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 March 31, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ 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 March 31, 2009, the number of Priority Class A Common Shares of Beneficial Interest outstanding was 48,292,360.
 


 
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
 
8
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
 

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 [UNAUDITED] AND DECEMBER 31, 2008
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
March 31,
 2009
   
December 31,
2008
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $ 973,208     $ 982,082  
Investment in Unconsolidated Joint Ventures
    45,307       46,283  
Development Loans Receivable
    83,500       81,500  
Cash and Cash Equivalents
    14,770       15,697  
Escrow Deposits
    13,278       12,404  
Hotel Accounts Receivable, net of allowance for doubtful accounts of $66 and $120
    6,963       6,870  
Deferred Costs, net of Accumulated Amortization of $4,143 and $3,606
    8,629       9,157  
Due from Related Parties
    4,262       3,595  
Intangible Assets, net of Accumulated Amortization of $656 and $595
    7,251       7,300  
Other Assets
    14,468       13,517  
                 
Total Assets
  $ 1,171,636     $ 1,178,405  
                 
Liabilities and Equity:
               
Line of Credit
  $ 105,321     $ 88,421  
Mortgages and Notes Payable, net of unamortized discount of $59 and $61
    654,151       655,360  
Accounts Payable, Accrued Expenses and Other Liabilities
    16,525       17,745  
Dividends and Distributions Payable
    11,240       11,240  
Due to Related Parties
    694       302  
                 
Total Liabilities
    787,931       773,068  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ 17,592     $ 18,739  
                 
Equity:
               
Shareholders' Equity:
               
Preferred Shares - 8% Series A, $.01 Par Value, 2,400,000 Shares Issued and Outstanding at March 31, 2009 and December 31, 2008 (Aggregate Liquidation Preference $60,000)
    24       24  
Common Shares - Class A, $.01 Par Value, 80,000,000 Shares Authorized, 48,292,360 and 48,276,222 Shares Issued and Outstanding at March 31, 2009 and December 31, 2008, respectively
    483       483  
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (58 )     (109 )
Additional Paid-in Capital
    464,394       463,772  
Distributions in Excess of Net Income
    (132,729 )     (114,207 )
Total Shareholders' Equity
    332,114       349,963  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    32,620       34,781  
Noncontrolling Interests - Consolidated Joint Ventures
    1,379       1,854  
Total Noncontrolling Interests
    33,999       36,635  
                 
Total Equity
    366,113       386,598  
                 
Total Liabilities and Equity
  $ 1,171,636     $ 1,178,405  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
Revenue:
           
Hotel Operating Revenues
  $ 45,069     $ 51,919  
Interest Income from Development Loans
    2,397       2,020  
Land Lease Revenue
    1,321       1,334  
Other Revenues
    216       252  
Total Revenues
    49,003       55,525  
                 
Operating Expenses:
               
Hotel Operating Expenses
    30,538       32,432  
Hotel Ground Rent
    292       226  
Land Lease Expense
    724       749  
Real Estate and Personal Property Taxes and Property Insurance
    3,348       3,162  
General and Administrative
    1,901       1,875  
Acquisition and Terminated Transaction Costs
    7       -  
Depreciation and Amortization
    10,938       9,466  
Total Operating Expenses
    47,748       47,910  
                 
Operating Income
    1,255       7,615  
                 
Interest Income
    60       82  
Interest Expense
    10,619       10,707  
Other Expense
    50       28  
Loss before loss from Unconsolidated Joint Venture Investments and Discontinued Operations
    (9,354 )     (3,038 )
                 
Loss from Unconsolidated Joint Venture Investments
    (1,329 )     (738 )
                 
Loss from Continuing Operations
    (10,683 )     (3,776 )
                 
Discontinued Operations (Note 12):
               
Loss from Discontinued Operations
    -       (109 )
                 
Net Loss
    (10,683 )     (3,885 )
                 
Loss allocated to Noncontrolling Interests
    2,053       1,006  
Preferred Distributions
    (1,200 )     (1,200 )
                 
Net Loss applicable to Common Shareholders
  $ (9,830 )   $ (4,079 )

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


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
Earnings Per Share:
           
BASIC
           
Loss from continuing operations applicable to common shareholders
  $ (0.21 )   $ (0.10 )
Loss from discontinued operations applicable to common shareholders
    -       -  
                 
