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As filed with the Securities and Exchange Commission on February 2, 2011
 
Registration No. 333-170176
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Amendment No. 3
     to     
 
Form S-11
 
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES
OF CERTAIN REAL ESTATE COMPANIES
 
 
 
 
CHATHAM LODGING TRUST
(Exact name of registrant as specified in governing instruments)
 
 
 
 
50 Cocoanut Row, Suite 216
Palm Beach, Florida 33480
(561) 802-4477
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Jeffrey H. Fisher
Chief Executive Officer
50 Cocoanut Row, Suite 216
Palm Beach, Florida 33480
(561) 802-4477
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
Copies to:
 
     
David C. Wright
Hunton & Williams LLP
Riverfront Plaza, East Tower
951 E. Byrd Street
Richmond, Virginia 23219-4074
(804) 788-8200
(804) 788-8218 (Telecopy)
  Julian T. H. Kleindorfer
Latham & Watkins LLP
355 South Grand Avenue
Los Angeles, California 90071-1560
(213) 485-1234
(213) 891-8763 (Telecopy)
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the Securities registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
    Amount of
Title of Securities Being
    Aggregate
    Registration
Registered     Offering Price(1)(2)     Fee(1)
Common shares of beneficial interest, $0.01 par value
    $ 150,000,000       $ 10,695  
                     
 
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
 
(2) Includes the offering price of common shares that may be purchased by the underwriters upon the exercise of their over-allotment option.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion, dated February 2, 2011
PROSPECTUS
4,000,000 Shares
 
(CHATHAM LODGING TRUST LOGO)
Common Shares
We are offering 4,000,000 common shares of beneficial interest, $0.01 par value per share, or common shares. Our common shares are listed on the New York Stock Exchange, or NYSE, under the symbol “CLDT”. The last reported sale price of our common shares on the NYSE on February 1, 2011 was $16.96 per share.
 
We are organized and conduct our operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes. To assist us in qualifying as a REIT, among other reasons, ownership of our outstanding common shares by any person is limited to 9.8% by value or number of shares, whichever is more restrictive, subject to certain exceptions. In addition, our declaration of trust contains various other restrictions on the ownership and transfer of our common shares.
 
Investing in our common shares involves risks. See “Risk Factors” beginning on page 10 of this prospectus for a discussion of risks that you should consider before investing in our common shares.
                 
    Per Share     Total  
 
Price to the public
  $                $             
Underwriting discounts and commissions
  $       $    
Proceeds to us (before expenses)
  $       $  
 
We have granted the underwriters the option to purchase up to an additional 600,000 common shares from us, at the offering price, less the underwriting discount, within 30 days of the date of this prospectus to cover over-allotments, if any.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
Barclays Capital, on behalf of the underwriters, expects to deliver the common shares on or about February   , 2011.
Joint Book-Running Managers
 
Barclays Capital UBS Investment Bank
 
 
Joint Lead Manager
 
FBR Capital Markets
 
 
Co-Managers
 
Morgan Keegan  
            Credit Agricole CIB  
            Piper Jaffray  
  Stifel Nicolaus Weisel  
  JMP Securities
 
Prospectus dated February   , 2011


 

 
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 EX-23.1
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 EX-23.4
 EX-23.5
 EX-23.6
 
 
 
 
The names of the brands under which our hotels operate are registered trademarks of the respective owners of those brands, and neither they nor any of their officers, directors, agents, employees, accountants or attorneys:
 
  •      have approved any disclosure in which they or the names of their brands appear; or
 
  •      are responsible or liable for any of the content of this document.
 
You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or another date specified herein. Our business, financial condition and prospects may have changed since such dates.
 
Until          , 2011 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common shares, whether or not participating in the offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY
 
The following summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common shares. You should read the entire prospectus, including “Risk Factors,” before making a decision to invest in our common shares. In this prospectus, references to “our company,” “we,” “us,” and “our” mean Chatham Lodging Trust and our subsidiaries and references to our “operating partnership” mean Chatham Lodging, L.P. Unless otherwise indicated, the information contained in this prospectus assumes (1) the sale of 4,000,000 common shares at $16.96 per share, the last reported sale price of our common shares on the NYSE on February 1, 2011 and (2) no exercise by the underwriters of their over-allotment option to purchase up to 600,000 additional common shares.
 
Overview
 
We are a self-advised hotel investment company organized in October 2009 to invest in premium-branded upscale extended-stay and select-service hotels. In April 2010, we raised net proceeds of approximately $158.7 million in our initial public offering of common shares, or IPO, and an additional $10 million through a concurrent private placement of our common shares to Jeffrey H. Fisher, our Chairman, President and Chief Executive Officer. Since the completion of our IPO, we have acquired 13 hotels with an aggregate of 1,650 rooms in nine states for approximately $209 million and have entered into a contract to purchase a hotel located in the greater Pittsburgh, Pennsylvania area for approximately $25 million. We have funded our acquisitions to date with the net proceeds of our IPO and private placement, through the assumption of debt and with borrowings under our senior secured revolving credit facility. We expect to finance the acquisition of the hotel we have under contract to purchase from the net proceeds of this offering and through the assumption of $7.3 million in debt. Our portfolio includes upscale extended-stay hotels that operate under the Homewood Suites by Hilton® brand (seven hotels) and Residence Inn by Marriott® brand (three hotels), as well as premium-branded select-service hotels that operate under the Courtyard by Marriott® brand (one hotel), Hampton Inn and Suites by Hilton® brand (one hotel) and SpringHill Suites by Marriott® brand (one hotel).
 
We focus our hotel investments primarily in the 25 largest metropolitan markets in the United States. We believe that current market conditions will continue to create attractive opportunities to acquire high quality hotels at cyclically low prices that will benefit from an improving economy and our aggressive asset management.
 
Our management team, led by Mr. Fisher, has extensive experience acquiring, developing, financing, repositioning, managing and selling hotels. Prior to forming Chatham Lodging Trust, Mr. Fisher served as chairman, chief executive officer and president of Innkeepers USA Trust, or Innkeepers, a New York Stock Exchange-listed hotel REIT, from its inception in 1994 through its sale in June 2007. In addition, Peter Willis, our Executive Vice President and Chief Investment Officer, and Dennis M. Craven, our Executive Vice President and Chief Financial Officer, served in similar positions at Innkeepers.
 
In addition to the hotel we have under contract to purchase, we have identified and are in various stages of reviewing and negotiating a number of additional potential hotel acquisition opportunities. As of February 1, 2011, we were actively reviewing potential hotel acquisitions having an aggregate transaction value in excess of $200 million, based on our preliminary discussions with sellers and our internal assessment of the properties’ values. Our management team sourced these potential acquisitions through its extensive relationships with hotel owners, management companies, franchisors, brokers, banks, insurance companies, public institutions, fund managers, REITs, private investors and developers.


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Our acquisition of these properties is subject to us negotiating and executing with the sellers mutually acceptable definitive and binding purchase and sale agreements with respect to the properties, which we expect will contain a number of conditions to closing the acquisitions, including:
 
  (i)       our ability to negotiate and execute new management agreements and franchise agreements, or assume the existing agreements, for the properties,
 
  (ii)       our completion of satisfactory due diligence with respect to the properties,
 
  (iii)       lender approval of our assumption of existing indebtedness with respect to certain of the properties, and
 
  (iv)       satisfaction of customary closing conditions.
 
There can be no assurance that the sellers of the properties discussed above will be willing to proceed with the transactions, that we will be able to negotiate and execute satisfactory definitive purchase and sale agreements with the sellers, that our due diligence will be satisfactory or that the conditions to closing will be satisfied.
 
Upon completion of this offering and the application of the net proceeds as described in “Use of Proceeds,” we expect to have approximately $      million of cash, together with $85 million of borrowing capacity under our credit facility, available to invest in additional hotel properties.
 
We intend to elect and qualify to be treated as a REIT for federal income tax purposes.
 
Our Hotels
 
The following table sets forth certain operating information for each of our hotels. The operating data includes periods prior to our acquisition of these hotels.
 
                                                         
                Number
      Purchase
      Nine Months Ended
        Date of
  Year
  of
  Purchase
  Price per
  Assumed
  September 30, 2010
Property   Location   Acquisition   Opened   Rooms   Price   Room   Debt   Occupancy   ADR   RevPAR
    (Unaudited)
 
Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington
  Billerica, Massachusetts   April 23, 2010   1999   147   $12.5 million   $ 85,714         72.2 %   $ 111.36     $ 80.40  
Homewood Suites by Hilton Minneapolis-Mall of America
  Bloomington, Minnesota   April 23, 2010   1998   144   $18.0 million   $ 125,000         86.9 %   $ 108.82     $ 94.58  
Homewood Suites by Hilton Nashville-Brentwood
  Brentwood, Tennessee   April 23, 2010   1998   121   $11.3 million   $ 93,388         76.0 %   $ 100.45     $ 76.30  
Homewood Suites by Hilton Dallas-Market Center
  Dallas, Texas   April 23, 2010   1998   137   $10.7 million   $ 78,102         65.7 %   $ 98.63     $ 64.80  
Homewood Suites by Hilton Hartford-Farmington
  Farmington, Connecticut   April 23, 2010   1999   121   $11.5 million   $ 95,041         68.2 %   $ 110.42     $ 75.34  
Homewood Suites by Hilton Orlando-Maitland
  Maitland, Florida   April 23, 2010   2000   143   $9.5 million   $ 66,433         67.6 %   $ 94.90     $ 64.14  
Hampton Inn & Suites Houston-Medical Center
  Houston, Texas   July 2, 2010   1997   120   $16.5 million   $ 137,500         76.3 %   $ 113.27     $ 86.42  
Residence Inn Long Island Holtsville
  Holtsville, New York   August 3, 2010   2004   124   $21.3 million   $ 171,774         84.2 %   $ 119.48     $ 100.66  
Courtyard Altoona
  Altoona, Pennsylvania   August 24, 2010   2001   105   $11.3 million   $ 107,619     $7.0 million     71.6 %   $ 99.51     $ 71.23  
Springhill Suites
Washington
  Washington, Pennsylvania   August 24, 2010   2000   86   $12.0 million   $ 139,535     $5.4 million     85.6 %   $ 103.00     $ 88.15  
Residence Inn White Plains
  White Plains, New York   September 23, 2010   1982   133   $21.2 million   $ 159,398         86.4 %   $ 138.12     $ 119.32  
Residence Inn New Rochelle
  New Rochelle, New York   October 5, 2010   2000   124   $21.0 million   $ 169,355         87.8 %   $ 149.63     $ 131.43  
Homewood Suites by Hilton Carlsbad (North San Diego County)   Carlsbad, California   November 3, 2010   2008   145   $32.0 million   $ 220,690         88.7 %   $ 134.86     $ 119.65  
Total/Weighted Average               1,650   $208.9 million   $ 126,606     $12.4 million     78.2 %   $ 115.74     $ 90.46  
 
 
(1) Occupancy represents the average daily occupancy rate for the period presented.
 
(2) ADR represents average daily rate.
 
(3) RevPAR represents room revenue per available room, calculated as total revenue divided by available room nights.


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Recent Developments
 
Hotel Under Contract
 
The following table sets forth certain operating information with respect to the hotel we have under contract to purchase.
 
                                         
        Year
          Nine Months Ended
        Opened/
  Purchase
  Assumed
  September 30, 2010
Property   Location   Renovated   Price   Debt   Occupancy   ADR   RevPAR
    (Unaudited)
 
Greater Pittsburgh hotel
  Pittsburgh, Pennsylvania   2000   $24.9 million   $ 7.3 million     76.9%   $ 118.83     $ 91.40  
 
The closing of the purchase of the greater Pittsburgh hotel is subject to satisfaction of customary closing requirements and conditions. There is no assurance that this acquisition will be consummated in a timely manner or at all.
 
Credit Facility
 
On October 12, 2010, we entered into an $85 million senior secured revolving credit facility to fund future acquisition, redevelopment and expansion activities. Subject to the consent of the lenders, we may increase the credit facility by an additional $25 million, for an aggregate principal amount of $110 million. The credit facility has a three-year term and bears interest at our choice of (i) LIBOR (subject to a floor of 1.25%) plus a margin between 3.25% and 4.25%, depending on our leverage ratio, or (ii) a base rate based on the federal funds rate or the administrative agent’s then current “prime rate” plus a margin between 2.25% to 3.25%, depending on our leverage ratio. See “Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”. We intend to repay amounts outstanding under the credit facility from time to time with the proceeds received from periodic issuances of common and preferred shares, long-term debt financings and cash flows from operations.
 
Other Matters
 
Although our audited consolidated financial statements for the year ended December 31, 2010 are not yet complete, we currently anticipate reporting pro forma revenue per available room, or RevPAR, for our 13 hotels of $83.27 for the three months ended December 31, 2010, a 3.5% increase over RevPAR of $80.48 for these 13 hotels for the three months ended December 31, 2009. RevPAR for the three months ended December 31, 2009 and, for a portion of the three months ended December 31, 2010 with respect to the Residence Inn by Marriott in New Rochelle, New York and the Homewood Suites by Hilton in Carlsbad (North San Diego County), California, reflects operations of the hotels prior to our ownership. RevPAR for a portion of the three months ended December 31, 2010 also reflects the adverse impact of 389 rooms (or approximately 24% of our total portfolio) that were out of service during part of this period due to accelerated renovations at three of our 13 hotels. These renovations, as well as renovations at two additional hotels that begin in the first quarter of 2011, are expected to continue throughout the first quarter of 2011. Together, we expect these renovations to account for a total of 670 rooms, or 41% of our total rooms. As a result of these ongoing renovations, we expect our portfolio RevPAR will continue to be adversely impacted through the first quarter of 2011.
 
We have prepared our anticipated RevPAR for the three months ended December 31, 2010 in good faith based on our internal reporting. However, our anticipated RevPAR for the three months ended December 31, 2010 is derived from our anticipated total revenue for the three months ended December 31, 2010, an amount that has not been audited and is subject to revision based on the completion of the accounting and financial reporting processes necessary to finalize our consolidated financial statements as of and for the year ended December 31, 2010. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to our anticipated RevPAR for the three months ended December 31, 2010. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect to that information. We cannot assure


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you that, upon completion of such accounting and financial reporting processes and finalizing the financial statements as of and for the year ended December 31, 2010, we will not report RevPAR for the three months ended December 31, 2010 materially different than as set forth above. This information should be read in conjunction with the consolidated financial statements and the related notes and “Management Discussion and Analysis of Financial Condition and Results Of Operations” for prior periods included elsewhere in this prospectus.
 
On September 27, 2010, we declared our first dividend, a third quarter dividend of $0.175 per common share, which was paid on October 29, 2010 to shareholders of record as of October 15, 2010. On December 16, 2010, we declared our second dividend, a fourth quarter dividend of $0.175 per common share, which was paid on January 14, 2011 to shareholders of record as of December 31, 2010.
 
On September 9, 2010, we appointed Dennis M. Craven as our Executive Vice President and Chief Financial Officer. See “Management — Trustees and Executive Officers.”
 
Market Opportunity
 
We believe current market conditions will continue to create attractive opportunities to acquire hotel properties at prices that represent significant discounts to replacement cost and that provide potential for significant long-term value appreciation. Operating performance of the U.S. hotel industry declined significantly in 2008 and 2009 due to challenging economic conditions created by declining gross domestic product, or GDP, high levels of unemployment, low consumer confidence, a significant decline in home prices and a reduction in the availability of credit. While the U.S. hotel industry has shown improvement since the time of our IPO, industry operating performance remains significantly below pre-2008 levels. In addition to facing weakened operating performance, hotel owners have been adversely impacted by a significant decline in the availability of debt financing. We believe that the combination of a decline in operating performance and reduction in the availability of debt financing has caused hotel values to decline in recent years and will continue to lead to increased hotel loan foreclosures and distressed hotel property sales. In addition, we believe that the supply of new hotels is likely to remain low for the next several years due to limited availability of debt financing. Hotel industry operating performance historically has correlated with U.S. GDP growth, and a number of economists and government agencies currently predict that the U.S. economy will grow over the next several years. We believe that U.S. GDP growth, coupled with limited supply of new hotels, will lead to increases in lodging industry RevPAR and hotel operating profits. We believe that our management team’s significant experience in acquiring hotels, our growth oriented capital structure, and our focused business strategy will position us to take advantage of hotel investment opportunities created by current market conditions.
 
Competitive Strengths
 
Experienced management team:  We believe that our senior executive officers, who have extensive lodging industry experience, will help drive our company’s growth. Our management team is led by Mr. Fisher, who has over 24 years of experience in the lodging industry, including 13 years as founder and chief executive officer of Innkeepers. Mr. Fisher has longtime relationships with hotel owners, developers, management companies, franchisors, brokers, financiers, research analysts and institutional investors.
 
Strong acquisition and growth record:  Our management team has executed our initial acquisition growth strategy, having acquired 13 premium-branded upscale extended-stay and select-service hotels since our IPO. Additionally, prior to our formation, Mr. Fisher oversaw the growth of Innkeepers through a $46.9 million IPO in 1994 and served as its chairman and chief executive officer until it was sold in 2007 for a total enterprise value of $1.5 billion.
 
Prudent capital structure:  We believe that many potential buyers of hotel properties typically utilize significant levels of debt to fund acquisitions and thus may be limited in their ability to make acquisitions under current market conditions. In addition, we believe many potential buyers of hotel


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properties already have high leverage levels that could limit their ability to acquire additional properties. Upon completion of this offering and application of the net proceeds, as described in “Use of Proceeds,” we will have approximately $      million of cash, together with $85 million of borrowing capacity under our credit facility, available to invest in additional hotel properties and to fund renovations at our existing properties, and only $12.4 million in debt. We plan to maintain a prudent capital structure and intend to limit our consolidated indebtedness, net of cash, to not more than 35% of our investment in hotel properties at cost (defined as our initial acquisition price plus the gross amount of any subsequent capital investment and excluding any impairment charges).
 
Longtime relationships with leading lodging franchise and management companies:  Mr. Fisher has longtime relationships with several leading hotel franchise and management companies, having acquired and developed a significant number of hotels that operate under premium hotel brands, including but not limited to Marriott’s Residence Inn® and Courtyard by Marriott® brands as well as Hilton’s Homewood Suites® and Hampton Inn® brands, among others.
 
Strategy and Investment Criteria
 
Our primary objective is to generate attractive returns for our shareholders through investing in hotel properties 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 Island Hospitality Management Inc., or IHM, a hotel management company 90% owned by Mr. Fisher that currently manages five 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 secured 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


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  where we do not expect to gain ownership of the underlying property or to originate any debt financing.
 
Summary Risk Factors
 
An investment in our common shares involves various risks. You should carefully consider the matters discussed in “Risk Factors” beginning on page 10 of this prospectus before you decide whether to invest in our common shares. Some of the risks include the following:
 
  •      We were organized in October 2009 and have limited operating history.
 
  •      The closing of our purchase of the hotel we have under contract is subject to customary closing conditions and may not be consummated in a timely manner or at all.
 
  •      Our success depends upon the efforts and expertise of our management team. The loss of their services, and our inability to find suitable replacements, could have an adverse impact on our business.
 
  •      A substantial part of our business strategy is based on our belief that lodging industry fundamentals will improve. If these fundamentals do not improve when or as we expect, or deteriorate, our ability to execute our business strategy and our financial condition, operating results and cash flow may be adversely affected.
 
  •      We rely on third-party hotel management companies to operate our hotel properties under the terms of hotel management agreements. Even if we believe our hotel properties are being operated inefficiently or in a manner that does not result in satisfactory RevPAR or profits, we may not be able to force the hotel management company to change its method of operating our hotels.
 
  •      Our hotel management agreements require us, through the wholly-owned subsidiaries of our taxable REIT subsidiaries, or TRSs, to bear the operating risks of our hotel properties. We refer to our TRSs and their wholly-owned subsidiaries as our TRS lessees. Any increases in hotel operating expenses or decreases in revenues may have a significant adverse impact on our operating results and cash flow.
 
  •      Because our chief executive officer, Mr. Fisher, owns 90% of IHM, a hotel management company that currently manages five of our hotels and that we may engage to manage certain additional hotels we acquire in the future, conflicts of interest may arise as to the terms of management agreements between us and IHM.
 
  •      To qualify and maintain our qualification for taxation as a REIT, we are generally required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, each year to our shareholders and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income each year. As a result, our ability to fund capital expenditures, acquisitions and hotel redevelopment through retained earnings is very limited. We may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities. Consequently, after investing the net proceeds of this offering, we will rely upon the availability of debt or equity capital to fund investments in hotel properties and capital improvements. There can be no assurance that we will be able to obtain such financing on favorable terms or at all. We also may not generate sufficient cash flow to fund distributions required to maintain our qualification as a REIT.
 
  •      Funding distributions to shareholders from the net proceeds of this offering could be dilutive to our financial results.
 
  •      If we fail to qualify, or lose our qualification, as a REIT, we will be subject to federal income tax on our taxable income. Our hotel properties leased by our TRS lessees must be operated by “eligible independent contractors,” as defined in the Internal Revenue Code of 1986, as amended, or the Code, in order for the rental income from our TRS leases to qualify as rents from real property under the applicable REIT gross income tests.


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  Complex constructive ownership rules under the Code apply in determining whether a person qualifies as an eligible independent contractor.
 
  •      We will incur a 100% excise tax on transactions with any of our TRSs, including our TRS lessees, that are not conducted on an arm’s-length basis.
 
  •      Subject to certain exceptions, our declaration of trust provides that no person may beneficially own more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our shares of beneficial interest. In addition, our declaration of trust and bylaws contain other provisions that may delay, defer or prevent an acquisition of control of our company by a third party without our board of trustees’ approval, even if our shareholders believe the change of control is in their best interests.
 
