form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

£
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.)
     
44 Hersha Drive
   
Harrisburg, Pennsylvania
 
17102
(Address of Registrant’s Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  (717) 236-4400


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.
T Yes  ¨ 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 ¨
Accelerated filer T
Non-accelerated filer ¨

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

As of September 30, 2007, the number of Class A common shares of beneficial interest outstanding was 41,197,876.
 


1


Hersha Hospitality Trust
Table of Contents for Quarterly Report on Form 10-Q
 
Item No.  
  Page
     
PART I.  FINANCIAL INFORMATION 
3
3
   
3
   
4
   
6
   
7
27
35
36
37
37
37
37
37
37
37
38


PART I.     FINANCIAL INFORMATION
Item 1. Financial Statements.

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2007 [UNAUDITED] AND DECEMBER 31, 2006
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
September 30, 2007
   
December 31, 2006
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $
894,185
    $
807,784
 
Investment in Joint Ventures
   
53,945
     
50,234
 
Development Loans Receivable
   
70,042
     
47,016
 
Cash and Cash Equivalents
   
10,280
     
10,316
 
Escrow Deposits
   
15,178
     
14,927
 
Hotel Accounts Receivable, net of allowance for doubtful accounts of $50 and $30
   
11,877
     
4,608
 
Deferred Costs, net of Accumulated Amortization of $2,760 and $1,543
   
8,509
     
7,525
 
Due from Related Parties
   
2,097
     
4,059
 
Intangible Assets, net of Accumulated Amortization of $779 and $618
   
5,665
     
5,594
 
Other Assets
   
17,566
     
16,145
 
Hotel Assets Held for Sale
   
24,660
     
-
 
Total Assets
  $
1,114,004
    $
968,208
 
                 
Liabilities and Shareholders’ Equity:
               
Line of Credit
  $
72,100
    $
24,000
 
Mortgages and Notes Payable, net of unamortized discount of $74 and $1,312
   
620,131
     
556,542
 
Accounts Payable, Accrued Expenses and Other Liabilities
   
17,458
     
14,740
 
Dividends and Distributions Payable
   
9,473
     
8,985
 
Due to Related Parties
   
2,632
     
3,297
 
Liabilities Related to Assets Held for Sale
   
17,082
     
-
 
Total Liabilities
   
738,876
     
607,564
 
                 
Minority Interests:
               
Common Units
  $
40,393
    $
25,933
 
Interest in Consolidated Joint Ventures
   
2,797
     
3,092
 
                 
Total Minority Interests
   
43,190
     
29,025
 
                 
Shareholders' Equity:
               
Preferred Shares - 8% Series A, $.01 Par Value, 29,000,000 Shares Authorized, 2,400,000 Shares Issued and Outstanding at September 30, 2007 and December 31, 2006, respectively.  (Aggregate Liquidation Preference $60,000 at September 30, 2007 and December 31, 2006, respectively)
   
24
     
24
 
Common Shares - Class A, $.01 Par Value, 80,000,000 Shares Authorized, 41,197,876 and 40,671,950 Shares Issued and Outstanding at September 30, 2007 and December 31, 2006, respectively.
   
412
     
405
 
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
   
-
     
-
 
Accumulated Other Comprehensive Income
   
86
     
233
 
Additional Paid-in Capital
   
395,730
     
381,592
 
Distributions in Excess of Net Income
    (64,314 )     (50,635 )
                 
Total Shareholders' Equity
   
331,938
     
331,619
 
                 
Total Liabilities and Shareholders’ Equity
  $
1,114,004
    $
968,208
 
 
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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2007
   
September 30, 2006
   
September 30, 2007
   
September 30, 2006
 
Revenue:
                       
Hotel Operating Revenues
  $
65,609
    $
39,002
    $
171,984
    $
97,693
 
Interest Income from Development Loans
   
1,379
     
839
     
4,013
     
1,562
 
Land Lease Revenue
   
1,324
     
408
     
3,529
     
408
 
Hotel Lease Revenue
   
254
     
137
     
586
     
137
 
Other Revenues
   
265
     
202
     
592
     
555
 
Total Revenues
   
68,831
     
40,588
     
180,704
     
100,355
 
                                 
Operating Expenses:
                               
Hotel Operating Expenses
   
35,794
     
21,598
     
97,348
     
56,964
 
Hotel Ground Rent
   
211
     
222
     
650
     
600
 
Land Lease Expense
   
741
     
-
     
1,974
     
-
 
Real Estate and Personal Property Taxes and Property Insurance
   
2,861
     
1,559
     
8,353
     
4,151
 
General and Administrative
   
1,689
     
1,350
     
5,521
     
4,326
 
Depreciation and Amortization
   
8,905
     
4,983
     
25,123
     
12,879
 
Total Operating Expenses
   
50,201
     
29,712
     
138,969
     
78,920
 
                                 
Operating Income
   
18,630
     
10,876
     
41,735
     
21,435
 
                                 
Interest Income
   
136
     
443
     
590
     
923
 
Interest Expense
   
10,677
     
6,693
     
31,414
     
17,694
 
Loss on Debt Extinguishment
   
-
     
-
     
-
     
1,163
 
                                 
Income before income from Unconsolidated Joint Venture Investments, Minority Interests and Discontinued Operations
   
8,089
     
4,626
     
10,911
     
3,501
 
                                 
Income from Unconsolidated Joint Venture Investments
   
1,680
     
1,773
     
2,584
     
1,432
 
                                 
Income before Minority Interests and Discontinued Operations
   
9,769
     
6,399
     
13,495
     
4,933
 
                                 
Income allocated to Minority Interests in Continuing Operations
   
1,379
     
859
     
1,554
     
525
 
Income from Continuing Operations
   
8,390
     
5,540
     
11,941
     
4,408
 
                                 
Discontinued Operations, net of minority interests (Note 12):
                               
Gain on Disposition of Hotel Properties
   
-
     
-
     
-
     
436
 
Income from Discontinued Operations
   
106
     
240
     
113
     
428
 
Income from Discontinued Operations
   
106
     
240
     
113
     
864
 
                                 
Net Income
   
8,496
     
5,780
     
12,054
     
5,272
 
Preferred Distributions
   
1,200
     
1,200
     
3,600
     
3,600
 
                                 
Net Income applicable to   Common Shareholders
  $
7,296
    $
4,580
    $
8,454
    $
1,672
 
