UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Commission File Number 1-11527

HOSPITALITY PROPERTIES TRUST

(Exact name of Registrant as Specified in its Charter)

617-964-8389

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b–2 of the Exchange Act. (Check one): Large Accelerated Filer x Accelerated Filer o  Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

Number of registrant’s common shares of beneficial interest, $0.01 par value per share, outstanding as of November 7, 2007: 93,890,359

HOSPITALITY PROPERTIES TRUST

FORM 10-Q

September 30, 2007

INDEX

References in this Form 10-Q to “HPT”, “we”, “us” or “our” include Hospitality Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

2

PART I          Financial Information

Item 1.  Financial Statements

HOSPITALITY PROPERTIES TRUST

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except share data)

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

3

HOSPITALITY PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(in thousands, except per share data)

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

4

HOSPITALITY PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(in thousands)

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

5

HOSPITALITY PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

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

6

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 1. Basis of Presentation

The accompanying consolidated financial statements of Hospitality Properties Trust and its subsidiaries have been prepared without audit. Certain information and disclosures required by U.S. generally accepted accounting principles for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between Hospitality Properties Trust and its subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

Note 2. Revenue Recognition

We report hotel operating revenues for managed hotels in our consolidated statement of income. Hotel operating revenues, consisting primarily of room, food and beverage sales, are generally recognized 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. Additional returns due to us under our management agreements are recognized at year end when all contingencies are met and the income is earned. Deferred additional returns were $7,723 and $20,516 for the three and nine months ended September 30, 2007, respectively, compared with $3,975 and $17,318 for the three and nine months ended September 30, 2006, respectively.

We recognize rental income from operating leases on a straight line basis over the life of the lease agreements. Rental income includes $4,308 and $11,494 for the three and nine months ended September 30, 2007, respectively, and $16 and $96 for the three and nine months ended September 30, 2006, respectively, of adjustments necessary to record rent on the straight line basis. Percentage rent due to us under leases is generally determined annually and is recognized at year end when all contingencies are met and the rent is earned. Deferred percentage rent from continuing operations was $1,651 and $4,748 for the three and nine months ended September 30, 2007, respectively, and $1,344 and $4,179 for the three and nine months ended September 30, 2006, respectively.

We own all the FF&E reserve escrows for hotels leased to our taxable REIT subsidiaries, or TRSs, and leased to third parties. We report deposits by our third party tenants into the escrow account as FF&E reserve income. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels as FF&E reserve income.

Note 3. Per Common Share Amounts

Per common share amounts are computed using the weighted average number of common shares outstanding during the period. We had no dilutive common share equivalents at September 30, 2007 or 2006.

Note 4. Shareholders’ Equity

On January 16, 2007, April 16, 2007 and July 16, 2007, we paid a $0.5546875 per share distribution to our Series B preferred shareholders with respect to the periods ended January 14, 2007, April 14, 2007 and July 14, 2007, respectively. On September 4, 2007, we declared a $0.5546875 per share distribution to Series B preferred shareholders of record on September 28, 2007, with respect to the period ending October 14, 2007. This amount was paid on October 15, 2007.

On May 15, 2007, we paid a $0.40833 per share distribution to our Series C preferred shareholders with respect to the period ended May 14, 2007, and on August 15, 2007, we paid a $0.4375 per share distribution to our Series C preferred shareholders with respect to the period ended August 14, 2007. On October 1, 2007, we declared a distribution of $0.4375 per Series C preferred shareholders with respect to the period ending November 14, 2007. We expect to pay this amount on or about November 15, 2007.

7

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

On February 15, 2007, we paid a $0.74 per share distribution to our common shareholders for the quarter ended December 31, 2006, and on May 17, 2007 and August 16, 2007, we paid a $0.76 per share distribution to our common shareholders for the quarters ended March 31, 2007 and June 30, 2007, respectively. On October 10, 2007, we declared a $0.77 per share distribution to our common shareholders of record on October 19, 2007, for the quarter ended September 30, 2007. We expect to pay this amount on or about November 15, 2007.