  •      Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties for reasonable prices in response to changing economic, financial and investment conditions is limited. In addition, because some of our hotel management agreements may be long-term and may not terminate in the event of a sale, our ability to sell hotel properties may be further limited.
 
Our Organizational Structure
 
We were formed as a Maryland real estate investment trust in October 2009. We are the sole general partner of Chatham Lodging, L.P., the subsidiary through which we conduct substantially all of our operations and make substantially all of our investments and which we refer to as our operating partnership. Upon completion of this offering, we will contribute to our operating partnership the net proceeds of this offering in exchange for additional limited partnership interests in our operating partnership. In the future we may issue limited partnership interests in our operating partnership as consideration for the purchase of hotel properties or in connection with our Equity Incentive Plan.
 
In order for the income from our hotel operations to constitute “rents from real property” for purposes of the gross income tests required for REIT qualification under the Code, we cannot directly operate any of our hotel properties. Instead, we must lease our hotel properties. Accordingly, we lease each of our hotel properties to one of our TRS lessees, which are wholly owned by our operating partnership. Our TRS lessees pay rent to us that can qualify as “rents from real property,” provided that the TRS lessees engage “eligible independent contractors” to manage our hotels. A TRS is a corporate subsidiary of a REIT that jointly elects with the REIT to be treated as a TRS of the REIT and that pays federal income tax at regular corporate rates on its taxable income. We expect that all of our hotel properties will continue to be leased to one of our wholly owned TRS lessees, which pay us rent out of the revenue of the hotels and engage multiple eligible independent contractors to manage our hotels.


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The following chart shows the structure of our company:
 
(CHART)
 
 
(1) Includes grants of an aggregate of 40,000 restricted common shares to our independent trustees. Also includes 10,450 restricted common shares awarded to each of Messrs. Willis and Craven pursuant to our Equity Incentive Plan as part of our 2010 compensation program.
 
(2) Includes 15,650 restricted common shares awarded to Mr. Fisher pursuant to our Equity Incentive Plan as part of our 2010 compensation program.
 
(3) Upon completion of our IPO, we issued an aggregate of 231,525 long-term incentive plan, or LTIP, units in our operating partnership to Messrs. Fisher and Willis. In addition, we issued 26,250 LTIP units to Mr. Craven upon commencement of his employment in September 2010. See “Compensation Discussion and Analysis — Equity Incentive Plan.”
 
(4) Includes IHM.
 
Tax Status
 
Upon filing our federal income tax return for our short taxable year ended December 31, 2010, we will elect to be taxed as a REIT for federal income tax purposes. 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 were 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 commencing with our short taxable year ended December 31, 2010 and continuing thereafter.
 
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


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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.
 
Distribution Policy
 
We intend over time to make regular quarterly distributions to our common shareholders. In order to qualify and maintain our qualification for taxation as a REIT, we intend to make annual distributions to our shareholders of at least 90% of our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. On September 27, 2010, we declared our first dividend, a third quarter dividend of $0.175 per common share, which was paid on October 29, 2010 to shareholders of record as of October 15, 2010. On December 16, 2010, we declared our second dividend, a fourth quarter dividend of $0.175 per common share, which was paid on January 14, 2011 to shareholders of record as of December 31, 2010. Distributions will be authorized by our board of trustees and declared by us based upon a variety of factors deemed relevant by our board of trustees. Distributions to our shareholders generally will be taxable to our shareholders as ordinary income; however, because a significant portion of our investments represent ownership of equity interests in hotel properties, which generate depreciation and other non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with qualifying and maintaining our qualification as a REIT, we may retain any earnings that accumulate in our TRSs.
 
Restrictions on Ownership of Our Common Shares
 
In order to help us qualify as a REIT, among other reasons, our declaration of trust, subject to certain exceptions, restricts the amount of our shares of beneficial interest that a person may beneficially or constructively own. Our declaration of trust provides that, subject to certain exceptions, no person may beneficially or constructively own more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our shares of beneficial interest. Our declaration of trust also prohibits any person from (i) beneficially owning shares of beneficial interest to the extent that such beneficial ownership would result in our being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of the taxable year), (ii) transferring our shares of beneficial interest to the extent that such transfer would result in our shares of beneficial interest being beneficially owned by less than 100 persons (determined under the principles of Section 856(a)(5) of the Code), (iii) beneficially or constructively owning our shares of beneficial interest to the extent such beneficial or constructive ownership would cause us to constructively own ten percent or more of the ownership interests in a tenant (other than a TRS) of our real property within the meaning of Section 856(d)(2)(B) of the Code or (iv) beneficially or constructively owning or transferring our shares of beneficial interest if such ownership or transfer would otherwise cause us to fail to qualify as a REIT under the Code, including, but not limited to, as a result of any hotel management companies failing to qualify as an “eligible independent contractor” under the REIT rules. Our board of trustees, in its sole discretion, may prospectively or retroactively exempt a person from certain of these limits and may establish or increase an excepted holder percentage limit for such person. The person seeking an exemption must provide to our board of trustees such representations, covenants and undertakings as our board of trustees may deem appropriate in order to conclude that granting the exemption will not cause us to lose our status as a REIT.


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The Offering
 
Common shares offered 4,000,000 common shares (plus up to 600,000 additional common shares that we may issue and sell upon exercise of the underwriters’ over-allotment option).
 
Common shares outstanding upon completion of this offering 13,220,854 common shares(1)
 
Use of proceeds We will contribute the net proceeds of this offering to our operating partnership. We intend to use approximately $43 million of the net proceeds of this offering to pay down debt under our credit facility and approximately $18 million of the net proceeds of this offering to complete the acquisition of a hotel located in the greater Pittsburgh, Pennsylvania area, which we currently have under contract to purchase.
 
Our operating partnership will use the remaining net proceeds to invest in additional hotel properties in accordance with our investment strategy described in this prospectus and for general business purposes, including renovations and upgrades of guest rooms and common areas at certain of our hotels. Prior to the full investment of the net offering proceeds in hotel properties, we intend to invest in interest-bearing short-term securities or money-market accounts that are consistent with our intention to qualify as a REIT. These initial investments are expected to provide a lower net return than we will seek to achieve from investments in hotel properties. See “Use of Proceeds.”
 
New York Stock Exchange symbol “CLDT”
 
Ownership and transfer restrictions Our declaration of trust, subject to certain exceptions, prohibits any person from directly or indirectly owning more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our shares of beneficial interest. See “Description of Shares of Beneficial Interest — Restrictions on Ownership and Transfer.”
 
Risk Factors Investing in our common shares involves risks. You should carefully read and consider the information set forth under “Risk Factors” and all other information in this prospectus before investing in our common shares.
 
 
(1) Includes 40,000 restricted common shares issued to our independent trustees concurrent with the closing of our IPO under our Equity Incentive Plan and an aggregate of 36,550 restricted common shares awarded to Messrs. Fisher, Willis and Craven pursuant to our Equity Incentive Plan. Excludes (i) an aggregate of 257,775 common shares underlying LTIP units in our operating partnership that were issued to Messrs. Fisher and Willis in connection with our IPO and to Mr. Craven upon joining our company, (ii) 211,730 common shares reserved for issuance under our Equity Incentive Plan and (iii) 600,000 common shares issuable upon exercise of the underwriters’ over-allotment option.
 
Our Information
 
Our principal executive offices are located at 50 Cocoanut Row, Suite 216, Palm Beach, Florida 33480. Our telephone number is (561) 802-4477.


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RISK FACTORS
 
An investment in our common shares involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus, including in “Management Discussion and Analysis of Financial Condition and Results of Operations.” If any of the risks discussed in this prospectus occurs, our business, prospects, financial condition, cash flows, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. If this were to happen, the price of our common shares could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
 
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.
 
The purchase of the property we have under contract may not be consummated in a timely manner or at all.
 
We have entered into an agreement to purchase a hotel located in the greater Pittsburgh, Pennsylvania area. The closing of the purchase of this hotel is subject to satisfaction of customary closing requirements and conditions and there is no assurance that it will be consummated in a timely manner or at all. This transaction, whether or not it is successful, requires substantial time and attention from management. Furthermore, this potential acquisition requires significant expense, including expenses for due diligence, legal fees and related overhead. To the extent we do not acquire this hotel, these expenses will not be offset by revenues from this property. If we do not consummate this acquisition in a timely manner or at all, our financial results would be adversely affected.
 
Although we are in various stages of reviewing and negotiating a number of potential hotel properties for potential acquisition, we have not yet committed a substantial portion of the net proceeds from this offering to any specific hotel property and, therefore, you will be unable to evaluate the allocation of a substantial amount of the net proceeds from the offering or the economic merits of some of our acquisitions prior to making an investment decision.
 
We have not yet committed a substantial portion of the net proceeds of this offering to specific hotel properties and you will be unable to evaluate the economic merits of investments we make with a substantial portion of the net proceeds before making an investment decision to purchase our common shares. As a result, we will have broad authority to invest the net proceeds of this offering 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 this offering effectively or 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.


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Until appropriate investments can be identified, we may invest the net proceeds of the offering 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 our hotel properties. We may be unable to invest the net proceeds on acceptable terms, or at all, which could delay shareholders 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.
 
Because our senior executive officers have broad discretion to invest the proceeds of the offering, they may make investments where the returns are substantially below expectations or which result in net operating losses.
 
Our senior executive officers have broad discretion, within the general investment criteria established by our board of trustees, to invest the net proceeds of the offering and to determine the timing of such investment. Our senior executive officers may therefore make investments where the returns are substantially below expectations or which result in net losses.
 
Our investment policies are subject to revision from time to time in 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 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.


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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. Jeffrey H. Fisher, our chief executive officer, controls IHM, a hotel management company that currently manages five of our hotels 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


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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 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; 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 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, net of cash, of not more than 35% of our investment in hotel properties 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. 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;


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  •      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 two other hotels we acquired, 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 thereunder. 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 may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint


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venture partners may have economic or other business interests or goals which 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. Disputes between us and 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, 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.
 
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 in the future distribute taxable dividends that are payable in cash and 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. See “Investment Policies and Policies with Respect to Certain Activities — Conflict of Interest Policy”.
 
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 five of our hotels and may manage additional hotels that we acquire 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. See “Certain Relationships and Related Transactions”.


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Risks Related to the Lodging Industry
 
The lodging industry has experienced recent significant declines 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. The current global economic downturn has led to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels and significantly reduced room rates.
 
A substantial part of our business strategy is based on the belief that the lodging markets in which we invest will experience improving economic fundamentals in the future. We anticipate that recovery will lag an improvement in economic conditions. However, we cannot predict the severity or length of the global economic downturn or the extent to which lodging industry fundamentals will improve. In the event conditions in the industry do not improve when and as we expect, 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.


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


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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 these 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.
 
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.


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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.
 
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 therefor 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 occurs.
 
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.


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Compliance with the Americans with Disabilities Act 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 Americans with Disabilities Act of 1990, or 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.
 
The Employee Free Choice Act could substantially increase our cost of doing business and adversely affect our operating results and our ability to make distributions to shareholders.
 
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.
 
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;


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  •      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, little credit is available to purchasers of hotel properties and financing structures such as CMBS, which have been used to finance many 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


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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


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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, use the proceeds from this offering or make taxable distributions of our capital shares or debt securities, to enable us to pay out enough of our 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 intend to elect to be taxed as a REIT for federal income tax purposes, commencing with our short taxable year ended December 31, 2010 upon the filing of our federal income tax return for that year. 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. 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.


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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.
 
The formation of our TRS lessees 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.
 
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 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 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 will be 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 we anticipate will constitute substantially all of our gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. We 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. 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 as a REIT status.


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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, which is prohibited, to the extent the TRS lessee leases properties from us that are managed by an “eligible independent contractor.”
 
We believe that the rent paid by our TRS lessee is qualifying income for purposes of the REIT gross income tests and that our TRSs qualify to be treated as taxable REIT subsidiaries for federal income tax purposes, but there can be no assurance that the IRS will not challenge this treatment or that a court would not sustain such a challenge. If the IRS were successful in challenging this treatment, it is possible that we would fail to meet the asset tests applicable to REITs and substantially all of our income would fail to qualify for the gross income tests. If we failed to meet either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless certain relief provisions applied.
 
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. 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.


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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. 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. See “Material U.S. Federal Income Tax Considerations — Gross Income Tests — Hedging Transactions.” 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 TRS 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 U.S. 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 will require us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually attest to our


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evaluation, as well as issue their opinion on our internal control over financial reporting. While we intend to undertake substantial work to prepare for compliance with Section 404, we cannot be certain that we will be successful in implementing or maintaining adequate control over our financial reporting and financial processes. Furthermore, 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 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 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 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 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 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. We currently do not expect to use the proceeds from this offering to make distributions to our shareholders. 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


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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 invest the proceeds of the offering;
 
  •      our inability to realize attractive returns on our investments;
 
  •      unanticipated expenses that reduce our cash flow or non-cash earnings;
 
  •      defaults in our investment portfolio or 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. In addition, prior to the time we have fully invested the net proceeds of this offering, we may fund our quarterly distributions out of such net proceeds. The use of our net proceeds for 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 trading price of our common shares may be less than the offering price.
 
The public offering price for the shares in this offering has been determined by us and the underwriters. We cannot assure you that the price at which the common shares will sell in the public market after the completion of this offering will not be lower than the price at which they are sold by the underwriters.
 
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;


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  •      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. Upon completion of this offering, we expect to have 13,220,854 common shares outstanding, including the common shares sold in this offering, or 13,820,854 common shares outstanding if the underwriters’ over-allotment option is exercised in full. Our Equity Incentive Plan provides for grants of equity based awards up to an aggregate of 565,359 common shares.
 
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.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, cash flow and plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:
 
  •      use of the proceeds of this offering;
 
  •      market trends in our industry, interest rates, real estate values, the debt financing markets or the general economy or the demand for commercial real estate loans;
 
  •      our business and investment strategy;
 
  •      our projected operating results;
 
  •      actions and initiatives of the U.S. government and changes to U.S. government policies and the execution and impact of these actions, initiatives and policies;
 
  •      the state of the U.S. economy generally or in specific geographic regions;
 
  •      economic trends and economic recoveries;
 
  •      our ability to obtain and maintain financing arrangements;
 
  •      changes in the value of our properties;
 
  •      our expected portfolio of properties;
 
  •      the degree to which our hedging strategies may or may not protect us from interest rate volatility;
 
  •      impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;
 
  •      our ability to satisfy the requirements for REIT qualification under the Code;
 
  •      availability of qualified personnel;
 
  •      estimates relating to our ability to make distributions to our shareholders in the future;
 
  •      general volatility of the capital markets and the market price of our common shares; and
 
  •      degree and nature of our competition.
 
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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USE OF PROCEEDS
 
We estimate that the net proceeds of this offering will be approximately $      after deducting the underwriting discounts and commissions and other estimated offering expenses. If the underwriters’ over-allotment option is exercised in full, our net proceeds will be approximately $     .
 
We will contribute the net proceeds of this offering to our operating partnership in exchange for additional limited partnership interests in our operating partnership.
 
Our operating partnership intends to use approximately $43 million of the net proceeds of this offering to pay down debt under our credit facility, which bears interest at a rate of approximately 4.5% per annum as of February 1, 2011 and will mature on October 12, 2013. We intend to use approximately $18 million of the net proceeds of this offering to complete the acquisition of a hotel located in the greater Pittsburgh, Pennsylvania area, which we currently have under contract to purchase.
 
We will use the remaining net proceeds to invest in hotel properties in accordance with our investment strategy described in this prospectus and for general business purposes, including renovations and upgrades of guest rooms and common areas of certain of our hotels, which we believe will enhance their competitive position as economic and lodging industry conditions improve. We generally intend to invest the remaining net proceeds as promptly as we can identify hotel acquisition opportunities that are consistent with our investment strategy. However, we cannot predict if or when we will identify and acquire hotels that meet our acquisition criteria so as to permit us to invest the net proceeds of this offering. Prior to the full investment of the offering proceeds in hotel properties, we intend to invest in interest-bearing short-term securities or money-market accounts that are consistent with our intention to qualify as a REIT. Such investments may include, for example, government and government agency certificates, certificates of deposit, interest-bearing bank deposits and mortgage loan participations. These investments are expected to provide a lower net return than we seek to achieve from investments in our hotel properties.


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CAPITALIZATION
 
The following table sets forth:
 
  •      our actual capitalization as of September 30, 2010;
 
  •      our pro forma capitalization as of September 30, 2010, giving effect to (i) borrowings of $42.8 million under our credit facility, (ii) completion of our acquisitions of the Residence Inn by Marriott® in New Rochelle, New York, the Homewood Suites by Hilton® in Carlsbad (North San Diego County), California and (iii) the probable acquisition of a hotel located in the greater Pittsburgh, Pennsylvania area, which we currently have under contract to purchase, to be financed from the net proceeds of this offering and through the assumption of $7.3 million in debt; and
 
  •      our pro forma capitalization as of September 30, 2010, as adjusted to give effect to the sale of our common shares in this offering, at an offering price of $16.96 per share, not including shares subject to the underwriters’ over-allotment option, and net of the underwriting discounts and commissions and other estimated offering expenses payable by us in connection with this offering, and the application of $42.8 million of the net proceeds thereof to pay down borrowings under our credit facility.
 
The following table should be read in conjunction with the section captioned “Management Discussion and Analysis of Financial Condition and Results of Operations.”
 
                         
    As of September 30, 2010  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
          (Unaudited)        
    (Dollars in thousands)  
 
Borrowings under revolving credit facility
        $ 42,800        
Mortgage loans payable
    12,410       19,750       19,750  
                         
Total debt
    12,410       62,550       19,750  
                         
Shareholders’ equity
                       
Common shares, $0.01 par value, 500,000,000 shares authorized, 9,208,750 shares issued and outstanding, actual; 13,208,750 shares issued and outstanding, as adjusted(1)
    92       92       132  
Additional paid-in capital
    168,966       168,966       232,463  
Retained deficit
    (2,542 )     (2,542 )     (2,542 )
                         
Total shareholders’ equity
    166,516       166,516       230,053  
                         
Noncontrolling interest in operating partnership
    275       275       275  
                         
Total capitalization
  $ 179,201     $ 229,341     $ 250,078  
                         
 
 
(1) Excludes (i) 478,359 common shares reserved for issuance under our Equity Incentive Plan and (ii) 600,000 common shares issuable upon exercise of the underwriters’ over-allotment option.


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DISTRIBUTION POLICY
 
We intend over time to make regular quarterly distributions to holders of our common shares. In order to qualify for taxation as a REIT, we intend to make annual distributions to our shareholders of an amount at least equal to:
 
  •      90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain); plus
 
  •      90% of the excess of our net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
 
  •      the sum of certain items of non-cash income (as determined under Sections 857 of the Code).
 
Generally, we expect to distribute 100% of our REIT taxable income so as to avoid the income and excise tax on undistributed REIT taxable income. See “Material U.S. Federal Income Tax Considerations.”
 
  •      Distributions are authorized by our board of trustees and declared by us based upon a variety of factors, including:
 
  •      actual results of operations;
 
  •      the timing of the investment of the net proceeds of this offering;
 
  •      any debt service requirements;
 
  •      capital expenditure requirements for our properties;
 
  •      our taxable income;
 
  •      the annual distribution requirement under the REIT provisions of the Code;
 
  •      our operating expenses; and
 
  •      other factors that our board of trustees may deem relevant.
 
Our ability to pay distributions to our shareholders depend, in part, upon our receipt of distributions from our operating partnership, which depends upon receipt of rent payments from our TRS lessees and the management of our hotels by the third-party hotel management companies that our TRS lessees have engaged to operate our hotels. Distributions to our shareholders generally will be taxable to our shareholders as ordinary income; however, because a significant portion of our investments consists of ownership of equity interests in hotel properties, which generates depreciation and other non-cash charges against our income, a portion of our distributions may constitute a return of capital for federal income tax purposes. To the extent not inconsistent with our qualification as a REIT, we may retain any earnings that accumulate in our TRSs.
 
Our ability to pay distributions is restricted by the terms of our credit facility, which limits the amount of our quarterly distributions to the amount necessary to enable us to (1) maintain our REIT qualification and (2) avoid incurring income and excise taxes.
 
In addition, prior to the time we have fully invested the net proceeds of this offering, we may fund our quarterly distributions out of such net proceeds. The use of our net proceeds for 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 pay distributions.


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MARKET PRICE OF OUR COMMON SHARES
 
Our common shares are traded on the NYSE under the symbol “CLDT.” As of February 1, 2011, we had 9,220,854 common shares outstanding and three registered shareholders of record of our common shares. This figure does not include beneficial owners who hold shares in nominee name. On February 1, 2011, the closing price of our common shares, as reported on the NYSE, was $16.96. The following table sets forth, for the periods indicated, the high and low sale prices of our common shares since completion of our IPO, as reported on the NYSE, and the dividends paid by us with respect to those periods.
 
                         
2010   High   Low   Dividends
 
Second quarter (commencing April 16, 2010 to June 30, 2010)
  $ 20.70     $ 17.45        
Third quarter
  $ 18.92     $ 14.25     $ 0.175  
Fourth quarter
  $ 19.46     $ 16.11     $ 0.175  
                         
2011            
 
First quarter (through February 1, 2011)
  $ 17.57     $ 16.46          


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SELECTED FINANCIAL DATA
 
The following table presents selected historical financial information as of and for the nine months ended September 30, 2010. The selected historical financial information as of and for the period from inception through December 31, 2009 has been derived from our historical financial statements audited by PricewaterhouseCoopers LLP, independent registered certified public accounting firm, whose report with respect to such financial information is included elsewhere in this prospectus. The selected historical financial information as of and for the nine months ended September 30, 2010 has been derived from our interim unaudited financial statements. These interim unaudited financial statements have been prepared on substantially the same basis as our audited consolidated financial statements and reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of our financial position as of September 30, 2010 and the results of our operations and cash flow for the nine months ended September 30, 2010. All such adjustments are of a normal recurring nature. These results are not necessarily indicative of our results for the full year. The selected historical financial data should be read in conjunction with “Management Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes thereto appearing elsewhere in this prospectus.
 