 
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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2007
   
September 30, 2006
   
September 30, 2007
   
September 30, 2006
 
Earnings Per Share:
                       
BASIC
                       
Income from continuing operations applicable to common shareholders
  $
0.18
    $
0.15
    $
0.20
    $
0.03
 
Income from Discontinued Operations
  $
0.00
    $
0.01
    $
0.00
    $
0.03
 
                                 
Net Income applicable to common shareholders
  $
0.18
    $
0.16
    $
0.20
    $
0.06
 
                                 
DILUTED*
                               
Income from continuing operations applicable to common shareholders
  $
0.18
    $
0.15
    $
0.20
    $
0.03
 
Income from Discontinued Operations
  $
0.00
    $
0.01
    $
0.00
    $
0.03
 
                                 
Net Income applicable to common shareholders
  $
0.18
    $
0.16
    $
0.20
    $
0.06
 
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
   
40,807,626
     
28,413,553
     
40,663,670
     
24,760,185
 
Diluted*
   
40,807,626
     
28,428,637
     
40,663,670
     
24,760,185
 
 
*
Income allocated to minority interest in the Partnership has been excluded from the numerator and Partnership units have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact. Weighted average Partnership units outstanding for the three months ended September 30, 2007 and 2006 were 6,095,971 and 3,724,426, respectively. Weighted average Partnership units outstanding for the nine months ended September 30, 2007 and 2006 were 5,139,657 and 3,459,590, respectively.
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS]

   
September 30, 2007
   
September 30, 2006
 
Operating activities:
           
Net Income
  $
12,054
     
5,272
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on disposition of hotel assets held for sale
   
-
      (497 )
Depreciation
   
25,722
     
13,798
 
Amortization
   
1,475
     
719
 
Debt extinguishment
   
-
     
1,163
 
Income allocated to minority interests
   
1,568
     
643
 
Equity in income of unconsolidated joint ventures
    (2,584 )     (1,432 )
Distributions from unconsolidated joint ventures
   
2,703
     
1,834
 
Gain recognized on change in fair value of derivative instrument
    (57 )     (68 )
Stock based compensation expense
   
554
     
198
 
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (7,214 )     (3,560 )
Escrows
   
490
      (757 )
Other assets
    (1,764 )     (3,235 )
Due from related party
   
2,850
      (3,968 )
Increase (decrease) in:
               
Due to related party
    (665 )    
2,646
 
Accounts payable and accrued expenses
   
2,590
     
5,263
 
Net cash provided by operating activities
   
37,722
     
18,019
 
                 
Investing activities:
               
Purchase of hotel property assets
    (32,659 )     (225,857 )
Capital expenditures
    (11,874 )     (8,029 )
Proceeds from disposition of hotel assets held for sale
   
-
     
3,665
 
Cash paid for franchise fee intangible
    (71 )     (48 )
Repayment of notes receivable
   
34
     
1,843
 
Investment in development loans receivable
    (60,700 )     (35,616 )
Repayment of development loans receivable
   
36,000
     
33,550
 
Distributions from unconsolidated joint venture
   
4,686
     
3,227
 
Advances and capital contributions to unconsolidated joint ventures
    (1,699 )     (4,042 )
Net used in investing activities
    (66,283 )     (231,307 )
                 
Financing activities:
               
Proceeds from borrowings under line of credit, net
   
48,100
     
37,768
 
Principal repayment of mortgages and notes payable
    (19,387 )     (66,701 )
Proceeds from mortgages and notes payable
   
28,543
     
165,012
 
Settlement of interest rate derivative
   
-
     
79
 
Cash paid for deferred financing costs
    (250 )     (796 )
Proceeds from issuance of common stock
   
-
     
103,357
 
Distributions to partners in consolidated joint ventures
    (340 )     (221 )
Dividends paid on common shares
    (22,016 )     (12,350 )
Dividends paid on preferred shares
    (3,600 )     (3,600 )
Distributions paid on common partnership units
    (2,525 )     (1,767 )
Net cash provided by financing activities
   
28,525
     
220,781
 
                 
Net (decrease) increase in cash and cash equivalents
    (36 )    
7,493
 
Cash and cash equivalents - beginning of year
   
10,316
     
8,780
 
                 
Cash and cash equivalents - end of quarter
  $
10,280
    $
16,273
 
 
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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hersha Hospitality Trust (“we” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Recent Accounting Pronouncements

SFAS No. 157

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”  (“SFAS No. 157”). SFAS No. 157 establishes a new definition of fair value, provides guidance on how to measure fair value and establishes new disclosure requirements of assets and liabilities at their fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not determined whether the adoption of SFAS No. 157 will have a material effect on the Company’s financial statements.

SFAS No. 159

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and requires certain disclosures for amounts for which the fair value option is applied.  This standard is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of Statement 157. The Company has not determined whether the adoption of SFAS No. 159 will have a material effect on the Company’s financial statements.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES

Investment in Hotel Properties consists of the following at September 30, 2007 and December 31, 2006:

   
September 30, 2007
   
December 31, 2006
 
             
Land
  $
171,500
    $
135,943
 
Buildings and Improvements
   
700,741
     
640,666
 
Furniture, Fixtures and Equipment
   
103,267
     
88,179
 
Construction in Progress
   
2,541
     
4,359
 
     
978,049
     
869,147
 
                 
Less Accumulated Depreciation
    (83,864 )     (61,363 )
                 
Total Investment in Hotel Properties
  $
894,185
    $
807,784
 
 
2007 Transactions

During the nine months ended September 30, 2007 we acquired the following wholly owned hotel properties:

