Hersha Hospitality 10-Q 6-30-2006


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2006
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____ to ____
 
COMMISSION FILE NUMBER: 001-14765
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Maryland
 
251811499
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 

 
148 Sheraton Drive, Box A
     
 
New Cumberland, Pennsylvania
 
17070
 
 
(Address of Registrant’s Principal Executive Offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: (717) 770-2405
 
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing requirements for the past 90 days.
 
x Yes   o No
 
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  o
Accelerated filer  x
Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
o Yes   x No
 
As of June 30, 2006, the number of Class A common shares of beneficial interest outstanding was 27,967,214.
 


 


Hersha Hospitality Trust
Table of Contents for Form 10-Q Report

Item No.
   
Page
     
PART I.
2
       
 
Item 1.
2
       
   
2
       
   
4
       
   
6
       
   
8
       
 
Item 2.
36
       
 
Item 3.
46
       
 
Item 4.
48
     
PART II.
49
       
 
Item 1.
49
       
 
Item 1A.
50
       
 
Item 2.
49
       
 
Item 3.
49
       
 
Item 4.
49
       
 
Item 5.
49
       
 
Item 6.
49
 

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.
 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2006 [UNAUDITED] AND DECEMBER 31, 2005
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
(UNAUDITED)
     
   
June 30,
2006
 
December 31, 2005
 
Assets:
         
Investment in Hotel Properties, net of Accumulated Depreciation
 
$
488,195
 
$
317,980
 
Investment in Joint Ventures
   
55,370
   
55,981
 
Development Loan Receivables from Related Parties
   
32,016
   
32,450
 
Cash and Cash Equivalents
   
4,846
   
8,780
 
Escrow Deposits
   
10,345
   
7,329
 
Hotel Accounts Receivable
   
5,512
   
2,211
 
Deferred Costs, net of Accumulated Amortization of $1,169 and $1,437
   
5,256
   
4,131
 
Due from Related Parties
   
3,785
   
2,799
 
Intangible Assets, net of Accumulated Amortization of $536 and $478
   
5,415
   
4,681
 
Other Assets
   
20,273
   
15,606
 
Hotel Assets Held for Sale
   
17,140
   
3,407
 
               
Total Assets
 
$
648,153
 
$
455,355
 
               
Liabilities and Shareholders’ Equity:
             
Line of Credit
 
$
32,034
 
$
-
 
Mortgages and Notes Payable
   
343,109
   
256,146
 
Capital Lease Payable
   
739
   
-
 
Accounts Payable and Accrued Expenses
   
10,559
   
6,969
 
Advance Deposits
   
389
   
130
 
Dividends and Distributions Payable
   
6,623
   
5,151
 
Due to Related Parties
   
4,881
   
4,655
 
Liabilities Related to Hotel Assets Held for Sale
   
10,289
   
375
 
                       
Total Liabilities
 
$
408,623
   
273,426
 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2006 [UNAUDITED] AND DECEMBER 31, 2005
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
(UNAUDITED)
     
   
June 30, 2006
 
December 31, 2005
 
Minority Interests:
         
Common Units
 
$
26,379
 
$
15,147
 
Interest in Consolidated Joint Ventures
   
2,955
   
2,079
 
               
Total Minority Interests
   
29,334
   
17,226
 
               
Shareholder's Equity:
             
Preferred Shares - 8% Series A, $.01 Par Value, 10,000,000 Shares Authorized, 2,400,000 Shares Issued and Outstanding at June 30, 2006 and December 31, 2005 (Aggregate Liquidation Preference $60,000 at June 30, 2006 and December 31, 2005, Respectively)
   
24
   
24
 
               
Common Shares - Class A, $.01 Par Value, 50,000,000 Shares Authorized, 27,824,464 and 20,302,752 Shares Issued and Outstanding at June 30, 2006 and December 31, 2005, Respectively
   
278
   
203
 
               
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, None Issued and Outstanding
   
-
   
-
 
Accumulated Other Comprehensive Income
   
478
   
327
 
Additional Paid-in Capital
   
250,047
   
193,228
 
Distributions in Excess of Net Income
   
(40,631
)
 
(29,079
)
               
Total Shareholder's Equity
   
210,196
   
164,703
 
                 
Total Liabilities and Shareholders’ Equity
 
$
648,153
 
$
455,355
 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED] 
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Revenue:
                 
Hotel Operating Revenues
 
$
38,183
 
$
19,122
 
$
62,084
 
$
30,126
 
                           
Expenses:
                         
Hotel Operating Expenses
   
21,392
   
10,857
   
37,350
   
18,952
 
Land Lease
   
216
   
109
   
378
   
217
 
Real Estate and Personal Property Taxes and Property Insurance
   
1,460
   
837
   
2,947
   
1,611
 
General and Administrative
   
1,812
   
1,135
   
2,976
   
2,113
 
Depreciation and Amortization
   
4,609
   
2,096
   
8,405
   
3,751
 
Total Operating Expenses
   
29,489
   
15,034
   
52,056
   
26,644
 
                           
Operating Income
   
8,694
   
4,088
   
10,028
   
3,482
 
                           
Interest Income
   
322
   
64
   
480
   
101
 
Interest Income - Secured Loans Related Party
   
295
   
911
   
723
   
1,911
 
Other Revenue
   
230
   
159
   
424
   
203
 
Interest Expense
   
5,923
   
2,633
   
11,541
   
4,259
 
Debt Extinguishment
   
908
   
-
   
1,163
   
-
 
Income (loss) before income (loss) from Unconsolidated Joint Venture Investments, Minority Interests and Discontinued Operations
   
2,710
   
2,589
   
(1,049
)
 
1,438
 
                           
Income (loss) from Unconsolidated Joint Venture Investments
   
769
   
279
   
(341
)
 
328
 
                           
Income (Loss) before Minority Interests and Discontinued Operations
   
3,479
   
2,868
   
(1,390
)
 
1,766
 
                           
Income (Loss) allocated to Minority Interests in Continuing Operations
   
690
   
399
   
(325
)
 
157
 
Income (Loss) from Continuing Operations
   
2,789
   
2,469
   
(1,065
)
 
1,609
 
                       
Discontinued Operations (Note 12):
                         
Gain on Disposition of Hotel Properties
   
434
   
1,161
   
434
   
1,161
 
Income (Loss) from Discontinued Operations
   
153
   
125
   
123
   
9
 
Income from Discontinued Operations
   
587
   
1,286
   
557
   
1,170
 
                           
Net Income (Loss)
   
3,376
   
3,755
   
(508
)
 
2,779
 
Preferred Distributions
   
1,200
   
-
   
2,400
   
-
 
                           
Net Income (Loss) applicable to Common Shareholders
 
$
2,176
 
$
3,755
 
$
(2,908
)
$
2,779
 

 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Earnings Per Share:
                 
BASIC
                 
Income (loss) from continuing operations applicable to common shareholders
 
$
0.06
 
$
0.12
 
$
(0.15
)
$
0.08
 
Income from Discontinued Operations
 
$
0.03
 
$
0.07
 
$
0.02
 
$
0.06
 
                           
Net Income (Loss) applicable to common shareholders
 
$
0.09
 
$
0.19
 
$
(0.13
)
$
0.14
 
                           
DILUTED
                         
Income (loss) from continuing operations applicable to common shareholders
 
$
0.06
 
$
0.12
 
$
(0.15
) *
$
0.08
 
Income from Discontinued Operations
 
$
0.03
 
$
0.06
 
$
0.02
  *
$
0.06
 
                           
Net Income (Loss) applicable to common shareholders
 
$
0.09
 
$
0.18
 
$
(0.13
) *
$
0.14
 
                           
Weighted Average Common Shares Outstanding:
                         
Basic
   
25,469,708
   
20,293,169
   
22,903,225
   
20,292,167
 
Diluted
   
29,056,539
   
23,159,013
   
22,903,225
  *  
23,146,372
 

*
Partnership units and stock awards have been omitted from the denominator for the purpose of computing diluted earnings per share for the six months ended June 30, 2006 since the effect of including these amounts in the denominator would be anti -dilutive.