The following table presents unaudited selected pro forma consolidated balance sheet data as of September 30, 2010, which has been prepared to reflect adjustments to our historical consolidated balance sheet to illustrate the estimated effect of the following transactions as if they had occurred on September 30, 2010:
 
  (i)     the acquisition of the Residence Inn by Marriott® in New Rochelle, New York, which was completed on October 5, 2010; and
 
  (ii)    the sale of 4,000,000 common shares in this offering at an assumed public offering price of $16.96 per share, not including shares subject to the underwriters’ over-allotment option and net of underwriting discounts and commissions and offering costs.
 
The unaudited selected pro forma consolidated operating data in the table below for the nine months ended September 30, 2010 and the year ended December 31, 2009 has been prepared to illustrate the estimated effect of the transactions described in items (i) and (ii) above, assuming such transactions and our initial public offering were completed on January 1, 2009, but does not include the estimated effect of our acquisition of the Homewood Suites by Hilton® in Carlsbad (North San Diego County), California for approximately $32 million or our anticipated acquisition of a hotel located in the greater Pittsburgh, Pennsylvania area, which we currently have under contract to purchase, for approximately $25 million, including the assumption of $7.3 million in debt.
 
The following selected historical and pro forma financial data should be read in conjunction with (i) our historical audited financial statements as of and for the period ended December 31, 2009 and the notes thereto appearing elsewhere in this prospectus, (ii) our historical unaudited financial statements as of and for the nine months ended September 30, 2010 and the notes thereto appearing elsewhere in this prospectus (iii) our unaudited pro forma financial statements and the notes thereto appearing elsewhere in this prospectus, (iv) the historical audited consolidated financial statements of our hotels and the notes thereto appearing elsewhere in this prospectus and (v) the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Management Discussion and Analysis of Results of Operations and Financial Condition” sections in this prospectus. We have based our unaudited pro forma adjustments on available information and assumptions that we believe are


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reasonable. The following selected unaudited pro forma financial data does not purport to be, and should not be viewed as, indicative of our future results of operations or financial condition.
 
                         
    Historical   Pro Forma
    Nine Months
  Year Ended
  Nine Months
    Ended
  December 31,
  Ended
Property   September 30, 2010   2009   September 30, 2010
    (In thousands, except share and per share data)
 
Statement of Operations Data:
                       
Total revenues
  $ 13,041     $ 47,236     $ 37,144  
Hotel operating expenses
    7,592       29,062       22,463  
Corporate general and administrative
    2,340       3,387       3,168  
Hotel property acquisition costs
    2,165              
Property taxes and insurance
    718       3,345       2,672  
Depreciation and amortization
    1,200       6,821       5,153  
Total operating expenses
    14,015       42,615       33,456  
Operating income (loss)
    (974 )     4,621       3,688  
Interest expense
    (19 )     (752 )     (556 )
Interest income
    109             109  
Income (loss) before income tax expense
    (884 )     3,869       3,241  
Income tax expense
    (46 )     (276 )     (124 )
Net income (loss) attributable to common shareholders
  $ (930 )   $ 3,593     $ 3,117  
Income (loss) per common share, basic and diluted
  $ (0.17 )   $ 0.39     $ 0.34  
Weighted average number of common shares, basic and diluted
    5,448,663       9,208,750       9,208,750  
 
                 
    Historical   Pro Forma
    As of September 30,
  As of September 30,
    2010   2010
    (Unaudited)    
    (In thousands)   (Unaudited)
        (In thousands)
 
Balance Sheet Data:
               
Investment in hotel properties, net
  $ 154,040     $ 174,755  
Cash and cash equivalents
    26,845       69,120  
Restricted cash
    5,689       5,689  
Hotel receivables (net of allowance for doubtful accounts)
    859       905  
Deferred costs, net
    1,047       1,109  
Prepaid expenses and other assets
    592       762  
                 
Total assets
  $ 189,072     $ 252,340  
                 
Mortgage loans payable
  $ 12,410     $ 12,410  
Accounts payable and accrued expenses
    3,039       3,075  
Accrued underwriter fees
    5,175       5,175  
Distributions payable
    1,657       1,657  
                 
Total liabilities
    22,281       22,317  
                 
Total shareholders’ equity
    166,516       229,748  
                 
Noncontrolling interest in operating partnership
    275       275  
                 
Total liabilities and equity
  $ 189,072     $ 252,340  
                 


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MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the information provided under the section of this prospectus entitled “Risk Factors,” “Cautionary Note Regarding Forward-looking Statements,” and “Business” and our audited balance sheet and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We are a self-advised hotel investment company organized in October 2009 to invest in premium-branded upscale extended-stay and select-service hotels. In April 2010, we raised net proceeds of approximately $158.7 million in our IPO and an additional $10 million through a concurrent private placement of our common shares to Mr. Fisher. Since the completion of our IPO, we have acquired 13 hotels with an aggregate of 1,650 rooms in nine states for approximately $209 million and have entered into a contract to purchase a hotel located in the greater Pittsburgh, Pennsylvania area for approximately $25 million. We have funded our acquisitions to date with the net proceeds of our IPO and private placement, through the assumption of debt and with borrowings under our credit facility. We expect to finance the acquisition of the hotel we have under contract to purchase from the net proceeds of this offering and through the assumption of $7.3 million in debt. Our portfolio includes upscale extended-stay hotels that operate under the Homewood Suites by Hilton® brand (seven hotels) and Residence Inn by Marriott® brand (three hotels), as well as premium-branded select-service hotels they operate under the Courtyard by Marriott® brand (one hotel), Hampton Inn and Suites by Hilton® brand (one hotel) and SpringHill Suites by Marriott® brand (one hotel).
 
Upscale extended-stay hotels typically have the following characteristics:
 
  •      their principal customer base includes business travelers who are on extended assignments and corporate relocations;
 
  •      their 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
 
  •      their 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® and SpringHill Suites by Marriott®. 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. We focus primarily on hotels in the 25 largest metropolitan markets in the United States. We believe that current market conditions will continue to create attractive opportunities to acquire high quality hotels at cyclically low prices that will benefit from an improving economy and our aggressive asset management.
 
Our management team, led by Mr. Fisher, has extensive experience acquiring, developing, financing, repositioning, managing and selling hotels. Prior to forming Chatham Lodging Trust, Mr. Fisher served as chairman, chief executive officer and president of Innkeepers USA Trust, or Innkeepers, a New York Stock Exchange-listed hotel real estate investment trust, or REIT, from its inception in 1994 through its sale in June 2007. In addition, Peter Willis, our Executive Vice President


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and Chief Investment Officer, and Dennis M. Craven, our Executive Vice President and Chief Financial Officer, served in similar positions at Innkeepers.
 
In addition to the hotel we have under contract to purchase, we have identified and are in various stages of reviewing and negotiating a number of additional potential hotel acquisition opportunities. As of February 1, 2011, we were actively reviewing potential hotel acquisitions having an aggregate transaction value in excess of $200 million, based on our preliminary discussions with sellers and our internal assessment of the properties’ values. Our management team sourced these potential acquisitions through their extensive relationships with hotel owners, management companies, franchisors, brokers, banks, insurance companies, public institutions, fund managers, REITs, private investors and developers.
 
Our acquisition of these properties is subject to us negotiating and executing with the sellers mutually acceptable definitive and binding purchase and sale agreements with respect to the properties, which we expect will contain a number of conditions to closing the acquisitions, including:
 
  (i)     our ability to negotiate and execute new management agreements and franchise agreements, or assume the existing agreements, for the properties,
 
  (ii)     our completion of satisfactory due diligence with respect to the properties,
 
  (iii)      lender approval of our assumption of existing indebtedness with respect to certain of the properties, and
 
  (iv)      satisfaction of customary closing conditions.
 
There can be no assurance that the sellers of the properties discussed above will be willing to proceed with the transactions, that we will be able to negotiate and execute satisfactory definitive purchase and sale agreements with the sellers, that our due diligence will be satisfactory or that the conditions to closing will be satisfied.
 
We intend to elect and qualify to be treated as a REIT for federal income tax purposes.
 
For us to qualify as a REIT under the Code, we cannot operate the hotels that we acquire. Therefore, our operating partnership and its subsidiaries lease our hotel properties to our TRS lessees, who in turn have engaged eligible independent contractors to manage our hotels. Each of these lessees is owned by a TRS for federal income tax purposes and is consolidated into our financial statements for accounting purposes. However, since both our operating partnership and our TRS lessees are controlled by us, our principal source of funds on a consolidated basis is from the operations of our hotels. The earnings of our TRS lessees are subject to taxation as regular C corporations, reducing such lessees’ ability to pay dividends, our funds from operations and the cash available for distribution to our shareholders.
 
Results of Operations
 
Industry outlook
 
Operating performance for the U.S. lodging industry declined 16.7% in 2009, as reported by Smith Travel Research, due to the challenging economic conditions created by declining GDP, high levels of unemployment, low consumer confidence, the significant decline in home prices and a reduction in available credit. 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 and consumer confidence improving, we expect a rebound in the performance of the hotel industry. After 19 consecutive months of declining year over year RevPAR, monthly RevPAR has been higher year over year beginning in March 2010, as reported by Smith Travel Research.


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While the U.S. hotel industry has shown improvement since the time of our IPO and we are encouraged by these improvements, industry operating performance remains significantly below pre-2008 levels. In addition to facing weakened operating performance, hotel owners have been adversely impacted by a significant decline in the availability of debt financing. We believe that the combination of a decline in operating performance and reduction in the availability of debt financing has caused hotel values to decline in recent years and will continue to lead to increased hotel loan foreclosures and distressed hotel property sales. In addition, we believe that the supply of new hotels is likely to remain low for the next several years due to limited availability of debt financing. Hotel industry operating performance historically has correlated with U.S. GDP growth, and a number of economists and government agencies currently predict that the U.S. economy will grow over the next several years. We believe that U.S. GDP growth, coupled with limited supply of new hotels, will lead to increases in lodging industry RevPAR and hotel operating profits.
 
Three months and nine months ended September 30, 2010
 
Prior to April 21, 2010, operations had not commenced because we were in our developmental stage. For the third quarter and year to date of 2010, we had a net loss of $0.3 million, or a loss of $0.03 per diluted share, and $0.9 million, or a loss of $0.17 per diluted share, respectively. For the quarter, FFO, Adjusted FFO, EBITDA and Adjusted EBITDA were $0.5 million, $2.0 million, $0.9 million and $2.3 million, respectively. Year to date, FFO, Adjusted FFO, EBITDA and Adjusted EBITDA were $0.3 million, $2.7 million, $0.9 million and $3.3 million, respectively.
 
Results of operations for the three and nine months ended September 30, 2010 include the operating activities of the 11 hotels owned at September 30, 2010 since their acquisition.
 
Revenues
 
Total revenue was $8.4 million and $13.0 million for the quarter and year to date, respectively. Since all of our hotels are select service or limited service hotels, room revenue is the primary revenue source as these hotels do not have a meaningful food and beverage source or large group conference facilities. As such, room revenue was $8.1 million and $12.7 million for the quarter and year to date, respectively, which revenue comprised 97% of total revenue for the quarter and year to date. Other operating revenue, comprised of meeting room, gift shop, in-room movie and other ancillary amenities revenue, was $0.2 million and $0.3 million for the quarter and year to date, 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 based on the period since our acquisition of the hotels:
 
                 
    Quarter Ended
  Year to Date
    September 30, 2010   September 30, 2010
 
Portfolio
               
ADR
  $ 107.93     $ 106.32  
Occupancy
    74.3 %     75.7 %
RevPAR
  $ 80.21     $ 80.49  
 
Hotel Operating Expenses
 
Hotel operating expenses were $4.9 million and $7.6 million for the quarter and year to date, respectively. As a percentage of total revenue, hotel operating expenses were 59% and 58% for the quarter and year to date, respectively. Direct hotel operating expenses included rooms expense of $1.9 million and $3.0 million for the quarter and year to date, respectively. Other direct expenses, which include management and franchise fees, insurance, utilities, repairs and maintenance, advertising and


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sales, and corporate general and administrative expenses, were $3.0 million and $4.6 million for the quarter and year to date, respectively.
 
Depreciation and Amortization
 
Depreciation and amortization expense was $0.8 million and $1.2 million for the quarter and year to date, respectively. 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 real estate and personal property taxes expenses were $0.5 million and $0.7 million for the quarter and year to date, respectively.
 
Corporate General and Administrative
 
Corporate general and administrative expenses principally consist of employee-related costs, including base payroll and amortization of restricted stock and LTIP unit awards. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total corporate general and administrative expenses were $1.4 million and $2.3 million for the quarter and year to date, respectively. Payroll related costs were $0.4 million and $0.6 million and share-based compensation was $0.4 million and $0.6 million for the quarter and year to date, respectively. During the quarter, payroll costs included expenses of $0.2 million and share-based compensation included an expense of $0.1 million related to the termination of the former chief financial officer. Organization costs of $0 and $0.1 million are included in corporate general and administrative expenses for the quarter and year to date, respectively, and we do not expect these costs to recur as the costs were related to our start-up as an organization.
 
Hotel Property Acquisition Costs
 
We incurred acquisition costs of $1.2 million and $2.2 million for the quarter and year to date, respectively. These expenses represent costs associated with the purchase of the eleven hotels owned at September 30, 2010, costs associated with the purchase of two hotels acquired subsequent to the end of the quarter, as well as costs for potential hotel acquisitions. These acquisition-related costs are expensed when incurred rather than capitalized. Including the acquisitions completed subsequent to the end of the quarter, year to date acquisition costs were approximately 1% of total assets.
 
Interest Income
 
Interest income on cash and cash equivalents was $0.1 million for both the quarter and year to date.
 
Interest Expense
 
Interest expense was $19 thousand for both the quarter and year to date. In connection with the acquisition of two hotels during the quarter, we assumed two loans with a combined aggregate principal balance of approximately $12.4 million. The average interest rate of the two fixed rate loans is 5.9%.
 
Income Tax Expense
 
Income tax expense was $0 and $46 thousand for the quarter and year to date, respectively. Our TRSs are subject to income taxes and this expense is based on the taxable income of the TRSs for the periods at a tax rate of approximately 40%.


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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 “Risk Factors”.
 
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, cash flows from operations or any other measures of our operating performance prescribed by GAAP.
 
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, 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.
 
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including hotel property acquisition costs and costs associated with the departure of our former chief financial officer, which are referred to as “Other charges included in general and administrative expenses” below. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs.
 
The following is a reconciliation between net loss to FFO and Adjusted FFO for the nine months ended September 30, 2010 (in thousands, except share data):
 
         
    For the
 
    Nine Months Ended
 
    September 30,  
    2010  
 
FFO:
       
Net loss attributable to common shareholders
  $ (930 )
Depreciation
    1,200  
         
FFO
    270  
Hotel property acquisition costs
    2,165  
Other charges included in general and administrative expenses
    270  
         
Adjusted FFO
  $ 2,705  
         
 
We calculate EBITDA as net income or loss excluding interest expense; provision for income taxes, including income taxes applicable to sale of assets; and depreciation and amortization (including amortization of non-cash share-based compensation). 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


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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 and costs associated with the departure of our former chief financial officer, which are referred to as “Other charges included in general and administrative expenses” below and which we believe are not indicative of the performance of our underlying hotel properties. We believe that Adjusted EBITDA provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs.
 
The following is a reconciliation between net loss to EBITDA and Adjusted EBITDA for the nine months ended September 30, 2010 (in thousands):
 
         
    For the
 
    Nine Months Ended
 
    September 30,  
    2010  
 
EBITDA:
       
Net loss attributable to common shareholders
  $ (930 )
Interest expense
    19  
Income tax expense
    46  
Depreciation and amortization
    1,200  
Share-based compensation
    630  
         
EBITDA
    965  
Hotel property acquisition costs
    2,165  
Other charges included in general and administrative expenses
    183  
         
Adjusted EBITDA
  $ 3,313  
         
 
Although we present FFO, EBITDA and Adjusted EBITDA because we believe they are useful to investors in comparing our operating performance between periods and between REITs, 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 EBITDA;
 
  •      Adjusted FFO and Adjusted EBITDA do not reflect the impact of certain cash charges (including acquisition transaction costs) that result from matters we consider not to be indicative of the underlying performance of our hotel properties; and


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  •      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 in this prospectus 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, debt repayments and distributions to equity holders.
 
For the nine months ended September 30, 2010, net cash flows provided by operations were $1.7 million, as our net loss of $930 thousand was due in significant part to non-cash expenses, including $1.2 million of depreciation and amortization and $630 thousand 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 $834 thousand. Net cash flows used in investing activities were $148.6 million, which represents the acquisition of the eleven hotels as well as additional improvements in those hotels of $0.9 million and $5.7 million of funds placed into escrows for future acquisitions and lender or manager required escrows. Net cash flows provided by financing activities were $173.7 million, comprised primarily from proceeds generated from the IPO and our concurrent private placement of common shares to our Chief Executive Officer, net of underwriting fees and offering costs paid or payable to third parties of $173.9 million.
 
As of September 30, 2010, we had cash and cash equivalents of approximately $26.8 million. Subsequent to September 30, 2010, we used $19.0 million of cash and cash equivalents and $2.0 million of restricted cash to fund the acquisition of the Residence Inn by Marriott® in New Rochelle, New York and paid $5.2 million of deferred underwriting fees once we had invested 85% of the IPO proceeds in hotel properties. Payment of the deferred underwriting fees was made on October 21, 2010. On October 29, 2010, we paid $1.7 million in third quarter dividends on our common shares and distributions on our LTIP units.
 
Liquidity and Capital Resources
 
We intend to limit the outstanding principal amount of our consolidated indebtedness, net of cash, to not more than 35% of the investment in our hotel properties at cost (defined as our initial acquisition price plus the gross amount of any subsequent capital investment and excluding any impairment charges) 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. Our board of trustees may modify or eliminate this policy at any time without the approval of our shareholders. Upon completion of this offering, we expect to have approximately $      million of cash, together with $85 million of borrowing capacity under our credit facility, available to fund additional investments in hotel properties. There can be no assurance that we will continue to make investments in properties that meet our investment criteria.
 
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 requirements, 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


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acquisitions, through the cash we will have available upon completion of this offering and subsequent borrowings and expect to fund other investments in hotel properties and scheduled debt maturities through long-term secured and unsecured borrowings and the issuance of additional equity or debt securities.
 
On October 12, 2010, we entered into a senior secured revolving credit facility to fund future acquisition, redevelopment and expansion activities. Currently, we have $38 million of outstanding borrowings under this credit facility. We intend to repay amounts outstanding under the credit facility from time to time with periodic common and preferred share issuances, long-term debt financings and cash flows from operations.
 
The following chart summarizes certain terms of our credit facility.
 
                 
Lenders   Facility Amount   Interest Rate   Term   Security
 
Barclays Capital; Regions Capital Markets; Credit Agricole Corporate and Investment Bank; UBS Securities LLC and US Bank National Association   $85,000,000(1)   Our choice of (i) LIBOR(2) (floor of 1.25%) + a margin between 3.25% and 4.25%, depending on our leverage ratio(3); or (ii) base rate(4) + 2.25% to 3.25%, depending on our leverage ratio(3)   3 years (October 12, 2013)   All borrowing base properties(5), including any related personal property, and the equity interests of certain of our subsidiaries
 
 
(1) Subject to the consent of the lenders, we may increase the facility amount by an additional $25 million, for an aggregate principal amount of $110 million.
 
(2) LIBOR means London Interbank Offered Rate.
 
(3) Leverage ratio is the ratio of our consolidated total debt to the total value of our assets for the four fiscal quarters most recently ended at the time of calculation.
 
(4) Base rate means for any day a fluctuating annual rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) the administrative agent bank’s then-current “prime rate” and (c) one-month LIBOR (subject to a 1.25% floor) plus 1.00%.
 
(5) Borrowing base properties are subject to lender approval as set forth in the credit facility agreements.
 
Subject to certain terms and conditions set forth in the credit agreement, the operating partnership may increase the original principal amount of the credit agreement by an additional $25.0 million. Pursuant to the credit agreement, we and certain of our indirect subsidiaries guaranteed to the lenders all of the obligations of the operating partnership under the credit agreement, any notes and the other loan documents, including any obligations under hedging arrangements. From time to time, the operating partnership may be required to cause additional subsidiaries to become guarantors under the credit agreement.
 
Availability under the credit agreement is based on the least of the following: (i) the aggregate commitments of all lenders, (ii) a percentage of the “as-is” appraised value of qualifying borrowing base properties (subject to certain concentration limitations and other deductions) and (iii) a percentage of net operating income from qualifying borrowing base properties (subject to certain limitations and other deductions). The credit agreement is secured by each borrowing base property, including all personal property assets related thereto, and the equity interests of borrowing base entities and certain other of our subsidiaries. There are currently seven properties in the borrowing base under the credit agreement.
 
