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As filed with the Securities and Exchange Commission on August 20, 2003
Registration No. 333-105277


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 3 to

Form S-11

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its governing instruments)

14180 Dallas Parkway, 9th Floor

Dallas, Texas 75254
(972) 490-9600
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Montgomery J. Bennett

David A. Brooks
14180 Dallas Parkway, 9th Floor
Dallas, Texas 75254
(972) 980-2700
(Name, address, including zip code, and
telephone number, including area code, of agent for service)

Copies to:

     
David Barbour
Muriel C. McFarling
Andrews & Kurth L.L.P.
1717 Main Street, Suite 3700
Dallas, Texas 75201
(214) 659-4400
  Brad S. Markoff
Jonathan H. Talcott
Alston & Bird LLP
3201 Beechleaf Court, Suite 600
Raleigh, North Carolina 27604-1062
(919) 862-2200

     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.     o

     If the Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

     If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.     o

CALCULATION OF REGISTRATION FEE

                 


Proposed Proposed
Title of Securities Amount Being Maximum Offering Maximum Aggregate Amount of
Being Registered Registered(1) Price per Unit(2) Offering Price(2) Registration Fee(3)

Common Stock, $0.01 par value per share
  40,250,000 shares   $10.00   $402,500,000   $32,563


  (1)  Includes 5,250,000 shares that may be purchased pursuant to an over-allotment option granted to the underwriter.
 
  (2)  Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o).
 
  (3)  Previously paid.

     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 31, 2003

PROSPECTUS

35,000,000 Shares of Common Stock
(ASHFORD HOSPITALITY TRUST LOGO)
     Ashford Hospitality Trust, Inc. is a newly-formed, self advised Maryland corporation that intends to qualify as a real estate investment trust, or REIT, and that was organized to pursue opportunities in the lodging industry. This is our initial public offering of common stock, for which no public market currently exists. All of the shares offered by this prospectus are being sold by us. We expect the initial public offering price of the shares to be between $9.00 and $11.00 per share. After the pricing of this offering, we expect that our shares will trade on the New York Stock Exchange under the symbol “AHT.”

     We will acquire all of our initial properties and asset management and consulting agreements from entities owned by Archie Bennett, Jr., our Chairman, Montgomery J. Bennett, our President and Chief Executive Officer, David A. Brooks, our Chief Legal Officer, Mark L. Nunneley, our Chief Accounting Officer, and one of our directors, Martin L. Edelman (or his family), in exchange for cash and interests in our company. Each of the Bennetts will beneficially receive $1.5 million in cash and a 7.4% interest in our company on a fully-diluted basis, having a value of $31.4 million. Messrs. Brooks, Nunneley and Edelman, plus two others, will collectively receive a 1.6% interest in our company on a fully-diluted basis, having a value of $6.8 million. The interests in our company are valued using $10 per share, which is the mid-point of the price range disclosed above. We will use $65.7 million of the offering proceeds to repay debt secured by the contributed properties, which, together with the $3.0 million payment to the Bennetts, is 21.3% of the anticipated net proceeds of this offering. We will also assume $16.0 million in mortgage debt secured by one of the contributed properties. The Bennetts each intend to use their respective portion of the cash consideration to partially satisfy their obligations to purchase 500,000 shares of our common stock.

     See “Risk Factors” beginning on page 16 of this prospectus to read about risks you should consider before buying our common stock. These risks include:

  •  We are a blind pool investment opportunity. We have no operating history, have identified only six properties to acquire and, based on the mid-point of the price range disclosed above, have not committed approximately 78.7% of the anticipated net proceeds of this offering to any specific assets. As a result, investors will not be able to evaluate the economic merits of any assets we may later buy with our excess equity. We may also be unable to invest our excess proceeds on acceptable terms or at all.
 
  •  Our Chairman and President and Chief Executive Officer have conflicts of interest with us. Messrs. Archie and Montgomery Bennett own our hotel manager, which will receive substantial management fees from us and is party to an agreement with us that generally requires us to hire it to manage any future property. Certain of our officers and directors may suffer different and more adverse tax consequences than our stockholders upon the sale of some of our properties. Because of these conflicts of interest, and because of our tax indemnity obligation to the contributors of our initial assets, our management may make decisions concerning the sale, acquisition or refinancing of properties that are not in the stockholders’ best interests.
 
  •  We did not obtain independent appraisals of any of the initial assets we will acquire from our affiliates. Instead of paying a fixed price for these assets, we will issue a fixed number of interests in our company that have a value based on our initial public offering price. Consequently, the consideration we exchange for the assets may exceed their fair market value.
 
  •  We have agreed for a period of up to 10 years to pay the affiliated entities contributing our initial assets the amount of their income tax liability, plus a gross-up amount, if we dispose of any of their contributed properties in a taxable transaction.
 
  •  We may have to pay substantial fees to our hotel manager, which is owned by the Bennetts, upon early termination of our hotel management agreement. If we were to terminate the management agreement with respect to all six of our initial properties immediately after this offering, the termination fee would be approximately $10.6 million. This fee will increase if we acquire additional properties. Any termination fees that we have to pay under the management agreement may reduce our cash available for distribution.
 
  •  Our mortgage loan assets will generally be non-recourse, and in the case of a defaulted non-recourse loan, our recovery will be limited to the value of the underlying property, which may be less than the loan amount. Our mezzanine mortgage loans may be unsecured entirely or subordinated to a senior lender and may become unsecured upon foreclosure.
 
  •  Increases in the interest rates on our borrowings may reduce our net income by reducing the spread between the interest rate on our borrowings to fund an investment and the investment’s return.
 
  •  Upon completion of this offering, our consolidated mortgage indebtedness will be approximately $16.0 million. We are also seeking a $120 million bank credit facility. While our initial policy is to limit our leverage to 60% of our gross assets, our board of directors may change this and our other operating policies and strategies at any time without stockholder approval. Our debt service obligations may reduce our cash available for distribution.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

                 
Per Share Total


Public offering price
  $       $    
Underwriting discount
  $       $    
Proceeds, before expenses, to us
  $       $    

     The underwriters have an option to purchase up to 5,250,000 additional shares of our common stock to cover over-allotments.

     Simultaneously with the completion of this offering, Messrs. Archie and Montgomery Bennett will acquire directly from us in a privately negotiated transaction (and not from the underwriters) a total of 500,000 shares of our common stock at a price per share equal to the offering price, net of an amount equal to the underwriting discount.

     We expect to deliver the common stock on or about                  , 2003.

Friedman Billings Ramsey

  Legg Mason Wood Walker
Incorporated  
  Credit Lyonnais Securities (USA) Inc.

The date of this prospectus is                    , 2003.


TABLE OF CONTENTS

PROSPECTUS SUMMARY
Overview
Risk Factors
Our Team
Our Business Strategy
Formation Transactions
Our Structure
Benefits to Related Parties
Conflicts of Interest
Corporate Information
The Offering
Use of Proceeds
Distribution Policy
Summary Selected Financial Information
RISK FACTORS
Risks Related to Our Business
Risks Related to Hotel Investments
Risks Relating to Investments in Mortgages and Mezzanine Loans
Risks Related to the Real Estate Industry
Risks Related to Our Status as a REIT
Risk Factors Related to This Offering and Our Corporate Structure
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
CAPITALIZATION
DISTRIBUTION POLICY
DILUTION
OUR COMPANY
Overview
Our Team
Our Opportunity
Our Business Strategy
Our Operating Partnership
Our Taxable REIT Subsidiary
Legal Proceedings
BUSINESS AND PROPERTIES
Initial Properties
Asset Management and Consulting Agreements
Leases
Management Agreement
Mutual Exclusivity Agreement
Franchise Licenses
Employees
Environmental Matters
Insurance
Depreciation
SELECTED FINANCIAL INFORMATION
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BALANCE SHEETS HISTORICAL AND PRO FORMA
STATEMENTS OF OPERATIONS HISTORICAL AND PRO FORMA For the Year Ended December 31, 2002 and the Six Months Ended June 30, 2003
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Results of Operations of the Initial Properties
Liquidity and Capital Resources
Inflation
Seasonality
Significant Accounting Policies
Investment in Hotel Properties
Revenue Recognition
New Accounting Pronouncements
Commitments
Financial Instruments Sensitivity Analysis
MANAGEMENT
Directors and Executive Officers
Corporate Governance -- Board of Directors and Committees
Compensation Committee Interlocks and Insider Participation
Director Compensation
Executive Compensation
Employment Agreements
Non-Compete Agreement
The Stock Plan
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
Disposition Policy
Financing Policies
Equity Capital Policies
Conflict of Interest Policy
Reporting Policies
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Contribution of Initial Properties
Other Benefits to Related Parties
Related Party Management Services
Mutual Exclusivity Agreement
Asset Management and Consulting Agreement
Other Relationships
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
General
Authorized Stock
Common Stock
Preferred Stock
Power to Increase Authorized Stock and Issue Additional Shares of Our Common Stock and Preferred Stock
Restrictions on Ownership and Transfer
Transfer Agent and Registrar
MATERIAL PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The Board of Directors
Business Combinations
Control Share Acquisitions
Amendment to Our Charter
Dissolution of Our Company
Advance Notice of Director Nominations and New Business
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws
Indemnification and Limitation of Directors’ and Officers’ Liability
SHARES AVAILABLE FOR FUTURE SALE
PARTNERSHIP AGREEMENT
Management
Transferability of Interests
Capital Contributions
Redemption Rights
Operations
Distributions
Allocations
Amendments
Exculpation and Indemnification of the General Partner
Term
Tax Matters
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
Taxation of Our Company
Requirements for Qualification
Income Tests
Asset Tests
Distribution Requirements
Recordkeeping Requirements
Failure to Qualify
Taxation of Taxable U.S. Stockholders
Taxation of U.S. Stockholders on the Disposition of Common Stock
Capital Gains and Losses
Information Reporting Requirements and Backup Withholding
Taxation of Tax-Exempt Stockholders
Taxation of Non-U.S. Stockholders
Changes in Federal Income Tax Laws
Other Tax Consequences
Income Taxation of the Partnerships and Their Partners
Sale of a Partnership’s Property
Taxable REIT Subsidiaries
State and Local Taxes
UNDERWRITING
EXPERTS
REPORTS TO STOCKHOLDERS
LEGAL MATTERS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS
SIGNATURES
EXHIBIT INDEX
EX-1.1 Form of Underwriting Agreement
EX-4.1 Form of Certificate for Common Stock
EX-8.1 Opinion of Andrews & Kurth LLP
EX-23.3 Consent of Ernst & Young LLP


Table of Contents

TABLE OF CONTENTS

           
PROSPECTUS SUMMARY
    1  
 
Overview
    1  
 
Risk Factors
    2  
 
Our Team
    4  
 
Our Business Strategy
    4  
 
Formation Transactions
    6  
 
Our Structure
    9  
 
Benefits to Related Parties
    10  
 
Conflicts of Interest
    11  
 
Corporate Information
    12  
 
The Offering
    13  
 
Use of Proceeds
    13  
 
Distribution Policy
    14  
 
Summary Selected Financial Information
    15  
RISK FACTORS
    16  
 
Risks Related to Our Business
    16  
 
Risks Related to Hotel Investments
    23  
 
Risks Relating to Investments in Mortgages and Mezzanine Loans
    24  
 
Risks Related to the Real Estate Industry
    26  
 
Risks Related to Our Status as a REIT
    29  
 
Risk Factors Related to This Offering and Our Corporate Structure
    31  
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
    35  
USE OF PROCEEDS
    36  
CAPITALIZATION
    37  
DISTRIBUTION POLICY
    38  
DILUTION
    39  
OUR COMPANY
    40  
 
Overview
    40  
 
Our Team
    41  
 
Our Opportunity
    42  
 
Our Business Strategy
    46  
 
Our Operating Partnership
    51  
 
Our Taxable REIT Subsidiary
    51  
 
Legal Proceedings
    51  
BUSINESS AND PROPERTIES
    52  
 
Initial Properties
    52  
 
Asset Management and Consulting Agreements
    54  
 
Leases
    57  
 
Management Agreement
    60  
 
Mutual Exclusivity Agreement
    66  
 
Franchise Licenses
    69  
 
Employees
    70  
 
Environmental Matters
    70  
 
Insurance
    71  
 
Depreciation
    72  
SELECTED FINANCIAL INFORMATION
    73  
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
    75  
 
Ashford Hospitality Trust, Inc. Balance Sheets Historical and Pro Forma as of June 30, 2003
    76  
 
Ashford Hospitality Trust, Inc. Statements of Operations Historical and Pro Forma as of December 31, 2002 and June 30, 2003
    79  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    82  
 
Overview
    82  
 
Results of Operations of the Initial Properties
    82  
 
Liquidity and Capital Resources
    85  
 
Inflation
    86  
 
Seasonality
    86  
 
Significant Accounting Policies
    86  
 
Investment in Hotel Properties
    86  
 
Revenue Recognition
    87  
 
New Accounting Pronouncements
    87  
 
Commitments
    89  
 
Financial Instruments Sensitivity Analysis
    89  
 
Cash Distribution Policy
    89  
MANAGEMENT
    91  
 
Directors and Executive Officers
    91  
 
Corporate Governance — Board of Directors and Committees
    94  
 
Compensation Committee Interlocks and Insider Participation
    95  
 
Director Compensation
    95  
 
Executive Compensation
    96  
 
Employment Agreements
    96  
 
Non-Compete Agreement
    98  
 
The Stock Plan
    99  
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
    103  
 
Disposition Policy
    103  
 
Financing Policies
    103  
 
Equity Capital Policies
    104  
 
Conflict of Interest Policy
    104  
 
Reporting Policies
    106  

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CERTAIN RELATIONSHIPS AND TRANSACTIONS
    106  
 
Contribution of Initial Properties
    106  
 
Other Benefits to Related Parties
    109  
 
Related Party Management Services
    113  
 
Mutual Exclusivity Agreement
    114  
 
Asset Management and Consulting Agreement
    114  
 
Other Relationships
    114  
PRINCIPAL STOCKHOLDERS
    115  
DESCRIPTION OF CAPITAL STOCK
    115  
 
General
    115  
 
Authorized Stock
    115  
 
Common Stock
    116  
 
Preferred Stock
    116  
 
Power to Increase Authorized Stock and Issue Additional Shares of Our Common Stock and Preferred Stock
    117  
 
Restrictions on Ownership and Transfer
    117  
 
Transfer Agent and Registrar
    119  
MATERIAL PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
    120  
 
The Board of Directors
    120  
 
Business Combinations
    120  
 
Control Share Acquisitions
    121  
 
Amendment to Our Charter
    122  
 
Dissolution of Our Company
    122  
 
Advance Notice of Director Nominations and New Business
    122  
 
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws
    122  
 
Indemnification and Limitation of Directors’ and Officers’ Liability
    122  
SHARES AVAILABLE FOR FUTURE SALE
    124  
 
General
    124  
 
Redemption/Exchange Rights
    124  
 
Rule 144
    124  
 
Registration Rights
    124  
 
Lock-Up Agreements
    125  
PARTNERSHIP AGREEMENT
    125  
 
Management
    125  
 
Transferability of Interests
    126  
 
Capital Contributions
    126  
 
Redemption Rights
    127  
 
Operations
    127  
 
Distributions
    127  
 
Allocations
    128  
 
Amendments
    128  
 
Exculpation and Indemnification of the General Partner
    128  
 
Term
    129  
 
Tax Matters
    129  
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
    129  
 
Taxation of Our Company
    130  
 
Requirements for Qualification
    131  
 
Income Tests
    132  
 
Asset Tests
    138  
 
Distribution Requirements
    139  
 
Recordkeeping Requirements
    140  
 
Failure to Qualify
    140  
 
Taxation of Taxable U.S. Stockholders
    140  
 
Taxation of U.S. Stockholders on the Disposition of Common Stock
    141  
 
Capital Gains and Losses
    141  
 
Information Reporting Requirements and Backup Withholding
    142  
 
Taxation of Tax-Exempt Stockholders
    142  
 
Taxation of Non-U.S. Stockholders
    143  
 
Changes in Federal Income Tax Laws
    144  
 
Other Tax Consequences
    144  
 
Income Taxation of the Partnerships and Their Partners
    146  
 
Sale of a Partnership’s Property
    147  
 
Taxable REIT Subsidiaries
    148  
 
State and Local Taxes
    148  
UNDERWRITING
    149  
EXPERTS
    152  
REPORTS TO STOCKHOLDERS
    152  
LEGAL MATTERS
    152  
WHERE YOU CAN FIND MORE INFORMATION
    152  
INDEX TO FINANCIAL STATEMENTS
    F-1  

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PROSPECTUS SUMMARY

      This summary highlights information relating to Ashford Hospitality Trust, Inc. and our common stock that is being offered by this prospectus. More detailed discussions of this information are contained in this prospectus. To better understand the offering and our business, you should carefully review this entire prospectus, including “Risk Factors.” Unless indicated otherwise, the information included in this prospectus assumes no exercise of the underwriter’s over-allotment option, and, unless otherwise mentioned or unless the context requires, all references in this prospectus to “we,” “us,” “our” or similar references mean Ashford Hospitality Trust, Inc., Ashford Hospitality Limited Partnership, our operating partnership, and our other subsidiaries. In addition, unless otherwise mentioned or unless the context requires, all reference in the Prospectus to “Remington Hotel Corporation” or “Remington Hotel” means Remington Hotel Corporation, Remington Lodging & Hospitality, L.P. or Remington Lodging and their respective subsidiaries. Unless otherwise indicated, the information contained in this prospectus is as of June 30, 2003 and assumes that the underwriters’ overallotment option is not exercised, the common stock to be sold in this offering is sold at $10.00 per share, which is the mid-point of the range of prices indicated on the front cover of this prospectus, and the units of limited partnership in our operating partnership to be issued in the formation transactions are valued at $10.00 per unit. Each unit is redeemable for cash equal to the then-current market value of one share of common stock or, at our option, one share of our common stock, commencing 12 months following the consummation of this offering. The number of shares of restricted stock to be granted to our executive officers and employees as incentive compensation in connection with our initial public offering will be equal to 2.25% of the fully-diluted shares of common stock outstanding after completion of this offering, and for purposes of this prospectus we have assumed that we will sell 35.0 million shares of common stock and the underwriter’s overallotment option will not be exercised.

Overview

      We are a Maryland corporation that was formed in May 2003 to take advantage of the existing and developing investment opportunities in the lodging industry. These diverse lodging investment opportunities may result from inefficiencies related to market illiquidity, supply/ demand imbalances and general business cycles. We will initially target specific opportunities created by the current distressed lodging market but will retain the flexibility to invest in the most attractive risk-reward opportunities as they develop in the lodging business cycle. To our knowledge, we will be one of the few publicly traded REITs, if not the only publicly traded REIT, exclusively focused on investing in the hospitality industry at all levels of the capital structure and across all segments where pricing, yield and capital appreciation advantages may exist. While our initial investment policies are well defined, because we will have approximately $254.1 million of net proceeds for which we have not yet identified specific properties to purchase or investments to make, we will be considered a blind pool. Further, our board of directors may change our investment policies at any time without stockholder approval.

      Immediately prior to our formation, all of our senior executive officers were employed by and responsible for the lodging investment activities of Remington Hotel Corporation and its affiliated company, Ashford Financial Corporation, or Ashford Financial. Although these officers have no experience operating a public company or a REIT, they have experience in sourcing, underwriting, operating, repositioning, developing, selling and financing a wide variety of lodging investments. As a result, we believe that we have broad-based experience with the full spectrum of issues and business cycles that affect the lodging industry. Our management team has operated effectively across a variety of lodging-related investment types in both growth and recessionary cycles.

      Immediately following the completion of this offering and the formation transactions, we will own six hotel properties, have approximately $254.1 million of cash available to fund the acquisition or origination of lodging-related assets and for general corporate purposes and, with only $16.0 million of mortgage debt, will be relatively unleveraged. This capital structure provides us with the ability to make significant future investments to take advantage of what we believe are current opportunities in the hotel market. We intend

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to finance our future acquisitions with the net proceeds of this offering and future borrowings; however, we do not intend to exceed 60% leverage on our investments on a gross asset basis. We are currently seeking a secured line of credit of up to $120 million, which could greatly increase our debt position, and our charter does not contain any limitation on our ability to incur debt.

      We intend to be self-advised and own our lodging investments and conduct our business through an operating partnership, Ashford Hospitality Limited Partnership. We will own an 86.7% interest in our operating partnership. We also intend to elect to be treated as a real estate investment trust, or REIT, for federal income tax purposes. Because of limitations imposed on REITs in operating hotel properties, Remington Lodging & Hospitality, L.P., or Remington Lodging, will manage our hotel properties. Remington Lodging is wholly owned by Messrs. Archie and Montgomery J. Bennett, who also own 100% of Remington Hotel Corporation, or Remington Hotel, which is one of the largest privately-owned independent hotel management companies in the country and has managed over $1 billion of hotels in 28 states.

      Our initial assets will consist of six hotels, four Embassy Suites and two Radisson Hotels, and eight asset management and consulting agreements. We will acquire all of our initial assets from affiliates, including Messrs. Archie and Montgomery Bennett or entities owned by them, Mr. Martin L. Edelman (or his family members), one of our anticipated directors, Mr. David A. Brooks, our Chief Legal Officer, Mr. Mark Nunneley, our Chief Accounting Officer, and two employees of Remington Hotel Corporation. The aggregate value of the consideration to be paid by us in exchange for our initial assets, including assumption of mortgage notes, is $143.5 million. We will own the hotels in fee simple except for the Radisson Hotel located in Covington, Kentucky, which will be owned part in fee simple and part pursuant to a ground lease which expires in 2070 (including all extensions). For the years ended December 31, 2002 and 2001 and the six months ended June 30, 2003, these six hotels had a cumulative net operating loss of $3.1 million, $2.9 million and $1.4 million, respectively, which losses include non-cash expenses for depreciation and amortization of $4.8 million, $4.4 million and $2.2 million for December 31, 2002 and 2001 and the six months ended June 30, 2003, respectively. The asset management and consulting agreements are contracts between Ashford Financial and eight affiliated hotel management companies. Under these agreements, Ashford Financial provides asset management and consulting services to 27 hotels managed under contract with eight management companies beneficially owned by Messrs. Archie and Montgomery Bennett. After the contribution of these agreements to us, we will take Ashford Financial’s interest under the agreements and will perform the services instead of Ashford Financial.

      Our initial assets were valued based on several factors, including a multiple of expected future earnings, internal rate of return analysis, review of replacement costs and analysis of sales of similar assets. No single factor was given greater weight than any other in valuing these assets. We did not obtain independent appraisals for any of these assets. As a result, such amounts may not reflect fair market value; however, our management believes that the total fair value of all consideration given in connection with our formation transactions (including the assumption of liabilities) is equal to the fair value of the assets acquired, assuming the common stock sold in this offering is sold at the mid-point of the range of prices indicated on the front cover of this prospectus. In connection with the determination of consideration to be paid for each of our initial assets, the total number of shares of common stock or units of our operating partnership is fixed. Accordingly, the ultimate value of the consideration we will deliver in exchange for the initial assets will fluctuate based on the initial public offering price of our stock. Specifically, if the initial public offering price is greater than the mid-point of our estimated range, the contributors of our initial assets will receive consideration greater than our original valuation.

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Risk Factors

      An investment in our common stock involves various risks. You should carefully consider these and other matters discussed under “Risk Factors” prior to making an investment in us. Some of these risks include:

  •  We are a blind pool. We have no operating history, have identified only six hotel properties and no mortgage loans to acquire and have not committed the substantial majority of the anticipated net offering proceeds to any specific assets. We may be unable to invest our excess proceeds on acceptable terms or at all.
 
  •  Our Chairman’s and Chief Executive Officer’s conflicts of interest arising from their ownership interests in our manager (which will receive substantial fees from us) and in other lodging business entities and their and our other officers’ tax positions and tax indemnification rights may result in management decisions not in the stockholders’ best interest and may make sales or refinancings of some of our properties less likely.
 
  •  We did not obtain independent appraisals of the initial hotels or the asset management and consulting agreements contributed to or acquired by us from affiliates. In addition, instead of paying a fixed price for the assets, we will issue a fixed number of interests in our company that have a value based on our initial public offering price. Consequently, the consideration we exchange for the assets may exceed their aggregate fair market value.
 
  •  We have agreed for a period of up to 10 years to pay the affiliated entities contributing our initial assets the amount of their income tax liability, plus a gross-up amount, if we dispose of any of their contributed properties in a taxable transaction. The partners in the contributing partnership include Messrs. Archie and Monty Bennett, Brooks and Nunneley and family members of Mr. Edelman.
 
  •  We may have to pay substantial fees to our hotel manager, which is owned by Messrs. Archie and Monty Bennett, upon early termination of our hotel management agreement.
 
  •  Our mortgage loan assets will generally be non-recourse, will not be government insured and may not be investment grade. In the case of a defaulted non-recourse loan, our recovery will be limited to the value of the underlying property, which may be less than the loan amount. Our mezzanine mortgage loans may be unsecured or secured but subordinated to a senior lender and may become unsecured upon foreclosure.
 
  •  Interest rate mismatches between our borrowings and our investments as well as changes in prepayment rates on our mortgage loans may reduce our income.
 
  •  Immediately upon completion of this offering, we will have consolidated mortgage indebtedness of approximately $16.0 million and we are currently seeking a bank credit facility of approximately $120.0 million. While our policy is to limit the leverage on our investments to 60% of gross assets, our board of directors may change this and our other operating policies and strategies at any time without stockholder approval. Our debt service obligations may reduce our cash available for distribution.
 
  •  We may enter into interest rate hedging transactions, which may reduce our net income because they may be unsuccessful or the counterparties to hedging transactions may not perform their obligations.
 
  •  Our officers have no experience operating a public company or a REIT.
 
  •  Hotel operations are sensitive to economic and political conditions.
 
  •  We depend on the business relationships and experience of our key personnel, the loss of whom could threaten our ability to execute our strategies.
 
  •  If we fail to qualify as a REIT, we will be subject to greater federal income tax.
 
  •  We may not be able to maintain or renew our hotel franchises.
 
  •  Maintaining our hotels and complying with hotel franchise standards may require us to make significant capital expenditures.

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  •  Our lodging-related assets will be illiquid, and sales of hotel investments could result in unfavorable tax consequences to us because of the Internal Revenue Code rules governing REITs.
 
  •  The costs of compliance with environmental and other regulations by us and the operators of the hotels underlying our loans may harm our operating results.

Our Team

      We intend to capitalize on the experience of our senior management in sourcing, underwriting, operating, repositioning, developing, selling and financing lodging-related assets. Our roots in the hotel industry trace back to 1968 when our Chairman, Archie Bennett, Jr., built his first hotel. Since then, Mr. Bennett and certain members of our senior management team have been involved in the investment in, or management of, 190 hotels or mortgage loans secured by hotels, totaling approximately 31,119 rooms in 33 states and in the development of 35 hotels, totaling approximately 9,201 rooms in 11 states.

      Historically, our management team’s business strategy has been threefold: first, to identify attractive investment opportunities in the lodging industry; second, to match such opportunities with appropriate institutional oriented investors; and third, to manage such investments, including providing development, management and construction services, for the institutional owners. We believe our management’s historical background in the hotel industry will allow us to successfully execute our business strategy.

      The Chairman of our board of directors, Archie Bennett, Jr., will continue to serve as the Chairman of the board of directors of Remington Hotel Corporation after this offering, and our President and Chief Executive Officer, Montgomery J. Bennett, will continue to serve as President and Chief Executive Officer of Remington Hotel Corporation. Remington Lodging, which is an affiliate of Remington Hotel and which is owned 100% by Messrs. Archie and Montgomery Bennett, will provide management and other related services for our hotel properties after the offering. All other members of our senior management team who were employees of Remington Hotel prior to our formation will resign from Remington Hotel at or prior to the closing of this offering.

Our Business Strategy

      We will implement an asset allocation strategy aimed at maximizing stockholder value by providing attractive risk-adjusted returns throughout the business cycles of the lodging industry. We intend to selectively invest capital in a variety of lodging-related assets based on our evaluation of diverse market conditions. By investing in diversified lodging assets, at different levels of a given hotel’s capital structure, we plan to take advantage of changes in the capital markets. Our investment strategy will target limited and full service hotels in primary, secondary and resort markets throughout the United States. To take full advantage of current and future investment opportunities in the lodging industry, we will invest according to the asset allocation policies described below. Due to changes in market conditions we will continually evaluate the appropriateness of our investment policies and our board of directors may change any or all of these policies at any time, thereby providing us with flexibility in our asset allocation strategy. In addition to our investment activities, we will also perform certain asset management and consulting services for other management companies affiliated with Remington Hotel.

Direct Hotel Investments

      We intend to acquire existing hotels and, under appropriate market conditions, to develop new hotels. Our direct hotel acquisition strategy will seek to achieve both current income and income from appreciation. We expect to acquire hotels that either offer a high return on investment or have the opportunity to increase in value through brand repositioning, market based recovery or improved management practices. We believe that values for, and operating performances of, lodging properties are currently below historical levels, making this an attractive time for acquisitions.

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Mezzanine Financing

      We intend to acquire or originate subordinated loans, also known as mezzanine loans, secured by junior mortgages on hotels or pledges of equity interests in entities owning hotels. These mezzanine loans may be secured by individual assets as well as cross-collateralized portfolios of assets. Although these types of loans generally have greater repayment risks than first mortgages due to the subordinated nature of such loans, we believe that there currently exists a strong need for lodging mezzanine loans. We believe that the recent slowdown in the travel industry has caused the value of hotel properties to decline below the values at which they were acquired or last refinanced. This decline in market value, coupled with more stringent underwriting criteria by senior hotel lenders, has caused a gap to develop in the loan-to-value ratio of these properties, making it increasingly difficult for owners to refinance their properties. We believe that mezzanine capital provides a solution for these owners by providing loans to cover the loan-to-value shortfalls. We expect this asset class to provide us with attractive yields and, potentially, allow us to participate in the improving economics of the underlying hotel. In addition, subject to regulatory compliance, we may acquire or originate corporate-level mezzanine loans on an unsecured basis.

First Mortgage Financing

      We intend to acquire, potentially at a discount to par, or originate loans secured by first priority mortgages on hotels. We may be subject to certain state-imposed licensing regulations related to commercial mortgage lenders, with which we intend to comply. However, because we are not a bank or a federally chartered lending institution, we are not subject to the state and federal regulatory constraints imposed on such entities. Also, because we do not intend to securitize our assets, we expect to be able to offer more flexible terms than commercial lenders who contribute loans to securitized mortgage pools. We anticipate that this asset class will provide us with stable, attractive current yields.

Sale-Leaseback Transactions

      We intend to purchase hotels and lease them back to their existing hotel owners. Our sale-leaseback policy will target hotel owners that want the ability to realize the value of their investments while maintaining operating control of their hotels. We will seek to structure the transactions as net leases with participation features, terms ranging up to 20 years plus extension options, and with the operating responsibility for the property assumed by the lessee. We believe these transactions will provide us current income, with growth through contractual rental increases or cash flow participations.

Asset Allocation

      Our initial asset allocation strategy will target investment opportunities presented by today’s distressed lodging market, which has been characterized by substantial reductions in performance and value of hotel properties. These conditions present significant opportunities for attractive risk-adjusted debt and equity investments. We believe, however, that the significant competitive advantage of our asset allocation strategy is its flexibility, which allows us to reallocate our investments to take advantage of changing opportunities in the lodging market. We intend to evaluate our portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs, we may sell investments opportunistically. Our decision to sell a hotel often will be predicated upon, among other things: the projected cash flow; size of the hotel; strength of the franchise; property condition and related costs to renovate the property; strength of market demand; projected supply of hotel rooms in the market; probability of increased valuation; and geographic profile of the hotel. Our decision to sell other lodging-related assets will depend upon, among other things, management’s forecast and review of the performance of our overall portfolio and management’s assessment of changing conditions in the investment and capital markets. We expect our initial asset allocation, once our net proceeds are fully invested, to be approximately 50%-60% in direct hotel investments, 20% to 30% in mezzanine financing, 5% to 10% in first mortgage financing and 5% to 10% in sale-leaseback transactions.