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

   
June 30, 2006
 
June 30, 2005
 
Operating activities:
         
Net (Loss) Income
 
$
(508
)
$
2,779
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
             
Gain on disposition of hotel assets held for sale
   
(497
)
 
(1,323
)
Depreciation
   
8,591
   
4,370
 
Amortization
   
563
   
184
 
Debt Extinguishment
   
1,163
   
-
 
(Loss) income allocated to minority interests
   
(238
)
 
320
 
Equity in loss (income) of unconsolidated joint ventures
   
341
   
(328
)
Distributions from unconsolidated joint ventures
   
1,135
   
-
 
Gain recognized on change in fair value of derivative instrument
   
(65
)
 
(7
)
Stock based compensation expense
   
103
   
-
 
Change in assets and liabilities:
             
(Increase) decrease in:
             
Hotel accounts receivable
   
(3,217
)
 
(1,971
)
Escrow deposits
   
(1,326
)
 
(3,190
)
Other assets
   
870
   
(2,019
)
Due from related party
   
(986
)
 
(455
)
Increase (decrease) in:
             
Advance deposits
   
259
   
164
 
Due to related party
   
178
   
688
 
Accounts payable and accrued expenses
   
3,695
   
6,290
 
Net cash provided by operating activities
   
10,061
   
5,502
 
               
Investing activities:
             
Purchase of hotel property assets
   
(144,816
)
 
(135,448
)
Capital expenditures
   
(5,124
)
 
(1,222
)
Proceeds from disposition of hotel assets held for sale
   
3,665
   
5,570
 
Deposits on hotel acquisitions
   
(15,207
)
 
(6,700
)
Purchase of franchise fees
   
(48
)
 
(347
)
Investment in common stock of Trust entities
   
-
   
(1,548
)
Investments in notes receivable
   
-
   
(442
)
Repayment of notes receivable
   
1,843
   
-
 
Investment in development loans to related parties
   
(33,116
)
 
(17,032
)
Repayment of development loans to related parties
   
33,550
   
-
 
Distributions from unconsolidated joint venture
   
3,153
   
392
 
Investments in and advances to unconsolidated joint ventures
   
(4,018
)
 
-
 
Net cash used in investing activities
   
(160,118
)
 
(156,777
)

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

   
June 30, 2006
 
June 30, 2005
 
Financing activities:
         
Proceeds from borrowings under line of credit
   
115,702
   
97,825
 
Repayment of borrowings under line of credit
   
(83,668
)
 
(96,907
)
Principal repayment of mortgages and notes payable
   
(57,796
)
 
(1,881
)
Proceeds from mortgages and notes payable
   
119,933
   
150,191
 
Proceeds from settlement of interest rate derivative
   
79
   
-
 
Cash paid for deferred financing costs
   
(455
)
 
(2,292
)
Proceeds from issuance of common stock
   
63,766
   
-
 
Stock issuance costs
   
(413
)
 
-
 
Distributions to consolidated joint venture minority interest
   
(150
)
 
(73
)
Contributions from consolidated joint venture minority interest
   
-
   
198
 
Dividends paid on common shares
   
(7,336
)
 
(7,319
)
Dividends paid on preferred shares
   
(2,400
)
 
-
 
Distributions paid on common partnership units
   
(1,139
)
 
(1,023
)
Net cash provided by financing activities
   
146,123
   
138,719
 
               
Net decrease in Cash and Cash Equivalents
   
(3,934
)
 
(12,556
)
Cash and Cash Equivalents - beginning of period
   
8,780
   
20,614
 
               
Cash and Cash Equivalents - end of period
 
$
4,846
 
$
8,058
 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Hersha Hospitality Trust (“we” or the “Company”) was formed in May 1998 as a self-administered, Maryland real estate investment trust (“REIT”) for Federal income tax purposes.
 
The Company owns a controlling general partnership interest in Hersha Hospitality Limited Partnership (the “Partnership”), which owns a 99% limited partnership interest in various subsidiary partnerships. Hersha Hospitality, LLC (“HHLLC”), a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships and the Partnership is the sole member of HHLLC.
 
The Partnership formed a wholly owned taxable REIT subsidiary, 44 New England Management Company (“44 New England” or “TRS Lessee”), to lease certain of the Company’s hotels.
 
As of June 30, 2006, the Company, through the Partnership and subsidiary partnerships, owned forty limited and full service hotels. All of the owned hotel facilities are leased to the Company’s taxable REIT subsidiary (“TRS”), 44 New England.
 
In addition to the wholly owned hotel properties, as of June 30, 2006, the Company owned joint venture interests in nineteen properties. The properties owned by the joint ventures are leased to a TRS owned by the joint venture or to an entity owned by the joint venture partners and 44 New England. The following table lists the properties owned by these joint ventures:
 
Joint Venture
 
Ownership
 
Property
 
Location
 
Lessee
                 
Unconsolidated Joint Ventures
               
Inn America Hospitality at Ewing, LLC
 
50.0%
 
Courtyard
 
Ewing/Princeton, NJ
 
Hersha Inn America TRS Inc.
HT CNL Metro Hotels, LP
 
33.3%
 
Hampton Inn
 
Chelsea/Manhattan, NY
 
Hersha/CNL TRS Inc
PRA Glastonbury, LLC
 
40.0%
 
Hilton Garden Inn
 
Glastonbury, CT
 
Hersha PRA TRS, Inc
PRA Suites at Glastonbury, LLC
 
40.0%
 
Homewood Suites
 
Glastonbury, CT
 
Hersha PRA LLC
Mystic Partners, LLC
 
66.7%
 
Marriott
 
Mystic, CT
 
Mystic Partners Leaseco, LLC
 
 
8.8%
 
Hilton
 
Hartford, CT
 
Mystic Partners Leaseco, LLC
 
 
66.7%
 
Courtyard
 
Norwich, CT
 
Mystic Partners Leaseco, LLC
 
 
66.7%
 
Courtyard
 
Warwick, RI
 
Mystic Partners Leaseco, LLC
 
 
66.7%
 
Residence Inn
 
Danbury, CT
 
Mystic Partners Leaseco, LLC
 
 
66.7%
 
Residence Inn
 
Mystic, CT
 
Mystic Partners Leaseco, LLC
 
 
44.7%
 
Residence Inn
 
Southington, CT
 
Mystic Partners Leaseco, LLC
 
 
66.7%
 
Springhill Suites
 
Waterford, CT
 
Mystic Partners Leaseco, LLC
 
 
15.0%
 
Marriott
 
Hartford, CT
 
Mystic Partners Leaseco, LLC
Hiren Boston, LLC
 
50.0%
 
Courtyard
 
South Boston, MA
 
South Bay Boston, LLC
SB Partners, LLC
 
50.0%
 
Holiday Inn Express
 
South Boston, MA
 
South Bay Sandeep, LLC
                 
Consolidated Joint Ventures
               
Logan Hospitality Associates, LLC
 
55.0%
 
Four Points - Sheraton
 
Revere/Boston, MA
 
Revere Hotel Group, LLC
LTD Associates One, LLC
 
75.0%
 
Springhill Suites
 
Williamsburg, VA
 
HT LTD Williamsburg One LLC
LTD Associates Two, LLC
 
75.0%
 
Residence Inn
 
Williamsburg, VA
 
HT LTD Williamsburg Two LLC
Affordable Hospitality Associates, LP
 
80.0%
 
Hampton Inn
 
Philadelphia, PA
 
Philly One TRS, LLC
 
Hersha Inn America TRS Inc; Hersha/CNL TRS Inc.; Hersha PRA TRS, Inc; South Bay Sandeep, LLC; and Revere Hotel Group, LLC, are each a TRS wholly-owned by their respective joint ventures. Mystic Partners, LLC owns an interest in nine hotel properties. Our interest in Mystic Partners, LLC is relative to our interest in each of the nine properties owned by the joint venture as defined in the joint venture’s governing documents. Each of the nine properties owned by Mystic Partners, LLC is leased to a separate entity that is consolidated in Mystic Partners Leaseco, LLC which is owned by 44 New England and our joint venture partner in Mystic Partners, LLC. Hersha PRA LLC, South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC, Philly One TRS, LLC, lease properties from each respective joint venture and are owned by 44 New England and our joint venture partner in each venture.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
44 New England and the joint venture TRS lessees lease the hotel properties pursuant to separate percentage lease agreements (the “Percentage Leases”) that provide for percentage rents based on the revenues of the hotels. Hersha Hospitality Management, LP (“HHMLP”) serves as the manager for all of the wholly owned assets and joint venture assets, except for the properties owned by Mystic Partners, LLC; Hiren Boston, LLC; SB Partners, LLC; LTD Associates One, LLC; and LTD Associates Two, LLC. These properties are managed by parties related to our partners in those joint ventures. HHMLP is owned in part by four of the Company’s executive officers, two of its trustees and other third party investors.
 
Principles of Consolidation and Presentation
 
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned TRS Lessee. All significant inter-company amounts have been eliminated. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or consolidated pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2005. In management’s opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of the Company and the consolidated results of its operations and its cash flows, are included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
 
Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company as general partner of the Partnership. Properties owned in joint ventures are also consolidated if the determination is made that we are the primary beneficiary in a variable interest entity or we maintain control of the asset through our voting interest in the entity. Control could also be demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the limited partners and the inability of the limited partners to replace the general partner.
 
We follow the provisions of Financial Accounting Standards Board FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (VIE’s), an interpretation of Accounting Research Bulletin No. 51 (ARB No. 51),” as revised.(“FIN 46R”). FIN 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in any variable interest entity (“VIE”) through means other than voting rights, and accordingly, should include the VIE in its consolidated financial statements.
 