The credit agreement provides for revolving credit loans to us. All borrowings under the credit agreement will bear interest at a rate per annum equal to, at our option, (i) the greater of (A) 1.25% plus a margin that fluctuates based upon our leverage ratio or (B) the Eurodollar Rate (as defined in


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the credit agreement) plus a margin that fluctuates based upon our leverage ratio; or (ii) the greatest of (A) 2.25%, (B) the prime lending rate as set forth on the Reuters Screen RTRTSY1 (or such other comparable publicly available rate if such rate no longer appears on the Reuters Screen RTRTSY1), (C) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, plus 1/2 of 1%, or (D) 1% plus the Eurodollar Rate (as defined in the credit agreement). The credit agreement also permits the issuance of letters of credit and provides for swing line loans.
 
The credit agreement 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 occurrence of an event of default under the credit agreement could result in all loans and other obligations becoming immediately due and payable and the credit facility being terminated and allow the lenders to exercise all rights and remedies available to them with respect to the collateral.
 
We intend to repay $43 million in borrowings under our credit facility out of the net proceeds from this offering. We may fund future acquisitions with the remaining net proceeds of this offering or with borrowings under our credit facility.
 
We intend to continue to invest in hotel properties only as suitable opportunities arise. In the near-term, we intend to fund future investments in properties with the net proceeds of this offering. Longer term, we intend to finance our 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 may depend, in part, on our ability to access additional capital through issuances of equity securities. There can be no assurance that we will continue to make investments in properties that meet our investment criteria.
 
Quantitative and Qualitative Disclosure 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 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.
 
At September 30, 2010, our consolidated debt was comprised only of fixed interest rate loans. The following table provides information about our financial instruments that are sensitive to changes in interest rates. 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):
 
                                                                 
    2010     2011     2012     2013     2014     Thereafter     Total     Fair Value  
 
Liabilities
                                                               
Fixed-rate:
                                                               
Debt
  $ 80     $ 334     $ 354     $ 375     $ 398     $ 10,894     $ 12,435     $ 12,346  
Average interest rate
    5.90 %     5.90 %     5.90 %     5.90 %     5.90 %     5.91 %     5.91 %        
                                                                 


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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.
 
Seasonality
 
Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating profits. 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. We also could utilize proceeds from this offering to fund distributions.
 
Debt
 
During the third quarter, we assumed $12.4 million of fixed rate mortgage loans in connection with two hotel acquisitions. The carrying value of the mortgage debt was approximately equal to the fair value of the debt on the date of assumption. The weighted average interest rate of the two loans is approximately 5.9%. In connection with our acquisition of a hotel located in the greater Pittsburgh, Pennsylvania area, which we currently have under contract to purchase, we expect to assume a $7.3 million loan carrying an interest rate of 6.5% that matures in September 2021.
 
Financial Covenants
 
The two mortgage loans we assumed contain financial covenants concerning the maintenance of a minimum debt service coverage ratio based on hotel EBITDA. The loan encumbering the Altoona hotel requires a minimum ratio of 1.5x and the hotel’s ratio is 1.8x. The loan encumbering the Washington hotel requires a minimum ratio of 1.65x and the hotel’s ratio is 2.6x. We are in compliance with these covenants at September 30, 2010.
 
Dividend Policy
 
We are required to distribute at least 90% of our annual taxable income, excluding net capital gains, to our stockholders in order to maintain our qualification as a REIT, including taxable income recognized for federal income tax purposes but with regard to which we do not receive cash. Funds used by us to pay dividends on our common shares are provided through distributions from the Operating Partnership.
 
Our current policy on common dividends is generally to distribute, over time, 100% of our annual taxable income. The amount of any dividends will be determined by our board of trustees. On September 27, 2010, we declared our first dividend, a third quarter dividend of $0.175 per common share and LTIP unit. The dividends to our common shareholders and the distributions to our LTIP unit holders were paid on October 29, 2010 to holders of record as of October 15, 2010. On December 16, 2010, we declared our second dividend, a fourth quarter dividend of $0.175 per common share and LTIP Unit, which was paid on January 14, 2011 to shareholders of record as of December 31, 2010.
 
Contractual Obligations
 
On October 12, 2010, we, as parent guarantor, and the operating partnership, as borrower, entered into a $85.0 million, three-year, secured revolving credit agreement with the lenders party thereto, Barclays Capital and Regions Capital Markets as joint lead arrangers, Barclays Bank PLC as administrative agent, Regions Bank as syndication agent, Credit Agricole Corporate and Investment Bank, UBS Securities LLC and US Bank National Association acting as co-documentation agents.
 
On October 5, 2010, we acquired the 124-room Residence Inn by Marriott® in New Rochelle, New York for $21 million, plus customary pro-rated amounts and closing costs, from New Roc Hotels, LLC. The hotel is managed by IHM pursuant to a 5-year management agreement. On November 3,


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2010, we acquired the 145-room Homewood Suites by Hilton® Carlsbad in Carlsbad, California for $32 million, plus customary pro-rated amounts and closing costs, from Royal Hospitality Washington, LLC and Lee Estates, LLC. The hotel is managed by IHM pursuant to a 5-year management agreement. On January 31, 2011, we entered into a contract to acquire a hotel located in the greater Pittsburgh, Pennsylvania area for a total purchase price of approximately $25 million, which includes the assumption of approximately $7.3 million in debt on the property. The acquisition of this hotel is subject to customary closing requirements and conditions, and there is no assurance that this acquisition will be consummated in a timely manner or at all.
 
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, 15 years for building improvements, seven years for land 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 our accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
 
We will periodically review its 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. We do not believe that there are any facts or circumstances indicating impairment in the carrying value of any of our hotel properties.
 
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.


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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 September 30, 2010, we had no hotel properties held for sale.
 
Revenue Recognition
 
Revenues from hotel operations are recognized when rooms are occupied and when services are provided. Revenues consist 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 statements of operations. We will pay dividends on nonvested restricted shares.
 
Income Taxes
 
We intend to elect to be taxed as a REIT under the Code and intend to operate as such beginning with our short taxable year ended December 31, 2010. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our shareholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with accounting principles generally accepted in the United States, or 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 intend to organize and operate in such a manner as to qualify for treatment as a REIT.
 
Recently Issued Accounting Standards
 
In June 2009, the FASB issued an accounting standard that requires enterprises to perform a more qualitative approach to determining whether or not a variable interest entity will need to be consolidated. This evaluation will be based on an enterprise’s ability to direct and influence the activities of a variable interest entity that most significantly impact its economic performance. It requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This accounting standard is effective for fiscal years beginning after November 15, 2009. Early adoption is not permitted. We are evaluating the effect of this accounting standard on future acquisitions.
 
In June 2009, the FASB issued an accounting standard that made the FASB Accounting Standards Codification, or the Codification, the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification has superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This accounting standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Following the issuance of this accounting standard, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. FASB will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to


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update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. The adoption of this accounting standard did not have a significant impact on our financial statements.
 
Off-balance Sheet Arrangements
 
As of the date of this prospectus, we have no off-balance sheet arrangements.


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BUSINESS
 
Overview
 
We are a self-advised hotel investment company organized in October 2009 to invest in premium-branded upscale extended-stay and select-service hotels. In April 2010, we raised net proceeds of approximately $158.7 million in our IPO and an additional $10 million through a concurrent private placement of our common shares to Mr. Fisher. Since the completion of our IPO, we have acquired 13 hotels with an aggregate of 1,650 rooms in nine states for approximately $209 million and have entered into a contract to purchase a hotel located in the greater Pittsburgh, Pennsylvania area for approximately $25 million. We have funded our acquisitions to date with the net proceeds of our IPO and private placement, through the assumption of debt and with borrowings under our credit facility. We expect to finance the acquisition of the hotel we have under contract to purchase from the net proceeds of this offering and through the assumption of $7.3 million in debt. Our portfolio includes upscale extended-stay hotels that operate under the Homewood Suites by Hilton® brand (seven hotels) and Residence Inn by Marriott® brand (three hotels), as well as premium-branded select-service hotels that operate under the Courtyard by Marriott® brand (one hotel), Hampton Inn and Suites by Hilton® brand (one hotel) and SpringHill Suites by Marriott® brand (one hotel).
 
We focus our hotel investments primarily in the 25 largest metropolitan markets in the United States. We believe that current market conditions will continue to create attractive opportunities to acquire high quality hotels at cyclically low prices that will benefit from an improving economy and our aggressive asset management.
 
Our management team, led by our chief executive officer, Mr. Fisher, has extensive experience acquiring, developing, financing, repositioning, managing and selling hotels. Prior to forming Chatham Lodging Trust, Mr. Fisher served as chairman, chief executive officer and president of Innkeepers USA Trust, or Innkeepers, a New York Stock Exchange-listed REIT, from its inception in 1994 through its sale in June 2007. In addition, Peter Willis, our Executive Vice President and Chief Investment Officer, and Dennis M. Craven, our Executive Vice President and Chief Financial Officer, served in similar positions at Innkeepers.
 
In addition to the hotel we have under contract to purchase, we have identified and are in various stages of reviewing and negotiating a number of additional potential hotel acquisition opportunities. As of February 1, 2011, we were actively reviewing potential hotel acquisitions having an aggregate transaction value in excess of $200 million, based on our preliminary discussions with sellers and our internal assessment of the properties’ values. Our management team sourced these potential acquisitions through their extensive relationships with hotel owners, management companies, franchisors, brokers, banks, insurance companies, public institutions, fund managers, REITs, private investors and developers.
 
Our acquisition of these properties is subject to us negotiating and executing with the sellers mutually acceptable definitive and binding purchase and sale agreements with respect to the properties, which we expect will contain a number of conditions to closing the acquisitions, including:
 
  (i)     our ability to negotiate and execute new management agreements and franchise agreements, or assume the existing agreements, for the properties,
 
  (ii)    our completion of satisfactory due diligence with respect to the properties,
 
  (iii)      lender approval of our assumption of existing indebtedness with respect to certain of the properties, and
 
  (iv)      satisfaction of customary closing conditions.
 
There can be no assurance that the sellers of the properties discussed above will be willing to proceed with the transactions, that we will be able to negotiate and execute satisfactory definitive


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purchase and sale agreements with the sellers, that our due diligence will be satisfactory or that the conditions to closing will be satisfied.
 
Upon completion of this offering and the application of the net proceeds as described in “Use of Proceeds,” we expect to have approximately $      million of cash, together with $85 million of borrowing capacity under our credit facility, available to invest in additional hotel properties.
 
We intend to elect and qualify to be treated as a REIT for federal income tax purposes.
 
Market Opportunity
 
We believe current market conditions will continue to create attractive opportunities to acquire hotel properties at prices that represent significant discounts to replacement cost and that provide potential for significant long-term value appreciation. Operating performance of the U.S. hotel industry declined significantly in 2008 and 2009 due to challenging economic conditions created by declining gross domestic product, or GDP, high levels of unemployment, low consumer confidence, a significant decline in home prices and a reduction in the availability of credit. While the U.S. hotel industry has shown improvement since the time of our IPO, industry operating performance remains significantly below pre-2008 levels. In addition to facing weakened operating performance, hotel owners have been adversely impacted by a significant decline in the availability of debt financing. We believe that the combination of a decline in operating performance and reduction in the availability of debt financing has caused hotel values to decline in recent years and will continue to lead to increased hotel loan foreclosures and distressed hotel property sales. In addition, we believe that the supply of new hotels is likely to remain low for the next several years due to limited availability of debt financing. Hotel industry operating performance historically has correlated with U.S. GDP growth, and a number of economists and government agencies currently predict that the U.S. economy will grow over the next several years. We believe that U.S. GDP growth, coupled with limited supply of new hotels, will lead to increases in lodging industry RevPAR and hotel operating profits. We believe that our management team’s significant experience in acquiring hotels, our growth oriented capital structure, and our focused business strategy will position us to take advantage of hotel investment opportunities created by current market conditions.
 
As shown in the table below, monthly RevPAR for U.S. hotels began to grow on a year-over-year basis in March 2010 after 19 consecutive months of decline.
 
(LINE GRAPH)
 
 
Source: Smith Travel Research.


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In addition to facing a decline in operating results, hotel owners have been adversely impacted by a significant decline in the availability of debt financing. As shown in the table below, the CMBS market historically provided a significant amount of debt financing to the real estate industry, especially from 2004 through 2007, but new issuances from 2008 through December 31, 2010 remain significantly below historical levels.
 
(FLOW CHART)
 
 
Source: Commercial Mortgage Alert (CMAlert.com).
 
Note: Includes U.S. agency and non-agency issuance.
 
Given weak current operating conditions in the lodging sector and limited availability of debt to fund new development projects, we believe that growth in new hotel room supply is likely to remain low for the next several years as shown in the chart below.
 
(LINE GRAPH)
 
 
Source: Smith Travel Research (1996-2010); Colliers PKF Hospitality Research, December 2010 — February 2011 Edition of “Hotel Horizons® Econometric Forecasts of U.S. Hotel Markets,” (2011E-2014E).


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Hotel industry operating performance historically has correlated with overall GDP growth. As shown below, U.S. real GDP is projected to grow over the next several years.
 
(LINE GRAPH)
 
 
Source: U.S. Real GDP from Bureau of Economic Analysis (1988-2009) and IMF World Economic and Financial Surveys (2010E-2014E).
 
We believe that a recovery in U.S. GDP growth, coupled with limited growth in new hotel room supply, will lead to significant increases in lodging industry RevPAR and operating profit.
 
(LINE GRAPH)
 
 
Source: Smith Travel Research (1996-2010); Colliers PKF Hospitality Research, December 2010 — February 2011 Edition of “Hotel Horizons® Econometric Forecasts of U.S. Hotel Markets,” (2011E-2014E).
 
Our hotels operate in the upscale or midscale without food and beverage chain-scale segments, as defined by Smith Travel Research. We believe increases in RevPAR for hotels in the


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upscale and midscale without food and beverage segments will be strong, as is reflected in the projections in the table below.
 
(LINE GRAPH)
 
 
Source: Smith Travel Research (2009-2010); Colliers PKF Hospitality Research, December 2010 — February 2011 Edition of “Hotel Horizons® Econometric Forecasts of U.S. Hotel Markets,” (2011E-2014E).
 
We believe our management team’s significant experience acquiring hotels, our growth oriented capital structure with no legacy issues and our focused business strategy, will position us to take advantage of acquisition opportunities created by current market conditions.
 
Competitive Strengths
 
Experienced management team:  We believe that our senior executive officers, who have extensive lodging industry experience, will help drive our company’s growth. Our management team is led by Mr. Fisher, who has over 24 years of experience in the lodging industry, including 13 years as founder and chief executive officer of Innkeepers. Mr. Fisher has longtime relationships with hotel owners, developers, management companies, franchisors, hotel brokers, financiers, research analysts and institutional investors.
 
Strong acquisition and growth record:  Mr. Fisher oversaw the growth of Innkeepers through a $46.9 million IPO in 1994 and served as its chairman and chief executive officer until it was sold in 2007. Mr. Fisher successfully grew Innkeepers from a portfolio of seven hotels at the time of its IPO in 1994 to 74 hotels at the time of its sale. Measuring its sale from a market capitalization standpoint, Innkeepers was sold for a total enterprise value of approximately $1.5 billion, calculated as Innkeepers’ net debt prior to its sale (total debt less cash and cash equivalents, each as reported in Innkeepers’ March 31, 2007 10-Q filing), plus the aggregate liquidation value of its preferred equity (consisting solely of 5,800,000 Series C preferred shares, each with a liquidation value of $25.00 per share), plus its total common equity market capitalization at May 1, 2007, calculated as the total number of common shares and units outstanding on that date multiplied by the acquisition price of $17.75 per share. Measuring the Innkeepers sale from a shareholder return standpoint, an investment in Innkeepers’ common shares from the date of its IPO through the date of its sale would have generated a compound total return of approximately 318% for each share purchased at the IPO price of $10.00 and held through the date of sale, according to Factset Research Systems. Compound total return assumes all cash dividends were reinvested to purchase additional common shares of Innkeepers at the closing share price on the record date that a shareholder was entitled to receive that dividend. The total return percentage is the percentage change in Innkeepers’


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share price from its IPO price to its acquisition price, multiplied by the percentage return of each cash distribution per share paid between Innkeepers’ IPO date and its acquisition date. The percentage return of each cash distribution per share was calculated by dividing the cash dividend per share by the closing share price on the record date that a shareholder was entitled to receive that dividend. Over the period beginning in the same month as the Innkeepers IPO and ending in June 2007, the month that Innkeepers was sold, the FTSE NAREIT Equity Lodging/Resorts Index, an index comprised of all U.S. public lodging REITs with portfolios and investment strategies ranging from premium full-service hotels to economy lodging, including those in the upscale extended-stay category, increased by approximately 209%. This index includes companies within a wider range of hotel categories and investment strategies than those on which Innkeepers focused, including some categories that may have performed poorly during this period.
 
Below is a table comparing the annual total returns to Innkeepers’ shareholders, for each year beginning with the partial year 1994, the year of Innkeepers’ IPO and ending with the partial year 2007, the year of Innkeepers’ sale, as compared to the annual total returns for the FTSE NAREIT Equity Lodging/Resorts Index for the same years. Also included for comparison is Innkeepers’ net income (loss), as calculated for each year through December 31, 2006.
 
                             
Fiscal Year Ended
  Annual Total Returns(1)   Net Income (loss) of
December 31 (except
      FTSE NAREIT Equity
  Innkeepers
where footnoted)   Innkeepers   Lodging/Resorts Index   ($ in thousands)(2)
 
  1994       (25.6 )%(3)     (8.9 )%   $ 368  
  1995       37.9 %     30.8 %     3,467  
  1996       65.3 %     49.2 %     8,489  
  1997       19.6 %     30.1 %     22,783  
  1998       (16.8 )%     (52.8 )%     33,164  
  1999       (21.6 )%     (16.1 )%     36,648  
  2000       51.5 %     45.8 %     44,774  
  2001       (3.3 )%     (8.6 )%     26,168  
  2002       (18.1 )%     (1.5 )%     (1,227 )
  2003       11.8 %     31.7 %     (8,161 )
  2004       72.3 %     32.7 %     14,600  
  2005       16.2 %     9.8 %     22,659  
  2006       1.3 %     28.2 %     30,562  
  2007       16.0 %(4)     (22.4 )%     N/A  
 
 
(1) Source: Factset Research Systems for Innkeepers total returns; www.REIT.com for published FTSE NAREIT Equity Lodging/Resorts Index historical annual total returns. Total return calculates the compound total return of an issuer’s stock assuming all cash dividends are reinvested to purchase additional stock of the issuer on the dividend ex-date (the date the owner of the stock of record is entitled to receive the dividend).
 
(2) Source: Innkeepers USA Trust Form 10-K SEC filings. Innkeepers’ IPO occurred in September 1994. Represents results from Innkeepers’ period of inception, September 30, 1994, through December 31, 1994.
 
(3) Total return for Innkeepers for the year ended December 31, 1994 reflects its total stock return, including the assumed reinvestment of cash dividends into additional stock, for the period beginning September 23, 1994, the first trading day of its common shares, to December 31, 1994.
 
(4) Total return for Innkeepers for the year ended December 31, 2007 reflects its total stock return, including the assumed reinvestment of cash dividends into additional stock, for the period beginning January 1, 2007 to June 29, 2007, the last trading day of its common shares.
 
Information regarding Innkeepers and the FTSE NAREIT Equity Lodging/Resorts Index reflects past performance, may have been due in part to external factors beyond the control of Innkeepers’


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management, including superior general economic conditions than those existing now, and is not a guarantee or prediction of our future operating results or the returns that our shareholders should expect to achieve in the future. Furthermore, Innkeepers experienced considerable challenges resulting from severe downturns in the lodging industry, such as the period following the attacks of September 11, 2001, during which Innkeepers reduced its distributions to shareholders and its capital investments due to substantial declines in its revenues and earnings. The geographical distribution of Innkeepers’ hotels in key market areas also negatively affected its earnings and distributions to shareholders, especially in the case of the downturn in the technology-related business sector, which had a substantial negative impact on Innkeepers’ hotels located in Northern California and Boston. If our management team is unable to predict or effectively adapt to future economic downturns or other adverse business developments, our business may also experience declines.
 
Prudent capital structure:  We believe that many potential buyers of hotel properties typically utilize significant levels of debt to fund acquisitions and thus may be limited in their ability to make acquisitions under current market conditions. In addition, we believe many potential buyers of hotel properties already have high leverage levels which could limit their ability to acquire additional properties. Upon completion of this offering and application of the net proceeds, as described under “Use of Proceeds,” we will have approximately $      million of cash available to invest in additional hotel properties, $85 million of borrowing capacity under our credit facility available to fund acquisitions and to fund renovations at our existing properties, and only $12.4 million in debt. We plan to maintain a prudent capital structure and intend to limit our consolidated indebtedness, net of cash, to not more than 35% of our investment in hotel properties at cost (defined as our initial acquisition price plus the gross amount of any subsequent capital investment and excluding any impairment charges).
 
Longtime relationships with leading lodging franchise and management companies:  Mr. Fisher has longtime relationships with several leading hotel franchise and management companies, having acquired and developed a significant number of hotels operated under Marriott’s Residence Inn® and Courtyard by Marriott® brands and Hilton’s Homewood Suites and Hampton Inn® brand. Prior to its sale in 2007, Innkeepers owned 44 Residence Inns, making it one of the world’s largest owners of Residence Inn hotels. Mr. Fisher has been a member of Marriott’s Residence Inn Advisory Board since 1998. Mr. Fisher was one of the early franchisees of Hampton Inn hotels and Innkeepers owned twelve Hampton Inns at the time of its sale.
 
