Part 1    Financial Information

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 3.  Revenue Recognition

We report hotel operating revenues for managed hotels in our condensed consolidated statements of income and comprehensive income. We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when services are provided. Our share of the net operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. We recognize additional returns due to us under our management agreements at year end when all contingencies are met and the income is earned. We had no deferred additional returns for the three and six months ended June 30, 2013 and 2012.

We recognize rental income from operating leases on a straight line basis over the term of the lease agreements except for one lease in which there is uncertainty regarding the collection of future rent.  Rental income includes $36 and $98 for the three and six months ended June 30, 2013, respectively, of adjustments necessary to record rent on the straight line basis and ($60) and $294 for the three and six months ended June 30, 2012, respectively, of adjustments necessary to record rent on the straight line basis.

We determine percentage rent due to us under our leases annually and recognize it at year end when all contingencies have been met and the rent is earned. We had deferred percentage rent of $672 and $1,282 for the three and six months ended June 30, 2013, respectively, and $1,253 and $2,562 for the three and six months ended June 30, 2012, respectively.

We own all the capital expenditure reserves, or FF&E reserves, for our hotels. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income. We report deposits by our third party hotel tenants into the escrow accounts as FF&E reserve income.

Note 4.  Per Common Share Amounts

We calculate per common share amounts using the weighted average number of our common shares of beneficial interest, $.01 par value, or our common shares, outstanding during the period. We had no dilutive common share equivalents at June 30, 2013 or 2012.

Note 5.  Shareholders’ Equity

Distributions

On each of January 15, 2013, April 15, 2013 and July 15, 2013, we paid a $0.4453125 per share distribution to our Series D preferred shareholders with respect to periods ended January 14, 2013, April 14, 2013 and July 14, 2013, respectively.

On each of February 15, 2013 and May 15, 2013, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the periods ended February 14, 2013 and May 14, 2013, respectively.

On each of February 22, 2013 and May 24, 2013, we paid a $0.47 per share distribution to our common shareholders.  On July 10, 2013, we declared a $0.47 per share distribution to our common shareholders of record on July 26, 2013. We expect to pay this amount on or about August 23, 2013.

Common Share Issuances

On March 22, 2013, we sold 16,100,000 of our common shares at a price of $25.55 per share in a public offering for net proceeds of $393,474 after underwriting discounts and other offering expenses.

On May 15, 2013, we granted 2,000 of our common shares valued at $30.69 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees as part of their annual compensation.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

Preferred Share Redemption

On July 1, 2013, we redeemed our 6,700,000 outstanding 7.00% Series C cumulative redeemable preferred shares at the standard liquidation preference of $25 per share plus accrued and unpaid distributions to the date of redemption.  We expect to recognize a loss in the 2013 third quarter of $5,627 on the excess of the liquidation preference of the redeemed shares over their carrying amount.

Other Comprehensive Income

Other comprehensive income represents the unrealized gain on the TravelCenters of America LLC, or TA, shares we own and our share of the comprehensive income of Affiliates Insurance Company, or AIC.  See Note 10 for further information regarding these investments.

Note 6.  Indebtedness

We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is September 7, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date by one year to September 7, 2016. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1,500,000 in certain circumstances. Borrowings under our revolving credit facility bear interest at a rate of LIBOR plus a premium of 130 basis points. We also pay a facility fee of 30 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of June 30, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.50%.  The weighted average annual interest rate for borrowings under our revolving credit facility was 1.50% and 1.51% for the three and six months ended June 30, 2013, respectively, and 1.58% for the six months ended June 30, 2012.  We had no amounts outstanding under our revolving credit facility during the three months ended June 30, 2012. As of June 30, 2013, we had $90,000 outstanding and $660,000 available under our revolving credit facility.

We have a $400,000 unsecured term loan.  Our term loan matures on March 13, 2017, and is prepayable without penalty at any time.  In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $500,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium, which was 145 basis points as of June 30, 2013. As of June 30, 2013, the interest rate for the amount outstanding under our term loan was 1.65%.  The weighted average interest rate for the amount outstanding under our term loan was 1.66% for both the three and six months ended June 30, 2013 and 1.70% for both the three months ended June 30, 2012 and the period March 12, 2012 (the date we entered into the term loan agreement) to June 30, 2012, respectively.

