease . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving credit facility, including interest (1) . . . . .
Ground leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property loans, including interest (1) . . . . . . . . . . . . .

Payments Due by Period

Total

141
73,854
12,698
211,887

Less Than
One Year

One to Three
Years

Three to Five
Years

More Than
Five Years

38
3,631
203
11,585

$
79
70,223
413
23,170

24
—
422
159,394

$ —
—
11,660
17,738

$298,580

$15,457

$93,885

$159,840

$29,398

(1) Does not reflect additional borrowings under the revolving credit facility after December 31, 2011 and

interest payments are based on the interest rate in effect as of December 31, 2011. See Note 7, “Debt” to our
consolidated financial statements for additional information relating to our property loans.

Inflation

Operators of hotels, 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 management companies to raise room
rates.

Critical Accounting Policies

We consider the following policies critical because they require estimates about matters that are inherently
uncertain, involve various assumptions and require management judgment. The preparation of the consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the balance sheet date and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from these estimates and assumptions.

Investment in Hotel Properties

We allocate the purchase prices of hotel properties acquired based on the fair value of the acquired real

estate, furniture, fixtures and equipment, identifiable intangible assets and assumed liabilities. 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 property, including valuations
performed by independent third parties and information obtained about each hotel property resulting from
pre-acquisition due diligence. Hotel property acquisition costs, such as transfer taxes, title insurance,
environmental and property condition reviews, and legal and accounting fees, are expensed in the period
incurred.

Our investment in hotel properties are carried at cost and are depreciated using the straight-line method over

the estimated useful lives of the assets, generally 40 years for buildings, 20 years for land improvements, 15
years for building improvements and three to ten years for furniture, fixtures and equipment. Renovations and/or
replacements at the hotel properties that improve or extend the life of the assets are capitalized and depreciated
over their useful lives, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of
property and equipment, the cost and related accumulated depreciation are removed from the Company’s
accounts and any resulting gain or loss is recognized in the consolidated statements of operations.

We will periodically review our hotel properties for impairment whenever events or changes in
circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or
circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging
at the properties due to declining national or local economic conditions and/or new hotel construction in markets
where the hotels are located. When such conditions exist, management will perform an analysis to determine if
the estimated undiscounted future cash flows, without interest charges, from operations and the proceeds from
the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash
flows are less than the carrying amount, an adjustment to reduce the carrying amount to the related hotel
property’s estimated fair market value is recorded and an impairment loss recognized. As of December 31, 2011,
we had no hotels that were impaired.

We will consider a hotel property as held for sale when a binding agreement to purchase the property has
been signed under which the buyer has committed a significant amount of nonrefundable cash, no significant
financing contingencies exist which could cause the transaction not to be completed in a timely manner and the
sale is expected to occur within one year. If these criteria are met, depreciation and amortization of the hotel
property will cease and an impairment loss if any will be recognized if the fair value of the hotel property, less
the costs to sell, is lower than the carrying amount of the hotel property. We will classify the loss, together with
the related operating results, as discontinued operations in the consolidated statements of operations and classify
the assets and related liabilities as held for sale in the consolidated balance sheets. As of December 31, 2011, we
had no hotel properties held for sale.

Revenue Recognition

Revenue from hotel operations is recognized when rooms are occupied and when services are provided.
Revenue consists of amounts derived from hotel operations, including sales from room, meeting room, gift shop,
in-room movie and other ancillary amenities. Sales, use, occupancy, and similar taxes are collected and presented
on a net basis (excluded from revenues) in the accompanying consolidated statements of operations.

Share-Based Compensation

We measure compensation expense for the restricted share awards based upon the fair market value of our

common shares at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting
period and is included in general and administrative expense in the accompanying consolidated statement of
operations. We pay dividends on vested and nonvested restricted shares.

Income Taxes

We elected to be taxed as a REIT for federal income tax purposes. In order to qualify as a REIT under the

Code, 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 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 qualification is lost unless the IRS grants us relief under certain statutory
provisions. Such an event could materially adversely affect our net income and net cash available for distribution
to shareholders. However, we believe we have been organized and that we operate in such a manner as to qualify
for treatment as a REIT.

Recently Issued Accounting Standards

In May 2011, the FASB and International Accounting Standards Board (“IASB”) (collectively the
“Boards”) issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2044-04”). ASC
2011-04 created a uniform framework for applying fair value measurement principles for companies around the
world and clarified existing guidance in U.S. GAAP. ASU 2011-04 is effective for the first annual reporting
period beginning after December 15, 2011 and shall be applied prospectively. The Company does not expect this
standard to have any material effect on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of

Comprehensive Income. This update is intended to increase the prominence of other comprehensive income in
the financial statements by requiring public companies to present comprehensive income either as a single
statement detailing the components of net income and total net income, the components of other comprehensive
income and total other comprehensive income, and a total for comprehensive income or using a two statement
approach including both a statement of income and a statement of comprehensive income. The option to present
other comprehensive income in the statement of changes in equity has been eliminated. The amendments in this
update, which should be applied retrospectively, are effective for public companies for fiscal years, and interim
periods beginning after December 15, 2011. Currently, the Company has no items of other comprehensive
income in any periods presented and adoption of this standard is not expected to impact us.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk

We may be exposed to interest rate changes primarily as a result of our assumption of long-term debt in
connection with our acquisitions. Our interest rate risk management objectives are to limit the impact of interest
rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we
will seek to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases,
with the ability to convert variable rates to fixed rates. With respect to variable rate financing, we will assess
interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact
expected future cash flows and by evaluating hedging opportunities.

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each
instrument at estimated market rates. Rates take into consideration general market conditions and maturity. The
estimated fair value of the Company’s fixed rate debt as of December 31, 2011 and 2010 was $159.4 million and
$12.6 million, respectively.

At December 31, 2011, our consolidated debt was comprised of floating and fixed rate debt. The fair value
of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements
that could have been borrowed at the date presented, at then current market interest rates. The following table
provides information about our financial instruments that are sensitive to changes in interest rates (in thousands):

Expected Maturities

2012

2013

2014

2015

2016

Thereafter

Total

Fair
Value

Liabilities
Floating rate:

Debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest rate (1) . . . . . .

$ — $67,500

5.25%

$ 67,500

$ 67,513

5.25%

Fixed rate:

Debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest rate . . . . . . . . .

$1,848

$ 1,981

$2,106

$6,778

$134,587

$14,140

$161,440

$159,386

5.95%

5.95% 5.95% 5.88%

6.00%

5.75%

5.97%

(1) LIBOR floor rate of 1.25% plus a margin of 4.0% at December 31, 2011. The one-month LIBOR rate was 0.28% at

December 31, 2011.

We estimate that a hypothetical one-percentage point increase in the variable interest rate would result in
additional interest expense of approximately $0.7 million annually. This assumes that the amount outstanding
under our floating rate debt remains at $67.5 million, the balance as of December 31, 2011.

Item 8.

Consolidated Financial Statements and Supplementary Data

See our Consolidated Financial Statements and the Notes thereto beginning at page F-1.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer

and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures were effective to provide reasonable assurance that information required
to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial

reporting. A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.

Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated
Framework”. Based on our assessment, management has concluded that, as of December 31, 2011, our internal
control over financial reporting is effective, based on those criteria.

The effectiveness of our internal control over financial reporting as of December 31, 2011, has been audited

by PricewaterhouseCoopers LLP, an independent registered certified public accounting firm as stated in their
report, which appears on page F-2 of this Annual Report on Form 10-K.

Item 9B. Other Information

None.

PART III

Item 10. Trustees, Executive Officers and Corporate Governance