In July of 2005, the Emerging Issues Task Force (EITF) agreed on a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate it. EITF Issue 04-5, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” (EITF 04-5), amends the guidance in AICPA Statement of Position No. 78-9, “Accounting for Investments in Real Estate Ventures” (SOP 78-9) and states that the presumption of general-partner control would be overcome only when the limited partners have either of two types of rights. The first type—referred to as “kick-out rights”—is the right to dissolve or liquidate the partnership or otherwise remove the general partner “without cause.” The second type—referred to as “participating rights”—is the right to effectively participate in significant decisions made in the ordinary course of the partnership’s business. The kick-out rights and the participating rights must be substantive in order to overcome the presumption of general-partner control. EITF 04-5’s guidance is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. The guidance will be effective for existing limited-partnership agreements no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. As of January 1, 2006, the Company has adopted EITF 04-5 for all partnerships. The adoption of EITF 04-5 did not have a material effect on its consolidated financial statements.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

Our investments and contractual relationships with the following entities have been evaluated to determine whether they meet the guidelines of consolidation in accordance with FIN 46: HHMLP; Logan Hospitality Associates, LLC; HT CNL Metro Hotels, LP; PRA Glastonbury, LLC; PRA Suites at Glastonbury, LLC; Hersha PRA LLC; Inn America Hospitality at Ewing, LLC; Mystic Partners, LLC; Mystic Partners Leaseco, LLC; Hiren Boston, LLC; South Bay Boston, LLC, SB Partners, LLC; LTD Associates One, LLC; HT LTD Williamsburg LLC; LTD Associates Two, LLC; HT LTD Williamsburg Two LLC; Hersha Statutory Trust I; Hersha Statutory Trust II; Affordable Hospitality Associates, LP; Philly One TRS, LLC; and Risingsam Hospitality, LLC, Risingsam Union Square, LLC, and Brisam Management, LLC.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Our examination consisted of reviewing the sufficiency of equity at risk, controlling financial interests, voting rights, and the obligation to absorb expected losses and expected gains, including residual returns. Based on our examination, each of the following entities were determined to be VIE’s: Mystic Partners, LLC; Mystic Partners Leaseco, LLC; Hersha PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC; Philly One TRS, LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II. Mystic Partners, LLC is a VIE entity, however because we are not the primary beneficiary it is not consolidated by the Company. Also, Mystic Partners Leaseco, LLC; Hersha PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC; and Philly One TRS, LLC lease hotel properties from our joint venture interests and are variable interest entities. These entities are consolidated by the lessors, the primary beneficiaries of each entity. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs but HHLP is not the primary beneficiary in these entities. The accounts of Hersha Statutory Trust I and Hersha Statutory Trust II are not consolidated with and into HHLP.
 
We have consolidated the operations of the Logan Hospitality Associates, LLC; LTD Associates One, LLC; LTD Associates Two, LLC; and Affordable Hospitality Associates, LP joint ventures because each entity is a voting interest entity and the Company owns a majority voting interest in the venture.
 
Our investments in HT/CNL Metro Hotels, LP; PRA Glastonbury, LLC; PRA Suites at Glastonbury, LLC; Inn America Hospitality at Ewing, LLC; Hiren Boston, LLC; and SB Partners, LLC represent non-controlling ownership interests in the ventures. All of these entities are voting interest entities. These investments are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for our share of equity in income (loss), which is allocated in accordance with the provisions of the applicable partnership or joint venture agreements, and subsequent contributions or distributions in these entities.
 
We hold an investment in development loan receivables with Risingsam Union Square, LLC, Risingsam Hospitality, LLC, and Brisam Management, LLC. We have determined that each borrower has sufficient equity at risk, a controlling financial interest and an obligation to absorb expected losses and expected gains, including residual returns of the entity. These entities are voting interest entities and because we have no voting interest they are not consolidated.
 
We will continue to evaluate each of our investments and contractual relationships to determine if consolidation is required based upon the provisions of FIN 46.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Investment in Hotel Properties
 
Investment in hotel properties is stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method.
 
The estimated lives used to depreciate the hotel properties are as follows:
 
Building and Improvements
15 to 40 Years
 
 
Furniture, Fixtures and Equipment
5 to 7 Years
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition
 
We directly recognize revenue and expense for all consolidated hotels as “Hotel Operating Revenue” and “Hotel Operating Expense” when earned and incurred. Included in hotel operating revenues is primarily room revenues and revenue from other hotel operating departments. These revenues are recorded net of any sales or occupancy taxes collected from our guests. All revenues are recorded on an accrual basis, as earned. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred.
 
Stock Compensation
 
We apply Statement of Financial Accounting Standards No. 123R, “Share-Based Payments” (SFAS 123R) where by we measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award.
 
Minority Interest
 
Minority Interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income (Loss) is allocated to minority interest in accordance with the weighted average percentage ownership of the Partnership during the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted average percentage ownership of the Partnership during the period. Our ownership interest in the Partnership as of June 30, 2006 and 2005 was 88.9% and 87.7%, respectively.
 
We also maintain minority interests for the equity interest owned by third parties in Logan Hospitality Associates, LLC; LTD Associates One, LLC; LTD Associates Two, LLC; and Affordable Hospitality, LP. Third parties own a 45% interest in Logan Hospitality Associates, LLC; a 25% interest in each of LTD Associates One LLC and LTD Associates Two, LLC; and a 20% interest in Affordable Hospitality Associates, LP. We allocate the income (loss) of these joint ventures to the minority interest in consolidated joint venture account based upon the ownership of the entities, preferences in distributions of cash available and the terms of each ventures liquidation.
 
Shareholder’s Equity
 
On August 5, 2005, we completed a public offering of 2,400,000 of 8.00% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share. Net proceeds of the offering, less expenses and underwriters commissions, were approximately $57,750. Proceeds from the offering were used to finance the acquisition of the Company’s interests in Mystic Partners, LLC and SB Partners, LLC. The remaining net proceeds have been principally allocated to fund secured development loans and for general corporate purposes.
 
On April 28, 2006, we completed a public offering of 6,520,000 common shares at $9.00 per share. On May 9, 2006, the underwriter exercised its over-allotment option with respect to that offering, and we issued an additional 977,500 common shares at $9.00 per share. Proceeds to us, net of underwriting discounts and commissions and expenses, were approximately $63,400. Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $30,000 was used to repay indebtedness and approximately $19,500 was used to fund property acquisitions.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Impairment of Long-Lived Assets
 
We review the carrying value of each hotel property in accordance with SFAS No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell.
 
Income Taxes
 
The Company qualifies as a REIT under applicable provisions of the Internal Revenue Code, as amended, and intends to continue to qualify as a REIT. In general, under such provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income will not be subject to Federal income tax to the extent of the income which it distributes. Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation of hotel properties for Federal income tax purposes.
 
Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS Lessee and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors.
 
Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, the Company is permitted to lease hotels to a wholly owned taxable REIT subsidiary (“TRS”) and may continue to qualify as a REIT provided the TRS enters into management agreements with an “eligible independent contractor” who will manage the hotels leased by the TRS. The Company formed the TRS Lessee in 2003. The TRS Lessee currently leases 40 properties from the Partnership. The TRS Lessee is subject to taxation as a C-Corporation. The TRS Lessee had operating income for financial reporting purposes for the period ended June 30, 2006, however no income taxes are recorded in the Consolidated Statement of Operations because net operating loss carryforwards are sufficient to offset tax liabilities incurred as a result of this operating income.
 
Although the TRS Lessee is expected to operate at a profit for Federal income tax purposes in future periods, the value of the deferred tax asset is not able to be quantified with certainty. Therefore, no deferred tax assets have been recorded as we have not concluded that it is more likely than not that these deferred tax assets will be realizable.
 
Reclassification
 
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES

Investment in Hotel Properties consist of the following at June 30, 2006 and December 31, 2005:
 
   
June 30, 2006
 
December 31, 2005
 
           
Land
 
$
79,990
 
$
32,430
 
Buildings and Improvements
   
395,356
   
283,791
 
Furniture, Fixtures and Equipment
   
61,111
   
43,528
 
Construction in Progress
   
1,553
   
-
 
     
538,010
   
359,749
 
               
Less Accumulated Depreciation
   
(49,815
)
 
(41,769
)
               
Total Investment in Hotel Properties
 
$
488,195
 
$
317,980
 
 
2006 Transactions
 
The following acquisitions were made by HHLP, our operating partnership.
 
New Jersey and Pennsylvania Portfolio. On January 3, 2006, we acquired the 118-room Fairfield Inn & Suites in Mt. Laurel, New Jersey, the 103-room Fairfield Inn & Suites in Bethlehem, New Jersey, and the 118-room Langhorne Courtyard in Langhorne, Pennsylvania in one transaction, for a total purchase price of approximately $41,261 which included $250 in deposits included in the balance sheet on December 31, 2005. The total purchase price is subject to a post closing adjustment on June 30, 2007, which may increase the purchase price by an amount of up to $2,500.
 