Our Strategy and Investment Criteria
 
Our primary objective is to generate attractive returns for our shareholders through investing in hotel properties 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 our estimate of 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-


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  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 such as Marriott International, Inc., Hilton Worldwide, Starwood Hotels & Resorts Worldwide, Inc., Hyatt Hotels Corporation and InterContinental Hotels Group, as well as independent management companies such as IHM. We believe this strategy will increase the universe of potential acquisition opportunities we can consider because many hotel properties are encumbered by long-term management contracts. We believe that our willingness to utilize brand-affiliated management companies may lead to these companies bringing “off-market” transactions to our attention that may not be available to other hotel investors.
 
  •      Selective investment in hotel debt:  We may consider selectively investing in debt secured 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.
 
Our Hotels
 
The following table sets forth certain operating information for each of our hotels. The operating data includes periods prior to our acquisition of these hotels.
 
                                                         
                Number
      Purchase
      Nine Months Ended
        Date of
  Year
  of
  Purchase
  Price per
  Assumed
  September 30, 2010
Property   Location   Acquisition   Opened   Rooms   Price   Room   Debt   Occupancy   ADR   RevPAR
    (Unaudited)
 
Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington
  Billerica, Massachusetts   April 23, 2010   1999   147   $12.5 million   $ 85,714         72.2 %   $ 111.36     $ 80.40  
Homewood Suites by Hilton Minneapolis-Mall of America
  Bloomington, Minnesota   April 23, 2010   1998   144   $18.0 million   $ 125,000         86.9 %   $ 108.82     $ 94.58  
Homewood Suites by Hilton Nashville-Brentwood
  Brentwood, Tennessee   April 23, 2010   1998   121   $11.3 million   $ 93,388         76.0 %   $ 100.45     $ 76.30  
Homewood Suites by Hilton Dallas-Market Center
  Dallas, Texas   April 23, 2010   1998   137   $10.7 million   $ 78,102         65.7 %   $ 98.63     $ 64.80  
Homewood Suites by Hilton Hartford-Farmington
  Farmington, Connecticut   April 23, 2010   1999   121   $11.5 million   $ 95,041         68.2 %   $ 110.42     $ 75.34  
Homewood Suites by Hilton Orlando-Maitland
  Maitland, Florida   April 23, 2010   2000   143   $9.5 million   $ 66,433         67.6 %   $ 94.90     $ 64.14  
Hampton Inn & Suites Houston-Medical Center
  Houston, Texas   July 2, 2010   1997   120   $16.5 million   $ 137,500         76.3 %   $ 113.27     $ 86.42  
Residence Inn Long Island Holtsville
  Holtsville, New York   August 3, 2010   2004   124   $21.3 million   $ 171,774         84.2 %   $ 119.48     $ 100.66  
Courtyard Altoona
  Altoona, Pennsylvania   August 24, 2010   2001   105   $11.3 million   $ 107,619     $7.0 million     71.6 %   $ 99.51     $ 71.23  
Springhill Suites
Washington
  Washington, Pennsylvania   August 24, 2010   2000   86   $12.0 million   $ 139,535     $5.4 million     85.6 %   $ 103.00     $ 88.15  
Residence Inn White Plains
  White Plains, New York   September 23, 2010   1982   133   $21.2 million   $ 159,398         86.4 %   $ 138.12     $ 119.32  
Residence Inn New Rochelle
  New Rochelle, New York   October 5, 2010   2000   124   $21.0 million   $ 169,355         87.7 %   $ 149.63     $ 131.43  
Homewood Suites by Hilton Carlsbad (North San Diego County)   Carlsbad, California   November 3, 2010   2008   145   $32.0 million   $ 220,690         88.7 %   $ 134.86     $ 119.65  
Total/Weighted Average               1,650   $208.9 million   $ 126,606     $12.4 million     78.2 %   $ 115.74     $ 90.46  
 
 
(1) Occupancy is the average daily occupancy for the period presented.
 
(2) ADR is average daily rate.
 
(3) RevPAR is room revenue per available room.


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Hotel Under Contract
 
The following table sets forth certain operating information with respect to the hotel we have under contract to purchase.
 
                                                 
        Year
          Nine Months Ended
        Opened/
  Purchase
  Assumed
  September 30, 2010
Property   Location   Renovated   Price   Debt   Occupancy   ADR   RevPAR
    (Unaudited)
 
                                               
Greater Pittsburgh Hotel   Pittsburgh, Pennsylvania   2000     $24.9 million     $ 7.3 million       76.9 %   $ 118.83     $ 91.40  
 
The closing of the greater Pittsburgh hotel is subject to satisfaction of customary closing requirements and conditions. There is no assurance that this acquisition will be consummated in a timely manner or at all.
 
Hotel Operating Statistics
 
The table below presents operating statistics for all of our currently owned hotels on a combined basis for the nine months ended September 30, 2010 (pro forma) and the years ended December 31, 2008 and 2009. Information for the nine months ended September 30, 2010 includes periods during which we owned our hotels and periods prior to our ownership. Information for the years ended December 31, 2008 and 2009 reflects periods prior to our ownership.
 
                         
    Pro Forma
       
    Nine Months Ended
  Fiscal Year Ended
    September 30,
  December 31,
Operating Statistics   2010   2009   2008
 
Occupancy
    78.2 %     71.7 %     76.3 %
ADR(1)
  $ 115.74     $ 116.36     $ 125.32  
RevPar(2)
  $ 90.46     $ 83.42     $ 95.68  
 
 
(1) ADR represents average daily rate.
 
(2) RevPAR represents revenue per available room, calculated as room revenue divided by available room nights.
 
The table below presents financial information for all of our currently owned hotels on a combined basis for the nine months ended September 30, 2010 (pro forma), with the exception of the Homewood Suites Carlsbad. Information for the nine months ended September 30, 2010 includes periods during which we owned our hotels and periods prior to our ownership.
 
         
    Pro Forma
 
    Nine Months Ended
 
    September 30,
 
    2010  
    ($ in thousands)  
 
Revenue
  $ 37,144  
Net income
    3,117  
Interest expense
    556  
Income tax expense
    124  
Depreciation and amortization
    5,153  
Corporate general and administrative expense(1)
    3,168  
         
Property EBITDA(2)
  $ 12,118  


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The tables below present financial information for all of our currently owned hotels for the years ended December 31, 2008 and 2009 on a historical basis, with the exception of the Homewood Suites Carlsbad. These periods were prior to our ownership.
 
                                                 
          Hampton Inn
                         
          & Suites by
    Residence Inn
          Residence Inn
       
Fiscal Year Ended
  Initial Acquisition
    Hilton
    by Marriott
          by Marriott
       
December 31, 2009   Hotels(3)     Houston(4)     Holtsville(5)     Moody Portfolio(6)     New Rochelle(7)     Total  
 
Revenue
    21,738       3,634       4,509       11,590       5,765       47,236  
Net income (loss)
    457       (290 )     334       (640 )     (403 )     (542 )
Interest expense
    3,573       854       740       2,571       930       8,668  
Income tax expense
                                   
Depreciation and amortization
    2,619       435       506       1,642       1,136       6,338  
                                                 
Property EBITDA(2)
    6,649       999       1,580       3,573       1,663       14,464  
                                                 
 
                                                 
          Hampton Inn
                         
          & Suites by
    Residence Inn
          Residence Inn
       
Fiscal Year Ended
  Initial Acquisition
    Hilton
    by Marriott
          by Marriott
       
December, 2008   Hotels(3)     Houston(4)     Holtsville(5)     Moody Portfolio(6)     New Rochelle(7)     Total  
    ($ in thousands)  
 
Revenue
    24,964       3,893       4,844       13,228       7,198       54,127  
Net income (loss)
    2,069       1,054       103       (811 )     63       2,478  
Interest expense
    3,672       799       757       3,594       934       9,756  
Income tax expense
                                   
Depreciation and amortization
    2,481       372       850       1,610       1,102       6,415  
                                                 
Property EBITDA(2)
    8,222       2,225       1,710       4,393       2,099       18,649  
                                                 
 
 
(1) Pro Forma Property EBITDA does not reflect any corporate general and administrative expense. See “Pro forma financial information of Chatham Lodging Trust.”
 
(2) Property EBITDA is defined as net income (loss) (calculated in accordance with GAAP) before interest, taxes, depreciation and amortization and is presented here based on historical financial information for all hotels acquired by us during 2010, with the exception of the Homewood Suites by Hilton Carlsbad. We believe that the presentation of historical Property EBITDA for our hotels provides useful supplemental information to investors regarding the financial condition of the hotels. Property EBITDA is also a factor in our evaluation of hotel level operating performance and is one measure in determining the value of acquisitions. However, Property EBITDA should not be considered as an alternative to net income, net cash provided by operating activities or any other financial and operating performance measure prescribed by GAAP and should only be used in accordance with GAAP measures. Property EBITDA does not reflect any corporate general and administrative expense.
 
(3) Includes the Homewood Suites by Hilton Boston — Billerica/Bedford/Burlington; Homewood Suites by Hilton Minneapolis — Mall of America; Homewood Suites by Hilton Nashville — Brentwood; Homewood Suites by Hilton Dallas — Market Center; Homewood Suites by Hilton Farmington and Homewood Suites by Hilton Orlando — Maitland information acquired on April 23, 2010.
 
(4) Acquired on July 2, 2010.
 
(5) Acquired on August 3, 2010.
 
(6) Includes the Courtyard by Marriot Altoona and Springhill Suites by Marriott Washington we acquired on August 24, 2010 and the Residence Inn by Marriott White Plains we acquired on September 23, 2010.
 
(7) Acquired on October 5, 2010.
 
The following information relates to the hotels we currently own and reflects periods both before and during our ownership.
 
Homewood Suites Billerica
 
The 147-room Homewood Suites Billerica is centrally located in Boston’s high-tech corridor within minutes from Routes 3 and 128 and I-495, the main thoroughfares for Northeast Massachusetts’ technology based businesses. The hotel offers easy access to the area’s businesses and cultural attractions and is only a short drive to numerous corporate headquarters and downtown Boston.


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Primary demand generators include the many high technology companies located in the area, Hanscom Air Force Base, the University of Massachusetts Billerica and the Lahey Clinic.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 3,313     $ 3,826     $ 4,476          
Occupancy
    72.2 %     61.9 %     66.7 %        
ADR
  $ 111.36     $ 111.90     $ 120.48          
RevPAR
  $ 80.40     $ 69.30     $ 80.31          
 
Homewood Suites Bloomington
 
The 144-room Homewood Suites Bloomington is located in Bloomington, Minnesota directly across the street from the Mall of America, the largest indoor shopping complex in the U.S. The hotel is located three miles from the Minneapolis/St. Paul International Airport and offers easy access to downtown Minneapolis, the Metrodome and Como Park Zoo and Conservatory. Primary demand generators include the Mall of America, which has approximately 40 million annual visitors, the Minneapolis/St. Paul International Airport, and several publicly traded Fortune 1000 companies headquartered in the city of Bloomington, including Toro, Donaldson Corporation and Ceridian Corp.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 3,837     $ 4,695     $ 5,200          
Occupancy
    86.9 %     79.9 %     80.5 %        
ADR
  $ 108.82     $ 108.16     $ 117.63          
RevPAR
  $ 94.58     $ 86.40     $ 94.65          
 
Homewood Suites Brentwood
 
The 121-room Homewood Suites Brentwood is located in Maryland Farms, Nashville’s largest office park, and is approximately nine miles south of downtown Nashville. Primary demand generators include AT&T, Gulfstream Aircraft, IASIS Healthcare and other Fortune 500 companies located in and proximate to the Maryland Farms office park, the Nashville Convention Center and tourist attractions in the Nashville area, including the Grand Ole Opry.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,569     $ 2,966     $ 3,450          
Occupancy
    76.0 %     66.1 %     72.6 %        
ADR
  $ 100.45     $ 99.59     $ 103.96          
RevPAR
  $ 76.30     $ 65.78     $ 75.50          
 
Homewood Suites Dallas Market Center
 
The 137-room Homewood Suites Dallas Market Center is located across the Stemmons Freeway from the Dallas Market Center, which is the world’s largest wholesale merchandise mart and is visited by approximately 400,000 retail buyers each year. Additional demand is generated from the Dallas


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Convention Center, only three miles from the hotel, as well as from Methodist Hospital, FDIC, 7-11, Southwest Airlines, AT&T, Comerica and many other corporate and medical businesses in the area.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,478     $ 3,315     $ 3,718          
Occupancy
    65.7 %     61.4 %     73.2 %        
ADR
  $ 98.63     $ 105.42     $ 98.27          
RevPAR
  $ 64.80     $ 64.75     $ 71.89          
 
Homewood Suites Farmington
 
The 121-room Homewood Suites Farmington is located in Connecticut’s Farmington Valley off of I-84 and is eight miles from downtown Hartford. Primary demand generators include the University of Connecticut Health Center, a major research hospital located less than 0.25 miles from the hotel, businesses in an office park located approximately two miles from the hotel, including corporate headquarters for Otis Elevators and Carrier Corporation, Stanley and CSC and the Hill-Stead museum, as well as numerous companies and attractions located in downtown Hartford.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,556     $ 3,567     $ 4,232          
Occupancy
    68.2 %     67.1 %     75.6 %        
ADR
  $ 110.42     $ 117.60     $ 121.18          
RevPAR
  $ 75.34     $ 78.87     $ 91.60          
 
Homewood Suites Maitland
 
The 143-room Homewood Suites Maitland is located in the heart of the Maitland Business Center, one of the largest office parks in the Orlando area, approximately six miles north of downtown Orlando. The hotel offers convenient access to attractions at Lake Lucien and is a short driving distance from Walt Disney World, Universal Studios and numerous championship golf courses. Maitland and the surrounding area are also home to a number of high technology firms and corporate training centers for Lucent, Avaya, New Horizons, Northrop Grumman, Darden Restaurants, CAN, Fidelity and Federal Express, as well as government employers.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,552     $ 3,369     $ 3,888          
Occupancy
    67.6 %     63.6 %     68.9 %        
ADR
  $ 94.90     $ 99.59     $ 105.16          
RevPAR
  $ 64.14     $ 63.37     $ 72.43          
 
Hampton Inn & Suites Houston
 
The 120-room Hampton Inn & Suites Houston is located near downtown Houston and within a mile of Minute Maid Park, where the Houston Astros play. The hotel is located less than two miles from Texas Medical Center (the largest medical center in the world), Rice University and the Houston


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Zoo. Downtown Houston includes attractions such as the Downtown Aquarium, the Museum of Fine Arts and the Museum of Natural Science, all within close proximity to the hotel.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,903     $ 3,634     $ 3,893          
Occupancy
    76.3 %     67.9 %     73.4 %        
ADR
  $ 113.27     $ 119.62     $ 135.17          
RevPAR
  $ 86.42     $ 81.26     $ 99.28          
 
Residence Inn Holtsville
 
The 124-room Residence Inn Holtsville on Long Island, New York is located across from Motorola’s enterprise mobility headquarters, near Hauppauge Industrial Park (home to over 1,300 companies employing more than 55,000 people) and Islip MacArthur Airport, less than ten miles from SUNY Stony Brook University and an hour from JFK and LaGuardia Airports. The hotel is conveniently located near the Fire Island ferry and the Long Island Railroad, which offers access to the rest of Long Island and Manhattan.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 3,508     $ 4,509     $ 4,844          
Occupancy
    84.2 %     83.3 %     86.7 %        
ADR
  $ 119.48     $ 116.66     $ 120.31          
RevPAR
  $ 100.66     $ 97.17     $ 104.29          
 
Courtyard Altoona
 
The 105-room Courtyard Altoona is located in the heart of the Allegheny mountains near area attractions such as Penn State Altoona, Blair County Ball Park, Lakemont Park, Delgrosso’s Amusement Park and Canoe Creek State Park. Additionally, the hotel is conveniently connected to the Blair County Convention Center, which boasts 115,000 square feet of flexible event space and state of the art technology. The hotel is subject to a ground lease with the Blair County Convention and Sports Facility Authority. The term of the lease expires on April 30, 2029, with 12 additional terms of five years each. The lease rate is the greater of a fixed rate that is subject to annual 2.5% increases or a rate based on the quarterly average room occupancy of the hotel, details of which are presented in the combined unaudited financial statements for the hotel, the SpringHill Suites Washington and the Residence Inn White Plains that are found elsewhere in this prospectus.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,204     $ 2,823     $ 3,174          
Occupancy
    71.6 %     68.1 %     70.8 %        
ADR
  $ 99.51     $ 100.19     $ 109.97          
RevPAR
  $ 71.23     $ 68.19     $ 77.06          
 
SpringHill Suites Washington
 
The 86-room SpringHill Suites Washington is centrally located off I-70/I-79 near The Tanger Outlet Mall, CONSOL Energy Park (a 3,200-seat minor league ballpark), numerous restaurants and the


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headquarters of CONSOL Energy Inc., an energy company with over 8,000 employees. The hotel is located in Washington County, Pennsylvania, which is the epicenter of the Marcellus Shale, a massive rock formation and potentially vast source of natural gas. Additionally, the hotel is just one mile from Washington & Jefferson College, two miles from The Meadows Racetrack & Casino and 29 miles from downtown Pittsburgh and Pittsburgh International Airport.
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 2,136     $ 2,801     $ 3,031          
Occupancy
    85.6 %     80.8 %     84.6 %        
ADR
  $ 103.00     $ 106.31     $ 109.57          
RevPAR
  $ 88.15     $ 85.94     $ 92.31          
 
Residence Inn White Plains
 
The 133-room Residence Inn White Plains is located in Westchester County, New York, less than ten miles from Westchester County Airport and less than 20 miles from LaGuardia Airport. The hotel is in the heart of downtown White Plains and is located one block from the Metro North rail station, which offers access to nearby Yankee Stadium and New York City. Greenwich and Stamford, Connecticut, home to numerous businesses in the financial and other industries, are each less than 20 miles away. The hotel is also near numerous educational institutions, including Sarah Lawrence College, Manhattanville College and Pace University School of Law.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 4,447     $ 5,966     $ 7,023          
Occupancy
    86.4 %     85.7 %     82.6 %        
ADR
  $ 138.12     $ 139.35     $ 171.82          
RevPAR
  $ 119.32     $ 119.47     $ 141.83          
 
Residence Inn New Rochelle
 
The 124-room Residence Inn New Rochelle is central to a major transportation hub and is located just 20 miles from the center of New York City in Westchester County, which is home to several Fortune 500 Companies, sports venues, colleges, banquet halls, country clubs, shopping, and historic sites. The hotel offers access to nearby LaGuardia and JFK Airports, the Bronx Zoo, Sarah Lawrence College, New York Botanical Gardens, College of New Rochelle and Pelham Bay Park. The hotel is party to an air rights lease with the City of New Rochelle that is subject to an annual base rent of $10. The lease expires on December 1, 2062, subject to extension until December 1, 2104 if certain other conditions are fulfilled. Further details on the air rights lease are presented in the combined unaudited financial statements for the hotel found elsewhere in this prospectus.
 
                                 
        Fiscal Year Ended
   
    Nine Months Ended
  December 31,    
    September 30, 2010   2009   2008    
        ($ in thousands, except
        ADR and RevPAR data)
 
Total Revenue
  $ 4,641     $ 5,765     $ 7,198          
Occupancy
    87.8 %     78.1 %     85.2 %        
ADR
  $ 149.63     $ 157.35     $ 175.33          
RevPAR
  $ 131.43     $ 122.89     $ 149.46          


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Homewood Suites Carlsbad
 
The 145-room Homewood Suites Carlsbad is located in Carlsbad, California, 35 miles north of downtown San Diego, and provides convenient access to many leisure activities in the surrounding San Diego area, including Legoland, as well as access to many commercial demand generators and the McClellan-Palomar Airport. Carlsbad is also a major hub of the golf industry, with more than 15 golf equipment companies within 50 miles of each other, including Acushnet, Callaway and TaylorMade.
 
         
    Nine Months Ended
    September 30, 2010
    ($ in thousands, except ADR
    and RevPAR data)
 
Total Revenue
  $ 4,855  
Occupancy
    88.7 %
ADR
  $ 134.86  
RevPAR
  $ 119.65  
 
Greater Pittsburgh Hotel
 
The hotel we have under contract to purchase in the greater Pittsburgh, Pennsylvania area benefits from downtown Pittsburgh and is close to the headquarters of six Fortune 500 Companies, three professional sports venues, the University of Pittsburgh, Carnegie Mellon University, the University of Pittsburgh Medical Center, Hillman Cancer Center and the Children’s Hospital of Pittsburgh. The hotel was fully renovated in 2008.
 
         
    Nine Months Ended
 
    September 30, 2010  
    ($ in thousands, except ADR
 
    and RevPAR data)  
 
Total Revenue
  $ 4,341  
Occupancy
    76.9 %
ADR
  $ 118.83  
RevPAR
  $ 91.40  
 
The following is a summary of the terms of agreements related to our hotels and agreements we expect to enter into in connection with the purchase of the hotel we have under contract.
 
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, Hartford-Farmington Homewood Suites and Orlando-Maitland Homewood Suites — all of which are managed by Promus Hotels, Inc., a subsidiary of Hilton Hotels Worldwide, or 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


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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. If we were to terminate the management agreements prior to the termination date, we would be responsible for paying termination fees to the manager.
 
Our management agreements with Concord Hospitality Enterprises, 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 would be responsible for paying termination fees to the manager.
 
All of our remaining hotels, as well as the hotel we currently have under contract to purchase, are or will be 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, 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.
 
Hotel Franchise Agreements
 
Our TRS lessees have entered into franchise agreements for our hotels and will enter into a new franchise agreement for the hotel we have under contract to purchase. Our TRS lessees have entered into new hotel franchise agreements with Promus Hotels, Inc., a subsidiary of Hilton, as manager for our seven Homewood Suites by Hilton® hotels. Each of the new hotel franchise agreements has an initial term of 15 years and may be renewed for an additional 5-year term.
 
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.
 
