Edgar Filing: LaSalle Hotel Properties

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LHO-2013-12.31-10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



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

For the Fiscal Year Ended December 31, 2013



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

For the transition period from to .

Commission file number 1-14045

LASALLE HOTEL PROPERTIES

(Exact name of registrant as specified in its charter)



Maryland	36-4219376
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
3 Bethesda Metro Center, Suite 1200 Bethesda, Maryland	20814
(Address of principal executive offices)	(Zip Code)

(301) 941-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Shares of Beneficial Interest ($0.01 par value)		New York Stock Exchange
7 ¼% Series G Cumulative Redeemable Preferred Shares ($0.01 par value)		New York Stock Exchange
7 ½% Series H Cumulative Redeemable Preferred Shares ($0.01 par value)		New York Stock Exchange
6 ⅜% Series I Cumulative Redeemable Preferred Shares ($0.01 par value)		New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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:

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

The aggregate market value of the 96,256,468 common shares of beneficial interest held by non-affiliates of the registrant was approximately $2.4 billion based on the closing price on the New York Stock Exchange for such common shares of beneficial interest as of June 28, 2013.

Number of the registrant’s common shares of beneficial interest outstanding as of February 12, 2014: 103,984,541.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2014 Annual Meeting of Shareholders to be held on or about May 7, 2014 are incorporated by reference in Part II and Part III of this report as noted therein.

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LASALLE HOTEL PROPERTIES

INDEX



Item No.		Form 10-K Report Page
	PART I
1.	Business	2
1A.	Risk Factors	6
1B.	Unresolved Staff Comments	14
2.	Properties	15
3.	Legal Proceedings	16
4.	Mine Safety Disclosures	16
	PART II
5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	16
6.	Selected Financial Data	19
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
7A.	Quantitative and Qualitative Disclosures about Market Risk	42
8.	Consolidated Financial Statements and Supplementary Data	42
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
9A.	Controls and Procedures	42
9B.	Other Information	43
	PART III
10.	Trustees, Executive Officers and Corporate Governance	44
11.	Executive Compensation	44
12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	44
13.	Certain Relationships and Related Transactions, and Trustee Independence	44
14.	Principal Accountant Fees and Services	44
	PART IV
15.	Exhibits and Financial Statement Schedules	44

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Forward-Looking Statements

This report, together with other statements and information publicly disseminated by LaSalle Hotel Properties (the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “plan,” “seek,” “should,” “will” or similar expressions. Forward-looking statements in this report include, among others, statements about the Company’s business strategy, including its acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:


•	risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs, potential unionization, actual or threatened terrorist attacks, any type of flu or disease-related pandemic and downturns in general and local economic conditions;


•	the availability and terms of financing and capital and the general volatility of securities markets;


•	the Company’s dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly;


•	risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act of 1990, as amended (the “ADA”), and similar laws;


•	interest rate increases;


•	the possible failure of the Company to maintain its qualification as a real estate investment trust (“REIT”) and the risk of changes in laws affecting REITs;


•	the possibility of uninsured losses;


•	risks associated with redevelopment and repositioning projects, including delays and cost overruns; and


•	the factors discussed under the headings “Risk Factors” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K.

Accordingly, there is no assurance that the Company’s expectations will be realized. 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 the Company to predict those events or how they may affect the Company. Except as otherwise required by law, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future events or trends.

The “Company”, “we”, "our" or “us” means LaSalle Hotel Properties and one or more of its subsidiaries (including LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”) and LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”)), or, as the context may require, LaSalle Hotel Properties only, the Operating Partnership only or LHL only.

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PART I


Item 1.	Business

General

The Company, a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed REIT as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LHL, the Company’s wholly owned taxable REIT subsidiary ("TRS"), is subject to taxation at normal corporate rates.

As of December 31, 2013, the Company owned interests in 45 hotels with approximately 11,400 guest rooms located in 10 states and the District of Columbia. Each hotel is leased to LHL under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2014 and December 2016. Lease revenue from LHL is eliminated in consolidation. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement, the terms of which are discussed in more detail under “—Hotel Managers and Hotel Management Agreements”.

Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.7% of the common units of the Operating Partnership at December 31, 2013. The remaining 0.3% is held by limited partners who held 296,300 common units of the Operating Partnership at December 31, 2013. Common units in the Operating Partnership are redeemable for cash, or at the Company's option, for a like number of the Company's common shares of beneficial interest, $0.01 par value per share.

The Company’s principal offices are located at 3 Bethesda Metro Center, Suite 1200, Bethesda, Maryland 20814. The Company’s website is www.lasallehotels.com. The Company makes available on its website free of charge its filings with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports. The information contained on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this report or any other report or document we file with or furnish to the SEC.

Strategies and Objectives

The Company’s primary objectives are to provide income to its shareholders through increases in distributable cash flow and to increase long-term total returns to shareholders through appreciation in the value of its common shares of beneficial interest. To achieve these objectives, the Company seeks to:


•	enhance the return from, and the value of, the hotels in which it owns interests and any additional hotels the Company may acquire or develop; and


•	invest in or acquire additional hotel properties on favorable terms.

The Company seeks to achieve revenue growth principally through:


•	renovations, repositionings and/or expansions at selected hotels;


•	acquisitions of full-service hotels located in convention, resort and major urban markets in the U.S. especially upscale and luxury full-service hotels in such markets where the Company perceives strong demand growth or significant barriers to entry;


•	selective development of hotel properties, particularly upscale and luxury full-service hotels in high barrier-to-entry and high demand markets where development economics are favorable; and


•	revenue enhancing programs at the hotels.

The Company intends to acquire additional hotels in urban, convention and resort markets, consistent with the growth strategies outlined above and which may:

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•	possess unique competitive advantages in the form of location, physical facilities or other attributes;


•	be available at significant discounts to replacement cost, including when such discounts result from reduced competition for hotels with long-term management and/or franchise agreements;


•	benefit from brand or franchise conversion or removal, new management, renovations or redevelopment or other active and aggressive asset management strategies; or


•	have expansion opportunities.

The Company continues to focus on eight primary urban markets; however, it will acquire assets in other markets if the investment is consistent with the Company’s strategies and return criteria. The primary urban markets are:



• Boston	• San Diego
• Chicago	• San Francisco
• Los Angeles	• Seattle
• New York	• Washington, DC

Hotel Managers and Hotel Management Agreements

The Company seeks to grow through strategic relationships with premier, internationally recognized hotel operating companies, including Westin Hotels and Resorts, Hilton Hotels Corporation, Outrigger Lodging Services, Noble House Hotels & Resorts, Hyatt Hotels Corporation, Benchmark Hospitality, White Lodging Services Corporation, Commune Hotels and Resorts, Davidson Hotel Company, Denihan Hospitality Group, Kimpton Hotel & Restaurant Group, L.L.C., Accor, Destination Hotels & Resorts, HEI Hotels & Resorts, JRK Hotel Group, Inc., Viceroy Hotel Group, Highgate Hotels and Access Hotels & Resorts. The Company believes that having multiple operators creates a network that will generate acquisition opportunities. In addition, the Company believes its acquisition capabilities are enhanced by its considerable experience, resources and relationships in the hotel industry specifically and the real estate industry generally.

As of December 31, 2013, all of our 45 hotels are leased by LHL, and are managed and operated by third parties pursuant to management agreements entered into between LHL and the respective hotel management companies.

Our management agreements for the 45 hotels leased to LHL have the terms described below.


•	Base Management Fees. Our management agreements generally provide for the payment of base management fees between 1.0% and 4.0% of the applicable hotel’s revenues or a fixed amount, as determined in the agreements.

•

Incentive Management and Other Fees. Some of our management agreements provide for the payment of incentive management fees between 10.0% and 20.0% of gross operating profit or as a percentage of, or in excess of, certain thresholds of net operating income or cash flow of the applicable hotel, if certain criteria are met. Certain of the management agreements also provide for the payment by us of sales and marketing, accounting and other fees.


•	Terms. The remaining terms of our management agreements range from less than one year to 34 years not including renewals, and less than one year to 48 years including renewals. Only one management agreement has a remaining term of 48 years including renewals. The next longest remaining management agreement term, including renewals, is 34 years.

•

Ability to Terminate. We have 44 management agreements (Park Central Hotel and WestHouse Hotel New York operate under one agreement) of which 37 are terminable at will and two are terminable upon sale. The remaining five management agreements are terminable only with cause or after certain anniversary dates. Termination fees range from zero to up to ten times annual base management and incentive management fees, due upon early termination. Only two management agreement have termination fees at ten times, one at nine times and one at eight times, with the next highest at two times annual base management and incentive management fees.


•	Operational Services. Each manager has exclusive authority to supervise, direct and control the day-to-day operation and management of the respective hotel including establishing all room rates, processing reservations, procuring inventories, supplies and services, and preparing public relations, publicity and marketing plans for the hotel.

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•	Executive Supervision and Management Services. Each manager supervises all managerial and other employees, reviews the operation and maintenance, prepares reports, budgets and projections, and provides other administrative and accounting support services to the respective hotel.

•

Chain Services. Our management agreements with major brands require the managers to furnish chain services that are generally made available to other hotels managed by such managers. Such services may, for example, include: (1) the development and operation of computer systems and reservation services; (2) management and administrative services; (3) marketing and sales services; (4) human resources training services and (5) such additional services as may from time to time be more efficiently performed on a national, regional or group level.


•	Working Capital. Our management agreements typically require us to maintain working capital for a hotel and to fund the cost of supplies such as linen and other similar items. We are also responsible for providing funds to meet the cash needs for the hotel operations if at any time the funds available from the hotel operations are insufficient to meet the financial requirements of the hotel.

•

Furniture, Fixtures and Equipment Replacements. We are required to provide to the managers all the necessary furniture, fixtures and equipment for the operation of the hotels (including funding any required furniture, fixture and equipment replacements). Our management agreements generally provide that once each year the managers will prepare a list of furniture, fixtures and equipment to be acquired and certain routine repairs to be performed in the next year and an estimate of funds that are necessary therefore, subject to our review and approval. For purposes of funding the furniture, fixtures and equipment replacements, a specified percentage of the gross revenues of each hotel (typically 4.0% to 5.0%) is either deposited by the manager in an escrow account or held by the owner.

•

Building Alterations, Improvements and Renewals. Our management agreements generally require the managers to prepare an annual estimate of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements to the structural, mechanical, electrical, heating, ventilating, air conditioning, plumbing and vertical transportation elements of the hotels. In addition to the foregoing, the management agreements generally provide that the managers may propose such changes, alterations and improvements to the hotels as required by reason of laws or regulations or, in each manager’s reasonable judgment, to keep each respective hotel in a safe, competitive and efficient operating condition.


•	Sale of a Hotel. Seven of our management agreements limit our ability to sell, lease or otherwise transfer a hotel, unless the transferee assumes the related management agreement and meets specified other conditions and/or unless the transferee is not a competitor of the manager.


•	Service Marks. During the term of our management agreements, the service mark, symbols and logos currently used by the managers may be used in the operation of the hotels. Any right to use the service marks, logo and symbols and related trademarks at a hotel will terminate with respect to that hotel upon termination of the management agreement with respect to such hotel.

Recent Developments

The Park Central Hotel located in New York City underwent a comprehensive renovation in 2013. The project consisted of the full renovation and splitting of the original 934-room Park Central Hotel into two distinct hotels: the newly renovated 761-room Park Central Hotel and the upgraded 172-room premium WestHouse Hotel New York. The renovation was fully completed in the fourth quarter of 2013.

On January 8, 2014, the Company refinanced its senior unsecured credit facility and Second Term Loan (as defined in the "Term Loans" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The $750.0 million senior unsecured credit facility has a revised accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $1.05 billion. The new maturity date is January 8, 2018, subject to two six-month extension options, pursuant to certain terms and conditions, including the payment of an extension fee. Borrowings bear interest at variable rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. The $300.0 million Second Term Loan includes a new accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $500.0 million. The Second Term Loan has a new five-year term maturing on January 8, 2019 and bears interest at variable rates, but is hedged to a fixed interest rate based on the Company’s current leverage ratio (as defined in the swap agreements) through August 2, 2017. Additionally, LHL refinanced its unsecured revolving credit facility with no change in capacity of $25.0 million, on similar terms as the senior unsecured credit facility. The new maturity date is January 8, 2018, subject to two six-month extension options, pursuant to certain terms and conditions, including the payment of an extension fee.

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On January 29, 2014, the Company signed a Purchase and Sale Agreement to acquire a 100% leasehold interest in Hotel Vitale, a 200-room hotel located on the Embarcadero in San Francisco, CA, for $130.0 million. Closing of this transaction is subject to the City of San Francisco, as landlord, approving of the assignment of the ground lease, and various closing requirements and conditions.

On February 10, 2014, the Company received $72.0 million in early repayment of its mezzanine loan which was secured by pledges of ownership interests of the entities that own the underlying hotel properties, Shutters on the Beach and Casa Del Mar, in Santa Monica, CA. The mezzanine loan was due to mature on May 11, 2014. The proceeds were used to pay down amounts outstanding under the Company’s senior unsecured credit facility and under the LHL unsecured credit facility.

Hotel Renovations

The Company believes that its regular program of capital improvements at the hotels, including replacement and refurbishment of furniture, fixtures and equipment, helps maintain and enhance its competitiveness and maximize revenue growth.

Joint Venture

On December 28, 2012, the Company, through a joint venture in which the Company holds a 99.99% controlling interest, acquired a majority ownership interest in The Liberty Hotel, a 298-room full-service, luxury hotel located in Boston, MA, for $170.0 million. Since the Company holds a controlling interest, the accounts of the joint venture have been included in the consolidated financial statements. The 0.01% interest of the outside partner is included in noncontrolling interests in consolidated entities in the consolidated balance sheets.

Tax Status

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, the Company generally is not subject to corporate income tax on that portion of its net income that is currently distributed to shareholders. A REIT is subject to a number of highly technical and complex organizational and operational requirements, including requirements with respect to the nature of its gross income and assets and a requirement that it currently distribute at least 90% of its taxable income. The Company may, however, be subject to certain state and local taxes on its income and property.

Effective January 1, 2001, the Company elected to operate its wholly owned subsidiary, LHL, as a TRS. Accordingly, LHL is required to pay corporate income taxes at the applicable rates.

Seasonality

The Company’s hotels’ operations historically have been seasonal. Taken together, the hotels maintain higher occupancy rates during the second and third quarters of each year. These seasonality patterns can be expected to cause fluctuations in the quarterly hotel operations.

Competition

The hotel industry is highly competitive. Each of the hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy, average daily rate (“ADR”) and room revenue per available room (“RevPAR”) at the Company’s current hotels or at hotels acquired in the future. The Company may be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the amount of leverage utilized, creditworthiness of a hotel operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell.

