UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-31775

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland		86-1062192
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)
14185 Dallas Parkway, Suite 1100
Dallas, Texas		75254
(Address of principal executive offices)		(Zip code)

(972) 490-9600
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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. þ Yes o 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). o Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):

 

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 par value per share		51,284,182
(Class)		Outstanding at November 9, 2010

 

 

ASHFORD HOSPITALITY TRUST, INC
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)			3
Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009			4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2010 and 2009			5
Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2010			6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009			7
Notes to Consolidated Financial Statements			8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			41
ITEM 4. CONTROLS AND PROCEDURES			42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			42
ITEM 1A. RISK FACTORS			43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			46
ITEM 6. EXHIBITS			46
SIGNATURES			47
EX-21.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

		September 30,				December 31,
		2010				2009
		(Unaudited)
Assets
Investments in hotel properties, net		$	3,253,095			$	3,383,759
Cash and cash equivalents			72,120				165,168
Restricted cash			68,113				77,566
Accounts receivable, net of allowance of $402 and $492, respectively			36,682				31,503
Inventories			2,816				2,975
Notes receivable			33,095				55,655
Investment in unconsolidated joint ventures			36,590				20,736
Deferred costs, net			19,832				20,960
Prepaid expenses			15,410				13,234
Interest rate derivatives			125,256				94,645
Other assets			3,492				3,471
Intangible assets, net			2,921				2,988
Due from third-party hotel managers			45,122				41,838
Total assets		$	3,714,544			$	3,914,498
Liabilities and Equity
Liabilities:
Indebtedness		$	2,489,475			$	2,772,396
Capital leases payable			49				83
Accounts payable and accrued expenses			98,940				91,387
Dividends payable			7,309				5,566
Unfavorable management contract liabilities			16,810				18,504
Due to related parties			1,929				1,009
Due to third-party hotel managers			2,059				1,563
Other liabilities			7,714				7,932
Total liabilities			2,624,285				2,898,440
Commitments and contingencies (Note 14)
Preferred stock, $0.01 par value, Series B-1 Cumulative Convertible Redeemable Preferred Stock, 7,447,865 shares issued and outstanding			75,000				75,000
Redeemable noncontrolling interests in operating partnership			118,720				85,167
Equity:
Shareholders’ equity of the Company:
Preferred stock, $0.01 par value, 50,000,000 shares authorized —
Series A Cumulative Preferred Stock, 1,487,900 shares issued and outstanding at September 30, 2010 and December 31, 2009			15				15
Series D Cumulative Preferred Stock, 8,966,797 and 5,666,797 shares issued and outstanding at September 30, 2010 and December 31, 2009			90				57
Common stock, $0.01 par value, 200,000,000 shares authorized, 123,026,246 and 122,748,859 shares issued at September 30, 2010 and December 31, 2009; 51,121,677 and 57,596,878 shares outstanding at September 30, 2010 and December 31, 2009			1,230				1,227
Additional paid-in capital			1,513,224				1,436,009
Accumulated other comprehensive loss			(796	)			(897	)
Accumulated deficit			(405,802	)			(412,011	)
Treasury stock, at cost, 71,904,569 and 65,151,981 shares at September 30, 2010 and December 31, 2009			(228,422	)			(186,424	)
Total shareholders’ equity of the Company			879,539				837,976
Noncontrolling interests in consolidated joint ventures			17,000				17,915
Total equity			896,539				855,891
Total liabilities and equity		$	3,714,544			$	3,914,498

See Notes to Consolidated Financial Statements.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Unaudited)
Revenue
Rooms		$	168,351			$	159,798			$	502,626			$	494,555
Food and beverage			34,483				33,488				117,518				118,106
Rental income from operating leases			1,185				1,236				3,727				3,830
Other			9,914				10,641				30,636				32,576
Total hotel revenue			213,933				205,163				654,507				649,067
Interest income from notes receivable			349				1,761				1,032				10,397
Asset management fees and other			100				173				312				552
Total revenue			214,382				207,097				655,851				660,016
Expenses
Hotel operating expenses:
Rooms			40,304				38,091				117,244				112,758
Food and beverage			26,602				26,220				84,265				85,153
Other expenses			69,889				68,687				209,307				210,533
Management fees			8,616				8,270				26,486				26,115
Total hotel operating expenses			145,411				141,268				437,302				434,559
Property taxes, insurance and other			13,281				14,643				40,715				42,433
Depreciation and amortization			35,836				36,868				108,158				111,941
Impairment charges			694				19,816				(1,263	)			149,272
Corporate general and administrative			7,700				9,257				22,680				23,014
Total expenses			202,922				221,852				607,592				761,219
Operating income (loss)			11,460				(14,755	)			48,259				(101,203	)
Equity in earnings of unconsolidated joint ventures			3				642				1,325				1,863
Interest income			114				56				226				253
Other income			15,874				13,228				47,045				35,140
Interest expense and amortization of loan costs			(36,187	)			(34,478	)			(108,688	)			(103,496	)
Write-off of loan costs, premiums and exit fees, net			—				—				—				930
Unrealized gain (loss) on derivatives			382				5,525				30,824				(14,166	)
(Loss) income from continuing operations before income taxes			(8,354	)			(29,782	)			18,991				(180,679	)
Income tax benefit (expense)			14				(138	)			(395	)			(397	)
(Loss) income from continuing operations			(8,340	)			(29,920	)			18,596				(181,076	)
Income (loss) from discontinued operations			56,005				(3,776	)			41,796				(23,318	)
Net income (loss)			47,665				(33,696	)			60,392				(204,394	)
Loss from consolidated joint ventures attributable to noncontrolling interests			293				476				1,422				629
Net (income) loss attributable to noncontrolling interests in operating partnership			(6,689	)			4,424				(8,610	)			25,567
Net income (loss) attributable to the Company			41,269				(28,796	)			53,204				(178,198	)
Preferred dividends			(4,988	)			(4,831	)			(14,649	)			(14,492	)
Net income (loss) attributable to common shareholders		$	36,281			$	(33,627	)		$	38,555			$	(192,690	)
Income (loss) per share — Basic and Diluted
(Loss) income from continuing operations attributable to common shareholders		$	(0.24	)		$	(0.47	)		$	0.04			$	(2.39	)
Income (loss) from discontinued operations attributable to common shareholders			0.97				(0.05	)			0.69				(0.28	)
Net income (loss) attributable to common shareholders		$	0.73			$	(0.52	)		$	0.73			$	(2.67	)
Weighted average common shares outstanding — basic and diluted			49,714				65,266				51,251				72,167
Dividends declared per common share		$	—			$	—			$	—			$	—
Amounts attributable to common shareholders:
(Loss) income from continuing operations, net of tax		$	(6,842	)		$	(25,519	)		$	16,959			$	(157,722	)
Income (loss) from discontinued operations, net of tax			48,111				(3,277	)			36,245				(20,476	)
Preferred dividends			(4,988	)			(4,831	)			(14,649	)			(14,492	)
Net income (loss) attributable to common shareholders		$	36,281			$	(33,627	)		$	38,555			$	(192,690	)