Our credit facility agreement and our term loan agreement provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including a change of control of us and the termination of our business management agreement with Reit Management & Research LLC, or RMR.  Our revolving credit facility agreement and our term loan agreement contain a number of covenants that restrict our ability to incur debt in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and generally require us to maintain certain financial ratios.  We believe we were in compliance with the terms and conditions of our revolving credit facility agreement and our term loan agreement at June 30, 2013.

On June 6, 2013, we issued $300,000 of 4.5% unsecured senior notes due 2023 in a public offering for net proceeds of $297,132 after underwriting and other offering expenses.

Note 7.  Real Estate Properties

At June 30, 2013, we owned 475 properties consisting of 290 hotels and 185 travel centers that were operated under eleven management or lease agreements.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

During the six months ended June 30, 2013, we funded $143,608 of improvements to certain of our properties that pursuant to the terms of our management and lease agreements with our hotel managers and tenants resulted in increases in our contractual annual minimum returns and rents of $11,534.

On May 17, 2013, we acquired a 426 room full service hotel located in Duluth, GA for $29,700, excluding related acquisition costs of $241.  We accounted for this transaction as a business combination.  The following table summarizes our preliminary allocation of the acquisition cost to estimated fair value of the assets we acquired.  This allocation is based on preliminary estimates and may change upon the completion of a third party appraisal.

On June 28, 2013, we acquired the fee interest in the Royal Sonesta Hotel New Orleans in New Orleans, LA, or the New Orleans Hotel, for $120,500, excluding acquisition costs, from the third party owner from which we previously leased this hotel.  We accounted for this transaction as an acquisition of assets. In connection with this acquisition, we incurred acquisition costs of $309 which we capitalized and we reclassified $18,958 of intangible assets related to our previous leasehold interest in the hotel to land and building.  The following table summarizes our allocation of the acquisition cost to estimated fair value of the assets we acquired.

Simultaneously with this acquisition, the lease with the third party terminated and we entered into an amended and restated management agreement with Sonesta International Hotels Corporation, or Sonesta. See Notes 10 and 11 for further information about this agreement.

On July 1, 2013, we acquired the fee interest in a travel center in Montgomery, NY we previously leased from a third party and subleased to TA.  We also acquired land parcels adjacent to three of our other travel centers and leased these to TA.  The aggregate consideration for these transactions was $6,323.  See Note 10 for further information about these transactions.

On August 1, 2013, we acquired a 219 room full service hotel in Florham Park, NJ for $52,750, excluding closing costs. See Note 11 for further information about this transaction.

On February 27, 2013, we announced that we had entered a letter of intent with NH Hoteles, S.A., or NH Hoteles, for investments with NH Hoteles in Latin America, Europe and the United States totaling approximately $375,000.  On April 24, 2013, NH Hoteles notified us that it was unable to obtain the necessary bank approvals to allow it to complete the transaction as outlined in the letter of intent.  We subsequently held discussions with NH Hoteles about possible modifications or alternatives to the proposed transaction originally announced but were unable to reach agreement and are currently no longer pursuing this transaction.

Note 8. Income Taxes

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and, accordingly are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

requirements.  We are subject to income tax in Canada, Puerto Rico and certain states despite our REIT status.  Also, we lease our managed hotels to our wholly owned TRSs that, unlike most of our other subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal, state and foreign income taxes.  Our consolidated income tax provision included in our condensed consolidated statements of income and comprehensive income includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our REIT status.

During the three and six months ended June 30, 2013, we recognized a current income tax expense of $907 and $1,637, respectively, which includes $547 and $897, respectively, of federal taxes, $31 and $62, respectively, of foreign taxes and $329 and $678, respectively, of certain state taxes that are payable without regard to our REIT status and TRS tax loss carry forwards. In addition, during the three and six months ended June 30, 2013, we recognized a deferred tax benefit of $6,857 and $7,069, respectively, related primarily to the restructuring of certain of our TRSs.

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

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Note 10. Related Person Transactions

Relationship with TA

TA is our former 100% owned subsidiary and our largest tenant, and we are TA’s largest shareholder.  TA was created as a separate public company in 2007 as a result of its spin off from us.  As of June 30, 2013, we owned 2,540,000 common shares of TA, representing approximately 8.6% of TA’s outstanding common shares.  Mr. Barry Portnoy, one of our Managing Trustees, is a managing director of TA.  Mr. Thomas O’Brien, an officer of RMR and a former officer

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

of us prior to the TA spin off, is President and Chief Executive Officer and the other managing director of TA.  Mr. Arthur Koumantzelis, who was one of our Independent Trustees prior to the TA spin off, serves as an independent director of TA.  RMR provides management services to both us and TA.