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Asset Management and Consulting Services

      To comply with the REIT rules, Remington Lodging will perform the day-to-day management activities related to the operations of our properties. However, we will provide certain asset management services to other entities affiliated with Remington Hotel. Specifically, our initial assets will include eight asset management and consulting agreements under which we will provide various services to eight property managers affiliated with Remington Hotel in exchange for a fee. In performing these services, we will either provide or supervise specific asset management services, including risk management and insurance procurement; assistance with preparation of tax returns and monitoring of the payment of taxes; negotiation of hotel franchise agreements and monitoring compliance with franchise requirements; negotiation of property financings and monitoring compliance with loan covenants; negotiation and closing of equipment leases; property litigation management; assistance with preparation of annual operating and capital budgets for the hotels; and monitoring compliance with the management agreements. We will also provide additional services to these property managers such as market and feasibility analysis, capital improvement assistance, financial planning and franchise support. To the extent permitted by REIT rules, we will perform similar functions with respect to our own properties.

Formation Transactions

      The principal transactions in connection with our formation and the contribution or acquisition of the initial hotel properties and the other initial assets are as follows:

  •  We will sell 35,000,000 shares of common stock in the offering and will contribute the net proceeds to Ashford Hospitality Limited Partnership, our operating partnership. In addition, we will sell privately 500,000 shares of common stock to Mr. Archie Bennett, Jr., our Chairman, and Mr. Montgomery Bennett, our President and Chief Executive Officer, at the initial offering price less the underwriting discount.
 
  •  Four limited partnerships will each contribute a hotel property to us in exchange for limited partnership units in our operating partnership, and one additional limited partnership will contribute a hotel property to us in exchange for limited partnership units and $3 million in cash (which cash will be used by Messrs. Archie and Montgomery Bennett to purchase shares of our common stock). Four of these limited partnerships are owned approximately 84.5% by Messrs. Archie and Montgomery Bennett; approximately 5% by Mr. Martin L. Edelman, one of our directors, or his family members; approximately 5% by Mr. David A. Brooks, our Chief Legal Officer; approximately 2% by Mr. Mark Nunneley, our Chief Accounting Officer; approximately 2.5% by Mr. Mark Sharkey; and approximately 1% by Ms. Mary Villarreal, both of whom are employees of Remington Hotel Corporation. The other limited partnership is owned 100% by Messrs. Archie and Montgomery Bennett. In exchange for these five properties, we will:

  —  issue to these partnerships 4,632,917 units of limited partnership interest in our operating partnership, valued at approximately $46.3 million based on a value per unit equal to the initial public offering price for our common stock, of which the following persons will beneficially own the following number of units:

         
Archie Bennett, Jr.
    1,974,457  units  
Montgomery Bennett
    1,974,457  units  
Martin Edelman
    220,647 units  
David Brooks
    220,647 units  
Mark Nunneley
    88,257 units  
Mark Sharkey
    110,323 units  
Mary Villarreal
    44,129 units  

  —  assume approximately $63.9 million of mortgage debt secured by the hotel properties, $47.9 million of which will be repaid with the proceeds of this offering, including the pay-off of

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  $6.0 million on the Covington property (after giving effect to an agreed upon discount of $3.3 million) and a $2.9 million payment to Promus Hotels, Inc., as a redemption of the special limited partner on the Las Vegas property.

  •  A sixth limited partnership will sell a hotel property to us for consideration payable in shares of our common stock. Messrs. Archie and Montgomery Bennett own 100% of this partnership. In exchange for this property, we will:

  —  issue to this sixth partnership 216,634 shares of our common stock, valued at approximately $2.2 million based on a value per share equal to the initial public offering price; and
 
  —  assume approximately $17.8 million of mortgage debt secured by the hotel property, which will be repaid with the proceeds of this offering.

  •  Ashford Financial Corporation will contribute eight asset management and consulting agreements to us in exchange for 1,025,000 units of limited partnership interest in our operating partnership, valued at approximately $10.25 million based on a value per unit equal to the initial public offering price for our common stock. The asset management and consulting agreements relate to management and consulting services that Ashford Financial Corporation has agreed to perform for 27 hotel properties managed by affiliates of Remington Hotel Corporation. Messrs. Archie and Montgomery Bennett own 100% of Ashford Financial Corporation and also own a minority interest in the hotel properties underlying these asset management and consulting agreements.
 
  •  Four of the six entities contributing initial assets to us will be responsible for the payment of $550,000 of exit fees associated with the pay-off of debt on certain of the initial assets. These exit fee payments will be made from working capital maintained by the respective entities. Substantially all of the balance of any working capital maintained by these entities as well as substantially all of the working capital maintained by the other two entities contributing or selling initial assets to us will be retained by such entities for ultimate distribution to its respective partners. As of June 30, 2003, there is approximately $4.2 million cumulative net working capital in the contributing or selling entities.
 
  •  We will serve as the sole general partner of our operating partnership, and immediately following the consummation of this offering, we will own an approximately 86.7% limited partnership interest in our operating partnership.
 
  •  In general, we intend to own our properties and conduct substantially all of our business through our operating partnership and its subsidiaries, including Ashford TRS Corporation, a Delaware corporation. Ashford TRS will operate as a taxable REIT subsidiary or TRS.
 
  •  Each of the initial properties will be held in a separate partnership. Each such partnership will be our wholly-owned subsidiary. We have established these single-asset entities to facilitate any possible future property-level debt as commercial lenders often prefer borrowers that are single-asset entities. Each of the partnerships in which the initial hotel properties are held will enter into percentage leases with Ashford TRS.
 
  •  Ashford TRS will enter into a management agreement with Remington Lodging & Hospitality, L.P., which is wholly-owned by Mr. Archie Bennett, Jr., our Chairman, and Mr. Montgomery Bennett, our President and Chief Executive Officer. Pursuant to this agreement, Remington Lodging will manage and provide certain project management services for each of our initial properties. In exchange for such services, Remington Lodging will be entitled to the following fees:

  —  a monthly base management fee for each hotel property equal to the greater of: (i) $10,000 (increased annually based on consumer price index) and (ii) 3% of the gross monthly revenues,
 
  —  an annual incentive management fee equal to the lesser of: (i) 1% of gross annual revenues and (ii) the amount by which the actual gross operating profit exceeds the target gross operating profit in the annual operating budget, and

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  —  a project management fee equal to 4% of the total project costs associated with the implementation of the capital improvement budget up to 5% of gross revenue for that fiscal year, and 3% of total project costs to the extent the capital improvement budget and/or renovation project involves the expenditure of an amount in excess of 5% of gross revenues for that fiscal year.

  •  We and our operating partnership will enter into a mutual exclusivity agreement with Remington Lodging, Remington Hotel, and Messrs. Archie and Montgomery Bennett. Pursuant to this exclusivity agreement, we will have a first right of refusal to purchase or originate any lodging-related investments identified by these entities and any of their respective affiliates. Also, pursuant to this agreement, Remington Lodging will manage and provide certain project management and development services for all future properties that we acquire, unless our independent directors either (i) unanimously vote to hire a different manager, or (ii) based on special circumstances or past performance, by a majority vote elect not to engage Remington Lodging because they have determined that it would be in our best interest not to engage Remington Lodging or that another manager or developer could perform the duties materially better. In connection with any development services provided by Remington Lodging, Remington Lodging will be entitled to a development fee equal to 3% of the total project costs associated with the development.
 
  •  In connection with the consummation of this offering and the consummation of the formation transactions, Messrs. Archie and Montgomery Bennett will receive certain direct and indirect benefits as described in this prospectus.
 
  •  Eight employees of Remington Hotel Corporation, including Messrs. Archie and Montgomery Bennett and Messrs. Kessler and Nunneley, and three employees of Ashford Financial Corporation, including Messrs. Kimichik and Brooks, will become our employees.
 
  •  We will provide registration rights to holders of common stock to be issued either in connection with our acquisition of the initial properties or upon redemption of units in our operating partnership, in each case that were issued in connection with this offering.
 
  •  The obligation of the transferors or their affiliates to pay tax on the unrealized gain resulting from the transfer of equity interests in the five initial hotels being contributed to us in exchange for limited partnership interests will be deferred. In addition, with respect to the initial contributed properties, we have agreed to pay the contributors’ tax liability if we reduce the indebtedness related to one of our initial hotels or if we dispose of any of the contributed properties within 10 years of the date of this offering, unless we dispose of such property in a tax-deferred transaction, such as a like-kind exchange under §1031 of the Internal Revenue Code.

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Our Structure

      The following chart shows the structure of our company following completion of the offering and the formation transactions:

(CHART)

(1)  Certain of our executive officers and employees will own restricted shares, representing approximately 0.91% of our outstanding common stock, subject to vesting requirements; our independent directors will own restricted shares, representing approximately 0.07% of our outstanding common stock; and Friedman Billings Ramsey will beneficially own restricted shares representing 0.25% of our outstanding common stock. The actual number of restricted shares issued to our executive officers and employees will be equal, in the aggregate, to 2.25% of the fully-diluted shares of common stock outstanding after completion of this offering, excluding the 93,149 shares issued to the underwriters.
 
(2)  Messrs. Archie and Montgomery Bennett will beneficially own 11.73% of Ashford Hospitality Limited Partnership (2.42% through their 100% ownership of Ashford Financial Corporation). Mr. Marty Edelman and certain family members will beneficially own 0.52%. Mr. David Brooks will beneficially own 0.52%. Mr. Mark Nunneley will beneficially own 0.21%. Two employees of Remington Hotel Corporation will beneficially own 0.36%.
 
(3)  The general partner has no economic interest in the partnership (as permitted under Delaware law).

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Benefits to Related Parties

      Three of our directors, Messrs. Archie and Montgomery Bennett and Mr. Edelman (or his family members), two of our executive officers, Messrs. Brooks and Nunneley, and two employees of Remington Hotel Corporation, Mr. Mark Sharkey and Ms. Mary Villarreal, indirectly own 100% of the interests in the entities that own all of our initial assets. In exchange for these initial assets, we will give total consideration of $143.5 million, in the form of (i) 5,657,917 limited partnership units in our operating partnership, valued at $56.6 million, (ii) 216,634 shares of our common stock, valued at $2.2 million, (iii) $3.0 million in cash and (iv) $81.7 million in the form of assumption of debt ($65.7 million of which will be repaid at closing).

      The following chart depicts, on an individual basis, the total value of consideration to be received by each of our affiliates in connection with our acquisition of the initial assets:

                                 
Number of Shares
Number of Units of Common Stock Cash Value of
Contributor to be Received to be Received Payments Consideration





Archie Bennett, Jr. 
    2,486,957       108,317     $ 1,500,000     $ 27,452,740  
Montgomery J. Bennett
    2,486,957       108,317       1,500,000       27,452,740  
Marty Edelman
    220,647                       2,206,470  
David A. Brooks
    220,647                       2,206,470  
Mark Nunneley
    88,257                       882,570  
Mark Sharkey
    110,323                       1,103,230  
Mary Villarreal
    44,129                       441,290  

      Additionally, Messrs. Archie and Montgomery Bennett beneficially own 100% of Remington Lodging & Hospitality, L.P., our hotel manager, and will benefit from the payment of management and other fees by us to Remington Lodging pursuant to our management agreement or the mutual exclusivity agreement. We intend to engage Remington Lodging as the property manager for our six initial hotels and for any future hotels that we lease to Ashford TRS. Under the terms of the management agreement, Remington Lodging will receive a base management fee, and if the hotels meet and exceed certain identified thresholds, an additional incentive management fee. In certain instances, Remington Lodging will also be entitled to project management fees and other fees under the management agreement and to development fees under the mutual exclusivity agreement. Set forth below is a summary of each of the fees payable to Remington Lodging and affiliated entities, by hotel property, pursuant to the management agreement and the exclusivity agreement as well as the cumulative amount of such fees for the trailing 12 months ended June 30, 2003 with respect to the six initial properties, assuming these agreements had been in place during such period.

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Actual Amount for the
Initial Properties for the
12 Months Ended
Type of Fee Calculation June 30, 2003 (1)



Management Fee
  Monthly base management fee equal to the greater of: (i) $10,000 (increased annually based on consumer price index) and (ii) 3% of the gross monthly revenues   $ 1,050,658  
    Annual incentive management fee equal to the lesser of: (i) 1% of gross annual revenues and (ii) the amount by which the actual gross operating profit exceeds the target gross operating profit in the annual operating budget.     none  
 
Project Management Fee
  4% of the total project costs associated with the implementation of the capital improvement until the total project costs equal 5% of gross revenues, and then 3% of project costs for expenditures in excess of 5% of the gross revenue threshold.     20,771  
 
Development Fee
  3% of total project costs associated with the development     none  
 
Other Fees
  Then-current market rates     356,531  
         
 
Total   $ 1,427,960 (2)


(1)  Assuming the new management agreement was in place during such period.
 
(2)  The total actual amount for the 12 months ended June 30, 2003 paid under the existing management agreement, which will be terminated upon the consummation of this offering, is the same as the total shown assuming the new management agreement was in place during such period.

     We and our operating partnership will enter into a mutual exclusivity agreement with Remington Lodging, Remington Hotel and Messrs. Archie and Montgomery Bennett. Pursuant to this agreement, we will have the right of first refusal to pursue all lodging investment opportunities identified by Remington Lodging or Remington Hotel or their affiliates, including Messrs. Archie and Montgomery Bennett. Also, if we elect to pursue an investment opportunity that consists of buying a hotel property or buying land for the purpose of building a hotel property or constructing hotel improvements, we will hire Remington Lodging to manage the hotel, build the hotel, construct the improvements or provide project management or other services unless our independent directors either (i) unanimously elect not to engage Remington Lodging, or (ii) based on special circumstances or past performance, by a majority vote elect not to engage Remington Lodging because they have determined that it would be in our best interest not to engage Remington Lodging or that another manager or developer could perform the duties materially better. Certain existing investments, management arrangements and exchanges pursuant to existing contractual obligations are excluded from the mutual exclusivity agreement.

Conflicts of Interest

      Some of our directors and executive officers have interests that may conflict with our interests and result in them receiving personal benefits from this offering. Mr. Archie Bennett, Jr., our Chairman, and his son, Mr. Montgomery Bennett, our President and Chief Executive Officer, and certain of our other executive officers and family members of one of our anticipated directors own beneficial interests in the entities from which we are acquiring our initial assets. As such, they are beneficiaries of the payments to be made by us under the contribution, sale or assignment agreements pursuant to which we will acquire our initial assets in connection with the formation transactions.

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      We have also agreed to indemnify the contributors for any tax liability they incur if we reduce the indebtedness related to one of the contributed properties or if we dispose of any contributed property within 10 years of the date of this offering, unless we dispose of such property in a tax-deferred transaction. We have agreed, until the tenth anniversary of the consummation of this offering, to indemnify each of the contributors of our initial assets, including Messrs. Archie and Montgomery Bennett and certain other affiliates, against adverse tax consequences to them in the event that we directly or indirectly sell, exchange or otherwise dispose of, in a taxable transaction, five properties contributed to us in exchange for operating partnership units. In addition, under the debt maintenance provisions of the tax indemnity agreements, we have agreed to use commercially reasonable efforts to maintain certain levels of indebtedness which will, among other things, allow the contributors to defer the recognition of gain in connection with the contribution of one of our hotel properties as part of the formation transactions.

      Additionally, Messrs. Archie and Montgomery Bennett beneficially own 100% of the manager of our properties, Remington Lodging. Thus, Messrs. Archie and Montgomery Bennett will benefit from the fees paid to Remington Lodging under the management agreement as well as any development fees paid to Remington Lodging under the exclusivity agreement. The initial term of the management agreement is 10 years, with three seven-year and one four-year renewal options. Each renewal is within the sole discretion of Remington Lodging, provided it has satisfied certain minimum performance standards. If we terminate the management agreement, we will be required to pay Remington Lodging a substantial termination fee. Additionally, Messrs. Archie and Montgomery Bennett will benefit from the terms of the mutual exclusivity agreement, which limit our ability to engage other entities for property management, development, and other project management related services without the unanimous consent of our independent directors or, in certain circumstances, the majority vote of our independent directors.

      In addition to their ownership interest in Remington Lodging, Messrs. Archie and Montgomery Bennett beneficially own 100% of Remington Hotel and Ashford Financial Corporation. Also, Mr. Archie Bennett, Jr., is the Chairman of Remington Hotel’s board of directors and Mr. Montgomery Bennett is a director of Remington Hotel and is its President and Chief Executive Officer. As a result, their fiduciary duties to us may conflict with their fiduciary duties to and pecuniary interest in Remington Hotel, Remington Lodging and Ashford Financial Corporation. Therefore, the negotiations and agreements between us, our wholly-owned subsidiaries or our operating partnership and these entities and their affiliates may not solely reflect the interests of our stockholders.

      To mitigate any potential conflicts of interest, our initial board of directors will consist of five independent directors, out of a total of seven. Furthermore, our charter requires that, at all times, a majority of our board of directors be independent directors. This independent director requirement may not be amended, altered, changed or repealed without the affirmative vote of at least a majority of the independent directors on our board of directors and the affirmative vote of the holders of at least two-thirds of our then outstanding common stock. Our directors also are subject to provisions of Maryland law that address transactions between Maryland corporations and our directors or other entities in which our directors have a material financial interest. In addition, our charter, consistent with Maryland law, contains a requirement that any transaction or agreement involving us, our wholly-owned subsidiaries or our operating partnership and a director or officer or an affiliate of any director or officer will require the approval of a majority of disinterested directors. However, there can be no assurance that these policies always will be successful in eliminating the influence of such conflicts, and if they are not successful, decisions could be made that might not fully reflect the interests of all of our stockholders.

Corporate Information

      We were incorporated in Maryland on May 13, 2003. Our principal executive offices are located at 14180 Dallas Parkway, 9th floor, Dallas, Texas 75254. Our telephone number is (972) 490-9600. Mr. Montgomery Bennett currently owns all of our outstanding shares of common stock.

      We intend to elect to be treated as a REIT for federal income tax purposes. As a REIT, we will not incur federal income tax on our earnings to the extent that we distribute those earnings to our stockholders

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and as long as we meet the tests required by the Internal Revenue Code. However, we will be subject to tax at normal corporate rates on net income or capital gains not distributed to stockholders, and we may be subject to state income and franchise taxes. Moreover, Ashford TRS will be subject to federal and state income and franchise taxation on its taxable income. See “Federal Income Tax Consequences of our Status as a REIT.”
 
The Offering
 
Common stock 35,000,000 shares (1)
 
Common stock outstanding after this offering 36,766,283 shares (2)
 
Proposed NYSE symbol “AHT”


(1)  Does not include 500,000 shares of restricted stock issuable to Messrs. Archie and Montgomery Bennett or 216,634 shares conveyed to a limited partnership, owned by Messrs. Archie and Montgomery Bennett, in exchange for one of our initial properties.
 
(2)  Includes (a) 500,000 shares of restricted stock issuable to Messrs. Archie and Montgomery Bennett; (b) 216,634 shares of restricted stock conveyed to a limited partnership, owned by Messrs. Archie and Montgomery Bennett, in exchange for one of our initial properties; (c) 25,000 shares of restricted stock issuable to our directors upon consummation of this offering as an inducement to agree to serve on our board; (d) 93,149 shares of restricted stock issuable to Friedman Billings Ramsey upon the consummation of this offering as compensation for services performed in connection with this offering (the actual number of shares issued will depend on the number of shares we sell in the offering); and (e) 931,500 shares of restricted stock issuable to our Chairman, our CEO and President, our Chief Operating Officer, our Chief Legal Officer, our Chief Financial Officer, our Chief Accounting Officer and other employees upon the consummation of this offering, subject to vesting based on continued service by such directors or employment by such officers. The actual number of restricted shares issuable to our executive officers and employees will be equal to 2.25% of the fully-diluted shares of common stock outstanding after completion of this offering, excluding the 93,149 shares issuable to the underwriters. Excludes (a) 5,657,917 shares issuable upon the conversion of units of partnership interest in our operating partnership; and (b) 1,138,500 restricted shares issuable to executive officers and employees as incentive compensation, at the discretion of the compensation committee. The actual number of restricted shares issuable in the future to executive officers and employees as incentive compensation will be equal to 2.75% of the fully-diluted shares of common stock outstanding after completion of this offering, excluding the 93,149 shares issuable to the underwriters.

Use of Proceeds

      We estimate that the net proceeds of this offering will be approximately $322.75 million, based upon the assumed price per share of common stock of $10 and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriter’s over-allotment option is exercised in full, our net proceeds will be approximately $371.58 million. We intend to use the net proceeds from the offering as follows:

  •  approximately $65.7 million to repay mortgage indebtedness secured by the initial properties, including the discounted payoff of Covington debt and the $2.9 million redemption price of the special limited partner;
 
  •  approximately $3.0 million to pay the cash portion of the acquisition cost related to the contribution of one of our initial properties; and
 
  •  the remainder to fund the acquisition or origination of lodging-related assets and for general corporate purposes.

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Distribution Policy

      To maintain our qualification as a REIT, we intend to make annual distributions to our stockholders of at least 90% of our taxable income (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). Distributions will be authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our dividend policy will not change in the future. Our ability to pay distributions to our stockholders will depend, in part, upon our receipt of distributions from our operating partnership, Ashford Hospitality Limited Partnership, which may depend upon receipt of lease payments with respect to our properties from our indirect, wholly-owned subsidiary and lessee, Ashford TRS, and, in turn, upon the management of our properties by Remington Lodging. Distributions to our stockholders will generally be taxable to our stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status, we may maintain accumulated earnings of Ashford TRS in such entity.

      Our charter allows us to issue preferred stock with a preference on distributions. We currently have no intention to issue any preferred stock, but if we do, the dividend preference on the preferred stock could limit our ability to make a dividend distribution to our common stockholders.

      We anticipate adopting in the future, a dividend reinvestment plan that allows our stockholders that have enrolled in the plan to reinvest their distributions automatically in additional shares of common stock.

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Summary Selected Financial Information

      The following table sets forth summary selected historical operating and financial data for Ashford Hospitality Trust, Inc. This information represents the historical financial condition and results of operations of entities that own the initial assets.

      The following summary selected historical combined financial information as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 were derived from audited financial statements contained elsewhere in this prospectus. The following summary selected historical combined financial information as of December 31, 2000, was derived from unaudited financial statements. The following summary selected historical combined financial information as of June 30, 2003 and for the six months ended June 30, 2003 and 2002, were derived from unaudited financial statements contained elsewhere in this prospectus. The unaudited historical combined financial statements include all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such dates and for such periods under accounting principles generally accepted in the United States.

      You should read the information below along with all other financial information and analysis presented in this prospectus, including the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ashford Hospitality Trust, Inc.’s combined financial statements and related notes included elsewhere in this prospectus.

                                             
Six Months Ended June 30, Year Ended December 31,


2003 2002 2002 2001 2000





Operating Information:
                                       
Revenue
                                       
   
Total revenue
  $ 17,858,401     $ 18,169,569     $ 35,357,781     $ 36,215,646     $ 29,303,224  
Expenses
                                       
 
Operating expenses
    14,063,847       13,054,544       27,134,438       27,381,490       20,488,035  
 
Depreciation and amortization
    2,192,332       2,249,896       4,833,551       4,446,486       3,249,308  
 
Interest expense, net
    2,999,017       3,049,606       6,482,710       7,294,163       4,853,159  
     
     
     
     
     
 
   
Total expenses
    19,255,196       18,354,046       38,450,699       39,122,139       28,590,502  
     
     
     
     
     
 
Net (loss) income
  $ (1,396,795 )   $ (184,477 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722  
     
     
     
     
     
 
Balance Sheet Information:
                                       
 
Investments in hotel properties, net
  $ 83,118,083             $ 85,246,801     $ 88,874,078     $ 68,292,242  
 
Cash and cash equivalents (2)
    6,827,530               6,322,368       8,329,486       5,991,418  
 
Total assets
    92,669,265               95,416,446       100,001,305       77,046,232  
 
Mortgage notes payable
    82,096,150               82,126,150       80,410,792       49,355,734  
 
Capital leases payable
    528,919               621,351       277,810       92,370  
 
Total liabilities and owners’ equity
  $ 92,669,265             $ 95,416,446     $ 100,001,305     $ 77,046,232  
Other Information:
                                       
 
Cash Flow:
                                       
 
Provided by operating activities
  $ 2,638,890     $ 1,026,672     $ 622,734     $ 1,108,150     $ 4,870,739  
 
Used in investing activities
  $ (50,484 )   $ (1,023,366 )   $ (1,079,824 )   $ (24,899,286 )   $ (12,778,381 )
 
(Used in) provided by financing activities
  $ (1,629,500 )   $ (932,537 )   $ (1,726,457 )   $ 24,921,233     $ 8,315,129  
 
Total number of rooms
    1,094       1,094       1,094       1,094       906  
 
Total number of hotels
    6       6       6       6       5  
EBITDA (1)
  $ 3,811,403     $ 5,132,404     $ 8,276,828     $ 9,060,687     $ 8,976,193  


(1)  EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We believe EBITDA is useful to investors as an indicator of our ability to service debt and pay cash distributions. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. EBITDA does not represent cash generated from operating activities determined in accordance with generally accepted accounting principles (GAAP), and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.
(2)  Includes restricted cash.

                                           
Reconciliation of EBITDA
                                       
 
Net (loss) income
  $ (1,396,795 )   $ (184,477 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722  
 
Plus depreciation and amortization
    2,192,332       2,249,896       4,833,551       4,446,486       3,249,308  
 
Plus interest expense
    3,015,866       3,066,985       6,536,195       7,520,694       5,014,163  
     
     
     
     
     
 
 
EBITDA
  $ 3,811,403     $ 5,132,404     $ 8,276,828     $ 9,060,687     $ 8,976,193  
     
     
     
     
     
 

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RISK FACTORS

      An investment in our common stock involves various risks. You should carefully consider the following risk factors in conjunction with the other information contained in this prospectus before purchasing our common stock. The risks discussed in this prospectus can adversely affect our business, liquidity, operating results, prospects and financial condition. This could cause the market price of our common stock to decline and could cause you to lose all or part of your investment. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects and financial condition.

Risks Related to Our Business

 
We are a blind pool and currently have no operations, and a substantial majority of the net offering proceeds has not been committed toward acquiring any specific assets.

      We were organized in May 2003 and have only nominal capitalization, currently equal to $1,000 in cash. Consequently, we are dependent on the net proceeds of the offering to commence our business operations.

      We have no operating history, have identified only six hotel properties, several asset management agreements and no mortgage loans to acquire and have not committed approximately 78.7% of the anticipated net proceeds of this offering to purchasing any specific assets. As a result, before investing, investors will not be able to evaluate the historical financial performance or economic merits of any assets we may later buy with our excess proceeds.

 
We may be unable to invest the excess proceeds raised in our initial public offering on acceptable terms or at all, which would harm our financial condition and operating results.

      Until we identify a real estate investment, including mortgage loans, consistent with our investment criteria, we intend to invest the portion of the proceeds of our initial public offering not used to repay indebtedness on the contributed properties in money market funds. We cannot assure you that we will be able to identify real estate investments that meet our investment criteria, that we will be successful in completing any investment we identify or that any investment we complete using the proceeds of our initial public offering will produce a return on our investment. Moreover, because we will not have identified these future investments at the time of our initial public offering, we will have broad authority to invest the excess proceeds of our initial public offering in any real estate investments that we may identify in the future.

 
Conflicts of interest could result in our management acting other than in our stockholders’ best interest.

      Conflicts of interest relating to Remington Hotel Corporation may lead to management decisions that are not in the stockholders’ best interest. The Chairman of our board of directors, Mr. Archie Bennett, Jr., serves as the Chairman of the board of directors of Remington Hotel, and our Chief Executive Officer and President, Mr. Montgomery Bennett serves as the Chief Executive Officer and President of Remington Hotel. Messrs. Archie and Montgomery Bennett own 100% of Remington Hotel. After completion of the offering, Remington Lodging, which is also 100% owned by Messrs. Archie and Montgomery Bennett, will manage our properties and provide related services and continue to provide property management services, fee development services and occasional property identification services for third parties. Additionally, Messrs. Archie and Montgomery Bennett will continue to own minority interests in several lodging properties not transferred to our operating partnership in connection with this offering.

      Messrs. Archie and Montgomery Bennett’s ownership interests in and management obligations to Remington Hotel and Remington Lodging will present them with conflicts of interest in making management decisions related to the commercial arrangements between us and Remington Hotel and may reduce the time and effort they each spend managing us. Our board of directors has adopted a policy that

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requires all management decisions relating to the management agreement with Remington Lodging be approved by a majority or, in certain circumstances, all of our independent directors. See “Policies and Objectives with Respect to Certain Activities — Conflict of Interest Policy.”

      Holders of units in our operating partnership, including members of our management team, may suffer adverse tax consequences upon our sale of certain properties. Therefore, holders of units, either directly or indirectly, including Messrs. Archie and Montgomery Bennett, Brooks, Nunneley and Edelman (or his family members), may have different objectives regarding the appropriate pricing and timing of a property’s sale. These officers and directors of ours may influence us not to sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

      In addition, we have agreed to indemnify the contributors of our five initial properties contributed to us for operating partnership units, including (indirectly) Messrs. Archie and Montgomery Bennett, Brooks and Nunneley and Edelman (or his family members), against the income tax they may incur if we dispose of an initial property that they contributed to us in exchange for our operating partnership units. Because of this indemnification, our indemnified management team members may make decisions about selling one of the initial properties that is not in our stockholders’ best interest. If we were to sell in a taxable transaction all five of the initial properties contributed to us in exchange for operating partnership units immediately after the closing of the offering, our estimated total tax indemnification obligation to our indemnified contributors, including a gross-up payment we would make, would be approximately $17.3 million.

      We have entered into a master hotel management agreement and an exclusivity agreement with Remington Lodging. The management agreement describes the terms of Remington Lodging’s management of our initial hotels and any future hotels of ours managed by Remington Lodging. If we terminate the management agreement as to any of the initial hotels, or if we terminate as to any future hotel that becomes subject to the management agreement, we will be required to pay Remington Lodging a substantial termination fee. For example, if we were to terminate the management agreement with respect to all six of our initial hotels immediately after this offering in connection with a sale of those hotels, the fee would be approximately $10.6 million. The exclusivity agreement requires us to engage Remington Lodging, unless our independent directors either (i) unanimously vote to hire a different manager or developer, or (ii) by a majority vote, elect not to engage Remington Lodging because they have determined that special circumstances exist or that, based on Remington Lodging’s prior performance, another manager or developer could perform the duties materially better. As the sole owners of Remington Lodging, which would receive any development, management and management termination fees payable by us under the management agreement, Messrs. Archie and Montgomery Bennett may influence our decisions to sell a hotel or acquire or develop a hotel when it is not in the best interests of our stockholders to do so.

 
The consideration we pay for the initial assets may exceed their total fair market value because we did not obtain independent appraisals of the initial assets and the negotiations on the related contribution agreements were not arm’s length negotiations, and because the value of the consideration will depend on the initial public offering price.

