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, 2010

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, PA
 
17102
(Address of Registrant’s Principal Executive Offices)
 
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Class A Common Shares of Beneficial Interest, par value $.01 per share
 
New York Stock Exchange
Series A Cumulative Redeemable Preferred Shares, par value $.01 per share
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes   x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes   x No

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

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

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

As of May 7, 2010, the number of Class A common shares of beneficial interest outstanding was 138,335,755 and there were no Class B common shares outstanding.
 


 
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.
 
31
Item 3.
 
40
Item 4.
 
41
PART II.  OTHER INFORMATION
 
Item 1.
 
42
Item 1A.
 
42
Item 2.
 
42
Item 3.
 
42
Item 4.
 
42
Item 5.
 
43
Item 6.
 
46
       
    47

 
2


PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2010 [UNAUDITED] AND DECEMBER 31, 2009
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
 
   
March 31, 2010
   
December 31, 2009
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $ 1,111,255     $ 938,954  
Investment in Unconsolidated Joint Ventures
    35,831       39,182  
Development Loans Receivable
    46,700       46,094  
Cash and Cash Equivalents
    22,004       11,404  
Escrow Deposits
    18,112       16,174  
Hotel Accounts Receivable, net of allowance for doubtful accounts of $109 and $34
    8,865       7,103  
Deferred Financing Costs, net of Accumulated Amortization of $4,690 and $4,262
    8,074       8,696  
Due from Related Parties
    4,614       2,394  
Intangible Assets, net of Accumulated Amortization of $864 and $803
    7,771       7,542  
Other Assets
    12,663       12,428  
Assets Held for Sale
    21,073       21,073  
                 
Total Assets
  $ 1,296,962     $ 1,111,044  
                 
Liabilities and Equity:
               
Line of Credit
  $ -     $ 79,200  
Mortgages and Notes Payable, net of unamortized discount of $1,200 and $49
    657,998       645,351  
Accounts Payable, Accrued Expenses and Other Liabilities
    23,067       16,216  
Dividends and Distributions Payable
    8,337       4,293  
Due to Related Parties
    282       769  
Liabilities Related to Assets Held for Sale
    20,876       20,892  
                 
Total Liabilities
    710,560       766,721  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ 15,874     $ 14,733  
                 
Equity:
               
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) at March 31, 2010 and December 31, 2009
    24       24  
Common Shares - Class A, $.01 Par Value, 300,000,000 and 150,000,000 Shares Authorized at March 31, 2010 and December 31, 2009, 137,246,278 and 57,682,917 Shares Issued and Outstanding at March 31, 2010 and December 31, 2009, respectively
    1,372       577  
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (165 )     (160 )
Additional Paid-in Capital
    747,229       487,481  
Distributions in Excess of Net Income
    (208,409 )     (185,725 )
Total Shareholders' Equity
    540,051       302,197  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    30,524       27,126  
Noncontrolling Interests - Consolidated Joint Ventures
    (47 )     267  
Total Noncontrolling Interests
    30,477       27,393  
                 
Total Equity
    570,528       329,590  
                 
Total Liabilities and Equity
  $ 1,296,962     $ 1,111,044  
 
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 MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
Revenue:
           
Hotel Operating Revenues
  $ 49,388     $ 42,397  
Interest Income from Development Loans
    1,374       2,397  
Other Revenues
    165       229  
Total Revenues
    50,927       45,023  
                 
Operating Expenses:
               
Hotel Operating Expenses
    32,163       28,144  
Hotel Ground Rent
    292       292  
Real Estate and Personal Property Taxes and Property Insurance
    4,045       3,198  
General and Administrative
    2,834       1,480  
Stock Based Compensation
    656       421  
Acquisition and Terminated Transaction Costs
    3,336       7  
Depreciation and Amortization
    12,056       10,439  
Total Operating Expenses
    55,382       43,981  
                 
Operating (Loss) Income
    (4,455 )     1,042  
                 
Interest Income
    41       60  
Interest Expense
    11,357       10,230  
Other Expense
    92       50  
Loss on Debt Extinguishment
    731       -  
Loss before Income (Loss) from Unconsolidated Joint Venture Investments and Discontinued Operations
    (16,594 )     (9,178 )
                 