TA is the lessee of 37% of our real estate properties, at cost, as of June 30, 2013.  Additional financial information about TA may be found on the Securities and Exchange Commission, or the SEC’s, website by entering TA’s name at http://www.sec.gov/edgar/searchedgar/companysearch.html.  Reference to TA’s financial information on this external website is presented to comply with applicable accounting regulations of the SEC.  Except for such financial information contained therein as is required to be included herein under such regulations, TA’s public filings and other information located in external websites are not incorporated by reference into these financial statements.   See below for further information relating to our TA leases.

TA has two leases with us, the TA No. 1 lease and the TA No. 2 lease, pursuant to which TA leases 185 travel centers from us.  The TA No. 1 lease is for 145 travel centers that TA operates under the “TravelCenters of America” or “TA” brand names.  The TA No. 2 lease is for 40 travel centers that TA operates under the “Petro” brand name.  The TA No. 1 lease expires on December 31, 2022.  The TA No. 2 lease expires on June 30, 2024, and may be extended by TA for up to two additional periods of 15 years each.  Both of these leases require TA to: (1) make payments to us of minimum rents; (2) pay us percentage rent equal to 3% of non-fuel revenues and 0.3% of fuel revenues above applicable base year revenues subject to certain limitations (with the first $2,500 of percentage rents under the TA No. 2 lease waived by us); (3) pay us at lease expiration an amount equal to an estimate of the cost of removing underground storage tanks on our leased sites and (4) maintain the leased travel centers, including structural and non-structural components.  In addition to minimum and percentage rent, TA is obligated to pay us ground rent of approximately $5,150 per year under the TA No. 1 lease.  Previously deferred rent due from TA of $107,085 and $42,915 is due in December 2022 and June 2024, respectively.  We have not recognized any of the deferred rent as rental income or as rents receivable due to uncertainties regarding future collection.

We recognized rental income of $53,948 and $51,592 for the three months ended June 30, 2013 and 2012, respectively, and $107,438 and $102,909 for the six months ended June 30, 2013 and 2012, respectively, under our leases with TA.  Rental income for the three and six months ended June 30, 2013 and 2012 includes $432 and $899 and ($69) and $287, respectively, of adjustments necessary to record the scheduled rent increase on our TA No. 1 lease and the estimated future payment to us by TA for the cost of removing underground storage tanks on a straight line basis.  As of June 30, 2013 and December 31, 2012, we had accruals for unpaid amounts of $30,650 and $29,300, respectively, owed to us by TA, excluding any deferred rents, which accrued amounts are included in other assets on our condensed consolidated balance sheets.  We had deferred percentage rent under our TA No. 1 lease of $672 and $471 for the three months ended June 30, 2013 and 2012, respectively, and $1,282 and $1,200 for the six months ended June 30, 2013 and 2012, respectively.  We determine percentage rent due under our TA No. 1 lease annually and recognize it at year end when all contingencies are met.

Under the TA No. 1 and No. 2 leases, TA may request that we fund approved amounts for renovations, improvements and equipment at leased travel centers in return for increases in TA’s minimum annual rent.  We are not required to fund these improvements and TA is not required to sell them to us.  For the six months ended June 30, 2013, we funded $45,229 for capital improvements purchased from TA under this lease provision; and, as a result, TA’s minimum annual rent payable to us increased by approximately $3,844.

On April 15, 2013, TA entered an agreement with Shell Oil Products US, or Shell, pursuant to which Shell has agreed to construct a network of natural gas fueling lanes at up to 100 of TA’s travel centers located along the U.S. interstate highway system, including travel centers TA leases from us.  In connection with that agreement, on April 15, 2013, we and TA amended our leases to specify the economic equivalent for natural gas sales to diesel fuel sales for the calculation of percentage rent payable to us under the leases, with the intended effect that the amount of percentage rent be unaffected by the source of fuel sold, whether diesel fuel or natural gas.  That amendment also made certain administrative changes.  Also on that date, in order to facilitate TA’s agreement with Shell, we entered into a subordination, non-disturbance and attornment agreement with Shell, whereby we agreed to recognize Shell’s license

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

and other rights with respect to the natural gas fueling lanes at our travel centers leased to TA on certain conditions and in certain circumstances.