      We did not obtain independent appraisals of the initial properties or the asset management and consulting agreements, and the terms of the contribution and sale agreements relating to these properties and other assets were not negotiated in an arm’s length transaction. The terms of these agreements and the valuation methods used to determine the value of the assets were determined by our management team. Certain of our directors and certain members of our management team specifically, Messrs. Archie and Montgomery Bennett, Edelman (or his family members), Brooks and Nunneley, will receive, indirectly through their ownership of the partnerships that currently own the initial hotel properties and Ashford Financial Corporation (which is contributing the asset management and consulting agreements), shares of our common stock and limited partnership units in our operating partnership, which are convertible into shares of our common stock. These officers and directors will receive total consideration for the initial

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assets of 5,657,917 units and 216,634 shares of common stock, which together approximate 13.8% of our outstanding common stock, with a value of $58.7 million. Because the number of units and shares of common stock has been fixed, the actual value of the consideration paid for our initial assets will depend on the initial public offering price. Accordingly, the contributors of the initial properties may receive value greater than the fair market value of the initial assets if the initial public offering price of our common stock is greater than the mid-point of our estimated range. Messrs. Archie and Montgomery Bennett will also benefit from the fees earned by Remington Lodging in managing our hotel properties after the offering. It is possible that the consideration we give in exchange for our initial assets may exceed the fair market value of the assets and that we could realize less value from our initial assets than we would have realized if the contribution or sale agreements had been entered into with an unrelated third party or if we had obtained independent appraisals of the initial assets.

      In addition, the management agreement between us and Remington Lodging and the exclusivity agreement among us, Remington Hotel, Remington Lodging and Messrs. Archie and Montgomery Bennett were not negotiated in arm’s length transactions.

 
We may not realize the full estimated value of the asset management and consulting agreements contributed to us by Ashford Financial Corporation.

      The asset management and consulting agreements contributed to us by Ashford Financial Corporation relate to management and consulting services that Ashford Financial Corporation has agreed to perform for hotel property managers with respect to certain identified hotel properties. Ashford Financial Corporation is 100% owned by Messrs. Archie and Montgomery Bennett. The agreements provide for annual payments to us, as the assignee of Ashford Financial Corporation, in consideration for our performance of certain asset management and consulting services. These services relate to 27 hotel properties managed by eight management companies. The exact amount of the consideration due to us is contingent upon the revenue generated by the hotels underlying the asset management and consulting agreements. Initially, the estimated payment to us under these agreements will be approximately $1.2 million per year. Ashford Financial Corporation has guaranteed a minimum payment to us of $1.2 million per year, subject to adjustments based on the consumer price index, for five years beginning on the completion of this offering. If any property underlying any asset management and consulting agreement is sold at any time, we will no longer derive any income from such property, and the amount of income we receive under the applicable asset management and consulting agreement will be decreased. Any sale or related decrease in income, however, will not affect the amount guaranteed by Ashford Financial Corporation under its guaranty. Each of the eight management companies is either owned 100% by Messrs. Archie and Montgomery Bennett, or is a wholly-owned subsidiary of Remington Hotel Corporation, which is owned 100% by Messrs. Archie and Montgomery Bennett. Messrs. Archie and Montgomery Bennett also have a minority ownership interest in the hotel properties benefiting from the services provided pursuant to the asset management and consulting agreements. Although they do not own a controlling interest in such properties, Messrs. Archie and Montgomery Bennett may benefit from a future sale of the properties.

 
Tax indemnification obligations that apply in the event that we sell certain properties could limit our operating flexibility.

      If we dispose of any of the five initial properties that were contributed to us in exchange for units in our operating partnership, we may be obligated to indemnify the contributors, in which Messrs. Archie and Monty Bennett have substantial ownership interests, against the tax consequences of the sale. We have agreed to pay a contributor’s tax liability if we dispose of a property contributed by the contributor in a taxable transaction before the earlier of:

  •  10 years after the contribution of such property, and
 
  •  the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of property to our operating partnership.

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      This tax indemnity will be equal to the amount of the federal and state income tax liability the contributor incurs with respect to the gain allocated to the contributor. The terms of the contribution agreements also require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment. While the tax indemnities do not contractually limit our ability to conduct our business in the way we desire, we are less likely to sell any of the contributed properties in a taxable transaction during the indemnity period. Instead, we would either hold the property for the entire indemnity period or seek to transfer the property in a tax-deferred like-kind exchange. In addition, a condemnation of one of our properties could trigger our tax indemnification obligations.

      If we were to sell in a taxable transaction all five of the initial properties contributed to us in exchange for operating partnership units immediately after the closing of the offering, our estimated total tax indemnification obligation to our indemnified contributors, including the gross-up payment, would be approximately $17.3 million. See “Certain Relationships and Related Transactions — Contribution of Initial Properties.”

      In addition, under the tax indemnification agreements, we have agreed for a period of 10 years to use commercially reasonable efforts to maintain non-recourse mortgage indebtedness in the amount of at least $16.0 million, which will allow the contributors to defer recognition of gain in connection with the contribution of the Las Vegas hotel property as part of our formation.

 
Our executive officers have no experience operating a public company or REIT.

      None of our executive officers has any experience managing a public company or a REIT. This inexperience on the part of our officers could have an adverse effect on our operations.

 
Because our executive officers will have broad discretion to allocate proceeds, they may acquire mortgage securities or other assets where the investment returns are substantially below expectations or which result in net operating losses.

      Our executive officers will have broad discretion, within the general investment criteria established by our board of directors, to allocate the proceeds of the offering and to determine the timing of investment of such proceeds. Such discretion could result in allocation of proceeds to assets where the investment returns are substantially below expectations or which result in net operating losses, which would materially and adversely affect our business, operations and results.

 
Hotel franchise requirements could adversely affect distributions to our stockholders.

      We must comply with operating standards and terms and conditions imposed by the franchisors of the hotel brands under which our initial hotels operate as well as any hotels we may acquire in the future. The franchisors periodically inspect their licensed hotels to confirm adherence to their operating standards. The failure of a hotel to maintain standards could result in the loss or cancellation of a franchise license. With respect to operational standards, we rely on our property manager, Remington Lodging, to conform to such standards. The franchisors may also require us to make certain capital improvements to maintain the hotel in accordance with system standards, the cost of which can be substantial. It is possible that a franchisor could condition the continuation of a franchise on the completion of capital improvements that our management or board of directors determines are too expensive or otherwise not economically feasible in light of general economic conditions or the operating results or prospects of the affected hotel. In that event, our management or board of directors may elect to allow the franchise to lapse or be terminated which could result in a change in brand franchising or operation of the hotel as an independent hotel.

      In addition, when the term of a franchise expires, the franchisor has no obligation to issue a new franchise. The loss of a franchise could have a material adverse effect on the operations or the underlying value of the affected hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a franchise could also have a material adverse effect on cash available for distribution to stockholders.

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The events of September 11, 2001, the current U.S. economic recession and the recent military action in Iraq have negatively affected the performance of the initial properties and the hotel industry and may negatively affect our future results of operations and financial condition.

      The terrorist attacks of September 11, 2001, their after-effects (including the prospects for more terror attacks in the U.S.), the U.S.-led military action in Iraq and the general economic climate have substantially reduced business and leisure travel throughout the United States and hotel industry revenue per available room, or RevPAR, generally. We cannot predict the extent to which these factors will continue to directly or indirectly impact the hotel industry or our operating results in the future. Continued lower RevPAR at the initial properties or any acquired property or a property securing a mortgage loan originated or acquired by us could have an adverse effect on our results of operations and financial condition, including our ability to remain in compliance with any debt covenants to which we may be or may become subject, our ability to fund capital improvements at our hotels, and our ability to make stockholder distributions necessary to maintain our status as a REIT. Additional terrorist attacks, acts of war or similar events could have further material adverse effects on the hotel industry at large and our operations in particular.

 
Our investments will be concentrated in particular segments of a single industry.

      Our entire proposed business is hotel related. Our current investment strategy is to acquire or develop mid to upscale hotels, acquire first mortgages on hotel properties, invest in other mortgage-related instruments such as mezzanine loans to hotel owners and operators and participate in hotel sale-leaseback transactions. Continued adverse conditions in the hotel industry will have a material adverse effect on our operating and investment revenues and cash available for distribution to our stockholders.

 
We rely on Remington Lodging to operate our hotels and for our cash flow.

      For us to continue to qualify as a REIT, third parties must operate our hotels. A REIT may lease its hotels to taxable REIT subsidiaries in which the REIT can own up to a 100% interest. A TRS pays corporate level income tax and may retain any after-tax income. A REIT must satisfy certain conditions to use the TRS structure. One of those conditions is that the TRS must hire, to manage the hotels, an “eligible independent contractor” (“EIC”) that is actively engaged in the trade or business of managing hotels for parties other than the REIT. An EIC cannot (i) own more than 35% of the REIT, (ii) be owned more than 35% by persons owning more than 35% of the REIT or (iii) provide any income to the REIT ( i.e. , the EIC cannot pay fees to the REIT and the REIT cannot own any debt or equity securities of the EIC).

      Accordingly, while we may lease hotels to a TRS that we own, the TRS must engage a third-party operator to manage the hotels and our ability to direct and control how our hotels are operated is less than if we were able to manage our hotels directly. We have entered into a management agreement with Remington Lodging, which is owned 100% by Messrs. Archie and Montgomery Bennett, to manage all of the contributed properties and to manage any new lodging properties that we may later acquire. We do not supervise Remington Lodging or its personnel on a day-to-day basis, and we cannot assure you that Remington Lodging will manage our properties in a manner that is consistent with its obligations under the management agreement or our obligations under our hotel franchise agreements, that Remington Lodging will not be negligent in its performance or engage in other criminal or fraudulent activity, or that Remington Lodging will not otherwise default on its management obligations to us. If any of the foregoing occurs, our relationships with the franchisors may be damaged and we may then be in breach of the franchise agreement, and we could incur liabilities resulting from loss or injury to our property or to persons at our properties, any of which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

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If we cannot obtain financing, our growth will be limited.

      We are required to distribute to our stockholders at least 90% of our taxable income each year to continue to qualify as a REIT. As a result, our retained earnings available to fund acquisitions, development or other capital expenditures are nominal. After investing the proceeds of this offering, we will rely upon the availability of additional debt or equity capital to fund these activities. Our long-term ability to grow through acquisitions or development of hotel-related assets will be limited if we cannot obtain additional financing. Market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.

 
Our business strategy depends on our rapid growth and quick investment of the offering proceeds. We may fail to integrate additional investments into our operations or otherwise manage our planned growth, which may adversely affect our operating results.

      Our business plan contemplates a period of rapid growth following the completion of this offering. We cannot assure you that if we in fact experience rapid growth in our investment portfolio we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate these investments into our portfolio and manage any future acquisitions of additional assets without operating disruptions or unanticipated costs. Acquisition of any additional portfolio of properties or mortgages would generate additional operating expenses that we would be required to pay. As we acquire additional assets, we will be subject to the operational risks associated with owning new lodging properties. Our failure to integrate successfully any future acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.

 
We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay dividends to our stockholders.

      As a REIT, we are required to distribute at least 90% of our taxable income each year to our stockholders. We intend to distribute to our stockholders all or substantially all of our taxable income each year so as to qualify for the tax benefits accorded to REITs, but our ability to make distributions may be adversely affected by the risk factors described in this prospectus. Our initial properties had cumulative net losses of approximately $3.1 million, $2.9 million and $1.4 million for the years ended December 31, 2002 and 2001, and the six months ended June 30, 2003, respectively. These losses include non-cash expenses for depreciation and amortization of $4.8 million, $4.4 million and $2.2 million for the years ended December 31, 2002 and 2001, and the six months ended June 30, 2003, respectively. We cannot assure you that we will be able to make distributions in the future. In the event of continued or future downturns in our operating results and financial performance or unanticipated capital improvements to our hotels or declines in the value of our mortgage portfolio, we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our financial performance, debt service obligations and applicable debt covenants (if any), and capital expenditure requirements.

 
We are subject to various risks related to our use of, and dependence on, debt.

      The amount we have to pay on variable rate debt increases as interest rates increase, which may decrease cash available for distribution to stockholders. We cannot assure you that we will be able to meet our debt service obligations. If we do not meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure. Changes in economic conditions or our financial results or prospects could (i) result in higher interest rates on variable rate debt, (ii) reduce the availability of debt financing generally or debt financing at favorable rates, (iii) reduce cash available for distribution to stockholders and (iv) increase the risk that we could be forced to liquidate assets to repay debt, any of which could have a material adverse affect us.

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      If we violate covenants in any debt agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in our being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required.

      In any event, financial covenants under our current or future debt obligations could impair our planned business strategies by limiting our ability to borrow (i) beyond certain amounts or (ii) for certain purposes.

      While our initial policy is to limit the leverage on our investments to 60% of gross assets, our board of directors may change this and our other operating policies and strategies at any time without stockholder approval. Our governing instruments do not contain any limitation on our ability to incur indebtedness.

                  An interest rate mismatch could occur between asset yields and borrowing rates, resulting in decreased yields on our investment portfolio.

      Our operating results will depend in part on differences between the income from our assets (net of credit losses) and our borrowing costs. We intend to fund the origination and acquisition of a portion of our assets with borrowings that have interest rates that reset relatively rapidly, such as monthly or quarterly. We anticipate that, in many cases, the income from our assets will respond more slowly to interest rate fluctuations than the cost of our borrowings, creating a mismatch between asset yields and borrowing rates. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Increases in these rates will tend to decrease our net income and market value of our mortgage assets. We will incur operating losses if interest rate fluctuations result in our interest expense exceeding interest income.

 
We compete with other hotels for guests. We will also face competition for acquisitions of lodging properties and of desirable mortgage investments.

      The upscale and mid-price segments of the hotel business are competitive. Our hotels compete on the basis of location, room rates, quality, service levels, reputation, and reservation systems, among many other factors. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash available for distribution to stockholders.

      We will compete for hotel acquisitions with entities that have similar investment objectives as we do. This competition could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms or on the terms contemplated in our business plan.

      We will also compete for mortgage asset investments with numerous public and private real estate investment vehicles, such as mortgage banks, pension funds, other REITs, institutional investors and individuals. Mortgages and other investments are often obtained through a competitive bidding process. In addition, competitors may seek to establish relationships with the financial institutions and other firms from which we intend to purchase such assets. Competition may result in higher prices for mortgage assets, lower yields and a narrower spread of yields over our borrowing costs.

      In addition, competition for desirable investments could delay the investment of proceeds from this offering in desirable assets, which may, in turn, negatively affect our ability to pay dividends. There can be no assurance that we will achieve investment results that will allow any specified level of cash distribution.

      Many of our competitors are larger than us, may have access to greater capital, marketing and other resources, may have personnel with more experience than our officers, may be able to accept higher levels of debt or otherwise may tolerate more risk than us, may have better relations with hotel franchisors, sellers or lenders and may have other advantages over us in conducting certain business and providing certain services.

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We may engage in hedging transactions, which can limit our gains and increase exposure to losses.

      We may enter into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt and also to protect our portfolio of mortgage assets from interest rate and prepayment rate fluctuations. Our hedging transactions may include entering into interest rate swap agreements or interest rate cap or floor agreements, purchasing or selling futures contracts, purchasing put and call options on securities or securities underlying futures contracts, or entering into forward rate agreements. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition. No hedging activity can completely insulate us from the risks associated with changes in interest rates and prepayment rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

  •  Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought.
 
  •  The duration of the hedge may not match the duration of the related liability.
 
  •  The party owing money in the hedging transaction may default on its obligation to pay.
 
  •  The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction.
 
  •  The value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity.

      Hedging involves risk and typically involves costs, including transaction costs, that may reduce our overall returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distributions to stockholders. We generally intend to hedge as much of the interest rate risk as management determines is in our best interests given the cost of such hedging transactions. The REIT qualification rules may limit our ability to enter into hedging transactions by requiring us to limit our income from qualified hedges. See “Risks Related to Our Status as a REIT — Complying with REIT requirements may limit our ability to hedge effectively.” If we are unable to hedge effectively because of the REIT rules, we will face greater interest rate exposure than may be commercially prudent.

 
We may not be able to sell our investments on favorable terms.

      We may decide to sell investments for a variety of reasons. We cannot assure you that we will be able to sell any of our investments on favorable terms, or that our investments will not be sold for a loss.

Risks Related to Hotel Investments

 
We are subject to general risks associated with operating hotels.

      Our hotels (and the hotels underlying our mortgage and mezzanine loans) are subject to various operating risks common to the hotel industry, many of which are beyond our control, including the following:

  •  our hotels compete with other hotel properties in their geographic markets and many of our competitors have substantial marketing and financial resources;
 
  •  over-building in our markets, which adversely affects occupancy and revenues at our hotels;
 
  •  dependence on business and commercial travelers and tourism; and
 
  •  adverse effects of general, regional and local economic conditions and increases in energy costs or labor costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists.

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      These factors could adversely affect our hotel revenues and expenses, as well as the hotels underlying our mortgage and mezzanine loans, which in turn would adversely affect our ability to make distributions to our stockholders.

 
We may have to make significant capital expenditures to maintain our lodging properties.

      Our hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. The franchisors of our hotels may also require periodic capital improvements as a condition of keeping the franchise licenses. Generally, we are responsible for the costs of these capital improvements, which gives rise to the following risks:

  •  cost overruns and delays;
 
  •  renovations can be disruptive to operations and can displace revenue at the hotels, including revenue lost while rooms under renovation are out of service;
 
  •  the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and
 
  •  the risk that the return on our investment in these capital improvements will not be what we expect.

      If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow to fund future capital improvements.

 
The hotel business is seasonal, which will affect our results of operations from quarter to quarter.

      The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can cause quarterly fluctuations in our revenues.

 
Our development activities may be more costly than we have anticipated.

      As part of our growth strategy, we may develop additional hotels. Hotel development involves substantial risks, including that:

  •  actual development costs may exceed our budgeted or contracted amounts;
 
  •  construction delays may prevent us from opening hotels on schedule;
 
  •  we may not be able to obtain all necessary zoning, land use, building, occupancy and construction permits;
 
  •  our developed properties may not achieve our desired revenue or profit goals;
 
  •  we face intense competition for suitable development sites from competitors with greater financial resources than ours; and
 
  •  we may incur substantial development costs and then have to abandon a development project before completion.

Risks Relating to Investments in Mortgages and Mezzanine Loans

 
Mortgage investments that are not United States government insured and non-investment grade mortgage assets involve risk of loss.

      We intend to originate and acquire lodging-related uninsured and non-investment grade mortgage loans and mortgage assets, including mezzanine loans, as part of our investment strategy. While holding these interests, we will be subject to risks of borrower defaults, bankruptcies, fraud and losses and special hazard losses that are not covered by standard hazard insurance. Also, the costs of financing the mortgage

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loans could exceed the return on the mortgage loans. In the event of any default under mortgage loans held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan. To the extent we suffer such losses with respect to our investments in mortgage loans, our value and the price of our common stock may be adversely affected.
 
We intend to invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.

      Our mortgage loan assets will generally be non-recourse. With respect to our non-recourse mortgage loan assets, in the event of a borrower default, the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan, may be less than the amount owed under the mortgage loan. As to those mortgage loan assets that provide for recourse against the borrower and its assets generally, we cannot assure you that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.

 
Interest rate fluctuations will affect the value of our mortgage assets, net income and common stock.

      Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations can adversely affect our income and value of our common stock in many ways and present a variety of risks including the risk of variances in the yield curve, a mismatch between asset yields and borrowing rates, and changing prepayment rates.

      Variances in the yield curve may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Short-term interest rates are ordinarily lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our assets may bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our mortgage loan assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested in mortgage loans, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.

      The effect of a mismatch between asset yields and borrowing rates is explained above under “Risks Related to our Business — An interest rate mismatch could occur between asset yields and borrowing rates, resulting in decreased yields on our investment portfolio.” The effect of mortgage prepayments are explained in the risk factor immediately below.

 
Prepayment rates on our mortgage loans may adversely affect our yields.

      The value of our mortgage loan assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. To the extent we originate mortgage loans, we expect that such mortgage loans will have a measure of protection from prepayment in the form of prepayment lock-out periods or prepayment penalties. However, this protection may not be available with respect to investments that we acquire but do not originate. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of

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rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to fully recoup our cost of acquisition of certain investments.

      Before making any investment, we will consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment. These considerations will affect our decision whether to originate or purchase such an investment and the price offered for such an investment. No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions and the quality of management of the underlying property. Our inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may adversely affect the price of our common stock.

 
Volatility of values of mortgaged properties may adversely affect our mortgage loans.

      Lodging property values and net operating income derived from lodging properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described in this prospectus relating to general economic conditions, operating lodging properties and owning real estate investments. In the event its net operating income decreases, a borrower may have difficulty paying our mortgage loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could also cause us to suffer losses.

 
Mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

      We expect to make and acquire mezzanine loans. These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.

 
We have not established investment criteria limiting geographical concentration of our mortgage investments or requiring a minimum credit quality of borrowers.

      We have not established any limit upon the geographic concentration of properties securing mortgage loans acquired or originated by us or the credit quality of borrowers of uninsured mortgage assets acquired or originated by us. As a result, properties securing our mortgage loans may be overly concentrated in certain geographic areas and the underlying borrowers of our uninsured mortgage assets may have low credit quality. We may experience losses due to geographic concentration or low credit quality.

Risks Related to the Real Estate Industry

 
Mortgage debt obligations expose us to increased risk of property losses, which could harm our financial condition, cash flow and ability to satisfy our other debt obligations and pay dividends.

      Incurring mortgage debt increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders of that income.

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      In addition, our default under any one of our mortgage debt obligations may increase the risk of our default on our other indebtedness. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay dividends may be harmed.

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

      Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties or mortgage loans in our portfolio in response to changing economic, financial and investment conditions is limited. The real estate market is affected by many factors that are beyond our control, including:

  •  adverse changes in national and local economic and market conditions;
 
  •  changes in interest rates and in the availability, cost and terms of debt financing;
 
  •  changes in governmental laws and regulations, fiscal policies and zoning and other ordinances and costs of compliance with laws and regulations;
 
  •  the ongoing need for capital improvements, particularly in older structures;
 
  •  changes in operating expenses; and
 
  •  civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

      We cannot predict whether we will be able to sell any property or loan for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property or loan. Because we intend to offer more flexible terms on our mortgage loans than some providers of commercial mortgage loans, we may have more difficulty selling or participating our loans to secondary purchasers than would these more traditional lenders.

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

 
The costs of compliance with or liabilities under environmental laws may harm our operating results.

      Our properties (and the properties underlying our mortgage loans) may be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

  •  our knowledge of the contamination;
 
  •  the timing of the contamination;
 
  •  the cause of the contamination; or
 
  •  the party responsible for the contamination of the property.

      There may be environmental problems associated with our properties of which we are unaware. Some of our properties use, or may have used in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the

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contamination by virtue of our ownership interest. For each of the initial hotels we have a Phase I Environmental Assessment Reports which is no more than one year old.

      The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.

      We will seek environmental insurance policies on each of our six initial properties, and we intend to obtain environmental insurance for any other properties that we may acquire. However, if environmental liabilities are discovered during the underwriting of the insurance policies for our initial properties, or any subsequently acquired property, we may be unable to obtain insurance coverage for the liabilities at commercially reasonable rates or at all, and we may experience losses.

 
Our properties (and the properties underlying our mortgage loans) may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

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

 
Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our operating results.

      All of our properties (and the properties underlying our mortgage loans) are required to comply with the Americans with Disabilities Act, or the ADA. The ADA requires that “public accommodations” such as hotels be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. We may be required to expend funds to comply with the provisions of the ADA at our hotels, which could adversely affect our results of operations and financial condition and our ability to make distributions to stockholders. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders.

 
We may experience uninsured or underinsured losses.

      Upon closing of this offering, we will have (i) property and casualty insurance with respect to our six initial properties, as well as any other property we may acquire before the closing of this offering, and (ii) other insurance, in each case, with loss limits and coverages deemed reasonable by our management (and with the intent to satisfy the requirements of lenders and franchisors). In doing so, we have made decisions with respect to what deductibles, policy limits and terms are reasonable based on management’s experience, our risk profile, the loss history of Remington Hotel Corporation and the initial properties, the nature of the initial properties and our businesses, our loss prevention efforts and the cost of insurance.

      Various types of catastrophic losses may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors might cause insurance proceeds to be insufficient to fully replace or

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renovate a hotel after it has been damaged or destroyed. Accordingly, there can be no assurance (i) that the insurance coverages that we have obtained will fully protect us against insurable losses ( i.e. , losses may exceed coverage limits); (ii) that we will not incur large deductibles that will adversely affect our earnings; (iii) that we will not incur losses from risks that are not insurable or that are not economically insurable; or (iv) that current coverages will continue to be available at reasonable rates. We do not intend to maintain terrorism insurance on any of our properties. As a result, one or more large uninsured or underinsured losses could have a material adverse affect on us.

      Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc. and our lender on the Las Vegas Embassy Suites property, requires us to maintain certain insurance coverages, and we anticipate that future lenders will have similar requirements. We believe that we have complied with the insurance maintenance requirements under the current governing loan documents and we intend to comply with any such requirements in any future loan documents. However, a lender may disagree, in which case the lender could obtain additional coverages and seek payment from us, or declare us in default under the loan documents. In the former case, we could spend more for insurance than we otherwise deem reasonable or necessary, or, in the latter case, subject us to a foreclosure on hotels collateralizing one or more loans. In addition, a material casualty to one or more hotels collateralizing loans may result in (i) the insurance company applying to the outstanding loan balance insurance proceeds that otherwise would be available to repair the damage caused by the casualty, which would require us to fund the repairs through other sources, or (ii) the lender foreclosing on the hotels if there is a material loss that is not insured.

Risks Related to Our Status as a REIT

 
If we do not qualify as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.

      We expect to operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

  •  we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;
 
  •  any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and
 
  •  unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and, thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT.

 
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

      Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets. For example:

  •  We will be required to pay tax on undistributed REIT taxable income.
 
  •  We may be required to pay the “alternative minimum tax” on our items of tax preference.

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  •  If we have net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay tax on that income at the highest corporate rate.
 
  •  If we sell a property in a “prohibited transaction,” our gain from the sale would be subject to a 100% penalty tax. A “prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business.
 
  •  Our taxable REIT subsidiary, Ashford TRS, is a fully taxable corporation and will be required to pay federal and state taxes on its income.

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

      To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

 
Complying with REIT requirements may limit our ability to hedge effectively.

      The REIT provisions of the Internal Revenue Code may limit our ability to hedge mortgage securities and related borrowings by requiring us to limit our income in each year from qualified hedges, together with any other income not generated from qualified real estate assets, to no more than 25% of our gross income. In addition, we must limit our aggregate income from nonqualified hedging transactions, from our provision of services and from other non-qualifying sources to no more than 5% of our annual gross income. As a result, we may have to limit our use of advantageous hedging techniques. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the amount of income in excess of those limitations, multiplied by a fraction intended to reflect our profitability. If we fail to satisfy the REIT gross income tests, unless our failure was due to reasonable cause and not due to willful neglect, we could lose our REIT status for federal income tax purposes.

 
Complying with REIT requirements may force us to liquidate otherwise attractive investments.

      To qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.

 
Complying with REIT requirements may force us to borrow to make distributions to stockholders.

      As a REIT, we must distribute at least 90% of our annual taxable income (subject to certain adjustments) to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

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      From time to time, we may generate taxable income greater than our net income for financial reporting purposes due to, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.

 
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

      At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. On May 28, 2003, the President signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which we refer to as the Jobs and Growth Tax Act. Effective for taxable years beginning after December 31, 2002, the Jobs and Growth Tax Act will generally reduce the maximum rate of tax applicable to individuals on dividend income from regular C corporations from 38.6% to 15.0%. This will reduce substantially the so-called “double taxation” (that is, taxation at both the corporate and stockholder levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs will not qualify for the dividend tax reduction because, as a result of the dividends paid deduction to which REITs are entitled, REITs generally do not pay corporate level tax on income that they distribute to stockholders. The implementation of the Jobs and Growth Tax Act could cause individual investors to view stocks of non-REIT corporations as more attractive relative to shares of REITs than was the case previously because the dividends paid by non-REIT corporations would be subject to lower tax rates for the individual. Due to the very recent enactment of this legislation, we cannot predict whether in fact this will occur or whether, if it occurs, what the impact will be on the value of our common shares.

 
Your investment in our common stock has various federal, state and local income tax risks that could affect the value of your investment.

      Although the provisions of the Internal Revenue Code relevant to your investment in our common stock are generally described in “Federal Income Tax Consequences of Our Status as a REIT,” we strongly urge you to consult your own tax advisor concerning the effects of federal, state and local income tax law on an investment in our common stock, because of the complex nature of the tax rules applicable to REITs and their stockholders.

Risk Factors Related to This Offering and Our Corporate Structure

 
We cannot assure you that a public market for our common stock will develop.

      Prior to the offering, there has not been a public market for our common stock, and we cannot assure you that a regular trading market for the shares of common stock offered hereby will develop or, if developed, that any such market will be sustained. In the absence of a public trading market, an investor may be unable to liquidate an investment in our common stock. The initial public offering price has been determined by us and the underwriter. We cannot assure you that the price at which the shares of common stock will sell in the public market after the closing of the offering will not be lower than the price at which they are sold by the underwriter. While there can be no assurance that a market for the common stock will develop, we intend to apply for listing of our shares of common stock on the New York Stock Exchange under the symbol “AHT.”

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There are no assurances of our ability to make distributions in the future.

      We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. However, our ability to pay dividends may be adversely affected by the risk factors described in this prospectus. All distributions will be made at the discretion of our board of directors and will depend upon our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future. In addition, some of our distributions may include a return of capital.

 
Failure to maintain an exemption from the Investment Company Act would adversely affect our results of operations.

      We believe that we will conduct our business in a manner that allows us to avoid registration as an investment company under the Investment Company Act of 1940, or the 1940 Act. Under Section 3(c)(5)(C) of the 1940 Act, entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate” are not treated as investment companies. The SEC staff’s position generally requires us to maintain at least 55% of our assets directly in qualifying real estate interests to be able to rely on this exemption. To constitute a qualifying real estate interest under this 55% requirement, a real estate interest must meet various criteria. Mortgage securities that do not represent all of the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and, thus, may not qualify for purposes of the 55% requirement. Our ownership of these mortgage securities, therefore, is limited by the provisions of the 1940 Act and SEC staff interpretive positions. There are no assurances that efforts to pursue our intended investment program will not be adversely affected by operation of these rules.

 
Our charter does not permit ownership in excess of 9.8% of our capital stock, and attempts to acquire our capital stock in excess of the 9.8% limit without prior approval from our board of directors are void.

      For the purpose of preserving our REIT qualification, our charter prohibits direct or constructive ownership by any person of more than 9.8% of the lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. Our charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding stock, and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the board of directors will be void, and could result in the shares being automatically transferred to a charitable trust.

 
Because provisions contained in Maryland law and our charter may have an anti-takeover effect, investors may be prevented from receiving a “control premium” for their shares.

      Provisions contained in our charter and Maryland general corporation law may have effects that delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the following:

  •  Ownership limit: The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock without our permission.

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  •  Classification of Preferred stock: Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.

      Maryland statutory law provides that an act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director. Hence, directors of a Maryland corporation are not required to act in takeover situations under the same standards as apply in Delaware and other corporate jurisdictions.

 
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend distributions, may adversely affect the market price of our common stock.

      In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

 
Common stock eligible for future sale may have adverse effects on our share price.

      We cannot predict the effect, if any, of future sales of common stock, or the availability of common stock for future sales, on the market price of our common stock. Sales of substantial amounts of common stock (including up to (i) 93,149 shares of common stock issuable to Friedman Billings Ramsey upon consummation of this offering, (ii) 5,657,917 shares of common stock issuable upon the conversion of units of our operating partnership, (iii) 956,500 restricted shares, issued to certain of our directors, executive officers and employees, which, in the case of the executive officers and employees, are subject to continued employment by such officer or employee and (iv) restricted shares issuable to executive officers only if specified performance criteria are identified), or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.

      Each of our directors and executive officers who has received stock grants has entered into lock up agreements with respect to their common stock, restricting the sale of his shares, for 180 days. The underwriters, at any time, may release all or a portion of the common stock subject to the foregoing lock-up provisions. If the restrictions under such agreements are waived, the affected common stock may be available for sale into the market, which could reduce the market price for our common stock.