Loss from Unconsolidated Joint Ventures
    (1,040 )     (1,329 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    1,818       -  
Income (Loss) from Unconsolidated Joint Venture Investments
    778       (1,329 )
                 
Loss from Continuing Operations
    (15,816 )     (10,507 )
                 
Discontinued Operations  (Note 12):
               
Loss from Discontinued Operations
    (521 )     (176 )
                 
Net Loss
    (16,337 )     (10,683 )
                 
Loss Allocated to Noncontrolling Interests
    1,715       2,053  
Preferred Distributions
    (1,200 )     (1,200 )
                 
Net Loss applicable to Common Shareholders
  $ (15,822 )   $ (9,830 )
 
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 MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
Earnings Per Share:
           
BASIC
           
Loss from Continuing Operations applicable to Common Shareholders
  $ (0.16 )   $ (0.21 )
Loss from Discontinued Operations applicable to Common Shareholders
    -       -  
                 
Net Loss applicable to Common Shareholders
  $ (0.16 )   $ (0.21 )
                 
DILUTED
               
Loss from Continuing Operations applicable to Common Shareholders
  $ (0.16 ) *   $ (0.21 ) *
Loss from Discontinued Operations applicable to Common Shareholders
    - *     - *
                 
Net Loss applicable to Common Shareholders
  $ (0.16 ) *   $ (0.21 ) *

*
Loss 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, 2010 and 2009 were 9,515,228 and 8,746,300, respectively.

 
Unvested stock awards and options to acquire our common shares have been omitted from the denominator for the purpose of computing diluted earnings per share for the three months ended March 31, 2010 and 2009, since the effect of including these awards in the denominator would be anti-dilutive to loss from continuing operations applicable to common shareholders.  For the three months ended March 31, 2010, there were 124,685 anti-dilutive unvested stock awards outstanding and 1,539,416 anti-dilutive options to acquire our common shares outstanding.
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 
5


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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, 2009
  $ 24     $ 577     $ -     $ 487,481     $ (160 )   $ (185,725 )   $ 302,197     $ 27,126     $ 267     $ 27,393     $ 329,590     $ 14,733  
                                                                                                 
Reallocation of Noncontrolling Interest
    -       -       -       (1,745 )     -       -       (1,745 )     -       -       -       (1,745 )     1,745  
Unit Conversion
    -       1       -       601       -       -       602       (602 )     -       (602 )     -       -  
Units Issued for Acquisitions
    -       -       -       -       -       -       -       5,299       -       5,299       5,299          
Common Share Issuance, net of costs
    -       794       -       260,233       -       -       261,027       -       -       -       261,027       -  
Dividends and Distribution declared:
                                                                                               
Preferred Shares ($0.50 per share)
    -       -       -       -       -       (1,200 )     (1,200 )     -       -       -       (1,200 )     -  
Common Shares ($0.05 per share)
    -       -       -       -       -       (6,862 )     (6,862 )     -       -       -       (6,862 )     -  
Common Units ($0.05 per share)
    -       -       -       -       -       -       -       (350 )     -       (350 )     (350 )     (152 )
Dividend Reinvestment Plan
    -       -       -       3       -       -       3       -       -       -       3       -  
Stock Based Compensation
                                                                                               
Restricted Share Award Vesting
    -       -       -       656       -       -       656       -       -       -       656       -  
Comprehensive Loss:
                                                                                               
Other Comprehensive Income
    -       -       -       -       (5 )     -       (5 )     -       -       -       (5 )     -  
Net Loss
    -       -       -       -       -       (14,622 )     (14,622 )     (949 )     (314 )     (1,263 )     (15,885 )     (452 )
Total Comprehensive Loss
                                                    (14,627 )     (949 )     (314 )     (1,263 )     (15,890 )     (452 )
                                                                                                 
Balance at March 31, 2010
  $ 24     $ 1,372     $ -     $ 747,229     $ (165 )   $ (208,409 )   $ 540,051     $ 30,524     $ (47 )   $ 30,477     $ 570,528     $ 15,874  
                                                                                                 