On July 1, 2013, we purchased land that we previously leased from a third party and subleased to TA under the TA No. 1 lease.  Effective as of that date, rents due to that third party and TA’s reimbursement of those rents to us under the terms of the TA No. 1 lease ceased.  Also on that date, we and TA amended the TA No. 1 lease to reflect our direct lease to TA of that land and certain minor properties adjacent to existing travel centers included in the TA No. 1 lease that we purchased and to increase the annual rent payable by TA to us by 8.5% of our total investment in these properties, or $537.

Relationship with RMR

We have no employees.  Personnel and various services we require to operate our business are provided to us by RMR.  We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to the property level operations of the office building component of only one property in Baltimore, MD, which property is adjacent to a Royal Sonesta hotel.

Under our business management agreement with RMR, we acknowledge that RMR also provides services to other companies, including TA and Sonesta.  One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR.  Each of our executive officers is also an officer of RMR, including Mr. Ethan Bornstein, who is the son-in-law of Mr. Barry Portnoy and the brother-in-law of Mr. Adam Portnoy.  Certain of TA’s and Sonesta’s executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies, including TA, and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies, but not TA.  In addition, officers of RMR serve as officers of those companies.

Pursuant to our business management and property management agreements with RMR, we recognized aggregate business management fees and property management fees of $10,050 and $9,934 for the three months ended June 30, 2013 and 2012, respectively, and $19,967 and $18,582 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated financial statements.

Relationship with Sonesta

On January 31, 2012, pursuant to a series of transactions, we effectively acquired entities that owned the Royal Sonesta Hotel Boston in Cambridge, MA, or the Cambridge Hotel, and had leasehold interests in the New Orleans Hotel, for approximately $150,500.  On that date, in connection with these transactions, we entered into hotel management agreements with Sonesta to manage the Cambridge Hotel and the New Orleans Hotel.  Since that time, we have rebranded additional hotels to Sonesta brands and management.  We currently lease all hotels that we own and which are managed by Sonesta to one of our TRSs.

In April 2012, we entered into a pooling agreement with Sonesta that combined our management agreements with Sonesta for hotels that we owned for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and the calculation of minimum returns due to us.  We previously referred to this agreement and combination of hotels and management agreements as our Sonesta No. 1 agreement.  The management agreements for all of our hotels managed by Sonesta, excluding, until June 28, 2013, the New Orleans Hotel, were included in the Sonesta No. 1 agreement.  On June 28, 2013, we acquired the fee interest in the New Orleans Hotel from the third party owner from which we previously leased that hotel and, as a result, the lease with the third party terminated. Simultaneous with this acquisition, we and Sonesta amended and restated the prior management agreement we had with Sonesta for this hotel.  The terms of the amended and restated management agreement are substantially the

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

same as those contained in our other management agreements with Sonesta relating to full service hotels and this management agreement was added to our pooling agreement with Sonesta.  We now refer to the pooling agreement and combination of our 22 Sonesta branded hotels and management agreements as our Sonesta agreement.  See Note 11 for further information about our management agreements with Sonesta.

In May 2013, we acquired a full service hotel in Duluth, GA and this hotel has been branded a Sonesta hotel, Sonesta Gwinnett Place.  Sonesta is managing this hotel pursuant to a hotel management agreement on terms consistent with our other applicable hotel management agreements with Sonesta.  This hotel management agreement has been added to the Sonesta agreement.  We expect to invest approximately $4,600 to renovate this hotel to Sonesta brand standards.

Pursuant to our management agreements with Sonesta, we incurred management, system and reservation fees payable to Sonesta of $2,379 and $1,173 for the three months ended June 30, 2013 and 2012, respectively, and $3,851 and $1,633 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in hotel operating expenses in our condensed consolidated statements of income and comprehensive income.  In addition, we also incurred procurement and construction supervision fees payable to Sonesta in connection with capital expenditures at our hotels managed by Sonesta of $1,141 and zero dollars for the three months ended June 30, 2013 and 2012, respectively, and $1,623 and zero dollars for the six months ended June 30, 2013 and 2012, respectively.  These amounts have been capitalized in our condensed consolidated balance sheets.  Under our hotel management agreements with Sonesta, routine property maintenance, which is expensed, is an operating expense of the hotels and repairs and periodic renovations, which are capitalized, are funded by us, except in the case of the New Orleans Hotel for capital expenditures incurred prior to June 28, 2013, which were borne in large part by the lessor.