Courtyard, Scranton, Pennsylvania. On February 1, 2006, we acquired the 120-room Courtyard in Scranton, Pennsylvania for approximately $8,817 in cash.
 
Residence Inn, Tyson’s Corner, Virginia. On February 2, 2006, we acquired the 96-room Residence Inn in Tyson’s Corner, Virginia for approximately $20,130 which included the assumption of $9,596 in debt.
 
Hampton Inn, Philadelphia, Pennsylvania. On February 15, 2006, we acquired an 80% interest in Affordable Hospitality Associates, LP, the owner of the land, improvements and certain personal property of the 250-room Hampton Inn (Center City) in Philadelphia for approximately $25,067 which included $3,000 in deposits included in the balance sheet on December 31, 2005. Our ownership interest entitles us to a 9.0% participating preferred return on our capital contribution.
 
Hilton Garden Inn, JFK Airport, New York. On February 16, 2006, we acquired 100% of the outstanding ownership interests in Metro JFK Associates, LLC, the owner of a leasehold interest in the land, improvements and certain personal property of the Hilton Garden Inn - JFK Airport, located in Jamaica, New York, for approximately $29,165. The purchase price includes the assumption of $13,000 in debt, $6,000 in newly issued units of our operating partnership, $5,000 in deposits that were on the balance sheet as of December 31, 2005, and cash.
 
KW Portfolio. On April 25, 2006 we acquired the 100-room Hawthorn Inn & Suites in Franklin, Massachusetts for $12,034. On May 1, 2006, we acquired the 96-room Residence Inn and the 84-room Comfort Inn for $14,811 and $4,838, respectively.
 
Holiday Inn Express, Cambridge, Massachusetts. On May 3, 2006, we acquired the 112-room Holiday Inn Express, Cambridge, Massachusetts for approximately $12,227.
 
Land- 39th and 8th Avenue. On June 28, 2006, we purchased land at 39th and 8th Avenue, New York City, for $21,774 plus closing costs and leased the land to Metro 39th Street Associates, LLC, a related party.
 
In addition, in June, the Company signed definitive agreements to purchase the 161-room Hampton Inn in Farmingville, New York and the seven story 133-room Holiday Inn Express in Hauppauge, New York for a total of $39.5 million.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (Continued)

The purchase price, including transaction costs, and the allocation of purchase price to land; building and improvements; furniture, fixtures and equipment; and franchise fees and loan costs is as follows:

Hotel
 
Location
 
Acquisition Date
 
Land
 
Buildings and Improvements
 
Furniture Fixtures and Equipment
 
Franchise Fees and Loan Costs
 
Leasehold Intangible
 
Total Purchase Price
 
Assumed Debt
 
NJ and PA Portfolio
         
1/3/2006
 
$
6,207
 
$
30,951
 
$
3,978
 
$
125
   
-
 
$
41,261
   
-
 
Courtyard by Marriott
   
Scranton, PA
   
2/1/2006
   
761
   
7,168
   
831
   
57
   
-
 
$
8,817
   
-
 
Residence Inn
   
Tyson’s Corner, VA
   
2/2/2006
   
11,233
   
7,306
   
1,390
   
201
   
-
 
$
20,130
   
9,596
 
Hilton Garden Inn
   
JFK Airport, NY
   
2/16/2006
   
N/A
   
25,001
   
3,621
   
317
   
226
 
$
29,165
   
13,000
 
KW Portfolio
   
Massachusetts
   
4/25/2006, 5/1/2006
   
4,708
   
22,863
   
3,919
   
193
   
-
 
$
31,683
   
9,020
 
Holiday Inn Express
   
Cambridge, Massachusetts
   
5/3/2006
   
1,956
   
9,827
   
444
   
-
   
-
 
$
12,227
   
-
 
8th Avenue
   
New York
   
6/28/2006
   
21,774
   
-
   
-
   
-
   
-
 
$
21,774
   
-
 
Total Wholly Owned Acquisitions
     
$
46,639
 
$
103,116
 
$
14,184
 
$
893
 
$
226
 
$
165,057
 
$
31,616
 
     
 
                                                 
Hampton Inn (Affordable Hospitality)
   
Philadelphia, PA
   
2/15/2006
 
$
2,928
 
$
21,062
 
$
3,029
 
$
117
 
$
-
 
$
27,136
 
$
873
 
Total Consolidated Joint Venture Acquisitions
$
2,928
 
$
21,062
 
$
3,029
 
$
117
 
$
-
 
$
27,136
 
$
873
 
     
 
                                                 
Total 2006 Acquisitions
     
$
49,567
 
$
124,178
 
$
17,213
 
$
1,010
 
$
226
 
$
192,193
 
$
32,489
 

All of the newly acquired wholly owned hotels are leased to the TRS Lessee and managed by HHMLP. The Hampton Inn, Philadelphia, Pennsylvania is leased to an entity that is owned by the TRS Lessee and our joint venture partner.
 
Included in the acquisition of the Hilton Garden Inn at the JFK Airport, New York, was a land lease for the underlying land with a remaining term of approximately 93 years. The remaining lease payments were determined to be below market value and as a result purchase price was allocated to an intangible asset with a value of $226. Included in the acquisition of the Courtyard by Marriott in Brookline, Massachusettes in 2005, was a prepaid land lease for the underlying land with a remaining term of approximately 90 years. This prepaid land lease is classified as an intangible asset with a value of $3,570. Both lease intangibles are recorded in other assets on the consolidated balance sheet and are being amortized over the remaining life of the leases.
 
The interest rate on the fixed rate debt assumed in the acquisitions of the KW Portfolio is 5.67% and was below the market rate of interest on the date of the acquisition. As a result, a discount of $354 was recorded and reduces the principal balance recorded in mortgages and notes payable. The discount is being amortized over the remaining life of the debt and is recorded as interest expense. Interest rates on debt assumed in the acquisition of Residence Inn, Tyson’s Corner, Virginia and Hilton Garden Inn, JFK Airport, New York were at market rates.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (Continued)
 
Subsequent to June 30, 2006, we closed on the acquisition of the following property or entered into a contract for the following transaction:
 
Residence Inn, Norwood, Massachusetts. On July 27, 2006, we purchased the newly constructed 96-room Residence Inn in Norwood, Massachusetts for approximately $14,925. The purchase price includes the assumption of $8,000 in debt, $3,940 in newly issued units of our operating partnership, and $2,985 in cash.
 
Holiday Inn Conference Center, New Cumberland, Pennsylvania. We terminated our lease with 44 New England for the Holiday Inn Conference Center in New Cumberland, Pennyslvania. Effective July 1, 2006, we now lease the hotel to a third party, who has committed to purchase the property at the end of the five-year lease term.
 
Land - 41st Street, New York. On July 28, 2006, we purchased land at 440 West 41st Street, New York City, for $21,500 plus closing costs and leased the land to Metro Forty First Street, LLC, a related party.

The following condensed pro forma financial is presented as if the acquisitions of the KW Portfolio; Holiday Inn Express, Cambridge; NY and PA Portfolio; Courtyard by Marriott, Scranton, Pennsylvania; Residence Inn, Tyson’s Corner, Virginia; Hampton Inn, Philadelphia, Pennsylvania; Fairfield Inn, Laurel, Maryland; McIntosh Portfolio; Courtyard by Marriott, Brookline, Massachussettes; Springhill Suites, Williamsburg, Virginia; and Residence Inn, Williamsburg, Virginia had been consummated as of January 1, 2005. All of the other acquisitions listed above were either purchased without any operating history or did not have a full year's operating history in 2005. The condensed pro forma information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated at the beginning of the respective periods presented, nor does it purport to represent the results of operations for future periods.
           
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Pro Forma Total Revenues
 
$
39,215
 
$
34,903
 
$
68,013
 
$
59,184
 
Pro Forma Income (Loss) from Continuing Operations
 
$
2,824
 
$
4,628
 
$
(311
)
$
2,989
 
Pro Forma Income (Loss) from Continuing Operations per Common Share-Basic
 
$
0.11
 
$
0.23
 
$
(0.01
)
$
0.15
 
Pro Forma Income (Loss) from Continuing Operations per Common Share-Diluted
 
$
0.11
 
$
0.23
 
$
(0.01
)
$
0.15
 
                           
Weighted Average Common Shares Outstanding
                         
Basic
   
25,469,708
   
20,293,169
   
22,903,225
   
20,292,167
 
Diluted
   
29,056,539
   
23,159,013
   
22,903,225
   
23,146,372
 


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
On August 29, 2003, HT/CNL Metro Hotels, LP purchased the Hampton Inn, (Manhattan) Chelsea, NY. We own a one-third equity interest in this joint venture partnership while CNL Hospitality Partners LP owns the remaining equity interests.
 