Under the terms of our management agreement with Reit Management & Research LLC, or RMR, on March 26, 2007, we issued 29,928 common shares in payment of an incentive fee of $1,390 for services rendered by RMR during 2006.

On January 11, 2007, we issued 1,500 common shares, at a price of $47.10, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to our two new trustees as part of their annual compensation. On May 15, 2007, we issued 3,750 common shares, at a price of $44.38, the closing price of our common shares on the NYSE on that day, to our five trustees as part of their annual compensation.

On September 18, 2007, we issued 21,050 common shares pursuant to our Incentive Share Award Plan based upon a per common share price of $41.36, the closing price of our common shares on the NYSE on that day, to our officers and certain key employees of RMR.

In January 2007, we sold 1,800,000 of our common shares at a price of $47.51 per share in a public offering pursuant to an over allotment option granted to the underwriters of our December 2006 common share offering. Net proceeds from this sale of $81,775 (after underwriting and other offering expenses) were used to partially fund our acquisition of TravelCenters of America, Inc., or TravelCenters (see Note 7).

In February 2007, we sold 5,750,000 of our common shares at a price of $47.67 per share in a public offering. Net proceeds from these sales of $261,677 (after underwriting and other offering expenses) were used to reduce borrowings under our Acquisition Facility (see Note 7).

In February 2007, we sold 12,700,000 Series C cumulative redeemable preferred shares at a price of $25.00 per share in a public offering. Net proceeds from these sales of $306,833 (after underwriting and other offering expenses) were used to reduce borrowings under our Acquisition Facility (see Note 7). Each of our Series C preferred shares has a distribution rate of $1.75 per annum, payable in equal quarterly amounts, and a liquidation preference of $25.00 per share. The Series C preferred shares are redeemable at our option for $25.00 each plus accrued and unpaid distributions at any time on or after February 15, 2012.

Note 5. Indebtedness

We have a $750,000, interest only, unsecured revolving credit facility. Our credit facility matures in October 2010 and may be extended at our option to October 2011 upon payment of an extension fee. The interest rate on drawings under the credit facility is LIBOR plus a spread (6.29% per annum at September 30, 2007). As of September 30, 2007, we had $137,000 outstanding on our revolving credit facility and $613,000 available to be drawn for acquisitions and general business purposes.

In March 2007, we sold $575,000 of 3.8% convertible senior notes due 2027. Net proceeds from these offerings of $562,525 (after placement and other offering expenses) were used to repay amounts outstanding under the Acquisition Facility (see Note 7) and for general business purposes. The convertible senior notes are convertible if certain conditions are met (including certain changes in control) into cash equal to the principal amount of the notes and, to the extent the market price of our common shares exceeds the initial exchange price of $50.50 per share, subject to adjustment, either cash or our common shares at our option with a value based on such excess amount. Holders of our convertible senior notes may require us to repurchase all or a portion of the notes on March 20, 2012, March 15, 2017, and March 15, 2022, or upon the occurrence of certain change in control events.

8

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

On March 12, 2007, we sold $300,000 of 5.625% senior notes due 2017. Net proceeds from this offering of $296,468 (after placement and other offering expenses) were used to reduce borrowings under our Acquisition Facility (see Note 7).

On September 24, 2007, we sold $350,000 of 6.7% unsecured senior notes due 2018. Net proceeds from this offering of $344,226 (after underwriting and other offering expenses) were used to reduce borrowings under our revolving credit facility.

Note 6. Real Estate Properties

During the nine months ended September 30, 2007, we funded $53,667 of improvements to certain of our properties that are leased to or managed by others, which resulted in a $5,053 increase in our annual minimum returns and rents.

Note 7. Acquisitions

On January 31, 2007, we completed our acquisition of TravelCenters pursuant to the Agreement and Plan of Merger dated as of September 15, 2006, as amended, among TravelCenters, us, one of our former subsidiaries and the stockholders of TravelCenters. Upon completion of the acquisition, we restructured the business of TravelCenters and distributed all of the common shares of our former subsidiary, TravelCenters of America LLC, or TA, to our shareholders in a spin off transaction. The acquisition of TravelCenters, the restructuring of the TravelCenters business and the spin off transaction are collectively referred to herein as the TA Transaction.