2007 Acquisitions
                                           
Hotel
   
Acquisition Date
   
Land
   
Buildings and Improvements
   
Furniture Fixtures and Equipment
   
Franchise Fees and Loan Costs
   
Total Purchase Price
   
Fair Value of Assumed Debt and Capital Lease
 
Residence Inn,  Langhorne, PA
   
1/8/2007
    $
1,463
    $
12,125
    $
2,170
    $
50
    $
15,808
     
-
 
Residence Inn,  Carlisle, PA
   
1/10/2007
     
1,015
     
7,511
     
1,330
     
89
     
9,945
     
7,000
 
Holiday Inn Express,  Chester, NY
   
1/25/2007
     
1,500
     
6,701
     
1,031
     
126
     
9,358
     
6,700
 
Hampton Inn - Seaport,  New York, NY
   
2/1/2007
     
7,816
     
19,056
     
1,729
     
1,036
     
29,637
     
20,202
 
Hotel 373 and Starbucks Lease - 5th Avenue,  New York, NY
   
6/1/2007
     
14,239
     
16,801
     
3,294
     
11
     
34,345
     
22,000
 
Nevins Street, Brooklyn, NY
   
6/11/2007 & 7/11/2007
     
10,650
     
-
     
-
     
269
     
10,919
     
6,500
 
Holiday Inn, Norwich, CT
   
7/1/2007
     
1,984
     
12,037
     
2,041
     
67
     
16,129
     
8,162
 
Total 2007 Wholly Owned Acquisitions
          $
38,667
    $
74,231
    $
11,595
    $
1,648
    $
126,141
    $
70,564
 

In connection with the 2007 acquisitions we acquired $798 in working capital. In addition to cash and assumed debt, consideration included $2,100 in deposits made in 2006. Included in the purchase price of Residence Inn, Langhorne, PA is $226 that was reimbursed to entities that are owned in part by certain executives and affiliated trustees of the Company.

Interest rates on debt assumed in the acquisition of the Residence Inn, Carlisle, PA and the Holiday Inn Express & Suites, Chester, NY were at market rates.  We assumed $19,250 in debt with the acquisition of the Hampton Inn-Seaport, New York, NY bearing interest at a fixed rate of 6.36% which was determined to be above market rates.  We recorded a premium of $952 related to the assumption of this debt. In the acquisition of Hotel 373 – 5th Avenue, New York, NY, we assumed $22,000 in variable rate debt bearing interest at LIBOR plus 2.00% and an interest rate cap which effectively caps interest on this debt at 7.75%.  The debt matures and the interest rate cap terminates on April 9, 2009.  The interest rate cap had a fair value of $15 on the date of acquisition.  We assumed $6,500 in variable rate debt bearing interest at LIBOR plus 2.70% with the acquisition of a parcel of land on Nevins Street in Brooklyn, NY.  This parcel of land is being leased to a hotel developer that is owned in part by certain executives and affiliated trustees of the Company.  Lease income on the land includes payment of debt service on the assumed debt.  We assumed $8,162 in debt with the acquisition of the Holiday Inn, Norwich, CT which was repaid on July 30, 2007.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

The Residence Inn, Carlisle, PA and the Hampton Inn-Seaport, New York, NY were acquired from entities that are owned by certain of the Company’s executives and affiliated trustees.  Included in the consideration paid for the Residence Inn, Carlisle, PA was 119,818 units in our operating partnership subsidiary valued at $11.10 per unit that were issued to sellers that are not affiliated with the Company.  Consideration paid for the Hampton Inn-Seaport, New York, NY, included 15,016 units of our operating partnership subsidiary valued at $11.20 per unit and an $8,208 note payable.  The operating partnership units were issued to certain executives and affiliated trustees of the Company and the note payable was with entities that are owned in part by certain executives and affiliated trustees of the Company.  On May 24, 2007 the note payable was fully repaid.  Interest expense of $203 was incurred on the notes payable during the nine months ended September 30, 2007, respectively.  Included in the consideration paid for the Hotel 373 – 5th Avenue, New York, NY were 1,000,000 units in our operating partnership subsidiary valued at $12.32 per unit that were issued to a seller that is not affiliated with the Company.  Consideration paid for the Holiday Inn, Norwich, CT, included 659,312 units of our operating partnership subsidiary valued at $11.83, which were issued to entities that are owned in part by certain executives and affiliated trustees of the Company.

The purchase agreement entered into for the 2006 acquisition of the Courtyard, Langhorne, PA; the Fairfield Inn, Bethlehem, PA; and the Fairfield Inn, Mt. Laurel, NJ contains certain provisions that entitled the seller to an earn-out payment of up to $2,500 based on the collective Net Operating Income thresholds of the three properties, as defined.  The earn-out period expired on September 30, 2007 and based on the operating results of these properties, no earn-out was paid by the Company to the seller.  On December 28, 2006, we closed on the acquisition of seven Summerfield Suites.  The purchase agreement for this acquisition contains certain provisions that entitle the seller to an earn-out payment of up to $6,000 based on the Net Operating Income of the properties, as defined.  The earn-out period expires on December 31, 2009.  On January 8, 2007, we closed on the acquisition of the Residence Inn, Langhorne, PA.  The purchase agreement for this acquisition contains certain provisions that entitle the seller to an earn-out payment of up to $1,000 based on the Net Operating Income of the property, as defined.  The earn-out period expires on August 31, 2008.  We are currently unable to determine whether amounts will be paid under these two earn-out provisions since significant time remains until the expiration of the earn-out periods.  Due to uncertainty of the amounts that will ultimately be paid, if any, no accrual has been recorded on the consolidated balance sheet for amounts due under these earn-out provisions.  In the event amounts are payable under these provisions, payments made will be recorded as additional consideration given for the properties.

All of the newly acquired wholly owned hotels are leased to our wholly owned taxable REIT subsidiary (TRS), 44 New England Management Company and all are managed by Hersha Hospitality Management, LP (“HHMLP”).  HHMLP is owned by three of the Company’s executives, two of its affiliated trustees and other investors that are not affiliated with the Company.

The following condensed pro forma financial information is presented as if we had consummated the acquisition of the 6 properties in 2007 and the 16 properties in 2006 on January 1, 2006. Properties acquired without any operating history are excluded from the condensed pro forma operating results. The condensed pro forma information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the acquisitions had been consummated at the beginning of the years presented, nor does it purport to represent the results of operations for future periods.