On November 13, 2003, we purchased a 40% joint venture interest in PRA Glastonbury, LLC. The only asset owned by PRA Glastonbury, LLC is the Hilton Garden Inn, Glastonbury, CT.
 
On July 1, 2004, we purchased a 50% joint venture interest in Inn America Hospitality at Ewing, LLC. The only asset owned by this entity is the Courtyard by Marriott, Ewing-Hopewell, NJ.
 
On July 1, 2005, we acquired a 49.9% interest in Hiren Boston. LLC (“Hiren”), the owner of a 164 room Courtyard by Marriott in South Boston, Massachusetts, for approximately $5,031, including settlement costs of approximately $331. This hotel is leased to South Bay Boston, LLC, a joint venture owned by 44 New England and our joint venture partner, and managed by an affiliate of our joint venture partner. Our joint venture partner and the manager of the property are unaffiliated with the Company. The Hiren joint venture agreement provides for a 10% preferred return during the first two years of the venture based on our equity interest in Hiren. Cash distributions will be made from cash available for distribution, first, to us to provide a 10% annual non-compounded return on our capital contributions and then to our joint venture partner to provide a 10% annual non-compounded return of their contributions. The 10% returns are not cumulative. Any remaining cash available for distribution will be distributed 50% to us. Subsequent to this initial two year period, cash distributions will be made 50% to us and 50% to our joint venture partners in Hiren. In accordance with AICPA Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” (SOP 78-9), Hiren will allocate income to HHLP and our joint venture partner consistent with the allocation of cash distributions and liquidating distributions.
 
On October 7, 2005, we acquired a 49.9% interest in SB Partners, LLC (“SB Partners”), the owner of a 118 room Holiday Inn Express in South Boston, Massachusetts, for approximately $2,250. This hotel will be leased to South Bay Sandeep, LLC, a TRS wholly owned by SB Partners, and managed by an affiliate of our joint venture partner. Our joint venture partner and the manager of the property are owned by certain members that have an interest in Hiren and are unaffiliated with the Company. The SB Partners joint venture agreement provides for a 10% preferred return during the first two years of the venture based on our equity interest in SB Partners. Cash distributions will be made from cash available for distribution, first, to us to provide a 10% annual non-compounded return on our capital contributions and then to our joint venture partner to provide a 10% annual non-compounded return of their contributions. The 10% returns are not cumulative. Any remaining cash available for distribution will be distributed 50% to us. Subsequent to this initial two year period, cash distributions will be made 50% to us and 50% to our joint venture partners in SB Partners. In accordance with SOP 78-9, SB Partners allocates income to us and our joint venture partner consistent with the allocation of cash distributions and liquidating distributions.
 
In June 2005, we entered into a joint venture with Waterford Hospitality and Mystic Hotel Investors, LLC (“MHI,” and together with Waterford, the “MHI Parties”), pursuant to which the parties agreed to establish Mystic Partners, LLC (“Mystic”). The MHI Parties contributed to Mystic Partners its membership interests in a portfolio of nine entities that own nine Marriott- or Hilton-branded hotels in Connecticut and Rhode Island. Aggregate fair value of the contributed properties was approximately $250,000. We contributed approximately $40,000 in cash to Mystic Partners in exchange for a 66.7% preferred equity interest in the seven stabilized hotel properties in the portfolio and a 50% preferred equity interest in the two newly-developed hotel properties in the portfolio, subject to minority interest participations in certain hotels.
 
On February 8, 2006, Mystic Partners closed on the acquisition of the 409 room Hartford Marriott in Hartford, Connecticut, the final hotel in the portfolio to be acquired by Mystic. The acquisition included the hotel, improvements, certain personal property and a pre-paid airspace sublease relating to airspace comprising a portion of the Hartford Convention Center. We contributed approximately $6,700 to Mystic Partners, and the Waterford Parties contributed its Membership Interests in the Owner of the Hartford Marriott. In conjunction with this closing, the Mystic Partners agreed to adjust each party’s equity ownership interest in the two development properties, the Hartford Hilton and the Hartford Marriott, as follows:
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (Continued)
 
   
Hersha
 
MHI Parties
 
Hartford Hilton
   
8.8
%
 
79.2
%
Hartford Marriott
   
15.0
%
 
81.0
%
 
Both the Hartford Hilton and the Hartford Marriott properties maintain minority interest ownership from unrelated third party investors for approximately 12.0% and 4.0%, respectively.
 
Additionally, the amendment provides us with the option to purchase up to a 50.0% equity ownership interest in Mystic Partners’ equity interest in the Hartford Hilton and the Hartford Marriott, respectively, at a price determined in accordance with the Amendment. Also, the Company entered into an agreement whereby we and MHI jointly and severally guarantee the performance of the terms of a loan to Adriaen’s Landing Hotel, LLC, owner of the Hartford Marriott, in the amount of $50,000, and 315 Trumbull Street Associates, LLC, in the amount of $27,000 if at any time during the term of the note and during such time as the net worth of Mystic falls below the amount of the guarantee.
 
The Mystic Partners joint venture agreement provides for an 8.5% preferred return based on our preferred equity interest in the stabilized and newly-developed hotel properties. Cash distributions will be made from cash available for distribution, first, to us to provide an 8.5% annual non-compounded return on our unreturned capital contributions and then to the Waterford Parties to provide an 8.5% annual non-compounded return of their unreturned contributions. The 8.5% returns are not cumulative. Any remaining cash available for distribution will be distributed to us 56.7%, with respect to the net cash flow from the stabilized properties, 10.5% with respect to the net cash flow from the Hartford Marriott, and 7.0% with respect to the Hartford Hilton. In accordance with SOP 78-9, Mystic Partners will allocate income to us and the Waterford Parties consistent with the allocation of cash distributions and liquidating distributions.
 
The nine hotels acquired by Mystic through June 30, 2006 are:
 
Hotel Name
 
Location
 
Date Acquired
 
Owner
 
Hersha Ownership
 
Number of Rooms
Mystic Marriott Hotel & Spa
 
Mystic, CT
 
August 9, 2005
 
Exit 88 Hotel, LLC
 
66.7%
 
285
Danbury Residence Inn
 
Danbury, CT
 
August 9, 2005
 
Danbury Suites, LLC
 
66.7%
 
78
Southington Residence Inn
 
Southington, CT
 
August 9, 2005
 
Southington Suites, LLC and 790 West Street, LLC
 
44.7%
 
94
Norwich Courtyard by Marriott and Rosemont Suites
 
Norwich, CT
 
August 9, 2005
 
Norwich Hotel, LLC
 
66.7%
 
144
Warwick Courtyard by Marriott
 
Warwick, RI
 
August 9, 2005
 
Warwick Lodgings, LLC
 
66.7%
 
92
Waterford SpringHill Suites
 
Waterford, CT
 
August 9, 2005
 
Waterford Suites, LLC
 
66.7%
 
80
Mystic Residence Inn
 
Mystic, CT
 
September 15, 2005
 
Whitehall Mansion Partners, LLC
 
66.7%
 
133
Hartford Hilton
 
Hartford, CT
 
October 6, 2005
 
315 Trumbull Street, LLC
 
8.8%
 
393
Marriott Downtown
 
Hartford, CT
 
February 8, 2006
 
Adriaen’s Landing Hotel, LLC
 
15.0%
 
409


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
Each of the Mystic Partners hotel properties, except the Hartford Hilton, is under an Asset Management Agreement with 44 New England to provide asset management services. Fees for these services are paid monthly to 44 New England and recognized as income in the amount 1% of operating revenues, except for the Hartford Marriott which is 0.25% of operating revenues. Each property owned by the joint venture is managed by Waterford Hotel Group, Inc., an affiliate of MHI Parties. The property manager will receive a base fee of 3% or 4% of gross revenues of the property, depending on the property, and an incentive fee of 10% of net operating income less debt service after each of HHLP and the MHI Parties receive a 12.0% annual non-compounded return on its unreturned capital contributions.
 
On June 15, 2006, we acquired a 40.0% interest in PRA Suites at Glastonbury, LLC (“PRA Suites”), the owner of a 136 room Homewood Suites in Glastonbury, Connecticut, for approximately $2,480. This hotel will be leased to Hersha PRA LLC, an entity owned by 44 New England and our joint venture partner. The hotel will be managed HHMLP. Our joint venture partner include members that have an interest in PRA Glastonbury, LLC and are unaffiliated with the Company. The PRA Suites joint venture agreement provides for a 10% preferred return based on the equity interest in PRA Suites. Cash distributions will be made from cash available for distribution, first, to us to provide a 10% annual non-compounded return on our capital contributions and then to our joint venture partner to provide a 10% annual non-compounded return of their contributions. The 10% returns are not cumulative. Any remaining cash available for distribution will be distributed 40% to us. In accordance with SOP 78-9, SB Partners allocates income to us and our joint venture partner consistent with the allocation of cash distributions and liquidating distributions.
 