      We also may issue from time to time additional shares of common stock or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of our common stock or the perception that these sales could occur may adversely affect the prevailing market price for our common stock or may impair our ability to raise capital through a sale of additional equity securities.

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We depend on key personnel with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

      Our future success depends, to a significant extent, upon the continued services of our management team. In particular, the lodging industry experience of Messrs. Archie and Montgomery Bennett, Kessler, Brooks, Kimichik and Nunneley and the extent and nature of the relationships they have developed with hotel franchisors, operators and owners and hotel lending and other financial institutions are critically important to the success of our business. We do not maintain key person life insurance on any of our officers. Although these officers currently have employment agreements with us through 2006 (2007 for Mr. Montgomery Bennett), we cannot assure you of the continued employment of all of our officers. The loss of services of one or more members of our corporate management team could harm our business and our prospects.

 
Investors in this offering will experience immediate and significant dilution in the book value per share.

      The initial public offering price of our common stock is substantially higher than what our net tangible book value per share will be immediately after this offering. Purchasers of our common stock in this offering will incur immediate dilution of approximately $2.19 in net tangible book value per share of common stock from the price payable for our common stock in this offering.

 
An increase in market interest rates may have an adverse effect on the market price of our securities.

      One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our common stock likely will be based primarily on the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to stockholders, and not from the market value or underlying appraised value of the properties or investments themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common stock. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common stock could decrease because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

 
Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification and distributions, are determined by our board of directors. Although we have no present intention to do so, our board of directors may amend or revise these and other policies from time to time without a vote of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and the changes could harm our business, results of operations and share price.

      Although we have adopted a policy pursuant to which we plan to maintain the amount of indebtedness that we incur at no more than 60% of our gross assets, our board may amend or waive this debt policy and our other operating policies at any time without stockholder approval and without notice to stockholders. Changes in our strategy or investment or leverage policy could expose us to greater credit risk and interest rate risk or could result in a more leveraged balance sheet. We cannot predict the effect any changes to our current operating policies and strategies may have on our business, operating results and stock price. However, the effects may be adverse.

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

      We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects are forward-looking by their nature:

  •  our business and investment strategy;
 
  •  our projected operating results;
 
  •  completion of any pending transactions;
 
  •  our ability to obtain future financing arrangements;
 
  •  our understanding of our competition;
 
  •  market trends;
 
  •  projected capital expenditures;
 
  •  the impact of technology on our operations and business; and
 
  •  use of the proceeds of this offering.

      The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our common stock. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

  •  the factors discussed in this prospectus, including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Business and Properties;”
 
  •  general volatility of the capital markets and the market price of our common stock;
 
  •  changes in our business or investment strategy;
 
  •  availability, terms and deployment of capital;
 
  •  availability of qualified personnel;
 
  •  changes in our industry and the market in which we operate, interest rates or the general economy; and
 
  •  the degree and nature of our competition.

      When we use the words “will likely result,” “may,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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USE OF PROCEEDS

      We estimate that the net proceeds of this offering will be approximately $322.75 million, based upon the assumed price per share of common stock of $10 and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriter’s over-allotment option is exercised in full, our net proceeds will be approximately $371.58 million. We intend to use the net proceeds from the offering as follows:

  •  approximately $65.7 million to repay the following indebtedness secured by the initial properties:

  —  a loan secured by our Embassy Suites located in Dallas, Texas, our Embassy Suites Dulles Airport located in Herndon, Virginia and our Embassy Suites located in Austin, Texas with a principal amount outstanding of $39.0 million, an interest rate of LIBOR plus 3.4% with a floor on LIBOR of 5%, an exit fee of 1% (which will be paid by certain of the contributors) and a term ending March 1, 2004;
 
  —  a loan secured by our Radisson Hotel located in Covington, Kentucky with a principal amount outstanding of $9.3 million, but a discounted pay-off amount of $6.0 million, an interest rate of LIBOR plus 3.50% and a term ending November 30, 2003;
 
  —  a loan secured by our Radisson Hotel MacArthur Airport located in Holtsville, New York, with a principal amount outstanding of $17.8 million, an interest rate of LIBOR plus 3.50% and a term ending January 31, 2004;
 
  —  a special partnership interest held by Promus Hotels, Inc. in the partnership that owns the Embassy Suites located in Las Vegas, Nevada, with an outstanding investment of $2.9 million subject to a guaranteed annual return of 11%, which return is current and would be the equivalent of an interest rate if such special partnership interest were structured as debt;

  •  approximately $3.0 million to pay the cash portion of the acquisition cost related to our acquisition of the Embassy Suites located in Las Vegas, Nevada; and
 
  •  the remainder to fund the acquisition or origination of lodging-related assets and for general corporate purposes.

      A tabular presentation of our estimated use of proceeds follows:

                 
Percentage
of Gross
Dollar Amount Proceeds


(in thousands)
Gross offering proceeds
  $ 350,000       100.00 %
Underwriting discounts and commissions
    24,500       7.00  
Other expenses of offering
    2,750       0.79  
     
     
 
Net offering proceeds
  $ 322,750       92.21 %
     
     
 
Estimated amount of net proceeds used to repay indebtedness related to our initial assets
  $ 65,700       18.77 %
Estimated amount to pay cash portion of acquisition cost of one hotel
    3,000       0.86  
Estimated amount allocated to fund future acquisitions and for general corporate purposes
    254,050       72.58  
     
     
 
Total net offering proceeds used
  $ 322,750       92.21 %
     
     
 
Total underwriting discounts, commissions and other expenses
    27,250       7.79  
Total application of gross offering proceeds
  $ 350,000       100.00 %
     
     
 

      Pending these uses, we intend to make temporary investments in money market funds.

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CAPITALIZATION

      The following table sets forth:

  •  the historical capitalization of the initial assets, which includes the entities that own the initial properties as of June 30, 2003; and
 
  •  the pro forma capitalization of Ashford Hospitality Trust, Inc. as of June 30, 2003; and
 
  •  the pro forma capitalization of Ashford Hospitality Trust, Inc. to give effect to the sale of 35,000,000 shares of common stock in this offering and the sale by us to Messrs. Archie and Montgomery Bennett of 500,000 shares of common stock at an offering price of $10 per share, net of the underwriter’s discount and application of the net proceeds as described in “Use of Proceeds.”

      This table should be read in conjunction with the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical and unaudited pro forma financial information and related notes included elsewhere in this prospectus.

                             
Historical Pro Forma Pro Forma
June 30, 2003 Adjustments June 30, 2003



Debt:
                       
 
Mortgage notes payable
  $ 82,096,150     $ (66,096,150 ) (2)   $ 16,000,000  
 
Capital leases payable
    528,919             528,919  
     
     
     
 
   
Total debt
  $ 82,625,069     $ (66,096,150 )   $ 16,528,919  
     
     
     
 
Stockholders’ equity:
                       
 
Common Stock, $.01 par value per share, 500,000,000 shares authorized, 36,766,283 at June 30, 2003 issued and outstanding, as adjusted (1)
  $     $ 367,662     $ 367,662  
 
Additional paid-in capital
          331,420,187       331,420,187  
 
Owners’ equity
    6,407,091       (6,407,091 )      
     
     
     
 
   
Total stockholders’ equity
    6,407,091       325,380,758       331,787,849  
     
     
     
 
   
Total capitalization
  $ 89,032,160     $ 259,284,608     $ 348,316,768  
     
     
     
 


(1)  Includes 35,000,000 shares of common stock issued in the offering, 216,634 shares of common stock to be issued in connection with the contribution of the initial properties into Ashford Hospitality Trust, Inc. by the contributing entities and 500,000 shares of common stock that Messrs. Archie and Montgomery Bennett will purchase from us at a price equal to the offering price, net of an amount equal to the underwriting discount. Also includes 25,000 shares of common stock to be issued to directors, 931,500 shares of common stock to be issued to officers and employees of the company and 93,149 shares of common stock to be issued to the underwriters as compensation. The actual number of shares of restricted stock to be granted to executive officers and employees will depend upon the number of shares of common stock we sell in this offering and will equal, in the aggregate, 2.25% of the fully-diluted shares of common stock outstanding after the completion of this offering (including the exercise of the underwriters’ over-allotment option, but excluding the 93,149 shares of common stock to be issued to the underwriters as compensation). As a result, the number of shares of restricted stock issued to our executive officers and employees may be increased or decreased on a pro rata basis to reflect 2.25% of the actual fully-diluted shares of common stock outstanding after this offering.
 
(2)  Includes actual mortgage loan payoffs and the entry for $3.3 million of debt forgiveness.

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DISTRIBUTION POLICY

      We intend to make regular quarterly distributions to our stockholders. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

        (i) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain, (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles); plus
 
        (ii) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code; less
 
        (iii) any excess non-cash income (as determined under the Internal Revenue Code). See “Federal Income Tax Consequences of Our Status as a REIT.”

      Distributions will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, the timing of the investment of the net proceeds of this offering, the amount of funds from operations, our financial condition, debt service requirements, capital expenditure requirements for our properties, our taxable income, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, our operating expenses and other factors our directors deem relevant. Our ability to pay dividends to our stockholders will depend upon our receipt of distributions from our operating partnership, Ashford Hospitality Limited Partnership, which may depend, in part, upon receipt of lease payments with respect to our properties from Ashford TRS, and, in turn, from Remington Lodging’s management of our properties. Distributions to stockholders will generally be taxable to our stockholders as ordinary income; however, because a portion of our investments will be equity ownership interest in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status, we may accumulate earnings of Ashford TRS in such entity. We cannot assure you that we will be able to generate sufficient revenue from operations to pay dividends to our stockholders or that our directors will not change our dividend policy in the future. See “Risk Factors.”

      Our charter allows us to issue preferred stock that could have a preference on distributions, including dividends. We currently have no intention to issue any preferred stock, but if we do, the dividend preference on the preferred stock could limit our ability to make a dividend distribution to our common stockholders.

      We anticipate adopting, in the future, a dividend reinvestment plan that allows our stockholders that have enrolled in the plan to reinvest their distributions automatically in additional shares of common stock.

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DILUTION

      The initial price per share to the public of the common stock offered hereby will exceed the pro forma net tangible book value per share after the offering. Therefore, purchasers of the common stock in the offering will realize an immediate dilution in the net tangible book value of their shares. Pro forma net tangible book value per share is determined by subtracting our total liabilities from our total tangible assets and dividing the remainder by the number of shares of common stock that will be outstanding after the offering. The following table illustrates the dilution to purchasers of shares sold in the offering, based on the initial public offering price of $10 per share.

         
Initial price per share to the public
  $ 10.00  
Net tangible book value per share prior to the offering (1)
  $ .15  
Pro forma net tangible book value per share after the offering, before the
issuance of restricted stock (2)
  $ 9.47  
Decrease in net tangible book value per share attributable to the issuance of restricted stock (3)
  $ (.46 )
Decrease in pro forma net tangible book value per share to existing stockholders attributable to the conversion of outstanding units of operating partnership interest (4)
  $ (1.20 )
Pro forma net tangible book value per share after the offering (5)
  $ 7.81  
Dilution per share sold in the offering (6)
  $ 2.19  


(1)  Historical net tangible book value per common share is determined by dividing net tangible book value as of June 30, 2003 (net book value of the tangible assets consists of total assets less deferred cost, net of liabilities to be assumed) by the number of common shares of the offering.
 
(2)  After deducting underwriting discounts, commissions and other expenses of this offering.
 
(3)  Includes issuance of restricted shares as follows: 500,000 shares of stock issued to Archie and Montgomery Bennett, 216,634 shares of stock conveyed to a limited partnership owned by Archie and Montgomery Bennett, 25,000 shares of stock issued to directors, 93,149 shares of stock issued to underwriters, 931,500 shares of stock issued to executives and employees. The actual number of restricted shares issued to our executive officers and employees will be equal, in the aggregate, to 2.25% of the fully-diluted shares of common stock outstanding after completion of this offering, excluding the 93,149 shares issued to underwriters.
 
(4)  Includes restricted shares of 5,657,917 issued upon the conversion of units of partnership interests in our operating partnership.
 
(5)  Based on pro forma net tangible book value attributable to common stockholders of approximately $331.4 million divided by the sum of 35,000,000 shares of our common shares to be outstanding, the issuance of 1,766,283 shares of restricted stock, and the issuance of 5,657,917 common shares upon the conversion of outstanding units of our operating partnership.
 
(6)  Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to this offering from the initial public offering price paid by a new investor for a common share.

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OUR COMPANY

 
Overview

      We are a Maryland corporation that was formed in May 2003 to take advantage of the existing and developing investment opportunities in the lodging industry. These diverse lodging investment opportunities may result from inefficiencies related to market illiquidity, supply/ demand imbalances and general business cycles. We will initially target specific opportunities created by the current distressed lodging market but will retain the flexibility to invest in the most attractive risk-reward opportunities as they develop in the lodging business cycle. To our knowledge, we will be one of the few publicly traded REITs, if not the only publicly traded REIT, exclusively focused on investing in the hospitality industry at all levels of the capital structure and across all segments where pricing, yield and capital appreciation advantages may exist.

      Our current investment strategy is intended to take advantage of strengthening lodging fundamentals. We believe that the U.S. economy is currently at or near the bottom of its current business cycle and that the underlying cash flows of hotels will improve once the industry rebounds from this cyclical low point. We believe that our current investment policies will allow us to participate in future improvements in performance within the lodging industry. However, we also believe that as supply, demand and capital market cycles change, we will be able to quickly shift our investment policies to take advantage of newly-created lodging investment opportunities as they develop. Initially, we do not intend to focus our acquisitions on any specific geographical market. While our initial investment policies are well defined, because we will have approximately $254.1 million of net proceeds for which we have not yet identified specific properties to purchase or investments to make, we will be considered a blind pool. Further, our board of directors may change our investment policies at any time without stockholder approval.

      Immediately prior to our formation, all of our senior executive officers were employed by and responsible for the lodging investment activities of Remington Hotel Corporation, a Texas corporation, and its affiliated company, Ashford Financial Corporation, a Texas corporation. Although these officers have no experience operating a public company or a REIT, they have experience in sourcing, underwriting, operating, repositioning, developing, selling and financing a wide variety of lodging investments. As a result, we believe that we have broad-based experience with the full spectrum of issues and business cycles that affect the lodging industry. Our management team has operated effectively across a variety of lodging-related investment types in both growth and recessionary cycles.

      We believe that the current hotel market conditions present opportunities to achieve favorable risk-adjusted returns. Immediately following the completion of this offering and the formation transactions, we will own six hotel properties, have approximately $254.1 million of cash available to fund the acquisition or origination of lodging-related assets and for general corporate purposes and, with only $16.0 million of mortgage debt, will be relatively unleveraged. This capital structure provides us with the ability to make significant future investments to take advantage of what we believe are current opportunities in the hotel market. We intend to finance our future acquisitions with the net proceeds of this offering and future borrowings. We are currently seeking a secured line of credit of up to $120 million, which could greatly increase our debt position, and our charter does not contain any limitation on our ability to incur debt.

      We intend to be self-advised and own our lodging investments and conduct our business through an operating partnership, Ashford Hospitality Limited Partnership, a Delaware limited partnership. We will own an 86.7% interest in our operating partnership. We also intend to elect to be treated as a real estate investment trust, or REIT, for federal income tax purposes. Because of limitations imposed on REITs in operating hotel properties, Remington Lodging will manage our hotel properties. Remington Lodging is wholly owned by Messrs. Archie and Montgomery Bennett, who also own 100% of Remington Hotel Corporation, or Remington Hotel, which is one of the largest privately-owned independent hotel management companies in the country and has extensive management experience in the hospitality industry through its management of over $1 billion of hotels in 28 states.

      Our initial assets will consist of six hotels, four Embassy Suites and two Radisson Hotels, and eight asset management and consulting agreements. We will acquire all of our initial assets from affiliates,

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including Messrs. Archie and Montgomery Bennett or entities owned by them, Mr. Martin L. Edelman, one of our anticipated directors, or his family members, Mr. David A. Brooks, our Chief Legal Officer, Mr. Mark Nunneley, our Chief Accounting Officer, and two employees of Remington Hotel Corporation. The aggregate value of the consideration to be paid by us in exchange for our initial assets is $143.5 million, including assumption of $16.0 million in mortgage debt. We will own the hotels in fee simple except for the Radisson Hotel located in Covington, Kentucky, which will be owned part in fee simple and part pursuant to a ground lease which expires in 2070 (including all extensions). For the years ended December 31, 2002 and 2001 and the six months ended June 30, 2003, these six hotels had a cumulative net operating loss of $3.1 million and $2.9 million and $1.4 million, respectively, which losses include non-cash expenses for depreciation and amortization of $4.8 million and $4.4 million and $2.2 million for the years ended December 31, 2002 and 2001 and the six months ended June 30, 2003, respectively. The asset management and consulting agreements are contracts between Ashford Financial and eight affiliated hotel management companies. Under these agreements, Ashford Financial provides asset management and consulting services to 27 hotels managed under contract with eight management companies affiliated with Remington Hotel. After the contribution of these agreements to us, we will take Ashford Financial’s interest under the agreements and will perform the services instead of Ashford Financial.

      Our initial assets were valued based on several factors, including a multiple of expected future earnings, internal rate of return analysis, review of replacement costs and analysis of sales of similar assets. No single factor was given greater weight than any other in determining valuation of these assets. We did not obtain independent appraisals for any of these assets. As a result, such amounts may not reflect fair market value. Moreover, the total number of shares of common stock or units of our limited partnership that we will pay for our initial assets is fixed. Accordingly, the ultimate value of such consideration will fluctuate based on the initial public offering price of our stock. Specifically, if the initial public offering price is greater than the mid-point of our estimated range, the contributors of our initial assets will receive consideration greater than our valuation of the assets.

Our Team

      We intend to capitalize on the experience of our senior management in sourcing, underwriting, operating, repositioning, developing, selling and financing lodging-related assets. Our roots in the hotel industry trace back to 1968 when our Chairman, Archie Bennett, Jr., built his first hotel. Since then, Mr. Bennett and certain members of our senior management team have been involved in the investment in, or management of, 190 hotels or mortgage loans secured by hotels, totaling approximately 31,119 rooms in 33 states and in the development of 35 hotels, totaling approximately 9,201 rooms in 11 states.

      Historically, our management team’s business strategy has been threefold: first, to identify attractive investment opportunities in the lodging industry; second, to match such opportunities with appropriate institutional oriented investors; and third, to manage such investments, including providing development, management and construction services, for the institutional owners.

      We believe our management’s historical background in the hotel industry will allow us to successfully execute our business strategy. Together with our Chairman, the members of our senior management team have an average of 19 years experience in the hotel industry. With the exception of Mr. Douglas Kessler, our Chief Operating Officer, all members of our senior management team have worked together at Remington Hotel Corporation and affiliated entities since 1992. Our management’s experience during that time includes:

  •  purchasing over $1 billion in hotels and mortgages secured by hotels;
 
  •  building seven hotels at a cost of $125 million;
 
  •  managing $1 billion of hotels, ranging from economy to upper up-scale, in 28 states;

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  •  effectively asset managing over 145 predominantly non-performing hospitality loans (with a book value of approximately $500 million) acquired from third parties, substantially all of which were either recovered at par or foreclosed upon, with the assets sold for an amount in excess of the initial investment (approximately two-thirds of which we also operated as managers); and
 
  •  co-investing with major institutional investors, including, among others, G. Soros Realty Inc., Gordon Getty Trust, The Fisher Brothers, Olympus Real Estate Partners and Goldman Sachs’ Whitehall Real Estate Funds.

      In addition, before Mr. Kessler, our Chief Operating Officer, joined Remington Hotel Corporation in July 2002, he assisted in overseeing the investment management, acquisition, sale and financing of more than $11 billion in real estate assets for Goldman Sachs’ Whitehall Real Estate Funds, including over $6 billion of lodging-related assets. During his nine years at Whitehall, Mr. Kessler served on the boards or executive committees of several lodging companies, including Westin Hotels and Resorts and Strategic Hotel Capital.

      The Chairman of our board of directors, Archie Bennett, Jr., will continue to serve as the Chairman of the board of directors of Remington Hotel Corporation after this offering, and our President and Chief Executive Officer, Montgomery Bennett, will continue to serve as President and Chief Executive Officer of Remington Hotel Corporation. Remington Lodging, which is an affiliate of Remington Hotel and which is owned 100% by Messrs. Archie and Montgomery Bennett, will provide management and other related services for our hotel properties after the offering. All other members of our senior management team who were employees of Remington Hotel Corporation prior to our formation, will resign from Remington Hotel Corporation at or prior to the closing of this offering.

 
Our Opportunity

      We intend to invest in a variety of lodging-related assets based upon our evaluation of diverse market conditions. These investments may include: (i) direct hotel investments; (ii) mezzanine financing through origination or through acquisition in secondary markets; (iii) first lien mortgage financing through origination or through acquisition in secondary markets; and (iv) sale-leaseback transactions.

      Our strategy is designed to take advantage of current lodging industry conditions and adjust to changes in market conditions over time. In the current market, we believe we can purchase assets at discounts to previous trading ranges or replacement costs and acquire or originate debt positions at higher than recent historical interest rate ranges. Over time, our assessment of market conditions will determine asset reallocation strategies. While we seek to capitalize on the following favorable market fundamentals, conditions beyond our control may have an impact on overall profitability and on the investment returns.

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Market Timing

      Even before the events of September 2001, the travel industry had been suffering from an overall decline as a result of a relatively stagnant U.S. economy. The travel industry suffered further after the terrorist attacks on September 11, 2001. Revenue per available room, or RevPAR, declined substantially following the attacks according to HVS. As a result, a broad gap exists between the long-term growth trend before the attacks and the current trend line following the events. The following chart depicts this historical anomaly in RevPAR and illustrates the current industry slump and the opportunity for significant RevPAR growth if the gap narrows and lodging fundamentals improve.

(GRAPH)

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      We believe that the number of hotel rooms in a given market is an important factor in determining the viability of a hotel investment in that market. To maintain revenue levels, an increase in room supply should be matched with a corresponding increase in room demand. Historically, the supply of hotel rooms typically lags behind changes in the demand for hotel rooms because of the lead time necessary to construct new hotels. As noted in the chart below, according to Smith Travel, growth in the supply of hotel rooms has been declining since 1998, when year over year growth reached approximately 4%. Year-over-year growth in room supply dropped below 2% in 2001 and 2002. Thus, growth in new room supply has been and, we believe, will continue to be, below the historical growth average of approximately 3% per year. Based on our experience, we believe decreases in growth of new room supply are typically followed by increases in hotel values. On a per room basis, hotel values, as measured by HVS, declined by 10% in 2001 and an estimated 3% in 2002. Consequently, we believe that there is an opportunity to acquire assets at reduced prices at a point in the cycle in advance of potential increases in hotel values.

(GRAPH)

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Hotel Room Demand

      An increase in the demand for hotel rooms generally leads to an increase in income for hotels. When the growth in hotel room demand exceeds the growth in room supply, revenues are likely to increase as occupancy or room rates increase. According to Smith Travel Research, a leading market research firm for the lodging industry, hotel occupancy in the United States was 59%, in 2002, the lowest level in 31 years, and well below the average of 65% from 1975 to 2001. As shown by the chart below, historically the growth in hotel room demand has correlated directly with the growth in the United States gross domestic product, indicating that corporate and leisure travel move similarly with the economy. This historical correlation broke down in 2001 when gross domestic product grew approximately 1% while hotel room demand declined approximately 4%. We believe this deviation from historical trends primarily reflects the impact of the September 11, 2001 terrorist attacks and the threat of additional terrorism, and clearly indicates that hotels were disproportionately affected compared to the overall economy. As the U.S. economy recovers and business and leisure travel improves, we believe this correlation will return to normal levels. Combined with lower than average new supply, as noted above, we believe that conditions exist for RevPAR growth to accelerate faster than gross domestic product growth.

(GRAPH)

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Hotel Transaction Volume

      The following chart according to HVS shows that the number of hotel properties sold on an annual basis has decreased significantly since 1998 when total sales for hotels (with sales prices over $10 million) equaled $10.7 billion compared to the 2002 total of just over $2 billion. We believe this decline was due to a widening of the bid-ask spread between buyers and sellers that developed as hotel operating performance declined in response to the slowing economy and that during this period, the gap between what a buyer was willing to pay and what a seller was willing to accept for a hotel property increased. Because of the prolonged nature of the stagnant economy, we believe that sellers of lodging assets are being forced to adjust their pricing expectations. This pricing realization coupled with continued cash flow deficiencies and the current lack of capital being invested in the lodging sector by traditional providers should result in an increase in the number of hotels being offered for sale. We believe that the pricing spread will narrow and the transaction volume at discounted values will increase. With increasing transaction volume, we expect opportunities for acquiring assets at attractive prices and placing hotel debt capital (both for first mortgages and mezzanine loans) will increase in line with our investment strategies.

(GRAPH)

 
Capital Markets

      Even though current market conditions are depressed and delinquencies are rising, new debt origination and acquisition opportunities continue to be available as hotel owners are faced with refinancing issues, defaults and opportunities to capitalize on historically low interest rates. As pools of commercial mortgage-backed security loans mature, hotel owners are faced with refinancing based on lower asset values than those in the mid-to-late 1990’s, which provide us an opportunity to offer mezzanine financing to these borrowers at loan-to-value levels previously held by the first mortgage holders. As pools of commercial mortgage-backed security loans continue to default, we will seek to acquire these loan pools at prices that are at discounts to par value.

Our Business Strategy

      The following is a discussion of our business strategy and related investment policies. Our investment policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Any change to any of these policies by our board of directors, however, would be made only after a review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, our board of directors believes that it is advisable to do so in our best interests. We cannot assure you that our investment objectives will be attained.

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      We will implement an asset allocation strategy aimed at maximizing stockholder value by providing attractive risk-adjusted returns throughout the business cycles of the lodging industry. We intend to selectively invest capital in a variety of lodging-related assets based on our evaluation of diverse market conditions. By investing across diversified lodging assets at different levels of a given hotel’s capital structure, we plan to take advantage of changes in the capital markets.

      Our business strategy of combining lodging-related equity and debt investments seeks to:

  •  maximize economic benefits from an industry that has suffered significant reductions in performance and is poised for a strong recovery;
 
  •  capitalize on both current yield and appreciation, while simultaneously offering diversification of types of assets within the hospitality industry;
 
  •  vary investment concentrations across an array of hospitality assets to take advantage of market cycles for each asset class; and
 
  •  offer an attractive liquidity alternative to asset sales (through pricing, structure and tax deferral) and traditional financing (due to rate, structure, loan-to-value and asset class).

      Our investment strategy will target limited and full service hotels in primary, secondary and resort markets throughout the United States. To take full advantage of current and future investment opportunities in the lodging industry, we will invest according to the asset allocation policies described below. Due to changes in market conditions we will continually evaluate the appropriateness of our investment policies and the board of directors may change any or all of these policies at any time, thereby providing us with flexibility in our asset allocation strategy. In addition to our investment activities, we will also perform certain asset management and consulting services for other management companies affiliated with Remington Hotel.

 
Investments in Real Estate or Interests in Real Estate

      Direct Hotel Investments. We intend to acquire existing hotels and, under appropriate market conditions, to develop new hotels. Our direct hotel acquisition strategy will seek to achieve both current income and income from appreciation. We expect to acquire hotels that either offer a high return on investment or have the opportunity to increase in value through brand repositioning, market based recovery or improved management practices. Our direct hotel investments will target mid to upscale, limited and full service hotels in primary, secondary and resort markets throughout the United States. We believe that values for, and operating performances of, lodging properties are currently below historical levels, making this an attractive time for acquisitions.

      Sale-Leaseback Transactions. We intend to purchase hotels and lease them back to their existing hotel owners. Our sale-leaseback policy will target hotel owners that want the ability to realize the value of their investments while maintaining operating control of their hotels. We will seek to structure the transactions as net leases with participation features, terms ranging up to 20 years plus extension options, and with the operating responsibility for the property assumed by the lessee. We believe these transactions will provide us current income, with growth through contractual rental increases or cash flow participations.

      As with our direct hotel investments, we will seek opportunities on limited and full service hotels in primary, secondary and resort markets throughout the United States. We will consider both major franchises and select independents. All terms of our sale-leaseback transactions will be subject to the acceptable creditworthiness of the prospective lessee. We expect to receive a base lease payment that provides an adequate risk-adjusted return, with growth based on contractual rent growth or cash flow participations.

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Investments in Financial Assets

      Mezzanine Financing. We intend to acquire or originate subordinated loans, also known as mezzanine loans, secured by junior mortgages on hotels or pledges of equity interests in entities owning hotels. These mezzanine loans may be secured by individual assets as well as cross-collateralized portfolios of assets. As a result of the experience of our executives in operating hotels, we believe that our underwriting criteria and experience in valuing hotel assets enable us to underwrite our debt investments on values and at levels where we believe we could profitably operate the collateral hotel if we were required to foreclose. Although these types of loans generally have greater repayment risks than first mortgages due to the subordinated nature of such loans, we believe that there currently exists a strong need for lodging mezzanine loans. We believe that the recent slowdown in the travel industry has caused the value of hotel properties to decline below the values at which they were acquired or last refinanced. This decline in market value, coupled with more stringent underwriting criteria by senior hotel lenders, has caused a gap to develop in the loan-to-value ratio of these properties, making it increasingly difficult for owners to refinance their properties. We believe that mezzanine capital provides a solution for these owners by providing loans to cover the loan-to-value shortfalls. We expect this asset class to provide us with our attractive yields and, potentially, allow us to participate in the improving economics of the underlying hotel. In addition, subject to regulatory compliance, we may acquire or originate corporate-level mezzanine loans on an unsecured basis.

      These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. If a property that secures a mezzanine financing is foreclosed by the senior lender, we may not recover some or all of our investment in these loans.

      First Mortgage Financing. We intend to acquire, potentially at a discount to par, or originate loans secured by first priority mortgages on hotels. We may be subject to certain state-imposed licensing regulations related to commercial mortgage lenders, with which we intend to comply. However, because we are not a bank or a federally chartered lending institution, we are not subject to the state and federal regulatory criteria imposed on such entities. Also, because we do not intend to securitize our assets, we expect to be able to offer more flexible terms than commercial lenders who contribute loans to securitized mortgage pools. We anticipate that this asset class will provide us with stable, attractive current yields.

Asset Allocation

      Our initial asset allocation strategy will target investment opportunities presented by today’s distressed lodging market, which has been characterized by substantial reductions in performance and value of hotel properties. These conditions present significant opportunities for attractive risk-adjusted debt and equity investments. We believe, however, that the significant competitive advantage of our asset allocation strategy is its flexibility, which allows us to reallocate our investments to take advantage of changing opportunities in the lodging market. We intend to evaluate our portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs, we may sell investments opportunistically. Our decision to sell a hotel often will be predicated upon, among other things: the projected cash flow; size of the hotel; strength of the franchise; property condition and related costs to renovate the property; strength of market demand; projected supply of hotel rooms in the market; probability of increased valuation; and geographic profile of the hotel. Our decision to sell other lodging-related assets will depend upon, among other things, management’s forecast and review of the performance of our overall portfolio and management’s assessment of changing conditions in the investment and capital markets. We expect our initial asset allocation, once our net proceeds are fully invested, to be approximately 50% to 60% in direct hotel investments, 20% to 30% in mezzanine financing, 5% to 10% in first mortgage financing and 5% to 10% in sale-leaseback transactions.

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Operating Procedures

      In implementing our business strategy through investments that satisfy the applicable investment policies described above, we will consider each of the following:

      Asset Review. In making future hotel investment decisions, we will consider the following criteria, although no single criteria by itself will be determinative:

  •  Number of Rooms — We anticipate acquiring or investing in hotels with at least 150 rooms.
 
  •  Ownership Structure — We prefer properties with a fee simple title.
 
  •  Management — We prefer that the property is unencumbered by long-term management contracts.
 
  •  Franchise Affiliations — We will consider both major franchises as well as independents.
 