See Notes to Consolidated Financial Statements.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Unaudited)
Net income (loss)		$	47,665			$	(33,696	)		$	60,392			$	(204,394	)
Other comprehensive income, net of tax:
Change in unrealized loss on derivatives			(11	)			(6	)			(265	)			55
Reclassification to interest expense			171				55				446				123
Total other comprehensive income			160				49				181				178
Comprehensive income (loss)			47,825				(33,647	)			60,573				(204,216	)
Less: Comprehensive loss attributable to noncontrolling interests in consolidated joint ventures			263				472				1,359				599
Less: Comprehensive (income) loss attributable to redeemable noncontrolling interests in operating partnership			(6,707	)			4,418				(8,627	)			25,547
Comprehensive income (loss) attributable to the Company		$	41,381			$	(28,757	)		$	53,305			$	(178,070	)

See Notes to Consolidated Financial Statements.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

																																																						Redeemable
																																		Accumulated												Noncontrolling								Noncontrolling
		Preferred Stock																								Additional								Other												Interests in								Interests in
		Series A								Series D								Common Stock								Paid-in				Accumulated				Comprehensive				Treasury Stock								Consolidated								Operating
		Shares				Amounts				Shares				Amounts				Shares				Amounts				Capital				Deficit				Loss				Shares				Amounts				Joint Ventures				Total				Partnership
Balance at January 1, 2010			1,488			$	15				5,667			$	57				122,749			$	1,227			$	1,436,009			$	(412,011	)		$	(897	)			(65,152	)		$	(186,424	)		$	17,915			$	855,891			$	85,167
Issuance of additional Series D preferred stock			—				—				3,300				33				—				—				72,093				—				—				—				—				—				72,126				—
Repurchases of treasury shares			—				—				—				—				—				—				—				—				—				(7,158	)			(45,087	)			—				(45,087	)			—
Forfeiture of restricted shares			—				—				—				—				—				—				146				—				—				(63	)			(447	)			—				(301	)			—
Issuance of restricted shares/units under stock/unit-based compensation plan			—				—				—				—				—				—				(3,536	)			—				—				469				3,536				—				—				54
Stock/unit-based compensation expense			—				—				—				—				—				—				3,104				—				—				—				—				—				3,104				2,035
Net income (loss)			—				—				—				—				—				—				—				53,204				—				—				—				(1,422	)			51,782				8,610
Dividends declared — Preferred A shares			—				—				—				—				—				—				—				(2,385	)			—				—				—				—				(2,385	)			—
Dividends declared — Preferred B-1 shares			—				—				—				—				—				—				—				(3,129	)			—				—				—				—				(3,129	)			—
Dividends declared — Preferred D shares			—				—				—				—				—				—				—				(9,135	)			—				—				—				—				(9,135	)			—
Change in unrealized losses on derivatives			—				—				—				—				—				—				—				—				(212	)			—				—				(14	)			(226	)			(39	)
Reclassification to interest expense			—				—				—				—				—				—				—				—				313				—				—				77				390				56
Contributions from noncontrolling interests			—				—				—				—				—				—				—				—				—				—				—				1,034				1,034				—
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				—				—				—				(275	)			(275	)			(2,206	)
Deferred compensation to be settled in shares			—				—				—				—				—				—				3,422				—				—				—				—				—				3,422				—
Redemption/conversion of operating partnership units			—				—				—				—				277				3				1,986				(127	)			—				—				—				—				1,862				(7,176	)
Operating partnership units redemption value adjustments			—				—				—				—				—				—				—				(32,219	)			—				—				—				—				(32,219	)			32,219
Other			—				—				—				—				—				—				—				—				—				—				—				(315	)			(315	)			—
Balance at September 30, 2010			1,488			$	15				8,967			$	90				123,026			$	1,230			$	1,513,224			$	(405,802	)		$	(796	)			(71,904	)		$	(228,422	)		$	17,000			$	896,539			$	118,720

See Notes to Consolidated Financial Statements.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2010				2009
		(Unaudited)
Cash Flows from Operating Activities
Net income (loss)		$	60,392			$	(204,394	)
Adjustments to reconcile net income (loss) to net cash flow provided by operating activities:
Depreciation and amortization			109,662				118,927
Impairment charges			10,805				160,143
Equity in earnings of unconsolidated joint venture			(1,325	)			(1,863	)
Distributions of earnings from unconsolidated joint venture			492				667
Income from derivatives			(47,120	)			(33,203	)
Amortization of discounts, deferred loan costs and deferred income on notes receivable			—				(3,128	)
Amortization of loan costs			4,262				5,883
Write-off of loan costs, premiums and exit fees, net			—				(930	)
Gain on disposition of hotel properties			(55,931	)			—
Unrealized (gain) loss on derivatives			(30,824	)			14,166
Stock/unit-based compensation expense			5,168				3,896
Changes in operating assets and liabilities —
Restricted cash			9,453				4,536
Accounts receivable and inventories			(6,725	)			2,128
Prepaid expenses and other assets			(2,840	)			(3,322	)
Accounts payable and accrued expenses			25,648				22,731
Due to/from related parties			899				(975	)
Due to/from third-party hotel managers			(2,404	)			(6,143	)
Other liabilities			(1,215	)			(2,240	)
Net cash provided by operating activities			78,397				76,879
Cash Flows from Investing Activities
Repayments of notes receivable			23,823				6
Proceeds from sale/disposition of properties			1,445				858
Investment in unconsolidated joint venture			(15,000	)			—
Improvements and additions to hotel properties			(46,481	)			(51,734	)
Net cash used in investing activities			(36,213	)			(50,870	)
Cash Flows from Financing Activities
Borrowings on indebtedness			4,000				67,800
Repayments of indebtedness and capital leases			(188,971	)			(55,063	)
Payments of deferred loan costs			(3,168	)			(1,822	)
Issuance of Series D preferred stock			72,126				—
Contributions from noncontrolling interests in consolidated joint ventures			1,034				—
Distributions to noncontrolling interests in consolidated joint ventures			(275	)			(1,119	)
Payments of dividends			(16,699	)			(17,341	)
Payments for derivatives			(52	)			(31,022	)
Cash income from derivatives			47,120				32,871
Repurchases of treasury stock			(45,087	)			(53,334	)
Redemption of operating partnership units			(5,314	)			—
Repurchases of preferred stock			—				(10,656	)
Other			54				—
Net cash used in financing activities			(135,232	)			(69,686	)
Net decrease in cash and cash equivalents			(93,048	)			(43,677	)
Cash and cash equivalents at beginning of year			165,168				241,597
Cash and cash equivalents at end of period		$	72,120			$	197,920
Supplemental Cash Flow Information
Interest paid		$	107,172			$	99,983
Income taxes paid		$	1,442			$	380
Supplemental Disclosure of Non-Cash Investing and Financing Activity
Accrued interest added to principal of indebtedness		$	3,016			$	—
Assets transferred to lender in deed-in-lieu of foreclosure		$	54,625			$	—
Liabilities transferred to lender in deed-in-lieu of foreclosure		$	110,837			$	—