                                                                                                 
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)
    -       -       -       -       -       (8,692 )     (8,692 )     -       -       -       (8,692 )     -  
Common Units ($0.18 per share)
    -       -       -       -       -       -       -       (1,023 )     -       (1,023 )     (1,023 )     (552 )
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
    -       -       -       -       -       (8,630 )     (8,630 )     (1,026 )     (475 )     (1,501 )     (10,131 )     (552 )
Total Comprehensive Loss
                                                    (8,579 )     (1,026 )     (475 )     (1,501 )     (10,080 )     (552 )
                                                                                                 
Balance at March 31, 2009
  $ 24     $ 483     $ -     $ 464,394     $ (58 )   $ (132,729 )   $ 332,114     $ 32,620     $ 1,379     $ 33,999     $ 366,113     $ 17,592  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 
6


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS]


   
For the Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
Operating activities
           
Net loss
  $ (16,337 )   $ (10,683 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Acquisition and terminated transaction costs
    3,248       -  
Depreciation
    11,973       10,871  
Amortization of intangible assets and deferred costs
    678       597  
Debt extinguishment
    580       -  
Development loan interest added to principal
    (606 )     -  
Equity in (income) loss of unconsolidated joint venture investments
    (778 )     1,329  
Distributions from unconsolidated joint venture investments
    -       400  
Loss (gain) recognized on change in fair value of derivative instrument
    2       (75 )
Stock based compensation
    656       422  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (1,530 )     (93 )
Escrow deposits
    (1,938 )     (874 )
Other assets
    179       (951 )
Due from related parties
    (2,059 )     383  
Increase (decrease) in:
               
Due to related parties
    (488 )     (658 )
Accounts payable, accrued expenses and other liabilities
    4,955       (1,066 )
Net cash provided by operating activities
    (1,465 )     (398 )
                 
Investing activities:
               
Purchase of hotel property assets
    (164,016 )     -  
Capital expenditures
    (1,373 )     (1,998 )
Investment in development loans receivable
    -       (2,000 )
Advances and capital contributions to unconsolidated joint venture investments
    -       (753 )
Net cash used in investing activities
    (165,389 )     (4,751 )
                 
Financing activities:
               
(Repayments of) proceeds from borrowings under line of credit, net
    (79,200 )     16,900  
Principal repayment of mortgages and notes payable
    (31,384 )     (1,380 )
Proceeds from mortgages and notes payable
    31,535       169  
Cash paid for deferred financing costs
    (8 )     (9 )
Proceeds from issuance of common shares, net of issuance costs
    261,027       -  
Dividends paid on common shares
    (2,881 )     (8,683 )
Dividends paid on preferred shares
    (1,200 )     (1,200 )
Distributions paid on common units
    (435 )     (1,575 )
Net cash provided by financing activities
    177,454       4,222  
                 
Net increase (decrease) in cash and cash equivalents
    10,600       (927 )
Cash and cash equivalents - beginning of period
    11,404       15,697  
                 
Cash and cash equivalents - end of period
  $ 22,004     $ 14,770  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 
7


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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 (“US GAAP”) 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 US GAAP 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any future period.  Accordingly, readers of these consolidated interim financial statements should refer to the Company’s audited financial statements prepared in accordance with US GAAP, and the related notes thereto, for the year ended December 31, 2009, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 as certain footnote disclosures normally included in financial statements prepared in accordance with US 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.

Sale of Common Shares

On January 21, 2010, we completed a public offering in which 51,750,000 common shares, including 6,750,000 common shares subject to an overallotment option exercised by the underwriters, were sold by us through several underwriters for net proceeds to us of approximately $148,955 before the payment of offering-related expenses.  Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests.

On March 24, 2010, we completed a public offering in which 27,600,000 common shares, including 3,600,000 common shares subject to an overallotment option exercised by the underwriters, were sold by us through several underwriters for net proceeds to us of approximately $112,762 before the payment of offering-related expenses.  Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests.

Aggregate offering-related expenses associated with these two public offerings were approximately $690, resulting in net proceeds after expenses of $261,027.
 
Noncontrolling Interest

In accordance with US GAAP, we define noncontrolling interest as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.  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 addition, 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 US GAAP to evaluate whether the Company controls the actions or events necessary to issue the maximum number of common shares that could be required to be delivered at the time of settlement of the contract.