Environmental Matters

In connection with the ownership of hotels, the Company is subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may

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be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership of hotels, the Company may be potentially liable for such costs.

The Company believes that its hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company. The Company has not received verbal or written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of the properties currently under its ownership.

Employees

The Company had 36 employees as of February 12, 2014. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the lessees to operate such hotels.

Additional Information

All reports filed with the SEC may also be read and copied at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Further information regarding the operation of the public reference room may be obtained by calling 1-800-SEC-0330. In addition, all of our filed reports can be obtained at the SEC’s website at www.sec.gov or through the Company’s website at www.lasallehotels.com. The information contained on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this report or any other report or document we file with or furnish to the SEC.


Item 1A.	Risk Factors

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that it may currently deem immaterial also may impair its business operations. If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected.

The continued uncertainty in the general economic environment and potential volatility in the credit and equity markets may reduce demand for hotel properties and adversely affect our profitability.

The performance of the lodging industry has traditionally been closely linked with the performance of the general economy and, specifically, growth in the U.S. gross domestic product (“GDP”). All of our hotels are classified as luxury, upper upscale or upscale. In an economic downturn, these types of hotels may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. This characteristic may result from the fact that upper upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may seek to reduce travel costs by limiting travel or seeking to reduce costs on their trips. Consequently, the continued uncertainty in the general economic environment could adversely affect our business.

In addition, recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of U.S. credit rating downgrades and economic slowdowns, or a recession in the United States. Volatility in the credit and equity markets or an economic recession would have an adverse effect on our business. Even after an economic recovery begins, a significant period of time may elapse before RevPAR, operating margins and other key lodging fundamentals improve.

The return on our hotels depends upon the ability of the hotel operators to operate and manage the hotels.

To maintain our status as a REIT, we are not permitted to operate any of our hotels. As a result, we are unable to directly implement strategic business decisions with respect to the daily operation and marketing of our hotels, such as decisions with respect to the setting of room rates, repositioning of a hotel, food and beverage pricing and certain similar matters. Although LHL consults with the hotel operators with respect to strategic business plans, the hotel operators are under no obligation to implement any of our recommendations with respect to such matters. Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR, ADR or operating profits, we may not have sufficient rights under our hotel operating agreements to enable us to force the hotel operator to change its method of operation. We generally can only seek redress if a hotel operator violates the terms of the applicable operating agreement, and then only to the extent of the remedies provided for under the terms of the agreement. Some of the operating agreements have lengthy terms and may not be terminable by us before the agreement’s expiration. In the event that we are able to and do replace any of our hotel operators,

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we may experience significant disruptions at the affected hotels, which may adversely affect our ability to make distributions to our shareholders.

We currently own only luxury, upper upscale and upscale hotels. These segments of the lodging market are highly competitive and generally subject to greater volatility than most other market segments, which could negatively affect our profitability.

The luxury, upper upscale and upscale segments of the hotel business are highly competitive. Our hotels compete on the basis of location, room rates, quality, service levels, reputation and reservations systems, among many factors. There are many competitors in the luxury, upper upscale and upscale segments, and many of these competitors may have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and room revenue at our hotels, which would harm our operations. Over-building in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. In addition, in periods of weak demand, as may occur during a general economic recession, profitability is negatively affected by the relatively high fixed costs of operating luxury, upper upscale and upscale hotels.

Our performance and our ability to make distributions on our shares are subject to risks associated with the hotel industry.

Competition for guests, increases in operating costs, dependence on travel and poor economic conditions could adversely affect our cash flow. Our hotels are subject to all operating risks common to the hotel industry. These risks include:


•	adverse effects of weak national, regional and local economic conditions;


•	tightening credit standards;


•	competition for guests and meetings from other hotels including competition and pricing pressure from internet wholesalers and distributors;


•	increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increased room rates;


•	labor strikes, disruptions or lockouts that may impact operating performance;


•	dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;


•	increases in energy costs, airline fares and other expenses related to travel, which may negatively affect traveling; and


•	terrorism, terrorism alerts and warnings, military actions, pandemics or other medical events which may cause decreases in business and leisure travel.

These factors could adversely affect the ability of the hotel operators to generate revenues which could adversely affect LHL's ability to make rental payments to the Operating Partnership pursuant to the participating leases and ultimately impact our liquidity.

Unexpected capital expenditures could adversely affect our cash flow. Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of furniture, fixtures and equipment. Under the terms of our leases, we are obligated to pay the cost of certain capital expenditures at the hotels, including new brand standards, and to pay for periodic replacement or refurbishment of furniture, fixtures and equipment. If capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures.

In addition, we have acquired hotels that have undergone significant renovation and may acquire additional hotels in the future that require significant renovation. Renovations of hotels involve numerous risks, including the possibility of environmental problems, construction cost overruns and delays, the effect on current demand, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels.

Our lenders may have suffered losses related to the weakening economy and may not be able to fund our borrowings.

Our lenders, including the lenders participating in our $750.0 million senior unsecured credit facility, may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy and increased financial instability of many borrowers. As a result, lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our credit facility or to obtain other financing on favorable terms or at

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all. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our credit facility because of a lender default or to obtain other cost-effective financing.

Our obligation to comply with financial covenants in our unsecured credit facilities, term loans and mortgages on some of our hotel properties could impact our operations, may require us to liquidate our properties and could adversely affect our ability to make distributions to our shareholders.

Our unsecured credit facilities and term loans. We have a $750.0 million senior unsecured credit facility (with an accordion feature that allows us to request an increase in the total commitments of up to $1.05 billion, subject to certain terms and conditions) that matures on January 8, 2018, subject to two six-month extensions that we may exercise at our option, pursuant to certain terms and conditions, including the payment of an extension fee. We also have a $177.5 million unsecured seven-year term loan and a $300.0 million unsecured five-year term loan (with an accordion feature that allows us to request an increase in the total commitments of up to $500.0 million, subject to certain terms and conditions). In addition, LHL has a $25.0 million unsecured revolving credit facility, which matures on January 8, 2018, subject to two six-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including the payment of an extension fee.

Each of the senior unsecured credit facility, the term loans and the LHL unsecured revolving credit facility contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict our ability to make distributions or other payments to our shareholders upon events of default. The senior unsecured credit facility and term loans also contain cross-default provisions that allows the lenders under the credit facility and term loans to stop future extensions of credit and/or accelerate the maturity of any outstanding principal balances under the credit facility or term loans if we are in default under certain other debt obligations, including our non-recourse secured mortgage indebtedness.

If we violate the financial covenants in our credit facilities or term loans, we could be required to repay all or a portion of our indebtedness with respect to such credit facility or term loan before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, or at all. Moreover, if we are unable to refinance our debt on acceptable terms, including at maturity of our credit facilities and term loans, we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. Failure to comply with our financial covenants contained in our credit facilities and term loans, or our non-recourse secured mortgages described below, could result from, among other things, changes in our results of operations, the incurrence of additional debt or changes in general economic conditions.

Our non-recourse secured mortgages. In addition to our senior unsecured credit facility, our term loans and the LHL unsecured revolving credit facility, we have from time to time entered into non-recourse mortgages secured by specific hotel properties. Under the terms of these debt obligations, a lender’s only remedy in the event of default is against the real property securing the mortgage, except where a borrower has, among other customary exceptions, engaged in an action constituting fraud or an intentional misrepresentation. In those cases, a lender may seek a remedy for a breach directly against the borrower, including its other assets. The Indianapolis Marriott Downtown, Westin Copley Place, Hotel Deca, Westin Michigan Avenue and Hotel Roger Williams are each mortgaged to secure payment of indebtedness aggregating $514.4 million (excluding loan premiums) as of December 31, 2013. The Hyatt Boston Harbor (formerly Harborside Hyatt Conference Center & Hotel) is mortgaged to secure payment of principal and interest on bonds with an aggregate par value of $42.5 million. These mortgages contain debt service coverage tests related to the mortgaged properties. If the debt service coverage ratio for that specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel will automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows will be directed to the lender ("cash trap") until such time as we again become compliant with the specified debt service coverage ratio or the mortgage is paid off.

If we are unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to us. We may also elect to sell the property, if we are able to sell the property, for a loss in advance of a foreclosure or other transfer. An event of default under our non-recourse secured mortgage may also constitute an event of default under our senior unsecured credit facility or term loans.

As of December 31, 2013, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable or mortgages.

Our liquidity may be reduced and our cost of debt financing may be increased because we may be unable to, or elect not to, remarket debt securities related to the Hyatt Boston Harbor for which we may be liable.

We are the obligor with respect to a $37.1 million tax-exempt special project revenue bond and a $5.4 million taxable special project revenue bond, both issued by the Massachusetts Port Authority (collectively, the “Massport Bonds”). The Massport Bonds, which mature on March 1, 2018, bear interest based on weekly floating rates and have no principal reductions prior to their

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scheduled maturities. The Massport Bonds may be redeemed at any time, at our option, without penalty. The Royal Bank of Scotland provides the supporting letters of credit on the Massport Bonds. The letters of credit expire on February 14, 2015, pursuant to amendments to the agreements in 2013. The Royal Bank of Scotland letters of credit also have two one-year extensions that we may exercise at our option, subject to certain terms and conditions. If the Royal Bank of Scotland fails to renew its letters of credit at expiration and an acceptable replacement provider cannot be found, we may be required to pay off the bonds. If we are unable to, or elect not to, issue or remarket the Massport Bonds, we would expect to rely primarily on our available cash and credit facilities to pay off the Massport Bonds. At certain times, we may hold some of the Massport Bonds that have not been successfully remarketed. Our borrowing costs under our revolving credit facility may be higher than tax-exempt bond financing costs. Borrowings under the credit facilities to pay off the Massport Bonds would also reduce our liquidity to meet other obligations.

Our performance is subject to real estate industry conditions, the terms of our leases and management agreements.

Because real estate investments are illiquid, we may not be able to sell hotels when desired. Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to economic or other conditions. In addition, provisions of the Code limit a REIT’s ability to sell properties in some situations when it may be economically advantageous to do so.

Liability for environmental matters could adversely affect our financial condition. As an owner of real property, we are subject to various federal, state and local laws and regulations relating to the protection of the environment that may require a current or previous owner of real estate to investigate and clean-up hazardous or toxic substances at a property. These laws often impose such liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability is not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner. Persons who arrange for the disposal or treatment facility, whether or not such facility is owned or operated by the person may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. Even if more than one person were responsible for the contamination, each person covered by the environmental laws may be held responsible for the entire amount of clean-up costs incurred.

Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials. These laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with ownership (direct or indirect) of our hotels, we may be considered an owner or operator of properties with asbestos-containing materials. Having arranged for the disposal or treatment of contaminants, we may be potentially liable for removal, remediation and other costs, including governmental fines and injuries to persons and property.

The costs of compliance with the ADA and other government regulations could adversely affect our cash flow. Under the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that we are not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. If we are required to make substantial modifications to our hotels, whether to comply with ADA or other government regulation such as building codes or fire safety regulations, our financial condition, results of operations and ability to make shareholder distributions could be adversely affected.

Certain leases and management agreements may constrain us from acting in the best interest of shareholders or require us to make certain payments. The Hyatt Boston Harbor, San Diego Paradise Point Resort and Spa, The Hilton San Diego Resort and Spa, Hotel Roger Williams, Viceroy Santa Monica, The Liberty Hotel, Harbor Court Hotel, Hotel Triton and Southernmost Hotel Collection (restaurant facility) are each subject to a ground or land and building lease with a third-party lessor which requires us to obtain the consent of the relevant third party lessor in order to sell any of these hotels or to assign our leasehold interest in any of the ground or land and building leases. Accordingly, if we determine that the sale of any of these hotels or the assignment of our leasehold interest in any of these ground or land and building leases is in the best interest of our shareholders, we may be prevented from completing such a transaction if we are unable to obtain the required consent from the relevant lessor. The Indianapolis Marriott Downtown, Westin Copley Place and Hotel Solamar are each subject to a ground or air rights lease and do not require approval from the relevant third-party lessor.

In some instances, we may be required to obtain the consent of the hotel operator or franchisor prior to selling the hotel. Typically, such consent is only required in connection with certain proposed sales, such as if the proposed purchaser is engaged in the operation of a competing hotel or does not meet certain minimum financial requirements. The operators of Hyatt Boston Harbor and Alexis Hotel require approval of certain sales.

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Some of our hotels are subject to rights of first offer which may adversely affect our ability to sell those properties on favorable terms or at all.

We are subject to a franchisor’s or operator’s right of first offer with respect to the Hilton Alexandria Old Town, Hilton San Diego Gaslamp Quarter, The Hilton San Diego Resort and Spa, Embassy Suites Philadelphia—Center City, Park Central Hotel, Harbor Court Hotel and Hotel Triton. These third-party rights may adversely affect our ability to timely dispose of these properties on favorable terms, or at all.

Increases in interest rates may increase our interest expense.

As of December 31, 2013, $263.1 million of aggregate indebtedness (21.0% of total indebtedness) was subject to variable interest rates, excluding amounts outstanding under the Company's term loans since the Company hedged their variable interest rates to fixed interest rates. An increase in interest rates could increase our interest expense and reduce our cash flow and may affect our ability to make distributions to shareholders and to service our indebtedness.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on our shareholders' investment.

We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income tests. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. We cannot provide assurance that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses that may reduce the overall return on our shareholders' investment.

Failure to qualify as a REIT would be costly.

We have operated, and intend to continue to operate, in a manner that we believe allows us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1998. No assurance can be given, however, that we will in fact qualify or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex provisions of the Code. 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, potentially applicable with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT or could increase our tax liability or reduce our operating flexibility.

For example, among other risks,


•	if our hotel managers do not qualify as “eligible independent contractors” under the Code,


•	if the leases of our hotel properties to LHL are not respected as true leases for federal income tax purposes, or


•	if the Operating Partnership failed to qualify as a partnership for federal income tax purposes (which would cause it to become subject to federal and state corporate income tax and would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us),

we would fail to qualify as a REIT.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, we also will be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would cause us to incur additional tax liabilities, significantly impair our ability to service indebtedness and reduce the amount of cash available to make new investments or to make distributions on our common or preferred shares.

The Operating Partnership owns 100% of the common shares of a subsidiary REIT that elected to be taxed as a REIT under the Code. If our subsidiary REIT were to fail to qualify as a REIT, then our subsidiary REIT would become subject to additional federal income tax and we could in turn fail to qualify as a REIT, unless we could avail ourselves of certain relief provisions.

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Complying with REIT requirements may cause us to forego otherwise attractive business opportunities or liquidate otherwise attractive investments and may limit our ability to hedge our liabilities effectively and cause us to incur tax liabilities.