We account for our investment in the above mentioned unconsolidated joint ventures using the equity method of accounting.
 
As of June 30, 2006 and December 31, 2005 our investment in unconsolidated joint ventures consists of the following:
 
   
Percent Owned
 
June 30, 2006
 
December 31, 2005
 
               
HT/CNL Metro Hotels, LP
   
33.3
%
$
4,242
 
$
4,487
 
HT/PRA Glastonbury, LLC
   
40.0
%
 
565
   
2,379
 
Inn American Hospitality at Ewing, LLC
   
50.0
%
 
1,537
   
1,456
 
Hiren Boston, LLC
   
50.0
%
 
4,808
   
5,034
 
SB Partners, LLC
   
50.0
%
 
2,177
   
2,232
 
Mystic Partners, LLC
   
8.8%-66.7
%
 
39,529
   
40,393
 
PRA Suites at Glastonbury, LLC
   
40.0
%
 
2,512
   
-
 
         
$
55,370
 
$
55,981
 
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
The following tables set forth the total assets, liabilities, equity and components of net income, including the Company’s share, related to the unconsolidated joint ventures discussed above as of June 30, 2006 and December 31, 2005 and for the three and six months ended June 30, 2006 and 2005.
 
   
June 30,
 
December 31,
 
   
2006
 
2005
 
Balance Sheets
         
Assets
         
Investment in hotel property, net
 
$
276,973
 
$
182,708
 
Other assets
   
27,807
   
22,708
 
Total Assets
 
$
304,780
 
$
205,416
 
               
Liabilities and Equity
             
Mortgages and notes payable
 
$
226,938
 
$
166,564
 
Capital Leases
   
794
   
357
 
Other liabilities
   
13,730
   
8,021
 
Equity:
             
Hersha Hospitality Trust
   
55,370
   
55,981
 
Other
   
7,948
   
(25,507
)
               
Total Liabilities and Equity
 
$
304,780
 
$
205,416
 

 
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Statements of Operations
                 
Room revenue
 
$
22,695
 
$
4,471
 
$
39,074
 
$
8,088
 
Other revenue
   
8,411
   
403
   
14,605
   
760
 
Operating expenses
   
(21,394
)
 
(2,477
)
 
(39,516
)
 
(4,799
)
Interest expense
   
(3,909
)
 
(620
)
 
(7,368
)
 
(1,207
)
Land Lease Expense
   
(96
)
 
-
   
(213
)
 
 
Property taxes
   
(1,335
)
 
(294
)
 
(2,624
)
 
(558
)
State & Federal Income Taxes
   
(142
)
 
(128
)
 
(142
)
 
(154
)
Depreciation, amortization and other
   
(4,471
)
 
(643
)
 
(8,255
)
 
(1,283
)
Minority interest in earnings of consolidated subsidiaries
   
55
   
-
   
223
   
-
 
                           
Net income (loss)
 
$
(186
)
$
712
 
$
(4,216
)
$
847
 
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
Equity income (loss) recognized during the three and six months ended June 30, 2006 and 2005 for our Equity Investments in Unconsolidated Joint Ventures:
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
HT/CNL
 
$
193
 
$
115
 
$
231
 
$
153
 
HT/PRA Glastonbury
   
30
   
72
   
(229
)
 
73
 
Inn American Hospitality at Ewing, LLC
   
71
   
92
   
81
   
102
 
Hiren Boston, LLC
   
108
   
-
   
(226
)
 
-
 
S B Partners, LLC
   
76
   
-
   
(55
)
 
-
 
Mystic Partners, LLC
   
291
   
-
   
(143
)
 
-
 
PRA Suites at Glastonbury
   
-
   
-
             
                           
Total equity in income (loss)
 
$
769
 
$
279
 
$
(341
)
$
328
 
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 4 - DEVELOPMENT LOANS RECEIVABLE
 
We have approved mortgage lending to entities in which our executive officers and affiliated trustees own an interest to enable such entities to construct hotels and conduct related improvements on specific hotel projects at interest rates ranging from 8.0% to 10.0% (“Development Line Funding”). As of June 30, 2006 and December 31, 2005, we had Development Loans Receivable from Related Parties of $32,016 and $32,450, respectively. Interest income from these advances included in “Interest - Secured Loans Related Party,” was $295 and $743 for the three months ended June 30, 2006 and 2005, respectively, and $716 and $1,743 for the six months ended June 30, 2006 and 2005, respectively.
 
As of June 30, 2006, our development loans to related parties consist of the following:
 
Hotel Property
 
Borrower
 
Principal Outstanding 6/30/2006
 
Interest Rate
 
Interest Income Earned for the six months ended 6/30/2006
 
Interest Due and Accrued as of 6/30/2006
 
Maturity Date
 
Sheraton - JFK Airport, NY
  Risingsam Hospitality, LLC  
$
7,016
   
10
%
$
170
 
$
170
   
March 30, 2007
 
Hilton Garden Inn - Union Square, NY
  Risingsam Union Square, LLC    
10,000
   
10
%
 
54
   
54
   
May 31, 2007
 
Holiday Inn Express - 29th Street, NY
  Brisam Management, LLC    
15,000
   
10
%
 
56
   
56
   
May 31, 2007
 
         
$
32,016
       
$
280
 
$
280
       
 
As of December 31, 2005 our development loans to related parties consisted of the following:
 
Hotel Property
 
Borrower
 
Principal Outstanding 12/31/2005
 
Interest Rate
 
Interest Income Earned for the year ended 12/31/2005
 
Interest Due and Accrued as of 12/31/2005
 
Maturity Date
 
Boutique Hotel - 35th Street, New York, NY
  44 Fifth Avenue, LLC  
$
9,100
   
9
%
$
599
 
$
181
   
August 31, 2006
 
Hampton Inn - Seaport, New York, NY
  HPS Seaport, LLC and BCM, LLC    
13,000
   
10
%
 
908
   
734
   
March 31, 2006
 
Boutique Hotel - Tribeca, New York, NY
  5444 Associates, LP    
9,500
   
10
%
 
570
   
381
   
August 31, 2006
 
Hilton Garden Inn - JFK Airport, NY
  Metro Ten Hotels, LLC    
850
   
10
%
 
1,258
   
239
   
December 31, 2005
 
         
$
32,450
       
$
3,335
 
$
1,535
       

All outstanding loans as of December 31, 2005 were repaid during the first and second quarters of 2006.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 5 — OTHER ASSETS

Transaction Costs
 
Legal fees and other third party transaction costs incurred relative to entering into debt facilities, issuances of equity securities or acquiring interests in hotel properties are recorded in other assets prior to the closing of the respective transactions. Transaction costs included in other assets were $381 and $1,863 as of June 30, 2006 and December 31, 2005.
 
Deposits
 
Deposits paid in connection with the acquisition of hotels are recorded in other assets. As of June 30, 2006, we had $13,308 in interest bearing deposits and $1,898 in non-interest bearing deposits related to the acquisition of hotel properties. Interest bearing deposits as of June 30, 2006 consisted of a deposit of $7,328 bearing interest at a rate of 15.4% and a deposit of $5,980 bearing interest at a rate of 18.8%. As of December 31, 2005, we had $8,000 in interest bearing deposits and $250 in non-interest bearing deposits. The interest bearing deposits as of December 31, 2005 accrued interest at 8.0%.
 
Investment in Statutory Trusts
 
We had investments in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II of $1,548 as of June 30, 2006 and December 31, 2005. Our investment in the common stock of the statutory trust entities is accounted for under the equity method.
 
Notes Receivable
 
Notes receivable included in other assets were $43 as of June 30, 2006 and $1,886 as of December 31, 2005.
 
Other Assets
 
The remaining balance of other assets consists of accrued interest receivable, prepaid property taxes, prepaid insurance and other miscellaneous prepaid expenses.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 6 — DEBT

Mortgages and Notes Payable
 
The total mortgages payable balances at June 30, 2006, and December 31, 2005, were $291,561 and $204,598, respectively, and consisted of mortgages with fixed and variable interest rates ranging from 4.0% to 9.43%. In addition, we had mortgages on our held for sale properties of $ 10,289 and $-0- as of June 30, 2006 and December 31, 2005, respectively, which is classified in Liabilities Related to Hotel Assets Held for Sale on the consolidated balance sheets. The maturities for the outstanding mortgages ranged from August 2007 to January 2032. Aggregate interest expense incurred under the mortgages payable totaled $4,531 and $2,071 for the three months ended June 30, 2006 and 2005, respectively and $8,611 and $3,603 during the six months ended June 30, 2006 and 2005, respectively.
 