We classify the noncontrolling interests of our consolidated joint ventures and certain common units of limited partnership interests in HHLP (“Nonredeemable Common Units”) as equity.  The noncontrolling interests of Nonredeemable Common Units totaled $30,524 as of March 31, 2010 and $27,126 as of December 31, 2009.  As of March 31, 2010, there were 6,963,961 Nonredeemable Common Units outstanding with a fair market value of $36,073, 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 the control of the Company.  As a result, the Redeemable Common Units are classified in the mezzanine section of the consolidated balance sheets as they do not meet the requirements for equity classification under US GAAP.  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.

 
8


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 — BASIS OF PRESENTATION (CONTINUED)

As of March 31, 2010 and December 31, 2009, there were 3,064,252 Redeemable Common Units outstanding with a redemption value equal to the fair value of the Redeemable Common Units, or $15,874.  The redemption value of the Redeemable Common Units is based on the price per share of our common shares on the New York Stock Exchange on such date.  As of March 31, 2010, the Redeemable Common Units were valued on the consolidated balance sheets at fair value since the Redeemable Common Units redemption value exceeded historical cost of $14,130.  As of December 31, 2009, the Redeemable Common Units were valued on the consolidated balance sheets at carrying value based on historical cost of $14,733 since historical cost exceeded the Redeemable Common Units redemption value of $9,622.

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

Consolidation of Variable Interest Entities

On January 1, 2010, the Company adopted a pronouncement that amends existing US GAAP as follows: (a) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity and to identify the primary beneficiary of a variable interest entity, (b) to require ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest entity, rather than only when specific events occur, (c) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, (d) to amend certain guidance for determining whether an entity is a variable interest entity, (e) to add an additional reconsideration event when changes in facts and circumstances pertinent to a variable interest entity occur, (f) to eliminate the exception for troubled debt restructuring regarding variable interest entity reconsideration, and (g) to require advanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  Upon adoption, the Company re-evaluated each of our investments and contractual relationships to determine whether they meet the guidelines of consolidation, in light of the amendments described above.  Based on the evaluation performed, we have concluded that there is no change from our initial assessment with regard to these investments and contractual relationships.

 
9


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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, 2010 and December 31, 2009:
 
 
   
March 31,
2010
   
December 31,
2009
 
             
Land
  $ 195,394     $ 161,449  
Buildings and Improvements
    949,726       814,461  
Furniture, Fixtures and Equipment
    137,237       122,174  
      1,282,357       1,098,084  
                 
Less Accumulated Depreciation
    (171,102 )     (159,130 )
                 
Total Investment in Hotel Properties
  $ 1,111,255     $ 938,954  


Acquisitions

During the three months ended March 31, 2010, 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
 
Hilton Garden Inn,
    Glastonbury, CT
 
1/1/2010
  $ 1,898     $ 12,981     $ 2,223     $ 24     $ 17,126     $ 11,937  
Hampton Inn,
    Times Square, NY
 
2/9/2010
    10,691       41,637       3,939       89       56,356       -  
Holiday Inn Express,
    Times Square, NY
 
2/9/2010
    11,075       43,113       4,078       108       58,374       -  
Candlewood Suites,
    Times Square, NY
 
2/9/2010
    10,281       36,687       4,298       93       51,359       -  
Total
      $ 33,945     $ 134,418     $ 14,538     $ 314     $ 183,215     $ 11,937  


On January 1, 2010, we acquired our joint venture partner’s 52.0% membership interest in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT, and as a result, this hotel became one of our wholly-owned properties.  We assumed $13,141 in mortgage debt with the acquisition of this property bearing interest at 5.98% which was determined on the date of acquisition to be below market rates.  We recorded a discount of $1,204 related to the assumption of this debt which will be amortized through the date of the debt’s maturity in April 2016.  Amortization of the discount is recorded as interest expense on our consolidated statement of operations.  See “Note 3 – Investment in Unconsolidated Joint Ventures” for further discussion of this transaction.