To meet the tests applicable to REITs, we may be required to forego or exit investments we might otherwise make or hold. The REIT provisions of the Code also substantially limit our ability to hedge our liabilities. To the extent that we enter into hedging transactions (other than certain transactions to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets), the income from those transactions is likely to be treated as non-qualifying income for purposes of gross income tests applicable to REITs. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could expose us to greater risks associated with changes in interest rates than we would otherwise want to bear or increase the cost of our hedging activities because our TRS would be subject to tax on gains.

Our ownership of TRSs involves additional regulation and tax, and our transactions with TRSs will subject us to a 100% penalty tax on certain income or deductions if the transactions are not conducted on arm's-length terms.

A REIT may own up to 100% of the stock of one or more TRSs, and a TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. TRSs involve additional regulation, including a rule that no more than 25% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. Another rule imposes a 100% excise tax on certain transactions between a TRS and its parent REIT not conducted on an arm's-length basis. TRSs are also subject to applicable federal, foreign, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us.

Property ownership through partnerships and joint ventures could limit our control of those investments.

Partnership or joint venture investments may involve risks not otherwise present for investments made solely by us, including among others, the possibility that our co-investors might become bankrupt, might at any time have goals or interests that are different from ours because of disparate tax consequences or otherwise, and may take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT. Other risks of joint venture investments include an impasse on decisions, such as a sale, because neither our co-investors nor we would have full control over the partnership or joint venture. There is no limitation under our organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.

We may not have enough insurance.

We carry comprehensive liability, fire, flood, earthquake, extended coverage and business interruption policies that insure us against losses with policy specifications and insurance limits that we believe are reasonable. There are certain types of losses, such as losses from environmental problems or terrorism, that management may not be able to insure against or may decide not to insure against since the cost of insuring is not economical. We may suffer losses that exceed our insurance coverage. Further, market conditions, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.

Our organizational documents and agreements with our executives and applicable Maryland law contain provisions that may delay, defer or prevent change of control transactions and may prevent shareholders from realizing a premium for their shares.

Our trustees serve staggered three-year terms, the trustees may only be removed for cause and remaining trustees may fill board vacancies. Our Board of Trustees is divided into three classes of trustees, each serving a staggered three-year term. In addition, a trustee may only be removed for cause by the affirmative vote of the holders of a majority of our outstanding common shares. Our declaration of trust and bylaws also provide that a majority of the remaining trustees may fill any vacancy on the Board of Trustees and further effectively provide that only the Board of Trustees may increase or decrease the number of persons serving on the Board of Trustees. These provisions preclude shareholders from removing incumbent trustees, except for cause after a majority affirmative vote, and filling the vacancies created by such removal with their own nominees.

Our Board of Trustees may approve the issuance of shares with terms that may discourage a third party from acquiring the Company. The Board of Trustees has the power under the declaration of trust to classify any of our unissued preferred shares, and to reclassify any of our previously classified but unissued preferred shares from time to time, in one or more series of preferred shares, without shareholder approval. The issuance of preferred shares could adversely affect the voting power, dividend and other rights of holders of common shares and the value of the common shares.

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Our declaration of trust prohibits ownership of more than 9.8% of the common shares or 9.8% of any series of preferred shares. To qualify as a REIT under the Code, no more than 50% of the value of our outstanding shares may be owned, directly or under applicable attribution rules, by five or fewer individuals (as defined to include certain entities) during the last half of each taxable year. Our declaration of trust generally prohibits direct or indirect ownership by any person of (i) more than 9.8% of the number or value (whichever is more restrictive) of the outstanding common shares or (ii) more than 9.8% of the number or value (whichever is more restrictive) of the outstanding shares of any class or series of preferred shares. Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limitation. Any transfer of shares that would violate the ownership limitation will result in the shares that would otherwise be held in violation of the ownership limit being designated as “shares-in-trust” and transferred automatically to a charitable trust effective on the day before the purported transfer or other event giving rise to such excess ownership. The intended transferee will acquire no rights in such shares.

The Maryland Business Combination Statute applies to us. A Maryland “business combination” statute contains provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested stockholder, and thereafter impose special shareholder voting requirements on these combinations.

The Board of Trustees may choose to subject us to the Maryland Control Share Act. A Maryland law known as the “Maryland Control Share Act” provides that “control shares” of a company (defined as shares which, when aggregated with other shares controlled by the acquiring 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 the company’s 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. Our bylaws currently provide that we are not subject to these provisions. However, the Board of Trustees, without shareholder approval, may repeal this bylaw and cause us to become subject to the Maryland Control Share Act.

Other provisions of our organization documents may delay or prevent a change of control of the Company. Among other provisions, our organizational documents provide that the number of trustees constituting the full Board of Trustees may be fixed only by the trustees and that a special meeting of shareholders may not be called by holders of common shares holding less than a majority of the outstanding common shares entitled to vote at such meeting.

Our executive officers have agreements that provide them with benefits in the event of a change in control of the Company. We entered into agreements with our executive officers that provide them with severance benefits if their employment ends under certain circumstances within one year following a “change in control” of the Company (as defined in the agreements) or if the executive officer resigns for “good reason” (as defined in the agreements). These benefits could increase the cost to a potential acquirer of the Company and thereby prevent or deter a change in control of the Company that might involve a premium price for the common shares or otherwise be in our shareholders’ best interests.

We depend on the efforts and expertise of our key executive officers and would be adversely affected by the loss of their services.

We depend on the efforts and expertise of our President and Chief Executive Officer, as well as our other executive officers, to execute our business strategy. The loss of their services, and our inability to find suitable replacements, would have an adverse effect on our business.

A large number of shares available for future sale could adversely affect the market price of our common shares and may be dilutive to current shareholders.

The sales of a substantial number of our common shares, or the perception that such sales could occur, could adversely affect prevailing market prices for our common shares. As of December 31, 2013, there were 200,000,000 common shares authorized under our declaration of trust, as amended, of which 103,963,318 were outstanding. Our Board of Trustees may authorize the issuance of additional authorized but unissued common shares or other authorized but unissued securities at any time, including pursuant to our 2009 Equity Incentive Plan. We also have filed a registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity securities (including common or preferred shares) on an as-needed basis and subject to our ability to affect offerings on satisfactory terms based on prevailing conditions. In addition, in January 2013, our Board of Trustees authorized us to issue common shares having an aggregate offering price of up to $250.0 million in a continuous equity issuance program. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including issuances of common and preferred equity. No prediction can be made about the effect that future distributions or sales of our common shares will have on the market price of our common shares.

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Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.

Our Board of Trustees has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of December 31, 2013, 2,348,888 shares of our 7 ¼% Series G Cumulative Redeemable Preferred Shares (the “Series G Preferred Shares”), 2,750,000 shares of our 7½% Series H Cumulative Redeemable Preferred Shares (the “Series H Preferred Shares”) and 4,400,000 shares of our 6 ⅜% Series I Cumulative Redeemable Preferred Shares (the "Series I Preferred Shares") were issued and outstanding. The aggregate liquidation preference with respect to the outstanding preferred shares is approximately $237.5 million, and annual dividends on our outstanding preferred shares are approximately $16.4 million. Holders of our Series G Preferred Shares, Series H Preferred Shares and Series I Preferred Shares are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of these preferred shares have the right to elect two additional trustees to our Board of Trustees whenever dividends on the preferred shares are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive. Because our decision to issue securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future preferred offerings. Thus, our shareholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting their interest.

The market price and trading volume of our common shares may be volatile.

The market price of our common shares may be volatile. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, shareholders may be unable to resell their shares at or above the price at which they traded when they acquired them. We cannot provide assurance that the market price of our common shares will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the market price of our common shares or result in fluctuations in the market price or trading volume of our common shares include:


•	actual or anticipated variations in our quarterly operating results;


•	changes in our operations or earnings estimates;


•	publication of research reports about us, the real estate industry or the lodging industry;


•	changes in our dividend policy;


•	increases in market interest rates that lead purchasers of our shares to demand a higher yield;


•	changes in market valuations of similar companies;


•	adverse market reaction to any additional equity or debt we may issue or incur in the future;


•	additions or departures of key management personnel;


•	speculation in the press or investment community;


•	the realization of any of the other risk factors presented or incorporated by reference in this prospectus supplement; and


•	general U.S. and worldwide market and economic conditions.

The Company and its hotel managers rely on information technology in their operations, and any material failure, inadequacy, interruption or security failure of that technology could harm the Company's business.

The Company and its hotel managers rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. The Company and its hotel managers purchase some of such information technology from vendors, on whom the Company's systems depend, and the hotel managers rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as individually identifiable information, including information relating to financial

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accounts. Although the Company and its hotel managers have taken steps to protect the security of its information systems and the data maintained in those systems, these safety and security measures may not be able to prevent the systems' improper functioning or damage, or the improper access or disclosure of personally identifiable information, such as in the event of cyber attacks, which are rapidly evolving and becoming increasingly sophisticated. For example, in February 2014, the hotel manager at the Indianapolis Marriott Downtown announced a suspected security breach of point of access sales systems at food and beverage outlets located at the hotel. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of the Company's or the hotel managers' information systems could interrupt the Company's operations; damage the Company's reputation; result in misstated financial reports, violations of loan covenants and/or missed reporting deadlines; result in the Company's inability to properly monitor its compliance with the rules and regulations regarding its qualification as a REIT; require significant management attention and resources to remedy any damages that result; subject the Company to liability claims or regulatory penalties; and have a material adverse effect on the Company's business, financial condition and results of operations.


Item 1B.	Unresolved Staff Comments

None.

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Item 2.	Properties

Hotel Properties

As of December 31, 2013, the Company owned interests in the following 45 hotel properties:



Hotel Properties		Number of Guest Rooms	Location
1.	Hotel Amarano Burbank	132	Burbank, CA
2.	L'Auberge Del Mar	120	Del Mar, CA
3.	Hilton San Diego Gaslamp Quarter	283	San Diego, CA
4.	Hotel Solamar ⁽¹⁾	235	San Diego, CA
5.	San Diego Paradise Point Resort and Spa⁽¹⁾	462	San Diego, CA
6.	The Hilton San Diego Resort and Spa ⁽¹⁾	357	San Diego, CA
7.	Harbor Court Hotel ⁽¹⁾	131	San Francisco, CA
8.	Hotel Monaco San Francisco	201	San Francisco, CA
9.	Hotel Triton⁽¹⁾	140	San Francisco, CA
10.	Serrano Hotel	236	San Francisco, CA
11.	Villa Florence	182	San Francisco, CA
12.	Chaminade Resort and Conference Center	156	Santa Cruz, CA
13.	Viceroy Santa Monica ⁽¹⁾	162	Santa Monica, CA
14.	Chamberlain West Hollywood	114	West Hollywood, CA
15.	Le Montrose Suite Hotel	133	West Hollywood, CA
16.	Le Parc Suite Hotel	154	West Hollywood, CA
17.	The Grafton on Sunset	108	West Hollywood, CA
18.	Donovan House	193	Washington, D.C.
19.	Hotel George	139	Washington, D.C.
20.	Hotel Helix	178	Washington, D.C.
21.	Hotel Madera	82	Washington, D.C.
22.	Hotel Palomar, Washington, DC	335	Washington, D.C.
23.	Hotel Rouge	137	Washington, D.C.
24.	Sofitel Washington, DC Lafayette Square	237	Washington, D.C.
25.	The Liaison Capitol Hill	343	Washington, D.C.
26.	Topaz Hotel	99	Washington, D.C.
27.	Southernmost Hotel Collection ⁽⁴⁾	260	Key West, FL
28.	Hotel Chicago (formerly Hotel Sax Chicago)	353	Chicago, IL
29.	Westin Michigan Avenue ⁽²⁾	752	Chicago, IL
30.	Indianapolis Marriott Downtown ⁽¹⁾⁽²⁾	622	Indianapolis, IN
31.	Hyatt Boston Harbor (formerly Harborside Hyatt Conference Center & Hotel) ⁽¹⁾⁽²⁾	270	Boston, MA
32.	Onyx Hotel	112	Boston, MA
33.	The Liberty Hotel ⁽¹⁾	298	Boston, MA
34.	Westin Copley Place ⁽²⁾⁽³⁾	803	Boston, MA
35.	Gild Hall	126	New York, NY
36.	Hotel Roger Williams ⁽¹⁾⁽²⁾	194	New York, NY
37.	Park Central Hotel	761	New York, NY
38.	WestHouse Hotel New York	172	New York, NY
39.	Embassy Suites Philadelphia – Center City	288	Philadelphia, PA
40.	Westin Philadelphia	294	Philadelphia, PA
41.	Hotel Viking	209	Newport, RI
42.	Hilton Alexandria Old Town	246	Alexandria, VA
43.	Lansdowne Resort	296	Lansdowne,VA
44.	Alexis Hotel	121	Seattle, WA
45.	Hotel Deca ⁽²⁾	158	Seattle, WA
	Total number of guest rooms	11,384


⁽¹⁾	Property subject to a long-term ground or land and building lease.

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⁽²⁾	Property subject to a mortgage/debt.


⁽³⁾	Property subject to a long-term air rights lease.


⁽⁴⁾	Property subject to a ground lease on a restaurant facility.

Each of our hotels is full service, with 13 classified as “luxury”, 29 classified as “upper upscale” and two classified as “upscale”, as defined by Smith Travel Research (“STR”), a provider of hotel industry data. The newly created WestHouse Hotel New York has not yet been rated, but the Company anticipates it will be classified as "luxury" or "upper upscale".


Item 3.	Legal Proceedings

The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.


Item 4.	Mine Safety Disclosures

Not applicable.

PART II


Item 5.	Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Information about the Company’s equity compensation plans is incorporated by reference to the material in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders (the “Proxy Statement”).

Market Information

The common shares of the Company began trading on the New York Stock Exchange (“NYSE”) on April 24, 1998 under the symbol “LHO.” The following table sets forth, for the periods indicated, the high and low sale prices per common share and the cash distributions declared per share:



	Calendar Year 2013						Calendar Year 2012
	High		Low		Distribution		High		Low		Distribution
First Quarter	$	27.81	$	24.44	$	0.20	$	29.39	$	24.11	$	0.11
Second Quarter	$	27.94	$	22.84	$	0.20	$	30.46	$	25.22	$	0.20
Third Quarter	$	30.04	$	24.34	$	0.28	$	30.01	$	24.78	$	0.20
Fourth Quarter	$	32.21	$	27.51	$	0.28	$	26.93	$	22.33	$	0.20

The closing price for the Company’s common shares, as reported by the NYSE on December 31, 2013, was $30.86 per share.

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SHARE PERFORMANCE GRAPH

The following graph provides a comparison of the cumulative total return on the common shares from December 31, 2008 to the NYSE closing price per share on December 31, 2013 with the cumulative total return on the Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500”) and the FTSE National Association of Real Estate Investment Trusts Equity REITs Index (“FTSE NAREIT Equity Index”). Total return values were calculated assuming a $100 investment on December 31, 2008 with reinvestment of all dividends in (i) the common shares, (ii) the S&P 500 and (iii) the FTSE NAREIT Equity Index.