Net loss applicable to common shareholders
  $ (0.21 )   $ (0.10 )
                 
DILUTED
               
Loss from continuing operations applicable to common shareholders
  $ (0.21 )  *   $ (0.10 )  *
Loss from discontinued operations applicable to common shareholders
    -
*
    -
*
                 
Net loss applicable to common shareholders
  $ (0.21 )  *   $ (0.10 )  *
                 
Weighted Average Common Shares Outstanding:
               
Basic
    47,786,503       40,891,140  
Diluted
    47,786,503
*
    40,891,140
*
 
*
Income allocated to noncontrolling 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 March 31, 2009 and 2008 were 8,746,300 and 7,178,799, respectively. Unvested stock awards have been omitted from the denominator for the purpose of computing diluted earnings per share for the three months ended March 31, 2008 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.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Shareholders' Equity
   
Noncontrolling Interests
         
Redeemable Noncontrolling Interests
 
   
Series A Preferred Shares
   
Class A Common Shares
   
Class B Common Shares
   
Additional Paid-In Capital
   
Other Comprehensive Income
   
Distributions in Excess of Net Earnings
   
Total Shareholders' Equity
   
Common Units
   
Consolidated Joint Ventures
   
Total Noncontrolling Interests
   
Total Equity
   
Common Units
 
Balance at December 31, 2008
  $ 24     $ 483     $ -     $ 463,772     $ (109 )   $ (114,207 )   $ 349,963     $ 34,781     $ 1,854     $ 36,635     $ 386,598     $ 18,739  
Reallocation of Noncontrolling Interest
    -       -       -       155       -       -       155       (112 )     -       (112 )     43       (43 )
Dividends and Distribution declared:
                                                                                               
Preferred Stock ($0.50 per share)
    -       -       -       -       -       (1,200 )     (1,200 )     -       -       -       (1,200 )     -  
Common Stock ($0.18 per share)
    -       -       -       -       -       (8,693 )     (8,693 )     -       -       -       (8,693 )     -  
Common Units ($0.18 per share)
    -       -       -       -       -       -       -       (1,023 )     -       (1,023 )     (1,023 )     (551 )
Dividend Reinvestment Plan
    -       -       -       9       -       -       9       -       -       -       9       -  
Stock Based Compensation
                                                                                               
Restricted Share Award Vesting
    -       -       -       421                       421       -       -       -       421       -  
Share Grants to Trustees
    -       -       -       37       -       -       37       -       -       -       37       -  
Comprehensive Income (Loss):
                                                                                               
Other Comprehensive Income
    -       -       -       -       51       -       51       -               -       51       -  
Net Loss
    -       -       -       -       -       (8,629 )     (8,629 )     (1,026 )     (475 )     (1,501 )     (10,130 )     (553 )
Total Comprehensive Loss
                                                    (8,578 )     (1,026 )     (475 )     (1,501 )     (10,079 )     (553 )
Balance at March 31, 2009
  $ 24     $ 483     $ -     $ 464,394     $ (58 )   $ (132,729 )   $ 332,114     $ 32,620     $ 1,379     $ 33,999     $ 366,113     $ 17,592  
                                                                                                 
                                                                                                 
Balance at December 31, 2007
  $ 24     $ 412     $ -     $ 397,127     $ (23 )   $ (67,135 )   $ 330,405     $ 42,845     $ 1,908     $ 44,753     $ 375,158     $ -  
Reallocation of Noncontrolling Interest
    -       -       -       1,597       -       -       1,597       (1,597 )     -       (1,597 )     -       -  
Common Units Issued for Acquisitions
    -       -       -       -       -       -       -       6,862       -       6,862       6,862       -  
Dividends and Distribution declared:
                                                                                               
Preferred Stock ($0.50 per share)
    -       -       -       -       -       (1,200 )     (1,200 )     -       -       -       (1,200 )     -  
Common Stock ($0.18 per share)
    -       -       -       -       -       (7,418 )     (7,418 )     -       -       -       (7,418 )     -  
Common Units ($0.18 per share)
    -       -       -       -       -       -       -       (1,296 )     -       (1,296 )     (1,296 )     -  
Dividend Reinvestment Plan
    -       -       -       7       -       -       7       -       -       -       7       -  
Stock Based Compensation
                                                                                               