See Notes to Consolidated Financial Statements.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

     Ashford Hospitality Trust, Inc., together with its subsidiaries (“Ashford”), is a self-advised real estate investment trust (“REIT”). We commenced operations in August 2003 with the acquisition of six hotels (the “Initial Properties”) in connection with our initial public offering. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of Ashford, serves as the sole general partner of our operating partnership. In this report, the terms “the Company,” “we,” “us” or “our” mean Ashford Hospitality Trust, Inc. and all entities included in its consolidated financial statements.

     As of September 30, 2010, we owned 94 hotel properties directly and six hotel properties through majority-owned investments in joint ventures, which represents 21,734 total rooms, or 21,392 net rooms excluding those attributable to joint venture partners. All of these hotel properties are located in the United States. At September 30, 2010, we also wholly owned $33.1 million of mezzanine or first-mortgage loan receivables and had ownership interests in two joint ventures that own mezzanine loans.

     For federal income tax purposes, we elected to be treated as a REIT, which imposes limitations related to operating hotels. As of September 30, 2010, 99 of our 100 hotel properties were leased or owned by our wholly-owned subsidiaries that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated statements of operations. As of September 30, 2010, one hotel property was leased on a triple-net lease basis to a third-party tenant who operates the hotel. Rental income from this operating lease is included in the consolidated results of operations.

     Remington Lodging & Hospitality, LLC (“Remington Lodging”), our primary property manager, is beneficially wholly owned by Mr. Archie Bennett, Jr., our Chairman, and Mr. Monty J. Bennett, our Chief Executive Officer. As of September 30, 2010, Remington Lodging managed 45 of our 100 hotel properties, while third-party management companies managed the remaining 55 hotel properties.

2. Significant Accounting Policies

     Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of Ashford, its majority-owned subsidiaries and its majority-owned joint ventures in which it has a controlling interest. All significant inter-company accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements.

     These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our 2009 Annual Report to Shareholders on Form 10-K.

     The following items affect our reporting comparability related to our consolidated financial statements:

	•		Some of our properties’ operations have historically been seasonal. This seasonality pattern causes fluctuations in the operating results. Consequently, operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
	•		Marriott International, Inc. (“Marriott”) manages 41 of our properties. For these Marriott-managed hotels, the fiscal year reflects twelve weeks of operations in each of the first three quarters of the year and sixteen weeks for the fourth quarter of the year. Therefore, in any given quarterly period, period-over-period results will have different ending dates. For Marriott-managed hotels, the third quarters of 2010 and 2009 ended September 10 and September 9, respectively.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

     Investments in Hotel Properties — Hotel properties are generally stated at cost. However, the Initial Properties contributed upon Ashford’s formation are stated at the predecessor’s historical cost, net of impairment charges, if any, plus a noncontrolling interest partial step-up related to the acquisition of noncontrolling interests from third parties associated with four of the Initial Properties. For hotel properties owned through our majority-owned joint ventures, the carrying basis attributable to the joint venture partners’ minority ownership is recorded at the predecessor’s historical cost, net of any impairment charges, while the carrying basis attributable to our majority ownership is recorded based on the allocated purchase price of our ownership interests in the joint ventures. All improvements and additions which extend the useful life of the hotel properties are capitalized.

     Impairment of Investment in Hotel Properties — Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We test impairment by using current and projected cash flows over the estimated holding period of the asset. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. We may also use fair values of comparable assets. If an asset is deemed to be impaired, we record an impairment charge for the amount that the property’s net book value exceeds its estimated fair value. In June 2010, we classified the Hilton Suites in Auburn Hills, Michigan as an asset held for sale as it was under a contract for sale and recorded a $12.1 million impairment charge. Subsequently in September 2010, we completed the sale of the hotel property and recorded an additional loss of $280,000. For the nine months ended September 30, 2009 we recorded a $10.9 million impairment charge on the Hyatt Regency Dearborn hotel property that was placed in receivership and deconsolidated effective December 3, 2009. See Notes 3 and 7.

     Assets Held for Sale and Discontinued Operations — We classify assets as held for sale when management has obtained a firm commitment from a buyer, and consummation of the sale is considered probable and expected within one year. In addition, we deconsolidate a property when it becomes subject to the control of a government, court, administrator or regulator and we effectively lose control of the property/subsidiary. When deconsolidating a property/subsidiary, we recognize a gain or loss in earnings measured as the difference between the fair value of any consideration received and the carrying amount of the former property/subsidiary. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from our ongoing operations, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) we will not have any significant continuing involvement subsequent to the disposal. In September 2010, the deed-in-lieu of foreclosure on the Westin O’Hare hotel was completed and the property was deconsolidated. The operating results of the Hilton Suites in Auburn Hills, Michigan and the Westin O’Hare hotel property in Rosemont, Illinois are reported as discontinued operations for all periods presented in the accompanying consolidated financial statements. For the three and nine months ended September 30, 2009, discontinued operations also include the operating results of the Hyatt hotel property in Dearborn, Michigan. See Notes 3 and 7.

     Notes Receivable — We provide mezzanine and first-mortgage financing in the form of notes receivable. These loans are held for investment and are intended to be held to maturity and accordingly, are recorded at cost, net of unamortized loan origination costs and fees, loan purchase discounts and net of the allowance for losses when a loan is deemed to be impaired. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method over the life of the loan. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received. Payments received on impaired nonaccrual loans are recorded as reductions to the note receivable balance. The net carrying amount of the impaired notes receivable is adjusted to reflect the net present value of the future cash flows with the adjustment recorded in impairment charges.