The actual returns on the graph above are as follows:



Name	Value of Initial Investment at December 31, 2008		Value of Initial Investment at December 31, 2009		Value of Initial Investment at December 31, 2010		Value of Initial Investment at December 31, 2011		Value of Initial Investment at December 31, 2012		Value of Initial Investment at December 31, 2013
LaSalle Hotel Properties	$	100.00	$	192.82	$	242.10	$	226.20	$	243.60	$	306.59
S&P 500 Index	$	100.00	$	126.46	$	145.51	$	148.59	$	172.37	$	228.19
FTSE NAREIT Equity Index	$	100.00	$	127.99	$	163.76	$	177.33	$	212.26	$	218.32

Shareholder Information

As of February 12, 2014, there were 68 record holders of the Company’s common shares of beneficial interest, including shares held in “street name” by nominees who are record holders, and approximately 14,000 beneficial holders.

Distribution Information

For 2013, the Company paid $0.96 per common share/unit in distributions, of which $0.9094 (rounded) was recognized as 2013 distributions for tax purposes and $0.0506 (rounded) will be recognized as 2014 distributions for tax purposes. Additionally, distributions of $0.1211 per common share for 2012 were recognized as 2013 distributions for tax purposes, bringing total 2013 distributions for tax purposes to $1.0305 per common share (rounded), 100.00% of which represented ordinary income. Distributions for 2013 were paid quarterly to the Company’s common shareholders and unitholders at a level of $0.20 per common share/unit for the first and second quarters and $0.28 per common share/unit for the third and fourth quarters.

For 2012, the Company paid $0.71 per common share/unit in distributions, of which $0.5889 (rounded) was recognized as 2012 distributions for tax purposes and $0.1211 (rounded) will be recognized as 2013 distributions for tax purposes. Additionally, distributions of $0.11 per common share for 2011 were recognized as 2012 distributions for tax purposes, bringing total 2012 distributions for tax purposes to $0.6989 per common share (rounded), 100.00% of which represented ordinary income.

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Distributions for 2012 were paid quarterly to the Company’s common shareholders and unitholders at a level of $0.11 per common share/unit for the first quarter and $0.20 per common share/unit for the second, third and fourth quarters.

The declaration of distributions by the Company is at the sole discretion of the Company’s Board of Trustees, and depends on the actual cash flow of the Company, its financial condition, capital expenditure requirements for the Company’s hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deems relevant.

Operating Partnership Units and Recent Sales of Unregistered Securities

The Operating Partnership issued 3,181,723 common units of limited partnership interest to third parties on April 24, 1998 (inception), in conjunction with the Company’s initial public offering. The following is a summary of common unit activity since inception:



Common units issued at initial public offering	3,181,723
Common units issued:
2000-2006	86,667
2011	296,300
Common units redeemed:
1999-2009	(3,268,390	)
Common units outstanding at December 31, 2013	296,300

Holders of common units of limited partnership interest receive distributions per unit in the same manner as distributions on a per common share basis to the common shareholders of beneficial interest.

Common shares issued upon redemption of common units of limited partnership interest were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act. The Company relied on the exemption based on representations given by the limited partners that redeemed the units.

On December 29, 2011, in connection with the Company’s acquisition of Park Central Hotel and as part of the consideration for the hotel acquisition, the Operating Partnership issued 296,300 common units of limited partnership interest. The issuance of the common units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act. The Company relied on the exemption based on representations given by the holders of the common units.

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Item 6.	Selected Financial Data

The following tables set forth selected historical operating and financial data for the Company. The selected historical operating and financial data for the Company for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 have been derived from the historical financial statements of the Company. The following selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

LASALLE HOTEL PROPERTIES Selected Historical Operating and Financial Data (Unaudited, in thousands, except share data)

	For the year ended December 31,
	2013			2012			2011			2010			2009
Operating Data:
Revenues:
Hotel operating revenues	$	969,356		$	862,146		$	714,005		$	594,642		$	535,944
Other income	7,937			4,929			5,002			5,715			6,702
Total revenues	977,293			867,075			719,007			600,357			542,646
Expenses:
Hotel operating expenses	596,241			533,237			452,838			380,459			338,539
Depreciation and amortization	143,991			124,363			111,282			105,587			102,856
Real estate taxes, personal property taxes and insurance	53,374			44,551			35,425			30,897			29,460
Ground rent	11,117			8,588			7,720			5,825			5,706
General and administrative	22,001			19,769			17,120			18,802			15,033
Acquisition transaction costs	2,646			4,498			2,571			3,003			0
Impairment of development property	0			0			0			8,427			0
Other expenses	9,361			3,017			2,527			3,287			3,016
Total operating expenses	838,731			738,023			629,483			556,287			494,610
Operating income	138,562			129,052			89,524			44,070			48,036
Interest income	9,679			4,483			48			126			63
Interest expense	(57,516		)	(52,896		)	(39,704		)	(36,500		)	(37,951		)
Income before income tax expense, equity in earnings of joint venture and discontinued operations	90,725			80,639			49,868			7,696			10,148
Income tax expense	(470		)	(9,062		)	(7,048		)	(5,075		)	(4,590		)
Income from continuing operations	90,255			71,577			42,820			2,621			5,558
Net income (loss) from discontinued operations	0			0			796			(851		)	2,412
Net income	90,255			71,577			43,616			1,770			7,970
Net (income) loss attributable to noncontrolling interests:
Redeemable noncontrolling interest in consolidated entity	0			0			2			191			30
Noncontrolling interests in consolidated entities	(17		)	0			0			0			0
Noncontrolling interest of common units in Operating Partnership	(303		)	(281		)	(1		)	0			(15		)
Noncontrolling interest of preferred units in Operating Partnership	0			0			0			0			(367		)
Net (income) loss attributable to noncontrolling interests	(320		)	(281		)	1			191			(352		)
Net income attributable to the Company	89,935			71,296			43,617			1,961			7,618
Distributions to preferred shareholders	(17,385		)	(21,733		)	(29,952		)	(26,754		)	(26,388		)
Issuance costs of redeemed preferred shares	(1,566		)	(4,417		)	(731		)	0			0
Net income (loss) attributable to common shareholders	$	70,984		$	45,146		$	12,934		$	(24,793	)	$	(18,770	)

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LASALLE HOTEL PROPERTIES Selected Historical Operating and Financial Data (Unaudited, in thousands, except share data)

	For the year ended December 31,
	2013			2012			2011			2010			2009
Earnings per Common Share:
Net income (loss) attributable to common shareholders before discontinued operations and excluding amounts attributable to unvested restricted shares:
Basic	$	0.73		$	0.52		$	0.15		$	(0.35	)	$	(0.39	)
Diluted	$	0.73		$	0.52		$	0.15		$	(0.35	)	$	(0.39	)
Net income (loss) attributable to common shareholders excluding amounts attributable to unvested restricted shares:
Basic	$	0.73		$	0.52		$	0.16		$	(0.36	)	$	(0.34	)
Diluted	$	0.73		$	0.52		$	0.16		$	(0.36	)	$	(0.34	)
Weighted average number of common shares outstanding:
Basic	97,041,484			85,757,969			81,155,228			69,549,441			54,477,414
Diluted	97,228,671			85,897,274			81,326,304			69,549,441			54,477,414
Balance Sheet Data:
Investment in hotel properties, net	$	3,383,188		$	3,053,044		$	2,712,174		$	2,229,362		$	1,882,502
Total assets	3,581,038			3,256,570			2,833,275			2,355,045			2,023,563
Borrowings under credit facilities	220,606			153,000			265,000			120,193			6,259
Term loans	477,500			477,500			0			0			0
Bonds payable	42,500			42,500			42,500			42,500			42,500
Mortgage loans, including unamortized loan premiums	514,456			579,220			643,897			646,207			595,389
Redeemable noncontrolling interest in consolidated entity	0			0			0			49			2,739
Noncontrolling interests in consolidated entities	18			18			17			33			48
Noncontrolling interests of common units in Operating Partnership	6,054			5,786			5,613			0			0
Preferred shares, liquidation preference	237,472			227,472			394,222			352,972			352,972
Total shareholders’ equity	2,103,391			1,853,126			1,765,613			1,443,467			1,296,187
Other Data:
Funds from operations ⁽¹⁾	$	215,219		$	169,607		$	123,251		$	92,484		$	90,825
Earnings before interest, taxes, depreciation and amortization ⁽¹⁾	290,666			253,481			200,952			152,374			160,079
Cash provided by operating activities	245,565			216,364			165,495			131,572			112,058
Cash used in investing activities	(422,045		)	(524,154		)	(569,936		)	(371,517		)	(31,634		)
Cash provided by (used in) financing activities	154,778			322,655			411,666			244,504			(90,039		)
Cash dividends declared per common share	$	0.96		$	0.71		$	0.44		$	0.24		$	0.04


⁽¹⁾	See “Non-GAAP Financial Measures” below in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a detailed description and reconciliation of funds from operations and earnings before interest, taxes, depreciation and amortization to net income applicable to common shareholders.

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

Overview

2013 marked the fourth consecutive year of growth for the U.S. economy, the lodging industry and the Company. The economic indicators that the Company tracks were generally positive. Consumer confidence, though volatile throughout the year, increased to its highest levels in five years. Corporate profits were strong, achieving another year of record levels. Unemployment, though still historically high, dropped 1.1 percentage points over the year. Enplanements were solid during 2013. GDP was also positive throughout the year. Overall, the lodging industry benefited from a navigable economic landscape. Industry demand increased by 2.2%, and was slightly offset by a 0.7% increase in supply. The favorable demand-supply picture resulted in a U.S. lodging industry-wide occupancy of 62.3%, a 1.5% improvement over 2012. U.S. lodging industry ADR improved 3.9%. As such, 2013 U.S. lodging industry RevPAR increased 5.4%. As a result of a strong U.S. lodging environment, RevPAR at the Company's hotels increased. During 2013, the Company's funds from operations (“FFO”) per diluted share and earnings before interest, taxes, depreciation and amortization (“EBITDA”) increased as compared to 2012 due mainly to improvements in the performance of its hotel portfolio.

For 2013, the Company had net income applicable to common shareholders of $71.0 million, or $0.73 per diluted share. FFO was $215.2 million, or $2.21 per diluted share/unit (based on 97,524,971 weighted average shares and units outstanding during the year ended December 31, 2013) and EBITDA was $290.7 million. RevPAR in 2013 was $167.62. The Company considers RevPAR and EBITDA to be key measures of the performance of the individual hotels. RevPAR for the total portfolio increased 2.8% for 2013. The RevPAR increase is attributable to a 2.7% increase in ADR to $211.52 and 0.1% growth in occupancy to 79.2%. During 2013, the Company continued to implement measures that result in efficient hotel operations. The results of the Company's portfolio were negatively impacted by the renovation at the Company’s Park Central Hotel and WestHouse Hotel New York in New York City. The project consisted of the full renovation and splitting of the original 934-room Park Central Hotel into two distinct hotels: the newly renovated 761-room Park Central Hotel and the upgraded 172-room premium WestHouse Hotel New York. Excluding the impact of this project, RevPAR for the Company's remaining portfolio increased 5.6%.

Hotel operations depend on the state of the overall economy which can significantly impact hotel operational performance and thus, impact the Company’s financial position. Should any of the hotels experience a significant decline in operational performance, it may affect the Company’s ability to make distributions to its shareholders, service debt or meet other financial obligations.

The Company measures hotel performance by evaluating financial metrics such as RevPAR, FFO and EBITDA. The Company evaluates the hotels in its portfolio and potential acquisitions using these metrics discussed above to determine each portfolio hotel’s contribution or acquisition hotel’s potential contribution toward reaching the Company’s goals of providing income to its shareholders through increases in distributable cash flow and increasing long-term total returns to shareholders through appreciation in the value of its common shares. The Company invests in capital improvements throughout the portfolio to continue to increase the competitiveness of its hotels and improve their financial performance. The Company actively seeks to acquire hotel properties, but continues to face significant competition for acquisitions that meet its investment criteria.

Please refer to “Non-GAAP Financial Measures” below for a detailed discussion of the Company’s use of FFO and EBITDA and a reconciliation of FFO and EBITDA to net income (loss), a U.S. generally accepted accounting principles (“GAAP”) measurement.

Critical Accounting Policies

The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and their subsidiaries in which they have a controlling interest, including joint ventures. All significant intercompany balances and transactions have been eliminated.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. In preparing these financial statements, management has used the information available including the Company’s past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements.

It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates. In addition, other

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companies may determine these estimates differently, which may impact comparability of the Company’s results of operations to those of companies in similar businesses.

Revenue Recognition

The Company recognizes hotel operating revenues on an accrual basis consistent with hotel operations. For retail operations, revenue is recognized on a straight line basis over the lives of the retail leases. Revenue from retail operations is included in other income in the consolidated statements of operations and comprehensive income.

Investment in Hotel Properties

Upon acquisition, the Company determines the fair value of the acquired long-lived assets, assumed debt and any intangible assets or liabilities. The Company’s investments in hotel properties are carried at cost and depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, the shorter of the useful life of the improvement or the term of the related tenant lease for tenant improvements, 7 years for land improvements, 20 years for golf course land improvements, 20 years for swimming pool assets and 3 to 5 years for furniture, fixtures and equipment. For investments subject to land and building leases that qualify as capital leases, assets are recorded at the estimated fair value of the right to use the leased property at acquisition and depreciated over the shorter of the useful lives of the assets or the term of the respective lease. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.

The Company is required to make subjective assessments as to the useful lives and classification of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company change the expected useful life or classification of particular assets, it would result in a change in depreciation expense and annual net income.

The Company reviews each hotel for impairment at the end of each reporting period or as events and circumstances dictate throughout the year. A property is considered impaired when the sum of estimated future undiscounted cash flows over the estimated remaining holding period is less than the carrying amount of a property.

At the end of each reporting period, the Company assesses whether any quantitative or qualitative triggering events have occurred in relation to a property. Examples of situations considered to be triggering events include:


•	a substantial decline in operating cash flows during the period, including declines related to decreased occupancy, ADR or RevPAR;


•	a current or projected loss from operations;


•	a significant cost accumulation above the original acquisition/development estimate;


•	a change in plan to sell the property prior to the end of its useful life or holding period;


•	a significant decrease in market price not in line with general market trends; and


•	any other quantitative or qualitative events deemed significant by our management or our Board of Trustees.

If the presence of one or more triggering events as described above is identified at the end of a reporting period or throughout the year with respect to a hotel, the Company performs a recoverability test. In doing so, an estimate of undiscounted future cash flows over the estimated remaining holding period is compared to the carrying amount of the hotel.