As a part of the restructuring of TravelCenters which occurred in connection with the TA Transaction, on January 31, 2007:

•                  TravelCenters became a subsidiary of our subsidiary, TA;

•                  certain real property interests of 146 travel centers that were operated by TravelCenters and certain other assets used in connection with the travel center business with an estimated total value of $1,697,221 were transferred to subsidiaries of ours that were not owned by TA;

•                  TA became the owner of all of the working capital of TravelCenters, including current assets (primarily consisting of cash, receivables and inventory) and current liabilities (primarily consisting of trade payables and accrued liabilities);

•                  we contributed cash of $121,166 to TA so that the sum of its current assets, net of current liabilities, was $200,000;

•                  TA became the owner of one travel center in Ontario, Canada, the operator of two travel centers leased from owners other than us, the manager of one travel center for an owner other than us, the franchisor of 13 travel centers owned and operated by third parties and the owner of certain other assets historically owned and used by TravelCenters;

•                  we entered into a lease of the 146 travel centers we acquired and certain related assets to TA pursuant to the terms described below; and

•                  TA commenced operating the travel center business formerly conducted by TravelCenters.

After this restructuring, on January 31, 2007, we distributed all of the shares of TA to our common shareholders of record on January 26, 2007. The book value of this distribution was $337,250. Shareholders were entitled to receive one TA common share for every ten of our common shares owned on the record date. Fractional shares were issued as necessary. TA’s common shares are listed on the American Stock Exchange under the symbol “TA”. We expensed $2,711 of costs in connection with the spin off transaction.

9

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

The cost of the TravelCenters acquisition was as follows:

We allocated the cost to the fair value of assets and liabilities acquired as follows:

On January 22, 2007, we entered into a new $2,000,000 interim loan agreement, or the Acquisition Facility, with a group of institutional lenders that became effective concurrently with our acquisition of TravelCenters. We funded the acquisition of TravelCenters and the capitalization of TA with a $1,400,000 borrowing under the Acquisition Facility and our then existing cash balances. We subsequently repaid all borrowings under the Acquisition Facility during the first quarter of 2007 with net proceeds from the financing transactions described in Notes 4 and 5. The annual interest rate of the Acquisition Facility was 6.02% during the period it was outstanding.

Our lease with TA is a “triple net” lease, which requires TA to pay all costs incurred in the operation of the leased travel centers, including personnel, utilities, inventories, services to customers, insurance, real estate and personal property taxes and ground lease payments, if any. The annual minimum rent due to us under this agreement is $153,650, $157,150, $161,150, $165,150 and $170,150 in each of the first five years of the agreement and $175,150 for the remaining years thereafter. Starting in 2012, the lease requires TA to pay us certain percentages of increases in gross revenues at the leased travel centers. We have agreed to provide up to $25,000 of funding annually for the first five years of the lease for certain specified improvements to the leased travel centers. This funding is cumulative and may be drawn by TA from us in subsequent years until December 2015. There will not be any adjustment in our minimum rent as we fund these amounts. All improvements funded by us will be owned by us. As of September 30, 2007, we have funded $14,127 under this agreement. TA is required to maintain, at its expense, the leased travel centers in good order and repair, including structural and non-structural components, but may request that we fund amounts in addition to the $125,000, in return for minimum annual rent increases equal to a percentage of the amount we fund. Our lease agreement with TA expires on December 31, 2022.

The following table presents our pro forma results of operations as if the TA Transaction and the related financing transactions were completed on January 1, 2006. This pro forma data is not necessarily indicative of what our actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period.

10

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Income from continuing operations and income from continuing operations available for common shareholders for the nine months ended September 30, 2007, excludes $2,711, or $0.03 per common share, of non recurring costs related to the spin off of TA.