The stockholders of Sonesta are Mr. Barry Portnoy and Mr. Adam Portnoy, who are our Managing Trustees, and they also serve as directors of Sonesta.  In addition, RMR also provides certain services to Sonesta.

Relationship with AIC

We, RMR, TA and five other companies to which RMR provides management services each currently own 12.5% of AIC, an Indiana insurance company.  All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.  As of June 30, 2013, we have invested $5,209 in AIC since its formation in November 2008.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,703 and $5,629 as of June 30, 2013 and December 31, 2012, respectively, which amounts are included in other assets on our condensed consolidated balance sheets.  We recognized income of $79 and $76 for the three months ended June 30, 2013 and 2012, respectively, and $155 and $121 for the six months ended June 30, 2013 and 2012, respectively, related to our investment in AIC.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2013 for a one year term and we were charged a premium, including taxes and fees, of $6,842 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in this program.  We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

Note 11. Hotel Management Agreements and Leases

Marriott No. 1 agreement . Our lease with Host Hotels & Resorts, Inc., or Host, for 53 hotels which we have historically referred to as our Marriott No. 1 agreement expired on December 31, 2012. As required upon the expiration of the

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

agreement, we paid the $50,540 security deposit we held to Host. Effective January 1, 2013, we leased these hotels to one of our TRSs and continued the previously existing hotel brand and management agreements with Marriott International Inc., or Marriott. This management agreement expires in 2024. Because we no longer hold a security deposit for this agreement, the minimum returns we receive under this agreement will be limited to available hotel cash flow after payment of operating expenses.

Marriott No. 234 agreement.   During the three and six months ended June 30, 2013, the payments we received under our Marriott No. 234 agreement, which requires annual minimum returns to us of $104,438, were $2,584 and $4,288 less than the minimum amounts contractually required, respectively.  Pursuant to our Marriott No. 234 agreement, Marriott provided us with a limited guarantee for shortfalls up to 90% of our minimum returns through 2019.  During the three months ended June 30, 2013, the amount available under Marriott’s guaranty was replenished by $5,388 of cash flows from these hotels in excess of the guaranteed portion of our minimum returns.  Marriott was not required to make any guarantee payments during the six months ended June 30, 2013 because the hotels generated cash flows in excess of the guaranty threshold amount (90% of the minimum returns due to us).  The available balance of this guaranty was $30,707 as of June 30, 2013. Also, during the period from June 30, 2013 to August 6, 2013, the payments we received for these hotels were $1,729 less than the contractual minimum returns due to us.

We currently expect to fund $19,200 of capital improvements during the remainder of 2013 to complete renovations at certain of the hotels included in our Marriott No. 234 agreement. We funded $28,900 during the six months ended June 30, 2013. As we fund these improvements, the annual minimum returns payable to us increase by 9% of the amounts funded.

InterContinental agreement.  During the three months ended June 30, 2013, the payments we received under our agreement with InterContinental Hotels Group, plc, or InterContinental, covering 91 hotels and requiring annual minimum returns to us of $135,159, were $5,917 more than the minimum amounts contractually required.  We replenished the available security deposit with the $5,917 of excess payments to recover payment shortfalls applied to the security deposit during the first quarter of 2013.  During the six months ended June 30, 2013 we have been paid all of our minimum returns due for the period.  The available balance of this security deposit was $26,466 as of June 30, 2013.  Also, during the period from June 30, 2013 to August 6, 2013, the payments we received under our InterContinental agreement were $37 less than the minimum amounts contractually required.  We applied the available security deposit to cover these shortfalls.  The remaining balance of the security deposit was $26,429 as of August 6, 2013.

When we reduce the amounts of the security deposits we hold for this agreement or any other operating agreements for payment deficiencies, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flow to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective lessees or managers who have provided us with these deposits upon expiration of the respective lease or management agreement.  The security deposits are non-interest bearing and are not held in escrow.  Under all of our hotel contracts that include a security deposit, any amount of the security deposits which are applied to payment deficits may be replenished from future cash flows from the applicable hotel operations pursuant to the terms of the respective contracts.