On February 9, 2010, we acquired a Hampton Inn, a Holiday Inn Express and a Candlewood Suites in the area of Times Square, New York, NY.  The sellers of the three hotels were related to each other, but not the Company.  The total purchase price for the three hotels was $166,089 and consisted of $160,500 in cash, $290 in franchise fees, and 1,451,613 Common Units, valued at $5,299.  In addition, we paid closing costs of $3,228 and acquired approximately $63 in net working capital assets.

 
10


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Included in the consolidated statements of operations for the three months ended March 31, 2010 are total revenues and total net loss for the 2010 acquisitions of $4,193 and $(3,047), respectively.

   
March 31, 2010
 
Hotel
 
Revenue
   
Net
(Loss)
 
Hilton Garden Inn,
    Glastonbury, CT
  $ 1,090     $ (76 )
Hampton Inn, Holiday Inn Express, Candlewood Suites,
    Times Square, NY
    3,103       (2,971 )
Total
  $ 4,193     $ (3,047 )


Earn-out Provisions

The purchase agreements for some of our previous 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
June 26, 2008
 
Holiday Inn Express, Camp Springs, MD
  $ 1,905  
December 31, 2010
August 1, 2008
 
Hampton Inn & Suites, Smithfield, RI
    1,515  
December 31, 2010
 
While we are unable to determine whether amounts will be paid under these two earn-out provisions until the expiration of the earn-out periods, based on the results of the hotel properties, we believe no amounts will be paid.  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.

 
11


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Pro Forma Results (Unaudited)

The following condensed pro forma financial data is presented as if all 2010 and 2009 acquisitions had been consummated as of January 1, 2009.  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 March 31,
 
   
2010
   
2009
 
Pro Forma Total Revenues
  $ 52,854     $ 47,717  
                 
Pro Forma Loss from Continuing Operations
  $ (15,763 )   $ (12,120 )
Loss from Discontinued Operations
    (521 )     (176 )
Pro Forma Net Loss
    (16,284 )     (12,296 )
Loss allocated to Noncontrolling Interest
    1,710       2,303  
Preferred Distributions
    (1,200 )     (1,200 )
Pro Forma Net Loss applicable to Common Shareholders
  $ (15,774 )   $ (11,193 )
                 
Pro Forma Loss applicable to Common Shareholders per Common Share
               
Basic
  $ (0.16 )   $ (0.23 )
Diluted
  $ (0.16 )   $ (0.23 )
                 
Weighted Average Common Shares Outstanding
               
Basic
    99,311,523       47,786,503  
Diluted
    99,311,523       47,786,503  

 
12


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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, 2010 and December 31, 2009, our investment in unconsolidated joint ventures consists of the following:
 
       
Percent
   
Preferred
   
March 31,
   
December 31,
 
Joint Venture
 
Hotel Properties
 
Owned
   
Return
   
2010
   
2009
 
                             
Inn American Hospitality at Ewing, LLC
 
Courtyard by Marriott,
    Ewing, NJ
    50.0 %  
11.0% cumulative
    $ 362     $ 459  
Hiren Boston, LLC
 
Courtyard by Marriott,
    Boston, MA
    50.0 %   N/A       -       -  
SB Partners, LLC
 
Holiday Inn Express,
    Boston, MA
    50.0 %   N/A       1,791       1,934  
Mystic Partners, LLC
 
Hilton and Marriott branded hotels in CT and RI
    8.8%-66.7 %  
8.5%
non-cumulative
      26,629       27,043  
Metro 29th Street Associates, LLC
 
Holiday Inn Express,
    New York, NY
    50.0 %   N/A       7,049       7,431  
PRA Glastonbury, LLC
 
Hilton Garden Inn,
    Glastonbury, CT
    48.0 %  
11.0% cumulative
      -       561  
PRA Suites at Glastonbury, LLC
 
Homewood Suites,
    Glastonbury, CT
    48.0 %  
10.0%
non-cumulative
      -       1,754  
                        $ 35,831     $ 39,182  


On January 1, 2010, we acquired our joint venture partner’s 52.0% membership interest in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT, and this hotel became one of our wholly-owned hotels. The consideration provided to our joint venture partner in exchange for its 52.0% membership interest consisted of:

 
·
cash of $253,
 
·
our 48% minority membership interest in PRA Suites at Glastonbury, LLC, the owner of the Homewood Suites, Glastonbury, CT;
 
·
settlement of a note receivable and accrued interest made to our former joint venture partner with a principal balance of $1,267 and accrued interest receivable of  $141; and
 
·
our assumption of the outstanding mortgage debt secured by the Hilton Garden Inn, Glastonbury, CT which had an outstanding principal balance of $13,141 as of December 31, 2009, bears interest at a fixed rate of 5.98% per annum and has an anticipated maturity date of April 1, 2016.
 