On May 30, 2007, we acquired Petro Stopping Centers Holdings, L.P., or Petro Holdings, pursuant to a purchase agreement dated May 30, 2007, for approximately $630,000. Petro Holdings owns 40 travel centers located in 25 states. In connection with our acquisition of Petro Holdings, we acquired certain Petro Holdings properties which secure debt that was previously issued by Petro Stopping Centers, L.P., or Petro, a former subsidiary of Petro Holdings acquired by TA on May 30, 2007. Upon closing of our acquisition of Petro Holdings, the Petro debt was covenant defeased and funds were escrowed to redeem the Petro debt on February 15, 2008. We agreed to pay certain costs associated with our acquisition of Petro Holdings, including those related to the defeasance and prepayment of the Petro debt and customary closing costs, that totaled approximately $25,000.

The allocation of the Petro Holdings purchase price to the fair value of assets acquired was as follows:

We funded the purchase price and costs by borrowing under our revolving credit facility.

Simultaneous with our acquisition of Petro Holdings, we leased the acquired sites to TA for an initial minimum rent of $62,225 per year. Starting in 2013, the lease requires TA to pay us additional rent calculated as certain percentages of increases in gross revenues at the leased travel centers. This lease agreement with TA expires on June 30, 2024, but TA has two renewal options of 15 years each, exercisable for all, and not less than all, of these 40 leased travel centers.

Note 8. Discontinued Operations

On July 26, 2007, we sold 18 Homestead Studio Suites hotels for gross proceeds of $205,350 and recognized a gain on sale of $95,711. Seventeen of these hotels were sold to an unrelated party. One hotel was purchased by a subsidiary of HRPT Properties Trust, a publicly traded real estate investment trust that is managed by RMR, which is also our manager. We used the net proceeds from these sales, totaling $189,309 after the refund of a $15,960 security deposit and payment of closing costs, to reduce amounts outstanding under our revolving credit facility. We have reclassified our consolidated statement of income for all periods presented to show the results of operations of the hotels which have been sold as discontinued. Following is a summary of the operating results of these discontinued operations:

11

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 9. Segment Information.

We have two reportable business segments: hotels and travel centers. Prior to our acquisition of TravelCenters in January 2007, our only reportable segment was hotels.

12

HOSPITALITY PROPERTIES TRUST

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

Note 10. New Accounting Pronouncement.

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.

We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions but, as a REIT, we generally do not pay tax on our net income distributed as dividends to our shareholders. We are subject to income tax in Canada and Puerto Rico without regard to our REIT status. Our taxable subsidiary does not join in our consolidated REIT tax filings and is itself subject to federal income tax as well as income tax in multiple state and local jurisdictions and Canada. As required, we adopted FIN 48 effective January 1, 2007, and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48.

Tax returns filed for the 2003 through 2006 tax years are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.

13

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview (dollar amounts in thousands, except per share amounts)

The following information should be read in conjunction with our consolidated financial statements and accompanying notes thereto included in this quarterly report and with our Annual Report on Form 10-K for the year ended December 31, 2006.

2007 Developments

On January 31, 2007, we completed our acquisition of TravelCenters of America, Inc., or TravelCenters, for approximately $1,900,000. Upon completion of the acquisition, we restructured the business of TravelCenters and distributed all of the common shares of our former subsidiary, TravelCenters of America LLC, or TA, to our shareholders in a spin off transaction. The acquisition of TravelCenters, the restructuring of the TravelCenters business and the spin off transaction are collectively referred to herein as the TA Transaction. The TA Transaction is further described in Note 7 to our consolidated financial statements, above.

On May 30, 2007, we acquired Petro Stopping Centers Holdings, L.P., or Petro Holdings, pursuant to a purchase agreement dated May 30, 2007, for approximately $630,000. Petro Holdings owns 40 travel centers located in 25 states. In connection with our acquisition of Petro Holdings, we acquired certain Petro Holdings properties which secure debt that was previously issued by Petro Stopping Centers, L.P., or Petro, a former subsidiary of Petro Holdings acquired by TA on May 30, 2007. Upon closing of our acquisition of Petro Holdings, the Petro debt was covenant defeased and funds were escrowed to redeem the Petro debt on February 15, 2008. We agreed to pay certain costs associated with our acquisition of Petro Holdings, including those relating to the defeasance and prepayment of the Petro debt and customary closing costs, that totaled approximately $25,000. We funded the purchase price and costs by borrowing under our revolving credit facility. Simultaneous with the acquisition of Petro Holdings, we leased the acquired sites to TA for an initial minimum rent of $62,225 per year. Starting in 2013, the lease requires TA to pay us additional rent calculated as certain percentages of increases in gross revenues at the leased travel centers. Our lease agreement with TA expires on June 30, 2024, but TA has two renewal options of 15 years each, exercisable for all, and not less than all, of these 40 leased travel centers.