     Our mezzanine and first-mortgage notes receivable are each secured by various hotel properties or partnership interests in hotel properties and are subordinate to the senior holders in the secured hotel properties. All such notes

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

receivable are considered to be variable interests in the entities that own the related hotels. Variable Interest Entities (“VIE”), as defined by authoritative accounting guidance, must be consolidated by a reporting entity if the reporting entity is the primary beneficiary that has: (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, (ii) an implicit financial responsibility to ensure that a VIE operates as designed, and (iii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Because we do not have the power and financial responsibility to direct the mezzanine loan VIEs’ activities and operations, we are not considered to be the primary beneficiary of these hotel properties as a result of holding these loans. Therefore, we do not consolidate the hotels for which we have provided financing. We assess our interests in those entities on an ongoing basis to determine whether such entities should be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.

     Impairment of Notes Receivable — We review notes receivable for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms. We apply normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.

     When a loan is impaired, we measure impairment based on the present value of expected cash flows discounted at the loan’s effective interest rate against the value of the asset recorded on the balance sheet. We may also measure impairment based on a loan’s observable market price or the fair value of collateral if the loan is collateral dependent. If a loan is deemed to be impaired, we record a valuation allowance through a charge to earnings for any shortfall. Our assessment of impairment is based on considerable judgment and estimates. An impairment charge of $837,000 was recorded for the three and nine months ended September 30, 2010 on a mezzanine loan based on the settlement reached with the borrower. During the three and nine months ended September 30, 2010, we also recorded credits to impairment charges of $143,000 and $2.1 million, respectively, related to valuation adjustments for impaired notes receivable and a previously fully reserved note receivable that was settled for a cash payment of $1.1 million. See Notes 3, 5 and 11. During the nine months ended September 30, 2009, we recorded a valuation allowance of $149.3 million on four notes receivable in our mezzanine loan portfolio.

     Revenue Recognition — Hotel revenues, including room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, and space rentals, are recognized when services have been rendered. Rental income represents income from leasing hotel properties to third-party tenants on triple-net operating leases. Base rent on the triple-net lease is recognized on a straight-line basis over the lease terms and variable rent is recognized when earned. Interest income, representing interest on the mezzanine and first mortgage loan portfolio (including accretion of discounts on certain loans using the effective interest method), is recognized when earned. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received. Asset management fees are recognized when services are rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. For the hotel leased to a third party, we report deposits into our escrow accounts for capital expenditure reserves as income.

     Derivative Financial Instruments and Hedges — We primarily use interest rate derivatives in order to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room). The interest rate derivatives include swaps, caps, floors, flooridors and corridors. All derivatives are recorded on the consolidated balance sheets at fair value in accordance with the applicable authoritative accounting guidance and reported as “Interest rate derivatives.” Accrued interest on the non-hedge designated derivatives is included in “Accounts receivable, net” on the consolidated balance sheets. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value is reported as a component of “Accumulated Other Comprehensive Income (Loss)” (“OCI”) in the equity section of the consolidated balance sheets. The amount recorded in OCI is reclassified to interest expense in the same period or periods during which the hedged transaction affects earnings, while the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings as “Unrealized gain (loss) on derivatives” in the consolidated statements of operations. For derivatives that are not designated as cash flow hedges, the changes in the fair value are recognized in earnings as “Unrealized gain (loss) on derivatives” in the consolidated statements of operations. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. Derivatives subject to master netting arrangements are reported net in the consolidated balance sheets.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Recently Adopted Accounting Standards — In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative accounting guidance to redefine the characteristics of the primary beneficiary to be identified when an enterprise performs an analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest in a VIE. This accounting guidance became effective at the beginning of the first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The new guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed and ongoing reassessments of whether it is the primary beneficiary of a VIE. It also amends certain previous guidance for determining whether an entity is a VIE and eliminates the quantitative approach previously required for determining the primary beneficiary of a VIE. As of January 1, 2010, we adopted this new guidance and the adoption of the new guidance did not have a material effect on our financial condition and results of operations.

     In January 2010, the FASB issued an accounting standard update to require additional disclosures for transfers in and out of levels 1 and 2 of the fair value input hierarchy and the activity in level 3 fair value measurements. The accounting update also requires disclosures about inputs and valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the level 3 activity that are effective for fiscal periods beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the disclosure requirements as of January 1, 2010 and the required disclosures are presented in the related footnotes. The adoption of these accounting rules did not have a material impact on our financial position and results of operations.

     Recently Issued Accounting Standards — In July 2010, the FASB issued an accounting standard update to require disclosures about the credit quality of financing receivables and the allowance for losses on a disaggregated basis. The accounting standard update defines two levels of disaggregation—portfolio segment and class of financing receivable. It also requires additional disclosures by class about credit quality indicators and the aging of past due financing receivables at the end of each reporting period, the nature and extent of troubled debt restructurings that occurred during the period, the nature and extent of financing receivables modified as troubled debt restructurings within the previous 12 months that defaulted during the reporting period, and significant purchases and sales of financing receivables disaggregated by portfolio segment. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We do not expect the adoption of this accounting guidance will have a material impact on our financial statements.

     Reclassifications — Certain amounts in the consolidated financial statements for the three and nine months ended September 30, 2009 have been reclassified as discontinued operations. These reclassifications have no effect on the previously reported results of operations and financial position.

3. Summary of Significant Transactions and Development

     Preferred Stock Offering — In September 2010, we completed the offering of 3.3 million shares of our 8.45% Series D Cumulative Preferred Stock at a gross price of $23.178 per share, and we received net proceeds of $72.1 million after underwriting fees and other costs and an accrued dividend of $1.6 million. The proceeds from the offering, together with some corporate funds, were used to pay down $80.0 million of our senior credit facility.

     Acquisition of a Mezzanine Loan — In July 2010, as a strategic complement to our existing joint venture with PREI in 2008, we contributed $15 million for an ownership interest in a new joint venture with PREI. The new joint venture acquired a tranche 4 mezzanine loan associated with JER Partner’s 2007 privatization of the Highland Hospitality portfolio. The mezzanine loan is secured by the same 29 hotel properties as our existing joint venture investment in tranche 6 of a mezzanine loan portfolio, which had a carrying value of $21.6 million at September 30, 2010. The borrower of these mezzanine loans stopped making debt service payments in August 2010. At this point we are pursuing our remedies under the loan documents as well as continuing discussions with the borrower and other lenders in the capital structure about possible consensual restructuring of the loan. There is not enough information at this time for us to recognize “other than temporary impairment” in these joint ventures that hold these mezzanine loans.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Sale of Hotel Property — In June 2010, we entered into an agreement to sell the Hilton Suites in Auburn Hills, Michigan for $5.1 million and the sale was completed in September 2010. Based on the sales price, we recorded an impairment charge of $12.1 million in June 2010, and an additional loss of $280,000 at closing based on the net proceeds of $4.9 million. The operating results of the hotel property, including the related impairment charge and the additional loss, for all periods presented have been reported as discontinued operations in the consolidated statements of operations. See Note 7.