  •  Competition — We intend to seek properties in areas that lack a substantial new supply of hotel rooms, appear resilient to down markets and either have an existing broad demand or a growing demand base.
 
  •  Physical Condition — The condition of the property that is acceptable to us will depend on the pricing structure. Major product improvement plans or renovations are acceptable if the pricing adequately reflects such renovations.
 
  •  Available Financing — To the extent we utilize financing in our investments, we will seek non-recourse financing.
 
  •  Amenities — We prefer properties that have amenities (food and beverage, meeting space, fitness equipment, parking, etc.) consistent with the needs of its targeted customer.
 
  •  Operating Performance — We intend to seek hotels that have shown a solid operating performance or alternatively seek assets where strategic changes in operations or its market positioning will generate improved revenue and operating margins.
 
  •  New Supply — We will invest in markets where the effects of future growth in new rooms are understood and factored in value considerations.
 
  •  Room Demand Generators — We will seek hotels that have a diversified base of room demand generators or alternatively seek to reposition hotels to capitalize on shifting the hotel’s guest mix in ways to improve operating performance.

      Underwriting Review. After we identify a potential investment, a due diligence team, consisting of in-house and third parties, will conduct detailed due diligence to assess the potential investment. This due diligence team will follow underwriting guidelines and review a list of property-level issues, including:

  •  property financials;
 
  •  property condition;
 
  •  environmental issues;
 
  •  ADA compliance;
 
  •  title surveys;
 
  •  competitive position;
 
  •  brand;
 
  •  market assessment;
 
  •  advance booking reports; and
 
  •  marketing plans.

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      Market Assessments. Our market assessment analysis will entail in-depth evaluation of macro and micro market forces affecting the lodging industry in a given market and the specific sub-market. We will process data obtained from numerous industry sources that focus on new supply, changes in demand patterns, brand expansion plans, performance of key corporations, government initiatives and essential hotel performance data (e.g., average daily rate, or ADR, occupancy and RevPAR). We will analyze this information to make near-term and long-term investment and sales decisions within each market and further within specific sub-markets.

      Capital Markets Evaluation. We will monitor the capital markets to determine trends in lodging investment patterns and debt-to-equity pricing. We will maintain a debt and equity transaction database encompassing recently closed transactions and suggested pricing for new transactions. This information will assist us in the formulation of competitive pricing trends and may serve as a good indicator of when liquidity gaps or pricing inefficiencies may exist in the market. We intend to use this pricing knowledge to optimally allocate our assets across our four targeted lodging-related investment classes to maximize our risk-adjusted returns.

      Value Optimization Strategies. We will regularly evaluate the incremental performance and resulting investment actions for each asset in our portfolio as part of our budget review process. Because of our fluid asset allocation strategy, it will be imperative that the relative merits of holding a particular property or investment demonstrate benefits in terms of accretion and portfolio diversification. Our objective in such an evaluation is to confirm that an existing asset adds to stockholder value. The methodology consists of a “re-buy” analysis that determines if continuing to hold a particular investment, using forward-looking market growth assumptions, is a valid strategy. By consistently applying this policy across all investments, we seek to maximize our investment returns by reallocating funds into more productive asset classes.

 
Asset Management and Consulting Services

      To comply with the REIT rules and regulations, Remington Lodging will perform the day-to-day management activities related to the operations of our properties. However, we will provide certain asset management services to other entities affiliated with Remington Hotel. Specifically, our initial assets will include eight asset management and consulting agreements under which we will provide various services to eight identified, property managers affiliated with Remington Hotel in exchange for a fee. In performing these services, we will either provide or supervise specific asset management services, including risk management and insurance procurement; assistance with preparation of tax returns and monitoring of the payment of taxes; negotiation of hotel franchise agreements and monitoring compliance with franchise requirements; negotiation of property financings and monitoring compliance with loan covenants; negotiation and closing of equipment leases; property litigation management; assistance with preparation of annual operating and capital budgets for the hotels; and monitoring compliance with the management agreements. We will also provide additional services to these property managers such as market and feasibility analysis, capital improvement assistance, financial planning and franchise support. To the extent permitted by the REIT rules, we will perform similar functions with respect to our own properties.

 
Financing

      We are currently in negotiations with a financial institution regarding the provision of an approximate $120 million secured line of credit. If we are unable to obtain debt financing, our ability to finance our business strategy would be adversely affected. In addition, we may selectively pursue mortgage financing on individual properties and our mortgage investments. Our initial policy is to limit consolidated indebtedness to no more than 60% of the aggregate purchase price of hotels and debt instruments in which we have invested. However, our board of directors may change the financing policy at any time without the approval of our stockholders.

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Internal Growth Strategy

      Our internal growth strategy is derived from appreciation in our hotel assets or pools of hotel assets and the improving credit of the collateral underlying our mortgage loans. Property appreciation is achieved through our ability to identify underperforming, undermanaged or mispriced hotels and realizing cash flows above our original yields. We feel that as the collateral underlying our mortgage loans improves, the credit and therefore the value of the loan will be enhanced.

Our Operating Partnership

      We have organized Ashford Hospitality Limited Partnership, our operating partnership, as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. Ashford OP General Partner LLC, a wholly-owned subsidiary of ours, serves as the sole general partner of our operating partnership, and upon completion of this offering, Ashford OP Limited Partner LLC, another of our wholly-owned subsidiaries, will own an 86.66% limited partnership interest in our operating partnership. The remaining 13.34% limited partnership interest in our operating partnership initially will be owned by (i) certain of our officers and directors (collectively, approximately 12.98% interest), as limited partners, and (ii) two employees of Remington Hotel Corporation (collectively, approximately 0.36% interest). Limited partners in our operating partnership will receive partnership units representing interests in the partnership in exchange for certain assets contributed to us as part of the formation transactions. Beginning one year after the completion of the offering, the partnership units will be redeemable, at the option of the holder, for cash, or at our election, our common stock, generally, on a one-for-one basis.

      Our operating partnership was formed in contemplation of this offering and has no prior history. Upon the completion of this offering, our operating partnership will conduct substantially all of our business as described in this prospectus.

Our Taxable REIT Subsidiary

      Ashford TRS Corporation, our taxable REIT subsidiary, was incorporated as a Delaware corporation. Following completion of this offering, Ashford TRS will lease each of our properties from us and enter into a management agreement with Remington Lodging, a wholly-owned subsidiary of Remington Hotel Corporation, for the management of the properties. Neither we nor our operating partnership can undertake the daily management activities directly under applicable REIT tax rules. Ashford TRS will pay income taxes at regular corporate rates on its taxable income.

Legal Proceedings

      We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

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BUSINESS AND PROPERTIES

 
Initial Properties

      Our initial properties will include six hotels, the Embassy Suites located in Austin, Texas, the Radisson Hotel Cincinnati Riverfront located in Covington, Kentucky, the Embassy Suites located in Dallas, Texas, the Embassy Suites-Dulles Airport located in Herndon, Virginia, the Radisson Hotel MacArthur Airport located in Holtsville, New York, and the Embassy Suites located in Las Vegas, Nevada. We will own the initial hotels in fee simple except for the Radisson Hotel Cincinnati Riverfront, which is owned part in fee simple and part pursuant to a ground lease which expires in 2070 (including all extensions). These properties will be held for investment purposes and operated by our manager. We have no present plans for major improvements on these properties. Presented below is certain descriptive information regarding these initial hotels, each of which is currently managed by an affiliate of Remington Hotel Corporation and owned by a partnership in which one or more affiliates of Remington Hotel Corporation own interests. We believe that each of these properties is adequately covered by insurance.

Twelve Months Ended December 31, 2002

                                             
Revenue
per
Average Average Available
Hotel Property Location Year Built Rooms Occupancy (1) Daily Rate (2) Room (3)







Embassy Suites
  Austin, TX     1998       150       72.4 %   $ 117.01     $ 84.72  
Embassy Suites
  Dallas, TX     1998       150       66.8       122.97       82.14  
Embassy Suites
  Herndon, VA     1998       150       73.9       132.36       97.81  
Embassy Suites
  Las Vegas, NV     1999       220       78.7       109.39       86.09  
Radisson Hotel
  Covington, KY     1972 (4)     236       53.4       67.63       36.10  
Radisson Hotel
  Holtsville, NY     1989 (5)     188       54.8       106.78       58.53  
                 
     
     
     
 
Total/ Weighted Average     1,094       66.0 %   $ 108.29     $ 71.45  
     
     
     
     
 


(1)  Average occupancy represents the number of occupied rooms in the applicable period divided by the product of the total number of rooms and 365 days in the period.
 
(2)  Average daily rate represents the total room revenue for the applicable period divided by the number of occupied rooms.
 
(3)  Revenue per available room, or RevPAR, represents the total room revenue per total available rooms for the applicable period and is calculated by multiplying average occupancy by the average daily rate.
 
(4)  Acquired in 1999 and renovation completed in 2000.
 
(5)  Acquired in 2000 and renovation completed in 2001.

     Embassy Suites, Austin, Texas. The Embassy Suites Hotel Austin, Texas features 150 all-suite guestrooms, one restaurant and lounge, 2,800 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 169 surface parking spaces. The hotel is currently managed by an affiliate of Remington Hotel Corporation under a license agreement with Promus Hotels, Inc.

      The majority of demand for the hotel is commercial in nature as the hotel is located in the Arboretum Shopping and Business District, an area with varied commercial uses. The hotel is located between two major highways (the MoPac Expressway and Capital of Texas Highway) in the Northwest portion of the city of Austin. Competitors include the Renaissance Hotel, Courtyard by Marriott Northwest, Embassy Suites Northwest, Residence Inn by Marriott Northwest and Holiday Inn Northwest. Major demand generators in the area are Apple, IBM, Applied Materials, Motorola, Emerson Electric and Dell Computers.

      Embassy Suites, Dallas, Texas. The Embassy Suites Hotel Dallas features 150 all-suite guestrooms, one restaurant and lounge, 2,800 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 174 surface

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parking spaces. The hotel is currently managed by an affiliate of Remington Hotel Corporation under a license agreement with Promus Hotels, Inc.

      Most demand for the hotel is commercial in nature as the hotel is located in an area with varied commercial uses and high-end retail outlets known as the Dallas Galleria. The hotel is located near two major highways (I-635/ LBJ Freeway and the North Dallas Tollway) in the northern section of the city of Dallas. Competitors include the Westin Galleria Hotel, the Marriott Quorum Hotel, the Hotel Intercontinental, the Hilton Inn & Suites, and the Wyndham Hotel. Major demand generators in the area are Accenture, AT&T, Cap Gemini, JP Morgan, Tenet Healthcare and Kinko’s.

      Embassy Suites-Dulles Airport, Herndon, Virginia. The Embassy Suites Hotel Dulles Airport features 150 all-suite guestrooms, one restaurant and lounge, 2,800 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 167 surface parking spaces. The hotel is currently managed by an affiliate of Remington Hotel Corporation under a license agreement with Promus Hotels, Inc.

      The hotel is located in the Dulles/ Herndon Corridor, twenty-one miles from downtown Washington, D.C., three miles from Dulles International Airport and near numerous business parks and retail centers. The hotel is located near the Dulles Tollroad (Rte. 267). Competitors include Hilton Hotel, Marriott Suites, Homewood Suites, Hyatt and Summerfield Suites. Major demand generators in the area are the Dulles International Airport, Northrop Grumman, Sprint Telecommunications, Computer Associates, Cisco Systems and AOL Time Warner.

      Embassy Suites, Las Vegas, Nevada. The Embassy Suites Hotel, Las Vegas features 220 all-suite guestrooms, one restaurant and lounge, 6,000 square feet of meeting space, one heated outdoor pool and jacuzzi, and exercise facilities. The hotel is six stories high, has three elevators, fire safety sprinklers and 180 surface parking spaces. The hotel is currently managed by an affiliate of Remington Hotel Corporation under a license agreement with Promus Hotels, Inc.

      The majority of demand for the hotel is both commercial and leisure in nature as the hotel is located in a varied commercial and entertainment area and is centrally located between the McCarran Airport, the University of Las Vegas (UNLV) and the Las Vegas Convention Center. The hotel is located on Swenson Street near Paradise Road. Competitors include Courtyard by Marriott Convention Center, Marriott Suites, Residence Inn Convention Center and Crowne Plaza. Major demand generators in the area are Bechtel, Sprint Telecommunications, Boeing, Citigroup, KPMG, Ford Motor Company, UNLV and PricewaterhouseCoopers.

      The Embassy Suites Las Vegas is subject to a mortgage loan having an outstanding balance as of June 30, 2003, of approximately $16.0 million, monthly interest-only payments of $73,333, effective interest rate of the greater of LIBOR plus 3.5%, or 5.5%, and monthly installments of principal of $20,000 commencing January 1, 2005. Prepayment of the loan following January 1, 2003 is subject to an exit fee of $160,000. The loan matures on December 31, 2006 unless the one-year extension option is exercised by the payment of an extension fee of $80,000 and certain conditions are met.

      Radisson Hotel Cincinnati Riverfront, Covington, Kentucky. The Radisson Hotel Cincinnati Riverfront features 236 guestrooms, a revolving river view restaurant on the 18th floor, a casual first-floor dining area and lobby bar, over 10,000 square feet of meeting space, one indoor pool with a retractable roof, a fitness center and a tanning salon. The hotel is 18 stories high, has four elevators, fire safety sprinklers and 120 parking spaces in a two-level underground parking garage. The hotel is currently managed by an affiliate of Remington Hotel Corporation under a license agreement with Radisson Hotels International, Inc.

      The majority of demand for the hotel is both commercial and group in nature as the hotel is located in the heart of the riverfront area in Covington, Kentucky, which houses a diversified business and residential community. Competitors include the Marriott Rivercenter Hotel, Courtyard by Marriott, Embassy Suites, Hampton Inn and Holiday Inn. Major demand generators in the area are Procter and

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Gamble, Fidelity Investments, Net Jets, Givaudan (a Switzerland-based global fragrance and flavor manufacturer), Sara Lee and Accenture.

      Radisson Hotel MacArthur Airport, Holtsville, New York. The Radisson Hotel MacArthur Airport features 188 guestrooms, one restaurant and lounge, 5,000 square feet of meeting space, one heated indoor pool and jacuzzi, and exercise facilities. The hotel is three stories high, has three elevators, fire safety sprinklers and approximately 200 surface parking spaces. The hotel is currently managed by an affiliate of Remington Hotel Corporation under a license agreement with Radisson Hotels International, Inc.

      The majority of demand for the hotel is both commercial and group in nature as the hotel is located in an area with varied commercial uses and residential neighborhoods within five miles of the Long Island MacArthur Airport (LIMA), a major regional hub servicing major commercial flights for the greater New York metropolitan area and Long Island. The hotel is located on the South Service Road of the Long Island Expressway (Route 495) at Exit 63. Competitors include the Marriott Hotel, the Wyndham Windwatch, the Holiday Inn and the Holiday Inn Express. Major demand generators in the area are LIMA, Computer Associates, Forest Laboratories, Symbol Technologies, Brookhaven National Laboratory and Stony Brook University.

Asset Management and Consulting Agreements

      In connection with the consummation of this offering and the completion of the formation transactions, in exchange for 1,025,000 limited partnership interest units in our operating partnership, valued at $10.25 million, Ashford Financial Corporation will contribute to us eight asset management and consulting agreements between Ashford Financial and eight hotel management companies. Under these eight agreements, Ashford Financial provides asset management and consulting services to 27 hotels managed under contract with the eight management companies. After the contribution, we will take Ashford Financial’s interest under the contributed agreements and will perform the services instead of Ashford Financial. Each of the eight management companies is either a wholly owned subsidiary of Remington Hotel, which is owned 100% by Messrs. Archie and Montgomery Bennett, or is 100% owned by one or both of the Bennetts. Messrs. Archie and Montgomery Bennett also have a minority ownership interest in the underlying 27 hotels for which the asset management and consulting services are to be provided and own 100% of Ashford Financial Corporation.

Services

      For two of the hotels subject to the asset management and consulting agreements, we will directly provide specific asset management services, including the following:

  •  risk management and insurance procurement;
 
  •  assistance with preparation of tax returns and monitoring of the payment of taxes;
 
  •  negotiation of hotel franchise agreements and monitoring compliance with franchise requirements;
 
  •  negotiation of property financings and monitoring compliance with loan covenants;
 
  •  negotiation and closing of equipment leases;
 
  •  property litigation management;
 
  •  assistance with preparation of annual operating and capital budgets for the hotels; and
 
  •  monitoring compliance with the management agreements.

      For the remaining 25 properties, we will supervise the performance of these same services, which will be provided directly by third parties or hotel employees. For all of the properties, we will provide additional services such as market and feasibility analysis, capital improvement assistance, financial planning and franchise support.

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Term

      The eight management companies provide services to the hotels pursuant to a separate management agreement with each of the 27 hotels. The term of each of the eight asset management and consulting agreements being contributed to our operating partnership will expire when all of the underlying management agreements expire (including all extension periods) or are terminated, unless such asset management and consulting agreement is earlier terminated pursuant to an uncured event of default. One of the management agreements expires in 2007, seven expire in 2008, seven expire in 2009, one expires in 2010, two expire in 2011, and the balance expire in 2020 or later, exercisable at the discretion of the manager. The management agreements generally have at least two renewal terms of five years each. Each of the management companies has agreed to exercise its renewal rights if it is commercially reasonable to do so.

Consulting Fee

      In exchange for performing the asset management and consulting services, we will be entitled, as the assignee of Ashford Financial Corporation, to annual payments equal to 25.8% of the total amount of base and incentive fees payable to the management companies pursuant to the underlying management agreements. The remaining 74.2% of the property management fee will be payable to the actual property managers as compensation for managing the day-to-day operations of the related hotel, which services will not be provided by our company. These payments depend on revenue generated by the underlying hotels for which the asset management and consulting services will be provided, and, as a result, we cannot make any assurance that any particular amount of revenue, if any, will be generated pursuant to the contributed agreements, except as described below under “— Guaranteed Minimum Fee.” The following table sets forth the estimated initial annual revenue, by property, expected to be generated by the asset management and consulting agreements.

                     
Expiration Date of Estimated
Manager Management Agreement (1) Property Revenue (2)




Remington Hospitality, Inc.
    October 26, 2020     Alexandria Sheraton   $ 30,500  
      October 11, 2009     Annapolis Historic     45,500  
      October 26, 2020     Beverly Hills Ramada     58,000  
      June 3, 2011     Coral Gables Holiday Inn     27,600  
      October 26, 2020     Ft. Worth Radisson     107,200  
      May 31, 2011     Key West — Crowne Plaza     61,000  
      October 26, 2020     Woburn Radisson     22,400  
Remington Indianapolis Employers Corporation
    October 26, 2020     Indy Airport — Radisson     41,100  
      October 26, 2020     Indy Circle — Radisson     85,300  
Remington Milford Hotel Employers Corporation
    April 26, 2008     Hyannis Ramada     24,000  
 
Remington Suites Hotel Corporation
    October 25, 2020     Houston Embassy     65,000  
 
Remington Employers Corporation
    May 6, 2009     Commack Howard Johnson     16,300  
      October 6, 2008     Dallas Best Western     12,400  
      March 3, 2008     Falmouth Square Inn     21,000  
      March 1, 2009     Gull Wings Suites     21,900  
      October 26, 2020     Milford Radisson     35,500  
      March 17, 2008     Rockland Radisson     25,600  
      May 16, 2009     Saddlebrook Radisson     26,300  
      September 1, 2009     St. Petersburg Hilton     72,500  
      November 30, 2007     Warner Robins Ramada     9,000  
      May 13, 2009     Westbury Howard Johnson     15,700  
      May 2, 2009     Woburn Four Points     12,300  

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Expiration Date of Estimated
Manager Management Agreement (1) Property Revenue (2)




Remington Employers Management Corporation
    May 31, 2010     West Palm Beach — Embassy Suites     49,500  
      July 13, 2008     Minnetonka Sheraton     41,500  
      October 26, 2020     Nassau Bay Hilton     64,400  
Remington Orlando Management Corporation
    January 31, 2008     Sheraton Orlando     177,000  
Remington Ventura Employers Corporation
    December 31, 2008     Ventura Marriott     31,500  
                 
 
TOTAL   $ 1,200,000  
     
 


(1)  These expiration dates represent the initial expiration dates without giving effect to any extensions. See “— Term.”
 
(2)  Calculated as 25.8% of the trailing 12-months actual management fee through June 30, 2003.

     As shown above, initially, the estimated payment to us under the asset management and consulting agreements will be approximately $1.2 million per year. If any covered property is sold at any time or upon expiration of the underlying management agreement, we will no longer derive any income from such property, thereby reducing the income we receive under the applicable asset management and consulting agreement. Any such sale or expiration of a management agreement will have no effect on the guaranteed minimum fee described below.

Guaranteed Minimum Fee

      Pursuant to a written guaranty agreement executed by Ashford Financial Corporation for our benefit, Ashford Financial Corporation has guaranteed that we will be paid a minimum of $1.2 million per year for each of the first five years, in consulting fees under all of the asset management and consulting agreements, for a total guarantee of $6.0 million. We will be entitled to this guaranteed minimum amount even if, during the five-year period, any of the 27 hotel properties is sold or if the hotels fail to generate sufficient revenue to result in at least $1.2 million in fees to us per year. The minimum guaranteed amount will be subject to annual adjustments based on the consumer price index. This guaranty will be secured by the 1,025,000 units of limited partnership interest in Ashford Hospitality Limited Partnership that we issued to Ashford Financial Corporation as consideration for its contribution to us of the eight asset management and consulting agreements. A pro rata portion of the units will be released from the pledge each year over the five-year term of the guaranty, provided the guaranteed minimum fee has been paid.

Assignment

      The asset management and consulting agreements may not be assigned by either the management companies or by us, as assignee of Ashford Financial Corporation, without the prior consent of the other, except that we may, without consent, assign the agreements to Ashford TRS or, solely to satisfy the REIT requirements and maintain our REIT status, a third party.

Substitution of Management Agreement

      During the first five years following this offering, if any of the covered hotel properties is sold, the management company has the right, in its sole election, to substitute a new management agreement.

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Events of Default

      Each of the following is an event of default under the asset management and consulting agreements:

  •  Our operating partnership or the management company experiences certain bankruptcy-related events.
 
  •  The management company fails to make any payment due under an asset management and consulting agreement, subject to a 10-day grace period.
 
  •  Our operating partnership or the management company does not observe or perform any other term of the asset management and consulting agreement, subject to a 30-day grace period that can be extended to a maximum of 120 days.

      If an event of default occurs and continues beyond any grace period, the non-defaulting party will have the option of terminating the applicable asset management and consulting agreement. If an asset management and consulting agreement is terminated as a result of an event of default, we will be entitled to receive any consulting fees earned and accrued through the date of termination. We will still be entitled under the guaranty agreement to a guaranty of the minimum annual $1.2 million consulting fees if an asset management and consulting agreement is terminated because of our default or the default of the management company.

Leases

      Each of our initial hotels will be owned by our operating partnership and leased to Ashford TRS, our taxable REIT subsidiary, pursuant to a percentage lease. Additionally, we intend to lease all hotels we acquire in the future, other than pursuant to sale-leaseback transactions with unrelated third parties, to Ashford TRS, pursuant to the terms of percentage leases that are generally similar to the terms of the existing percentage leases. Our management team will negotiate the terms and provisions of each future lease, considering such things as the purchase price paid for the hotel, then current economic conditions and any other factors deemed relevant at the time.

Term

      The leases for each of the initial hotels will have a non-cancelable term of five years. The leases may be terminated earlier than the stated term if certain events occur, including specified damages to the related hotel, a condemnation of the related hotel or the sale of the related hotel, or an event of default which is not cured within any applicable cure or grace periods.

Amounts Payable Under Leases

      The leases generally provide for Ashford TRS to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any. The percentage rent for each hotel equals the sum of (i) a percentage of gross revenues up to a specified threshold, (ii) a percentage of gross revenues in excess of the specified threshold but less than a second incentive threshold, and (iii) a percentage of gross revenues in excess of the second incentive threshold.

Maintenance and Modifications

      The operating partnership will be required to establish and fund, in respect of each fiscal year during the terms of the leases, a reserve account, in the amount of at least 4% of gross revenues per quarter for the replacement and refurbishment of furniture, fixtures and equipment and other capital improvements to be made as required under the applicable hotel management agreement. To the extent that amount is not used in a particular quarter, the unused amount will be carried forward, cumulatively, to future quarters. Ashford TRS is responsible for all routine repair and maintenance of the hotels, and the operating partnership will be responsible for non-routine capital expenditures. Any capital improvements to the hotels will be made pursuant to the capital improvement budget as approved by us.

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      Ashford TRS, at its own expense, may make routine additions, modifications or improvements to the hotels, so long as any such additions, modifications or improvements do not significantly alter the character or purposes of the hotels or significantly detract from the value or operating efficiencies of the hotels. Any such additions, modifications or improvements will be subject to the terms and provisions of the leases and will become our property upon the termination of the related lease. We will own substantially all personal property (other than inventory, linens and other nondepreciable personal property) not affixed to, or deemed a part of, the real estate or improvements on the initial hotels, unless ownership of such personal property would cause the rent under a lease not to qualify as “rents from real property” for REIT income test purposes. See “Federal Income Tax Consequences — Requirements for Qualification — Income Tests.”

Insurance and Property Taxes

      We will pay for real estate and personal property taxes on the hotels (except to the extent that personal property associated with the hotels is owned by Ashford TRS). We will pay for property and casualty insurance relating to the hotel properties and any personal property owned by us. Ashford TRS as the lessee, will pay for all insurance on its personal property, business interruption, comprehensive general public liability, workers’ compensation, vehicle, and other appropriate and customary insurance. Ashford TRS must name us as an additional insured on any policies it carries. Pursuant to the terms of the management agreement, Remington Lodging will be responsible for acquiring all insurance to be carried by Ashford TRS on behalf of Ashford TRS and will be reimbursed for all related costs by Ashford TRS.

Assignment and Subleasing

      Ashford TRS will not be permitted to sublet any part of the hotels or assign its interest under any of the leases without our prior written consent. No assignment or subletting will release Ashford TRS from any of its obligations under the leases.

Damage to Hotels

      If any of our insured hotels is destroyed or damaged, whether or not such destruction or damage prevents use of the property as a hotel, Ashford TRS will have the obligation, but only to the extent of insurance proceeds that are made available, to restore the hotel. If the insurance proceeds are not sufficient to restore the hotel, Ashford TRS or we have the right to terminate the lease upon written notice. In that event, neither we nor Ashford TRS will have any further liabilities or obligations under the lease, except that, if we terminate the lease, we have to pay Ashford TRS the fair market value of its leasehold interest in the remaining term of the lease. We will keep all insurance proceeds received as a result of such destruction or damage. If the lease is terminated by Ashford TRS, we have the right to reject the termination of the lease by Ashford TRS and to require Ashford TRS to restore the hotel, provided we agree to pay for all restoration costs in excess of available insurance proceeds. In that event, the related lease will not terminate and we will pay all insurance proceeds to Ashford TRS. If the cost of restoration exceeds the amount of insurance proceeds, we will contribute any excess amounts necessary to complete the restoration to Ashford TRS before requiring the work to begin.

      In the event of damage to or destruction of any uninsured hotel, we will have the option to either (i) restore the property, at our cost and expense, in which case the lease will not terminate, or (ii) terminate the lease. If the lease is terminated, neither we nor Ashford TRS will have any further liabilities or obligations under the lease, except that, if we terminate the lease, we have to pay Ashford TRS the fair market value of its leasehold interest in the remaining term of the lease. If the lease remains in effect and the damage does not result in a reduction of gross revenues at the hotel, Ashford TRS’s obligation to pay rent will be unabated. If, however, the lease remains in effect but the damage does result in a reduction of gross revenues at the hotel, Ashford TRS will be entitled to a certain amount of rent abatement while the hotel is being repaired. We will keep all proceeds from loss of income insurance.

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Condemnation

      If any of our initial hotels is subject to a total condemnation or a partial taking that prevents use of the property as a hotel, we and Ashford TRS each have the option to terminate the related lease. We will share in the condemnation award with Ashford TRS in accordance with the provisions of the related lease. If any partial taking of a hotel does not prevent use of the property as a hotel, Ashford TRS is obligated to restore the untaken portion of the hotel to a complete architectural unit but only to the extent of any available condemnation award. If the condemnation award is not sufficient to restore the hotel, Ashford TRS or we have the right to terminate the lease upon written notice. If the lease is terminated by Ashford TRS, we have the right to reject the termination of the lease by Ashford TRS and to require Ashford TRS to restore the hotel, provided we agree to pay for all restoration costs in excess of the available condemnation award. We will contribute the cost of such restoration to Ashford TRS. If a partial taking occurs, the base rent will be abated to some extent, taking into consideration, among other factors, the number of usable rooms, the amount of square footage, or the revenues affected by the partial taking.

Events of Default

      Events of Default under the leases include:

  •  Ashford TRS fails to pay rent or other amounts due under the lease, provided that Ashford TRS has a 10-day grace period after receiving a written notice from us that such amounts are due and payable before an event of default would occur.
 
  •  Ashford TRS does not observe or perform any other term of a lease, provided that Ashford TRS has a 30 day grace period after receiving a written notice from us that a term of the lease has been violated before an event of default of default would occur. There are certain instances in which the 30-day grace period can be extended to a maximum of 120 days.
 
  •  Ashford TRS is the subject of a bankruptcy, reorganization, insolvency, liquidation or dissolution event that is not discharged within 90 days.
 
  •  Ashford TRS voluntarily ceases operations of the hotels for a period of more than 30 days except as a result of damage, destruction, condemnation, or certain specified unavoidable delays.
 
  •  The franchise license for the related hotel is terminated by the franchisor because of any action or failure to act by Ashford TRS.

      If an event of default occurs and continues beyond any grace period, we will have the option of terminating the related lease. If we decide to terminate a lease, we must give Ashford TRS 10 days’ written notice. Unless the event of default is cured before the termination date we specify in the termination notice, the lease will terminate on the specified termination notice. In that event, Ashford TRS will be required to surrender possession of the related hotel.

Termination of Leases

      Our operating partnership has the right to terminate any lease with 30 days notice to Ashford TRS. If we elect to terminate a lease, we must either:

  •  pay Ashford TRS the fair market value of its leasehold interest in the remaining term of the lease; or
 
  •  offer to lease to Ashford TRS one or more substitute hotels on terms that will create a leasehold interest in such hotels with a fair market value equal to or greater than the fair market value of their remaining leasehold interest under the terminated lease.

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Breach by Us

      If we breach any of the leases, we will have 30 days from the time we receive written notice of the breach from Ashford TRS to cure the breach. This cure period may be extended in the event of certain specified, unavoidable delays.

Management Agreement

      Pursuant to the terms of a management agreement, we intend to engage Remington Lodging, which is owned by Messrs. Archie and Montgomery Bennett and is an affiliate of Remington Hotel Corporation, as the property manager for our six initial hotels and for any future hotels that we lease to Ashford TRS. We and Remington Lodging will execute the management agreement at the closing of our initial public offering, but for the purposes of this section, we have assumed that the management agreement has already been executed.

Term

      The management agreement provides, as to each initial or future hotel, for an initial term of 10 years. The term may be renewed by Remington Lodging, at its option, subject to certain performance tests, for three successive periods of seven years each and, thereafter, a final term of four years, provided that at the time the option to renew is exercised, Remington Lodging is not then in default under the management agreement. If at the time of the exercise of any renewal period, Remington Lodging is in default, then the exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then Ashford TRS may terminate the management agreement. If Remington Lodging desires to exercise any option to renew, it must give Ashford TRS written notice of its election to renew the management agreement no less than 90 days before the expiration of the then current term of the management agreement.

Amounts Payable under the Management Agreement

      Remington Lodging will receive a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee for each hotel will be due monthly and will be equal to the greater of:

  •  $10,000 (increased annually based on consumer price index adjustments); and
 
  •  3% of the gross revenues associated with that hotel for the related month.