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2007
   
September 30, 2006
   
September 30, 2007
   
September 30, 2006
 
Pro Forma Total Revenues
  $
68,967
    $
55,885
    $
182,942
    $
152,259
 
                                 
Pro Forma Income from Continuing Operations applicable to Common Shareholders
  $
8,390
    $
5,638
    $
11,680
    $
4,650
 
Income from Discontinued Operations
   
106
     
240
     
113
     
864
 
Pro Forma Net Income
   
8,496
     
5,878
     
11,793
     
5,514
 
Preferred Distributions
   
1,200
     
1,200
     
3,600
     
3,600
 
Pro Forma Net Income (Loss) applicable to Common Shareholders
  $
7,296
    $
4,678
    $
8,193
    $
1,914
 
                                 
Pro Forma Income (Loss) applicable to Common Shareholders per Common Share
                               
Basic
  $
0.18
    $
0.16
    $
0.20
    $
0.08
 
Diluted
  $
0.18
    $
0.16
    $
0.20
    $
0.08
 
                                 
Weighted Average Common Shares Outstanding
                               
Basic
   
40,807,626
     
28,413,553
     
40,663,670
     
24,760,185
 
Diluted
   
40,807,626
     
28,428,637
     
40,663,670
     
24,760,185
 


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

We account for our investment in the following unconsolidated joint ventures using the equity method of accounting.  As of September 30, 2007 and December 31, 2006 our investment in unconsolidated joint ventures consists of the following:

   
Percent Owned
     
September 30, 2007
   
December 31, 2006
 
                     
PRA Glastonbury, LLC
    48.0 %    
984
     
463
 
Inn American Hospitality at Ewing, LLC
    50.0 %      
1,284
     
1,414
 
Hiren Boston, LLC
    50.0 %      
5,179
     
4,871
 
SB Partners, LLC
    50.0 %      
2,404
     
2,213
 
Mystic Partners, LLC
    8.8%-66.7 %      
33,917
     
39,180
 
PRA Suites at Glastonbury, LLC
    48.0 %    
2,810
     
2,093
 
Metro 29th Street Associates, LLC
    50.0 %      
7,367
     
-
 
              $
53,945
    $
50,234
 
 
*  Percent owned was 40.0% through March 31, 2007.  On April 1, 2007 our percent owned increased to 48.0%

Any difference between the carrying amount of these investments and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets.

On April 1, 2007, we increased our investment in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT, and PRA Suites at Glastonbury, LLC, the owner of the Homewood Suites, Glastonbury, CT by acquiring an additional 8% preferred interest from our partner in each venture.  The purchase prices for our additional equity interests were $780 and $716 for PRA Glastonbury, LLC and PRA Suites at Glastonbury, LLC, respectively.

On February 1, 2007 we acquired a 50.0% interest in Metro 29th Street Associates, LLC (“Metro 29th”), the lessee of the 228 room Holiday Inn Express-Manhattan, New York, NY, for approximately $6,817. Metro 29th holds a twenty five year lease with certain renewal options at the end of the lease term.  We also acquired an option to acquire a 50% interest in the entity that owns the Holiday Inn Express-Manhattan.  The option is exercisable after February 1, 2012 or upon termination of Metro 29th Street’s lease of the hotel and expires at the end of the lease term.  The fair value of the option was $933 at the time of acquisition and is recorded in other assets on our consolidated balance sheet.  We issued 694,766 units in our operating partnership valued at $11.15 per unit for our interest in Metro 29th and the option.  Metro 29th Street entered into an agreement with Metro 29th Sublessee, LLC, a joint venture owned by 44 New England and our joint venture partner, to sublease the hotel property.  The hotel is managed by HHMLP.

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 September 30, 2007 and December 31, 2006 and for the three and nine months ended September 30, 2007 and 2006.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

Balance Sheets
           
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Investment in hotel properties, net
  $
233,384
    $
244,113
 
Other assets
   
32,412
     
24,496
 
Assets
  $
265,796
    $
268,609
 
                 
Liabilities and Equity
               
Mortgages and notes payable
  $
221,583
    $
211,576
 
Other liabilities
   
13,848
     
11,687
 
                 
Equity
   
30,365
     
45,346
 
                 
Total Liabilities and Equity
  $
265,796
    $
268,609
 
 
Statements of Operations
                       
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2007
   
September 30, 2006
   
September 30, 2007
   
September 30, 2006
 
Room Revenue
  $
27,480
    $
23,567
    $
72,770
    $
62,735
 
Other Revenue
   
7,359
     
6,873
     
22,586
     
21,478
 
Operating Expenses
    (21,424 )     (19,064 )     (59,829 )     (55,585 )
Interest Expense
    (3,977 )     (4,361 )     (11,607 )     (11,830 )
Debt Extinguishment
    (2,858 )    
-
      (2,858 )    
-
 
Lease Expense
    (1,314 )     (64 )     (3,927 )     (276 )
Property Taxes and Insurance
    (1,654 )     (1,625 )     (4,558 )     (4,248 )
Federal and State Income Taxes
    (53 )     (134 )     (161 )     (276 )
Depreciation, Amortization, and Other
    (6,004 )     (7,577 )     (17,731 )     (18,749 )
                                 
Net Loss
  $ (2,445 )   $ (2,385 )   $ (5,315 )   $ (6,751 )
 
Equity income recognized during the three and nine months ended September 30, 2007 and 2006 for our Investments in Unconsolidated Joint Ventures are as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2007
   
September 30, 2006
   
September 30, 2007
   
September 30, 2006
 
HT/CNL Metro Hotels, LP
  $
-
    $
168
    $
-
    $
398
 
PRA Glastonbury, LLC
   
26
      (28 )    
87
      (257 )
Inn American Hospitality at Ewing, LLC
   
20
     
42
     
91
     
124
 
Hiren Boston, LLC
   
175
     
254
     
309
     
28
 
SB Partners, LLC
   
183
     
106
     
192
     
51
 
Mystic Partners, LLC
   
1,006
     
1,232
     
1,253
     
1,089
 
PRA Suites at Glastonbury, LLC
    (2 )     (1 )     (5 )     (1 )
Metro 29th Street Associates, LLC
   
272
     
-
     
657
     
-
 
                                 
Total income from unconsolidated joint venture investments
  $
1,680
    $
1,773
    $
2,584
    $
1,432
 


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 — DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES

We have approved mortgage lending to entities, including 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 10.0% to 13.5% (“Development Line Funding”). As of September 30, 2007 and December 31, 2006, we had Development Loans Receivable of $70,042 and $47,016, respectively. Interest income included in “Interest Income — Development Loans,” was $1,379 and $839 for the three months ended September 30, 2007 and 2006, respectively and $4,013 and $1,562 for the nine months ended September 30, 2007 and 2006, respectively. Accrued interest on our development loans receivable was $1,014 as of September 30, 2007 and $883 as of December 31, 2006.