Our TRS lessees have entered into franchise agreements with Marriott International, Inc., or Marriott, relating to our Residence Inn properties in Holtsville, New York, New Rochelle, New York and White Plains, New York, 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 2030. 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’s interest in the agreement or more than a specified amount of the TRS to a competitor of Marriott, Marriott has the right to purchase or lease the hotel


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under terms consistent with those contained in the respective offer and may terminate if our TRS elects to proceed with such a transfer.
 
The Hampton Inn & Suites® Houston-Medical Center is governed by a franchise agreement with Hampton Inns Franchise LLC, or Hampton Inns. 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.
 
Our TRS Leases
 
In order for us to qualify as a REIT, we cannot operate the hotels we own. Our operating partnership, or subsidiaries of our operating partnership, as lessors, lease our hotels to our TRS lessees and our TRS lessees have assumed or entered into hotel management agreements with third-party managers to manage the hotels.
 
Financing Strategies
 
We plan to maintain a prudent capital structure and intend to limit our consolidated indebtedness, net of cash, to not more than 35% of our investment in hotel properties at cost (defined as our initial acquisition price plus the gross amount of any subsequent capital investment and excluding any impairment charges). As a result, we do not believe that a subsequent decrease in property values will not require us to repay debt. Over time, we intend to finance our growth with issuances of common and preferred shares and debt. Our debt may include mortgage debt secured by our hotel properties, including in connection with draws under our credit facility, 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 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.
 
Legal Proceedings
 
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation pending or threatened against us.


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MANAGEMENT
 
Trustees and Executive Officers
 
Our board of trustees consists of nine trustees. Our board of trustees is elected annually by our shareholders in accordance with our bylaws. Our bylaws provide that a majority of the entire board of trustees may establish, increase or decrease the number of trustees, provided that the number of trustees shall never be less than one or more than fifteen. All of our executive officers serve at the discretion of our board of trustees. Our board of trustees determines whether our trustees satisfy the NYSE’s independence standards.
 
The following table sets forth the names and ages of our executive officers, trustee and each person who has agreed to become a trustee upon completion of this offering and the descriptions below set forth information about each such person.
 
             
Name   Age   Position
 
Jeffrey H. Fisher
    55     Chairman, President and Chief Executive Officer
Peter Willis
    43     Executive Vice President and Chief Investment Officer
Dennis M. Craven
    39     Executive Vice President and Chief Financial Officer
Miles Berger
    80     Trustee
Thomas J. Crocker
    57     Trustee
Jack P. DeBoer
    79     Trustee
Glen R. Gilbert
    66     Trustee
C. Gerald Goldsmith
    82     Trustee
Robert Perlmutter
    49     Trustee
Rolf E. Ruhfus
    66     Trustee
Joel F. Zemans
    69     Trustee
 
Jeffrey H. Fisher — Chairman, President & Chief Executive Officer
 
Mr. Fisher is our Chairman of the Board, Chief Executive Officer and President. Mr. Fisher is also the majority shareholder of IHM, a firm he founded in 2007 that currently manages 77 hotels for unaffiliated hotel owners. From 1994 to 2007, Mr. Fisher was chairman, chief executive officer and president of Innkeepers USA Trust, a lodging REIT he founded and took public in 1994 and was also chairman and majority shareholder of Innkeepers Hospitality, a privately owned hotel management company. Mr. Fisher grew Innkeepers’ portfolio from seven hotels at the time of its initial public offering to 74 hotels at the time of its sale. In June of 2007, Innkeepers was sold to an institutional investor at a total enterprise value of $1.5 billion. Between 1986 and 1994, he served as President and Chief Executive Officer of JF Hotel Management, Inc.
 
Mr. Fisher received a Bachelor of Science degree in Business Administration from Syracuse University in 1977, a Doctor of Jurisprudence degree from Nova Southeastern University in 1980, and a Masters of Law in Taxation from the University of Miami in 1981. He is a licensed attorney and practiced at Jones & Foster P.A. and Jeffrey H. Fisher P.A. for a total of five years prior to starting his career in the hospitality industry. Additionally, Mr. Fisher currently serves as a Board Member of Marriott’s The Residence Inn Association (TRIA).
 
Peter Willis — Executive Vice President & Chief Investment Officer
 
Mr. Willis is our Executive Vice President & Chief Investment Officer. Mr. Willis has over 20 years of hotel acquisition experience. From 2001 to 2006, he served as Vice President of Acquisitions & Business Development for Innkeepers and oversaw over $500 million of investments in


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18 hotels. From June 2006 to January 2009, Mr. Willis served as Senior Vice President at The Kor Group, a privately held, fully integrated real estate investment firm with a portfolio of over $2 billion in upscale hotel and resort investments, where he focused on U.S. and Caribbean acquisitions and third-party management contracts. While evaluating, negotiating and underwriting specific hotel investments and obtaining and negotiating management contract prospects, Mr. Willis also supported strategic acquisition and corporate planning efforts.
 
Mr. Willis also held positions with an industry-leading firm supporting the opening of luxury hotels. Establishing the organization’s first international operation in the Asia/Pacific region in 1994, he directed the repositioning and opening of properties throughout the region and in the United States. By 2001, Mr. Willis led overall strategic planning, business development and investor relations, as well as integrating acquisitions among the firm’s operating entities. Mr. Willis began as an analyst and asset manager of hotel, residential and commercial properties for Japanese investment firm JDC America in Tokyo and in the United States.
 
Mr. Willis received a Bachelor of Science in Business Administration from the University of Florida in 1989 and has completed professional programs at Cornell University’s Hotel School and Obirin University in Tokyo.
 
Dennis M. Craven — Executive Vice President & Chief Financial Officer
 
Mr. Craven joined our company on September 9, 2010 as our Executive Vice President and Chief Financial Officer. Mr. Craven previously served as executive vice president and chief financial officer of Innkeepers USA Trust, a NYSE-listed hotel REIT, from March 2006 until the acquisition of Innkeepers by an affiliate of Apollo Investment Corporation in June 2007. Following the acquisition, he continued to serve as chief financial officer of Innkeepers until August 2010. Prior to joining Innkeepers in 2006, Mr. Craven was a partner in Addison Capital Advisors, a venture capital firm based in Memphis, Tennessee, and served as senior vice president and chief accounting officer of Independent Bank in Memphis. Prior to that, he served as vice president and controller, and later vice president and chief accounting officer, of RFS Hotel Investors, Inc., a NYSE-listed hotel REIT. Prior to joining RFS, he was a senior manager with PricewaterhouseCoopers LLP in Memphis and London. Mr. Craven received a Bachelor of Accountancy from the University of Mississippi in 1993. He is a licensed Certified Public Accountant in the State of Mississippi.
 
In addition to Mr. Fisher, the following persons serve on our board of trustees:
 
Miles Berger
 
Mr. Berger has been engaged in real estate, banking and financial services since 1950. In 1998, Mr. Berger became Chairman and Chief Executive Officer of Berger Management Services LLC, a real estate and financial consulting and advisory services company. From 1969 to 1998, he served as Vice Chairman of the Board of Heitman Financial Ltd., a real estate investment management firm. Mr. Berger served for more than thirty years, until 2001, as Chairman of the Board of MidTown Bank and Trust Company of Chicago, served as Vice Chairman of Columbia National Bank Corp. from 1965-1995 and was Chairman of the Board of Berger Financial Services, a full-service real estate advisory and financial services company from 1950 to 2006. Mr. Berger has served on the board of trustees of Universal Health Realty Income Trust, a publicly traded health care REIT, since December 1998. Mr. Berger also serves on the Board of Directors of Medallion Bank and serves as Trustee for Universal Health Trust and is on the boards of numerous philanthropic organizations. Mr. Berger previously served on the Board of Trustees of Innkeepers from September 1994 until Innkeepers’ sale in June 2007.
 
Thomas J. Crocker
 
Mr. Crocker is Chief Executive Officer and principal investor of Crocker Partners, LLC, a privately-held real estate investment company, which is the general partner of a real estate private


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equity fund, Crocker Partners IV, L.P. Mr. Crocker was previously the Chief Executive Officer of CRT Properties, Inc. (formerly known as Koger Equity, Inc.), until its sale in September 2005. CRT Properties, Inc. was a publicly-held real estate investment trust, which owned or had interests in more than 137 office buildings, containing 11.7 million rentable square feet, primarily located in 25 suburban and urban office projects in 12 metropolitan areas in the Southeastern United States, Maryland and Texas. Prior to joining Koger Equity, Inc. in March 2000, Mr. Crocker was Chairman of the Board and Chief Executive Officer of Crocker Realty Trust, Inc., a privately-held REIT, which owned and operated approximately 6.2 million square feet in 133 office buildings located in six states in the Southeast, plus more than 125 acres of developable land. Previously, Mr. Crocker was Chairman of the Board and Chief Executive Officer of Crocker Realty Trust, Inc., which was an office-based publicly-held REIT in the southeast U.S., from that company’s inception until June 1996, when it merged with Highwoods Properties, a publicly-held REIT. Prior to forming Crocker Realty Trust, Inc., Mr. Crocker headed Crocker & Co., a privately-held firm responsible for development, leasing and property management services to approximately 1.7 million square feet of commercial property and 272 residential units. Prior to 1984, Mr. Crocker was a real estate lending officer at Chemical Bank. Mr. Crocker previously served on the Board of Trustees of Innkeepers from February 1997 until Innkeepers’ sale in June 2007.
 
Jack P. DeBoer
 
Mr. DeBoer is Chairman of Consolidated Holdings, Inc., a private investment company focusing on real estate development and management. Mr. DeBoer is also the Chairman of the Board and majority owner of Value Place LLC, owner of the franchise rights to the Value Place brand of hotels, which provides affordable extended-stay lodging. Mr. DeBoer served as Chairman of the Board, President and Chief Executive Officer of Candlewood Hotel Company, Inc. from its inception in 1995 until it was acquired in December 2003. From October 1993 to September 1995, Mr. DeBoer was self-employed and engaged in the development of the Candlewood extended-stay hotel concept. From 1988 to 1993, Mr. DeBoer co-founded and developed Summerfield Hotel Corporation, an upscale extended-stay hotel chain. Previously, Mr. DeBoer founded and developed the Residence Inn franchise prior to selling the franchise to Marriott in 1987. Mr. DeBoer previously served on the Board of Trustees of Innkeepers from November 1996 until Innkeepers’ sale in June 2007.
 
Glen R. Gilbert
 
Mr. Gilbert has been employed by BFC Financial Corporation, a publicly-traded savings bank and real estate holding company, since November 1980. During that period, Mr. Gilbert served in several senior management positions, including as Chief Financial Officer from May 1987 to April 2007 and as Executive Vice President from July 1997 to April 2007. Mr. Gilbert also served as Senior Executive Vice President for Levitt Corporation (now known as Woodbridge Holdings Corp.), a then publicly-traded home builder and real estate developer, from August 2004 to December 2005, after serving as its Chief Financial Officer and Executive Vice President from April 1997 to August 2004. Mr. Gilbert has also held various executive and chief financial officer positions for other entities related to BFC Financial Corporation. Mr. Gilbert was a certified public accountant from 1970 through 2008 and graduated from the University of Florida with a B.S.B.A. degree in accounting. Mr. Gilbert began his accounting career with KPMG LLP in 1970.
 
C.   Gerald Goldsmith
 
Mr. Goldsmith has been an independent investor and financial advisor since 1976. He is currently Chairman of the Board of First Bank of the Palm Beaches, a community bank in Palm Beach County, Florida, and Chairman of Property Corp. International, a private real estate investment company. He has served as a director of several banks and NYSE-listed companies and various philanthropic organizations. He holds an A.B. from the University of Michigan and an M.B.A. from Harvard Business School. Mr. Goldsmith previously served on the Board of Trustees of Innkeepers from September 1994 until Innkeepers’ sale in June 2007.


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Robert Perlmutter
 
Robert Perlmutter is the managing member of Davis Street Land Company, LLC, a privately held firm focused on the development, management and ownership of upscale shopping centers, which currently owns 2.0 million square feet of retail properties. From 1983 to 1988, Mr. Perlmutter worked as an investment analyst for Heitman Financial Services, Ltd. in its acquisitions and dispositions division. From 1988 to 1990, he served as Heitman Financial’s President, a capacity in which he was responsible for overseeing all of its acquisitions, financings and dispositions. Mr. Perlmutter subsequently served as Chief Executive Officer of Chicago-based Heitman Retail Properties from 1990 to 1998, where he supervised overall operations and growth of its retail holdings from two retail properties to twenty directly managed malls and twenty-nine joint ventures in regional malls. From 1998 to 2001, he also served on the board of directors of Prime Retail Inc., a NYSE-listed outlet center company. He is a member of the International Council of Shopping Centers and a board member of the First Bank of Highland Park. Mr. Perlmutter received a Bachelor of Sciences degree in business administration, with a concentration in real estate, from the University of Colorado.
 
Rolf E. Ruhfus
 
Mr. Ruhfus is Chairman and Chief Executive Officer of LodgeWorks Corporation, a hotel development and management company, which owns the Hotel Sierra and AVIA hotel brands. Mr. Ruhfus also serves as Chairman and Chief Executive Officer of Wichita Consulting Company, L.P., a consulting services company. Previously, Mr. Ruhfus served as the Chairman and Chief Executive Officer of Summerfield Hotel Corporation, an upscale extended-stay hotel chain, from its founding in 1988 until its sale to Wyndham International, Inc. in 1998. Mr. Ruhfus served as President of the Residence Inn Company from February 1983 though July 1987 (when it was acquired by Marriott International, Inc.). Mr. Ruhfus joined the Residence Inn Company after spending four years as Director of Marketing for VARTA Battery, Europe’s largest battery manufacturer. Prior to this position, he was a management consultant for McKinsey and Company in its Dusseldorf, Germany office. Mr. Ruhfus was a German Air Force Lieutenant and received a bachelor’s degree from Western Michigan University in 1968. His graduate degrees include an M.B.A. from the Wharton School at the University of Pennsylvania in 1971 and a Ph.D. in marketing from the University of Muenster in 1974. Mr. Ruhfus is a member of the international chapter of The Young Presidents Organization and serves on the board of several European companies. Mr. Ruhfus previously served on the Board of Trustees of Innkeepers from July 1997 until Innkeepers’ sale in June 2007.
 
Joel F. Zemans
 
Mr. Zemans has been active in the ownership and operation of real estate and banks since 1969. From 1971 through 1976, he served as Executive Vice President (and through 1984 as a Director) of Chicago Properties Corporation, a real estate development company specializing in the rehabilitation of multi-unit residential properties in Chicago. Between 1976 and 2001, Mr. Zemans served as President and Chief Executive Officer of de novo Mid Town Bancorp, Inc. and its subsidiary, Mid Town Bank and Trust Company of Chicago, and as Chairman and Chief Executive Officer of two wholly-owned subsidiaries, Mid Town Development Corporation and Equitable Finance Corporation. He currently serves as a consultant to businesses and individuals for real estate financing, investing and strategic planning. Mr. Zemans also serves on the Board of Directors of Bright Electric Supply and MBA Building Supplies, and he provides pro-bono consulting to a number of not-for-profit organizations. Mr. Zemans holds both a B.A. and an M.B.A. from the University of Chicago. Mr. Zemans previously served on the Board of Trustees of Innkeepers from November 2001 until Innkeepers’ sale in June 2007. Mr. Zemans also served on the board of Mid America Bank from 2001 to 2004.


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Promoter
 
We consider Mr. Fisher, our chairman, president and chief executive officer, to be our promoter, in that he has taken initiative in funding and organizing our company. Mr. Fisher is the only person whom we consider to be our promoter.
 
Board Committees
 
Our board of trustees has appointed an Audit Committee, Compensation Committee and a Nominating and Corporate Governance Committee, and has adopted charters for each of these committees. Under these charters, the composition of each committee is required to comply with the listing standards and other rules and regulations of the NYSE, as amended or modified from time to time. Each of these committees is composed exclusively of independent trustees, as defined by the listing standards of the NYSE then in effect.
 
Audit Committee
 
Our Audit Committee consists of Messrs. Gilbert (Chair), Berger and Zemans. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and review the adequacy of our internal accounting controls.
 
Mr. Gilbert, an independent trustee, is the chair of our Audit Committee and is our audit committee financial expert as that term is defined by the SEC.
 
Compensation Committee
 
Our Compensation Committee consists of Messrs. Goldsmith (Chair), Berger and Zemans. The Compensation Committee determines compensation for our executive officers, administers our Equity Incentive Plan, produces an annual report on executive compensation for inclusion in our annual meeting proxy statement and publishes an annual committee report for our shareholders. All members of our Compensation Committee are independent under the applicable rules and regulations of the SEC, the NYSE and the Code.
 
Nominating and Corporate Governance Committee
 
Our Nominating and Corporate Governance Committee consists of Messrs. Crocker (Chair) and Goldsmith. The Nominating and Corporate Governance Committee is responsible for seeking, considering and recommending to the board qualified candidates for election as trustees and recommending a slate of nominees for election as trustees at the annual meeting. It also periodically prepares and submits to the board for adoption the committee’s selection criteria for trustee nominees. It reviews and makes recommendations on matters involving general operation of the board and our corporate governance, and it annually recommends to the board nominees for each committee of the board. In addition, the committee annually facilitates the assessment of the board of trustees’ performance as a whole and of the committees and individual trustees and reports thereon to the board.
 
Code of Ethics
 
We have adopted a corporate code of ethics relating to the conduct of our business by our employees, officers and trustees. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business, including those relating to doing business outside the U.S. Specifically, our code of ethics prohibits payments, directly


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or indirectly, to any foreign official seeking to influence such official or otherwise obtain an improper advantage for our business.
 
Compensation Committee Interlocks and Insider Participation
 
None of the trustees serving on our Compensation Committee is or has ever been one of our officers or employees, nor has any of our trustees entered into any transaction with us with a value in excess of $120,000. None of our executive officers, and no trustee serving on our Compensation Committee, serves as a member of the board of trustees (or board of directors) or Compensation Committee of any entity that has one or more executive officers serving on our board of trustees.
 
Indemnification of Trustees and Executive Officers and Limitations on Liability
 
For information concerning limitations of liability and indemnification applicable to our trustees, executive officers and, in certain circumstances, employees, see “Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws” located elsewhere in this prospectus.
 
Trustee Compensation
 
Each of our independent trustees who does not serve as the chairman of one of our committees is paid a trustee’s fee of $75,000 per year. The trustees who serve as our lead trustee, Audit Committee chairman, Compensation Committee chairman and Nominating and Corporate Governance Committee chairman are paid an additional cash fee of $10,000, $10,000, $7,500 and $5,000, respectively. Trustees’ fees are paid one-half in cash and one-half in our common shares although each trustee may elect to receive up to all of his trustee fees in the form of our common shares. Trustees who are employees receive no additional compensation as trustees. In addition, we reimburse all trustees for reasonable out-of-pocket expenses incurred in connection with their services on the board of trustees.


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COMPENSATION DISCUSSION AND ANALYSIS
 
We pay base salaries and annual bonuses and make grants of awards under our Equity Incentive Plan to certain of our officers. Awards under our Equity Incentive Plan are granted to provide performance and retention incentives to these individuals based on factors such as the desire to retain such officers’ services over the long-term, aligning such officers’ interest with those of our shareholders, incentivizing such officers over the near-, medium- and long-term, and rewarding such officers for exceptional performance. In addition, our Compensation Committee may determine to make awards to new executive officers to help attract them to our company.
 
Our compensation program for our named executive officers, Messrs. Fisher, Willis and Craven (and, prior to the termination of his employment, Mr. Morales), consists of four key elements:
 
  •      Cash compensation, in the form of base salaries and annual cash bonus awards;
 
  •      Long-term incentives, in the form of restricted share awards and awards of LTIP units that vest over time;
 
  •      Health and welfare benefits; and
 
  •      Severance arrangements under the executives’ employment agreements.
 
Elements of Named Executive Officer Compensation
 
Annual base salary.  Base salary is designed to compensate our named executive officers at a fixed level of compensation that serves as a retention tool throughout the executive’s career. The initial base salaries of Messrs. Fisher, Willis and Morales were determined by Messrs. Fisher and Willis prior to completion of our IPO while they served as our sole officers and trustees, and were ratified by our Compensation Committee following the completion of our IPO. The base salary of Mr. Craven was determined by our Compensation Committee in connection with the commencement of Mr. Craven’s employment in September 2010. In determining whether to increase base salaries for our named executive officers in any subsequent year, the Compensation Committee will consider each executive’s role and responsibility, unique skills, future potential with our company, salary levels for similar positions in our target market, internal pay equity and such other factors as the Compensation Committee may determine to be relevant.
 
Under their employment agreements, Messrs. Fisher, Willis and Craven were entitled to receive initial annual base salaries for 2010 of $300,000, $285,000, $285,000, respectively, payable in approximately equal bi-weekly installments. Base salary amounts paid to Messrs. Fisher and Willis for 2010 were prorated from the date of completion of our IPO in April 2010. Mr. Craven’s base salary amount for 2010 was prorated from the date of commencement of his employment in September 2010. Mr. Morales’s base salary amount for 2010 was prorated from the date of completion of our IPO until the date of termination of his employment in September 2010.
 
Annual cash bonus.  Annual cash bonuses are designed to provide incentives to our named executive officers at a variable level of compensation based on such individual’s performance. In connection with our annual cash bonus program, our Compensation Committee will determine annual performance criteria that are flexible and that change with the needs of our business. Each year, our annual cash bonus plan will be designed to reward the achievement of specific, pre-established financial and operational objectives. Pursuant to our initial growth strategy following the successful completion of our IPO, all of our named executive officers agreed not to accept any discretionary cash bonus for 2010.
 