We currently expect to fund $63,000 of capital improvement during the remainder of 2013 to complete renovations at certain of the hotels included in our InterContinental agreement.  We did not make any fundings during the six months ended June 30, 2013.  As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.

Sonesta agreement.  Our management agreement with Sonesta provides that we are paid a fixed minimum return equal to 8% of our invested capital, as defined in the management agreement, if gross revenues of the hotels, after payment of hotel operating expenses and base fees to Sonesta, are sufficient to do so.  In addition to recurring capital expenditures, we currently expect to fund an aggregate of $200,000 for rebranding, renovations and other improvements in 2013 and 2014 to these hotels.  We funded $47,715 of this amount during the six months ended June 30, 2013.  The annual

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Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)

minimum returns due to us under the Sonesta agreement will increase by 8% to the extent amounts funded for these improvements exceed threshold amounts, as defined.

We do not have any security deposits or guarantees for our hotels managed by Sonesta.  Sonesta’s incentive management fees, but not its other fees, are only earned after we receive our minimum returns, and we may cancel these management agreements if approximately 75% of our minimum returns are not paid for certain periods.  Accordingly, the returns we receive from hotels managed by Sonesta is limited to available hotel cash flow after payment of operating expenses.

See Note 10 for further information regarding our relationship with Sonesta.

Wyndham agreement.   On August 1, 2013, we acquired a full service hotel in Florham Park, NJ for $52,750, excluding the closing costs, and added it to our Wyndham Worldwide Corporation, or Wyndham, agreement. Our annual minimum returns under the Wyndham agreement increased by $4,220 and the limited guaranty provided by Wyndham increased to $35,656 upon closing of this hotel acquisition (and the annual maximum guarantee payment increased to $17,828).

We currently expect to fund $75,590 of capital improvements in 2013 to complete renovations at certain of the hotels included in our Wyndham agreement, including $10,000 related to the Florham Park, NJ hotel described above. We funded $19,142 of this amount during the six months ended June 30, 2013. As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.

Other management agreement and lease matters.  As of August 6, 2013, all payments due to us from our managers and tenants under our other operating agreements were current.  Minimum return and minimum rent payments due to us under some of our hotel management agreements and leases are supported by guarantees. The guarantee provided by Marriott, with respect to the 68 hotels (Marriott No. 234 agreement) managed by Marriott is limited to $40,000 ($30,707 remaining at June 30, 2013) and expires on December 31, 2019. The guarantee provided by Hyatt Hotels Corporation, or Hyatt, with respect to the 22 hotels managed by Hyatt is limited to $50,000 ($16,222 remaining at June 30, 2013). The guarantee provided by Carlson Hotels Worldwide, or Carlson, with respect to the 11 hotels managed by Carlson is limited to $40,000 ($21,484 remaining at June 30, 2013). The guarantee provided by Wyndham with respect to the 21 hotels managed by Wyndham is limited to $29,000 ($15,220 remaining at June 30, 2013). Certain of these guarantees may be replenished by future cash flows from the hotels in excess of our minimum returns. The guarantee provided by Wyndham for the lease with Wyndham Vacation Resorts, Inc., or Wyndham Vacation, is unlimited. The guarantee provided by Marriott with respect to the one hotel leased by Marriott (Marriott No. 5 agreement) is unlimited.

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $8,018 and $3,081 less than the minimum returns due to us for the three months ended June 30, 2013 and 2012, respectively, and $30,369 and $26,396 less than the minimum returns due to us for the six months ended June 30, 2013 and 2012, respectively. When managers of these hotels are required to fund the shortfalls under the terms of our operating agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of income and comprehensive income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was $1,267 and $535 in the three months ended June 30, 2013 and 2012, respectively, and $8,772 and $20,027 in the six months ended June 30, 2013 and 2012, respectively. We had $6,751 and $2,546 of shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our operating agreements during the three months ended June 30, 2013 and 2012, respectively, and $21,597 and $6,369 during the six months ended June 30, 2013 and 2012, respectively, which represents the unguaranteed portion of our minimum returns from Marriott and Sonesta.

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HOSPITALITY PROPERTIES TRUST

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share data)