As of September 30, 2007, our development loans receivable balance consisted of the following:

Hotel Property
 
Borrower
 
Principal Outstanding 9/30/2007
 
Interest Rate
 
Maturity Date
Sheraton - JFK Airport, NY
 
Risingsam Hospitality, LLC
  $
10,016
    10%  
September 30, 2008
Holiday Inn Express - 29th Street, NY
 
Brisam Management, LLC
   
15,000
    10%  
May 30, 2008
Hampton Inn & Suites - West Haven, CT
 
44 West Haven Hospitality, LLC
   
2,000
    10%  
October 9, 2008
Hilton Garden Inn - New York, NY
 
York Street LLC
   
15,000
    11%  
July 1, 2008
Hampton Inn - Smithfield, RI
 
44 Hersha Smithfield, LLC
   
2,000
    10%  
October 9, 2008
Homewood Suites - Newtown Square, PA
 
Reese Hotels, LLC
   
700
    11%  
June 1, 2008
Boutique Hotel - Union Square, NY
 
Risingsam Union Square, LLC
   
5,000
    10%  
May 31, 2008
Candlewood Suites - Windsor Locks, CT
 
44  Windsor Locks Hospitality, LLC
   
2,000
    10%  
August 6, 2008
Hilton Garden Inn/Homewood Suites - Brooklyn, NY
 
167 Johnson Street, LLC
               
Tranche 1
       
11,000
    11%  
September 21, 2008
Tranche 2
       
9,000
    13.5%  
September 24, 2008
Discount
        (1,674          
Total Hilton Garden Inn/Homewood Suites - Brooklyn, NY
       
18,326
         
                     
Total Development Loans Receivable
      $
70,042
         
 
In connection with originating the $11,000 and $9,000 development loans for the Hilton Garden Inn/Homewood Suites – Brooklyn, NY, we were granted an option to acquire a 50% interest in the entity that owns the Hilton Garden Inn – Brooklyn, NY.  The option can be exercised any time during the three year period beginning on the date the property receives its certificate of occupancy or upon the borrower’s default on the development loans.  The fair value of the option was $1,688 at the time of acquisition and is recorded in other assets on our consolidated balance sheet. We recorded a discount on the development loans receivable of $1,688 which is being amortized over life of the development loan, including the two year renewal period.  Amortization of this discount is recorded as interest income from development loans on the Company’s consolidated statement of operations and was $14 for the three and nine months ended September 30, 2007.

As of December 31, 2006 our development loans receivable balance consisted of the following:
 
Hotel Property
 
Borrower
 
Principal Outstanding 12/31/2006
 
Interest Rate
 
Maturity Date
 
Sheraton - JFK Airport, NY
 
Risingsam Hospitality, LLC
  $
9,016
    10%  
March 30, 2007
Hilton Garden Inn - Union Square, NY
 
Risingsam Union Square, LLC
   
10,000
    10%  
May 31, 2007
Holiday Inn Express - 29th Street, NY
 
Brisam Management, LLC
   
15,000
    10%  
May 31, 2007
Boutique Hotel - Manhattan, NY
 
Brisam East 52, LLC
   
3,000
    10%  
December 6, 2007
 
Boutique Hotel - Manhattan, NY
 
Brisam Greenwich, LLC
   
10,000
    10%  
September 12, 2007
 
                       
Total Development Loans Receivable
      $
47,016
           

*subsequent to December 31, 2006, the maturity dates of these development loans were extended.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 — DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES (CONTINUED)

We acquire land and improvements and lease them to entities, including entities in which our executive officers and affiliated trustees own an interest, to enable such entities to construct hotels and related improvements on the leased land.  The land is leased under fixed lease agreements which earn rents at a minimum rental rate of 10% of our net investment in the leased property. Additional rents are paid by the lessee for the interest on the mortgage, real estate taxes and insurance. Revenues from our land leases are recorded in land lease revenue on our consolidated statement of operations.  All expenses related to the land leases are recorded in operating expenses as land lease expense.  Leased land and improvements are included in investment in hotel properties on our consolidated balance sheet.  As of September 30, 2007 our investment in leased land and improvements consists of the following:

     
Investment In Leased Properties
                         
Location
   
Land
   
Improvements
   
Other
   
Total Investment
   
Debt
   
Net Investment
   
Acquisition/ Lease Date
   
Lessee
 
                                                   
440 West 41st Street, New York, NY
    $
10,735
    $
11,051
    $
196
    $
21,982
    $
12,100
    $
9,882
   
7/28/2006
   
Metro Forty First Street, LLC
 
39th Street and 8th Avenue, New York, NY
     
21,774
     
-
     
541
     
22,315
     
13,250
     
9,065
   
6/28/2006
   
Metro 39th Street Associates, LLC
 
Nevins Street, Brooklyn, NY
     
10,650
     
-
     
269
     
10,919
     
6,500
     
4,419
   
6/11/2007 & 7/11/2007
   
H Nevins Street Associates, LLC
*
                                                               
Total
    $
43,159
    $
11,051
    $
1,006
    $
55,216
    $
31,850
    $
23,366
             
 
* Indicates lessee is a related party.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 — OTHER ASSETS

Other Assets consisted of the following at September 30, 2007 and December 31, 2006:

   
September 30,
   
December 31,
 
   
2007
   
2006
 
             
Deferred Transaction Costs
  $
528
    $
252
 
Deposits on Hotel Acquisitions
   
24
     
2,144
 
Investment in Statutory Trusts
   
1,548
     
1,548
 
Notes Receivable
   
2,540
     
2,438
 
Due from Lessees
   
2,075
     
2,318
 
Prepaid Expenses
   
4,216
     
3,533
 
Interest due on Development Loans to Non-Related Parties
   
829
     
871
 
Deposits on Property Improvement Plans
   
1,536
     
1,405
 
Hotel Purchase Option
   
2,620
     
-
 
Other
   
1,650
     
1,636
 
    $
17,566
    $
16,145
 
 
Transaction Costs - Transaction costs include 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.