     Settlement of Notes Receivable — In August 2010, we reached an agreement with the borrower of the $7.1 million junior participation note receivable secured by a hotel property in La Jolla, California, to settle the loan which has been in default since March 2009. Pursuant to the settlement agreement, we received total cash payments of $1.8 million in the three months ended September 30, 2010, and expect to receive the remaining $4.5 million payment in the fourth quarter of 2010. We recorded an impairment charge of $837,000 based on the expected cash settlement.

     In May 2010, the senior mortgage lender foreclosed on the loan secured by the Four Seasons hotel property in Nevis in which we had a junior participation interest of $18.2 million. Our entire principal amount was fully reserved in 2009. As a result of the foreclosure, our interest in the senior mortgage was converted to a 14.4% subordinate beneficial interest in the equity of the trust that holds the hotel property. Due to our junior status in the trust, we have not recorded any value for our beneficial interest at September 30, 2010.

     In May 2010, the mezzanine loan secured by the Le Meridien hotel property in Dallas, Texas was settled with a cash payment of $1.1 million. The loan was fully reserved during the second quarter of 2009 as the borrower ceased making debt service payments on the loan. As a result of the settlement, the $1.1 million was recorded as a credit to impairment charges in accordance with authoritative accounting guidance for impaired loans.

     In February 2010, the $23.0 million net carrying value mezzanine loan receivable secured by the Ritz-Carlton hotel property in Key Biscayne, Florida, was restructured for a cash payment of $20.2 million and a $4.0 million note receivable. In connection with the restructuring, we recorded a net impairment charge of $10.7 million in the three months ended September 30, 2009 on the original mezzanine loan. The interest payments on the new note are recorded as a reduction of the principal of the note receivable, and the valuation adjustments to the net carrying amount of this note are recorded as a credit to impairment charges.

     In February 2010, we and the senior note holder of the participation note receivable formed a joint venture (the “Redus JV”) for the purposes of holding, managing or disposing of the Sheraton hotel property in Dallas, Texas, which collateralized the senior note participation and our $4.0 million junior participating note receivable. The note receivable was fully reserved in 2009. We have an 18% subordinated interest in Redus JV. In March 2010, the foreclosure was completed and the estimated fair value of the property was $14.2 million based on a third-party appraisal. However, because (i) pursuant to the operating agreement of Redus JV, as a junior lien holder of the original participation note receivable, we are only entitled to receive our share of distributions after the original senior note holder has recovered its original investment of $18.4 million and (ii) Redus JV intends to sell the hotel property in the next 12 months, it is unlikely that the senior holder will be able to recover its original investment. Therefore, no cash flows were projected from Redus JV for the projected holding period. Under the applicable authoritative accounting guidance, we recorded a zero value for our 18% subordinated interest in Redus JV.

     Debt Modifications, Repayments and Settlement — The $101.0 million non-recourse mortgage loan secured by the Westin O’Hare hotel property in Rosemont, Illinois was settled in September 2010 as we successfully negotiated a consensual transfer of the underlying hotel property to the lender. We recorded a gain of $56.2 million on the consensual transfer. An impairment charge of $59.3 million was previously recorded on this property in the fourth quarter of 2009 as we wrote down the hotel property to its estimated fair value. The operating results of the hotel property, including the gain from the disposition, have been reclassified to discontinued operations for all periods presented in the consolidated statements of operations. See Note 7.

     In the third quarter of 2010, we made payments totaling $175.0 million to reduce the outstanding balance of our senior revolving credit facility to $75.0 million.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     In July 2010, we modified the mortgage loan secured by the JW Marriott hotel property in San Francisco, California, to change the initial maturity date to its fully extended maturity of March 2013 in exchange for a principal payment of $5.0 million and an extension fee of $119,000 to be paid in March 2012.

     Effective April 1, 2010, we completed the modification of the $156.2 million mortgage loan secured by two hotel properties in Washington D.C. and La Jolla, California. Pursuant to the modified loan agreement, we obtained the full extension of the loan to August 2013 without any extension tests in exchange for a $5.0 million paydown. We paid $2.5 million of the paydown amount at closing, and the remaining $2.5 million is payable quarterly in four consecutive installments of $625,000 each with the first two installments due and paid on July 1 and October 1, 2010. We paid a modification fee of $1.5 million in lieu of the future extension fees. The modification also modifies covenant tests to minimize the likelihood of additional cash being trapped.

     In March 2010, we elected to cease making payments on the $5.8 million mortgage note payable maturing January 2011, secured by a hotel property in Manchester, Connecticut, because the anticipated operating cash flows from the underlying hotel property would be insufficient to cover the principal and interest payments on the note. As of the date of this report, the loan has been transferred to a special servicer. We are currently working with the special servicer for an extension or restructuring of the mortgage note.

     Repurchases of Common Shares and Units of Operating Partnership — During the nine months ended September 30, 2010, we repurchased 7.2 million shares of our common stock for a total cost of $45.1 million pursuant to a previously announced stock repurchase plan. During the three months ended June 30, 2010, we ceased the public repurchase of our preferred and common stock under our repurchase plan. During the three and nine months ended September 30, 2010, 200,000 and 719,000 operating partnership units were redeemed at an average price of $7.76 and $7.39 per unit, respectively. We redeemed the operating partnership units for cash rather than electing to satisfy the redemption request through the issuance of common shares. We paid a total redemption cost of $1.6 million and $5.3 million to the unit holders during the three and nine months ended September 30, 2010, respectively,

4. Investments in Hotel Properties

     Investments in hotel properties consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

		September 30,				December 31,
		2010				2009
Land		$	510,026			$	520,180
Buildings and improvements			2,968,696				3,002,249
Furniture, fixtures and equipment			403,135				394,246
Construction in progress			9,299				10,984
Total cost			3,891,156				3,927,659
Accumulated depreciation			(638,061	)			(543,900	)
Investment in hotel properties, net		$	3,253,095			$	3,383,759

     In June 2010, we entered into an agreement to sell the Hilton Suites in Auburn Hills, Michigan for $5.1 million and the sale was completed in September 2010. Based on the sales price, we recorded an impairment charge of $12.1 million for the expected loss in June 2010 on the sale and an additional loss of $280,000 based on net proceeds received at closing. In addition, in September 2010, we completed the consensual transfer of the Westin O’Hare hotel property in Rosemont, Illinois that secured a $101.0 million non-recourse mortgage loan to its lender. The hotel property was deconsolidated from our financial statements and a gain of $56.2 million was recognized upon deconsolidation. An impairment charge of $59.3 million was previously recorded on the Westin O’Hare hotel property in the fourth quarter of 2009 as we wrote down the hotel property to its estimated fair value. The operating results of these hotels, including the impairment charges and the net gain on dispositions, have been reported as discontinued operations for all periods presented in the consolidated statements of operations.