If the results of a recoverability analysis indicate that the carrying amount of a hotel exceeds the estimated future undiscounted cash flows, impairment is indicated. Upon presentation to and discussion with the Board of Trustees, an impairment charge is recorded equal to the excess of the carrying value of the hotel over the fair value. When performing a recoverability test or estimating the fair value of a property, the Company makes certain assumptions including, but not limited to, consideration of:


•	projected operating cash flows – considering factors such as booking pace, growth rates, occupancy, room rates, property-specific operating costs and future capital expenditures;


•	projected cash flows from the eventual disposition of the hotel based upon our estimation of a property-specific capitalization rate;

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•	property-specific discount rates; and


•	comparable selling prices.

In accordance with GAAP guidance, the Company considers a hotel as held for sale when a contract for sale is entered into, a substantial non-refundable deposit has been received from the purchaser and sale is expected to occur within one year.

The Company accounts for profit recognition in accordance with GAAP guidance. Upon sale of a hotel, the Company determines its profit from the sale under the full accrual method provided the following applicable criteria are met: a sale is consummated; the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; the Company’s receivable, if applicable, is not subject to future subordination; the Company has transferred to the buyer the usual risks and rewards of ownership; and the Company does not have a substantial continuing involvement with the property. If all of these conditions are met, the Company will recognize the profit on the sale.

Share-Based Compensation

From time to time, the Company awards nonvested shares under the 2009 Equity Incentive Plan (“2009 Plan”), which has approximately five years remaining, as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees vest over three to nine years. The Company generally recognizes compensation expense for nonvested shares on a straight-line basis over the vesting period based upon the fair value of the shares on the date of issuance, adjusted for forfeitures.

Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012

The U.S. lodging industry operated in a solid environment during 2013 as the U.S. economy continued to grow. On a year-over-year basis, overall industry demand increased 2.2%, while supply growth was limited to 0.7%. This favorable demand-supply imbalance resulted in an occupancy increase of 1.5%, while ADR improved 3.9%. Corporate demand grew during the year, and was particularly strong in the transient segment. Leisure demand also improved during 2013. The overall transient segment, as well as group, reflected increased pricing power due to higher overall industry demand levels. As such, lodging industry RevPAR grew by 5.4%. Hotel ADR, RevPAR and operating revenues for the Company’s portfolio were positively impacted by the overall industry performance.

Hotel Operating Revenues

Hotel operating revenues including room, food and beverage and other operating department revenues increased $107.3 million from $862.1 million in 2012 to $969.4 million in 2013. This increase is due primarily to the hotel operating revenues generated from the 2012 and 2013 hotel acquisitions, which consist of the acquisitions of the Hotel Palomar, Washington, DC, L'Auberge Del Mar, The Liberty Hotel, Hotel Triton, Harbor Court Hotel, Serrano Hotel and Southernmost Hotel Collection (collectively, the “2012 and 2013 Acquisition Properties”). The 2012 and 2013 Acquisition Properties, which are not comparable year-over-year, contributed $95.0 million to the increase in hotel operating revenues. Additionally, the effects of the slowly improving economic environment, which resulted in a 2.8% increase in RevPAR across the portfolio, attributable to a 2.7% increase in ADR and a 0.1% increase in occupancy, contributed to the increase in hotel operating revenues.

The following hotels experienced significant increases in total room, food and beverage and other operating department revenues primarily as a result of the effects of the improving economy:


•	$4.9 million increase from Westin Copley Place;


•	$3.4 million increase from San Diego Paradise Point Resort and Spa;


•	$2.2 million increase from Sofitel Washington, DC Lafayette Square;


•	$1.9 million increase from Lansdowne Resort; and


•	$1.9 million increase from Westin Michigan Avenue.

Additionally, total room, food and beverage and other operating department revenues increased $4.6 million at Hotel Roger Williams and $2.1 million at Le Montrose Suite Hotel resulting from the completion of hotel renovations in 2012.

These increases are partially offset by a decrease of $18.3 million from the Park Central Hotel as a result of the 2013 hotel renovation which was fully completed in the fourth quarter of 2013.

Hotel operating revenues across the remainder of the portfolio held relatively constant, increasing a net $9.6 million across 29 additional hotels in the portfolio.

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Other Income

Other income increased $3.0 million from $4.9 million in 2012 to $7.9 million in 2013 due primarily to increased gains from insurance proceeds related to minor property damage at various properties of approximately $2.2 million, and to a lesser extent, to $0.6 million of increased retail lease income and a $0.2 million gain from the sale of land significantly below ground level at the Alexis Hotel to the state, which had no effect on hotel operations, recognized in the 2013 period.

Hotel Operating Expenses

Hotel operating expenses increased $63.0 million from $533.2 million in 2012 to $596.2 million in 2013. This overall increase is primarily due to $54.0 million from the results of the 2012 and 2013 Acquisition Properties, which are not comparable year-over-year. To a lesser extent, the increase is a result of increased operating costs associated with higher occupancies at certain properties in the portfolio attributable to the slowly improving economic environment and two completed hotel renovations.

The following hotels experienced significant increases in total room, food and beverage, other direct and other indirect expenses primarily as a result of increased occupancies at the hotels:


•	$2.9 million increase from Westin Copley Place.


•	$2.0 million increase from San Diego Paradise Point Resort and Spa;


•	$1.9 million increase from Hotel Roger Williams (due to completion of the 2012 hotel renovation); and


•	$1.8 million increase from Westin Michigan Avenue.

These increases are partially offset by a decrease of $6.8 million from the Park Central Hotel as a result of portions of the hotel being out of service related to the 2013 hotel renovation.

Hotel operating expenses across the remainder of the portfolio remained relatively constant, increasing a net $7.2 million across the 32 additional hotels in the portfolio.

Depreciation and Amortization

Depreciation and amortization expense increased $19.6 million from $124.4 million in 2012 to $144.0 million in 2013. The increase is due, in part, to $11.6 million from the 2012 and 2013 Acquisition Properties, which are not comparable year-over-year. Depreciation and amortization expense increased $10.1 million at the Park Central Hotel primarily due to accelerated depreciation resulting from a change in useful life of certain existing assets upon the completion of the 2013 renovation, as well as increased deprecation expense on the completed renovation. These increases are partially offset by a net decrease of $2.1 million across the remaining hotels in the portfolio due to a portion of the furniture, fixtures and equipment becoming fully depreciated.

Real Estate Taxes, Personal Property Taxes and Insurance

Real estate taxes, personal property taxes and insurance expenses increased $8.8 million from $44.6 million in 2012 to $53.4 million in 2013. This increase is primarily due to $5.2 million of taxes and insurance expenses from the 2012 and 2013 Acquisition Properties, which are not comparable year-over-year. Real estate taxes and personal property taxes increased a net $3.2 million across the remaining hotels in the portfolio primarily due to increased assessed property values or tax rates at certain properties, partially offset by real estate taxes capitalized as part of renovations. Insurance expense for the remaining hotels in the portfolio held relatively constant, increasing a net $0.4 million due primarily to property insurance placed on the hotels securing the mezzanine loan.

Ground Rent

Ground rent increased $2.5 million from $8.6 million in 2012 to $11.1 million in 2013. Certain hotels are subject to ground rent under operating leases which call for either fixed or variable payments based on the hotel's performance. The Liberty Hotel and the Southernmost Hotel Collection, which are not comparable year-over-year, contributed $2.2 million and $0.2 million, respectively, to the 2013 increase. The other hotels subject to ground leases contributed a net $0.1 million to the increase due to improved operating results.

General and Administrative

General and administrative expense increased $2.2 million from $19.8 million in 2012 to $22.0 million in 2013 due primarily to increased compensation costs, partially due to additional staffing as a result of portfolio growth, and professional fees.

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Acquisition Transaction Costs

Acquisition transaction costs of $2.6 million in 2013 and $4.5 million in 2012 relate to the purchase of the 2012 and 2013 Acquisition Properties and the July 2012 acquisition of a mezzanine loan.

Other Expenses

Other expenses increased $6.4 million from $3.0 million in 2012 to $9.4 million in 2013 due primarily to a net increase of $5.3 million in pre-opening, severance, marketing and management transition expenses, consisting of $6.1 million incurred in 2013 related largely to the newly renovated Park Central Hotel and WestHouse Hotel New York, partially offset by $0.8 million of management transition costs incurred in 2012 related to operator changes at several hotels. In addition, losses from property damage, which are largely covered by insurance proceeds, increased $1.0 million primarily due to minor flooding at two properties in 2013 and retail lease expenses increased $0.1 million in 2013.

Interest Income

Interest income increased $5.2 million from $4.5 million in 2012 to $9.7 million in 2013 primarily as a result of the interest income earned on the mezzanine loan, which was acquired in July 2012.

Interest Expense

Interest expense increased $4.6 million from $52.9 million in 2012 to $57.5 million in 2013 due to an increase in the Company's weighted average debt outstanding, partly offset by a decrease in the weighted average interest rate. The Company's weighted average debt outstanding increased from $1.2 billion in 2012 to $1.3 billion in 2013 due primarily to the following borrowings:


•	additional borrowings to purchase the 2012 and 2013 Acquisition Properties;


•	additional borrowings to redeem the 7 ½% Series D Cumulative Redeemable Preferred Shares (the "Series D Preferred Shares) and the 8% Series E Cumulative Redeemable Preferred Shares (the "Series E Preferred Shares") in May 2012;


•	additional borrowings to acquire a performing mezzanine loan in July 2012;


•	additional borrowings to redeem 4,000,000 of the 6,348,888 Series G Preferred Shares in April 2013; and


•	additional borrowings to finance other capital improvements during 2012 and 2013.

The above borrowings were partially offset by paydowns with proceeds from the following:


•	the March 2013 issuance of the Series I Preferred Shares;


•	the issuance of common shares under the Company's equity distribution agreements during 2012 and 2013;


•	the December 2012 and October 2013 common share offerings; and


•	positive operating results from the hotel properties.

The Company's weighted average interest rate, including the impact of capitalized interest, decreased from 4.3% in 2012 to 4.1% in 2013. Interest capitalized on renovations increased from $0.4 million in 2012 to $0.6 million in 2013 primarily due to the renovation of the Park Central Hotel during the 2013 period.

Income Tax Expense

Income tax expense decreased $8.6 million from $9.1 million in 2012 to $0.5 million in 2013. This decrease is primarily due to a $20.5 million decrease in LHL's net income before income tax expense from $21.1 million in 2012 to $0.6 million in 2013, due primarily to an increase in pre-opening, severance, marketing and management transition expenses and lower hotel operating profits related to the Park Central Hotel renovation in 2013.

Noncontrolling Interests in Consolidated Entities

Noncontrolling interests in consolidated entities represent the allocation of income or loss to the outside preferred ownership interests in a subsidiary and the outside ownership interest in a joint venture.

Noncontrolling Interests of Common Units in Operating Partnership

Noncontrolling interests of common units in Operating Partnership represent the allocation of income or loss of the Operating Partnership to the common units held by third parties based on their weighted average percentage ownership throughout the period. At December 31, 2013, third party limited partners held 0.3% of the common units in the Operating Partnership.

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Distributions to Preferred Shareholders

Distributions to preferred shareholders decreased $4.3 million from $21.7 million in 2012 to $17.4 million in 2013 due to decreased distributions on the Series D Preferred Shares and Series E Preferred Shares, which were redeemed on May 21, 2012, and the Series G Preferred Shares, which were partially redeemed on April 5, 2013, partially offset by increased distributions on the Series I Preferred Shares, which were issued on March 4, 2013 and March 12, 2013.

Issuance Costs of Redeemed Preferred Shares

Issuance costs of redeemed preferred shares of $1.6 million in 2013 represent the offering costs related to the Series G Preferred Shares, which were partially redeemed on April 5, 2013, and $4.4 million in 2012 represent the offering costs related to the Series D Preferred Shares and Series E Preferred Shares, which were redeemed on May 21, 2012. The excess of fair value over carrying value (i.e. offering costs) is included in the determination of net income attributable to common shareholders.

Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011

The U.S. lodging industry operated in an improving environment during 2012 as the U.S. economy continued to recover. On a year-over-year basis, overall industry demand increased 3.0%, while supply grew 0.5%. This resulted in an occupancy increase of 2.5%, while ADR improved 4.2%. Corporate demand continued to recover during the year, which was reflected in both the transient and group segments. Leisure demand also improved and both segments reflected increased pricing power due to the higher demand levels. As such, lodging industry RevPAR grew by 6.8%. Hotel occupancy, ADR, operating revenues and operating expenses for the Company’s portfolio were positively impacted by the overall industry performance.

Hotel Operating Revenues

Hotel operating revenues including room, food and beverage and other operating department revenues increased $148.1 million from $714.0 million in 2011 to $862.1 million in 2012. This increase is due primarily to the hotel operating revenues generated from the 2012 and 2011 hotel acquisitions, which consist of the 2012 acquisitions of Hotel Palomar, Washington, DC, L'Auberge Del Mar and The Liberty Hotel and the 2011 acquisitions of Viceroy Santa Monica, Villa Florence and Park Central Hotel (collectively, the “2011 and 2012 Acquisition Properties”). The 2011 and 2012 Acquisition Properties, which are not comparable year-over-year, contributed $127.8 million to the increase in hotel operating revenues. Additionally, the effects of the improving economic environment, which resulted in a 4.6% increase in RevPAR across the portfolio, attributable to a 4.0% increase in ADR and a 0.5% increase in occupancy, contributed to the increase in hotel operating revenues.

The following hotels experienced significant increases in total room, food and beverage and other operating department revenues primarily as a result of the effects of the improving economy:


•	$2.4 million increase from San Diego Paradise Point Resort and Spa;


•	$2.3 million increase from Westin Michigan Avenue;


•	$2.1 million increase from The Hilton San Diego Resort and Spa;


•	$1.9 million increase from Westin Copley Place;


•	$1.9 million increase from Embassy Suites Philadelphia - Center City; and


•	$1.5 million increase from Westin Philadelphia.

Additionally, total room, food and beverage and other operating department revenues at Indianapolis Marriott Downtown increased $4.0 million primarily as a result of the positive effects of the Super Bowl being hosted by the City of Indianapolis in 2012.

These increases are partially offset by a decrease of $2.3 million from Hotel Roger Williams as a result of a room renovation project, which was completed in June 2012.

Hotel operating revenues increased a net $6.5 million across 26 additional hotels in the portfolio primarily as a result of the effects of the economic turnaround experienced throughout the portfolio.

Other Income

Other income decreased $0.1 million from $5.0 million in 2011 to $4.9 million in 2012. This decrease is primarily due to lower gains from insurance proceeds recognized in the 2012 period, partially offset by increased retail income.