As a result of this transaction, our joint venture partner acquired our 48.0% minority membership interest in PRA Suites at Glastonbury, LLC, the entity owning the Homewood Suites, Glastonbury, CT, and assumed the outstanding mortgage debt secured by the Homewood Suites, Glastonbury, CT.

Due to the increase in our ownership interest in PRA Glastonbury, LLC, the value of our existing 48.0% interest was remeasured resulting in a $1,818 gain which was recorded upon our acquisition of the remaining interests in the Hilton Garden Inn, Glastonbury, CT.

 
13


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

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, 2010 and 2009 for our investments in unconsolidated joint ventures is as follows:
 
   
March 31, 2010
   
March 31, 2009
 
Inn American Hospitality at Ewing, LLC
  $ (97 )   $ (74 )
Hiren Boston, LLC
    -       (233 )
SB Partners, LLC
    (144 )     (162 )
Mystic Partners, LLC
    (415 )     (409 )
Metro 29th Street Associates, LLC
    (384 )     (371 )
PRA Glastonbury, LLC
    -       (81 )
PRA Suites at Glastonbury, LLC
    -       1  
Loss from Unconsolidated Joint Ventures
    (1,040 )     (1,329 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    1,818       -  
Net income (loss) from Investment in Unconsolidated Joint Ventures
  $ 778     $ (1,329 )

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 March 31, 2010 and December 31, 2009 and for the three months ended March 31, 2010 and 2009.

Balance Sheets
           
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Assets
           
Investment in hotel properties, net
  $ 165,848     $ 196,842  
Other Assets
    26,103       28,473  
Total Assets
  $ 191,951     $ 225,315  
                 
Liabilities and Equity
               
Mortgages and notes payable
  $ 191,846     $ 218,116  
Other liabilities
    20,266       18,219  
Equity:
               
Hersha Hospitality Trust
    40,606       44,178  
Joint Venture Partner(s)
    (60,767 )     (55,198 )
Total Equity
    (20,161 )     (11,020 )
                 
Total Liabilities and Equity
  $ 191,951     $ 225,315  


Statements of Operations
           
   
Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
Room Revenue
  $ 15,584     $ 17,105  
Other Revenue
    4,718       5,313  
Operating Expenses
    (14,921 )     (16,572 )
Interest Expense
    (3,391 )     (3,234 )
Lease Expense
    (1,373 )     (1,364 )
Property Taxes and Insurance
    (1,547 )     (1,640 )
Depreciation and Amortization
    (3,121 )     (3,588 )
Loss Allocated to Noncontrolling Interests
    229       -  
General and Administrative
    (1,798 )     (1,833 )
                 
Net loss
  $ (5,620 )   $ (5,813 )

 
14


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures’ equity to the Company’s investment in the unconsolidated joint ventures as presented on the Company’s balance sheets as of March 31, 2010 and December 31, 2009.

   
March 31,
   
December 31,
 
   
2010
   
2009
 
Company's Share
  $ 40,606     $ 44,178  
Excess Investment (1)
    (4,775 )     (4,996 )
Investment in Joint Venture
  $ 35,831     $ 39,182  
 
 
(1)
Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:

 
·
cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements;
 
·
our basis in the investment in joint ventures not recorded on the joint ventures' financial statements; and
 
·
accumulated amortization of our equity in joint ventures that reflect our portion of the excess of the fair value of joint ventures' assets on the date of our investment over the carrying value of the assets recorded on the joint ventures’ financial statements.  This excess investment is amortized over the life of the properties, and the amortization is included in Income(Loss) from Unconsolidated Joint Venture Investments on our consolidated statement of operations.