In the second quarter of 2005, HHLP issued two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements. The $25,774 note issued to Hersha Statutory Trust I will mature on June 30, 2035, but may be redeemed at HHLP’s option, in whole or in part, beginning on June 30, 2010 in accordance with the provisions of the indenture agreement. The $25,774 note issued to Hersha Statutory Trust II will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, beginning on July 30, 2010 in accordance with the provisions of the indenture agreement. The note issued to Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum through June 30, 2010, and the note issued to Hersha Statutory Trust II bears interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent to June 30, 2010 for notes issued to Hersha Statutory Trust I and July 30, 2010 for notes issued to Hersha Statutory Trust II, holders the notes bear interest at a variable rate of LIBOR plus 3.0% pre annum. Interest expense in the amount of $946 and $401 was recorded during the three months ended June 30, 2006 and 2005, respectively, and $1,870 and $401 for the six months ended June 30, 2006 and 2005, respectively.
 
Revolving Line of Credit
 
On January 17, 2006, we entered into a revolving credit loan and security agreement with Commerce Bank, N.A. with a maximum amount of $60,000. Outstanding borrowings under the line of credit bear interest at the Company’s option of either the bank’s prime rate of interest minus .50% or LIBOR available for the periods of 1, 2, 3, or 6 months plus 2.25%. The line of credit is collateralized by a first lien-security interest in all existing and future assets of HHLP, and title-insured, first-lien mortgages on the Holiday Inn Express, Harrisburg, PA, the Mainstay Suites and Sleep Inn, King of Prussia, PA, the Fairfield Inn, Laurel, MD, the Hampton Inn, Philadelphia, PA, and collateral assignment of all hotel management contracts from which HHLP or its affiliates derive revenue. The line of credit includes certain financial covenants and requires that we maintain (1) a minimum tangible net worth of $110.0 million; (2) a maximum accounts and other receivables from affiliates of $75.0 million; and (3) certain financial ratios. The line of credit expires on December 31, 2008 and replaced the Sovereign Bank Line of Credit. This revolving credit loan replaced both the secured and unsecured lines of credit that we previously maintained. As a result of the termination of the Sovereign Bank Line of Credit , we expensed $255 in unamortized deferred costs related to the origination of the Sovereign Bank Line of Credit.
 
The Company maintained a Line of Credit balance of $32,034 at June 30, 2006 and $-0- at December 31, 2005. The Company recorded interest expense of $264 and $63, for the three months ended June 30, 2006 and 2005, respectively, and $664 and $81, for the six months ended June 30, 2006 and 2005, respectively. The weighted average interest rate on our Line of Credit during the three months ended June 30, 2006 and 2005 was 7.33% and 5.83%, respectively, and was 7.13% and 5.58% for the six months ended June 30, 2006 and 2005, respectively.
 
On July 28, 2006, we amended our Commerce Line of Credit to increase the maximum borrowing amount from $60,000 to $85,000 and modified the interest rate terms to the option of either the bank’s prime rate of interest minus 0.75% or LIBOR available for the periods of 1,2,3, or 6 months plus 2.00%. Provisions of the amended line of credit allow for an increase of the principal amount of borrowings made available under the line of credit to a maximum aggregate amount of $100,000, depending upon certain conditions described in the agreement. Certain hotel acquisitions occurring subsequent to June 30, 2006 will be added as supplemental collateral for the increase in the line of credit.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 6 — DEBT (Continued)

Deferred Costs
 
Costs associated with entering into mortgages and notes payable and our revolving line of credit are deferred and amortized over the life of the debt instruments. Amortization of deferred cost is recorded in interest expense. As of June 30, 2006 deferred cost was $5,256, net of accumulated amortization of $1,169. Deferred cost was $4,131, net of accumulated amortization of $1,437, as of December 31, 2005. Amortization of deferred costs for the three and six months ended June 30, 2006 was $163 and $375, respectively. Amortization of deferred costs for the three and six months ended June 30, 2005 was $105 and $171, respectively.
 
Debt Extinguishment
 
As noted above, the Sovereign Bank Line of Credit was replaced by the Commerce Line of Credit in January 2006. As a result of this termination, we expensed $255 in unamortized deferred costs related to the origination of the Sovereign Bank Line of Credit, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the six months ended June 30, 2006.
 
On April 7, 2006, we repaid $21,900 on our mortgage with Merrill Lynch for the Hampton Inn Herald Square property as a result of a debt refinancing. The new debt of $26,500 has a fixed interest rate of 6.085% and a maturity date of May 1, 2016. As a result of this extinguishment, we expensed $534 in unamortized deferred costs and prepayment penalties, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the three and six months ended June 30, 2006.
 
On June 9, 2006, we repaid $34,200 on our mortgage with UBS for the McIntosh Portfolio, as a result of a debt refinancing. The new debt of $36,300 has a fixed interest rate of 6.33% and maturity date of June 11, 2016 for each of the loans associated with the McIntosh Portfolio. As a result of this extinguishment, we expensed $374 in unamortized deferred costs, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the three and six months ended June 30, 2006.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 
We are the sole general partner in the Partnership, which is indirectly the sole general partner of the subsidiary partnerships. The Company does not anticipate any losses as a result of our obligations as general partner in the Partnership.
 
Management Agreements
 
44 New England engages HHMLP as the property manager for hotels it leases from us pursuant to management agreements. Each management agreement provides for a five-year term and is subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties are reimbursed or borne by the TRS Lessee to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel.
 
As of June 30, 2006, HHMLP managed all 40 hotels leased to the TRS Lessee, and we consolidated the financial statements of these 40 hotels in these financial statements. HHMLP also manages two consolidated joint venture hotel properties and four unconsolidated joint venture hotel properties in which we maintain an investment. For its services, HHMLP receives a base management fee, and if a hotel meets and exceeds certain thresholds, an additional incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. In addition, two of our consolidated joint venture hotel properties which are not managed by HHMLP pay an asset management fee to HHMLP each month equivalent to 1% of gross revenues. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal year and is based upon the financial performance of the hotel. For the three months ended June 30, 2006 and 2005, management fees incurred totaled $1,170 and $880, respectively, and for the six months ended June 20, 2006 and 2005, management fees incurred totaled $1,965 and $1,424, respectively. These fees are recorded as Hotel Operating Expenses.
 
Administrative Services Agreement
 
Prior to July 1, 2005, under the terms of an administrative service agreement, HHMLP provided accounting and reporting services for the Company. The terms of the agreement provided for us to pay HHMLP an annual fee of $10 per property (prorated from the time of acquisition) for each hotel in our portfolio. On July 1, 2005, the administrative service fee was replaced by monthly accounting and information technology fees for each of our wholly owned hotels. Monthly fees for accounting services are $2 per property and monthly information technology fees are $0.5 per property. For the three months ended June 30, 2006 and 2005, the Company incurred administrative services fees of $0 and $65, respectively, and for the six months ended June 30, 2006 and 2005, the Company incurred administrative fees of $0 and $130, respectively. For the three and six months ended June 30, 2006, the Company incurred accounting fees of $260 and $487 and information technology fees of $63 and $120. Administrative services fees, accounting fees, and information technology fees are included in General and Administrative expenses.
 
Franchise Agreements
 
The hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the lessees and charged to expenses as incurred. Franchise fee expense for the three months ended June 30, 2006 and 2005, was $2,580 and $1,435, respectively, and for the six months ended June 30, 2006 and 2005, was $4,340 and $2,365, respectively. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 
Acquisitions from Affiliates
 
We have acquired from entities owned or controlled by certain of our executive officers and our related party trustees, newly-developed or newly-renovated hotels that do not have an operating history that would allow us to make purchase price decisions based on historical performance. In buying these hotels, we previously utilized, a “re-pricing” methodology that, in effect, adjusted the initial purchase price for the hotel, one or two years after we initially purchased the hotel, based on the actual operating performance of the hotel during the twelve months prior to the repricing. As part of our lease termination agreement with HHMLP, the original sellers of all of these properties, HHMLP and the Company have waived their respective rights to any and all purchase price adjustments for all properties. In the future, we do not intend to use any re-pricing methodology in acquisitions from entities controlled by our officers and trustees.
 
We have entered into an option agreement with each of our officers and related party trustees such that we obtain a first right of refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them. This right of first refusal would apply to each party until one year after such party ceases to be an officer or related party trustee of our Company. Since our initial public offering in 1999, we have acquired, wholly or through joint ventures, a total of 60 hotels, including 19 hotels acquired from entities controlled by our officers or trustees.  Of the 19 acquisitions from these entities, 16 were newly-constructed or newly-renovated by these entities prior to our acquisition. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the purchase of hotels from related parties are negotiated with the Acquisition Committee. At the discretion of the independent trustees, the Board of Trustees has hired an independent accounting firm to provide our Board of Trustees with an “Agreed Upon Procedures” report for certain acquisitions and dispositions to related parties.
 