Hotel Operating Expenses

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Hotel operating expenses increased $80.4 million from $452.8 million in 2011 to $533.2 million in 2012. This overall increase is primarily due to $73.0 million from the results of the 2011 and 2012 Acquisition Properties, which are not comparable year-over-year. To a lesser extent, the increase is a result of the effects of increased operating costs associated with higher occupancies at certain properties in the portfolio attributable to the improving economic environment.

The following hotels experienced significant increases in total room, food and beverage, other direct and other indirect expenses primarily as a result of increased occupancies at the hotels:


•	$1.7 million increase from Indianapolis Marriott Downtown (positive effects of the Super Bowl);


•	$1.4 million increase from The Hilton San Diego Resort and Spa; and


•	$1.2 million increase from Westin Michigan Avenue.

Hotel operating expenses across the remainder of the portfolio remained relatively constant, increasing a net $3.1 million across the 31 additional hotels in the portfolio, including $0.4 million of management transition costs.

Depreciation and Amortization

Depreciation and amortization expense increased $13.1 million from $111.3 million in 2011 to $124.4 million in 2012. The increase is primarily due to $13.6 million from the 2011 and 2012 Acquisition Properties, which are not comparable year-over-year, partially offset by a net decrease of $0.5 million across the remaining hotels in the portfolio due to a portion of furniture, fixtures and equipment becoming fully depreciated, which exceeded the depreciation of new assets placed into service, including recent renovations.

Real Estate Taxes, Personal Property Taxes and Insurance

Real estate taxes, personal property taxes and insurance expenses increased $9.2 million from $35.4 million in 2011 to $44.6 million in 2012. This increase is primarily due to $7.4 million from the 2011 and 2012 Acquisition Properties, which are not comparable year-over-year. Real estate taxes and personal property taxes increased a net $1.4 million across the remaining hotels in the portfolio primarily due to increased assessed property values or tax rates at certain properties. Insurance expense increased $0.4 million for the remaining hotels in the portfolio, of which $0.2 million was due to property insurance placed on the hotels securing the mezzanine loan.

Ground Rent

Ground rent increased $0.9 million from $7.7 million in 2011 to $8.6 million in 2012. Certain hotels are subject to ground rent under operating leases which call for either fixed or variable payments based on the hotel's performance. Viceroy Santa Monica, which is not comparable year-over-year, contributed $0.4 million to the 2012 increase. The other hotels subject to ground leases contributed a net $0.5 million to the increase due to improved operating results.

General and Administrative

General and administrative expense increased $2.7 million from $17.1 million in 2011 to $19.8 million in 2012 due primarily to increased compensation expenses, including severance costs, Board of Trustees costs and professional fees of $3.3 million, partially offset by charges associated with the departure of the Company's former Chief Financial Officer of $0.6 million in 2011 with no similar costs in 2012.

Acquisition Transaction Costs

Acquisition transaction costs of $4.5 million in 2012 and $2.6 million in 2011 relate to the purchase of the 2011 and 2012 Acquisition Properties and the July 2012 acquisition of a mezzanine loan.

Other Expenses

Other expenses increased $0.5 million from $2.5 million in 2011 to $3.0 million in 2012 due primarily to management transition costs of $0.8 million related to the operator changes at several hotels in the second and third quarters of 2012, partially offset by $0.3 million related to reduced hotel retail outlet expenses and decreased losses from property damage, which were largely covered by insurance proceeds.

Interest Income

Interest income increased $4.5 million from an immaterial amount in 2011 to $4.5 million in 2012 as a result of the interest income earned on the mezzanine loan, which was acquired in July 2012.

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Interest Expense

Interest expense increased $13.2 million from $39.7 million in 2011 to $52.9 million in 2012 due to an increase in the Company's weighted average debt outstanding, partly offset by a decrease in the weighted average interest rate. The Company's weighted average debt outstanding increased from $716.7 million in 2011 to $1.2 billion in 2012 due primarily to the following borrowings:


•	additional borrowings to purchase the 2011 and 2012 Acquisition Properties;


•	additional borrowings to redeem the Series D Preferred Shares and the Series E Preferred Shares in May 2012;


•	additional borrowings to acquire a performing mezzanine loan in July 2012; and


•	additional borrowing to finance other capital improvements during 2011 and 2012.

The above borrowings are partially offset by paydowns with proceeds from the following:


•	the sale of the Sheraton Bloomington Hotel Minneapolis South in January 2011;


•	the January and February 2011 issuance of the Series H Preferred Shares, net of the March 2011 redemption of the 8⅜% Series B Cumulative Redeemable Preferred Shares (the “Series B Preferred Shares”);


•	the April 2011 common share offering, net of the August through October 2011 repurchases of common shares under an authorized share repurchase program;


•	the issuance of common shares under the Company's equity distribution agreements during 2011 and 2012;


•	the December 2012 common share offering; and


•	operating cash flows.

The Company's weighted average interest rate, including the impact of capitalized interest, decreased from 5.2% in 2011 to 4.3% in 2012. Interest capitalized on renovations decreased from $0.5 million in 2011 to $0.4 million in 2012 primarily due to slightly decreased renovation activity during the 2012 period.

Income Tax Expense

Income tax expense from continuing operations and discontinued operations increased $2.0 million from $7.1 million in 2011 to $9.1 million in 2012. This increased income tax expense is primarily due to an increase in LHL's net income before income tax expense of $6.3 million from $14.8 million in 2011 to $21.1 million in 2012 due to improved hotel performance, partially offset by decreased taxes due to the reversal of accruals resulting from the resolution of a previously disclosed uncertain tax position.

Discontinued Operations

Net income from discontinued operations decreased $0.8 million from $0.8 million in 2011 to zero in 2012. The 2011 period includes the operating results of the Sheraton Bloomington Hotel Minneapolis South, which was sold in January 2011, and the gain on finalization of the Seaview Resort roof project of $0.8 million.

Redeemable Noncontrolling Interest

Redeemable noncontrolling interest in loss of consolidated entity represents the outside equity interest in the Modern Magic Hotel, LLC joint venture, which is included in the consolidated financial statements of the Company since the Company held a controlling interest prior to dissolution on November 1, 2011.

Noncontrolling Interests of Common Units in Operating Partnership

Noncontrolling interests of common units in Operating Partnership represent the allocation of income or loss of the Operating Partnership to the common units held by third parties based on their weighted average percentage ownership throughout the period. At December 31, 2012, third party limited partners held 0.3% of the common units in the Operating Partnership.

Distributions to Preferred Shareholders

Distributions to preferred shareholders decreased $8.3 million from $30.0 million in 2011 to $21.7 million in 2012 due to decreased distributions on the Series B Preferred Shares, which were redeemed on March 14, 2011, and the Series D Preferred Shares and Series E Preferred Shares, which were redeemed on May 21, 2012, partially offset by increased distributions on the Series H Preferred Shares, which were issued on January 19 and February 4, 2011.

Issuance Costs of Redeemed Preferred Shares

Issuance costs of redeemed preferred shares of $4.4 million in 2012 represent the offering costs related to the Series D Preferred Shares and Series E Preferred Shares, which were redeemed on May 21, 2012, and $0.7 million in 2011 represent the

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offering costs related to the Series B Preferred Shares, which were redeemed on March 14, 2011. The excess of fair value over carrying value (i.e. offering costs) is included in the determination of net income attributable to common shareholders.

Non-GAAP Financial Measures

FFO and EBITDA

The Company considers the non-GAAP measures of FFO and EBITDA to be key supplemental measures of the Company’s performance and should be considered along with, but not as alternatives to, net income or loss as a measure of the Company’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO and EBITDA to be helpful in evaluating a real estate company’s operations.

The White Paper on FFO approved by the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002 defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization (excluding amortization of deferred finance costs) and after comparable adjustments for the Company’s portion of these items related to unconsolidated entities and joint ventures. In October 2011 and November 2011, NAREIT issued guidance reaffirming its view that impairment write-downs of depreciable real estate should be excluded from the computation of FFO. The Company computes FFO consistent with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company.

With respect to FFO, the Company believes that excluding the effect of extraordinary items, real estate-related depreciation and amortization, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. However, FFO may not be helpful when comparing the Company to non-REITs.

With respect to EBITDA, the Company believes that excluding the effect of non-operating expenses and non-cash charges, and the portion of these items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and amortization, and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrues directly to common shareholders.

FFO and EBITDA do not represent cash generated from operating activities determined by GAAP and should not be considered as alternatives to net income, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO and EBITDA are not measures of the Company’s liquidity, nor are FFO and EBITDA indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO and EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of the Company’s operating performance.

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The following is a reconciliation between net income (loss) attributable to common shareholders and FFO for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 (in thousands, except share and unit data):



	For the year ended December 31,
	2013		2012		2011			2010			2009
Net income (loss) attributable to common shareholders	$	70,984	$	45,146	$	12,934		$	(24,793	)	$	(18,770	)
Depreciation ⁽¹⁾	143,560		123,809		110,760			110,138			109,174
Amortization of deferred lease costs	355		371		318			363			436
Noncontrolling interests:
Redeemable noncontrolling interest in consolidated entity	0		0		(2		)	(191		)	(30		)
Noncontrolling interests in consolidated entities	17		0		0			0			0
Noncontrolling interests of common units in Operating Partnership	303		281		1			0			15
Less: Net gain on sale of property	0		0		(760		)	(29,162		)	0
Loss on impairment of properties	0		0		0			36,129			0
FFO	$	215,219	$	169,607	$	123,251		$	92,484		$	90,825
Weighted Average number of common shares and units outstanding:
Basic	97,337,784		86,054,269		81,157,663			69,549,441			54,534,939
Diluted	97,524,971		86,193,574		81,328,739			69,722,700			54,611,974


⁽¹⁾	Includes amounts from discontinued operations.

The following is a reconciliation between net income (loss) attributable to common shareholders and EBITDA for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 (in thousands):



	For the year ended December 31,
	2013		2012		2011			2010			2009
Net income (loss) attributable to common shareholders	$	70,984	$	45,146	$	12,934		$	(24,793	)	$	(18,770	)
Interest expense ⁽¹⁾	57,516		52,896		39,704			36,504			37,956
Income tax expense ⁽¹⁾	470		9,062		7,081			3,424			4,257
Depreciation and amortization ⁽¹⁾	143,991		124,363		111,282			110,676			109,896
Noncontrolling interests:
Redeemable noncontrolling interest in consolidated entity	0		0		(2		)	(191		)	(30		)
Noncontrolling interests in consolidated entities	17		0		0			0			0
Noncontrolling interests of common units in Operating Partnership	303		281		1			0			15
Noncontrolling interests of preferred units in Operating Partnership	0		0		0			0			367
Distributions to preferred shareholders	17,385		21,733		29,952			26,754			26,388
EBITDA ⁽²⁾	$	290,666	$	253,481	$	200,952		$	152,374		$	160,079


⁽¹⁾	Includes amounts from discontinued operations.


⁽²⁾	EBITDA includes the gain on finalization of the Seaview Resort roof project of $0.8 million in 2011. EBITDA includes the gain on sale of Westin City Center Dallas of $29.2 million and the loss on impairment of Seaview Resort, Sheraton Bloomington Hotel Minneapolis South and 330 N. Wabash Avenue property of $24.5 million, $3.2 million and $8.4 million, respectively, in 2010.

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The Hotels

The following table sets forth historical comparative information with respect to occupancy, ADR and RevPAR for the total hotel portfolio for the years ended December 31, 2013 and 2012:



	Year ended December 31,
	2013			2012			Variance
Occupancy ⁽¹⁾	79.2		%	79.2		%	0.1	%
ADR	$	211.52		$	206.03		2.7	%
RevPAR	$	167.62		$	163.10		2.8	%

⁽¹⁾ Percentages are rounded to the nearest tenth of a percent.

The above hotel statistics include adjustments made for presentation of comparable information.

Off-Balance Sheet Arrangements

Reserve Funds for Future Capital Expenditures

Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% to 5.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of December 31, 2013, the Company held a total of $19.7 million of restricted cash reserves, $13.3 million of which was available for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.

The Company has no other off-balance sheet arrangements.

Liquidity and Capital Resources

The Company’s principal source of cash to meet its cash requirements, including distributions to shareholders, is the operating cash flow from the Company’s hotels. Additional sources of cash are the Company’s senior unsecured credit facility, LHL’s unsecured credit facility, additional unsecured financing, secured financing on one or all of the Company’s 39 unencumbered properties as of December 31, 2013, the sale of one or more properties, equity issuances available under the Company’s shelf registration statement and the issuance of up to $230.1 million of common shares from time to time under the 2013 Agreement (as defined under "Equity Issuances and Redemptions" below).

LHL is a wholly owned subsidiary of the Operating Partnership. Payments to the Operating Partnership are required pursuant to the terms of the lease agreements between LHL and the Operating Partnership relating to the properties owned by the Operating Partnership and leased by LHL. LHL’s ability to make rent payments to the Operating Partnership and the Company’s liquidity, including its ability to make distributions to shareholders, are dependent on the lessees’ ability to generate sufficient cash flow from the operation of the hotels.

In addition, cash flow from hotel operations is subject to all operating risks common to the hotel industry. These risks include:


•	adverse effects of weak national, regional and local economic conditions;


•	tightening credit standards;


•	competition for guests and meetings from other hotels, including competition and pricing pressures from internet wholesalers and distributors;


•	increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increases in room rates;


•	labor strikes, disruptions or lockouts that may impact operating performance;


•	dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;

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•	increases in energy costs, airline fares and other expenses related to travel, which may negatively affect traveling; and


•	terrorism, terrorism alerts and warnings, military actions, pandemics or other medical events which may cause decreases in business and leisure travel.

These factors could adversely affect the ability of the hotel operators to generate revenues which could adversely affect LHL’s ability to make rental payments to the Company pursuant to the participating leases and ultimately impact the Company’s liquidity.

The Company’s senior unsecured credit facility, LHL’s unsecured credit facility and the Company's term loans contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict its ability to make distributions or other payments to its shareholders upon events of default. There are currently no other contractual or other arrangements limiting payment of distributions by the Operating Partnership.

Failure of the Company to comply with the financial covenants contained in its credit facilities, term loans and non-recourse secured mortgages could result from, among other things, changes in our results of operations, the incurrence of additional debt or changes in general economic conditions.

If the Company violates the financial covenants contained in any of its credit facilities or term loans, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company's cash flow, and, consequently, cash available for distribution to its shareholders.