Deposits on Hotel Acquisitions - Refundable deposits paid in connection with the acquisition of hotels, including accrued interest receivable, are recorded in other assets. As of September 30, 2007, we had $-0- in interest bearing and non interest bearing deposits.   As of December 31, 2006, we had $2,000 in interest bearing deposits and $100 in non-interest bearing deposits related to the acquisition of hotel properties. The interest bearing deposit as of December 31, 2006 accrued interest at 10%.

Investment in Statutory Trusts - We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II. Our investment is accounted for under the equity method.

Notes Receivable - Notes receivable as of September 30, 2007 and December 31, 2006 include notes receivable of $1,350 extended in November and December 2006 to the purchaser of the Holiday Inn Express, Duluth, GA; Comfort Suites, Duluth, GA; Hampton Inn, Newnan, GA; and the Hampton Inn Peachtree City, GA (collectively the “Atlanta Portfolio”).  Each of these notes bear interest at 8% and have maturity dates of December 31, 2007 or January 1, 2008. Also included in notes receivable is a loan made to one of our partners in an unconsolidated joint venture in the amount of $1,000 bearing interest at 12% with a maturity date of December 27, 2007.

Due from Lessees - Due from lessees represent rents due under our land lease and hotel lease agreements.

Prepaid Expense - Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in the next twelve months.

Interest due on Development Loans– Interest due on development loans represents interest income due from loans extended to non-related parties that are used to enable such entities to construct hotels and conduct related improvements on specific hotel projects.

Deposits on Property Improvement Plans– Deposits on property improvement plans consists of amounts advanced to HHMLP that is to be used to fund capital expenditures as part of our property improvement programs at certain properties.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 — DEBT

Mortgages and Notes Payable

The total mortgages payable balance at September 30, 2007 and December 31, 2006, was $585,415 and $504,523, respectively, and consisted of mortgages with fixed and variable interest rates ranging from 4.0% to 9.0%. The maturities for the outstanding mortgages ranged from July 2008 to January 2032. Aggregate interest expense incurred under the mortgages payable totaled $8,755 and $5,131 for the three months ended September 30, 2007 and 2006, respectively and $25,151 and $14,215 for the nine  months ended September 30, 2007 and 2006, respectively. Based on our estimate of market interest rates, the fair value of the Company’s debt exceeded its carrying value by approximately $12,898 at September 30, 2007.

We have 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 our 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, the notes bear interest at a variable rate of LIBOR plus 3.0% per annum. Interest expense in amount of $921 and $940 was recorded for the three months ended September 30, 2007 and 2006, respectively and $2,837 and $2,810 for the nine months ended September 30, 2007 and 2006, respectively.

Revolving Line of Credit

We have a revolving credit loan and security agreement with Commerce Bank, N.A. with a maximum amount of $100,000 and interest rate terms 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%, at our discretion.  This revolving credit loan replaced both the secured and unsecured lines of credit that we previously maintained.

The Company maintained a line of credit balance of $72,100 at September 30, 2007 and $24,000 at December 31, 2006. The Company recorded interest expense of $1,125 and $861 related to the line of credit borrowings, for the three months ended September 30, 2007 and 2006, respectively and $3,121 and $1,524 for the nine months ended September 30, 2007 and 2006, respectively. The weighted average interest rate on our Line of Credit for the three months ended September 30, 2007 and 2006 was 7.43% and 7.58%, respectively and 7.48% and 7.28% for the nine months ended September 30, 2007 and 2006, respectively.

Capitalized Interest

The Company utilizes its revolving line of credit to finance on-going capital improvement projects at its properties.  Interest incurred on the revolving line of credit that relates to our capital improvement projects is capitalized through the date when the assets are placed in service.  For the three and nine months ended September 30, 2007, we capitalized $339 of interest expense related to these projects.

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 costs is recorded in interest expense. As of September 30, 2007, deferred costs were $8,509, net of accumulated amortization of $2,760. Deferred costs were $7,525, net of accumulated amortization of $1,543, as of December 31, 2006. Amortization of deferred costs for the three months ended September 30, 2007 and 2006 was $448 and $225 respectively and $1,204 and $607 for the nine months ended September 30, 2007 and 2006, respectively.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 — DEBT (CONTINUED)

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 nine months ended September 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 nine months ended September 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. 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 nine months ended September 30, 2006.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS

We are the sole general partner in our operating partnership subsidiary, Hersha Hospitality Limited Partnership (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

Our wholly owned TRS, 44 New England, engages eligible independent contractors, including HHMLP, as the property managers for hotels it leases from us pursuant to management agreements. Our management agreements with HHMLP provide for five-year terms and are 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 our TRS 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.  Management agreements with other unaffiliated hotel management companies have similar terms.

As of September 30, 2007, HHMLP managed forty six of the properties leased to our TRS.  HHMLP also managed 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 exceeds certain thresholds, an 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. 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. There were no incentive management fees for the three and nine months ended September 30, 2007 and 2006. For the three months ended September 30, 2007 and 2006, management fees incurred totaled $1,636 and $1,246, respectively, and $4,164 and $3,211 for the nine months ended September 30, 2007 and 2006, respectively and are recorded as Hotel Operating Expenses.  In addition, the Company incurred $30 related to the sale of one hotel in the second quarter of 2006.  These fees are included in discontinued operations.

Accounting and Information Technology Fees

Each of the wholly owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and information technology fee.   Monthly fees for accounting services are $2 per property and monthly information technology fees are $0.5 per property. In addition, each of the wholly owned hotels not managed by HHMLP, but for which the accounting is provided by HHMLP incurs a monthly accounting fee of $3.  For the three months ended September 30, 2007 and 2006, the Company incurred accounting fees of $345 and $281, respectively, and incurred information technology fees of $71 and $64, respectively. For the nine months ended September 30, 2007 and 2006, the Company incurred accounting fees of $1,012 and $768, respectively, and incurred information technology fees of $207 and $184, respectively. Accounting 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 hotels and charged to expense as incurred. Franchise fee expense for the three months ended September 30, 2007 and 2006 was $4,550 and $2,871 respectively and $11,785 and $7,210 for the nine months ended September 30, 2007 and 2006, 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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)

Acquisitions from Affiliates

We have entered into an option agreement with each of our officers and affiliated 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 at fair market value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of our Company. Since our initial public offering in 1999, we have acquired, wholly or through joint ventures, a total of 78 hotels, including 23 hotels acquired from entities controlled by our officers or affiliated trustees. Of the 23 acquisitions from these entities, 20 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 approved by the Acquisition Committee.