Hotel Supplies
 
For the three months ended June 30, 2006 and 2005, we incurred expenses of $434 and $478, respectively, and for the six months ended June 30, 2006 and 2005, we incurred expenses of $685 and $718, respectively, for hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating Expenses. Approximately $0 and $52 is included in accounts payable at June 30, 2006 and December 31, 2005.
 
Capital Expenditure Fees
 
Beginning April 1, 2006, HHMLP began to charge a 5% fee on all capital expenditures and pending renovation projects at the properties as compensation for procurement services related to capital expenditures and for project management of renovation projects. For the three and six months ended June 30, 2006, we incurred fees of $57 which were capitalized in with the cost of fixed asset additions.
 
Due From Related Parties
 
The Due from Related Party balance as of June 30, 2006 and December 31, 2005 was approximately $3,785 and $2,799, respectively. The balance as of June 30, 2006 and December 31, 2005 consisted of accrued interest due on our development loans and receivables owed from our unconsolidated joint ventures.
 
Due to Related Parties
 
The due to related party balance as of June 30, 2006 and December 31, 2005, totaled $4,881 and $4,655, respectively. The due to related party balances at June 30, 2006 and December 31, 2005 consisted of monies payable to HHMLP for administrative, management, and benefit related fees.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
 
Land Leases
 
In conjunction with the acquisition of the Hilton Garden Inn, Edison, NJ, we assumed a land lease from a third party with an original term of 75 years. Monthly payments as determined by the lease agreement are due through the expiration in August 2074. On February 16, 2006, in conjunction with the acquisition of the Hilton Garden Inn, JFK Airport, NY, we assumed a land lease with an original term of 99 years. Monthly payments as determined by the lease agreement are due through the expiration in July of 2100. Both land leases provide rent increases at scheduled intervals. We record rent expense on a straight-line basis over the life of the lease from the beginning of the lease term. For the three months ended June 30, 2006 and 2005, we incurred $216 and $109, respectively, and for the six months ended June 30, 2006 and 2005,we incurred $378 and $217, respectively, in lease expense under the agreements.
 
On January 6, 2005, we purchased land in Carlisle, PA for $700 plus closing costs from a related party entity and leased the land to 44 Carlisle Associates, L.P., a related party. In July 2005, 44 Carlisle Associates, L.P. exercised their option to purchase the land from us. The purchase price consisted of $700 for the land plus all fees and expenses.
 
On February 18, 2005, we purchased land at the Bradley International Airport, Windsor Locks, CT for $1,000 plus closing costs and leased the land to 44 Windsor Locks Associates, LLC, a related party. In addition to the purchase price, the terms of the lease required 44 Windsor Locks Associates, LLC to post a $350 deposit. In July 2005, 44 Windsor Locks Associates, LLC exercised their option to purchase the land from us. The purchase price consisted of $1,000 for the land plus all fees and expenses, and the $350 deposit was returned.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 8 - DERIVATIVE INSTRUMENTS

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to increases in variable interest rates.
 
On July 1, 2005, the Company acquired an interest rate cap with a notional amount of $34,230 to hedge against the variability in cash flows on a variable interest rate debt instrument. The principal of the variable interest rate debt being hedged equals the notional amount of the interest rate cap. The interest rate cap effectively fixes interest payments when LIBOR exceeds 5.0%. On June 12, 2006, we terminated this interest rate cap due to the refinancing of the associated interest rate debt instrument to a fixed rate. We received $79 in cash and reclassified $58 in reduction to interest expense as a result of the termination of this cap.
 
At June 30, 2006, the fair value of the interest rate swap was $160 and is included in other assets on the face of the consolidated balance sheets. At December 31, 2005, the fair value of the interest rate cap was $23 and is included in other assets and the fair value of the interest rate swap was $0. The change in net unrealized gains/losses of $92 and $130 for the three months ended June 30, 2006 and 2005, respectively, for derivatives designated as cash flow hedges. The change in net unrealized gains/losses of $209 and $100 for the six months ended June 30, 2006 and 2005, respectively, for derivatives designed as cash flow hedges. Hedge ineffectiveness of $3 and $3 on cash flow hedges was recognized in unrealized gain/loss on derivatives during the three months ended June 30, 2006 and 2005, respectively. Hedge ineffectiveness of $7 and $7 on cash flow hedges was recognized in unrealized gain/loss on derivatives during the six months ended June 30, 2006 and 2005, respectively. Hedge ineffectiveness is included in interest expense on the face of the consolidated statements of operations.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 9 - SHARE-BASED PAYMENTS

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”). SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion No. 25”) and its related implementation guidance. SFAS No. 123R requires companies to record compensation expense for share-based payments to employees, including grants of employee stock options and stock awards, at fair value. Effective April 1, 2005, the Company has adopted SFAS 123R. No stock-based payments were outstanding at the time SFAS 123R was adopted. In 2004, the Company established the Hersha Hospitality Trust 2004 Equity Incentive Plan which provides for the grant of stock options, stock appreciation rights, stock awards, performance shares and incentive awards. The maximum number of shares of common stock that can be issued under this plan is 1.5 million shares. No share-based payments were granted under this plan during the year ended December 31, 2004.
 
On June 1, 2005, the Compensation Committee of the Board of Trustees granted 71,000 restricted share awards to executives. The restricted share awards vest 25% each year over four years and compensation expense is recognized ratably over the four year vesting period based on the fair value of the shares on the date of grant. The fair value of the restricted share awards on the grant date was $9.60 per share. For the quarter ended June 30, 2006, 25% of these restricted share awards became vested.
 
On June 1, 2006, the Compensation Committee of the Board of Trustees granted 89,500 restricted share awards to executives. The restricted share awards vest 25% each year over four years and compensation expense is recognized ratably over the four year vesting period based on the fair value of the shares on the date of grant. The fair value of the restricted share awards on the grant date was $9.40 per share. For the quarter ended June 30, 2006, none of these restricted share awards became vested.
 
A summary of the stock awards issued under the 2004 Equity Incentive Plan are as follows:
 
Date of Award Issuance
 
Shares Issued
 
Shares Vested at 6/30/2006
 
Unearned Compensation at 6/30/2006
 
Period until Full Vesting
 
June 1, 2005
   
71,000
   
17,750
 
$
497
   
3 years
 
June 1, 2006
   
89,500
   
-
   
824
   
4 years
 
     
160,500
   
17,750
 
$
1,321
       
 
Compensation expense of $60 and $14 was incurred during the three months ended June 30, 2006 and 2005, respectively, and $103 and $14 for the six months ended June 30, 2006 and 2005, respectively, related to the restricted share awards and is recorded in general and administrative expense on the statement of operations. Unearned compensation as of June 30, 2006 and December 31, 2005 was $1,321 and $582, respectively.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 10 — EARNINGS PER SHARE

The following table is a reconciliation of the income (numerator) and weighted average shares (denominator) used in the calculation of basic earnings per common share and diluted earnings per common share in accordance with SFAS No. 128, Earnings Per Share.The computation of basic and diluted earnings per share is presented below.
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Numerator:
                 
BASIC
                 
Income (Loss) from Continuing Operations
 
$
2,789
 
$
2,469
 
$
(1,065
)
$
1,609
 
Distributions to 8.0% Series A Preferred Shareholders
   
(1,200
)
 
-
   
(2,400
)
 
-
 
Income (loss) from continuing operations applicable to common shareholders
   
1,589
   
2,469
   
(3,465
)
 
1,609
 
                           
Income from Discontinued Operations
   
587
   
1,286
   
557
   
1,170
 
                           
Net Income (Loss) applicable to common shareholders
 
$
2,176
 
$
3,755
 
$
(2,908
)
$
2,779
 
                           
DILUTED
                         
Income (Loss) from Continuing Operations
 
$
2,789
 
$
2,469
 
$
(1,065
)
$
1,609
 
Allocation of income (loss) to minority interest in continuing operations
   
390
   
346
   
-
 
 *
 
225
 
Distributions to 8.0% Series A Preferred Shareholders
   
(1,200
)
 
-
   
(2,400
)
 
-
 
Income (loss) from continuing operations applicable to common shareholders
   
1,979
   
2,815
   
(3,465
)
 
1,834
 
Income from Discontinued Operations
   
587
   
1,286
   
557
   
1,170
 
Allocation of income (loss) to minority interest in discontinued operations
   
81
   
180
   
 *  
163
 
Income from Discontinured Operations
   
668
   
1,466
   
557 
   
1,333
 
                           
Net Income (Loss) applicable to common shareholders
 
$
2,647
 
$
4,281
 
$
(2,908
)
$
3,167
 
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 10 — EARNINGS PER SHARE (Continued)

   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Denominator:
         
 
     
Weighted average number of common shares - basic
   
25,469,708
   
20,293,169
   
22,903,225
   
20,292,167
 
Effect of dilutive securities:
                         
Stock awards
   
94,654
   
23,407
   
-
 *  
11,768
 
Partnership units
   
3,492,177
   
2,842,437