     Because the anticipated operating cash flows would be insufficient to cover the debt service payments on the mortgage note payable secured by the hotel property in Manchester, Connecticut, we elected to cease making payments

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

on the $5.8 million mortgage note maturing January 2011. We are currently working with the special servicer for an extension or a restructuring of the mortgage note payable. Because the projected operating cash flows for our intended holding period exceed the current carrying value of the hotel property, no impairment was recorded.

5. Notes Receivable

Notes receivable consisted of the following at September 30, 2010 and December 31, 2009 ($ in thousands):

		September 30,				December 31,
		2010				2009
Mezzanine loan secured by 105 hotel properties, matures April 2011, at an interest rate of LIBOR plus 5%, with interest-only payments through maturity		$	25,688			$	25,688
Mezzanine loan secured by one hotel property, at an interest rate of LIBOR plus 9%, currently subject to a settlement agreement for discounted payoff			4,453				7,056
Mezzanine loan with principal balance of $38,000 secured by one hotel property, matures in June 2017, at an interest rate of 9.66% through restructuring, and the balance before valuation allowance at December 31, 2009 was $33,684. The loan was restructured for a $20,181 cash payment and a $4,000 note at an interest rate of 6.09%, with interest-only payments through maturity			2,954				22,955
Mezzanine loan with principal balance of $164,000 secured by 681 extended-stay hotel properties, matured June 2009, with three one-year extension options, at an interest rate of LIBOR plus 2.5%, with interest-only payments through maturity, the balance before valuation allowance was $109,272			—				—
			33,095				55,699
Deferred loan costs, net			—				(44	)
Total notes receivable		$	33,095			$	55,655
Weighted average effective interest rate			4.1	%			2.4	%

     In evaluating possible loan impairments, we analyze our notes receivable individually and collectively for possible loan losses in accordance with applicable authoritative accounting guidance. Based on the analysis, if we conclude that no loans are individually impaired, we then further analyze the specific characteristics of the loans, based on other authoritative guidance to determine if there would be probable losses in a group of loans with similar characteristics.

     The loans in our portfolio are collateralized by hotel properties. Some loans are collateralized by single hotel properties and others by hotel portfolios. The hotel properties are in different geographic locations, have different ages and a few of the properties have recently completed significant renovations which have a significant impact on the value of the underlying collateral. The hotel properties include independent and nationally recognized brands in all segments and classes including luxury, economy, extended-stay, full service, and select service. In addition, our loan assets can vary by position in the related borrower’s capital structure, ranging from junior mortgage participations to mezzanine loans. The terms of our notes or participations were structured based on the different features of the related collateral and the priority in the borrower’s capital structure.

     In August 2010, we reached an agreement with the borrower of the $7.1 million junior participation note receivable secured by a hotel property in La Jolla, California, to settle the loan which has been in default since March 2009. Pursuant to the settlement agreement, we received total cash payments of $1.8 million in the three months ended September 30, 2010, and expect to receive the remaining $4.5 million payment in the fourth quarter of 2010. We recorded an impairment charge of $837,000 based on the expected cash settlement.

     In May 2010, the mezzanine loan secured by the Le Meridien hotel property in Dallas, Texas was settled with a cash payment of $1.1 million. The loan was fully reserved during the second quarter of 2009 as the borrower ceased making debt service payments on the loan. As a result of the settlement, the $1.1 million was recorded as a credit to impairment charges in accordance with authoritative accounting guidance for impaired loans.

     In May 2010, the senior mortgage lender foreclosed on the loan secured by the Four Seasons hotel property in Nevis in which we had a junior participation interest of $18.2 million. Our entire principal amount was fully reserved in 2009. As a result of the foreclosure, our interest in the senior mortgage was converted to a 14.4% subordinate beneficial

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

interest in the equity of the trust that holds the hotel property. Due to our junior status in the trust, we have not recorded any value for our beneficial interest at September 30, 2010.

     In February 2010, the mezzanine loan with a principal amount of $38.0 million and a net carrying value of $23.0 million at December 31, 2009 was restructured. In connection with the restructuring, we recorded a net impairment charge of $10.7 million in the three months ended September 30, 2009 on the original mezzanine loan and we received a cash payment of $20.2 million and a $4.0 million note receivable. The restructured note bears an interest rate of 6.09% and matures in June 2017 with interest only payments through maturity. The note was recorded at its net present value of $3.0 million at September 30, 2010, based on its future cash flows. The interest payments are recorded as reductions of the principal of the note receivable, and the valuation adjustments to the net carrying amount of this note are recorded as a credit to impairment charges.

     In February 2010, we and the senior note holder of the participation note receivable formed Redus JV for the purposes of holding, managing or disposing of the Sheraton hotel property in Dallas, Texas, which collateralized our $4.0 million principal amount junior participating note receivable that matured in July 2009. The note receivable was fully reserved in 2009. We have an 18% subordinated interest in Redus JV. In March 2010, the foreclosure was completed and the estimated fair value of the property was $14.2 million based on a third-party appraisal. However, because (i) pursuant to the operating agreement of Redus JV, as a junior lien holder of the original participation note receivable, we are only entitled to receive our share of distributions after the original senior note holder has recovered its original investment of $18.4 million and (ii) Redus JV intends to sell the hotel property in the next 12 months, it is unlikely that the senior holder will be able to recover its original investment. Therefore, no cash flows were projected from Redus JV for the projected holding period. Under the applicable authoritative accounting guidance, we recorded a zero value for our 18% subordinated interest in Redus JV.