Hotel Supplies

For the three months ended September 30, 2007 and 2006, we incurred expenses of $456 and $372, respectively, and for the nine months ended September 30, 2007 and 2006, we incurred expenses of $1,901 and $1,247 respectively, for hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating Expenses. Approximately $149 and $66 is included in accounts payable at September 30, 2007 and December 31, 2006, respectively.

Capital Expenditure Fees

Beginning April 1, 2006, HHMLP began to charge a 5% fee on all capitalized 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 months ended September 30, 2007 and 2006 we incurred fees of $74 and $59, respectively and for the nine months ended September 30, 2007 and 2006 we incurred fees of $237 and $116, respectively, which were capitalized in with the cost of fixed asset additions.

Due From Related Parties

The Due from Related Party balance as of September 30, 2007 and December 31, 2006 was approximately $2,097 and $4,059 respectively. The majority of the balance as of September 30, 2007 and December 31, 2006 were receivables owed from our unconsolidated joint ventures.

Due to Related Parties

The Due to Related Parties balance as of September 30, 2007 and December 31, 2006 was approximately $2,632 and $3,297, respectively. The balances as of September 30, 2007 and December 31, 2006 consisted of amounts payable to HHMLP for administrative, management, and benefit related fees.

Hotel Ground Rent

During 2003, 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, we assumed a land lease with an original term of 99 years.  Monthly payments are determined by the lease agreement and are due through the expiration in July 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 September 30, 2007 and 2006, we incurred $211 and $222, and for the nine months ended September 30, 2007 and 2006 we incurred $650 and $685, respectively, in hotel ground rent expense under the agreement.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 — DERIVATIVE INSTRUMENTS

We maintain an interest rate swap that fixes our interest rate on a variable rate mortgage.  Under the terms of this interest rate swap, we pay fixed rate interest of 4.73% of the notional amount and we receive floating rate interest equal to the one month U.S. dollar LIBOR.  The notional amount amortizes in tandem with the amortization of the underlying hedged debt and is $7,825 as of September 30, 2007.

On June 1, 2007, through the acquisition of Hotel 373, New York, NY, the Company assumed a mortgage containing an interest rate cap with a notional amount of $22,000 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 5.75%. The interest rate cap terminates on April 9, 2009, the maturity date of the hedged debt instrument.

At September 30, 2007, the fair value of the interest rate swap was $33 and is included in Accounts Payable, Accrued Expenses and Other Liabilities and at December 31, 2006, the fair value of the interest rate swap was $47 and is included in Other Assets on the face of the consolidated balance sheets.   At September 30, 2007, the fair value of the interest rate cap was $5 and is included in Other Assets on the face of the consolidated balance sheets.  The change in net unrealized gains/losses was a loss of $136 and $122 for the three months ended September 30, 2007 and 2006, respectively, and a loss of $147 and loss of $87 for the nine months ended September 30, 2007 and 2006, respectively, for derivatives designated as cash flow hedges which were reflected on our Balance Sheet in Accumulated Other Comprehensive Income. Hedge ineffectiveness of $3 on cash flow hedges was recognized in interest expense for each of the three months ended September 30, 2007 and 2006 and $12 and $10 for the nine months ended September 30, 2007 and 2006, respectively.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 9 — SHARE-BASED PAYMENTS

The following table summarizes the stock awards issued to executives of the Company pursuant to the 2004 Equity Incentive Plan:

           
Shares Vested
   
Unearned Compensation
     
Date of Award Issuance
   
Shares Issued
   
September 30, 2007
   
December 31, 2006
   
September 30, 2007
   
December 31, 2006
   
Period until Full Vesting
June 1, 2005
     
71,000
     
35,500
     
17,750
    $
284
    $
412
   
1.75 years
June 1, 2006
     
89,500
     
22,375
     
-
     
561
     
719
   
2.75 years
June 1, 2007
     
214,582
     
-
     
-
     
2,423
     
-
   
3.75 years
       
375,082
     
57,875
     
17,750
    $
3,268
    $
1,131
     
 
On June 1, 2007, the Compensation Committee of the Board of Trustees granted 214,582 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 $12.32 per share.  As of September 30, 2007, none of these restricted share awards was vested.

Compensation expense related to stock awards issued to executives of the Company of $260 and $95 was incurred during the three months ended September 30, 2007 and 2006, respectively, and $505 and $198 was incurred during the nine months ended September 30, 2007 and 2006, respectively, related to the restricted share awards.

On January 3, 2006, we awarded 1,000 common shares to each of our five independent trustees.  The fair value of each of the shares on the grant date was $9.12 per share. On January 2, 2007, we awarded 1,000 common shares to each of our four independent trustees. The fair value of each of the shares on the grant date was $11.44 per share. On July 2, 2007, we awarded 1,000 common shares to each of our four independent trustees.  The fair value of each of the shares on the grant date was $12.12.  Compensation expense related to stock awards issued to the Board of Trustees of $-0- and $13 was incurred during the three months ended September 30, 2007 and 2006, respectively and $49 and $38 was incurred during the nine months ended September 30, 2007 and 2006, respectively.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT 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 September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Numerator:
                       
BASIC
                       
Income from Continuing Operations
  $
8,390
    $
5,540
    $
11,941
    $
4,408
 
Dividends paid on unvested restricted shares
    (57 )     (26 )     (140 )     (64 )
Distributions to 8.0% Series A Preferred Shareholders
    (1,200 )     (1,200 )     (3,600 )     (3,600 )
Income from continuing operations applicable to common shareholders
   