 
15


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 — DEVELOPMENT LOANS RECEIVABLE

Development Loans

Historically, we provided first mortgage and mezzanine loans to hotel developers, including entities in which our executive officers and affiliated trustees own an interest that enabled such entities to construct hotels and conduct related improvements on specific hotel projects at interest rates ranging from 10% to 20%.  These loans were initially originated as part of our acquisition strategy.  During the three months ended March 31, 2010, no such loans were originated by us.  Interest income from development loans was $1,374 and $2,397 for the three months ended March 31, 2010 and 2009, respectively.  Accrued interest on our development loans receivable was $3,138 as of March 31, 2010 and $2,451 as of December 31, 2009.  Accrued interest on our development loans receivable as of March 31, 2010 does not include $3,700 of cumulative interest income which has been accrued and paid–in kind by adding it to the principal balance of certain loans as indicated in the table below.
 
Hotel Property
 
Borrower
 
Principal Outstanding 3/31/2010
   
Principal Outstanding 12/31/2009
   
Interest Rate
 
Maturity Date (1)
 
Operational Hotels
                         
Holiday Inn - New York, NY
 
Maiden Hotel, LLC
    7,000     $ 7,000       20 %
July 31, 2010
 
Renaissance by Marriott - Woodbridge, NJ
 
Hersha Woodbridge Associates, LLC
    5,000       5,000       11 % April 1, 2011  *
Element Hotel - Ewing, NJ
 
American Properties @ Scotch Road, LLC
    2,000       2,000       11 % August 6, 2010  *
Hilton Garden Inn - Dover, DE
 
44 Aasha Hospitality Associates, LLC
    1,000       1,000       10 % November 1, 2010  *
                                 
Construction Hotels
                               
Lexington Avenue Hotel - New York, NY (2)
 
44 Lexington Holding, LLC
    11,910       11,591       11 % December 31, 2010  *
Union Square Hotel - New York, NY (2)
 
Risingsam Union Square, LLC
    11,790       11,503       10 %
December 31, 2010
 
Hampton Inn - New York, NY
 
SC Waterview, LLC
    8,000       8,000       10 %
December 31, 2010
 
                                 
Total Development Loans Receivable
 
 
  $ 46,700     $ 46,094              
 
*
Indicates borrower is a related party.
(1)
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.  As these loans typically finance hotel development projects, it is common for the borrower to exercise their options to extend the loans, in whole or in part, until the project has been completed and the project provides cash flow to the developer or is refinanced by the developer.
(2)
We have amended the following development loans to allow the borrower to elect, quarterly, to pay accrued interest in-kind by adding the accrued interest to the principal balance of the loan:

   
Interest Income
       
Borrower
 
Three Months Ended
March 31, 2010
   
Cumulative
Interest Income
Paid In-Kind
 
44 Lexington Holding, LLC
  $ 319     $ 1,910  
Risingsam Union Square, LLC
    287       1,790  
                 
Total
  $ 606     $ 3,700  
 
For additional information regarding the development loan to Maiden Hotel, LLC, see Note 13, "Subsequent Events."
 
 
16


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 — OTHER ASSETS

Other Assets consisted of the following at March 31, 2010 and December 31, 2009:

   
March 31,
2010
   
December 31,
2009
 
             
Transaction Costs
  $ 568     $ 292  
Investment in Statutory Trusts
    1,548       1,548  
Notes Receivable
    -       1,412  
Deposits on Hotel Acquisitions
    1,500       20  
Prepaid Expenses
    4,517       4,468  
Interest Receivable from Development Loans to Non-Related Parties
    2,043       1,573  
Deposit on Property Improvement Plans
    279       167  
Hotel Purchase Option
    933       933  
Other
    1,275       2,015  
    $ 12,663     $ 12,428  


Transaction Costs - Transaction costs include legal fees and other third party transaction costs incurred relative to entering into debt facilities and issuances of equity securities which 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 December 31, 2009 included a loan, and related accrued interest, made to one of our unconsolidated joint venture partners.  The $1,267 note accrued interest at 11% and matured on December 31, 2009.  The principal and accrued interest receivable under this note was settled in connection with our acquisition of the remaining interest in PRA Glastonbury, LLC as noted in “Note 3 – Investment in Unconsolidated Joint Ventures.”