      The incentive management fee, if any, for each hotel will be due annually in arrears within 90 days of the end of the fiscal year and will be equal to the lesser of (i) 1% of gross revenues and (ii) the amount by which the actual gross operating profit exceeds the target gross operating profit as set forth in the annual operating budget approved for the applicable fiscal year. If, however, based on actual operations and revised forecasts from time to time, it is reasonably anticipated that the incentive fee will be earned, Ashford TRS will consider payment of the incentive fee pro-rata on a quarterly basis.

      The incentive fee is designed to encourage Remington Lodging to generate higher gross operating profit at each hotel by increasing the fee due to Remington Lodging when the hotels generate gross operating profit above certain threshold levels. Any increased revenues will generate increased lease payments under the percentage leases and should thereby benefit our stockholders.

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Early Termination

      The management agreement may be terminated as to one or more of the hotels earlier than the stated term if certain events occur, including:

  •  a sale of a hotel or a substitution of the hotel;
 
  •  the failure of Remington Lodging to satisfy certain performance standards with respect to any of the future hotels or, after the initial 10-year term, the six initial hotels;
 
  •  for the convenience of Ashford TRS;
 
  •  in the event of a casualty to, condemnation of, or force majeure involving a hotel; or
 
  •  upon a default by Remington Lodging or us that is not cured prior to the expiration of any applicable cure periods.

Termination Fees

      In certain cases of early termination of the management agreement with respect to one or more of the hotels, we must pay Remington Lodging termination fees, plus any amounts otherwise due to Remington Lodging pursuant to the terms of the management agreement. We will be obligated to pay termination fees in the circumstances described below, provided that Remington Lodging is not then in default, subject to certain cure and grace periods.

 
Sale of a Hotel.

  •  Sale of an Initial Hotel — If any of the initial hotels is sold prior to the expiration of the initial 10-year term, the management agreement will terminate with respect to the hotels and we must pay a termination fee equal to the product obtained by multiplying (i) the aggregate management fees (both base fees and incentive fees) estimated to be paid to Remington Lodging with respect to the sold hotels pursuant to the then current annual operating budget (but in no event less than the management fees for the preceding full fiscal year) by (ii) the years then remaining under the initial 10-year term. Ashford TRS does not have to pay any termination fees in connection with a sale of an initial hotel that occurs after the initial 10-year term. In addition, we have the right, without incurring any termination fee, to substitute a hotel for any of the initial hotels under the management agreement. The substitute hotel must be reasonably equivalent in terms of size, number of rooms, quality of the franchise, market type and gross revenues.
 
  •  Sale of a Future Hotel — If any of the future hotels is sold during the first 12 months of the date such hotels become subject to the management agreement, Ashford TRS may terminate the management agreement with respect to such sold hotel, provided that we pay to Remington Lodging, an amount equal to the management fee (both base fees and incentive fees) estimated to be paid to Remington Lodging with respect to the applicable hotels pursuant to the then current annual operating budget for the balance of the first year of the 10-year base term. If any of the future hotels is sold at any time after the first year of the 10-year base term and Ashford TRS terminates the management agreement with respect to those hotels, Ashford TRS will have no obligation to pay any termination fees.

 
Casualty.

  •  Casualty of an Initial Hotel — If any of the initial hotels are damaged and Ashford TRS elects for any reason not to rebuild the damaged hotel, we must pay a termination fee to Remington Lodging equal to the termination fee that would be owed if the hotel had been sold.
 
  •  Casualty of a Future Hotel — If any of the future hotels is the subject of a casualty and Ashford TRS elects not to rebuild, then we must pay to Remington Lodging the termination fee, if any, that would be owed if the hotel had been sold. However, after the first year of the initial 10-year term

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  for a future hotel, if the future hotel is the subject of a casualty and Ashford TRS elects not to rebuild the hotel even though sufficient casualty insurance proceeds are available to do so, then we must pay to Remington Lodging a termination fee equal to the product obtained by multiplying (i) 65% of the aggregate management fees (both base fees and incentive fees) estimated to be paid to Remington Lodging with respect to the applicable hotels pursuant to the then current annual operating budget (but in no event less than the management fees for the preceding full fiscal year) by (ii) nine.

      Condemnation or Force Majeure. In the event of a condemnation of or force majeure events to any of the hotels, Ashford TRS has no obligation to pay any termination fees if the management agreement terminates as to those hotels.

 
Failure to Satisfy Performance Test.

  •  Future Hotels — If any of the future hotels fail to satisfy a certain performance test, Ashford TRS may terminate the management agreement with respect to such future hotel, and in such case, we must pay to Remington Lodging an amount equal to 60% of the product obtained by multiplying (i) 65% of the aggregate management fees (both base fees and incentive fees) estimated to be paid to Remington Lodging with respect to the applicable future hotel pursuant to the then current annual operating budget (but in no event less than the management fees for the preceding full fiscal year) by (ii) nine. Remington Lodging will have failed the performance test with respect to a particular hotel if during any fiscal year during the term (i) such hotel’s gross operating profit margin for such fiscal year is less than 75% of the average gross operating profit margins of comparable hotels in similar markets and geographical locations, as reasonably determined by Remington Lodging and us, and (ii) such hotel’s RevPAR yield penetration is less than 80% of the RevPAR yield penetration of a pre-identified competitive set (subject to adjustment from time to time) of hotels (which includes the hotel). Upon a performance test failure, Ashford TRS must give Remington Lodging two years to cure. If, within the first year, the performance test failure has not been cured, then we may, in order not to waive any such failure, require Remington Lodging to engage a nationally-recognized consultant with significant hotel lodging experience reasonably acceptable to both of us, to make a determination as to whether or not another management company could have managed the hotel in a materially more efficient manner. If the consultant’s determination is in the affirmative, then Remington Lodging must engage such consultant to assist with the cure of such performance failure during the second year of the cure period. If the consultant’s determination is in the negative, then Remington Lodging will be deemed not to be in default under the performance test. The cost of such consultant will be shared by Ashford TRS and Remington Lodging equally. If Remington Lodging fails the performance test during the second year of the cure period and the consultant again makes a finding that another manager could manage materially better than Remington Lodging, then Ashford TRS has the right to terminate the management agreement with respect to such hotel and to pay to Remington Lodging the termination fee described above. Further, if any of the future hotels are within a cure period due to a failure of the performance test, an exercise of a renewal option shall be conditioned upon timely cure of the performance test failure, and if the performance failure is not timely cured, Ashford TRS may elect to terminate the management agreement without paying any termination fee.
 
  •  Initial Hotels — The initial hotels are not subject to the performance test until after the initial 10-year term of the management agreement.

      For Convenience. With respect to any of the hotels, if Ashford TRS elects for convenience to terminate the management agreement with respect to such hotel, at any time, including during any renewal term, we must pay a termination fee to Remington Lodging, equal to the product of (i) 65% of the aggregate management fees (both base fees and incentive fees) estimated to be paid to Remington Lodging with respect to the applicable hotels pursuant to the then current annual operating budget (but in no event less than the management fees for the preceding full fiscal year) and (ii) nine.

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New Manager; Mutual Exclusivity Agreement

      Pursuant to the mutual exclusivity agreement between Remington Hotel, Remington Lodging and us, we have agreed to engage Remington Lodging for the management, development, construction, project management and certain other services in connection with any future hotels acquired by us unless our independent directors either (i) unanimously vote to engage another manager or developer, or (ii) based on special circumstances or past performance, by a majority vote elect not to engage Remington Lodging because they have determined that it would be in our best interest not to engage Remington Lodging or that another manager or developer could perform the duties materially better. If the management agreement terminates as to all of the hotels covered in connection with a default under the management agreement, the mutual exclusivity agreement will also terminate. See “— Mutual Exclusivity Agreement.”

Maintenance and Modifications

      Remington Lodging must maintain each hotel in good repair and condition and make such routine maintenance, repairs and minor alterations as it deems reasonably necessary. The cost of all such maintenance, repairs and alterations will be paid by Ashford TRS.

Insurance

      Remington Lodging is responsible for maintaining and paying for all workers’ compensation, employer’s liability, and other appropriate and customary insurance related to its operations as a property manager, the cost of which is the responsibility of Ashford TRS.

Assignment and Subleasing

      Neither Remington Lodging nor Ashford TRS may assign its rights and obligations under the management agreement without the other party’s prior written consent. However, Remington Lodging may assign its rights and obligations to an affiliate of Remington Lodging that satisfies the eligible independent contractor requirements and is “controlled” by Messrs. Archie and Montgomery Bennett or their respective family partnership or trusts, the sole members of which are at all times lineal descendants of Messrs. Archie and Montgomery Bennett (including step children) and spouses. “Control” means (i) the possession of a majority of the capital stock and voting power of such affiliate, directly or indirectly, or (ii) the power to direct or cause the direction of the management and policies of such affiliate in the capacity of chief executive officer, president, chairman, or other similar capacity where they are actively engaged or involved in providing such direction or control and spend a substantial amount of time managing such affiliate. No assignment will release Remington Lodging from any of its obligations under the management agreement.

Damage to Hotels

      If any of our insured properties is destroyed or damaged, Ashford TRS is obligated, subject to the requirements of the underlying lease, to repair or replace the damaged or destroyed portion of the hotel to the same condition as existed prior to such damage or destruction. If the lease relating to such damaged hotel is terminated pursuant to the terms of the lease, Ashford TRS has the right to terminate the management agreement with respect to such damaged hotel. In the event of a termination, neither Ashford TRS nor Remington Lodging will have any further liabilities or obligations under the management agreement with respect to such damaged hotel, except that we may be obligated to pay to Remington Lodging a termination fee, as described above. If the management agreement remains in effect with respect to such damaged hotel, and the damage does not result in a reduction of gross revenues at the hotel, our obligation to pay management fees will be unabated. If, however, the management agreement remains in effect with respect to such damaged hotel, but the damage does result in a reduction of gross revenues at the hotel, we will be entitled to partial abatement of the management fees while the hotel is being repaired.

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Condemnation of a Property or Force Majeure

      If any of our hotels is subject to a total condemnation or a partial taking that prevents use of the property as a hotel, the management agreement, with respect to such condemned hotel, will terminate, subject to the requirements of the applicable lease. In the event of termination, neither Ashford TRS nor Remington Lodging will have any further liabilities or obligations under the management agreement with respect to such hotel. If any partial taking of a property does not prevent use of the property as a hotel, we must restore the untaken portion of the property to a complete architectural unit. If there is an event of force majeure or any other cause beyond the control of Remington Lodging that directly involves a hotel and has a significant adverse effect upon the continued operations of that hotel, then the management agreement may be terminated by Ashford TRS. In the event of a termination, neither Ashford TRS nor Remington Lodging will have any further liabilities or obligations under the management agreement with respect to such hotel.

Annual Operating Budget

      The management agreement provides that not less than 45 days prior to the beginning of each fiscal year during the term of the management agreement, Remington Lodging will submit to Ashford TRS for each of the hotels, an annual operating budget setting forth in detail an estimated profit and loss statement for the next 12 months (or for the balance of the fiscal year in the event of a partial first fiscal year), including a schedule of hotel room rentals and other rentals and a marketing and business plan for each of the hotels. The budget is subject to Ashford TRS approval, which may not be unreasonably withheld. The budget may be revised from time to time, taking into account such circumstances as Ashford TRS deems appropriate or as business and operating conditions shall demand, subject to the reasonable approval of Remington Lodging.

Capital Improvement Budget

      Remington Lodging must prepare a capital improvement budget of the expenditures necessary for replacement of furniture, fixtures and equipment and building repairs for the hotels during the following fiscal year and provide such budget to Ashford TRS for approval, which approval may not be unreasonably withheld, at the same time Remington Lodging submits the proposed annual operating budget for approval. Remington Lodging will, in accordance with the capital improvement budget, make such substitutions and replacements of or renewals to furniture, fixtures and equipment and non-routine repairs and maintenance as it deems necessary to maintain our hotels. Remington Lodging may not make any other expenditures without Ashford TRS approval, except expenditures which are required by reason of any (i) emergency, (ii) applicable legal requirements, (iii) the terms of any franchise agreement or (iv) are otherwise required for the continued safe and orderly operation of our hotels. The cost of all such changes, repairs, alterations, improvements, renewals, or replacements will be paid from the capital improvement reserve or other monies advanced by Ashford TRS.

Service and Project Management Fees

      Ashford TRS has agreed to pay Remington Lodging a project management fee equal to 4% of the total project costs associated with the implementation of the approved capital improvement budget or renovation project for a hotel until such time that the capital improvement budget and renovation project costs involve expenditures in excess of 5% of gross revenues of such hotel, whereupon the project management fee will be 3% of total project costs in excess of the 5% of gross revenue threshold. In addition, Ashford TRS has agreed to pay Remington Lodging additional fees at then-current market rates for other services beyond managing the hotels or implementing the capital improvement budget. These other services include: (i) construction management, (ii) interior design assistance involved in implementing the capital improvement budget, (iii) managing architects and preparing drawings applicable to the implementation of the capital improvement budget and reviewing plans, drawings, shop drawings and other matters necessary for the proper implementation of the capital improvement budget, (iv) purchasing services, (v) managing freight selection and shipping processes, (vi) the warehousing of

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goods delivered at the job site, inspection of materials delivered, and the filing of claims associated with the delivery of defective or damaged goods and (vii) supervision and oversight of the installation of furniture, fixtures and equipment.

      The fees for the additional services will be consistent with the approved capital improvement budget and will be deemed approved by Ashford TRS unless a majority of our independent directors determine that such fees for the additional services are not in line with market rates for similar services. In the event that the majority of our independent directors determine that the fees for the additional services are not market, Ashford TRS and Remington Lodging will engage a consultant reasonably satisfactory to both parties to provide then current market information with respect to the proposed fees and a written recommendation as to whether such fees are market rates or not. If the consultant determines that such fees as proposed by Remington Lodging are market, then we agree to pay any consultant fees incurred by such consultant in making the determination. If the consultant’s recommendation does not support the fees as proposed by Remington Lodging, then Remington Lodging agrees to pay the consultant’s fees incurred in connection with the determination and may, at its election, perform such service for fees consistent with the market research and recommendation of the consultant.

Indemnity Provisions

      Remington Lodging has agreed to indemnify Ashford TRS against all damages not covered by insurance that arise from (i) the fraud, willful misconduct or gross negligence of Remington Lodging; (ii) employee claims based on a substantial violation by Remington Lodging of employment laws or that are a direct result of the corporate policies of Remington Lodging; (iii) the knowing or reckless placing, discharge, leakage, use or storage of hazardous materials in violation of applicable environmental laws on or in any of our hotels by Remington Lodging; or (iv) the breach by Remington Lodging of the management agreement, including action taken by Remington Lodging beyond the scope of its authority under the management agreement, which is not cured.

      Except to the extent indemnified by Remington Lodging as described in the preceding paragraph, Ashford TRS has agreed to indemnify Remington Lodging against all damages not covered by insurance and that arise from (i) the performance of Remington Lodging’s services under the management agreement; (ii) the condition or use of our hotels; (iii) certain liabilities to which Remington Lodging is subjected pursuant to the WARN Act in connection with the termination of the management agreement; or (iv) any claims made by an employee of Remington Lodging against Remington Lodging or Ashford TRS that are based on a violation or alleged violation of the employment laws.

Events of Default

      Events of default under the management agreement include:

  •  Ashford TRS or Remington Lodging experiences a bankruptcy-related event that is not discharged within 90 days.
 
  •  Ashford TRS or Remington Lodging fails to make any payment due under the management agreement, subject to a 10-day grace period.
 
  •  Ashford TRS or Remington Lodging fails to observe or perform any other term of the management agreement, subject to a 30-day grace period. There are certain instances in which the 30-day grace period extends to 120 days.
 
  •  Remington Lodging does not qualify as an “eligible independent contractor” as such term is defined in Section 856(d)(9) of the Internal Revenue Code of 1986, as amended.

      If an event of default occurs and continues beyond any grace period, the non-defaulting party will have the option of terminating the management agreement, on 30 days’ notice to the other party. If the event of default relates solely to one or more, but not all, of the hotels, then the management agreement may only be terminated with respect to the hotels to which the event of default relates.

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Mutual Exclusivity Agreement

      We and Ashford Hospitality Limited Partnership, our operating partnership, will enter into a mutual exclusivity agreement with Remington Lodging, Remington Hotel and Messrs. Archie and Montgomery Bennett regarding lodging investment opportunities any of us identifies in the future. Messrs. Archie and Montgomery Bennett are the sole owners of Remington Hotel and Remington Lodging. The following summary assumes that we have already entered into the mutual exclusivity agreement. We will sign the agreement at the closing of the offering described in this prospectus.

Term

      The initial term of the mutual exclusivity agreement will be 10 years. This term will automatically extend for three additional renewal periods of seven years each and a final renewal period of four years, for a total of up to 25 additional years. The agreement may be sooner terminated because of:

  •  an event of default (see “— Events of Default”),
 
  •  a party’s early termination rights (see “— Early Termination”), or
 
  •  a termination of the management agreement between Ashford TRS and Remington Lodging because of an event of default under the management agreement with respect to all properties (see “— Relationship with Management Agreement”).

Our Exclusivity Rights

      Remington Lodging, Remington Hotel and Messrs. Archie and Montgomery Bennett have granted us a first right of refusal to pursue all lodging investment opportunities identified by Remington Lodging or Remington Hotel or their affiliates (including the Bennetts), including opportunities to buy hotel properties, to buy land and build hotels, to buy existing loans on hotel properties, to make loans on hotel properties, or to otherwise invest in hotel properties. If investment opportunities are identified, Remington Hotel, Remington Lodging, or the Bennetts, as the case may be, will not pursue those opportunities (except as described below) and will give us a written notice and description of the investment opportunity, and we will have 10 business days to either accept or reject the investment opportunity. If we reject the opportunity, Remington Lodging or Remington Hotel or its respective affiliates may then pursue such investment opportunity on the same terms as offered to us. If the terms of such investment opportunity materially change, then Remington Lodging or Remington Hotel must offer the revised investment opportunity to us, whereupon we will have 10 business days to either accept or reject the opportunity on the revised terms.

Reimbursement of Costs

      If we accept an investment opportunity from Remington Lodging or Remington Hotel, we will be obligated to reimburse Remington Lodging or Remington Hotel for the actual out-of-pocket and third-party expenses in connection with such investment opportunity, including any earnest money deposits, but excluding any finder’s fees, brokerage fee, development fee, management fee or other compensation to Remington Lodging, Remington Hotel or their affiliates. Remington Lodging or Remington Hotel must submit to us an accounting of the costs in reasonable detail.

Exclusivity Rights of Remington Lodging

      If we elect to pursue an investment opportunity that consists of buying a hotel property or buying land for the purpose of building a hotel property, or constructing hotel improvements, we will hire Remington Lodging to manage the hotel, build the hotel, construct the improvements or provide project management or other services unless our independent directors either (i) unanimously elect not to engage Remington Lodging, or (ii) by a majority vote, elect not to engage Remington Lodging because they have determined (A) special circumstances exist such that it would be in our best interest not to engage Remington Lodging for the particular hotel, or (B) based on the prior performance of Remington Lodging, another

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manager or developer could perform the duties materially better than Remington Lodging for the particular hotel. In return, Remington Lodging has agreed that it will provide those services.

Excluded Investment Opportunities

      The following are excluded from the mutual exclusivity agreement and are not subject to any exclusivity rights or right of first refusal:

  •  With respect to Remington, an investment opportunity where our independent directors have unanimously voted not to engage Remington Lodging as the manager or developer.
 
  •  With respect to Remington, an investment opportunity where our independent directors, by a majority vote, have elected not to engage Remington Lodging as the manager or developer based on their determination that special circumstances exist such that it would be in our best interest not to engage Remington Lodging with respect to the particular hotel.
 
  •  With respect to Remington, an investment opportunity where our independent directors, by a majority vote, have elected not to engage Remington Lodging as the manager or developer because they have determined that another manager or developer could perform the management or development duties materially better than Remington Lodging for the particular hotel, based on Remington Lodging’s prior performance.
 
  •  Existing hotel investments of Remington Lodging, Remington Hotel, or affiliates with any of their existing joint venture partners or property owners.
 
  •  Existing bona fide arm’s length third party management arrangements (or arrangements for other services such as project management) of Remington Lodging, Remington Hotel, or any of their affiliates with third parties other than us and our affiliates.
 
  •  Like-kind exchanges that may be made pursuant to existing contractual obligations by any of the existing joint ventures in which Remington Lodging, Remington Hotel, or their affiliates have an ownership interest.

Management or Development

      If we hire Remington Lodging to manage a hotel or construct hotel improvements, it will be pursuant to the terms of the management agreement between us and Remington Lodging. If we hire Remington Lodging to develop a hotel, the terms of the development will be pursuant to a form of development agreement that has been approved by us.

Events of Default

      Each of the following is a default under the mutual exclusivity agreement:

  •  we, Remington Lodging or Remington Hotel experience a bankruptcy-related event;
 
  •  we fail to reimburse Remington Lodging or Remington Hotel as described under “— Reimbursement of Costs,” subject to a 30-day cure period;
 
  •  we, Remington Lodging or Remington Hotel does not observe or perform any other term of the agreement, subject to a 30-day cure period (up to a maximum of 120 days in certain instances); and
 
  •  Remington Lodging, Remington Hotel or an affiliate defaults under the terms of any document that evidences the investment opportunity accepted by us, subject to any cure periods provided in such document.

      If a default occurs, the non-defaulting party will have the option of terminating the mutual exclusivity agreement and pursuing its rights and remedies under applicable law.

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Early Termination

      Remington Lodging and Remington Hotel have the right to terminate the exclusivity rights granted to us if:

  •  Montgomery Bennett is removed as our Chief Executive Officer without cause, resigns for good reason, or his employment agreement is not renewed or there is a change in control of us and Mr. Bennett resigns within 12 months after the change in control, except, in all such cases, because of his death;
 
  •  Archie Bennett, Jr. is removed as one of our directors without cause, is not renominated to serve as Chairman or resigns for good reason, or there is a change in control of us and Mr. Bennett resigns within 12 months after the change in control, except, in all such cases, because of his death;
 
  •  upon expiration of the non-competition restrictions contained in the employment agreement of Montgomery Bennett, which apply if Montgomery Bennett has resigned without good reason as our Chief Executive Officer, if his employment agreement is not renewed, or if we terminate his employment for cause, if we have not then already terminated the exclusivity rights granted to Remington Lodging and Remington Hotel as a result of his resignation or our termination of his employment for cause;
 
  •  subject to each party’s obligation to act in good faith, Montgomery Bennett is no longer our Chief Executive Officer and is subject to the non-competition restrictions in his employment agreement, and our independent directors, three times in a calendar year, in any combination set forth below:

  —  elect not to pursue an investment opportunity presented to us by Remington Lodging, Remington Hotel or their affiliates;
 
  —  elect not to engage Remington Lodging with respect to a management or development opportunity we have elected to pursue; or
 
  —  fail to close on an investment opportunity presented to us by Remington Lodging, Remington Hotel or their affiliates (and accepted by us), and the failure to close is caused by us and not the third party selling the investment opportunity; or

  •  we terminate the Remington exclusivity rights because (i) Montgomery Bennett resigns as our Chief Executive Officer without good reason or we terminate his employment for cause, (ii) Remington Lodging or Remington Hotel is no longer controlled by Archie Bennett, Jr. or Montgomery Bennett or their respective family partnership or trusts (as described below in the third bullet point describing our termination rights) or (iii) we experience a change in control and terminate the management agreement with Remington Lodging.

      We may terminate the exclusivity rights granted to Remington Lodging if:

  •  Remington Lodging fails to qualify as an “eligible independent contractor” as defined in Section 856(d)(9) of the Internal Revenue Code;
 
  •  Montgomery Bennett resigns as our Chief Executive Officer without good reason or if we terminate his employment for cause;
 
  •  if either Remington Lodging or Remington Hotel is no longer “controlled” by Archie Bennett, Jr. or Montgomery Bennett or their respective family partnership or trusts, the sole members of which are at all times lineal descendants of Archie Bennett, Jr. or Montgomery Bennett (including step children) and spouses. “Control” means (i) the possession, directly or indirectly, of a majority of the capital stock and voting power of Remington Lodging and Remington Hotel, or (ii) the power to direct or cause the direction of the management and policies of Remington Lodging and Remington Hotel by serving as chief executive officer, president, chairman or similar position and spending a substantial amount of time managing Remington Lodging and Remington Hotel;

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  •  if we experience a change in control and terminate the management agreement between us and Remington Lodging and have paid the termination fee owing to Remington Lodging under the management agreement in the event of our termination for convenience; or
 
  •  if Remington Lodging or Remington Hotel terminates the exclusivity rights granted to us pursuant to an early termination right that they have.

“Cause” and “good reason” for Montgomery Bennett and Archie Bennett, Jr., respectively, are defined in the employment agreement of Montgomery Bennett and the non-competition agreement of Archie Bennett, Jr.

Assignment

      The mutual exclusivity agreement may not be assigned by Remington Lodging, Remington Hotel, the Bennetts, or us without the prior written consent of the other parties.

Relationship with Management Agreement

      The rights provided to us and to Remington Lodging and Remington Hotel in the exclusivity agreement may be terminated if the management agreement between us and Remington Lodging terminates in its entirety because of an event of default as to all of the managed properties. A termination of Remington Lodging’s management rights with respect to one or more hotels (but not all hotels) does not terminate the mutual exclusivity agreement. A termination of the mutual exclusivity agreement does not terminate the management agreement either in part or in whole, and the management agreement would continue in accordance with its terms as to the hotels it covers, despite a termination of the mutual exclusivity agreement.

Franchise Licenses

      Embassy Suites is a registered trademark of Promus Hotels, Inc., and Radisson is a registered trademark of Radisson Hotels International, Inc. The registered owners of the trademarks have approved the change of the franchise licenses to our company, either through a transfer of the existing license or through the issuance of a new license. Based on this approval, we expect the registered owners to confirm our operating partnership or the subsidiary entity that owns the applicable property as a licensee in good standing upon the completion of the license transfer or upon the issuance of a new license, which will occur in each case upon completion of this offering.

      We anticipate that most of the additional hotels we acquire will be operated under franchise licenses. We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems.

      Remington Lodging must operate each hotel pursuant to the terms of the related franchise agreement, and Remington Lodging must use its best efforts to maintain the right to operate each hotel as such. In the event of termination of the related franchise agreement, Remington Lodging must operate the hotel under such other franchise agreement, if any, as we enter into or obtain as franchisee.

      The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses the franchisee must comply with the franchisors’ standards and requirements with respect to:

  •  training of operational personnel;
 
  •  safety;
 
  •  maintaining specified insurance;

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  •  the types of services and products ancillary to guest room services that may be provided;
 
  •  display of signage; and
 
  •  the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.

Additionally, as the franchisee we are required to pay the franchise fees described below.

      The following table sets forth certain information in connection with the existing franchise licenses for the initial properties:

                 
Expiration
Property Franchise Fee (1) Marketing/Reservation Fee (1) Date




Austin Embassy Suites
  4.0%   3.5%     07/12/2017  
Dallas Embassy Suites
  4.0%   3.5%     01/22/2018  
Dulles Embassy Suites
  4.0%   3.5%     06/26/2017  
Las Vegas Embassy Suites
  4.0%   3.5%     04/06/2018  
Covington Radisson
  3.0% (10/1/02 - 3/31/04)   3.75% (10/1/02 - 3/31/04)     12/31/2021  
    3.5% (4/1/04 - 3/31/06)   3.75% (4/1/04 - 3/31/06)        
    4.0% (4/1/06 and thereafter)   3.75% (4/1/06 and thereafter)        
Holtsville Radisson
  3.0% (10/1/02 - 1/31/04   3.75% (10/1/02 - 1/31/04     12/31/2022  
    3.5% (2/1/04 - 1/31/06)   3.75% (2/1/04 - 1/31/06        
    4.0% (2/1/06 and thereafter)   3.75% (2/1/06 and thereafter)        


(1)  Percentage of room revenues payable to the franchisor.

     Embassy Suites is a registered trademark of Promus Hotels, Inc. Promus Hotels, Inc. has not endorsed or approved this offering. A grant of an Embassy Suites license for certain of the initial properties is not intended and should not be interpreted as an express or implied approval or endorsement by Promus Hotels, Inc. or any of its affiliates, subsidiaries or divisions of us, our operating partnership or our common stock.

      Radisson is a registered trademark of Radisson Hotels International, Inc. Radisson Hotels International, Inc. has not endorsed or approved this offering. A grant of a Radisson license for certain of the initial properties is not intended and should not be interpreted as an express or implied approval or endorsement by Radisson Hotels International, Inc. or any of its affiliates, subsidiaries or divisions of us, our operating partnership or our common stock.

Employees

      Eight employees of Remington Hotel Corporation, including Messrs. Archie and Montgomery Bennett and Messrs. Kessler and Nunneley, and three employees of Ashford Financial Corporation, including Messrs. Kimichik and Brooks, will become our employees. We intend to be self-advised, so we will utilize the services of our employees rather than retain an advisor.

Environmental Matters

      Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal of a hazardous substance or transports a hazardous substance for disposal or treatment from property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely

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affect the owner’s ability to sell the affected property or to borrow using the affected property as collateral. In connection with the ownership and operation of the initial properties, we, our operating partnership or Ashford TRS may be potentially liable for any such costs. In addition, the value of any lodging property loan we make or acquire would be adversely affected if the underlying property contained hazardous or toxic substances.

      Recent Phase I environmental assessments have been obtained on each of the initial properties. The Phase I environmental assessments were intended to identify potential environmental contamination for which our properties may be responsible. The Phase I environmental assessments included:

  •  historical reviews of the initial properties,
 
  •  reviews of certain public records,
 
  •  preliminary investigations of the sites and surrounding properties,
 
  •  screening for the presence of hazardous substances, toxic substances and underground storage tanks, and
 
  •  the preparation and issuance of a written report.

The Phase I environmental assessments did not include invasive procedures, such as soil sampling or ground water analysis.

      The Phase I environmental assessments have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, and we are not aware of any such liability. However, it is possible that these environmental assessments did not reveal all environmental liabilities. There may be material environmental liabilities of which we are unaware, including environmental liabilities that may have arisen since the Phase I assessments were completed or updated. No assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability, or (ii) the current environmental condition of our properties will not be affected by the condition of properties in the vicinity of our properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to the us.

      We believe that the initial properties are in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters. Neither we nor, to our knowledge, any of the current owners of the initial properties have been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matter in connection with any of the initial properties.

Insurance

      We will maintain comprehensive insurance, including liability, fire, workers’ compensation, extended coverage, rental loss and, when available on reasonable commercial terms, flood and earthquake insurance, with policy specifications, limits and deductibles customarily carried for similar properties. We will not maintain terrorism insurance on our properties. We do intend, however, to obtain environmental insurance on our initial properties. Certain types of losses, however (for example, matters of a catastrophic nature such as acts of war or earthquakes, or substantial known environmental liabilities), are either uninsurable or require such substantial premiums that the cost of maintaining such insurance is economically infeasible. Certain types of losses, such as those arising from subsidence activity, are insurable only to the extent that certain standard policy exceptions to insurability are waived by agreement with the insurer. See “Risk Factors — Real Estate Investment Risks — Uninsured and Underinsured Losses.” We believe, however, that the initial properties are adequately insured, consistent with industry standards.

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Depreciation

      We will use the carryover basis for determining the tax basis for each of our initial properties contributed in exchange for units of partnership interests in our operating partnership. For federal income tax purposes, we intend to depreciate all depreciable hotel property over the same remaining useful lives and using the same methods currently used by the owners of the properties. Depreciation with respect to the real property components of our properties (other than land) generally will be computed using the straight-line method over a useful life of 15-39 years, for a depreciation rate ranging from 2.56% to 6.67% per year.