     At September 30, 2010, the impaired loans in our portfolio had a carrying value of $4.5 million and no income was recognized on those impaired loans during the three and nine months ended September 30, 2010. During the three and nine months ended September 30, 2009, we recorded impairment charges on our notes receivable totaling $19.8 million and $149.3 million, respectively. The average recorded investment in the impaired loans and the related interest income recognized for the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Average investment in impaired loans		$	5,877			$	37,786			$	6,585			$	117,840
Interest income recognized on impaired loans		$	—			$	1,017			$	—			$	8,003
Interest income recognized on impaired loans using cash-basis		$	—			$	—			$	—			$	—

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Investment in Unconsolidated Joint Ventures

     As described in the previous notes, we have an 18% subordinated interest in Redus JV and a 14.4% subordinated beneficial interest in a trust that holds the Four Seasons hotel property in Nevis, both of which have a zero carrying value. In addition, we have ownership interests in two joint ventures with PREI that invest in mezzanine loans. The investment in the mezzanine loan joint ventures consisted of the following ($ in thousands):

		September 30,				December 31,
		2010				2009
25% of a mezzanine loan acquired at a discounted price, secured by 29 hotel properties, matured August 2010, at an interest rate of LIBOR plus 2.75%, and with interest-only payments through maturity		$	20,997			$	20,221
25% of a mezzanine loan at par value, secured by two hotel properties, matures January 2018, at an interest rate of 14%, with interest-only payments through maturity			5,461				5,461
Allowance for loan losses			(5,461	)			(5,461	)
A partial interest in mezzanine loan secured by 29 hotel properties, matured August 2010, at an interest rate of LIBOR plus 2.00%, and with interest-only payments through maturity			15,000				—
Other, net			129				106
Distributions			(3,165	)			(2,673	)
Equity in earnings since inception before discount amortization and impairment charge			3,629				3,082
Total		$	36,590			$	20,736

     In July 2010, as a strategic complement to our existing joint venture with PREI in 2008, we contributed $15 million for an ownership interest in a new joint venture with PREI. The new joint venture acquired a tranche 4 mezzanine loan associated with JER Partner’s 2007 privatization of the Highland Hospitality portfolio. The mezzanine loan is secured by the same 29 hotel properties as our existing joint venture investment in tranche 6 of a mezzanine loan portfolio, which had a carrying value of $21.6 million at September 30, 2010. The borrower of these mezzanine loans stopped making debt service payments in August 2010. At this point we are pursuing our remedies under the loan documents as well as continuing discussions with the borrower and other lenders in the capital structure about possible consensual restructuring of the loan. There is not enough information at this time for us to recognize “other than temporary impairment” in these joint ventures that hold these mezzanine loans.

7. Asset Held for Sale and Discontinued Operations

     In August 2010, we completed the sale of the Hilton Suites in Auburn Hills, Michigan. In September 2010, we completed the consensual transfer of the Westin O’Hare hotel property in Rosemont, Illinois to the lender. The operating results of these hotel properties are classified as discontinued operations for all the periods presented. For the 2009 periods, discontinued operations also include the operating results of the Hyatt Dearborn hotel property. Effective December 3, 2009, a receiver appointed by the State of Michigan circuit court completed taking possession and full control of the Hyatt Dearborn hotel property and the hotel property was deconsolidated.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The following table summarizes the operating results of the discontinued hotel properties (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Hotel revenue		$	6,156			$	13,495			$	22,317			$	40,220
Hotel operating expenses			(4,964	)			(11,702	)			(17,267	)			(35,156	)
Operating income			1,192				1,793				5,050				5,064
Property taxes, insurance and other			501				(1,380	)			(1,372	)			(4,170	)
Depreciation and amortization			(348	)			(2,067	)			(1,504	)			(6,986	)
Impairment charges			—				—				(12,068	)			(10,871	)
Gain on disposal of properties			55,931				—				55,931				—
Interest expense and amortization of loan costs			(1,161	)			(2,067	)			(4,119	)			(6,167	)
Income (loss) from discontinued operations before income tax expense			56,115				(3,721	)			41,918				(23,130	)
Income tax expense			(110	)			(55	)			(122	)			(189	)
(Income) loss from discontinued operations attributable to redeemable noncontrolling interests in operating partnership			(7,894	)			499				(5,551	)			2,843
Income (loss) from discontinued operations attributable to Company		$	48,111			$	(3,277	)		$	36,245			$	(20,476	)

8. Indebtedness

     Indebtedness consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

								September 30,				December 31,
Indebtedness		Collateral		Maturity		Interest Rate		2010				2009
Mortgage loan		5 hotels		December 2010(1)		LIBOR(2) + 1.72%		$	203,400			$	203,400
Mortgage loan		1 hotel		January 2011		8.32%			5,775				5,816
Senior credit facility		Notes receivable		April 2011(1)		LIBOR(2) + 2.75% to 3.5%(3)			75,000				250,000
Mortgage loan		10 hotels		May 2011(1)		LIBOR(2) + 1.65%			167,202				167,202
Mortgage loan		1 hotel		March 2012(4)		LIBOR(2) + 4%			60,800				60,800
Mortgage loan		1 hotel		March 2013		Greater of 6.25% or LIBOR(2) + 3.75%			47,500				52,500
Mortgage loan		2 hotels		August 2013		LIBOR(2) + 2.75%			151,808				156,600
Mortgage loan		1 hotel		December 2014		Greater of 5.5% or LIBOR(2) + 3.5%			19,740				19,740
Mortgage loan		8 hotels		December 2014		5.75%			109,445				110,899
Mortgage loan		1 hotel		January 2015		7.78%			3,909				4,345
Mortgage loan		10 hotels		July 2015		5.22%			160,014				160,490
Mortgage loan		8 hotels		December 2015		5.70%			100,576				100,576
Mortgage loan		5 hotels		December 2015		12.26%			147,276				141,402
Mortgage loan		5 hotels		February 2016		5.53%			115,321				115,645
Mortgage loan		5 hotels		February 2016		5.53%			95,637				95,905
Mortgage loan		5 hotels		February 2016		5.53%			82,842				83,075
Mortgage loan		1 hotel		December 2016		5.81%(5)			—				101,000
Mortgage loan		1 hotel		April 2017		5.91%			35,000				35,000
Mortgage loan		2 hotels		April 2017		5.95%			128,251				128,251
Mortgage loan		3 hotels		April 2017		5.95%			260,980				260,980
Mortgage loan		5 hotels		April 2017		5.95%			115,600				115,600
Mortgage loan		5 hotels		April 2017		5.95%			103,906				103,906
Mortgage loan		5 hotels		April 2017		5.95%			158,105				158,105
Mortgage loan		7 hotels		April 2017		5.95%			126,466				126,466
TIF loan		1 hotel		June 2018		12.85%			8,098				7,783
Mortgage loan		1 hotel		April 2034		Greater of 6% or Prime + 1%			6,824				6,910
Total indebtedness								$	2,489,475			$	2,772,396

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     In September 2010, we successfully completed a consensual transfer of the Westin O’Hare hotel property securing the $101.0 million non-recourse mortgage loan to the lender. We elected to cease making payments on this loan in December 2009 because the anticipated operating cash flows from the underlying hotel property were inadequate to cover the debt service payments.