Restricted Share and LTIP Unit Awards.  We have provided, and expect to provide in the future, awards pursuant to our Equity Incentive Plan. We made grants of time-based restricted shares to each of Messrs. Fisher, Willis and Morales of 15,650 shares, 10,450 shares and 10,450 shares, respectively, following the completion of our IPO. The number of shares granted, and the type of award made, were determined by Messrs. Fisher and Willis prior to completion of our IPO while they served


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as our sole officers and trustees, and were subsequently ratified by our Compensation Committee following the completion of our IPO. 7,200 of Mr. Morales’s restricted shares vested upon termination of his employment and the remaining shares in Mr. Morales’s restricted share award were forfeited. We also made a grant of 10,450 time-based restricted shares to Mr. Craven in connection with the commencement of his employment in September 2010, which was approved by our Compensation Committee at the time of his appointment. With the exception of Mr. Morales’s restricted share award, each restricted share award vests in substantially equal installments on each of the first, second and third anniversaries of the grant date.
 
We made grants of time-based LTIP units to each of Messrs. Fisher, Willis and Morales of 198,940 LTIP units, 32,585 LTIP units and 15,435 LTIP units, respectively, following the completion of our IPO. The number of LTIP units granted, and the type of award made, were determined by Messrs. Fisher and Willis prior to completion of our IPO while they served as our sole officers and trustees, and were subsequently ratified by our Compensation Committee following the completion of our IPO. Mr. Morales’s LTIP unit award was forfeited upon termination of his employment. We also made a grant of 26,250 time-based LTIP units to Mr. Craven in connection with the commencement of his employment in September 2010, which was approved by our Compensation Committee at the time of his appointment. With the exception of Mr. Morales’s LTIP unit award, each LTIP unit award vests in substantially equal installments on each of the first through fifth anniversaries of the grant date.
 
The time-based restricted share awards were designed to foster equity ownership by our named executive officers in our company and to align their interests with those of our shareholders. LTIP unit awards are tied to the performance of our company and were designed to provide these key executives, who will be primarily responsible for our growth and operations, with incentives to focus on long-term goals and enhancing shareholder value.
 
In determining future awards under our Equity Incentive Plan, our Compensation Committee will take into account, among other things, the company’s overall financial performance, the contributions of each of our named executive officers, the long-term equity incentive compensation of officers in similar positions in our target market, internal pay equity and such other factors as the Compensation Committee may determine to be relevant.
 
Retirement savings opportunities.  We have established and plan to maintain a retirement savings plan under section 401(k) of the Code. All eligible employees are able to participate in our 401(k) Retirement Savings Plan, or 401(k) Plan, which allows such employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. Our 401(k) Plan is intended to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. We match employees’ annual contributions, within prescribed limits, dollar for dollar up to the first 3% of each employee’s compensation contributed and 50% of each employee’s contributions above such 3% threshold, up to 5% of such employee’s compensation.
 
Health and welfare benefits.  We provide a competitive benefits package to all full-time employees, which includes health and welfare benefits, such as medical, dental, disability insurance and life insurance benefits. The plans under which these benefits are offered do not discriminate in scope, terms or operation in favor of officers and trustees and are available to all full-time employees.
 
Post-termination pay.  As described more fully under “Employment Arrangements” and “Potential Payments upon Termination or Change in Control,” we have entered into employment agreements with each of our named executive officers that provide the officers with compensation if they are terminated without “cause,” they leave the company with “good reason” (each as defined in the applicable employment agreement) or their employment terminates in some circumstances following a change in control. We believe these common protections promote our ability to attract and retain management and assure us that our executive officers will continue to be dedicated and available to provide objective advice and counsel notwithstanding the possibility, threat or occurrence of a change in their circumstances or in the control of our company.


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Summary Compensation Table
 
                                                                         
                            Change in Pension
       
                            Value and
       
                        Non-Equity
  Nonqualified Deferred
       
Name and
              Share
  Option
  Incentive Plan
  Compensation
  All Other
   
principal position   Year   Base Salary(1)   Bonus(2)   Awards(3)(4)   Awards   Compensation   Earnings   Compensation   Total
 
Jeffrey H. Fisher
    2010     $ 209,589           $ 3,315,068                             $ 3,524,657  
Chairman, President & Chief Executive Officer
                                                                       
Peter Willis
    2010       199,110             691,727                               890,837  
Executive Vice President & Chief Investment Officer
                                                                       
Julio E. Morales(5)
    2010       110,877               431,390                               542,267  
Former Executive Vice President & Chief Financial Officer
                                                                       
Dennis M. Craven
    2010       88,233             574,767                               663,000  
Executive Vice President & Chief Financial Officer
                                                                       
 
 
(1) Amounts represent each named executive officer’s annual base salary, prorated to reflect partial year service. Mr. Fisher and Mr. Willis received a pro rata portion of their 2010 base salaries ($300,000 and $285,000, respectively) for the period from the completion of our IPO through December 31, 2010. Mr. Craven received a pro rata portion of his 2010 base salary ($285,000) for the period from September 9, 2010, the commencement date of his employment, through December 31, 2010. Mr. Morales received a pro rata portion of his 2010 base salary ($285,000) for the period from completion of our IPO through September 9, 2010, the date of termination of his employment.
 
(2) Any bonus awards are determined at the sole discretion of our Compensation Committee and our board of trustees based on our implementation of our business plan, including investment of the net proceeds of this offering, and such other factors as the Compensation Committee and the board of trustees may deem appropriate.
 
(3) Reflects restricted share awards in 2010 to Messrs. Fisher, Willis, Morales and Craven pursuant to our Equity Incentive Plan as part of our 2010 compensation program. The restricted share awards were 15,650 shares for Mr. Fisher, 10,450 for Mr. Willis, 10,450 for Mr. Morales and 10,450 for Mr. Craven. All restricted share awards will vest ratably over the first three anniversaries of the date of grant other than Mr. Morales’s, of which 7,200 shares vested upon termination of his employment and the rest of which were forfeited. Amounts in this column represent the aggregate grant date fair value of the restricted share awards. Amounts were calculated in accordance with Accounting Standards Codification Topic 718, Compensation — Stock Compensation, or ASC Topic 718. See Note 10. Equity Incentive Plan — Restricted Share Awards in the notes to our unaudited financial statements for the nine months ended September 30, 2010 found elsewhere in this prospectus.
 
(4) Amounts also account for the grant of LTIP units to Messrs. Fisher, Willis, Morales and Craven under our Equity Incentive Plan. Messrs. Fisher, Willis, Morales and Craven were awarded 198,940, 32,585, 15,435 and 26,250 LTIP units, respectively. All LTIP unit awards will vest ratably over the first five anniversaries of the date of grant other than Mr. Morales’s, which was forfeited upon termination of his employment. For purposes of this table and the pro forma financial information of Chatham Lodging Trust beginning on page F-3, we estimated, under the principles of GAAP, that the discounted values of the LTIP unit awards are $3,019,909 to Mr. Fisher, $494,640 to Mr. Willis, $234,303 to Mr. Morales and $398,475 to Mr. Craven. The compensation reported in the table related to the LTIP grants reflects the aggregate grant date fair value of the LTIP units, calculated in accordance with ASC 718. To determine the discounted value of the LTIP unit awards, we considered the inherent uncertainty that the LTIP units will reach parity with the other common partnership units, appropriateness of discounts for illiquidity, expectations for future dividends and various other data available to us as of the date of this grant, as discussed in Note 10. Equity Incentive Plan — Long-Term Incentive Plan Units in the notes to our unaudited financial statements for the nine months ended September 30, 2010 found elsewhere in this prospectus.
 
(5) Mr. Craven replaced Mr. Morales as our Executive Vice President and Chief Financial Officer on September 9, 2010.
 
Grants of Plan-Based Awards
 
The following table sets forth information with respect to plan-based equity awards granted in 2010 to our named executive officers.
 
                     
        All Other Share
       
Name   Grant Date   Awards or Units     Grant Date Fair Value  
 
Jeffrey H. Fisher
  April 23, 2010     198,940 (1)   $ 3,019,909 (4)
    May 20, 2010     15,650 (2)   $ 295,159 (5)
Peter Willis
  April 23, 2010     32,585 (1)   $ 494,640 (4)
    May 20, 2010     10,450 (2)   $ 197,087 (5)
Julio E. Morales
  April 23, 2010     15,435 (1)   $ 234,303 (4)
    May 20, 2010     10,450 (2)   $ 197,087 (5)
Dennis M. Craven
  September 9, 2010     26,250 (1)   $ 398,475 (4)
    September 9, 2010     10,450 (3)   $ 176,292 (5)


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(1) Amounts reflect the grant of LTIP unit awards to the executive under our Equity Incentive Plan in connection with the completion of our initial public offering or, in the case of Mr. Craven, in connection with the commencement of his employment. Each LTIP unit award vests ratably on each of the first five anniversaries of the date of grant other than Mr. Morales’s, which were forfeited upon termination of his employment.
 
(2) Represents restricted common shares issued to the executive pursuant to our Equity Incentive Plan following the first meeting of our Compensation Committee after completion of our IPO. Each restricted share award vests ratably on the first three anniversaries of the date of grant other than Mr. Morales’s, of which 7,200 shares vested upon termination of his employment and the rest of which were forfeited.
 
(3) Represents restricted common shares issued to Mr. Craven pursuant to our Equity Incentive Plan in connection with the commencement of his employment. Mr. Craven’s restricted share award vests ratably on the first three anniversaries of the date of grant.
 
(4) The grant date fair value of the LTIP unit awards was calculated in accordance with ASC 718. To determine the discounted value of the LTIP unit awards, we considered the inherent uncertainty that the LTIP units will reach parity with the other common partnership units, appropriateness of discounts for illiquidity, expectations for future dividends and various other data available to us as of the date of this grant, as discussed in Note 10. Equity Incentive Plan — Long-Term Incentive Plan Units in the notes to our unaudited financial statements for the nine months ended September 30, 2010 found elsewhere in this prospectus.
 
(5) Represents the aggregate grant date fair value of the restricted share awards. Amounts were calculated in accordance with ASC 718. See Note 10. Equity Incentive Plan — Restricted Share Awards in the notes to our unaudited financial statements for the nine months ended September 30, 2010 found elsewhere in this prospectus.
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth information with respect to outstanding equity awards held by the named executive officers as of December 31, 2010.
 
                 
    Number of Shares or Units That
    Market Value of Shares That
 
Name   Have Not Vested     Have Not Vested(4)  
 
Jeffrey H. Fisher
    198,940 (2)   $ 3,431,715  
      15,650 (3)   $ 269,963  
Peter Willis
    32,585 (2)   $ 562,092  
      10,450 (3)   $ 180,263  
Julio E. Morales(1)
           
Dennis M. Craven
    26,250 (2)   $ 452,813  
      10,450 (3)   $ 180,263  
 
 
(1) Mr. Morales did not hold outstanding equity awards as of December 31, 2010.
 
(2) Reflects the grant of LTIP unit awards to the executive under our Equity Incentive Plan upon completion of our initial public offering or, in the case of Mr. Craven, in connection with the commencement of his employment. The awards of LTIP units vest ratably on each of the first five anniversaries of the date of grant: April 23, 2011, April 23, 2012, April 23, 2013, April 23, 2014 and April 23, 2015, in the case of Messrs. Fisher and Willis; and on September 9, 2011, September 9, 2012, September 9, 2013, September 9, 2014 and September 9, 2015, in the case of Mr. Craven.
 
(3) Reflects restricted common shares issued to the executive pursuant to our Equity Incentive Plan following the first meeting of our board of trustees after completion of our IPO or, in the case of Mr. Craven, at the time of commencement of his employment. The awards of restricted common


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shares vest ratably on each of the first three anniversaries of the date of grant: May 20, 2011, May 20, 2012 and May 20, 2013, in the case of Messrs. Fisher and Willis; and on September 9, 2011, September 9, 2012 and September 9, 2013, in the case of Mr. Craven.
 
(4) Unless and until LTIP units reach parity with common shares, the value of LTIP units can only be estimated. However, for purposes of calculating the market value of LTIP units and restricted common shares that have not vested, the market value per unvested LTIP unit and restricted common share is assumed to be $17.25, the closing market price per common share at the end of the last completed fiscal year, December 31, 2010. This table further assumes that the LTIP units had reached parity with our common shares on December 31, 2010. However, as of December 31, 2010, the LTIP units had not reached parity with our common shares.
 
Option Exercises and Shares Vested
 
The following table summarizes vesting of common shares applicable to our named executive officers during the year ended December 31, 2010. None of the named executive officers exercised any options during 2010.
 
                 
    Stock Awards  
    Number of Shares
       
    Acquired on Vesting
    Value Realized on
 
Name   (#)     Vesting ($)(1)  
 
Jeffrey H. Fisher
           
Peter Willis
           
Julio E. Morales
    7,200       121,032  
Dennis M. Craven
           
 
 
(1) Amount shown is based on the fair market value of our common shares ($16.81) on the applicable vesting date (September 9, 2010).
 
Equity Incentive Plan
 
Prior to the completion our IPO, our board of trustees adopted, and our sole shareholder at the time approved, our Equity Incentive Plan to attract and retain independent trustees, executive officers and other key employees and service providers, including officers and employees of our affiliates. The Equity Incentive Plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards.
 
Administration of the Equity Incentive Plan
 
The Equity Incentive Plan is administered by our Compensation Committee, which is authorized to approve all terms of awards under the Equity Incentive Plan. Our Compensation Committee may also approve who receives grants under the Equity Incentive Plan and the number of common shares subject to the grant.
 
Eligibility
 
All of our employees and employees of our subsidiaries and affiliates, including our operating partnership, are eligible to receive grants under the Equity Incentive Plan. In addition, our independent trustees and individuals who perform services for us and our subsidiaries and affiliates, including employees of our operating partnership, may receive grants under the Equity Incentive Plan.
 
Share Authorization
 
The number of common shares that may be issued under the Equity Incentive Plan is 565,359.


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In connection with share splits, dividends, recapitalizations and certain other events, our board will make adjustments that it deems appropriate in the aggregate number of common shares that may be issued under the Equity Incentive Plan and the terms of outstanding awards.
 
If any options or share appreciation rights terminate, expire or are canceled, forfeited, exchanged or surrendered without having been exercised or paid or if any share awards, performance units or other equity-based awards are forfeited, the common shares subject to such awards will again be available for purposes of the Equity Incentive Plan.
 
Options
 
The Equity Incentive Plan authorizes our Compensation Committee to grant incentive stock options (under Section 422 of the Code) and options that do not qualify as incentive share options. The exercise price of each option will be determined by the Compensation Committee, provided that the price cannot be less than 100% of the fair market value of the common shares on the date on which the option is granted (or 110% of the shares’ fair market value on the grant date in the case of an incentive share option granted to an individual who is a “ten percent shareholder” under Sections 422 and 424 of the Code). The exercise price for any option is generally payable (i) in cash, (ii) by certified check, (iii) by the surrender of common shares (or attestation of ownership of common shares) with an aggregate fair market value on the date on which the option is exercised, equal to the exercise price, or (iv) by payment through a broker in accordance with procedures established by the Federal Reserve Board. The term of an option cannot exceed ten years from the date of grant (or five years in the case of an incentive share option granted to a “ten percent shareholder”).
 
Share Awards
 
The Equity Incentive Plan also provides for the grant of share awards. A share award is an award of common shares that may be subject to restrictions on transferability and other restrictions as our Compensation Committee determines in its sole discretion on the date of grant. The restrictions, if any, may lapse over a specified period of time or through the satisfaction of conditions, in installments or otherwise, as our Compensation Committee may determine. A participant who receives a share award will have all of the rights of a shareholder as to those shares, including, without limitation, the right to vote and the right to receive dividends or distributions on the shares. During the period, if any, when share awards are non-transferable or forfeitable, (i) a participant is prohibited from selling, transferring, pledging, exchanging, hypothecating or otherwise disposing of his or her share award shares, (ii) the company will retain custody of the certificates and (iii) a participant must deliver a share power to the company for each share award.
 
At the first meeting of our board of trustees following the completion of our IPO, our Compensation Committee approved the issuance of an aggregate of 36,550 restricted shares to Mr. Fisher, Mr. Willis and Mr. Morales, our former chief financial officer. Mr. Craven was granted 10,450 restricted shares at the commencement of his employment on September 9, 2010. All of these restricted share awards will vest ratably on the first three anniversaries of the date of grant other than Mr. Morales’s, of which 7,200 shares vested upon termination of his employment and the rest of which were forfeited.
 
Share Appreciation Rights
 
The Equity Incentive Plan authorizes our Compensation Committee to grant share appreciation rights that provide the recipient with the right to receive, upon exercise of the share appreciation right, cash, common shares or a combination of the two. The amount that the recipient will receive upon exercise of the share appreciation right generally will equal the excess of the fair market value of the common shares on the date of exercise over the shares’ fair market value on the date of grant. Share appreciation rights will become exercisable in accordance with terms determined by our Compensation Committee. Share appreciation rights may be granted in tandem with an option grant or as independents grants. The term of a share appreciation right cannot exceed ten years from the date of


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grant or five years in the case of a share appreciation right granted in tandem with an incentive share option awarded to a “ten percent shareholder.”
 
Performance Units
 
The Equity Incentive Plan also authorizes our Compensation Committee to grant performance units. Performance units represent the participant’s right to receive an amount, based on the value of the common shares, if performance goals established by the Compensation Committee are met. Our Compensation Committee will determine the applicable performance period, the performance goals and such other conditions that apply to the performance unit. Performance goals may relate to our financial performance or the financial performance of our operating partnership, the participant’s performance or such other criteria determined by the Compensation Committee. If the performance goals are met, performance units will be paid in cash, our common shares or a combination thereof.
 
Other Equity-Based Awards
 
Our Compensation Committee may grant other types of share-based awards as other equity-based awards under the Equity Incentive Plan, including Long-Term Incentive Plan, or LTIP, units. Other equity-based awards are payable in cash, our common shares or other equity, or a combination thereof, determined by the Compensation Committee. The terms and conditions of other equity-based awards are determined by the Compensation Committee.
 
LTIP units are a special class of partnership interests in our operating partnership. Each LTIP unit awarded will be deemed equivalent to an award of one common share under the Equity Incentive Plan, reducing availability for other equity awards on a one-for-one basis. We will not receive a tax deduction for the value of any LTIP units granted to our employees. The vesting period for any LTIP units, if any, will be determined at the time of issuance. LTIP units, whether vested or not, receive the same quarterly per unit profit distributions as units of our operating partnership, which profit distribution will generally equal per share dividends on our common shares. This treatment with respect to quarterly distributions is similar to the treatment of our restricted share awards, which generally receive full dividends whether vested or not. Initially, LTIP units do not have full parity with operating partnership units with respect to liquidating distributions. Under the terms of the LTIP units, our operating partnership will revalue its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to equalize the capital accounts of such holders with the capital accounts of operating partnership unit holders. Upon equalization of the capital accounts of the holders of LTIP units with the other holders of operating partnership units, the LTIP units will achieve full parity with operating partnership units for all purposes, including with respect to liquidating distributions. If such parity is reached, vested LTIP units may be converted into an equal number of operating partnership units at any time, and thereafter enjoy all the rights of operating partnership units, including exchange rights. However, there are circumstances under which such parity would not be reached. Until and unless such parity is reached, the value that an executive officer will realize for a given number of vested LTIP units will be less than the value of an equal number of our common shares.
 
Upon completion of our IPO, we caused our operating partnership to issue an aggregate of 246,960 LTIP units to certain of our officers. The 15,435 LTIP units granted to Mr. Morales at the completion of our IPO were forfeited upon termination of his employment. On September 9, 2010, we caused our operating partnership to grant 26,250 LTIP units to Mr. Craven in connection with the commencement of his employment with our company. The LTIP units granted to Messrs. Fisher, Willis and Craven will vest ratably over the first five anniversaries of the date of grant. See “Our Operating Partnership and the Partnership Agreement” for a further description of the rights of limited partners in our operating partnership.


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Dividend Equivalents
 
Our Compensation Committee may grant dividend equivalents in connection with the grant of performance units and other equity-based awards. Dividend equivalents may be paid currently or accrued as contingent cash obligations (in which case they will be deemed to have been invested in common shares) and may be payable in cash, common shares or a combination of the two. Our Compensation Committee will determine the terms of any dividend equivalents.
 
Change in Control
 
If we experience a change in control, the Compensation Committee may, at its discretion, provide that all outstanding options, share appreciation rights, share awards, performance units, or other equity based awards that are not exercised prior to the change in control will be assumed by the surviving entity, or will be replaced by a comparable substitute award of substantially equal value granted by the surviving entity. The Compensation Committee may also provide that (i) all outstanding options and share appreciation rights will be fully exercisable on the change in control, (ii) restrictions and conditions on outstanding share awards will lapse upon the change in control and (iii) performance units or other equity-based awards will become earned in their entirety. The Compensation Committee may also provide that participants must surrender their outstanding options and share appreciation rights, share awards, performance units, and other equity based awards in exchange for a payment, in cash or our common shares or other securities or consideration received by shareholders in the change in control transaction, equal to the value received by shareholders in the change in control transaction (or, in the case of options and share appreciation rights, the amount by which that transaction value exceeds the exercise price).
 
In summary, a change of control under the Equity Incentive Plan occurs if:
 
  •      a person, entity or affiliated group (with certain exceptions) acquires, in a transaction or series of transactions, more than 50% of the total combined voting power of our outstanding securities or common shares;
 
  •      we merge into another entity unless the holders of our voting shares immediately prior to the merger have more than 50% of the combined voting power of the securities in the merged entity or its parent;
 
  •      we sell or dispose of all or substantially all of our assets;
 
  •      we are liquidated or dissolved; or
 
  •      during any period of two consecutive years individuals who, at the beginning of such period, constitute our board of trustees together with any new trustees (other than individuals who become trustees in connection with certain transactions or election contests) cease for any reason to constitute a majority of our board of trustees.
 