Restricted Share Award Vesting
    -       -       -       260                       260       -       -       -       260       -  
Share Grants to Trustees
    -       -       -       37       -       -       37       -       -       -       37       -  
Comprehensive Loss:
                                                                                               
Other Comprehensive Loss
    -       -       -       -       (237 )     -       (237 )     -               -       (237 )     -  
Net Loss
    -       -       -       -       -       (2,879 )     (2,879 )     (506 )     (500 )     (1,006 )     (3,885 )     -  
Total Comprehensive Loss
                                                    (3,116 )     (506 )     (500 )     (1,006 )     (4,122 )     -  
Balance at March 31, 2008
  $ 24     $ 412     $ -     $ 399,028     $ (260 )   $ (78,632 )   $ 320,572     $ 46,308     $ 1,408     $ 47,716     $ 368,288     $ -  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS]


   
For the Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
Operating activities:
           
Net loss
  $ (10,683 )   $ (3,885 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation
    10,871       9,594  
Amortization
    597       373  
Equity in loss of unconsolidated joint ventures
    1,329       738  
Distributions from unconsolidated joint ventures
    400       500  
(Gain) loss recognized on change in fair value of derivative instrument
    (75 )     151  
Stock based compensation expense
    422       314  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (93 )     (2,388 )
Escrows
    (874 )     858  
Other assets
    (951 )     (274 )
Due from related party
    383       (1,118 )
Increase (decrease) in:
               
Due to related party
    (658 )     (528 )
Accounts payable and accrued expenses
    (1,066 )     (663 )
Net cash (used in) provided by operating activities
    (398 )     3,672  
                 
Investing activities:
               
Purchase of hotel property assets
    -       (34,460 )
Capital expenditures
    (1,998 )     (3,828 )
Cash paid for franchise fee intangible
    -       (13 )
Investment in development loans receivable
    (2,000 )     (12,700 )
Distributions from unconsolidated joint venture
    -       912  
Advances and capital contributions to unconsolidated joint ventures
    (753 )     (96 )
Net cash used in investing activities
    (4,751 )     (50,185 )
                 
Financing activities:
               
Proceeds from (repayments of) borrowings under line of credit, net
    16,900       30,400  
Principal repayment of mortgages and notes payable
    (1,380 )     (1,119 )
Proceeds from mortgages and notes payable
    169       27,491  
Cash paid for deferred financing costs
    (9 )     (71 )
Dividends paid on common shares
    (8,683 )     (7,410 )
Dividends paid on preferred shares
    (1,200 )     (1,200 )
Distributions paid on common units
    (1,575 )     (1,297 )
Net cash provided by financing activities
    4,222       46,794  
                 
Net (decrease) increase in cash and cash equivalents
    (927 )     281  
Cash and cash equivalents - beginning of period
    15,697       12,327  
                 
Cash and cash equivalents - end of period
  $ 14,770     $ 12,608  
 
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 MONTHS ENDED MARCH 31, 2009 AND 2008 [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 months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  Accordingly, readers of these consolidated interim financial statements should refer to the Company’s audited financial statements prepared in accordance with GAAP, and the related notes thereto, for the year ended December 31, 2008, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report pursuant to the rules of the SEC.

We are the sole general partner in our operating partnership subsidiary, Hersha Hospitality Limited Partnership (“HHLP”), which is indirectly the sole general partner of the subsidiary partnerships.

Application of New Accounting Standards

Effective January 1, 2009, we adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”), which defines a noncontrolling interest as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.  Under SFAS No. 160, such noncontrolling interests are reported on the consolidated balance sheets within equity, but separately from the Company’s equity.  Revenues, expenses and net income or loss attributable to both the Company and noncontrolling interests are reported on the consolidated statements of operations.

In accordance with FASB Emerging Issues Task Force Topic No. D-98, “Classification and Measurement of Redeemable Securities” (“EITF D-98”), we classify securities that are redeemable for cash or other assets at the option of the holder, or not solely within the control of the issuer, outside of permanent equity in the consolidated balance sheet.  The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions.  Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company considers the guidance in EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock” to evaluate whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.

As a result of the adoption of SFAS No. 160, we have reclassified the noncontrolling interests of our consolidated joint ventures from the mezzanine section of our consolidated balance sheets to equity.  This reclassification totaled $1,379 as of March 31, 2009 and $1,854 as of December 31, 2008.  In addition, certain common units of limited partnership interests in HHLP (“Nonredeemable Common Units”) were reclassified from the mezzanine section of our consolidated balance sheets to equity.  The reclassification of Nonredeemable Common Units totaled $32,620 as of March 31, 2009 and $34,781 as of December 31, 2008.  As of March 31, 2009, there were 5,682,048 Nonredeemable Common Units outstanding with a fair market value of $10,796, based on the price per share of our common shares on the New York Stock Exchange on such date.  These units are only redeemable by the unit holders for common shares on a one-for-one basis or, at our option, cash.

Certain common units of limited partnership interests in HHLP (“Redeemable Common Units”) have been pledged as collateral in connection with a pledge and security agreement entered into by the Company and the holders of the Redeemable Common Units.  The redemption feature contained in the pledge and security agreement where the Redeemable Common Units serve as collateral contains a provision that could result in a net cash settlement outside of the control of the Company.  As a result, the Redeemable Common Units will continue to be classified in the mezzanine section of the consolidated balance sheets as they do not meet the requirements for equity classification under EITF D-98.  As prescribed by EITF D-98, the carrying value of the Redeemable Common Units equals the greater of carrying value based on the accumulation of historical cost or the redemption value.  As of March 31, 2009, there were 3,064,252 Redeemable Common Units outstanding with a fair market value of $5,822, based on the price per share of our common shares on the New York Stock Exchange on such date.  As of March 31, 2009 and December 31, 2008, the Redeemable Common Units were valued on the consolidated balance sheets at carrying value based on historical cost of $17,592 and $18,739, respectively, since historical cost exceeded the Redeemable Common Units redemption value as of each date.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 — BASIS OF PRESENTATION (CONTINUED)

Net income or loss related to Nonredeemable Common Units and Redeemable Common Units (collectively, “Common Units”), as well as the net income or loss related to the noncontrolling interests of our consolidated joint ventures, is included in net income or loss in the consolidated statements of operations.  Net income or loss related to the Common Units and the noncontrolling interests of our consolidated joint ventures is excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.

Recent Accounting Pronouncements

SFAS No. 141R

On January 1, 2009, we adopted 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.” The adoption of SFAS No.141R 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.  Under SFAS No. 141R, costs related to future acquisitions will be expensed as incurred compared to the Company’s practice prior to the adoption of SFAS No. 141R 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 after the adoption of SFAS No. 141R 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.

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. Our adoption of SFAS No. 161 on January 1, 2009 did not have a material effect on our financial statements.

FSP EITF 03-6-1

In June 2008, the FASB issued FASB Staff Position on Emerging Issues Task Force Issue 03-6, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share (“EPS”) pursuant to the two-class method. We adopted FSP EITF 03-6-1 on January 1, 2009 and as a result all prior-period EPS data presented has been adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of FSP EITF 03-6-1. Our adoption of this statement did not impact our financial position or net income.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [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 March 31, 2009 and December 31, 2008:
 
   
March 31, 2009
   
December 31, 2008
 
             
Land
  $ 184,879     $ 184,879  
Buildings and Improvements
    804,059       802,760  
Furniture, Fixtures and Equipment
    122,678       121,991  
      1,111,616       1,109,630  
                 
Less Accumulated Depreciation
    (138,408 )     (127,548 )
                 
Total Investment in Hotel Properties
  $ 973,208     $ 982,082  
 
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.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [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 March 31, 2009 and December 31, 2008, our investment in unconsolidated joint ventures consists of the following:
 
     
Percent
   
Preferred
   
March 31,
   
December 31,
 
Joint Venture
Hotel Properties
 
Owned
   
Return
   
2009
   
2008
 
                           
PRA Glastonbury, LLC
Hilton Garden Inn, Glastonbury, CT
    48.0 %  
11.0%
cumulative
    $ 657     $ 738  
Inn American Hospitality at Ewing, LLC
Courtyard by Marriott, Ewing, NJ
    50.0 %  
11.0%
cumulative
      662       736  
Hiren Boston, LLC
 
Courtyard by Marriott, Boston, MA
    50.0 %  
N/A
      3,728       3,960  
SB Partners, LLC
 
Holiday Inn Express, Boston, MA
    50.0 %  
 N/A
      1,929       2,091  
Mystic Partners, LLC
Hilton and Marriott branded hotels in CT and RI
    8.8%-66.7 %  
8.5%
non-cumulative
      28,321       27,977  
PRA Suites at Glastonbury, LLC
Homewood Suites, Glastonbury, CT
    48.0 %  
10.0%
non-cumulative
      2,800       2,800  
Metro 29th Street Associates, LLC
 
Holiday Inn Express, New York, NY
    50.0 %  
 N/A
      7,210       7,981  
                      $ 45,307     $ 46,283  
 
Income or loss 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. Gains and losses recognized during the three months ended March 31, 2009 and 2008 for our investments in unconsolidated joint ventures is as follows:
 
   
Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
PRA Glastonbury, LLC
  $ (81 )   $ 5  
Inn American Hospitality at Ewing, LLC
    (74 )     (59 )
Hiren Boston, LLC
    (233 )     (280 )
SB Partners, LLC
    (162 )     (83 )
Mystic Partners, LLC
    (409 )     (405 )
PRA Suites at Glastonbury, LLC
    1       (2 )
Metro 29th Street Associates, LLC
    (371 )     86  
                 
Net Loss from Investment in Unconsolidated Joint Ventures
  $ (1,329 )   $ (738 )
 
 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [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, and equity, including the Company’s share, related to the unconsolidated joint ventures discussed above as of March 31, 2009 and December 31, 2008.
 
Balance Sheets
           
   
March 31,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Investment in hotel properties, net
  $ 206,701     $ 209,468  
Other Assets
    24,372       25,334  
Total Assets
  $ 231,073     $ 234,802  
 
               
Liabilities and Equity
               
Mortgages and notes payable
  $ 219,549     $ 219,889  
Other liabilities
    13,264       11,636  
Equity:
               
Hersha Hospitality Trust
    44,130       44,938  
Joint Venture Partner(s)
    (45,870 )     (41,661 )
Total Equity
    (1,740 )     3,277  
 
               
Total Liabilities and Equity
  $ 231,073     $ 234,802  
 
The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures to the Company’s investment in the unconsolidated joint ventures as presented on the Company’s balance sheets as of March 31, 2009 and December 31, 2008.
 
   
March 31,
   
December 31,
 
   
2009
   
2008
 
Company's Share
  $ 44,130     $ 44,938  
Excess Investment (1)
    1,177       1,345  
Investment in Joint Venture
  $ 45,307     $ 46,283  

 
(1)
Excess investment represents the unamortized difference between the Company's investment and the Company's share of the equity in the underlying net investment in the unconsolidated joint ventures. The excess investment is amortized over the expected useful life of the properties, and the amortization is included in income or loss from investments in unconsolidated joint ventures.

The following table sets forth the components of net loss, including the Company’s share, related to the unconsolidated joint ventures discussed above for the three months ended March 31, 2009 and 2008.
 
Statements of Operations
           
   
Three Months Ended
 
   
March 31,
2009
   
March 31,
2008
 
Room Revenue
  $ 17,105     $ 22,484  
Other Revenue
    5,313       7,323  
Operating Expenses
    (16,572 )     (20,161 )
Interest Expense
    (3,234 )     (3,489 )
Lease Expense
    (1,364 )     (1,374 )
Property Taxes and Insurance
    (1,640 )     (1,701 )
General and Administrative
    (1,833 )     (1,893 )
Depreciation and Amortization
    (3,588 )     (3,880 )
                 
Net loss
  $ (5,813 )   $ (2,691 )
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 — DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES

Development Loans

We have approved first mortgage and mezzanine lending to hotel developers, 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% to 20%.  Interest income from development loans was $2,397 and $2,020 for the three months ended March 31, 2009 and 2008, respectively. Accrued interest on our development loans receivable was $4,366 as of March 31, 2009 and $2,785 as of December 31, 2008.
 
Hotel Property
Borrower
 
Principal Outstanding 3/31/2009
   
Principal Outstanding 12/31/2008
   
Interest
Rate
 
Maturity Date **
 
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
 
Homewood Suites - Newtown, PA
Reese Hotels, LLC
    500       500       11%  
November 14, 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       10,000       10%  
January 16, 2010
 
Lexington Avenue Hotel - Manhattan, NY
44 Lexington Holding, LLC
    10,000       10,000       11%   May 30, 2009
Renaissance by Marriott - Woodbridge, NJ
Hersha Woodbridge Associates, LLC
    5,000       5,000       11%   April 1, 2010
32 Pearl - Manhattan, NY
SC Waterview, LLC
    8,000       8,000       10%  
July 4, 2009
 
Greenwich Street Courtyard - Manhattan, NY
Brisam Greenwich, LLC
    10,000       10,000       10%  
September 12, 2009
 
Independent Hotel - New York, NY
Maiden Hotel, LLC
    10,000       10,000       20%  
June 8, 2009
 
Hilton Garden Inn - Dover, DE
44 Aasha Hospitality Associates, LLC
    1,000       1,000       10%   November 1, 2009
Element Hotel - Ewing, New Jersey
American Properties @ Scotch Road LLC
    2,000       -       11%   August 6, 2009
                               
Total Development Loans Receivable
    $ 83,500     $ 81,500              

* Indicates borrower is a related party
** Represents current maturity date in effect. Agreements for our development loans receivable typically allow for two one-year extensions which can be exercised by the borrower if the loan is not in default.

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 sheet.  As of March 31, 2009 and December 31, 2008 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 MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 — OTHER ASSETS

Other Assets consisted of the following at March 31, 2009 and December 31, 2008:
 
   
March 31, 2009
   
December 31, 2008
 
             
Transaction Costs
  $ 147     $ 237  
Investment in Statutory Trusts
    1,548       1,548  
Notes Receivable
    1,318       1,267  
Due from Lessees
    2,417       1,907  
Prepaid Expenses
    3,530       3,182  
Interest Receivable from Development Loans to Non-Related Parties
    3,211       2,024  
Hotel Purchase Option
    933       933  
Other
    1,364       2,419  
    $ 14,468     $ 13,517  
 
Transaction Costs - Transaction costs, including legal fees and other third party transaction costs incurred relative to entering into debt facilities or issuances of equity securities, 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 March 31, 2009 and December 31, 2008 includes a loan, and related accrued interest, made to one of our unconsolidated joint venture partners in the amount of $1,266 bearing interest at 11% with a maturity date of December 31, 2009.  

Due from Lessees - Due from lessees represent rents due under our land leases.

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

Interest Receivable from Development Loans to Non-Related Parties– Interest receivable from development loans to non-related parties represents interest income receivable 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 receivable from development loans extended to related parties in the amounts of $1,155 and $761 as of March 31, 2009 and December 31, 2008, respectively, which is included in the Due From Related Parties caption on the face of the consolidated balance sheets.

Hotel Purchase Option – We have the option to acquire an interest in one hotel property at a fixed purchase price.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 — DEBT

Mortgages and Notes Payable

The Company has total mortgages payable balance at March 31, 2009, and December 31, 2008, of $602,324 and $603,538, respectively.  These balances consisted of mortgages with fixed and variable interest rates, which ranged from 3.19% to 8.94% as of March 31, 2009. Aggregate interest expense incurred under the mortgage loans payable totaled $8,286 and $8,610 for the three months ended March 31, 2009 and 2008, respectively.  Our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, non-recourse financing arrangements.  Our mortgage loans payable typically require that specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties.  If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan.  As of March 31, 2009 we were in compliance with all events of default covenants under the applicable loan agreements.

The maturities for the outstanding mortgage loans ranged from July 2009 to January 2032.  The loan agreement for one debt obligation totaling $12,100, which matures during the next twelve months, contains an extension option that can be exercised at our discretion, effectively extending the maturity of this mortgage loan to 2011.

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 $935 and $898 was recorded for the three months ended March 31, 2009 and 2008, respectively.

HHLP entered into a management agreement with an unaffiliated hotel manager that extended a $498 interest-free loan to HHLP for working capital contributions that are due at either the termination or expiration of the management agreement.  A discount was recorded on the note payable which reduced the principal balances recorded in the mortgages and notes payable. The discount 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 $279 as of March 31, 2009 and $274 as of December 31, 2008.

Revolving Line of Credit

During the quarter ended March 31, 2009, we maintained a revolving credit facility with T.D. Bank, NA and a syndicate of lenders.  The credit agreement provides for a revolving line of credit in the principal amount of up to $175,000, including a sub-limit of $25,000 for irrevocable stand-by letters of credit. The existing bank group has committed $135,000, and the credit agreement is structured to allow for an increase of up to an additional $40,000 under the line of credit, provided that additional collateral is supplied and additional lenders join the existing bank group.

Additional borrowings under the line of credit provided by T.D. Bank, NA and the other lenders may be used for working capital and general corporate purposes, including payment of distributions or dividends and for the future purchase of additional hotels.  The line of credit expires on December 31, 2011, and, provided no event of default has occurred and remains uncured, we may request that T.D. Bank, NA and the other lenders renew the line of credit for an additional one-year period.

At HHLP’s option, the interest rate on the line of credit is either (i) the Wall Street Journal variable prime rate per annum or (ii) LIBOR available for the periods of 1, 2, 3, or 6 months plus two and one half percent (2.5%) per annum.  
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 — DEBT (CONTINUED)

The line of credit is collateralized by a first lien-security interest in all existing and future assets of HHLP, a collateral assignment of all hotel management contracts of the management companies in the event of default, and title-insured, first-lien mortgages on the following properties:
 
- Fairfield Inn, Laurel, MD
- Holiday Inn Express, Hershey, PA
- Hampton Inn, Danville, PA
- Holiday Inn Express, New Columbia, PA
- Hampton Inn, Philadelphia, PA
- Mainstay Suites and Sleep Inn, King of Prussia, PA
- Holiday Inn, Norwich, CT
- Residence Inn, Langhorne, PA
- Holiday Inn Express, Camp Springs, PA
- Residence Inn, Norwood, MA
- Holiday Inn Express and Suites, Harrisburg, PA
- Sheraton Hotel, JFK Airport, New York, NY
 
The credit agreement providing for the line of credit includes certain financial covenants and requires that we maintain (1) a minimum tangible net worth of $300,000; (2) a maximum accounts and other receivables from affiliates of $125,000; (3) annual distributions not to exceed 95% of adjusted funds from operations; (4) maximum variable rate indebtedness to total debt of 30%; and (5) certain financial ratios, including the following:

·
a debt service coverage ratio of not less than 1.35 to 1.00;
·
a total funded liabilities to gross asset value ratio of not more than 0.67 to 1.00; and
·
a EBITDA to debt service ratio of not less than 1.40 to 1.00;

The Company is in compliance with each of the covenants listed above as of March 31, 2009.

The outstanding principal balance under the line of credit was of $105,321 at March 31, 2009 and $88,421 at December 31, 2008. The Company recorded interest expense of $791 and $906 related to the line of credit borrowings for the three months ended March 31, 2009 and 2008, respectively. The weighted average interest rate on our Line of Credit during the three months ended March 31, 2009 and 2008 was 3.54% and 6.14%, respectively.  As of March 31, 2009 we had $4,436 in irrevocable letters of credit issued and our remaining borrowing capacity under the facility was $25,243.

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 relates to our capital improvement projects is capitalized through the date when the assets are placed in service.  For the three months ended March 31, 2009 and 2008, we capitalized $2 and $242, 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 March 31, 2009, deferred costs were $8,629, net of accumulated amortization of $4,143. Deferred costs were $9,157 net of accumulated amortization of $3,606, as of December 31, 2008. Amortization of deferred costs for the three months ended March 31, 2009 and 2008 was $537 and $432, respectively.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS

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. For the three months ended March 31, 2009 and 2008, base management fees incurred totaled $1,067 and $1,194, 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 March 31, 2009 and 2008 was $2,774 and $3,553, respectively.  The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.

Administrative Services Agreement

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 March 31, 2009 and 2008, the Company incurred accounting fees of $394 and $341, respectively.  For the three months ended March 31, 2009 and 2008, the Company incurred information technology fees of $83 and $75, respectively.  Accounting fees, and information technology fees are included in General and Administrative 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 March 31, 2009 and 2008, we incurred fees of $42 and $66, respectively, which were capitalized in with the cost of fixed asset additions.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [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 March 31, 2009 and 2008, we incurred expenses of $41 and $455, respectively for hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating Expenses. Approximately $32 and $59 is included in accounts payable at March 31, 2009 and December 31, 2008, respectively.

Due from Related Parties

The due from related party balance as of March 31, 2009 and December 31, 2008 was approximately $4,262 and $3,595 respectively. The majority of the balance as of March 31, 2009 and December 31, 2008 were receivables owed from our unconsolidated joint ventures and interest income receivable from development loans extended to related parties.

Due to Related Parties

The due to related parties balance as of March 31, 2009 and December 31, 2008 was approximately $694 and $302, respectively. The balances as of March 31, 2009 and December 31, 2008 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 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 March 31, 2009 and 2008, we incurred $292 and $226, respectively.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [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 March 31, 2009, 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 March 31, 2009, 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 9, 2009, we renewed our interest rate swap agreement that effectively fixes the interest rate on a variable rate mortgage on the nu Hotel, Brooklyn, NY, which bears interest at one month U.S. dollar LIBOR plus 2.0%.  Under the terms of the interest rate swap, we pay fixed rate interest of 1.1925% on the $18,000 notional amount and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest on the mortgage debt at a rate of 3.1925%.  Prior to this renewal, we had maintained an interest rate swap agreement that effectively fixed the interest rate on a $13,240 portion of the variable rate mortgage at a rate of 5.245%. This swap matured on January 9, 2009 and was replaced with the renewed agreement.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

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

We maintain an interest rate swap agreement that fixes the interest rate on a variable rate mortgage, bearing interest at one month U.S. dollar LIBOR plus 3.0%, originated upon the refinance of the debt associated with the Hilton Garden Inn, Edison, NJ.  Under the terms of this interest rate swap, we pay fixed rate interest of 1.37% and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest at a rate of 4.37%.  The notional amount amortizes in tandem with the amortization of the underlying hedged debt and is $7,274 as of March 31, 2009.

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 T.D. Bank, NA, which bears interest at one month U.S. dollar LIBOR plus 2.5%.  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 5.1275%.  This interest rate swap agreement matured on February 1, 2009, and we did not replace it with another agreement.

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.  This cap matured on April 9, 2009 and was renewed with an identical cap that matures on May 9, 2010.

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 $7,576 as of March 31, 2009.  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 months ended March 31, 2009 was a gain of $75 and was recorded in Interest Expense on the Statement of Operations.

At March 31, 2009 and December 31, 2008, the fair value of the interest rate swaps and cap were:
 
               
Value
 
Date of Transaction
 
Hedged Debt
 
Type
 
Maturity Date
 
March 31, 2009
   
December 31, 2008
 
July 2, 2004
  Variable Rate Mortgage - Sheraton Four Points, Revere, MA  
Swap
 
July 23, 2009
  $ (97 )     (172 )
July 1, 2007
 
Variable Rate Mortgage - Hotel 373, New York, NY
 
Cap
 
April 9, 2009
    -       -  
January 15, 2008
 
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
 
Swap
 
January 12, 2009
    -       (6 )
February 1, 2008
 
Revolving Variable Rate Credit Facility
 
Swap
 
February 1, 2009
    -       (74 )
December 31, 2008
  Variable Rate Mortgage - Hilton Garden Inn, Edison, NJ  
Swap
 
January 1, 2011
    (28 )     (25 )
January 9, 2009
 
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
 
Swap
 
January 10, 2011
    (33 )     -  
                $ (158 )     (277 )
 
The fair value of the derivative instrument liabilities is included in Accounts Payable, Accrued Expenses and Other Liabilities at March 31, 2009 and December 31, 2008.

The change in fair value of derivative instruments designated as cash flow hedges was a gain of $51 and a loss of $238 for the three months ended March 31, 2009 and 2008, respectively.  These unrealized gains and losses were reflected on our Balance Sheet in Accumulated Other Comprehensive Income. Hedge ineffectiveness of $1 and $144 on cash flow hedges was recognized in interest expense for the three months ended March 31, 2009 and 2008, respectively.