      Our operating partnership’s tax depreciation deductions will be allocated among the partners in accordance with their respective interests in our operating partnership (except to the extent that the partnership is required under Internal Revenue Code section 704(c) to use a method for allocating depreciation deductions that results in us receiving a disproportionately larger share of the deductions). Because the initial basis in our properties contributed in exchange for operating partnership units will be less than the fair market value of those properties on the date of contribution, our depreciation deductions may be less than they otherwise would have been if our operating partnership had purchased those initial properties for cash or shares of our common stock.

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SELECTED FINANCIAL INFORMATION

      The following table sets forth selected historical operating and financial data for Ashford Hospitality Trust, Inc. This information represents the historical financial condition and results of operations of entities that own the initial assets.

      The following selected historical combined financial information as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 were derived from audited financial statements contained elsewhere in this prospectus. The following selected historical combined financial information as of December 31, 2000, 1999 and 1998 and for each of the years ending December 31, 1999 and 1998 were derived from unaudited financial statements. The following selected historical combined financial information as of June 30, 2003 and for the six months ended June 30, 2003 and 2002, were derived from unaudited financial statements contained elsewhere in this prospectus. The unaudited historical combined financial statements include all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such dates and for such periods under accounting principles generally accepted in the United States.

      You should read the information below along with all other financial information and analysis presented in this prospectus, including the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ashford Hospitality Trust, Inc.’s combined financial statements and related notes included elsewhere in this prospectus.

                                                             
Six Months Ended June 30, Year Ended December 31,


2003 2002 2002 2001 2000 1999 1998







Operating Information:
                                                       
Revenue:
                                                       
 
Hotel revenues
                                                       
   
Rooms
  $ 14,590,287     $ 14,624,736     $ 28,529,640     $ 29,165,515     $ 24,654,910     $ 17,420,118     $ 4,684,912  
   
Food and beverage
    2,797,012       2,941,784       5,698,029       5,691,902       3,178,314       1,911,786       429,823  
   
Other
    471,102       603,049       1,130,112       1,358,229       1,470,000       800,664       306,802  
     
     
     
     
     
     
     
 
 
Total Operating Revenue
  $ 17,858,401     $ 18,169,569     $ 35,357,781     $ 36,215,646     $ 29,303,224     $ 20,132,568     $ 5,421,537  
Expenses:
                                                       
 
Hotel operating expenses Rooms
  $ 3,366,255     $ 3,207,361     $ 6,461,721     $ 6,260,660     $ 5,763,985     $ 4,729,894     $ 1,135,559  
   
Food and beverage
    2,113,005       2,058,107       4,183,371       4,477,315       2,473,295       1,725,270       507,050  
   
Other direct
    370,117       323,103       621,693       608,350       661,351       508,164       126,563  
   
Indirect
    4,443,590       3,872,149       8,702,894       8,624,169       5,978,140       4,442,853       1,871,159  
   
Management fees
    535,730       545,082       1,059,867       1,463,900       1,308,966       907,612       243,969  
 
Property taxes, insurance, and other
    1,224,659       1,150,466       2,437,482       2,197,404       1,558,545       1,096,857       370,864  
 
Depreciation & amortization
    2,192,332       2,249,896       4,833,551       4,446,486       3,249,308       2,738,428       845,494  
 
Corporate general and administrative
    2,010,491       1,898,276       3,667,410       3,749,692       2,743,753       2,453,805       923,745  
     
     
     
     
     
     
     
 
 
Total Operating Expenses
  $ 16,256,179     $ 15,304,440     $ 31,967,989     $ 31,827,976     $ 23,737,343     $ 18,602,883     $ 6,024,403  
     
     
     
     
     
     
     
 
 
Operating income (loss)
    1,602,222       2,865,129       3,389,792       4,387,670       5,565,881       1,529,685       (602,866 )
     
     
     
     
     
     
     
 
 
Interest income
    16,849       17,379       53,485       226,531       161,004       9,075       8,100  
 
Interest expense
    3,015,866       3,066,985       6,536,195       7,520,694       5,014,163       3,417,233       1,100,853  
     
     
     
     
     
     
     
 
 
Net income (loss)
  $ (1,396,795 )   $ (184,477 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722     $ (1,878,473 )   $ (1,695,619 )
     
     
     
     
     
     
     
 

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Six Months Ended June 30, Year Ended December 31,


2003 2002 2002 2001 2000 1999 1998







Balance Sheet Information:
                                                       
 
Investments in hotel properties, net
  $ 83,118,083             $ 85,246,801     $ 88,874,078     $ 68,292,242     $ 58,710,746     $ 37,681,678  
 
Cash and cash equivalents (2)
    6,827,530               6,322,368       8,329,486       5,991,418       5,381,569       2,472,921  
 
Total assets
    92,669,265               95,416,446       100,001,305       77,046,232       66,843,976       41,541,202  
 
Mortgage notes payable
    82,096,150               82,126,150       80,410,792       49,355,734       39,653,655       23,297,291  
 
Capital leases payable
    528,919               621,351       277,810       92,370              
 
Total liabilities
    86,262,174               86,105,492       84,684,368       53,836,084       43,438,808       27,207,298  
 
Total liabilities and owners’ equity
  $ 92,669,265             $ 95,416,446     $ 100,001,305     $ 77,046,232     $ 66,843,976     $ 41,541,202  
Other Information:
                                                       
 
Cash Flow:
                                                       
   
Provided by (used in) operating activities
  $ 2,638,890     $ 1,026,672     $ 622,734     $ 1,108,150     $ 4,870,739     $ (628,153 )   $ 1,775,645  
   
Provided by (used in) investing activities
  $ (50,484 )   $ (1,023,366 )   $ (1,079,824 )   $ (24,899,286 )   $ (12,778,381 )   $ (23,744,316 )   $ (38,635,332 )
   
Provided by (used in) financing activities
  $ (1,629,500 )   $ (932,537 )   $ (1,726,457 )   $ 24,921,233     $ 8,315,129     $ 26,303,213     $ 38,543,720  
 
Total number of rooms
    1,094       1,094       1,094       1,094       906       670       450  
 
Total number of hotels
    6       6       6       6       5       4       3  
EBITDA (1)
  $ 3,811,403     $ 5,132,404     $ 8,276,828     $ 9,060,687     $ 8,976,193     $ 4,277,188     $ 250,728  


(1)  EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We believe EBITDA is useful to investors as an indicator of our ability to service debt and pay cash distributions. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. EBITDA does not represent cash generated from operating activities determined in accordance with generally accepted accounting principles (GAAP), and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.
 
(2)  Includes restricted cash.

                                                           
Reconciliation of EBITDA
                                                       
 
Net (loss) income
  $ (1,396,795 )   $ (184,477 )   $ (3,092,918 )   $ (2,906,493 )   $ 712,722     $ (1,878,473 )   $ (1,695,619 )
 
Plus depreciation and amortization
    2,192,332       2,249,896       4,833,551       4,446,486       3,249,308       2,738,428       845,494  
 
Plus interest expense
    3,015,866       3,066,985       6,536,195       7,520,694       5,014,163       3,417,233       1,100,853  
     
     
     
     
     
     
     
 
 
EBITDA
  $ 3,811,403     $ 5,132,404     $ 8,276,828     $ 9,060,687     $ 8,976,193     $ 4,277,188     $ 250,728  
     
     
     
     
     
     
     
 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

      The following unaudited pro forma combined financial information sets forth:

  •  The combined balance sheets of the entities to be contributed in the formation transactions, which are deemed to be our predecessor for accounting purposes, for the six months ended June 30, 2003.
 
  •  Pro forma adjustments and eliminations to give effect to the completion of the formation transactions and this offering as of the balance sheet date June 30, 2003.
 
  •  Pro forma, as adjusted, unaudited consolidated statements of operations of Ashford Hospitality Trust, Inc. for the six months ended June 30, 2003 and the year ended December 31, 2002 to give effect to the completion of the formation transactions and this offering as of January 1, 2002.

      You should read the information below along with all other financial information and analysis presented in this prospectus, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the predecessors’ historical combined financial statements and related notes included elsewhere in this prospectus. The unaudited pro forma combined financial information is presented for information purposes only, and we do not expect that this information will reflect our future results of operations or our financial position. The unaudited pro forma adjustments and eliminations are based upon assumptions that we believe are reasonable. The unaudited pro forma financial information assumes that the formation transactions and this offering were completed as of the balance sheet date for purposes of the unaudited pro forma consolidated balance sheet, and as of January 1st of the period for purposes of the unaudited pro forma consolidated statements of operation. Purchase accounting has not been applied to the contributed entities as they are under common ownership and control; the minority interest partners of the predecessor are considered part of the control group, as each minority interest partner is either a member of management of the predecessor or a director of Ashford Hospitality Trust, Inc.

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ASHFORD HOSPITALITY TRUST, INC.

 
BALANCE SHEETS
HISTORICAL AND PRO FORMA
As of June 30, 2003
                           
Unaudited
Historical Pro Forma Pro Forma
June 30, Adjustments and June 30,
2003 Eliminations 2003



ASSETS
Investment in hotel properties
  $ 101,187,622     $ 8,741,543   (17)   $ 109,929,165  
 
Accumulated depreciation
    (18,069,539 )             (18,069,539 )
     
     
     
 
Investment in hotel properties, net
    83,118,083       8,741,543       91,859,626  
Cash
    3,927,720       350,000,000   (1)     257,665,205  
              4,650,000   (2)        
              (3,638,016 ) (3)        
              (27,250,000 ) (4)        
              (3,000,000 ) (9)        
              (66,096,150 ) (13)        
              2,554,984   (14)        
              (2,933,333 ) (16)        
              (550,000 ) (18)        
Restricted cash
    2,899,810       (2,554,984 ) (14)     344,826  
Accounts receivable, net of allowance for doubtful accounts of $13,263 as of June 30, 2003
    1,070,296               1,070,296  
Inventories
    191,112               191,112  
Deferred costs, net
    1,001,045       (639,436 ) (15)     361,609  
Prepaid expenses
    416,369               416,369  
Other assets
    44,830               44,830  
     
     
     
 
Total assets
  $ 92,669,265     $ 259,284,608     $ 351,953,873  
     
     
     
 
 
LIABILITIES AND OWNERS’ EQUITY
Mortgage notes payable
  $ 82,096,150     $ (66,096,150 ) (13)   $ 16,000,000  
Capital lease payable
    528,919               528,919  
Accounts payable
    1,240,448               1,240,448  
Accrued payroll expense
    531,111               531,111  
Accrued vacation expense
    228,209               228,209  
Accrued sales and occupancy taxes
    361,846               361,846  
Accrued real estate taxes
    426,379               426,379  
Accrued expenses
    452,610               452,610  
Accrued interest
    273,000               273,000  
Due to affiliates
    123,502               123,502  
     
     
     
 
Total liabilities
  $ 86,262,174     $ (66,096,150 )   $ 20,166,024  
Minority interest
            60,093,592   (8)     0  
              (64,274,995 ) (8)        
              (528,919 ) (8)        
              (3,000,000 ) (9)        
              361,609   (10)        
              (2,933,333 ) (16)        
              8,741,543   (17)        
              (1,403,083 ) (19)        
              2,943,586   (20)        
Owners’ equity
    6,407,091       (4,363,032 ) (3)     0  
              4,710,322   (8)        
              (361,609 ) (10)        
              (5,203,336 ) (11)        
              (550,000 ) (18)        
              (639,436 ) (15)        
Shares of common stock
    0       350,000   (1)     367,662  
              5,000   (2)        
              250   (5)        
              9,315   (6)        
              931   (7)        
              2,166   (12)        
Additional paid-in capital
    0       349,650,000   (1)     331,420,187  
              4,645,000   (2)        
              725,016   (3)        
              (27,250,000 ) (4)        
              (250 ) (5)        
              (9,315 ) (6)        
              (931 ) (7)        
              23,024,491   (11)        
              (17,821,155 ) (11)        
              (2,166 ) (12)        
              1,403,083   (19)        
              (2,943,586 ) (20)        
     
     
     
 
Total owners’ equity
  $ 6,407,091     $ 325,380,758     $ 331,787,849  
     
     
     
 
Total liabilities and owners’ equity
  $ 92,669,265     $ 259,284,608     $ 351,953,873  
     
     
     
 

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Adjustment Notes:

  (1)  Reflects the sale of 35,000,000 shares of common stock of Ashford Hospitality Trust, Inc., par value of $.01 at the initial price of $10.
 
  (2)  Reflects the sale of 500,000 restricted shares of common stock of Ashford Hospitality Trust, Inc., par value of $.01, to Messrs. Archie and Montgomery Bennett at the initial price of $10 less the underwriters discount of 7%.
 
  (3)  Reflects the payment of net working capital to Messrs. Archie and Montgomery Bennett of $3,638,016 (net of fixed asset commitments of $725,016) as of June 30, 2003.
 
  (4)  Reflects the payment of $27,250,000 of underwriting costs of the offering, consisting of $24,500,000 of underwriters discount and $2,750,000 of underwriting expense.
 
  (5)  Reflects the issuance of 25,000 shares of common stock of Ashford Hospitality Trust, Inc., par value of $.01, to company directors. The pro forma balance sheet reflects only the par value in shares of common stock.
 
  (6)  Reflects the issuance of 931,500 restricted shares of common stock of Ashford Hospitality Trust, Inc., par value of $.01, to company employees and employees of affiliates based upon the assumed sale of 35.0 million shares of common stock in this offering. The pro forma income statement will reflect the transaction at the initial price of $10. The transaction has been reported in the pro forma balance sheet solely at par value through additional paid-in capital.
 
  (7)  Reflects the issuance of 93,149 shares of common stock of Ashford Hospitality Trust, Inc., par value of $.01, to the underwriters based upon the assumed sale of 35.0 million shares of common stock in this offering. The pro forma balance sheet reflects only the par value in shares of common stock.
 
  (8)  To record the minority interest resulting from the contributed assets to Ashford Hospitality Limited Partnership in exchange for 4,632,917 units as follows:

                                 
June 30, 2003

Minority Minority Minority Minority
Interest Net Interest Interest Lease Interest
Cost Debt Payables Net




Austin Embassy
  $ 9,744,288     $ 12,400,000                  
Dallas Embassy
    9,587,988       12,560,000                  
Dulles Embassy
    10,337,802       14,040,000                  
Las Vegas
    18,995,369       16,000,000                  
Covington
    11,428,145       9,274,995                  
     
     
     
     
 
Net initial contributed assets
  $ 60,093,592     $ 64,274,995     $ 528,919     $ (4,710,322 )
     
     
     
     
 

  (9)  Reflects additional consideration of $3,000,000 paid in cash for Las Vegas property transferred to Ashford Hospitality Limited Partnership.

(10)  Reflects reclass of owners’ equity to minority interest reflecting additional contributed asset of deferred loan costs relating to the continuing loan on the Las Vegas property.
 
(11)  To record the equity resulting from the contributed assets to Ashford Hospitality Trust, Inc. in exchange for 216,634 shares of common stock, par value of $.01, as follows:

                         
June 30, 2003

Owners’ Owners’ Owners’
Equity Net Equity Equity
Cost Debt Net



Holtsville
  $ 23,024,491     $ 17,821,155     $ 5,203,336  
     
     
     
 

(12)  Reflects reclass of 216,634 shares of common stock of Ashford Hospitality Trust, Inc., par value of $.01, from paid-in capital to capital stock from the contribution of the Holtsville property.
 
(13)  Reflects mortgage loans payoffs and debt forgiveness as follows:

         
June 30,
2003

Austin Embassy
  $ 12,400,000  
Dallas Embassy
    12,560,000  
Dulles Embassy
    14,040,000  
Covington
    9,274,995  
Holtsville
    17,821,155  
     
 
Total mortgage loans payoffs
  $ 66,096,150  
     
 

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(14)  Reflects adjustment of restricted cash balance due to mortgage loans payoffs.
 
(15)  Reflects an adjustment to write down deferred loan costs due to mortgage loans payoffs.
 
(16)  Reflects an adjustment for the redemption of Special Limited Partner. Promus, a Special Limited Partner to the Initial Limited Partnerships, is an affiliate of Embassy Suites. Promus agreed to contribute approximately $2 million of equity as Special Limited Partner to each of the developments under the master construction agreement with Nomura. Under the agreement, Promus is allocated an amount equivalent to a guaranteed 8% annual return during the one-year period beginning on the date the respective contribution was made, and an 11% return thereafter. The Special Limited Partner interest was redeemed by the Partnerships of Austin, Dallas, and Dulles upon closing a $39,000,000 mortgage loan in February of 2001. With respect to Las Vegas, the Special Limited Partner interest of $2.9 million continues to accrue a return of 11%.
 
(17)  Reflects an adjustment to record the step-up of the historical net carrying value resulting from the acquisition of the minority partner interests. The 15.5% minority interest step-up is calculated as follows:

                                 
Gross Asset Net Carrying 15.5% Minority
Value Value Excess Step-Up




Austin Embassy
  $ 22,037,500     $ 9,744,288     $ 12,293,212     $ 1,905,448  
Dallas Embassy
    19,218,750       9,587,988       9,630,762       1,492,768  
Dulles Embassy
    27,418,750       10,337,802       17,080,948       2,647,547  
Las Vegas Embassy
    36,387,500       18,995,369       17,392,131       2,695,780  
     
     
     
     
 
Totals
  $ 105,062,500     $ 48,665,447     $ 56,397,053     $ 8,741,543  
     
     
     
     
 

(18)  Reflects a reduction in purchased working capital from a 1% exit fee on the payoff of the $39,000,000 GMAC loan for the Austin Embassy, Dallas Embassy and Dulles Embassy properties and the $16,000,000 Merrill Lynch loan for the Las Vegas Embassy.
 
(19)  Reflects an adjustment to record as a distribution the excess of cash consideration received over net book value for the Las Vegas Embassy as follows:

         
June 30,
2003

Value of 1,445,417 units of Ashford Hospitality Limited Partnership at $10
  $ 14,454,170  
Cash payment
    3,000,000  
     
 
Total value of consideration
    17,454,170  
Property carrying value
    16,051,087  
     
 
Distribution
  $ 1,403,083  
     
 

(20)  Reflects the elimination of negative minority interest. The elimination is made in accordance with EITF 94-2, Treatment of Minority Interest in Certain Real Estate Investments , as the net equity of the operating partnership is less than zero (after contributions of the properties) and therefore the initial minority interest is zero.

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ASHFORD HOSPITALITY TRUST, INC.

 
STATEMENTS OF OPERATIONS
HISTORICAL AND PRO FORMA
For the Year Ended December 31, 2002 and the Six Months Ended June 30, 2003
                                                     
Unaudited
Historical Pro Forma Historical Pro Forma
June 30, Pro Forma June 30, December 31, Pro Forma December 31,
2003 Adjustments 2003 2002 Adjustments 2002






Revenue
                                               
 
Rooms
  $ 14,590,287             $ 14,590,287     $ 28,529,640             $ 28,529,640  
 
Food and beverage
    2,797,012               2,797,012       5,698,029               5,698,029  
 
Other
    471,102               471,102       1,130,112               1,130,112  
     
     
     
     
     
     
 
 
Total Revenue
    17,858,401             17,858,401       35,357,781             35,357,781  
Expenses
                                               
 
Hotel operating expenses
                                               
   
Rooms
    3,366,255               3,366,255       6,461,721               6,461,721  
   
Food and beverage
    2,113,005               2,113,005       4,183,371               4,183,371  
   
Other direct
    370,117               370,117       621,693               621,693  
   
Indirect
    4,443,590       1,552,500 (4)     5,996,090       8,702,894       3,105,000 (4)     11,807,894  
   
Management fees
    535,730               535,730       1,059,867               1,059,867  
 
Property taxes, insurance, and other
    1,224,659               1,224,659       2,437,482               2,437,482  
 
Depreciation & amortization
    2,192,332       175,689 (6)     2,368,021       4,833,551       342,743 (6)     5,176,294  
 
Corporate general and administrative
    2,010,491       1,980,837 (5)     3,991,328       3,667,410       3,961,674 (5)     7,629,084  
     
     
     
     
     
     
 
 
Total Operating Expenses
    16,256,179       3,709,026       19,965,205       31,967,989       7,409,417       39,377,406  
     
     
     
     
     
     
 
 
Operating Income (Loss)
    1,602,222       (3,709,026 )     (2,106,804 )     3,389,792       (7,409,417 )     (4,019,625 )
     
     
     
     
     
     
 
 
Interest income
    16,849               16,849       53,485               53,485  
 
Interest expense
    3,015,866       (2,306,050 ) (1)     496,816       6,536,195       (4,759,515 ) (1)     1,350,682  
              (213,000 ) (2)                     (425,998 ) (2)        
     
     
     
     
     
     
 
 
Net (Loss) Income before Minority Interest and Income Taxes
    (1,396,795 )     (1,189,976 )     (2,586,771 )     (3,092,918 )     (2,223,904 )     (5,316,822 )
     
     
     
     
     
     
 
 
Income tax expense
          (3)                 (3)      
 
Minority interest
          (8)                 (8)      
     
     
     
     
     
     
 
 
Net (Loss) Income from Continuing Operations
  $ (1,396,795 )   $ (1,189,976 )   $ (2,586,771 )   $ (3,092,918 )   $ (2,223,904 )   $ (5,316,822 )
     
     
     
     
     
     
 
Earnings per share from continuing operations:
                                               
 
Basic and diluted
                  $ (0.07 )                   $ (0.14 )
Common shares outstanding:
                                               
 
Basic and diluted
                    36,766,283 (7)                     36,766,283 (7)


  (1)  Adjustment to interest expense due to mortgage notes payoffs

                 
June 30, December 31,
2003 2002


Austin Embassy
  $ 523,694     $ 1,056,067  
Dallas Embassy
    530,450       1,069,693  
Dulles Embassy
    592,956       1,195,740  
Covington
    224,994       499,849  
Holtsville
    433,956       938,166  
     
     
 
    $ 2,306,050     $ 4,759,515  
     
     
 

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  (2)  Elimination of deferred loan cost amortization due to payoff of mortgage notes payable

                 
June 30, December 31,
2003 2002


Austin Embassy
  $ 46,120     $ 92,241  
Dallas Embassy
    46,407       92,814  
Dulles Embassy
    49,686       99,371  
Covington
    19,130       38,259  
Holtsville
    51,657       103,313  
     
     
 
    $ 213,000     $ 425,998  
     
     
 

  (3)  Income tax expense on a pro forma basis of the taxable REIT subsidiary is not significant.
 
  (4)  Adjustment represents restricted shares issued to officers, employees and employees of affiliates vesting one-third annually. Pro forma compensation expense is calculated as follows:

December 31, 2002 — 931,500 shares valued at $10 per share offering price for total compensation expense of $9,315,000, of which one-third vests annually for pro forma compensation expense of $3,105,000 for the year.

June 30, 2003 — 931,500 shares valued at $10 per share offering price for total compensation expense of $9,315,000, of which one-third vests annually for pro forma compensation expense of $1,552,500.

  (5)  Entry made to record additional general and administrative expenses associated with the operations of the company. Amount includes projected compensation and benefit expenses for the eight employees of Remington and three employees of Ashford, along with a provision for overhead and administration expense calculated on a historical cost basis, along with property level general and administrative expenses.
 
  (6)  Entry made to record additional depreciation expense resulting from step-up of net carrying value due to acquisition of minority interests.
 
  (7)  The shares used in the basic calculation include:

         
Initial shares
    35,000,000  
Shares of restricted stock issuable to Archie and Montgomery Bennett
    500,000  
Shares of restricted stock conveyed to a limited partnership owned by Archie and Montgomery Bennett
    216,634  
Stock issuable to our directors
    25,000  
Stock issuable to our underwriters
    93,149  
Restricted stock issuable to executives and employees
    931,500  
     
 
Total basic and diluted shares
    36,766,283  
     
 

  Shares issuable upon conversion of 5,657,917 units of partnership interest in our operating partnership have not been included in the calculation of diluted shares, as it would be anti-dilutive.

  (8)  The Minority Interests have not been allocated any of the pro forma loss as, in accordance with EITF 94-2, Treatment of Minority Interests in Certain Real Estate Investments , any losses in excess of the minority interest balance should be charged against the majority interest.

Nonrecurring items not reflected in the pro forma statements of operations:

  (9)  Elimination of unamortized deferred loan costs due to payoff of mortgage notes payable, which is nonrecurring and therefore excluded from the pro forma statements of operations.

                 
January 1, January 1,
2003 2002


Austin Embassy
  $ 99,928     $ 192,168  
Dallas Embassy
    100,548       193,362  
Dulles Embassy
    107,652       207,024  
Covington
    33,476       71,735  
Holtsville
    111,923       215,236  
     
     
 
    $ 453,527     $ 879,525  
     
     
 

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(10)  On May 13, 2003, the company entered into an agreement to amend the mortgage loans payable related to Covington and Holtsville that will extend the original terms through November 1, 2004. In addition, if the Covington and Holtsville related loans are both paid in full prior to November 1, 2003, the lender will discount the principal of the Covington related loan to $6,000,000 which is a reduction of $3,274,995. The agreement is subject to the parties entering into a definitive written modification document. The company believes the agreement is a commitment by the lender subject to normal commercial loan documentation. The $3,274,995 adjustment from forgiveness of Covington debt has not been included in the pro forma statements of operations as the adjustment is nonrecurring.
 
(11)  Compensatory shares of Ashford Hospitality Trust, Inc. will be granted to directors calculated as follows: 25,000 shares times $10 per share offering price which vests over six months for total compensation expense of $250,000 for the year ended December 31, 2002 and $250,000 for the period ended June 30, 2003. No adjustment has been recorded in the pro forma statements of operations as it is nonrecurring.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      You should read the following discussion and analysis of financial condition, results of operations, liquidity and capital resources in conjunction with our combined historical financial statements and the related notes. The notes to the combined financial statements provide information about us and the basis of presentation used in this prospectus.

Overview

      Ashford Hospitality Trust, Inc. is a newly-formed, self-advised real estate investment trust, or REIT, which was organized to take advantage of the existing and developing investment opportunities in the lodging industry. Immediately prior to our formation, all of our senior executive officers were employed by and were responsible for the lodging-related investment activities of Remington Hotel Corporation and its related company, Ashford Financial Corporation. Immediately following this offering we will own six hotel properties and intend to use the net proceeds to acquire additional hotels and provide structured financing to owners of lodging properties, including senior and junior loans and sale-leaseback transactions.

      The discussion below relates to the financial condition and results of operation of the six initial properties on a combined basis. For accounting purposes, the entities that previously owned the initial properties are deemed our predecessor. All significant intercompany accounts and transactions have been eliminated. The combined historical financial statements presented herein were prepared in accordance with generally accepted accounting principles.

      For us to qualify as a REIT, we cannot operate hotels. Therefore, our operating partnership will lease our hotel properties to our indirect wholly-owned subsidiary Ashford TRS Corporation. Ashford TRS will be treated as a taxable REIT subsidiary for federal income tax purposes. Our operating partnership’s and therefore our principal source of funds will be dependent primarily on Ashford TRS’s ability to generate cash flow from the operation of the hotels.

      The Embassy Suites hotels that are part of the initial properties were originally developed in a joint venture with Nomura Asset Capital Corporation. Through a negotiated buyout, Nomura Asset Capital Corporation was redeemed out of the various partnerships effective August 2000 for the Embassy Suites hotels in Austin, Dallas and Dulles and effective in December 2002 for the Embassy Suites hotel in Las Vegas.

      The following non-recurring items associated with the consummation of the formation transactions will affect future results of operations:

  •  As a result of the pay-off of existing debt obligations, future loan cost amortization expense will decline.
 
  •  Because of the Covington debt forgiveness, as described in Note 8 on page F-17, future interest expense will be less.

      Furthermore, we may recognize additional revenue from the payments under the management and consulting agreements which we estimate to be approximately $1.2 million per year.

Results of Operations of the Initial Properties

      Results of operations are best explained by three key performance indicators: occupancy, average daily rate or “ADR”, and net revenue per available room or “RevPAR”. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs. Increases in RevPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

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Comparison of the Six Months Ended June 30, 2003 with the Six Months Ended June 30, 2002

      Revenue. Total revenue for the six months ended June 30, 2003, decreased $311,168 or 1.71% from the six months ended June 30, 2002. Room revenues on an aggregate basis for the six months ended June 30, 2003, decreased $34,449, or 0.24% from the six months ended June 30, 2002. Individually, the Dallas Embassy Suites experienced a 15.9% decline in room revenues from the six-month period ended June 30, 2003 compared to the same period in 2002 as a result of decreased room demand due to a downturn in the North Dallas area economy, which is heavily dependent upon businesses in the high-tech and telecom sectors, and increased room supply in its competitive marketplace. The 15.9% decline in room revenue was made up of a decline in average daily rate of 10.3% and a decline in occupancy of 6.2%. The Dulles Embassy Suites experienced an increase in room revenue of 9.9% during the same period due to an improvement in the Dulles airport area marketplace that had suffered a downturn in business following the September 11, 2001 terrorist events. Food and beverage revenue on an aggregate basis declined $144,772 or 4.92% from the six months ended June 30, 2002 compared to the same period in 2003. Food and beverage revenue at the Covington property declined by $74,871 or 6.48% from the period ending June 30, 2003 compared to the same period in 2002, due to a change in the mix of business customer more toward airline crews coming into the Cincinnati/ Northern Kentucky airport, who utilize food and beverage facilities to a lesser extent than other business travelers. The food and beverage revenue at the Dulles Embassy Suites also declined by $42,811 or 17.24%, due to a decline in banquet revenues that were higher than usual in 2002, and did not reoccur in 2003. The $311,168 decrease in total revenue in the first six months of 2003 was due in part to a decline in telephone revenue. Telephone revenues declined by $151,304 due to changes in customer usage away from in-room phones and toward cellular phones.

      Expenses. Total hotel operating expenses increased $822,896 or 8.22% from the six months ended June 30, 2002 to the same period in 2003. Of this total increase, room expenses increased $184,200 or 5.79% primarily due to increased payroll costs; food and beverage expenses increased $54,901 or 2.67% due to increased food and payroll costs; repair and maintenance expense increased $140,276, or 12.61% due to capital improvements at the Dallas and Austin properties; ownership expenses increased $207,626 primarily due to higher than usual professional and legal fees and utility refunds; and energy costs increased $108,374 or 14.03% due to the following reasons:

  •  An 18% increase in energy costs at the Austin Embassy Suites with no significant change in rate primarily due to problems with the property energy management system that caused the air conditioning to run inefficiently.
 
  •  A 19% increase in energy costs at the Covington property driven primarily by increased usage due to increased occupancy.
 
  •  A 46% increase in energy costs at the Holtsville property driven by an increase in utility costs as well as a much colder winter period in 2003 vs. the same period in 2002.

      Other operating expenses increased by $128,843, or 2%, from June 30, 2002 compared to the same period in 2003. Of this total, insurance cost increased by $85,243 or 21.9% due to the increased cost of insurance after the terrorist events of September 11, 2001, and general and administrative expenses increased by $112,215 or 5.91% due to increased payroll costs at the hotels.

      Operating income declined $1,262,907 from the six months ended June 30, 2002 to the same period in 2003 due to the cumulative effect of a $311,168 decline in revenues and increased payroll and operating costs.

      Net loss increased by $1,212,316 from $184,477 for the six months ended June 30, 2002 to $1,396,793 for the same period in 2003.