On July 26, 2007, we sold 18 Homestead Studio Suites hotels for $205,350 and recognized a gain on sale of $95,711. Seventeen of these hotels were sold to an unrelated party. One hotel was purchased by a subsidiary of HRPT Properties Trust, a publicly traded real estate investment trust that is managed by Reit Management & Research LLC, or RMR, which is also our manager. We used the net proceeds from these sales, totaling $189,309 after the refund of a $15,960 security deposit and payment of closing costs, to reduce amounts outstanding under our revolving credit facility.

Management Agreements and Leases

At September 30, 2007, our 292 hotels were included in ten combinations of hotels of which 201 are leased to our wholly owned taxable REIT subsidiaries, or TRSs, and managed by independent hotel operating companies and 91 are leased to third parties. Our 185 travel centers were leased under two combination agreements. Our consolidated statement of income includes operating revenues and expenses of our managed hotels and rental income for leased hotels and travel centers. Additional information regarding the terms of our management agreements and leases is included in the table on pages 24 and 25.

14

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations (dollar amounts in thousands, except per share amounts)

Three Months Ended September 30, 2007 versus 2006

The increase in hotel operating revenues in the third quarter of 2007 versus the third quarter of 2006 was caused primarily by the increase in revenues at our managed hotels. Revenues at most of our managed hotels increased from the third quarter of 2006 due to higher average daily room rates, or ADR, and slightly higher occupancy rates. Additional operating statistics of our hotels are included in the table on page 26.

The increase in hotel operating expenses was primarily caused by the increases in the cost of wages and benefits in the third quarter of 2007.

Our share of the operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. Additional returns due to us under our management agreements are recognized as income at year end when all contingencies are met and the income is earned. Deferred additional returns were $7,723 and $3,975 for the three months ended September 30, 2007 and 2006, respectively.

Certain of our managed hotels had net operating results that were $2,174 and $815 less than the minimum returns due to us in the three months ended September 30, 2007 and 2006, respectively. These amounts are reflected in our

15

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

consolidated statement of income as a reduction to hotel operating expense because the minimum returns were funded by the manager of these hotels.

The increase in rental income - hotels is a result of our funding of improvements at certain of our leased hotels in 2006 and 2007 that resulted in increases in the annual minimum rents due to us.

The increase in rental income - travel centers is a result of our acquisition of 146 travel centers and commencement of our lease with TA on January 31, 2007 and our acquisition of an additional 40 travel centers and commencement of our second lease with TA on May 30, 2007. Rental income - travel centers includes $4,299 of adjustments necessary to record rent on the straight line basis for the three months ended September 30, 2007.

FF&E reserve income represents amounts paid by certain of our hotel tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total sales at our hotels. The increase in FF&E reserve income is primarily due to increased levels of hotel sales in 2007 versus 2006 at our leased hotels. We do not report the amounts which are escrowed as FF&E reserves for our managed hotels and for leased hotels where the FF&E reserve is owned by our tenants as FF&E reserve income.

The increase in interest income is due to higher average cash balances and higher average interest rates during 2007.

The increase in interest expense is primarily due to higher average borrowings as a result of our 2006 and 2007 acquisitions, which was partially offset by a lower weighted average interest rate during 2007 than in 2006.

The increase in depreciation and amortization - hotels is due principally to the depreciation and amortization of assets acquired in our 2006 acquisitions and the purchase of depreciable assets with funds from FF&E reserve accounts owned by us in 2006 and 2007.

The increase in depreciation and amortization - travel centers is due to the depreciation and amortization of assets acquired in our 2007 travel center acquisitions described above.