     In July 2010, we modified the mortgage loan secured by the JW Marriott hotel property in San Francisco, California, to change the initial maturity date to its full extended maturity of March 2013 in exchange for a principal payment of $5.0 million and an extension fee of $119,000 to be paid in March 2012.

     Effective April 1, 2010, we completed the modification of the $156.2 million mortgage loan secured by two hotel properties in Washington D.C. and La Jolla, California. Pursuant to the modified loan agreement, we obtained the full extension of the loan to August 2013 without any extension tests in exchange for a $5.0 million paydown. We paid $2.5 million of the paydown amount at closing, and the remaining $2.5 million is payable quarterly in four consecutive installments of $625,000 each with the first two installments due and paid on July 1 and October 1, 2010. We paid a modification fee of $1.5 million in lieu of future extension fees. The modification also modifies covenant tests to minimize the likelihood of additional cash being trapped.

     In March 2010, we elected to cease making payments on the $5.8 million mortgage note payable maturing January 2011, secured by a hotel property in Manchester, Connecticut, because the anticipated operating cash flows from the underlying hotel property would be insufficient to cover the principal and interest payments on the note. As of the date of this report, the loan has been transferred to a special servicer. We are currently working with the special servicer for an extension or restructuring of the mortgage note.

     We are required to maintain certain financial ratios under various debt, preferred equity and derivative agreements. If we violate covenants in any debt or derivative agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. The assets of our subsidiaries listed on Exhibit 21.1 of this filing are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of Ashford Hospitality Trust, Inc. or our operating partnership, Ashford Hospitality Limited Partnership and the liabilities of such subsidiaries do not constitute the obligations of Ashford Hospitality Trust, Inc. or Ashford Hospitality Limited Partnership. Presently, our existing financial debt covenants primarily relate to maintaining minimum debt coverage ratios, maintaining an overall minimum net worth, maintaining a maximum loan to value ratio, and maintaining an overall minimum total assets. At September 30, 2010, we were in compliance with all covenants or other requirements set forth in our debt, preferred equity and derivative agreements as amended.

9. Income (Loss) Per Share

     Basic income/loss per common share is calculated using the two-class method by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income/loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower income per share.

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The following table reconciles the amounts used in calculating basic and diluted income per share (in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Income (loss) per share – Basic and diluted
(Loss) income from continuing operations attributable to the Company		$	(6,842	)		$	(25,519	)		$	16,959			$	(157,722	)
Less: Dividends to preferred stocks			(4,988	)			(4,831	)			(14,649	)			(14,492	)
Less: Income from continuing operations allocated to unvested shares			—				—				(51	)			—
(Loss) income from continuing operations allocated to common shareholders		$	(11,830	)		$	(30,350	)		$	2,259			$	(172,214	)
Income (loss) from discontinued operations attributable to the Company		$	48,111			$	(3,277	)		$	36,245			$	(20,476	)
Less: Income from discontinued operations allocated to unvested shares			—				—				(841	)			—
Income (loss) from discontinued operations allocated to common shareholders		$	48,111			$	(3,277	)		$	35,404			$	(20,476	)
Weighted average common shares outstanding			49,714				65,266				51,251				72,167
(Loss) income from continuing operations allocated to common shareholders per share		$	(0.24	)		$	(0.47	)		$	0.04			$	(2.39	)
Income (loss) from discontinued operations allocated to common shareholders per share			0.97				(0.05	)			0.69				(0.28	)
Net income (loss) allocated to common shareholders per share		$	0.73			$	(0.52	)		$	0.73			$	(2.67	)

     Due to the anti-dilutive effect, the computation of diluted income (loss) per diluted share does not reflect the adjustments for the following items (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Income (loss) from continuing operations allocated to common shareholders is not adjusted for:
Dividends to Series B-1 Preferred stock		$	1,043			$	1,043			$	3,129			$	3,129
(Loss) income attributable to redeemable noncontrolling interests in operating partnership units			(1,205	)			(3,925	)			3,059				(22,724	)
Total		$	(162	)		$	(2,882	)		$	6,188			$	(19,595	)
Income (loss) from discontinued operations allocated to common shareholders is not adjusted for:
Income (loss) attributable to redeemable noncontrolling interests in operating partnership units		$	7,894			$	(499	)		$	5,551			$	(2,843	)
Weighted average diluted shares are not adjusted for:
Effect of assumed conversion of Preferred B-1 preferred stock			7,448				7,448				7,448				7,448
Effect of assumed conversion of operating partnership units			14,405				13,492				14,531				13,456
Total			21,853				20,940				21,979				20,904

10. Derivatives and Hedging Activities

     We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage the risks, we primarily use interest rate derivatives to hedge our debt as a way to potentially improve cash flows. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR and RevPAR. To mitigate the nonperformance risk, we routinely rely on a third party’s analysis of the creditworthiness of

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. The fair values of interest rate caps, floors, flooridors and corridors are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rates of the floors or rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts and payments on the swaps, caps, and floors are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the “Level 2” inputs that are observable at commonly quoted intervals, other than quoted prices). We also incorporate credit valuation adjustments (the “Level 3” inputs that are unobservable and typically based on our own assumptions, as there is little, if any, related market activity) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements.

     We have determined that when a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counter-parties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at September 30, 2010, the LIBOR interest rate forward curve (the Level 2 inputs) assumed an uptrend from 0.26% to 1.26% for the remaining term of our derivatives. The credit spreads (the Level 3 inputs) used in determining the fair values assumed an uptrend in nonperformance risk for most of our counterparties and a downtrend for our own nonperformance risk.

     The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):

		September 30, 2010												December 31, 2009
		Level 2				Level 3				Total				Level 2				Level 3				Total
Assets
Non-hedge derivatives:
Interest rate swap		$	114,017			$	—			$	114,017			$	69,462			$	—			$	69,462
Interest rate cap			—				—				—				248				—				248
Interest rate flooridor			44,907				—				44,907				42,664				—				42,664
Hedge derivatives:
Interest rate cap			2				—				2				243				—				243
Subtotal			158,926				—				158,926				112,617				—				112,617
Liabilities
Non-hedge derivatives:
Interest rate floor			(33,670	)			—				(33,670	)			—				(17,972	)			(17,972	)
Subtotal			(33,670	)			—				(33,670	)			—				(17,972	)			(17,972	)
Net		$	125,256			$	—			$	125,256			$	112,617			$	(17,972	)		$	94,645