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Comparison of the Year Ended December 31, 2002 to Year Ended December 31, 2001

      Revenue. Room revenues decreased $635,875, or 2.2% from 2001 to 2002. In spite of the 5.2% decline in market RevPAR for all the properties combined, the Embassy Suites hotels in Dallas, Austin, Dulles and Las Vegas and the hotel in Covington all continued to experience positive market yield penetration with the Embassy Suites hotel in Las Vegas experiencing the largest market yield increase of over 11.4%. Market yield penetration is a percentage of a property’s RevPAR (average daily rate or ADR multiplied by occupancy rate) to the RevPAR of a particular competitive set. A competitive set consists of properties that compete for business directly with a particular property. The competitive set properties have similar physical facilities, locations and room rates and compete for the same customers. Overall our occupancy increased by 7.3% from 61.5% for the year ended December 31, 2001 to 66% for the same period in 2002. The hotel in Covington experienced the largest gain increasing occupancy 41% from 2001 to 2002. The only occupancy decline occurred at the hotel in Holtsville declining over 8% mainly due to construction activity during 2002. Our average daily rate declined by 9.7% from $119.94 for the year ended December 31, 2001 to $108.29 for the same period in 2002. All the hotels except Las Vegas experienced declines in average daily rates. Food and beverage revenue stayed almost constant growing $6,127 from 2001 to 2002. Total revenues decreased $857,865, or 2.4%, from 2001 to 2002. Almost $300,000 of the revenue decline was due to energy surcharges that were eliminated due to franchise limitations. The decreasing hotel revenues at the Austin Embassy Suites, Dallas Embassy Suites, Dulles Embassy Suites and the Holtsville Radisson can be attributed to the general softening in the economy and the continued impact on the travel industry from the aftermath of the September 11, 2001 terrorist attacks.

      Expenses. Hotel operating expenses declined by $404,848 or 1.9% from 2001 to 2002 due to effective cost controls in the food and beverage area as well as a reduction in the management fee in the Embassy Suites properties from 4.5% to 3%. Included in the hotel operating expenses were sales and marketing expenses which increased 12.2% from December 31, 2001 to December 31, 2002 as a result of additional staffing at the Holtsville property and the Covington property in order to drive revenues.

      Total operating expenses increased by $140,013 or 0.4% from the year ended December 31, 2001 to December 31, 2002. The majority of this increase was due to an increase in depreciation of $387,065 from the year ended December 31, 2001 to December 31, 2002 resulting from the purchase of the Holtsville property in November of 2000 and the purchase of the Covington property in January of 2001; an increase of $363,724 or 60.3% for insurance costs for the same periods due to the increasing costs of insurance; and the write-off of an insurance claim that occurred at the Las Vegas Embassy Suites hotel in August 2000. Property taxes actually declined by $123,646 or 7.8% for the same period mainly due to the successful property tax appeal for the Austin Embassy Suites hotel where the valuation declined by around $5.5 million.

      Operating income declined by $997,878 from $4.4 million in 2001 to $3.4 million in 2002.

      Interest expense declined by $984,499 from December 31, 2001 to December 31, 2002 due to a reduction in interest rates.

      Net loss increased from $2.906 million to $3.093 million from 2001 to 2002.

Comparison of the Year Ended December 31, 2001 to Year Ended December 31, 2000

      Revenue. Room revenues increased $4.5 million, or 18.3% from 2000 to 2001. Food and beverage revenue grew $2.5 million or 79%. These revenue increases were primarily driven by the acquisition of the Holtsville MacArthur property in January 2001 and the acquisition of the Radisson Covington property in November 2000. Comparing all of the properties exclusive of the new acquisitions in Holtsville and Covington, room revenues declined $2.9 million or 11.7% from 2000 to 2001. Overall occupancy on all the properties exclusive of Holtsville and Covington declined 14% from 81.8% for the year ended December 31, 2000 to 70.3% for the year ended December 31, 2001. Average daily rate for all the properties exclusive of Holtsville and Covington increased 2.9% from $121.80 for the year ended December 31, 2000 to $125.35 for the year ended December 31, 2001. The revenue declines for the period

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December 31, 2000 to December 31, 2001 can be attributed to the overall softening of the economy in the United States that began early in 2001, continued softening throughout 2001 and then the steep decline precipitated with the terrorist attacks on September 11, 2001. In spite of the overall poor performance of the hotel industry in the United States during the period December 31, 2000 to December 31, 2001, all of the hotels with the exception of the new acquisition in Holtsville continued to experience positive market yield penetration during this period.

      Expenses. Hotel operating expenses grew by $5.2 million or 32.4% from 2000 to 2001 primarily because of the acquisition of the Holtsville MacArthur property in January 2001 and the Radisson Covington property in November 2000. Exclusive of these two hotels, hotel operating expenses declined by $1.6 million or 10% from 2000 to 2001 due to the cost cutting on variable costs associated with declining revenues. Energy costs continued to increase from December 31, 2000 to December 31, 2001 increasing 13.1% due to the increase in utility rates.

      Total operating expenses increased from $23.7 million to $31.8 million or 34.1% because of the acquisition of the Holtsville and Covington properties. Total operating expenses exclusive of Holtsville and Covington declined by $1.5 million or 6.6% because of the reduction of variable costs undertaken due to a reduction in revenues. Most of the operating expense reductions occurred as reductions of general administrative cuts at the Dallas Embassy Suites and the Austin Embassy Suites hotels. Operating income declined from $5.6 million in 2000 to $4.4 million in 2001.

      Interest expense increased from $5.0 million to $7.5 million from December 31, 2000 to December 31, 2001 due to the additional debt on the Holtsville MacArthur property and the Radisson Covington property, and increased amortization of deferred financing costs.

      Net income declined from a profit of $712,722 to a net loss of $2.9 million from 2000 to 2001.

 
Liquidity and Capital Resources

      Our principal source of funds to meet our cash requirements, including distributions to stockholders, will be our share of operating partnership’s cash flow. The partnership’s principal sources of revenue will include (i) cash flow from hotel operations; (ii) interest income from mortgages we own; and (iii) rental income from third parties in sale-leaseback transactions.

      Our principal source of cash to meet our cash requirements, including dividends to stockholders, is our share of the operating partnership’s cash flow from the operations of the hotels. Cash flow from hotel operations is subject to all operating risks common to the hotel industry, including:

  •  Competition for guests from other hotels;
 
  •  Adverse effects of general and local economic conditions;
 
  •  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 deter traveling;
 
  •  Increases in operating costs related to inflation and other factors, including wages, benefits, insurance and energy;
 
  •  Overbuilding in the hotel industry, especially in particular markets; and
 
  •  Actual or threatened acts of terrorism and actions taken against terrorists that cause public concern about travel safety.

      Upon the consummation of the offering and application of the net proceeds from the offering, we expect to have approximately $254.1 million to invest in lodging-related assets and for general corporate purposes and will have approximately $16.0 million of outstanding mortgage debt arising from our assumption of existing debt on the Las Vegas Embassy Suites. We intend to acquire and, in the appropriate market conditions, develop additional hotels and provide structured financings to owners of

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lodging properties. We may incur indebtedness to fund any such acquisitions, developments or financings. We may also incur indebtedness to meet distribution requirements imposed on REITS under the Internal Revenue Code to the extent that working capital and cash flow from our investments are insufficient to make the required distributions.

      We are currently in negotiations with several financial institutions to obtain an approximate $120 million secured credit facility prior to completion of this offering. No assurances can be given that we will obtain such credit facility or if we do what the amount and terms will be. Our failure to obtain such a facility for favorable terms could adversely impact our ability to execute on our business strategy.

      We will acquire or develop additional hotels and invest in structured financings only as suitable opportunities arise, and we will not undertake such investments unless adequate sources of financing are available. Funds for future hotel-related investments are expected to be derived, in whole or in part, from future borrowings under a credit facility or other borrowings or from the proceeds of additional issuances of common stock or other securities. We have no agreement or understanding to invest in any properties other than the initial hotels, and there can be no assurance that we will successfully make additional investments. See “Our Business Strategies — Investments in Real Estate or Interests in Real Estate.”

      The downturn in the national economy, the aftermath of the terrorist attacks against the United States and the impact of the war in Iraq have had a negative impact upon our operating cash flows. We expect the negative impact to continue through the second quarter of 2003.

Inflation

      Our revenues initially will be based on the property leases, which will result in changes in our revenues resulting from changes in the underlying initial property revenues. Therefore, we initially will be relying entirely on the performance of the initial properties and the ability of Remington Lodging & Hospitality, L.P., the manager of the properties on behalf of Ashford TRS, to increase revenues to keep pace with inflation. Operators of hotels can change room rates quickly, but competitive pressures may limit the ability to raise rates faster than inflation.

Seasonality

      The initial properties’ operations historically have been seasonal. Three of the initial properties maintain higher occupancy rates during the summer months. The two hotels located in Texas and the hotel located in Las Vegas experience their highest occupancy in the late winter and spring months. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. We anticipate that our cash flow from the operation of the properties will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, we expect to utilize other cash on hand or borrowings to make those distributions. See “Our Business Strategy — Financing Strategy.”) We cannot make any assurances we will make distributions in the future.

 
Significant Accounting Policies

      The critical accounting policies which we believe are the most significant to fully understand and evaluate our reported financial results are described below:

 
Investment in Hotel Properties

      Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 15-39 years for building and 3-5 years for furniture and equipment.

      We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse changes in the demand for lodging at our

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properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value is recorded and an impairment loss recognized.

      There were no charges for impairment recorded in 2002.

      We estimate the fair market values of our properties through cash flow analysis taking into account each property’s expected cash flow generated from operations, holding period and ultimate proceeds from disposition. In projecting the expected cash flows from operations of the asset, we base our estimates on future projected earnings before interest expense, income taxes, depreciation and amortization and deduct expected capital expenditure requirements. We then apply growth assumptions to project these amounts over the expected holding period of the asset. Our growth assumptions are based on estimated changes in room rates and expenses and the demand for lodging at our properties, as impacted by local and national economic conditions and estimated or known future new hotel supply. The estimated proceeds from disposition are judgmentally determined based on a combination of anticipated cash flow in the year of disposition, terminal capitalization rate, ration of selling price to gross hotel revenues and selling price per room.

      If actual conditions differ from those in our assumptions, the actual results of each asset’s future operations and fair market value could be significantly different from the estimated results and value used in our analysis.

Revenue Recognition

      Hotel revenues including room, food, beverage and other hotel revenues are recognized as the related services are delivered. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

New Accounting Pronouncements

      Effective January 1, 2002, the Company adopted SFAS No. 141, “Business Combinations,” which requires all business combinations be accounted for using the purchase method of accounting, and SFAS No. 142, “Goodwill and Other Intangible Assets,” which changes the accounting for goodwill and intangible assets with indefinite useful lives from an amortization approach to an impairment-only approach. The adoption of SFAS No. 141 and No. 142 on January 1, 2002 did not have an effect on the Company’s financial statements.

      In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The provisions of SFAS No. 144 are effective as of January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed Of”. SFAS No. 144 also established a single accounting model for long-lived assets to be disposed of by sale. The statement did not have a material effect on financial condition or results of operations for 2002.

      In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. Included in SFAS No. 145 is a requirement that all gains and losses related to extinguishments of debt other than extinguishments of debt items meeting the criteria in APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction” (“APB Opinion 30”) not be treated as extraordinary items. Any gains or losses on extinguishments of debt formerly classified as extraordinary and not meeting the criteria for extraordinary classifications as defined in APB Opinion 30 shall be reclassified. The Company has elected to early adopt Statement No. 145, which results in the classification of the expense resulting from early extinguishment of mortgage loans payable in the amounts of $13,000 and $716,000 in the years ended December 31, 2002, and 2001, respectively.

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      In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, “which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. Interpretation No. 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees. Interpretation No. 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, this is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. To date, the Company has not entered into any guarantees and will apply the recognition and measurement provisions for all guarantees entered into after January 1, 2003.

      In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure — an amendment of FASB Statement No. 123”. Statement No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In addition, to address concerns raised by some constituents about the lack of comparability caused by multiple transition methods, Statement No. 148 does not permit the use of the Statement No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003.

      On April 22, 2003, the FASB reached a decision to require all companies to expense the value of employee stock options. The FASB is committed to work with the International Accounting Standards Board (“IASB”) in order to achieve maximum convergence on stock based compensation accounting. This will affect the timing of the FASB’s project on accounting for stock based compensation. The FASB plans to issue an exposure draft later this year that could become effective in 2004. Until then, the provisions of SFAS 123 remain in effect. To date, the Company has no stock-based compensation subject to Statement No. 123. After December 31, 2002, the Company intends to use the intrinsic value method provided by Statement No. 123.

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities. In general, a variable interest entity is a corporate, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The objective of Interpretation No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns of both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Adoption is not expected to have a material effect on the Company’s financial condition of results of operation.

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Commitments

      The following table outlines the timing of payment requirements related to our commitments as of June 30, 2003:

Maturities due by Period (in thousands)

                                         
Less than After
1 Year 2-3 Years 4-5 Years 5 Years Total





Mortgage Notes Payable (1)
  $ 66,096     $ 360     $ 15,640     $ 0     $ 82,096  
Capital Leases Payable
  $ 151     $ 275     $ 103     $ 0     $ 529  


(1) Represents mortgage indebtedness outstanding at June 30, 2003. In connection with the consummation of the formation transactions we will prepay all mortgage indebtedness other than that maturing in years four to five.

Financial Instruments Sensitivity Analysis

      The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. All derivative instruments are entered into for hedging purposes.

      As of June 30, 2003, our debt included a $39 million fixed rate mortgage with an interest rate of 8.4% and $43.1 million in floating rate mortgages (bearing interest at LIBOR plus 350 basis points or in certain circumstances, the greater of 550 basis points or LIBOR plus 350 basis points). In January 2001 and February 2001, we entered into interest rate cap agreements to limit the impact of interest rate changes on our variable rate debt. One of these agreements has a notional amount (the stated amount in the interest rate cap agreement on which the interest payments are based) of $9.3 million which effectively caps LIBOR at 8.75% through maturity at November 30, 2003 and the other has a notional amount of $18 million which effectively caps LIBOR at 7.5% through maturity at January 31, 2004. The impact of the interest rate cap is recorded as a component of interest expense.

      Changes in market interest rates have different impacts on the fixed and variable portions of our debt. A change in market interest rates on the fixed portion of our debt impacts the fair value of the debt, but has no impact on interest incurred or cash flows. A change in market interest rates on the variable portion of our debt impacts the interest incurred and cash flows, but does not impact the fair value of the debt. The sensitivity analysis related to our fixed debt assumes an immediate 100 basis point move in interest rates from their factual June 30, 2003 levels, with all other variables held constant. A 100 point increase in market interest rates would result in a decrease in the fair value of our fixed rate debt by $370,848 at June 30, 2003. A 100 point decrease in market interest rates would result in an increase in the fair market value of our fixed rate debt by $374,807 at June 30, 2003. Based on our floating-rate debt outstanding as of June 30, 2003, a 100 point increase in interest rates would result in an additional $430,961 in interest expense on an annualized basis as of June 30, 2003. A 100 basis point decrease would reduce interest expense by $430,961 on an annualized basis as of June 30, 2003.

Cash Distribution Policy

      We will elect to be taxed as a REIT under the Internal Revenue Code commencing as of our taxable year ending December 31, 2003. To qualify as a REIT, we must meet a number of organizational and operational requirements, including the requirement that we distribute currently at least 90% of our ordinary taxable income to our stockholders. It is our intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state and local taxes on our income and to federal income and excise taxes on our undistributed taxable income, i.e. taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder.

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      It is our intention to pay to our stockholders within the time periods prescribed by the Internal Revenue Code no less than 90% of our annual taxable income, including gains from the sale of real estate and recognized gains on sale of securities. It will continue to be our policy to make sufficient cash distributions to stockholders in order for us to maintain our REIT status under the Internal Revenue Code.

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MANAGEMENT

Directors and Executive Officers

      Initially, the board of directors will consist of seven members, five of whom are “independent” directors as described below under “— Corporate Governance — Board of Directors and Committees.” All of the directors will serve one year terms, expiring at the first annual meeting of stockholders (2004). The following table sets forth certain information regarding our executive officers and directors and those persons who have agreed to become directors immediately after consummation of this offering:

             
Name Age Position



Archie Bennett, Jr.
    65     Chairman of the Board of Directors
Montgomery J. Bennett
    37     President, Chief Executive Officer and Director
Douglas A. Kessler
    42     Chief Operating Officer
David A. Brooks
    44     Chief Legal Officer and Secretary
David J. Kimichik
    43     Chief Financial Officer and Treasurer
Mark L. Nunneley
    45     Chief Accounting Officer
Martin L. Edelman*
    60     Director
W.D. Minami*
    46     Director
W. Michael Murphy*
    57     Director
Philip S. Payne*
    52     Director
Charles P. Toppino*
    44     Director


These five individuals have agreed to become directors upon completion of this offering, and are considered to be independent directors.

      Archie Bennett, Jr. will serve as the Chairman of our board of directors. Mr. Archie Bennett, Jr. is the father of Mr. Montgomery J. Bennett, who will serve as our President and Chief Executive Officer. Mr. Archie Bennett, Jr. served as the Chairman of the board of directors of Remington Hotel Corporation since its formation in 1992. He will continue to serve in this capacity after the consummation of the offering. Mr. Bennett started in the hotel industry in 1968 with the development and management of the Holiday Inn in Galveston, Texas. Since that time, he has been involved with hundreds of hotel properties, the value of which exceeds $1 billion. He is a frequent speaker at industry conferences and is a recognized authority on the subjects of hotel development, acquisitions, sales, and management. He has been featured in national business and industry publications including National Real Estate Investor, Hotel/ Motel Management, Lodging Hospitality and Commercial Real Estate News . Mr. Bennett was a founding member of Industry Real Estate Finance Advisory Council (IREFAC) of the American Hotel & Motel Association and served as its chairman on two separate occasions.

      Montgomery J. Bennett will serve as our President and Chief Executive Officer. Mr. Bennett is the son of Mr. Archie Bennett, Jr. Mr. Montgomery Bennett also will continue to serve as the President and Chief Executive Officer of Remington Hotel Corporation. Mr. Bennett joined Remington Hotel Corporation in 1992 and has served as its President since 1997. He has served in several key positions at Remington Hotel Corporation such as Executive Vice President, Director of Information Systems, General Manager, and Operations Director. He is extensively involved in the hotel industry, serving on the Urban Land Institute’s Hotel Council, Hilton Hotel Corporation’s Embassy Suites Franchise Advisory Council, Radisson Franchise Advisory Board, and the American Hotel & Lodging Association’s Industry Real Estate Finance Advisory Council (IREFAC). Mr. Bennett earned his Masters degree in Business Administration from the Johnson Graduate School of Management at Cornell University in 1989 and his Bachelor of Science degree with distinction from the School of Hotel Administration in 1988. He is a life member of the Cornell Hotel Society.

      Douglas A. Kessler will serve as our Chief Operating Officer and Head of Acquisitions. Since July of 2002, Mr. Kessler served as the managing director/ chief investment officer of Remington Hotel

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Corporation, where he was responsible for capital raising, acquisitions, and new business development. Prior to joining Remington Hotel Corporation in 2002, from 1993 to 2002, Mr. Kessler was employed at Goldman Sachs’ Whitehall Real Estate Funds, where he assisted in the management of more than $11 billion of real estate (including $6 billion of hospitality investments) involving over 20 operating partner platforms worldwide. During his nine years at Whitehall, Mr. Kessler served on the boards or executive committees of several lodging companies, including Westin Hotels and Resorts and Strategic Hotel Capital. He has been involved in the sale or acquisition of more than $2.5 billion of various real estate assets with public and private companies and has negotiated more than $1 billion of loans and credit facilities. Mr. Kessler co-led the formation of Goldman Sachs’ real estate investment management operations in France. Mr. Kessler has 18 years of experience in real estate acquisitions, development, sales, finance, asset management, operating companies, and fund raising. Mr. Kessler earned his Masters in Business Administration in 1988 and Bachelor of Arts from Stanford University in 1983.

      David A. Brooks will serve as our Chief Legal Officer and Head of Transactions. He has served as Executive Vice President and General Counsel for Remington Hotel Corporation and Ashford Financial Corporation since January of 1992. In such capacity, Mr. Brooks has been responsible for the management and oversight of the asset management department, the acquisition group, financing, development and the legal affairs of the companies. Prior to joining Remington Hotel Corporation, Mr. Brooks served as a partner with the law firm of Sheinfeld, Maley & Kay. Mr. Brooks earned his Bachelor of Business Administration in Accounting from the University of North Texas in 1981, his Juris Doctorate from the University of Houston in 1984 and his CPA from the State of Texas in 1984.

      David J. Kimichik will serve as our Chief Financial Officer. Mr. Kimichik has been associated with the Remington Hotel Corporation principals for the past 20 years and has been President of Ashford Financial Corporation since 1992. Mr. Kimichik previously served as Executive Vice President of Mariner Hotel Corporation, an affiliate of Remington Hotel Corporation, in which capacity he administered all corporate activities, including business development, financial management and operations. Since his involvement with Ashford Financial Corporation, Mr. Kimichik has played an integral role in the acquisition of 160 hotel assets and mortgage loans secured by hotel assets with book values in excess of $800 million. Mr. Kimichik earned his Bachelor of Science degree in Hotel Administration from Cornell University in 1982.

      Mark L. Nunneley will serve as our Chief Accounting Officer. Since 1992, Mr. Nunneley has served as Chief Financial Officer of Remington Hotel Corporation. He previously served as a tax consultant at Arthur Andersen & Company and as a tax manager at Deloitte & Touche. During his career, he has been responsible for the preparation, consultation and review of federal and state income tax, franchise and sales and use tax returns for hundreds of partnerships, corporations and individuals. Mr. Nunneley is a certified public accountant and is a member of the American Institute of Certified Public Accountants, Texas Society of CPAs and Dallas Chapter of AICPAs. He earned his Master of Science in Accounting from the University of Houston in 1981 and his Bachelor of Science in Business Administration from Pepperdine University in 1979.

      Martin L. Edelman has agreed to serve as a director immediately after consummation of this offering. Since 2000, Mr. Edelman has served as of counsel to Paul, Hastings, Janofsky & Walker LLP, specializing primarily in real estate and corporate transactions. From 1972 to 2000, Mr. Edelman served as a partner at Battle Fowler LLP. The focus of Mr. Edelman’s practice has been complex negotiations involving acquisitions, dispositions and financing. He was involved in the legal development of participating mortgages, institutional joint ventures in real estate and joint ventures between U.S. financial sources and European real estate companies and other financial structures. Mr. Edelman has been a real estate advisor to Quantum Realty Partners/ Soros Real Estate Partners and is one of the managing partners of GSR Hotel Portfolio and Grupo Chartwell de Mexico, privately-owned hotel companies. He is a director of Cendant Incorporated, Arcadia Realty, and Capital Trust. Mr. Edelman earned his B.A. from Princeton University in 1963 and his law degree from Columbia University School of Law in 1966. Mr. Edelman served as an Officer in the United States Army from 1966 through 1969.

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      W.D. Minami has agreed to serve as a director immediately after consummation of this offering. Mr. Minami is currently pursuing private investment opportunities. From 2001 until 2002, Mr. Minami served as President of Charles E. Smith Residential. In this capacity, Mr. Minami was responsible for the development, construction, acquisition and property management of over 22,000 high-rise apartments in five major U.S. markets. He resigned from this position after completing the transition and integration of Charles E. Smith from an independent public company to a division of Archstone-Smith, a NYSE-listed apartment company. From 1997 to 2001, Mr. Minami worked for Charles E. Smith Residential Realty Inc., a NYSE-listed real estate investment trust, initially as Chief Financial Officer, then as Chief Operating Officer, and beginning in 2001, as President. Prior to 1997, Mr. Minami served in various financial service capacities for numerous entities, including Ascent Entertainment Group, Comsat Corporation, Oxford Realty Services Corporation and Satellite Business Systems. Mr. Minami earned his Masters of Business Administration in Finance from the University of Chicago in 1980 and his Bachelor of Arts degree in Economics, with honors, from Grinnell College in 1978.

      W. Michael Murphy has agreed to serve as a director immediately after consummation of this offering. Mr. Murphy is currently performing advisory services for various hospitality companies. From 1998 to 2002 Mr. Murphy served as the Senior Vice President and Chief Development Officer of ResortQuest International, Inc., a public, NYSE-listed company and the leading provider of resort rental management services with offerings in over 40 leisure locations. At ResortQuest, Mr. Murphy was responsible for merger and acquisition activity. Prior to joining ResortQuest, from 1995 to 1997, Mr. Murphy was President of Footprints International, a company involved in the planning and development of environmentally friendly hotel properties. From 1994 to 1996, he was a Senior Managing Director of Geller & Co., a Chicago-based hotel advisory and asset management firm. Mr. Murphy earned his Bachelor of Science degree in English and Philosophy in 1967 from Memphis State University and earned a Masters of Science in English in 1969 from University of Iowa. Mr. Murphy has twice been Co- Chairman of the Industry Real Estate Finance Advisory Council (IREFAC) of the American Hotel and Lodging Association.

      Philip S. Payne has agreed to serve as a director immediately after consummation of this offering. Mr. Payne is currently director, executive vice president, treasurer and chief financial officer of BNP Residential Properties, Inc., an AMEX-listed real estate investment trust. Mr. Payne joined BT Venture Corporation, which was subsequently purchased by BNP Residential Properties, Inc., in 1990 as Vice President of Capital Market Activities and became Executive Vice President and Chief Financial Officer in January 1993. He was named Treasurer in April 1995 and a director in December 1997. From 1987 to 1990 he was a principal in Payne Knowles Investment Group, a financial planning firm. From 1983 to 1987 he was a registered representative with Legg Mason Wood Walker, Incorporated. From 1978 to 1983, Mr. Payne practiced law, and he currently maintains his license to practice law in Virginia. He received a B.S. degree from the College of William and Mary in 1973 and a J.D. degree in 1978 from the same institution. Mr. Payne serves on the board of directors of the National Multi Housing Council, is a member of the Urban Land Institute.

      Charles P. Toppino has agreed to serve as a director immediately after consummation of this offering. Since 1992, Mr. Toppino has served as the Executive Vice President, founder and principal of Secured Capital Corp., a real estate investment bank with offices in Los Angeles, New York, Paris and Tokyo. Secured Capital has two main lines of business: U.S. investment banking and sales and international real estate investment activities. Mr. Toppino’s primary responsibilities include overseeing the firm’s secondary market loan sale business and the day-to-day management of the firm. In the U.S., Secured Capital specializes in the sale and financing of commercial, multi-family and hospitality real estate, and the sale of mortgage assets and the private placement of capital for real estate operating companies.

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Corporate Governance — Board of Directors and Committees

      Our business is managed through the oversight and direction of our board of directors. At least a majority of our board of directors will be “independent,” with independence being defined in the manner established by our board of directors and in a manner consistent with listing standards established by the New York Stock Exchange, and will be nominated by our nominating/ corporate governance committee. These nominations must be submitted to and approved by our corporate governance/ nominating committee, and satisfy the standards established by that committee for membership on our board.

      Upon completion of this offering, our board will consist of seven directors, with two insiders and five “independent” directors. The directors are regularly kept informed about our business at meetings of the board and its committees and through supplemental reports and communications. Our non-management, independent directors expect to meet regularly in executive sessions without the presence of any corporate officers. Our board seeks to maintain high corporate governance standards.

      The board has established three committees whose principal functions are briefly described below.

Audit Committee

      Our board of directors has established an audit committee, which will be composed of three independent directors, Messrs. Payne, Minami and Murphy. Mr. Payne will serve as the chairperson of the audit committee and, along with Mr. Minami, will satisfy the financial expert requirements set forth by the Securities and Exchange Commission. The audit committee assists the board in overseeing (i) our accounting and financial reporting processes; (ii) the integrity and audits of our financial statements; (iii) our compliance with legal and regulatory requirements; (iv) the qualifications and independence of our independent auditors; and (v) the performance of our internal and independent auditors. The audit committee also:

  •  has sole authority to appoint or replace our independent auditors;
 
  •  has sole authority to approve in advance all audit and non-audit engagement fees, scope and terms with our independent auditors;
 
  •  monitors compliance of our employees with our standards of business conduct and conflict of interest policies; and
 
  •  meets at least quarterly with our senior executive officers, internal audit staff and our independent auditors in separate executive sessions.

The specific functions and responsibilities of the audit committee are set forth in the audit committee charter. Our board of directors has determined that at least one member of our audit committee will qualify as an audit committee financial expert under the current Securities and Exchange Commission regulations and the other members of our audit committee will satisfy the financial literacy requirements for audit committee members under the New York Stock Exchange proposed rules.

Compensation Committee

      Our board of directors has established a compensation committee, which will be composed of three independent directors, Messrs. Murphy, Payne and Toppino. Mr. Murphy will serve as the chairperson of the compensation committee. The principal functions of the compensation committee are to:

  •  evaluate the performance of our senior executives;
 
  •  review and approve the senior executive compensation plans, policies and programs;
 
  •  consider the design and competitiveness of our compensation plans;
 
  •  administer and implement changes to our stock plan under the terms of the plans; and
 
  •  produce an annual report on executive compensation for inclusion in our proxy statement.

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      The committee also reviews and approves corporate goals and objectives relevant to chief executive officer compensation, evaluates the chief executive officer’s performance in light of those goals and objectives, and establishes the chief executive officer’s compensation levels based on its evaluation. The committee has the authority to retain and terminate any compensation consultant to be used to assist in the evaluation of chief executive officer or senior executive compensation.

Nominating/ Corporate Governance Committee

      Our board of directors has established a nominating/ corporate governance committee, which will be composed of two independent directors, Messrs. Edelman and Murphy. Mr. Edelman will serve as the chairperson of the nominating/ corporate governance committee. The nominating/ corporate governance committee is responsible for seeking, considering and recommending to the board qualified candidates for election as directors and recommending a slate of nominees for election as directors at the annual meeting. It also periodically prepares and submits to the board for adoption the committee’s selection criteria for director nominees. It reviews and makes recommendations on matters involving general operation of the board and our corporate governance, and it annually recommends to the board nominees for each committee of the board. In addition, the committee annually facilitates the assessment of the board of directors’ performance as a whole and of the individual directors and reports thereon to the board. The committee has the sole authority to retain and terminate any search firm to be used to identify director candidates. Stockholders wishing to recommend director candidates for consideration by the committee can do so by writing to our secretary at our corporate headquarters in Dallas, Texas, giving the candidate’s name, biographical data and qualifications. The secretary will, in turn, deliver any stockholder recommendations for director candidates prepared in accordance with our bylaws to the nominating/ corporate governance committee. Any such recommendation must be accompanied by a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as director.

Compensation Committee Interlocks and Insider Participation

      The members of the compensation committee of the board of directors will be independent directors. Upon completion of this offering, none of these directors, or any of our executive officers will serve as a member of a board of directors or any compensation committee of any entity that has one or more executive officers serving as a member of our board.

Director Compensation

      Each of our independent directors who does not serve as the chairman of one of our committees will be paid a director’s fee of $20,000 per year. Each director who serves as a committee chairman, other than our audit committee chairman, will be paid a director’s fee of $25,000. The director who serves as our audit committee chairman will be paid a director’s fee of $35,000 per year. Each director will also be paid of fee of $2,000 for each board or committee meeting that he or she attends, except that the chairman of each committee will be paid a fee of $3,000 for each committee meeting that he or she attends. Each director will also be paid a fee of $500 for each telephone board or committee meeting that he or she attends. In addition, we will reimburse all directors for reasonable out-of-pocket expenses incurred in connection with their services on the board of directors.

      Our 2003 stock plan provides for grants of restricted stock to independent directors on and after the consummation of this offering. As an inducement to the directors to agree to serve on our board, on the date of the closing of the offering, each of our independent directors will receive restricted stock grants of 5,000 shares of our common stock, which shares will fully vest 180 days from the date of issuance. Similarly, each independent director who is initially elected to our board of directors after this offering will receive restricted stock grants of 5,000 shares of our common stock on the date of such initial election. These restricted stock grants will be fully vested immediately.

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      On the date of the first meeting of the board of directors following each annual meeting of stockholders at which an independent director is reelected to our board of directors, such independent director will receive additional restricted stock grants of 2,000 shares of our common stock. These restricted stock grants will be fully vested immediately.

Executive Compensation

      Set forth below are the initial annual cash compensation and restricted stock grants to be paid to our Chairman of the Board and our four other most highly compensated executive officers:

                         
Long-Term
Annual Compensation (1) Compensation