7,133
     
4,314
     
8,201
     
744
 
Income from Discontinued Operations
   
106
     
240
     
113
     
864
 
Net Income applicable to common shareholders
  $
7,239
    $
4,554
    $
8,314
    $
1,608
 
                                 
DILUTED*
                               
Income from Continuing Operations
  $
8,390
    $
5,540
    $
11,941
    $
4,408
 
Dividends paid on unvested restricted shares
    (57 )     (26 )     (140 )     (64 )
Distributions to 8.0% Series A Preferred Shareholders
    (1,200 )     (1,200 )     (3,600 )     (3,600 )
Income from continuing operations applicable to common shareholders
   
7,133
     
4,314
     
8,201
     
744
 
Income from Discontinued Operations
   
106
     
240
     
113
     
864
 
Net Income applicable to common shareholders
  $
7,239
    $
4,554
    $
8,314
    $
1,608
 
                                 
Denominator:
                               
Weighted average number of common shares – basic
   
40,807,626
     
28,413,553
     
40,663,670
     
24,760,185
 
Effect of dilutive securities:
                               
Unvested stock awards
   
-
     
15,084
     
-
     
-
 
                                 
Weighted average number of common shares - diluted*
   
40,807,626
     
28,428,637
     
40,663,670
     
24,760,185
 


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 10 — EARNINGS PER SHARE  (CONTINUED)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Earnings Per Share:
                       
BASIC
                       
Income from continuing operations applicable to common shareholders
  $
0.18
    $
0.15
    $
0.20
    $
0.03
 
Income from Discontinued Operations
  $
0.00
    $
0.01
    $
0.00
    $
0.03
 
                                 
Net Income applicable to common shareholders
  $
0.18
    $
0.16
    $
0.20
    $
0.06
 
                                 
DILUTED*
                               
Income from continuing operations applicable to common shareholders
  $
0.18
    $
0.15
    $
0.20
    $
0.03
 
Income from Discontinued Operations
  $
0.00
    $
0.01
    $
0.00
    $
0.03
 
                                 
Net Income applicable to common shareholders
  $
0.18
    $
0.16
    $
0.20
    $
0.06
 
 
*
Income allocated to minority interest in the Partnership has been excluded from the numerator and Partnership units have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact. Weighted average Partnership units outstanding for the three months ended September 30, 2007 and 2006 were 6,095,971 and 3,724,426, respectively. Weighted average Partnership units outstanding for the nine months ended September 30, 2007 and 2006 were 5,139,657 and 3,459,590, respectively.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 11 — CASH FLOW DISCLOSURES AND NON-CASH ACTIVITIES

Interest paid during the nine months ended September 30, 2007 and 2006 totaled $31,094 and $17,378, respectively.

The following non-cash activities occurred during the nine months ended September 30, 2007 and 2006:

   
Nine Months Ended September 30,
 
   
2007
   
2006
 
Common Shares issued as part of the Dividend Reinvestment Plan
  $
22
    $
19
 
Issuance of Common Shares to the Board of Trustees
   
94
     
46
 
Issuance of Stock Awards
   
2,644
     
841
 
Issuance of Common LP Units for acquisitions of hotel properties
   
21,167
     
9,940
 
Debt assumed in acquisition of  hotel properties
   
70,564
     
102,301
 
Issuance of Common LP Units for acquisition of unconsolidated joint venture
   
6,817
     
-
 
Issuance of Common LP Units for acquisition of option to acquire interest in hotel property
   
933
     
-
 
Conversion of Common LP Units to Common Shares
   
2,333
     
651
 
Reallocation to minority interest
   
11,180
     
6,578
 


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 12 — DISCONTINUED OPERATIONS

In September of 2005, our Board of Trustees authorized management of the Company to sell the Holiday Inn Express, Hartford, CT.  The Company acquired the hotel in January 2004 and sold the hotel on April 12, 2006. Proceeds from the sale were $3,600, and the gain on the sale was $497, of which $61 was allocated to minority interest in HHLP.  The operating results for this hotel have been classified as discontinued operations in the statements of operations for the nine months ended September 30, 2006.

In March of 2006, our Board of Trustees authorized management of the Company to sell the Holiday Inn Express, Duluth; Comfort Suites, Duluth; Hampton Inn, Newnan and the Hampton Inn, Peachtree City located in metropolitan Atlanta, Georgia.  These assets were classified as “held for sale” as of September 30, 2006. The operating results for these hotels were classified as discontinued operations in the statements of operations for the three and nine months ended September 30, 2006. These hotels were acquired by the Company in April and May 2000 and were sold during November and December 2006.  Proceeds from the sales were $18,100, and the gain on the sale was $290, of which $33 was allocated to minority interest in HHLP.   Notes receivable in the aggregate amount of $1,350 were received as part of the proceeds of the sale of the Atlanta Portfolio.  Interest payments are due quarterly with repayment of the principal due upon maturity on December 31, 2007 or January 1, 2008.

In September of 2007, our Board of Trustees authorized management of the Company to sell the Hampton Inn, Linden, NJ (Hampton Inn) and Fairfield Inn, Mt. Laurel, NJ (Fairfield Inn).  The Company acquired the Hampton Inn in October 2003 and the Fairfield Inn in January 2006.  These assets are classified as “held for sale” on the Company’s Consolidated Balance Sheet as of September 30, 2007. The operating results for these hotels have been reclassified to discontinued operations in the statements of operations for the three and nine months ended September 30, 2007 and 2006.  The Company has signed definitive agreements for the sale of the Hampton Inn and Fairfield Inn for a purchase price of $18 million and $11.5 million, respectively. The sale of these properties is expected to be completed by the end of the fourth quarter of 2007.

Assets Held for Sale consisted of the following at September 30, 2007:

   
September 30, 2007
 
Land
  $
2,955
 
Buildings and Improvements
   
20,698
 
Furniture, Fixtures and Equipment
   
4,073
 
Deferred Costs
   
138
 
Intangible Assets
   
107
 
    $
27,971
 
         
Less Accumulated Depreciation
    (3,311 )
         
Total Assets Held for Sale
  $
24,660
 

As of September 30, 2007, Liabilities Related to Assets Held for Sale was $17,082 and consisted of mortgages on the Hampton Inn and Fairfield Inn.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE