form10q.htm


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 September 30, 2008

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.
x Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Small reporting company ¨

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

As of September 30, 2008, the number of Priority Class A Common Shares of Beneficial Interest outstanding was
48,274,200.
 


 
1

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

Item No.
 
Page
     
PART I.  FINANCIAL INFORMATION
 
Item 1.
3
 
3
 
4
 
6
 
7
Item 2.
29
Item 3.
37
Item 4.
39
PART II.  OTHER INFORMATION
 
Item 1.
40
Item 1A.
40
Item 2.
40
Item 3.
40
Item 4.
40
Item 5.
40
Item 6.
41

2


PART I.     FINANCIAL INFORMATION
Item 1. Financial Statements.

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2008 [UNAUDITED] AND DECEMBER 31, 2007
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
September 30, 2008
   
December 31, 2007
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $ 990,335     $ 893,297  
Investment in Joint Ventures
    50,858       51,851  
Development Loans Receivable
    82,764       58,183  
Cash and Cash Equivalents
    20,951       12,327  
Escrow Deposits
    11,094       13,706  
Hotel Accounts Receivable, net of allowance for doubtful accounts of $120 and $47
    9,427       7,287  
Deferred Costs, net of Accumulated Amortization of $4,345 and $3,252
    8,371       8,048  
Due from Related Parties
    2,666       1,256  
Intangible Assets, net of Accumulated Amortization of $546 and $764
    7,630       5,619  
Other Assets
    17,033       16,033  
Hotel Assets Held for Sale
    3,546       -  
                 
Total Assets
  $ 1,204,675     $ 1,067,607  
                 
Liabilities and Shareholders’ Equity:
               
Line of Credit
  $ 51,400     $ 43,700  
Mortgages and Notes Payable, net of unamortized discount of $64 and $72
    680,483       619,308  
Accounts Payable, Accrued Expenses and Other Liabilities
    19,267       17,728  
Dividends and Distributions Payable
    11,237       9,688  
Due to Related Parties
    1,400       2,025  
                 
Total Liabilities
    763,787       692,449  
                 
Minority Interests:
               
Common Units
  $ 58,999     $ 42,845  
Interest in Consolidated Joint Ventures
    2,010       1,908  
                 
Total Minority Interests
    61,009       44,753  
                 
Shareholders' Equity:
               
Preferred Shares - 8% Series A, $.01 Par Value, 29,000,000 Shares Authorized, 2,400,000 Shares Issued and Outstanding (Aggregate Liquidation Preference $60,000)
    24       24  
Common Shares - Class A, $.01 Par Value, 80,000,000 Shares Authorized, 48,274,200 and 41,203,612 Shares Issued and Outstanding at September 30, 2008 and December 31, 2007, respectively
    483       412  
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and  Outstanding
    -       -  
Accumulated Other Comprehensive Income
    139       (23 )
Additional Paid-in Capital
    463,059       397,127  
Distributions in Excess of Net Income
    (83,826 )     (67,135 )
                 
Total Shareholders' Equity
    379,879       330,405  
                 
Total Liabilities and Shareholders’ Equity
  $ 1,204,675     $ 1,067,607  


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

3


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
   
September 30, 2008
   
September 30, 2007
 
Revenue:
                       
Hotel Operating Revenues
  $ 72,715     $ 65,609     $ 192,011     $ 171,984  
Development Loan Income
    1,586       1,379       5,759       4,013  
Land Lease Revenue
    1,320       1,324       4,044       3,529  
Other Revenues
    243       265       837       592  
Total Revenues
    75,864       68,577       202,651       180,118  
                                 
Operating Expenses:
                               
Hotel Operating Expenses
    40,517       35,794       109,635       97,348  
Hotel Ground Rent
    308       211       750       650  
Land Lease Expense
    722       741       2,216       1,974  
Real Estate and Personal Property Taxes and Property Insurance
    3,335       2,842       9,441       8,295  
General and Administrative
    1,918       1,689       5,821       5,521  
Depreciation and Amortization
    10,747       8,777       30,102       24,770  
Total Operating Expenses
    57,547       50,054       157,965       138,558  
                                 
Operating Income
    18,317       18,523       44,686       41,560  
                                 
Interest Income
    69       136       252       590  
Interest Expense
    10,892       10,605       31,873       31,203  
Loss on Debt Extinguishment
    1,416       -       1,416       -  
                                 
Income before income from Unconsolidated Joint Venture Investments, Minority Interests and Discontinued Operations
    6,078       8,054       11,649       10,947  
                                 
Income from Unconsolidated Joint Venture Investments
    1,629       1,680       2,251       2,584  
                                 
Income before Minority Interests and  Discontinued Operations
    7,707       9,734       13,900       13,531  
                                 
Income allocated to Minority Interests in   Continuing Operations
    1,417       1,376       2,165       1,558  
Income from Continuing Operations
    6,290       8,358       11,735       11,973  
                                 
Discontinued Operations, net of minority interests (Note 12):
                               
Income (loss) from Discontinued Operations
    45       138       (54 )     81  
                                 
Net Income
    6,335       8,496       11,681       12,054  
Preferred Distributions
    1,200       1,200       3,600       3,600  
                                 
Net Income applicable to  Common Shareholders
  $ 5,135     $ 7,296     $ 8,081     $ 8,454  

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

4


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
   
September 30, 2008
   
September 30, 2007
 
Earnings Per Share:
                       
BASIC
                       
Income from continuing operations applicable to common shareholders
  $ 0.11     $ 0.18     $ 0.18     $ 0.20  
Income (Loss) from  Discontinued Operations
    0.00       0.00       0.00       0.00  
                                 
Net Income applicable to common shareholders
  $ 0.11     $ 0.18     $ 0.18     $ 0.20  
                                 
DILUTED*
                               
Income from continuing operations applicable to common shareholders
  $ 0.11     $ 0.18     $ 0.18     $ 0.20  
Income (Loss) from  Discontinued Operations
    0.00       0.00       0.00       0.00  
                                 
Net Income applicable to common shareholders
  $ 0.11     $ 0.18     $ 0.18     $ 0.20  
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
    47,764,168       40,807,626       44,315,615       40,663,670  
Diluted*
    47,764,168       40,807,626       44,315,615       40,663,670  


*
Income allocated to minority interest in Hersha Hospitality Limited Partnership has been excluded from the numerator and units of limited partnership interest in Hersha Hospitality Limited Partnership 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 units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the three months ended September 30, 2008 and 2007 were 8,751,009 and 6,095,971, respectively and for the nine months ended September 30, 2008 and 2007 were 7,795,818 and 5,139,657, respectively.   Unvested stock awards have been omitted from the denominator for the purpose of computing diluted earnings per share for the three and nine months ended September 30, 2008 and 2007 since the effect of including these awards in the denominator would be anti-dilutive to income from continuing operations applicable to common shareholders.
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

5


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS]

   
Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
 
Operating activities:
           
Net income
  $ 11,681     $ 12,054  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    30,343       25,722  
Amortization
    1,346       1,475  
Debt extinguishment
    1,435       -  
Income allocated to minority interests
    2,156       1,568  
Equity in income of unconsolidated joint ventures
    (2,251 )     (2,584 )
Distributions from unconsolidated joint ventures
    2,991       2,703  
Gain recognized on change in fair value of derivative instrument
    (18 )     (57 )
Stock based compensation expense
    1,043       554  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (2,259 )     (7,214 )
Escrows
    2,612       490  
Other assets
    (1,872 )     (1,764 )
Due from related party
    (1,272 )     2,850  
Increase (decrease) in:
               
Due to related party
    (1,066 )     (665 )
Accounts payable and accrued expenses
    383       2,590  
Net cash provided by operating activities
    45,252       37,722  
                 
Investing activities:
               
Purchase of hotel property assets
    (62,609 )     (32,659 )
Capital expenditures
    (16,946 )     (11,874 )
Cash paid for franchise fee intangible
    (57 )     (71 )
Investment in development loans receivable
    (40,700 )     (60,700 )
Repayment of development loans receivable
    16,416       36,000  
Distributions from unconsolidated joint venture
    350       4,686  
Advances and capital contributions to unconsolidated joint ventures
    (97 )     (1,699 )
Repayment of notes receivable
    1,350       34  
Net used in investing activities
    (102,293 )     (66,283 )
                 
Financing activities:
               
Proceeds from borrowings under line of credit, net
    7,700       48,100  
Proceeds from mortgages and notes payable
    51,780       28,543  
Principal repayment of mortgages and notes payable
    (24,306 )     (19,387 )
Cash paid for deferred financing costs
    (85 )     (250 )
Proceeds from issuance of common stock, net of issuance costs
    61,845       -  
Distribution to partners in consolidated joint ventures
    -       (340 )
Dividends paid on common shares
    (23,501 )     (22,016 )
Dividends paid on preferred shares
    (3,600 )     (3,600 )
Distributions paid on common partnership units
    (4,168 )     (2,525 )
Net cash provided by financing activities
    65,665       28,525  
                 
Net increase (decrease) in cash and cash equivalents
    8,624       (36 )
Cash and cash equivalents - beginning of period
    12,327       10,316  
                 
Cash and cash equivalents - end of period
  $ 20,951     $ 10,280  

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

6


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [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,” ”us,” “our” 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 fair presentation, have been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

On May 5, 2008, we transferred the listing of our common shares of beneficial interest and 8.0% Series A preferred shares of beneficial interest from the American Stock Exchange to the New York Stock Exchange (the “NYSE”).  Hersha’s common shares now trade on the NYSE under the ticker symbol "HT" and its Series A preferred shares now trade on the NYSE under the ticker symbol "HT PR A."

On May 16, 2008, we completed a public offering of 6,000,000 common shares at $9.90 per share.  On May 20, 2008, the underwriters exercised a portion of their over-allotment option with respect to that offering, and we issued an additional 600,000 common shares at $9.90 per share.  Proceeds to us, net of underwriting discounts and commissions and expenses, were approximately $61,845.  Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests.  The net offering proceeds were used to repay indebtedness.

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. Adoption of SFAS No. 157 on January 1, 2008 did not have a material effect on the Company. In accordance with FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,” which was adopted by the FASB in February 2008, the Company has deferred the application of SFAS No. 157 related to non-recurring fair value measurements of non-financial assets and liabilities until January 1, 2009.

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 No. 159”). SFAS No. 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. Adoption of SFAS No. 159 on January 1, 2008 did not have a material effect on the Company since the Company did not elect to measure any financial assets or liabilities at fair value.

SFAS No. 141R

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value.” SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. The Company has not determined whether the adoption of SFAS No. 141R will have a material effect on the Company’s financial statements.  Adoption of SFAS No.141R on January 1, 2009 could have a material effect on the Company’s financial statements and the Company’s future financial results to the extent the Company acquires significant amounts of real estate assets.  Costs related to future acquisitions will be expensed as incurred compared to the Company’s current practice of capitalizing such costs and amortizing them over the useful life of the acquired assets.  In addition, to the extent the Company enters into acquisition agreements with earn-out provisions, a liability may be recorded at the time of acquisition based on an estimate of the earn-out to be paid compared to our current practice of recording a liability for the earn-out when amounts are probable and determinable.

7


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 — BASIS OF PRESENTATION (CONTINUED)

SFAS No. 160

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 requires noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders, and requires the amount of consolidated net income attributable to the noncontrolling interests to be identified in the consolidated financial statements. SFAS No.160 is effective for fiscal years beginning after December 15, 2008.The Company has not determined whether the adoption of SFAS No. 160 will have a material effect on the Company’s financial statements.
 
SFAS No. 161

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact SFAS No. 161 will have on the Company’s consolidated financial statements.

8


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [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, 2008 and December 31, 2007:

   
September 30, 2008
   
December 31, 2007
 
             
Land
  $ 184,879     $ 172,061  
Buildings and Improvements
    801,274       706,038  
Furniture, Fixtures and Equipment
    121,287       105,979  
Construction in Progress
    -       1,541  
      1,107,440       985,619  
                 
Less Accumulated Depreciation
    (117,105 )     (92,322 )
                 
Total Investment in Hotel Properties
  $ 990,335     $ 893,297  


During the nine months ended September 30, 2008, we acquired the following wholly owned hotel properties:

Hotel
 
Acquisition Date
 
Land
   
Buildings and Improvements
   
Furniture Fixtures and Equipment
   
Franchise Fees, Loan Costs, and Leasehold Intangible
   
Total Purchase Price
   
Fair Value of Assumed Debt
 
Duane Street Hotel, TriBeCa, New York, NY
 
1/4/2008
  $ 8,213     $ 12,869     $ 2,793     $ -     $ 23,875     $ -  
nu Hotel, Brooklyn, NY
 
1/14/2008
    -       17,343       -       -       17,343       -  
TownePlace Suites,  Harrisburg, PA
 
5/8/2008
    1,238       10,182       1,792       42       13,254       -  
Sheraton Hotel, JFK Airport, Jamaica, NY
 
6/13/2008
    -       27,342       4,374       3,157       34,873       23,800  
Holiday Inn Express, Camp Springs, MD
 
6/26/2008
    1,629       11,115       931       5       13,680       -  
Hampton Inn,  Smithfield, RI
 
8/1/2008
    2,057       9,502       1,156       102       12,817       6,990  
Total 2008 Wholly Owned Acquisitions
      $ 13,137     $ 88,353     $ 11,046     $ 3,306     $ 115,842     $ 30,790  
 
 
In connection with the acquisitions made during the nine months ended September 30, 2008, we acquired $344 in working capital assets and assumed $663 in working capital liabilities.

The Duane Street Hotel, TriBeCa, New York, NY, was acquired from entities that are owned by certain of the Company’s executives and affiliated trustees.  Included in the consideration paid for the Duane Street Hotel were 779,585 units of limited partnership interest (“OP Units”) in Hersha Hospitality Limited Partnership ("HHLP" or the “Partnership”), our operating partnership subsidiary, valued at $6,862. The OP Units were issued to certain executives and affiliated trustees of the Company.  In connection with the acquisition of the Duane Street Hotel, the Company entered into a $15,000 fixed rate mortgage with interest at 7.15%.  The mortgage matures in February 2018 and is interest only for the first three years.

Upon acquisition, we commenced renovations to fit out the building prior to opening the nu Hotel, located in Brooklyn, NY,.  Costs associated with the building while it was being renovated, including interest, were capitalized.  On July 7, 2008, the property opened and all renovation costs were capitalized to building and improvements and furniture, fixtures and equipment and are being depreciated over the useful lives of these assets.  In connection with the acquisition of the nu Hotel the Company entered into an $18,000 variable rate mortgage debt facility with interest at LIBOR plus 2.00%.  Principal of $13,240 was drawn on the date of acquisition, while the remainder of the balance has been drawn as renovations progressed and as interest was incurred.  The mortgage requires the payment of interest only and matures in January of 2011.

9


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
 
The Sheraton Hotel, JFK Airport, Jamaica, NY, was acquired from entities that are owned by certain of the Company’s executives and affiliated trustees and an unrelated third party.  Included in the consideration paid for the Sheraton Hotel were 1,177,306 OP Units in HHLP valued at $10,596.  The OP Units were issued to certain executives and affiliated trustees of the Company and an unrelated third party.  In connection with the acquisition of the Sheraton Hotel, the Company assumed a $23,800 variable rate mortgage which accrued interest at LIBOR plus 2.00% per annum and matured in April 28, 2010.  Subsequent to September 30, 2008, this mortgage was repaid with borrowings from our revolving line of credit, and this property now serves as collateral for borrowings under our revolving line of credit.  In connection with the acquisition of the Sheraton Hotel, we assumed a lease for the underlying land with a remaining term of approximately 94 years.  The remaining lease payments were determined to be below market value and, as a result, $2,442 of the purchase price was allocated to a leasehold intangible asset.  This asset is recorded in intangible assets on the consolidated balance sheet and is being amortized over the remaining life of the lease.

The Holiday Inn Express, Camp Springs, MD, was acquired from entities that are owned by certain of the Company’s executives and affiliated trustees and an unrelated third party.  Included in the consideration paid for the Holiday Inn Express were 540,337 OP Units in HHLP valued at $4,166.  The OP Units were issued to certain executives and affiliated trustees of the Company and an unrelated third party.

The Hampton Inn & Suites, Smithfield, RI, was acquired from entities that are owned by certain of the Company’s executives and affiliated trustees.  In connection with the acquisition of the Hampton Inn, the Company assumed a $6,990 fixed rate mortgage which accrues interest at 6.98%.  The mortgage matures in December 12, 2016.  In connection with the acquisition of the property, the sellers provided a $500 note payable which accrued interest at a rate of 7.00% per annum.  This note was repaid prior to September 30, 2008.

On January 8, 2007, we closed on the acquisition of the Residence Inn, Langhorne, PA. The purchase agreement for this acquisition contained 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 in the purchase agreement. The earn-out period expired on July 31, 2008.  Based on results for this property through July 31, 2008, $1,000 was accrued as of September 30, 2008 and is included in Accounts Payable, Accrued Expenses and Other Liabilities on the balance sheet.  The earn-out was paid in October of 2008.  This additional purchase price was capitalized to land, building and improvements, and furniture, fixtures and equipment and is being depreciated over the useful lives of these assets.

The purchase agreements for some of our acquisitions contain certain provisions that entitle the seller to an earn-out payment based on the Net Operating Income of the properties, as defined in each purchase agreement.  The following table summarizes our existing earn-out provisions:

Acquisition Date
 
Acquisition Name
 
Maximum Earn-Out Payment Amount
 
Earn-Out Period Expiration
12/28/2006
 
Summerfield Suites Portfolio
  $ 6,000,000  
December 31, 2009
6/26/2008
 
Holiday Inn Express, Camp Springs, MD
    1,905,000  
December 31, 2010
8/1/2008
 
Hampton Inn & Suites, Smithfield, RI
    1,515,000  
December 31, 2010
 
We are currently unable to determine whether amounts will be paid under these three 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, 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.

Our newly acquired 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.

10


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

The following condensed pro forma financial data is presented as if all 2008 and 2007 acquisitions had been consummated as of January 1, 2007. 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 actual results of operations of the Company would have been assuming the acquisitions had been consummated at the beginning of the year presented, nor does it purport to represent the results of operations for future periods.


   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Pro Forma Total Revenues
  $ 76,058     $ 68,713     $ 204,554     $ 182,356  
                                 
Pro Forma Income from Continuing Operations applicable to Common Shareholders
  $ 6,278     $ 8,369     $ 11,860     $ 11,453  
Income (Loss) from Discontinued Operations
    45       138       (54 )     81  
Pro Forma Net Income
    6,323       8,507       11,806       11,534  
Preferred Distributions
    1,200       1,200       3,600       3,600  
Pro Forma Net Income applicable to Common Shareholders
  $ 5,123     $ 7,307     $ 8,206     $ 7,934  
                                 
Pro Forma Income applicable to Common Shareholders per Common Share
                               
Basic
  $ 0.11     $ 0.18     $ 0.19     $ 0.20  
Diluted
  $ 0.11     $ 0.18     $ 0.19     $ 0.20  
                                 
Weighted Average Common Shares Outstanding
                               
Basic
    47,764,168       40,807,626       44,315,615       40,663,670  
Diluted
    47,764,168       40,807,626       44,315,615       40,663,670  

11


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [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, 2008 and December 31, 2007, our investment in unconsolidated joint ventures consists of the following:

       
Percent
   
Preferred
   
September 30,
   
December 31,
 
Joint Venture
 
Hotel Properties
 
Owned
   
Return
   
2008
   
2007
 
                             
PRA Glastonbury, LLC
 
Hilton Garden Inn, Glastonbury, CT
    48.0 %  
11.0% cumulative
    $ 827     $ 945  
Inn American Hospitality at Ewing, LLC
 
Courtyard by Marriott,  Ewing, NJ
    50.0 %  
11.0% cumulative
      862       1,016  
Hiren Boston, LLC
 
Courtyard by Marriott, Boston, MA
    50.0 %  
N/A
      4,039       4,148  
SB Partners, LLC
 
Holiday Inn Express, Boston, MA
    50.0 %  
N/A
      2,105       2,010  
Mystic Partners, LLC
 
Hilton and Marriott branded hotels in CT and RI
    8.8%-66.7 %  
8.5% non-cumulative
      32,237       32,928  
PRA Suites at Glastonbury, LLC
 
Homewood Suites, Glastonbury, CT
    48.0 %  
10.0% non-cumulative
      2,801       2,808  
Metro 29th Street Associates, LLC
 
Holiday Inn Express, New York, NY
    50.0 %  
N/A
      7,987       7,996  
                        $ 50,858     $ 51,851  


Income from our unconsolidated joint ventures is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. 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. Income (loss) recognized during the three and nine months ended September 30, 2008 and 2007 for our Investments in Unconsolidated Joint Ventures is as follows:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
   
September 30, 2008
   
September 30, 2007
 
PRA Glastonbury, LLC
  $ 18     $ 26     $ 83     $ 87  
Inn American Hospitality at Ewing, LLC
    (7 )     20       (4 )     91  
Hiren Boston, LLC
    59       175       (110 )     309  
SB Partners, LLC
    101       183       94       192  
Mystic Partners, LLC
    797       1,006       817       1,253  
PRA Suites at Glastonbury, LLC
    (2 )     (2 )     (6 )     (5 )
Metro 29th Street Associates, LLC
    663       272       1,377       657  
                                 
Total equity in income
  $ 1,629     $ 1,680     $ 2,251     $ 2,584  

12


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

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, 2008 and December 31, 2007 and for the three and nine months ended September 30, 2008 and 2007.


Balance Sheets
           
   
September 30,
   
December 31,
 
   
2008
   
2007
 
Assets
           
Investment in hotel properties, net
  $ 221,470     $ 229,829  
Other Assets
    30,645       30,000  
Total Assets
  $ 252,115     $ 259,829  
                 
Liabilities and Equity
               
Mortgages and notes payable
  $ 220,861     $ 221,398  
Other liabilities
    12,390       12,305  
Equity:
               
Hersha Hospitality Trust
    50,858       51,851  
Other
    (31,994 )     (25,725 )
                 
Total Liabilities and Equity
  $ 252,115     $ 259,829  

Statements of Operations
                       
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
   
September 30, 2008
   
September 30, 2007
 
Room Revenue
  $ 27,675     $ 27,480     $ 77,514     $ 72,770  
Other Revenue
    6,065       7,359       21,550       22,586  
Operating Expenses
    (20,899 )     (21,424 )     (62,502 )     (59,829 )
Interest Expense
    (3,303 )     (3,977 )     (10,020 )     (11,607 )
Debt Extinguishment
    -       (2,858 )     -       (2,858 )
Lease Expense
    (1,393 )     (1,314 )     (4,145 )     (3,927 )
Property Taxes and Insurance
    (1,471 )     (1,654 )     (4,875 )     (4,558 )
Federal and State Income Taxes
    (54 )     (53 )     (54 )     (161 )
Depreciation and Amortization
    (4,211 )     (4,155 )     (12,062 )     (12,494 )
General and Administrative
    (1,851 )     (1,849 )     (5,741 )     (5,237 )
                                 
Net income (loss)
  $ 558     $ (2,445 )   $ (335 )   $ (5,315 )

13


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 — DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES

Development Loans Receivable

We have approved mortgage and mezzanine 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 fixed interest rates ranging from 10.0% to 15.0% (“Development Line Funding”). As of September 30, 2008 and December 31, 2007, we had Development Loans Receivable of $82,764 and $58,183, respectively. Interest income included in “Interest Income from Development Loans,” was $1,586 and $1,379 for the three months ended September 30, 2008 and 2007, respectively, and $5,759 and $4,013 for the nine months ended September 30, 2008 and 2007, respectively. Accrued interest on our development loans receivable was $2,005 as of September 30, 2008 and $1,591 as of December 31, 2007.

As of September 30, 2008 and December 31, 2007, our development loans receivable balance consisted of the following:

Hotel Property
 
Borrower
 
Principal Outstanding 9/30/2008
   
Principal Outstanding 12/31/2007
   
Interest Rate
 
Maturity Date
 
Sheraton - JFK Airport, NY
 
Risingsam Hospitality, LLC
  $ -     $ 10,016       10 %
September 30, 2008
 
Hampton Inn & Suites - West Haven, CT
 
44 West Haven Hospitality, LLC
    2,000       2,000       10 % October 9, 2009
Hilton Garden Inn - New York, NY
 
York Street LLC
    15,000       15,000       11 %
May 31, 2009
 
Hampton Inn - Smithfield, RI
 
44 Hersha Smithfield, LLC
    -       2,000       10 % October 9, 2008
Homewood Suites - Newtown, PA
 
Reese Hotels, LLC
    -       700       11 %
April 22, 2009
 
Union Square Hotel - Union Square, NY
 
Risingsam Union Square, LLC
    10,000       10,000       10 %
May 31, 2009
 
Hyatt Place - Manhattan, NY
 
Brisam East 52, LLC
    10,000       -       10 %
January 16, 2009
 
Hampton Inn - Brattleboro, VT
 
Maple Lodging Inc.
    5,000       -       15 % November 29, 2008
Lexington Avenue Hotel - Manhattan, NY
 
44 Lexington Holding, LLC
    9,000       -       11 % May 30, 2009
Renaissance by Marriott - Woodbridge, NJ
 
Hersha Woodbridge Associates, LLC
    5,000       -       11 % April 1, 2009
32 Pearl - Manhattan, NY
 
SC Waterview, LLC
    8,000       -       10 %
July 4, 2009
 
Hilton Garden Inn/Homewood Suites - Brooklyn, NY
 
167 Johnson Street, LLC
                           
Tranche 1
        11,000       11,000       11 %
September 21, 2008
 
Tranche 2
        9,000       9,000       13.5 %
September 24, 2008
 
Discount
        (1,236 )     (1,533 )            
Total Hilton Garden Inn/Homewood Suites - Brooklyn, NY
    18,764       18,467              
                                 
Total Development Loans Receivable
      $ 82,764     $ 58,183              
                                 
* Indicates borrower is a related party
                               


In connection with originating the $11,000 and $9,000 development loans in September 2007 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 the 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 $-0- and $14 for the three months ended September 30, 2008 and 2007, respectively, and $297 and $14 for the nine months ended September 30, 2008, respectively.

We monitor our portfolio of development loans on an on-going basis to determine collectability of the loan principal and accrued interest.  As part of our review we determined that the developer of the Hilton Garden Inn/Homewood Suites – Brooklyn, NY has failed to make payments to the senior lender on the property’s first mortgage.  As a result, we have elected to discontinue the accrual of interest as of July 1, 2008 on our $11,000 and 9,000 loans receivable with the developer and we have not extended the maturity of this loan receivable.  We are in discussions with the developer and the senior lender to work out the loan and determine the best course of action.  As of September 30, 2008, accrued interest receivable for this loan is $716.  Based on the value of the underlying assets and our interest in those assets, we have determined that the loan receivable and accrued interest is collectible.  We will continue to monitor this loan, and if it is determined that portions of the loan principal or accrued interest are uncollectible, we will record a reserve for amounts that are deemed to be uncollectible.  Based on our review, the remainder of the development loan portfolio is current and is deemed to be collectible.

14


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

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

Land Leases

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 sheets as of September 30, 2008 and December 31, 2007:

   
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
                                         

15


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 — OTHER ASSETS

Other Assets consisted of the following at September 30, 2008 and December 31, 2007:

   
September 30, 2008
   
December 31, 2007
 
             
Transaction Costs
  $ 338     $ 209  
Investment in Statutory Trusts
    1,548       1,548  
Notes Receivable
    1,235       2,581  
Due from Lessees
    1,131       1,986  
Prepaid Expenses
    4,065       3,402  
Interest due on Development Loans to Non-Related Parties
    1,350       1,456  
Deposits on Property Improvement Plans
    187       640  
Hotel Purchase Option
    2,620       2,620  
Other
    4,559       1,591  
                 
Total Other Assets
  $ 17,033     $ 16,033  


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.

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, 2008 and December 31, 2007 includes a loan made to one of our unconsolidated joint venture partners in the amount of $1,120 bearing interest at 13.5% with a maturity date of December 27, 2008.  Notes receivable as of December 31, 2007 also included $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”).  The Atlanta Portfolio notes receivables were repaid in September 2008.  

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.  This excludes interest due on development loans from loans extended to related parties in the amounts of $530 and $135, as of September 30, 2008 and December 31, 2007, respectively, which is included in the Due From Related Parties caption on the face of the consolidated balance sheets.

Deposits on Property Improvement Plans – Deposits on property improvement plans consists of amounts to be capitalized as part of our property improvement programs at certain properties, including capitalized interest and advances to HHMLP and other affiliated entities we contract with to perform construction services.

Hotel Purchase Option – We have options to acquire interests in two hotel properties at fixed purchase prices.

16


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[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, 2008, and December 31, 2007, was $628,666 and $567,507, respectively, and consisted of mortgages with fixed and variable interest rates ranging from 4.0% to 8.94%. The maturities for the outstanding mortgages ranged from January 2009 to January 2032. Aggregate interest expense incurred under the mortgages payable totaled $8,857 and $8,755 for the three months ended September 30, 2008 and 2007, respectively, and $26,107 and $25,151 for the nine months ended September 30, 2008 and 2007, respectively.

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 the amount of $947 and $921 was recorded for the three months ended September 30, 2008 and 2007, respectively, and $2,784 and $2,837 for the nine months ended September 30, 2008 and 2007, respectively.

As part of the acquisition of the Hyatt Summerfield Suites Portfolio, HHLP entered into a management agreement with Lodgeworks, L.P. (“Lodgeworks”).  Lodgeworks extended an interest-free loan to HHLP for working capital contributions that are due at either the termination or expiration of the management agreement.  Because the interest rate on the note payable is below the market rate of interest at the date of the acquisition, a discount was recorded on the note payable.  The discount reduced the principal balances recorded in the mortgages and notes payable and is being amortized over the remaining life of the loan and is recorded as interest expense.  The balance of the note payable, net of unamortized discount, was $269 as of September 30, 2008 and $253 as of December 31, 2007.

As of September 30, 2008, mortgages and notes payable and borrowings under our line of credit had a carrying value of $731,947, which exceeded the fair value by approximately $49,790 due to an increase in market borrowing rates.

Revolving Line of Credit

During the quarter ended September 30, 2008, we maintained a revolving credit facility with T.D. Bank, N.A. (formerly Commerce Bank, N.A.) and a syndicate of lenders.  The credit facility bore interest at either the Wall Street Journal'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 the Company’s option. Provisions of the credit facility allowed 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.

The line of credit was 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, the Residence Inn, Norwood, MA, the Residence Inn, Langhorne, PA, the Holiday Inn, Norwich, CT and collateral assignment of all hotel management contracts of the management companies in the event of default. The line of credit included certain financial covenants and required that we maintain (1) a minimum tangible net worth of $110,000; (2) a maximum accounts and other receivables from affiliates of $75,000; and (3) certain financial ratios. The Company was in compliance with each of these covenants as of September 30, 2008.

The Company maintained a line of credit balance of $51,400 at September 30, 2008 and $43,700 at December 31, 2007. The Company recorded interest expense of $549 and $1,125 related to the line of credit borrowings, for the three months ended September 30, 2008 and 2007, respectively, and $2,162 and $3,121 for the nine months ended September 30, 2008 and 2007, respectively.  The weighted average interest rate on the line of credit for the three months ended September 30, 2008 and 2007 was 5.00% and 7.43%, respectively, and 5.41% and 7.48% for the nine months ended September 30, 2008 and 2007, respectively.

17


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 — DEBT (CONTINUED)

On October 14, 2008, we entered into a new credit facility with T.D. Bank, N.A. and a syndicate of lenders.  This new credit facility replaced our existing credit facility and as a result all amounts outstanding under our existing credit facility were repaid with borrowings from our new credit facility.  See Note 13 – Subsequent Events for a description of the terms of our new credit facility.

Capitalized Interest

We utilize mortgage debt and our revolving line of credit to finance on-going capital improvement projects at our properties.  Interest incurred on mortgages and the revolving line of credit that relate to our capital improvement projects is capitalized through the date when the assets are placed in service.  For the three months ended September 30, 2008 and 2007, we capitalized $38 and $339, respectively, of interest expense and for the nine months ended September 30, 2008 and 2007, we capitalized $544 and $339, respectively, 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, 2008, deferred costs were $8,371, net of accumulated amortization of $4,345. Deferred costs were $8,048 net of accumulated amortization of $3,252, as of December 31, 2007. Amortization of deferred costs for the three months ended September 30, 2008 and 2007 was $589 and $448 respectively and $1,487 and $1,204 for the nine months ended September 30, 2008 and 2007, respectively.

Debt Extinguishment

On July 1, 2008, we settled on the defeasance of loans associated with four of our properties.  These mortgage loans had an aggregate outstanding principal balance of approximately $11,028 as of June 30, 2008.  As a result of this extinguishment, we expensed $1,399 in unamortized deferred costs and defeasance premiums for three of the four properties, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the three and nine months ended September 30, 2008 and now serve as collateral for our revolving credit facility entered into on October 14, 2008. The fourth property, the Holiday Inn Conference Center, New Cumberland, PA was sold on October 30, 2008 and $19 in unamortized deferred costs expensed as a result of the debt extinguishment is included in the Income (Loss) from Discontinued Operations caption on the face of the consolidated statements of operations for the three and nine months ended September 30, 2008.

On September 30, 2008, we repaid $8,188 on our mortgage with M&T Bank for the Holiday Inn Express, Cambridge property as a result of debt refinancing.  The new debt of $11,000 has a fixed interest rate of 6.625% and a maturity date of September 30, 2023.  As a result of this extinguishment, we expensed $17 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 nine months ended September 30, 2008.

18


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[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, HHLP, which is indirectly the sole general partner of the subsidiary partnerships. At September 30, 2008, there were 8,746,300 non-controlling OP Units outstanding with a fair market value of $65,072, based on the price per share of our common shares on the New York Stock Exchange on such date.  These units are redeemable by the unitholders for cash or, at our option, common shares on a one-for-one basis.

Management Agreements

Our wholly owned TRS, 44 New England, engages eligible independent contractors pursuant to REIT qualifications, 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.

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, 2008 and 2007. For the three months ended September 30, 2008 and 2007, management fees incurred totaled $1,849 and $1,636, respectively, and $4,688 and $4,164 for the nine months ended September 30, 2008 and 2007, respectively and are recorded as Hotel Operating Expenses.

Franchise Agreements

Our branded 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, 2008 and 2007 was $4,974 and $4,550, respectively and for the nine months ended September 30, 2008 and 2007 was $13,112 and $11,785, respectively.  The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.

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, 2008 and 2007, the Company incurred accounting fees of $369 and $345, respectively, and incurred information technology fees of $82 and $71, respectively.  For the nine months ended September 30, 2008 and 2007, the Company incurred accounting fees of $1,056 and $1,012, respectively, and incurred information technology fees of $234 and $207, respectively. Accounting and information technology fees are included in Hotel Operating Expenses.

Capital Expenditure Fees

HHMLP charges 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 months ended September 30, 2008 and 2007, we incurred fees of $66 and $74, respectively, and for the nine months ended September 30, 2008 and 2007, we incurred fees of $207 and $237, respectively, which were capitalized in with the cost of fixed asset additions.

19


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[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 right of first 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. 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, 2008 and 2007, we incurred expenses of $423 and $456, respectively, and for the nine months ended September 30, 2008 and 2007, we incurred expenses of $1,245 and $1,901 for hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating Expenses. Approximately $43 and $149 is included in accounts payable at September 30, 2008 and December 31, 2007, respectively.

Due From Related Parties

The Due from Related Party balance as of September 30, 2008 and December 31, 2007 was approximately $2,666 and $1,256 respectively. The majority of the balance as of September 30, 2008 and December 31, 2007 were receivables owed from our unconsolidated joint ventures.

Due to Related Parties

The Due to Related Parties balance as of September 30, 2008 and December 31, 2007 was approximately $1,400
 and $2,025, respectively. The balances as of September 30, 2008 and December 31, 2007 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.  On June 13, 2008, in conjunction with the acquisition of the Sheraton Hotel, 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 November 2103.  Each 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, 2008 and 2007, we incurred $308 and $211, respectively, and for the nine months ended September 30, 2008 and 2007, we incurred $750 and $650, respectively, in hotel ground rent expense under these agreements.

20


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS

Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; the standard does not require any new fair value measurements of reported balances.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

As of September 30, 2008, the Company’s derivative instruments represented the only financial instruments measured at fair value.  Currently, the Company uses derivative instruments, such as interest rate swaps and caps, to manage its interest rate risk.   The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.

To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2008, the Company has assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Derivative Instruments

On January 15, 2008, we entered into an interest rate swap agreement that fixes the interest rate on the variable rate mortgage, bearing interest at one month U.S. dollar LIBOR plus 2.0%, originated to finance the acquisition of the nu Hotel, Brooklyn, NY.  Under the terms of this interest rate swap, we pay fixed rate interest of 3.245% on the $13,240 notional amount and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest at a rate of 5.245%.

On February 1, 2008, we entered into an interest rate swap agreement that fixes the interest rate on a $40,000 portion of our floating revolving credit facility with Commerce Bank, which bears interest at one month U.S. dollar LIBOR plus 2.0%.  Under the terms of this interest rate swap, we pay fixed rate interest of 2.6275% on the $40,000 notional amount and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest on this portion of the line of credit at a rate of 4.6275%.

21


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)

We maintain an interest rate cap that effectively fixes interest payments when LIBOR exceeds 5.75% on our debt financing Hotel 373, New York, NY.  The notional amount of the interest rate cap is $22,000 and equals the principal of the variable interest rate debt being hedged.

We maintain an interest rate swap that fixes our interest rate on a variable rate mortgage on the Sheraton Four Points, Revere, MA.  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 $7,662 as of September 30, 2008.  We entered into this interest rate swap in July of 2004 and designated it as a cash flow hedge in November of 2004 when the fair value of the swap was a liability of $342, causing ineffectiveness in the hedge relationship.  Prior to January 1, 2008, the hedge relationship was deemed to be effective and the change in fair value related to the effective portion of the interest rate swap was recorded in Accumulated Other Comprehensive Income on the Balance Sheet.  Subsequent to January 1, 2008, the hedge relationship was no longer deemed to be effective.  The change in fair value of the interest rate swap for the three and nine months ended September 30, 2008 was a gain of $51 and a gain of $28, respectively, and was recorded in Interest Expense on the Statement of Operations.

At September 30, 2008 and December 31, 2007, the fair value of the interest rate swaps and cap were:

               
Value
 
Date of Transaction
 
Hedged Debt
 
Type
 
Maturity Date
 
September 30, 2008
   
December 31, 2007
 
July 2, 2004
 
Variable Rate Mortgage - Sheraton Four Points, Revere, MA
 
Swap
 
July 23, 2009
  $ (92 )   $ (120 )
July 1, 2007
 
Variable Rate Mortgage - Hotel 373, New York, NY
 
Cap
 
April 9, 2009
    -       1  
January 15, 2008
 
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
 
Swap
 
January 12, 2009
    13       -  
February 1, 2008
 
Revolving Variable Rate Credit Facility
 
Swap
 
February 1, 2009
    139       -  
                $ 60     $ (119 )


The fair value of the derivative instrument assets is included in Other Assets and the fair value of the derivative instrument liabilities is included in Accounts Payable, Accrued Expenses and Other Liabilities at September 30, 2008 and December 31, 2007.

The change in fair value of derivative instruments designated as cash flow hedges was a gain of $160 and a loss of $136 for the three months ended September 30, 2008 and 2007, respectively, and a gain of $162 and a loss of $147 for the nine months ended September 30, 2008 and 2007, respectively.  These unrealized gains and losses were reflected on our Balance Sheet in Accumulated Other Comprehensive Income. Hedge ineffectiveness of $2 and $3 on cash flow hedges was recognized in interest expense for the three months ended September 30, 2008 and 2007, respectively and $2 and $12 for the nine months end September 30, 2008 and 2007, respectively.

22


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 9 — SHARE-BASED PAYMENTS

In May 2008, the Company established the Hersha Hospitality Trust 2008 Equity Incentive Plan for the purpose of attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the Company. Prior to the 2008 Equity Incentive Plan, the Company made awards pursuant to the 2004 Equity Incentive Plan.  Upon approval of the 2008 Equity Incentive Plan by the Company’s shareholders on May 22, 2008, the Company terminated the 2004 Equity Incentive Plan.  Termination of the 2004 Equity Incentive Plan did not have any effect on equity awards and grants previously made under that plan.

The following table summarizes the stock awards issued to executives of the Company pursuant to the 2004 Equity Incentive Plan and the 2008 Equity Incentive Plan as of September 30, 2008:

         
Shares Vested
   
Unearned Compensation
   
Date of Award Issuance
 
Shares Issued
   
September 30, 2008
   
December 31, 2007
   
September 30 2008
   
December 31, 2007
 
Period until Full Vesting
June 1, 2005
    71,000       53,250       35,500     $ 114     $ 242  
0.7 years
June 1, 2006
    89,500       44,750       22,375       351       508  
1.7 years
June 1, 2007
    214,582       53,645       -       1,762       2,258  
2.7 years
June 2, 2008
    278,059       -       -       2,286       -  
3.7 years
September 30, 2008
    3,616       -       -       27       -  
4.0 years*
      656,757       151,645       57,875       4,540       3,008    
                                           
* represents the maximum vesting period for the shares issued
                   


On June 2, 2008, the Compensation Committee of the Board of Trustees granted 278,059 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 $8.97 per share. As of September 30, 2008, none of these restricted share awards was vested.

On September 30, 2008, we awarded 3,616 restricted share awards to management employees.  The restricted share award vesting schedule varies by employee and compensation expense is recognized ratably over the 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 $7.44 per share.  As of September 30, 2008, none of these restricted share awards were vested.

Compensation expense related to stock awards issued to executives of the Company of $416 and $260 was incurred during the three months ended September 30, 2008 and 2007, respectively, and $989 and $505 for the nine months ended September 30, 2008 and 2007, respectively.  Compensation expense related to the restricted share awards is recorded in general and administrative expense on the statement of operations.

On January 2, 2008, 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 $9.33.  On June 2, 2008, we awarded 1,500 common shares to each of our four independent trustees. The fair value of each of the shares on the grant date was $8.97. No compensation expense related to stock awards issued to the Board of Trustees was incurred during the three months ended September 30, 2008 and 2007, respectively, and $54 and $49 was incurred during the nine months ended September 30, 2008 and 2007, respectively.

23


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007[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,
 
   
2008
   
2007
   
2008
   
2007
 
Numerator:
                       
BASIC
                       
Income from Continuing Operations
  $ 6,290     $ 8,358     $ 11,735     $ 11,973  
Dividends paid on unvested restricted shares
    (91 )     (57 )     (238 )     (140 )
Distributions to 8.0% Series A Preferred Shareholders
    (1,200 )     (1,200 )     (3,600 )     (3,600 )
Income from continuing operations applicable to common shareholders
    4,999       7,101       7,897       8,233  
Income (Loss) from Discontinued Operations
    45       138       (54 )     81  
Net Income applicable to common shareholders
  $ 5,044     $ 7,239     $ 7,843     $ 8,314  
                                 
DILUTED*
                               
Income from Continuing Operations
  $ 6,290     $ 8,358     $ 11,735     $ 11,973  
Dividends paid on unvested restricted shares
    (91 )     (57 )     (238 )     (140 )
Distributions to 8.0% Series A Preferred Shareholders
    (1,200 )     (1,200 )     (3,600 )     (3,600 )
Income from continuing operations applicable to common shareholders
    4,999       7,101       7,897       8,233