Amendment; Termination
 
Our board of trustees may amend or terminate the Equity Incentive Plan at any time, provided that no amendment may adversely impair the benefits of participants with outstanding awards. Our shareholders must approve any amendment if such approval is required under applicable law or stock exchange requirements. Our shareholders also must approve any amendment that materially increases the benefits accruing to participants under the Equity Incentive Plan, materially increases the aggregate number of common shares that may be issued under the Equity Incentive Plan or materially modifies the requirements as to eligibility for participation in the Equity Incentive Plan. Unless terminated sooner by our board of trustees or extended with shareholder approval, the Equity Incentive Plan will terminate on the day before the tenth anniversary of the date our board of trustees adopted the Equity Incentive Plan.


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Employment Arrangements
 
Jeffrey H. Fisher. Our employment agreement with Mr. Fisher has an initial term of three years and will renew for one-year terms thereafter unless terminated by written notice delivered at least 30 days before the end of the then-current term. The employment agreement provides for an annual base salary to Mr. Fisher of $300,000, subject to increase in the discretion of the Board or its Compensation Committee.
 
Under his employment agreement, Mr. Fisher is eligible to earn an annual cash bonus at the discretion of the Compensation Committee or to the extent that prescribed individual and corporate goals established by the Committee are achieved.
 
Mr. Fisher’s employment agreement entitles him to customary fringe benefits, including vacation and the right to participate in any other benefits or plans in which other executive-level employees participate (including but not limited to retirement, pension, profit-sharing, insurance (including life insurance) or hospital plans).
 
Mr. Fisher’s employment agreement provides for certain payments in the event that his employment ends upon termination by us for “cause,” his resignation without “good reason” (as defined below), his death or disability or any reason other than a termination by us without “cause” or his resignation with “good reason.” The agreement defines “cause” as (1) a failure to perform a material duty or a material breach of an obligation set forth in Mr. Fisher’s employment agreement or a breach of a material and written policy other than by reason of mental or physical illness or injury, (2) a breach of Mr. Fisher’s fiduciary duties, (3) conduct that demonstrably and materially injures us monetarily or otherwise or (4) a conviction of, or plea of nolo contendere to, a felony or crime involving moral turpitude or fraud or dishonesty involving our assets, and that in each case is not cured, to the Board’s reasonable satisfaction, within 30 days after written notice. In any such event, Mr. Fisher’s employment agreement provides for the payment to him of any earned but unpaid compensation up to the date of his termination and any benefits due to him under the terms of any of our employee benefit plans.
 
Mr. Fisher’s employment agreement provides for certain severance payments in the event that his employment ends upon termination by us without “cause” or his resignation for “good reason.” The agreement defines “good reason” as (1) our material breach of the terms of Mr. Fisher’s employment agreement or a direction from the Board that he act or refrain from acting in a manner unlawful or contrary to a material and written policy, (2) a material diminution in Mr. Fisher’s duties, functions and responsibilities without his consent or our preventing him from fulfilling or exercising his material duties, functions and responsibilities without his consent, (3) a material reduction in Mr. Fisher’s base salary or annual bonus opportunity or (4) a requirement that Mr. Fisher relocate more than 50 miles from the current location of his principal office without his consent, in each case provided that Mr. Fisher has given written notice to the Board within 30 days after he knows of the circumstances constituting “good reason,” the circumstances constituting “good reason” are not cured within 30 days of such notice and Mr. Fisher resigns within 30 days after the expiration of the cure period. In any such event, Mr. Fisher is entitled to receive any earned but unpaid compensation up to the date of his termination and any benefits due to him under the terms of our employee benefit plans. If Mr. Fisher signs a general release of claims, then any outstanding options, restricted shares and other equity awards shall be vested and exercisable as of the date of termination and outstanding options shall remain exercisable thereafter until their stated expiration date as if Mr. Fisher’s employment had not terminated. Mr. Fisher shall also be entitled to receive, subject to Mr. Fisher signing a general release of claims, an amount equal to three times his base salary in effect at the time of termination, an amount equal to three times the highest annual bonus paid to him for the three fiscal years ended immediately before the date of termination, a pro-rated bonus for the then-current fiscal year based on his annual bonus for the fiscal year ended prior to his termination and an amount equal to three times the annual premium or cost paid by us for Mr. Fisher’s health, dental, vision, disability and life insurance coverage in effect on his termination date.


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Mr. Fisher owns IHM, a hotel management company that currently manages five of our hotels and that we may engage to manage certain additional hotels we acquire in the future pursuant to management agreements with our TRS Lessees. In order to permit IHM to qualify as an “eligible independent contractor” as required by applicable tax law, Mr. Fisher’s employment agreement permits him to be the principal owner and serve as a director of entities engaged in the hotel management business, and to devote business time to those companies, so long as (1) such activities do not interfere with the performance of his duties to us and (2) he does not serve as an officer or employee of, or receive compensation for service as a director of, any such entity providing hotel management services to us or our affiliates.
 
Peter Willis and Dennis M. Craven. Our employment agreements with Mr. Willis and Mr. Craven have an initial term of three years and will renew for one-year terms thereafter unless terminated by written notice delivered at least 30 days before the end of the then-current term. The employment agreements provide for annual base salaries to each of Mr. Willis and Mr. Craven of $285,000, subject to increase in the discretion of the Board or its Compensation Committee. The employment agreements entitle each of Mr. Willis and Mr. Craven to fringe benefits substantially similar to those afforded to Mr. Fisher, as described above.
 
Under their employment agreements, Mr. Willis and Mr. Craven are eligible to earn annual cash bonuses at the discretion of the Compensation Committee or to the extent that prescribed individual and corporate goals established by the Committee are achieved.
 
Mr. Willis’s and Mr. Craven’s employment agreements provide for certain payments in the event of termination by us for “cause,” resignation without “good reason,” death or disability or any reason other than a termination by us without “cause” or resignation with “good reason.” The definitions of “cause” and “good reason” in Mr. Willis’s and Mr. Craven’s employment agreements are the same as those in Mr. Fisher’s employment agreement, as described above. In any such event, Mr. Willis’s and Mr. Craven’s employment agreements provide for the payment of any earned but unpaid compensation up to the date of termination and any benefits due under the terms of any of our employee benefit plans.
 
Mr. Willis’s and Mr. Craven’s employment agreements provide for certain severance payments in the event of termination by us without “cause” or resignation for “good reason.” In any such event, Mr. Willis or Mr. Craven, as applicable, would be entitled to receive any earned but unpaid compensation up to the date of his termination and any benefits due to him under the terms of our employee benefit plans. In addition, subject to his signing a general release of claims, any outstanding options, restricted shares and other equity awards held by Mr. Willis or Mr. Craven, as applicable, shall be vested and exercisable as of the date of termination and outstanding options shall remain exercisable thereafter until their stated expiration date as if employment had not terminated, provided that Mr. Craven will only become entitled to such accelerated vesting and extended exercisability if he is subject to a qualifying termination after September 8, 2011. Each of Mr. Willis and Mr. Craven, as applicable, shall also be entitled to receive, subject to his signing a general release of claims, an amount equal to his base salary at the time of termination, an amount equal to the highest annual bonus paid to him for the three fiscal years ended immediately before the date of termination, a pro-rated bonus for the then-current fiscal year based on his annual bonus for the fiscal year ended prior to his termination and an amount equal to the annual premium or cost paid by us for his health, dental, vision, disability and life insurance coverage in effect on his termination date.
 
Mr. Willis’s and Mr. Craven’s employment agreements provide for higher severance payments in the event of termination by us without “cause” no more than ninety days before a change in control or on or after a change in control or upon resignation for “good reason” on or after a change in control. The agreement defines “change in control” as (1) a person becoming the beneficial owner of 50% or more of our voting shares, (2) a transfer of 50% or more of our total assets, (3) our merger, consolidation or statutory share exchange, except where our shareholders immediately before the transaction own more than 50% of the outstanding voting securities of the surviving entity, (4) the


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date members of the Board at the time of completion of our IPO, which includes our initial independent trustees (or members of the Board whose nomination or election to the Board was approved by a majority of such members), cease to constitute a majority of the Board or (5) our complete liquidation or dissolution. In any such event, each of Mr. Willis and Mr. Craven is entitled to receive any earned but unpaid compensation up to the date of his termination and any benefits due to him under the terms of our employee benefit plans. In addition, subject to his signing a general release of claims, all outstanding options, restricted shares and other equity awards shall be vested and exercisable as of the date of termination and outstanding options held by Mr. Willis or Mr. Craven, as applicable, shall remain exercisable thereafter until their stated expiration date as if Mr. Willis’s or Mr. Craven’s employment, as applicable, had not terminated. Each of Mr. Willis and Mr. Craven shall also be entitled to receive, subject to his signing a general release of claims, an amount equal to two times his base salary at the time of termination, an amount equal to two times the highest annual bonus paid to him for the three fiscal years ended immediately before the date of termination, a pro-rated bonus for the then-current fiscal year based on his annual bonus for the fiscal year ended prior to his termination and an amount equal to two times the annual premium or cost paid by us for his health, dental, vision, disability and life insurance coverage in effect on his termination date.
 
Potential Payments upon Termination or Change of Control
 
The following table and accompanying footnotes reflect the estimated potential amounts payable to Messrs. Fisher, Willis and Craven under their employment agreements and the Company’s compensation and benefit plans and arrangements in the event the executive’s employment is terminated under various scenarios, including involuntary termination without cause, voluntary or involuntary termination with cause, voluntary resignation with good reason, involuntary or good reason termination in connection with a change in control and termination due to death and disability. The amounts shown below are estimates of the amounts that would be paid to Messrs. Fisher, Willis and Craven upon termination of their employment assuming that such termination was effective on December 31, 2010. Actual amounts payable will depend upon compensation levels at the time of


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termination, the amount of future equity awards and other factors, and will likely be greater than amounts shown in this table.
 
                                         
        Payment in Lieu of
           
        Medical/Welfare
  Acceleration and
      Total
        Benefits
  Continuation of
  Excise Tax
  Termination
    Cash Severance
  (present value)
  Equity Awards
  Gross-up
  Benefits
    Payment ($)   ($)(5)   ($)(6)   ($)(7)   ($)
 
Jeffrey H. Fisher(1),(2)
                                       
•   Involuntary Termination Without Cause(3)
  $ 900,000     $ 35,000     $ 3,701,678     $        0     $ 4,636,678  
•   Voluntary Termination or Involuntary Termination with Cause
    0       0       0       0       0  
•   Change in Control (No Termination)
    0       0       3,701,678       0       3,701,678  
•   Involuntary or Good Reason Termination in Connection With Change In Control(4)
    900,000       105,000       3,701,678       0       4,706,678  
•   Death or Disability
    0       0       3,701,678       0       3,701,678  
Peter Willis(1),(2)
                                       
•   Involuntary Termination Without Cause(3)
  $ 285,000     $ 20,000     $ 742,354     $ 0     $ 1,047,354  
•   Voluntary Termination or Involuntary Termination with Cause
    0       0       0       0       0  
•   Change in Control (No Termination)
    0       0       742,354       0       742,354  
•   Involuntary or Good Reason Termination in Connection With Change In Control(4)
    570,000       40,000       742,354       0       1,352,354  
•   Death or Disability
    0       0       742,354       0       742,354  
Dennis M. Craven(1),(2)
                                       
•   Involuntary Termination Without Cause(3)
  $ 285,000     $ 20,000     $ 633,075     $ 0     $ 938,075  
•   Voluntary Termination or Involuntary Termination with Cause
    0       0       0       0       0  
•   Change in Control (No Termination)
    0       0       633,075       0       633,075  
•   Involuntary or Good Reason Termination in Connection With Change In Control(4)
    570,000       40,000       633,075       0       1,243,075  
•   Death or Disability
    0       0       633,075       0       633,075  
 
 
(1) The amounts shown in the table do not include accrued salary, earned but unpaid bonuses, accrued but unused vacation pay or the distribution of benefits from any tax-qualified retirement or 401(k) plan. Those amounts are payable to Messrs. Fisher, Willis and Craven upon any termination of employment, including an involuntary termination with cause and a resignation without good reason.
 
(2) A termination of employment due to death or disability entitles Messrs. Fisher, Willis and Craven to benefits under the Company’s life insurance and disability insurance plans. In addition, outstanding restricted share awards and LTIP awards immediately vest upon a termination of employment due to death or disability.
 
(3) Mr. Fisher’s employment agreement provides for the payment of a cash severance benefit upon an involuntary termination without cause or a resignation with good reason (without distinction for terminations before or after a change in control). The cash severance benefit, which is payable in a single payment, is equal to the sum of (a) three times Mr. Fisher’s annual base salary, (b) three times the highest annual bonus paid to Mr. Fisher for the three prior fiscal years and (c) one times the amount of the annual bonus paid to Mr. Fisher for the prior fiscal year, pro rated based on the number of days of employment in the year of termination. As of December 31, 2010, no severance benefit is payable with respect to the amounts described in clause (b) and clause (c) of the preceding sentence because Mr. Fisher has not received an annual bonus with respect to 2010 (or with respect to 2009, the year of the Company’s formation). Consequently, the cash severance benefit shown for Mr. Fisher is three times his annual base salary as in effect on the completion of this offering.
 
Mr. Fisher’s employment agreement also provides for the payment of a single sum cash payment upon an involuntary termination without cause or a resignation with good reason (without distinction for terminations before or after a change in control). The payment is in lieu of continued participation in the Company’s health and welfare benefit plans (although Mr. Fisher may elect to pay for continuation coverage mandated by law). The payment is equal to three times the annual premium or portion of the annual premium paid by the Company for (a) health,


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dental and vision insurance coverage for Mr. Fisher and his eligible dependents and (b) life insurance and disability insurance coverage for Mr. Fisher.
 
The employment agreements with Messrs. Willis and Craven provide for the payment of a cash severance benefit upon an involuntary termination without cause or a resignation with good reason and not in connection with a change in control. The cash severance benefit for each of Messrs. Willis and Craven is equal to the sum of (a) one times the executive’s annual base salary, (b) one times the highest annual bonus paid to the executive for the three prior fiscal years and (c) the amount of the annual bonus paid to the executive for the prior fiscal year, pro rated based on the number of days of employment in the year of termination. As of December 31, 2010, no severance benefit is payable with respect to the amounts described in clause (b) and clause (c) of the preceding sentence because neither Mr. Willis nor Mr. Craven received an annual bonus with respect to 2010 (or with respect to 2009, the year of the Company’s formation). Consequently, the cash severance benefit shown for Messrs. Willis and Craven is one times the executive’s annual base salary as in effect on the completion of this offering.
 
The employment agreements with Messrs. Willis and Craven also provide for the payment of a single sum cash payment upon an involuntary termination without cause or a resignation with good reason and not in connection with a change in control. The payment is in lieu of continued participation in the Company’s health and welfare benefit plans (although Messrs. Willis and Craven may elect to pay for continuation coverage mandated by law). The payment is equal to one times the annual premium or portion of the annual premium paid by the company for (a) health, dental and vision insurance coverage for Messrs. Willis and Craven and their eligible dependents and (b) life insurance and disability insurance coverage for Messrs. Willis and Craven.
 
(4) The severance and other benefit payable to Mr. Fisher on account of an involuntary termination without cause or a resignation with good reason in connection with a change in control are the same as described in note (3) above.
 
The employment agreements with Messrs. Willis and Craven provide for the payment of benefits upon an involuntary termination without cause or a resignation with good reason in connection with a change of control. (A termination in either case is “in connection with a change in control” if it occurs on or after a change in control or, in the case of an involuntary termination without cause, during the ninety day period before a change in control.) In those events, the severance and other benefits payable to Messrs. Willis and Craven are the same as described in note (3) above, except that “two times” is substituted for “one times” each time it appears in note (3).
 
(5) The amounts shown in this column are estimates of the annual premiums to be paid by the Company for health care, insurance and other benefits expected to be provided to Messrs. Fisher, Willis and Craven.
 
(6) The amounts shown in this column represent the compensation to Messrs. Fisher, Willis and Craven due to accelerated vesting of LTIP awards and restricted share awards that were part of our 2010 compensation program, in each case based on the fair market value of our common shares as of December 31, 2010 ($17.25 per share). Outstanding LTIP awards and restricted share awards not previously vested are forfeited upon termination of employment unless employment ends on account of death, disability, an involuntary termination without cause or a resignation with good reason (in which case the restricted share awards and LTIP awards will accelerate and fully vest). With respect to Mr. Craven, restricted share awards and LTIP awards will accelerate and fully vest upon an involuntary termination without cause or a resignation with good reason that occurs after September 8, 2011. Outstanding restricted share awards and LTIP awards also will accelerate and fully vest upon a change in control.
 
Amounts reflecting accelerated vesting of equity awards in the rows “Change In Control (No Termination)” and “Involuntary or Good Reason Termination in Connection With Change In Control” will be paid upon only one of the specified triggering events (not both) and will not be duplicated in the event that the executive incurs a qualifying termination following a change in control event that has previously resulted in acceleration.
 
(7) The employment agreements with Messrs. Fisher, Willis and Craven do not provide an indemnification or gross-up payment for the parachute payment excise tax under Sections 280G and 4999 of the Code. The employment agreements instead provide that the severance and any other payments or benefits that are treated as parachute payments under the Code will be reduced to the maximum amount that can be paid without an excise tax liability. The parachute payments will not be reduced, however, if the executive will receive greater after-tax benefits by receiving the total or unreduced benefits (after taking into account any excise tax liability payable by the executive). The amounts shown in the table assume that Messrs. Fisher, Willis and Craven will receive the total or unreduced benefits.


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Trustee Compensation
 
The following table sets forth information with respect to the compensation of our independent trustees as of December 31, 2010.
 
                         
    Fees Earned or
             
Name(1)   Paid in Cash ($)(2)     Share Awards ($)(3)     Total  
 
Miles Berger
    33,645       125,974       159,619  
Thomas J. Crocker
    30,104       125,974       156,078  
Jack P. DeBoer
    26,562       125,974       152,536  
Glen R. Gilbert
    33,645       125,974       159,619  
C. Gerald Goldsmith
    31,875       125,974       157,849  
Robert Perlmutter
    26,562       125,974       152,536  
Rolf E. Ruhfus
    26,562       125,974       152,536  
Joel F. Zemans
    26,562       125,974       152,536  
 
 
(1) Mr. Fisher, our Chairman, President and Chief Executive Officer, is not included in this table as he is an employee of the Company and does not receive additional compensation for his service as a trustee. All of the compensation paid to Mr. Fisher for the services he provides to us is reflected in the Summary Compensation Table.
 
(2) Reflects cash payments of $37,500 to each of our independent trustees as one-half of the annual trustee’s retainer fee, as well as additional cash fees of (i) $10,000 to our lead independent trustee (Mr. Berger), (ii) $10,000 to the chairman of our Audit Committee (Mr. Gilbert), (iii) $7,500 to the chairman of our Compensation Committee (Mr. Goldsmith) and (iv) $5,000 to the chairman of our Nominating and Corporate Governance Committee (Mr. Crocker). See “Trustee Compensation” above.
 
(3) Amounts reflect the full grant date fair value of restricted common shares or common shares granted during 2010, calculated in accordance with ASC 718. As part of our 2010 compensation plan, we granted (i) 5,000 restricted common shares to each of our independent trustees in connection with the completion of our IPO and (ii) 1,513 common shares to each of our independent trustees as one-half of the annual trustee’s retainer fee. There can be no assurance that restricted shares will vest. See “Trustee Compensation” above.
 
Narrative Disclosure to Trustee Compensation Table
 
Our compensation policies and practices for our independent trustees are described above under “Trustee Compensation”.
 
Equity Compensation Plan Information
 
The following table provides information, as of December 31, 2010, 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
 
    Number of Securities to be
    Weighted-Average
    Remaining Available
 
    Issued Upon Exercise
    Exercise Price of
    for Future Issuance under
 
    of Outstanding Options,
    Outstanding Options,
    Equity Compensation
 
    Warrants and Rights     Warrants and Rights     Plans  
 
Equity compensation plans approved by security holders(1)
                211,730  
Equity compensation plans not approved by security holders
                 
                         
Total
                    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.


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INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
 
The following is a discussion of our investment policies and our policies with respect to certain other activities, including financing matters and conflicts of interest. These policies may be amended or revised from time to time at the discretion of our board of trustees, without a vote of our shareholders. Any change to any of these policies by our board of trustees, however, would be made only after a thorough review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, our board of trustees believes that it is advisable to do so in our and our shareholders’ best interests. Any such change will be disclosed in our periodic or other filings with the SEC. We cannot assure you that our investment objectives will be attained.
 
Investments in Real Estate or Interests in Real Estate
 
We invest principally in hotel properties. Our senior executive officers identify and negotiate acquisition opportunities. For information concerning the investing experience of these individuals, please see the section entitled “Management.”
 
We conduct substantially all of our investment activities through our operating partnership and its subsidiaries. Our primary investment objectives are to enhance shareholder value over time by generating strong returns on invested capital, paying distributions to our shareholders and achieving long-term appreciation in the value of our hotel properties.
 
There are no limitations on the amount or percentage of our total assets that may be invested in any one property. Additionally, no limits have been set on the concentration of investments in any one location or facility type.
 
Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
 
Generally speaking, we have not and do not expect to engage in any significant investment activities with other entities, although we may consider joint venture investments with other investors. We may also invest in the securities of other issuers in co