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Properties Leased to LHL

Effective January 1, 2001, LHL became a wholly owned subsidiary of the Company as provided for under the TRS provisions of the Code. As of December 31, 2013, LHL leased all 45 hotels owned by the Company as follows:



	Hotel Properties	Location
1.	Hotel Amarano Burbank	Burbank, CA
2.	L'Auberge Del Mar	Del Mar, CA
3.	Hilton San Diego Gaslamp Quarter	San Diego, CA
4.	Hotel Solamar	San Diego, CA
5.	San Diego Paradise Point Resort and Spa	San Diego, CA
6.	The Hilton San Diego Resort and Spa	San Diego, CA
7.	Harbor Court Hotel	San Francisco, CA
8.	Hotel Monaco San Francisco	San Francisco, CA
9.	Hotel Triton	San Francisco, CA
10.	Serrano Hotel	San Francisco, CA
11.	Villa Florence	San Francisco, CA
12.	Chaminade Resort and Conference Center	Santa Cruz, CA
13.	Viceroy Santa Monica	Santa Monica, CA
14.	Chamberlain West Hollywood	West Hollywood, CA
15.	Le Montrose Suite Hotel	West Hollywood, CA
16.	Le Parc Suite Hotel	West Hollywood, CA
17.	The Grafton on Sunset	West Hollywood, CA
18.	Donovan House	Washington, D.C.
19.	Hotel George	Washington, D.C.
20.	Hotel Helix	Washington, D.C.
21.	Hotel Madera	Washington, D.C.
22.	Hotel Palomar, Washington, DC	Washington, D.C.
23.	Hotel Rouge	Washington, D.C.
24.	Sofitel Washington, DC Lafayette Square	Washington, D.C.
25.	The Liaison Capitol Hill	Washington, D.C.
26.	Topaz Hotel	Washington, D.C.
27.	Southernmost Hotel Collection	Key West, FL
28.	Hotel Chicago (formerly Hotel Sax Chicago)	Chicago, IL
29.	Westin Michigan Avenue	Chicago, IL
30.	Indianapolis Marriott Downtown	Indianapolis, IN
31.	Hyatt Boston Harbor (formerly Harborside Hyatt Conference Center & Hotel)	Boston, MA
32.	Onyx Hotel	Boston, MA
33.	The Liberty Hotel	Boston, MA
34.	Westin Copley Place	Boston, MA
35.	Gild Hall	New York, NY
36.	Hotel Roger Williams	New York, NY
37.	Park Central Hotel	New York, NY
38.	WestHouse Hotel New York	New York, NY
39.	Embassy Suites Philadelphia - Center City	Philadelphia, PA
40.	Westin Philadelphia	Philadelphia, PA
41.	Hotel Viking	Newport, RI
42.	Hilton Alexandria Old Town	Alexandria,VA
43.	Lansdowne Resort	Lansdowne,VA
44.	Alexis Hotel	Seattle, WA
45.	Hotel Deca	Seattle, WA

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Contractual Obligations

The following is a summary of the Company’s obligations and commitments as of December 31, 2013 (in thousands):



	Total Amounts Committed		Amount of Commitment Expiration Per Period
Obligations and Commitments	Total Amounts Committed		Less than 1 year		1 to 3 years		4 to 5 years		Over 5 years
Mortgage loans ⁽¹⁾	$	578,031	$	42,634	$	535,397	$	0	$	0
Borrowings under credit facilities⁽²⁾	229,537		4,295		225,242		0		0
Rents⁽³⁾	524,829		10,333		21,273		22,139		471,084
Massport Bonds⁽¹⁾	43,275		186		373		42,716		0
Term loans ⁽⁴⁾	531,630		13,906		324,774		13,039		179,911
Purchase commitments ⁽⁵⁾
Purchase orders and letters of commitment	37,726		37,726		0		0		0
Total obligations and commitments	$	1,945,028	$	109,080	$	1,107,059	$	77,894	$	650,995


⁽¹⁾	Amounts include principal and interest.

⁽²⁾

Amounts include principal and interest. Interest expense is calculated based on the variable rate as of December 31, 2013. It is assumed that the outstanding debt as of December 31, 2013 will be repaid upon maturity with interest-only payments until then. On January 8, 2014, the Company refinanced its senior unsecured credit facility and LHL refinanced its unsecured credit facility resulting in new maturity dates of January 8, 2018, subject to two six-month extension options, pursuant to certain terms and conditions.


⁽³⁾	Amounts calculated based on the annual minimum future lease payments that extend through the term of the lease. Rents may be subject to adjustments based on future interest rates and hotel performance.

⁽⁴⁾

Amounts include principal and interest. The term loans bear interest at floating rates equal to LIBOR plus applicable margins. The Company entered into separate interest rate swap agreements for the full seven-year term of the First Term Loan and the five-year term, including a one-year extension subject to certain conditions, of the Second Term Loan, resulting in fixed all-in interest rates of 3.62% and 2.43%, respectively, at the Company's current leverage ratio (as defined in the agreements). It is assumed that the outstanding debt as of December 31, 2013 will be repaid upon maturity with fixed interest-only payments until then. On January 8, 2014, the Company refinanced its Second Term Loan resulting in a new maturity date of January 8, 2019.


⁽⁵⁾	As of December 31, 2013, purchase orders and letters of commitment totaling approximately $37.7 million had been issued for renovations at the properties. The Company has committed to these projects and anticipates making similar arrangements in the future with the existing properties or any future properties that it may acquire.

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Debt Summary

Debt as of December 31, 2013 and 2012 consisted of the following (in thousands):



			Balance Outstanding as of
Debt	Interest Rate	Maturity Date	December 31, 2013		December 31, 2012
Credit facilities
Senior unsecured credit facility	Floating ^(a)	January 2016 ^(a)	$	220,000	$	153,000
LHL unsecured credit facility	Floating ^(b)	January 2016 ^(b)	606		0
Total borrowings under credit facilities			220,606		153,000
Term loans
First Term Loan	Floating ^(c)	May 2019	177,500		177,500
Second Term Loan	Floating ^(c)	August 2016 ^(c)	300,000		300,000
Total term loans			477,500		477,500
Massport Bonds
Hyatt Boston Harbor (taxable)	Floating ^(d)	March 2018	5,400		5,400
Hyatt Boston Harbor (tax exempt)	Floating ^(d)	March 2018	37,100		37,100
Total bonds payable			42,500		42,500
Mortgage loans
Hotel Solamar	5.49%	December 2013 ^(e)	0		60,134
Hotel Deca	6.28%	August 1, 2014 ^(f)	8,809		9,111
Westin Copley Place	5.28%	September 2015	210,000		210,000
Westin Michigan Avenue	5.75%	April 2016	135,315		137,172
Indianapolis Marriott Downtown	5.99%	July 2016	98,875		100,142
Hotel Roger Williams	6.31%	August 2016	61,416		62,543
Mortgage loans at stated value			514,415		579,102
Unamortized loan premium^(g)			41		118
Total mortgage loans			514,456		579,220
Total debt			$	1,255,062	$	1,252,220

^(a)

Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of December 31, 2013, the rate, including the applicable margin, for the Company’s outstanding LIBOR borrowings of $220,000 was 1.92%. As of December 31, 2012, the rate, including the applicable margin, for the Company's outstanding LIBOR borrowing of $153,000 was 2.22%. On January 8, 2014, the Company refinanced its senior unsecured credit facility resulting in a new maturity date of January 2018, subject to two six-month extension options, pursuant to certain terms and conditions.

^(b)

Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of December 31, 2013, the rate, including the applicable margin, for the Company’s outstanding LIBOR borrowings of $606 was 1.92%. There were no borrowings outstanding at December 31, 2012. On January 8, 2014, LHL refinanced its unsecured credit facility resulting in a new maturity date of January 2018, subject to two six-month extension options, pursuant to certain terms and conditions.

^(c)

Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into separate interest rate swap agreements for the full seven-year term of the First Term Loan (as defined below) and the five-year term, including a one-year extension subject to certain conditions, of the Second Term Loan (as defined below), resulting in fixed all-in interest rates at December 31, 2013 of 3.62% and 2.43%, respectively, and at December 31, 2012 of 3.87% and 2.68%, respectively, at the Company's current leverage ratio (as defined in the agreements). On January 8, 2014, the Company refinanced its Second Term Loan resulting in a new maturity date of January 2019.

^(d)

The Massport Bonds are secured by letters of credit issued by the Royal Bank of Scotland that expire in February 2015, pursuant to an amendment to the agreement governing the letters of credit. The Royal Bank of Scotland letters of credit also have two one-year extension options and are secured by the Hyatt Boston Harbor (formerly the Harborside Hyatt Conference Center & Hotel). The bonds bear interest based on weekly floating rates. The interest rates as of December 31, 2013 were 0.70% and 0.40% for the $5,400 and $37,100 bonds, respectively. The interest rates as of December 31, 2012 were 0.65% and 0.17% for the $5,400 and $37,100 bonds, respectively. The Company also incurs an annual letter of credit fee of a variable rate based on an applicable margin as defined in the Company's senior unsecured credit agreement.

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^(e)	The Company repaid the mortgage loan on June 3, 2013 through borrowings on its senior unsecured credit facility.


^(f)	The Company intends to repay the mortgage loan through borrowings on its credit facilities upon maturity.


^(g)	Mortgage debt includes an unamortized loan premium on the mortgage loan on Hotel Deca of $41 as of December 31, 2013 and $118 as of December 31, 2012.

A summary of the Company’s interest expense and weighted average interest rates for borrowings for the years ended December 31, 2013, 2012 and 2011 is as follows (in thousands):



	For the year ended December 31,
	2013			2012			2011
Interest Expense:
Interest incurred	$	55,912		$	51,351		$	39,196
Amortization of deferred financing costs	2,253			1,915			967
Capitalized interest	(649		)	(370		)	(459		)
Interest expense	$	57,516		$	52,896		$	39,704

Weighted Average Interest Rates for Variable Rate Debt:
Senior unsecured credit facility	2.1		%	2.2		%	1.2		%
LHL unsecured credit facility	2.0		%	2.1		%	1.1		%
Massport Bonds	0.2		%	0.3		%	0.2		%

Credit Facilities

On January 8, 2014, the Company refinanced its $750.0 million senior unsecured credit facility with a syndicate of banks. As amended, the credit facility now matures on January 8, 2018, subject to two six-month extensions that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The credit facility includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $1.05 billion. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of 0.25% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.

On January 8, 2014, LHL also refinanced its $25.0 million unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. As amended, the LHL credit facility now matures on January 8, 2018, subject to two six-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of 0.25% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the LHL credit facility.

The Company's senior unsecured credit facility and LHL's unsecured credit facility contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company's ability to make distributions or other payments to its shareholders upon events of default.

Term Loans

On May 16, 2012, the Company entered into a $177.5 million unsecured term loan with a seven-year term maturing on May 16, 2019 (the “First Term Loan”). The First Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 3.62% at December 31, 2013, for the full seven-year term (see “Derivative and Hedging Activities” below).

On January 8, 2014, the Company refinanced its $300.0 million unsecured term loan (the "Second Term Loan"). The Second Term Loan includes a new accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $500.0 million. The Second Term Loan has a new five-year term maturing on January 8, 2019 and bears interest at variable rates, but was hedged to a fixed interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 2.43% at December 31, 2013, through August 2, 2017 (see "Derivative and Hedging Activities below").

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The Company's term loans contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company's ability to make distributions or other payments to its shareholders upon events of default.

Derivative and Hedging Activities

The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) ("OCI"). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) ("AOCI") related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company's variable rate debt. Effective May 16, 2012, the Company entered into three interest rate swap agreements with an aggregate notional amount of $177.5 million for the First Term Loan's full seven-year term, resulting in a fixed all-in interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 3.62% at December 31, 2013. Effective August 2, 2012, the Company entered into five interest rate swap agreements with an aggregate notional amount of $300.0 million for the Second Term Loan through August 2, 2017, resulting in a fixed all-in interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 2.43% at December 31, 2013. The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges.

The following table presents the effect of derivative instruments on the Company's consolidated statements of operations and comprehensive income, including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the years ended December 31, 2013 and 2012 (in thousands):



	Amount of Gain (Loss) Recognized in OCI on Derivative Instruments					Location of Loss Reclassified from AOCI into Income	Amount of Loss Reclassified from AOCI into Income
						Location of Loss Reclassified from AOCI into Income	Amount of Loss Reclassified from AOCI into Income
	(Effective Portion)					(Effective Portion)	(Effective Portion)
	For the year ended						For the year ended
	December 31,						December 31,
	2013		2012				2013		2012
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	12,375	$	(7,759	)	Interest expense	$	4,248	$	2,074

During the year ended December 31, 2013 and 2012, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.

As of December 31, 2013, there was $4.6 million in cumulative unrealized gain, of which $4.6 million was included in AOCI and an immaterial amount was attributable to noncontrolling interests. As of December 31, 2012, there was $7.8 million in cumulative unrealized loss, of which $7.7 million was included in AOCI and an immaterial amount was attributable to noncontrolling interests. The Company expects that approximately $4.4 million will be reclassified from AOCI and noncontrolling interests and recognized as a reduction to income in the next 12 months, calculated as estimated interest expense using the interest rates on the derivative instruments as of December 31, 2013.

Mortgage Loans

The Company’s mortgage loans are secured by the respective properties. The mortgages are non-recourse to the Company except for fraud or misapplication of funds.

On June 3, 2013, the Company repaid without fee or penalty the Hotel Solamar mortgage loan in the amount of $59.8 million plus accrued interest through borrowings on its senior unsecured credit facility. The loan was due to mature in December 2013.

The mortgage loans contain debt service coverage ratio tests related to the mortgaged properties. If the debt service coverage ratio for a specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender ("cash trap") until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.

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Financial Covenants

Failure of the Company to comply with the financial covenants contained in its credit facilities, term loans and non-recourse secured mortgages could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.

If the Company violates the financial covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.

A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.

Fair Value Measurements

In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2—Observable inputs, other than quoted prices included in level 1, such as interest rates, yield curves, quoted prices in active markets for similar assets and liabilities, and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3—Unobservable inputs that are supported by limited market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques when observable inputs are not available.

The Company estimates the fair value of its financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and subjectivity are involved in developing these estimates and, accordingly, such estimates are not necessarily indicative of amounts that would be realized upon disposition.

Recurring Measurements

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows (in thousands):



		Fair Value Measurements at
		December 31, 2013		December 31, 2012
		Using Significant Other Observable
		Inputs (Level 2)
Description	Consolidated Balance Sheet Location
Derivative interest rate instruments	Prepaid expenses and other assets	$	4,616	$	0
Derivative interest rate instruments	Accounts payable and accrued expenses	$	0	$	7,759

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The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties' nonperformance risk in the fair value measurement, which utilizes level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within level 2 of the fair value hierarchy.

Financial Instruments Not Measured at Fair Value

The following table represents the fair value, derived using level 2 inputs, of financial instruments presented at carrying value in the Company's consolidated financial statements as of December 31, 2013 and 2012 (in thousands):



	December 31, 2013				December 31, 2012
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Note receivable	$	71,014	$	71,014	$	68,490	$	68,490
Borrowings under credit facilities	$	220,606	$	220,957	$	153,000	$	153,719
Term loans	$	477,500	$	477,053	$	477,500	$	475,752
Bonds payable	$	42,500	$	42,500	$	42,500	$	42,500
Mortgage loans	$	514,456	$	522,788	$	579,220	$	607,109

The Company estimates the fair value of its borrowings under credit facilities, term loans, bonds payable and mortgage loans using a weighted average effective interest rate of 3.1% and 2.9% as of December 31, 2013 and 2012, respectively. The assumptions reflect the terms currently available on similar borrowings to borrowers with credit profiles similar to the Company's. The Company estimates that the fair value of its note receivable approximates its carrying value due to the relatively short period until maturity.

At December 31, 2013 and 2012, the carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.

Equity Issuances and Redemptions

From February 1, 2012 through February 14, 2012, the Company sold 1,714,939 common shares of beneficial interest, par value $0.01 per share, under an equity distribution agreement (the “2011 Agreement”) with Raymond James & Associates, Inc. (the “Manager”). After deducting the Manager’s discounts and commissions of $0.6 million, the Company raised net proceeds of $46.6 million. The net proceeds were used to pay down amounts outstanding under the Company’s senior unsecured credit facility and for general corporate purposes.

From May 18, 2012 through May 30, 2012, the Company sold 641,069 common shares of beneficial interest, par value $0.01 per share, under the 2011 Agreement. After deducting the Manager's discounts and commissions of $0.2 million, the Company raised net proceeds of $17.3 million. On August 8, 2012, the Company sold 3,100 common shares of beneficial interest, par value $0.01 per share, under the 2011 Agreement. After deducting the Manager's discounts and commissions of an immaterial amount, the Company raised net proceeds of $0.1 million. The net proceeds were used to pay down amounts outstanding under the Company's senior unsecured credit facility and under the LHL credit facility, and for general corporate purposes. For the year ended December 31, 2012, the Company incurred additional offering costs of $0.2 million related to maintaining the 2011 Agreement.

On May 21, 2012, the Company redeemed all 3,170,000 outstanding Series D Preferred Shares and all 3,500,000 outstanding Series E Preferred Shares for $79.3 million and $87.5 million ($25.00 per share), respectively, plus accrued distributions through May 21, 2012 of $0.8 million and $1.0 million, respectively. The fair values of the Series D Preferred Shares and Series E Preferred Shares exceeded their carrying values by $2.3 million and $2.1 million, respectively, which are included in the determination of net income attributable to common shareholders for the year ended December 31, 2012. The $2.3 million and $2.1 million represent the offering costs related to the Series D Preferred Shares and Series E Preferred Shares, respectively.

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million. The net proceeds were used to fund the acquisition of The Liberty Hotel on December 28, 2012, to pay down amounts outstanding under the Company’s senior unsecured credit facility and under the LHL unsecured credit facility, and for general corporate purposes.

On February 20, 2013, the Company entered into an equity distribution agreement (the "2013 Agreement") with the Manager. Under the terms of the 2013 Agreement, the Company may issue from time to time through or to the Manager, as sales agent or principal, the Company’s common shares of beneficial interest with aggregate gross proceeds totaling up to $250.0 million. The 2013 Agreement replaced the 2011 Agreement, under which $146.0 million of aggregate gross proceeds remained for potential issuance. During the year ended December 31, 2013, the Company incurred offering costs of $0.2 million related to executing and maintaining the 2013 Agreement.

On March 4, 2013, the Company issued 4,000,000 Series I Preferred Shares ($0.01 par value) at a price of $25.00 per share and received net proceeds, after deducting underwriting discounts and other offering costs, of $96.7 million. On March 12, 2013, the underwriters exercised their rights to cover overallotments and purchased 400,000 additional Series I Preferred Shares, resulting in additional net proceeds to the Company of $9.7 million. The net proceeds were used to redeem a portion of the Company's Series G Preferred Shares on April 5, 2013, to pay down amounts outstanding under the Company's senior unsecured credit facility, and for general corporate purposes.

On April 5, 2013, the Company redeemed 4,000,000 of the 6,348,888 outstanding Series G Preferred Shares for $100.0 million ($25.00 per share) plus accrued distributions through April 5, 2013 of $1.9 million. The redemption value of the Series G Preferred Shares exceeded their carrying value by $1.6 million, which is included in the determination of net income attributable to common shareholders for the year ended December 31, 2013. The $1.6 million represents the offering costs related to the redeemed Series G Preferred Shares.

From May 24, 2013 through May 31, 2013, the Company sold 721,706 common shares of beneficial interest, par value $0.01 per share, under the 2013 Agreement. After deducting the Manager's discounts and commissions of $0.2 million, the Company raised net proceeds of $19.7 million. The net proceeds were used to pay down amounts outstanding under the Company's senior unsecured credit facility and for general corporate purposes. As of December 31, 2013, the Company had availability under the 2013 Agreement to issue and sell common shares of beneficial interest having an aggregate offering price of up to $230.1 million.

On October 25, 2013, the Company completed an underwritten public offering of 7,705,000 common shares of beneficial interest, par value $0.01 per share, including the full exercise of the underwriters' option to purchase additional shares. After deducting the underwriters’ discounts and commissions and other offering costs, the Company raised net proceeds of $228.4 million. The net proceeds were used to pay down amounts outstanding under the Company’s senior unsecured credit facility and under the LHL unsecured credit facility, and for general corporate purposes.

Sources and Uses of Cash

As of December 31, 2013, the Company had $13.4 million of cash and cash equivalents and $19.7 million of restricted cash reserves, $13.3 million of which was available for future capital expenditures. Additionally, the Company had $527.7 million available under the Company's senior unsecured credit facility, with $2.3 million reserved for outstanding letters of credit, and $24.4 million available under LHL's unsecured credit facility.

Net cash provided by operating activities was $245.6 million for the year ended December 31, 2013 primarily due to the operations of the hotels, which were partially offset by payments for real estate taxes, personal property taxes, insurance and ground rent.

Net cash used in investing activities was $422.0 million for the year ended December 31, 2013 primarily due to the purchases of Harbor Court Hotel, Hotel Triton, Serrano Hotel and Southernmost Hotel Collection and outflows for improvements and additions at the hotels, including the 2013 renovation of the Park Central Hotel.

Net cash provided by financing activities was $154.8 million for the year ended December 31, 2013 primarily due to net proceeds from the common share offerings, net proceeds from the preferred share offering and net proceeds from the credit facilities, partially offset by payment for the redemption of preferred shares, mortgage loan repayments, payment of distributions to the common shareholders and unitholders and payment of distributions to preferred shareholders.

The Company has considered its short-term (one year or less) liquidity needs and the adequacy of its estimated cash flow from operations and other expected liquidity sources to meet these needs. The Company believes that its principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements, distributions on the preferred shares and the minimum distribution required to maintain the Company’s REIT qualification under the Code. The Company anticipates that these

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needs will be met with available cash on hand, cash flows provided by operating activities, borrowings under the Company's senior unsecured credit facility or LHL’s unsecured credit facility, additional unsecured financing, secured financing on any of the Company’s 39 unencumbered properties, potential property sales, equity issuances available under the Company’s shelf registration statement and the issuance of up to $230.1 million of common shares from time to time under the 2013 Agreement. The Company also considers capital improvements and property acquisitions as short-term needs that will be funded either with cash flows provided by operating activities, utilizing availability under the Company's senior unsecured credit facility or LHL’s unsecured credit facility, additional unsecured financing, secured financing on any of the Company’s 39 unencumbered properties, potential property sales or the issuance of additional equity securities.

The Company expects to meet long-term (greater than one year) liquidity requirements such as property acquisitions, scheduled debt maturities, major renovations, expansions and other nonrecurring capital improvements utilizing availability under the Company's senior unsecured credit facility or LHL’s unsecured credit facility, additional unsecured financing, secured financing on any of the Company’s 39 unencumbered properties, potential property sales, estimated cash flows from operations, equity issuances available under the Company’s shelf registration statement and the issuance of up to $230.1 million of common shares from time to time under the 2013 Agreement. The Company expects to acquire or develop additional hotel properties only as suitable opportunities arise, and the Company will not undertake acquisition or development of properties unless stringent acquisition or development criteria have been achieved.

Reserve Funds

The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the operating agreements. Please refer to “Off-Balance Sheet Arrangements” for a discussion of the Company's reserve funds.

Inflation

The Company relies entirely on the performance of the hotels and their ability to increase revenues to keep pace with inflation. The hotel operators can change room rates quickly, but competitive pressures may limit the hotel operators’ abilities to raise rates faster than inflation or even at the same rate.

The Company’s expenses (primarily real estate taxes, property and casualty insurance, administrative expenses and hotel operating expenses) are subject to inflation. These expenses are expected to grow at the general rate of inflation, except for energy costs, liability insurance, property taxes (due to increased rates and periodic reassessments), employee benefits and some wages, which are expected to increase at rates higher than inflation.

Derivatives and Hedging Activities

In the normal course of business, the Company is exposed to the effects of interest rate changes. The Company limits the risks associated with interest rate changes by following established risk management policies and procedures which may include the use of derivative instruments. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract and are recorded on the balance sheet at fair value, with offsetting changes recorded to other comprehensive income (loss). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. The Company incorporates credit valuation adjustments to reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging. The Company entered into derivative instruments during the second and third quarters of 2012.

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Item 7A.	Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

The table below provides information about financial instruments that are sensitive to changes in interest rates, including mortgage obligations, bonds and lines of credit. For debt obligations, scheduled maturities and related weighted average interest rates by expected maturity dates are as follows (in thousands):



	2014			2015			2016			2017			2018			Thereafter			Total
Fixed rate debt	$	13,324		$	214,797		$	586,294		$	0		$	0		$	177,500		$	991,915
Weighted average interest	6.2		%	5.3		%	4.1		%	0.0		%	0.0		%	3.6		%	4.3		%
Variable rate debt	$	0		$	0		$	220,606		$	0		$	42,500		$	0		$	263,106
Weighted average interest	0.0		%	0.0		%	1.9		%	0.0		%	0.4		%	0.0		%	1.7		%
Total	$	13,324		$	214,797		$	806,900		$	0		$	42,500		$	177,500		$	1,255,021

The table above presents the principal amount of debt maturing each year, including annual amortization of principal, through December 31, 2018 and thereafter and weighted average interest rates for the debt maturing in each specified period. This table reflects indebtedness outstanding as of December 31, 2013 and does not reflect new indebtedness, or revisions to terms of existing indebtedness, incurred after that date. On January 8, 2014, the Company refinanced its $750.0 million senior unsecured credit facility and $300.0 million Second Term Loan, and LHL refinanced its $25.0 million unsecured credit facility, resulting in new maturity dates of January 8, 2018, subject to two six-month extensions, pursuant to certain terms and conditions, for the senior unsecured credit facility and the LHL unsecured credit facility, and January 8, 2019 for the Second Term Loan. The Company’s ultimate exposure to interest rate fluctuations depends on the amount of indebtedness that bears interest at variable rates, the time at which the interest rate is adjusted, the amount of adjustment, the ability to prepay or refinance variable rate indebtedness and hedging strategies used to reduce the impact of any increases in rates. As of December 31, 2013, the estimated fair value of the Company’s fixed rate debt was $1.0 billion.

The Company is exposed to market risk from changes in interest rates. The Company seeks to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring the Company’s variable rate debt and converting such debt to fixed rates when the Company deems such conversion advantageous. From time to time, the Company may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose the Company to the risks that the other parties to the agreements will not perform, the Company could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under GAAP guidance. As of December 31, 2013, $263.1 million of the Company’s aggregate indebtedness (21.0% of total indebtedness) was subject to variable interest rates, excluding amounts outstanding under the First Term Loan and Second Term Loan since the Company hedged their variable interest rates to fixed interest rates.

If market rates of interest on the Company’s variable rate long-term debt fluctuate by 0.25%, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows by $0.7 million annually. This assumes that the amount outstanding under the Company’s variable rate debt remains at $263.1 million, the balance as of December 31, 2013.


Item 8.	Consolidated Financial Statements and Supplementary Data

See Index to Financial Statements on page F-1.


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


Item 9A.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures—The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to the members of senior management and the Board of Trustees.

Based on management’s evaluation as of December 31, 2013, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms.

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Management’s Report on Internal Control Over Financial Reporting—The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of December 31, 2013.

Independent Registered Public Accounting Firm’s Report on Internal Control Over Financial Reporting—KPMG LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein on page F-3, on the effectiveness of our internal control over financial reporting.

Changes in Internal Controls—There was no change to the Company’s internal control over financial reporting during the fourth quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


Item 9B.	Other Information

As of the quarter ended December 31, 2013, all items required to be disclosed under Form 8-K were reported under Form 8-K.

Additional Material Federal Income Tax Considerations

The following is a summary of additional material federal income tax considerations with respect to the ownership of our shares. This summary supplements and should be read together with the discussion under “Material Federal Income Tax Considerations” in the prospectus dated November 20, 2012 and filed as part of a Registration Statement on Form S-3 (No. 333-185081).

Recent Legislation

Pursuant to recently enacted legislation, as of January 1, 2013, (1) the maximum tax rate on “qualified dividend income” received by U.S. shareholders taxed at individual rates is 20%, (2) the maximum tax rate on long-term capital gain applicable to U.S. shareholders taxed at individual rates is 20%, and (3) the highest marginal individual income tax rate is 39.6%. Pursuant to such legislation, the backup withholding rate remains at 28%. We urge you to consult your tax advisors regarding the impact of this legislation on the purchase, ownership and sale of our shares of beneficial interest.

Taxation of Non-U.S. Shareholders

For payments after June 30, 2014, a U.S. withholding tax at a 30% rate will be imposed on dividends paid on our shares received by certain non-U.S. shareholders if they held our shares through foreign entities that fail to meet certain disclosure requirements related to U.S. persons that either have accounts with such entities or own equity interests in such entities. In addition, if those disclosure requirements are not satisfied, a U.S. withholding tax at a 30% rate will be imposed on proceeds from the sale of our shares received after December 31, 2016 by certain non-U.S. shareholders. If payment of withholding taxes is required, non-U.S. shareholders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect of such dividends and proceeds will be required to seek a refund from the Internal Revenue Service to obtain the benefit or such exemption or reduction. We will not pay any additional amounts in respect of any amounts withheld.

Information Reporting Requirements and Withholding

For payments after June 30, 2014, a U.S. withholding tax at a 30% rate will be imposed on dividends paid on our shares received by U.S. shareholders who own their shares through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. In addition, if those disclosure requirements are not satisfied, a U.S. withholding tax at a 30% rate will be imposed on proceeds from the sale of our shares received after December 31, 2016 by U.S. shareholders who own their shares through foreign accounts or foreign intermediaries. We will not pay any additional amounts in respect of any amounts withheld.

Table of Contents

PART III


Item 10.	Trustees, Executive Officers and Corporate Governance