The increase to general and administrative expense is due principally to the impact of additional property investments during 2006 and 2007.

The decrease in income from discontinued operations is the result of the sale of our 18 Homestead Studio Suites hotels in July 2007.

The gain on sale of real estate from discontinued operations in 2007 reflects the sale of our 18 Homestead Studio Suites hotels in July 2007 for $205,350.

The increases in income from continuing operations, net income, net income available for common shareholders, income from continuing operations available for common shareholders and net income available for common shareholders per common share are primarily due to the investment and operating activities discussed above. On a per share basis, the percentage increase in net income available for common shareholders was lower due to our issuance of common shares in 2007 and 2006.

16

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Nine Months Ended September 30, 2007 versus 2006

The increase in hotel operating revenues in 2007 versus the 2006 period was caused primarily by the increase in the number of managed hotels for the full nine month period in 2007 due to our January 2006 acquisition of nine hotels and our April 2006 acquisition of three hotels. In addition, revenues at most of our managed hotels increased from the 2006 period due to higher ADR partially offset by slightly lower occupancies. Additional operating statistics of our hotels are included in the table on page 26.

The increase in hotel operating expenses was caused by the increase in the number of managed hotels for the full nine month period in 2007 resulting from our 2006 acquisitions described above and increases in the cost of wages and benefits in 2007.

Our share of the operating results of our managed hotels in excess of the minimum returns due to us, or additional returns, are generally determined annually. Additional returns due to us under our management agreements are recognized as income at year end when all contingencies are met and the income is earned. Deferred additional returns were $20,516 and $17,318 for the nine months ended September 30, 2007 and 2006, respectively.

Certain of our managed hotels had net operating results that were $7,263 and $815 less than the minimum returns due to us in the nine months ended September 30, 2007 and 2006, respectively. These amounts are reflected in our

17

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

consolidated statement of income as a reduction to hotel operating expenses because the minimum returns were funded by the manager of these hotels.

The increase in rental income - hotels is a result of our funding of improvements at certain of our leased hotels in 2006 and 2007 that resulted in increases in the annual minimum rents due to us.

The increase in rental income - travel centers is a result of our acquisition of 146 travel centers and commencement of our lease with TA on January 31, 2007 and our acquisition of an additional 40 travel centers and commencement of our lease with TA on May 30, 2007. Rental income - travel centers includes $11,494 of adjustments necessary to record rent on the straight line basis for the nine months ended September 30, 2007.

The increase in FF&E reserve income is primarily due to increased levels of sales at our leased hotels in 2007 versus 2006.

The increase in interest income is due to higher average cash balances and higher average interest rates during 2007.

The increase in interest expense is primarily due to higher average borrowings as a result of our 2006 and 2007 acquisitions, which was partially offset by a lower weighted average interest rate during 2007 than in 2006.

The increase in depreciation and amortization - hotels is due principally to the depreciation and amortization of assets acquired in our 2006 acquisitions and the purchase of depreciable assets with funds from FF&E reserve accounts owned by us in 2006 and 2007.

The increase in depreciation and amortization - travel centers is due to the depreciation and amortization of assets acquired in our 2007 travel center acquisitions described above.

The increase to general and administrative expense is due principally to the impact of additional property investments during 2006 and 2007.

In the nine months ended September 30, 2007, we expensed $2,711 of costs in connection with the spin off of TA.

The decrease in income from discontinued operations is the result of the sale of our 18 Homestead Studio Suites hotels in July 2007.

The gain on sale of real estate from discontinued operations in 2007 reflects the sale of our 18 Homestead Studio Suites hotels in July 2007 for $205,350.

The increases in income from continuing operations, net income, net income available for common shareholders, income from continuing operations available for common shareholders and net income available for common shareholders per common share are primarily due to the investment and operating activities discussed above. On a per share basis the percentage increase in net income available for common shareholders was lower due to our issuance and sale of common shares in 2007 and 2006.

Liquidity and Capital Resources (dollar amounts in thousands, except per share amounts)

Our Managers and Tenants