Deposits on Hotel Acquisitions - Deposits paid in connection with the acquisition of hotels, including accrued interest, are recorded in other assets. As of March 31, 2010 and December 31, 2009, we had $1,500 and $20 in non-interest bearing deposits related to the acquisition of hotel properties.

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 $1,095 and $878 as of March 31, 2010 and December 31, 2009, respectively, which is included in due from related parties on the consolidated balance sheets.

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

Hotel Purchase Option – We have an option to acquire a 50% interest in the entity that owns the Holiday Inn Express – Manhattan.  This option is exercisable after February 1, 2012 or upon termination of Metro 29th Street’s lease of the hotel and expires at the end of the lease term.

 
17


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 — DEBT

Mortgages and Notes Payable

We had total mortgages payable at March 31, 2010, and December 31, 2009, of $627,025 and $614,401, respectively.  These balances consisted of mortgages with fixed and variable interest rates, which ranged from 2.25% to 8.94% as of March 31, 2010. Aggregate interest expense incurred under the mortgage loans payable totaled $9,461 and $8,286 for the three months ended March 31, 2010 and 2009, 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, 2010 we were in compliance with all events of default covenants under the applicable loan agreements.  As of March 31, 2010, the maturities for the outstanding mortgage loans ranged from January 2011 to September 2023.

We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements which 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 $25,774 note issued to Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum through July 30, 2010, and the $25,774 note issued to Hersha Statutory Trust II bears interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent to July 30, 2010 for notes issued to Hersha Statutory Trust I and 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 $935 was recorded for the three months ended March 31, 2010 and 2009, respectively.

HHLP has entered into a management agreement with an unaffiliated hotel manager that has 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 $301 as of March 31, 2010 and $294 as of December 31, 2009.

Revolving Line of Credit

We maintain 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 at the discretion of the lenders and provided that additional collateral is supplied and additional lenders join the existing bank group.

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 plus 1.50% per annum or (ii) the greater of LIBOR plus three and one half percent (3.5%) per annum or 4.25%.

 
18


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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 as of March 31, 2010:
 
- 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 1.20 to 1.00;
-
a total funded liabilities to gross asset value ratio of not more than 0.67 to 1.00;
-
a EBITDA to debt service ratio of not less than 1.25 to 1.00; and
-
The sum of the aggregate amount of outstanding loans and letter of credit obligations may not exceed the lesser of the committed amount of $135,000 or 67% of the appraised value of the hotel properties pledged as collateral.  In the event the aggregate amount of outstanding loans and letter of credit obligations exceeds this amount, we will be required to repay a portion of the outstanding loans and letter of credit obligations or provide additional collateral to the lenders.

The Company is in compliance with each of the covenants listed above as of March 31, 2010.

The outstanding principal balance under the line of credit was $0 at March 31, 2010 and $79,200 at December 31, 2009. The Company recorded interest expense of $742 and $791 related to the line of credit borrowings for the three months ended March 31, 2010 and 2009, respectively.  The weighted average interest rate on our line of credit during the three months ended March 31, 2010 and 2009 was 4.32% and 3.54%, respectively.  As of March 31, 2010 we had $7,182 in irrevocable letters of credit issued and our remaining borrowing capacity under the facility was $127,818.

Fair Value of Debt

The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity.   As of March 31, 2010, the carrying value and estimated fair value of the Company’s debt was $678,874 and $624,873, respectively. As of December 31, 2009, the carrying value and estimated fair value of the Company’s debt was $745,443 and $688,662 respectively.

Deferred Financing 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 financing costs is recorded in interest expense. As of March 31, 2010, deferred financing costs were $8,074 net of accumulated amortization of $4,690. Deferred financing costs were $8,696 net of accumulated amortization of $4,262, as of December 31, 2009. Amortization of deferred costs for the three months ended March 31, 2010 and 2009 was $538 and $537, respectively.

Debt Extinguishment

On January 29, 2010, we repaid outstanding mortgage debt of $29,632 secured by the Hilton Garden Inn, Tribeca, New York, NY and simultaneously entered into a new mortgage obligation of $32,000.  The new mortgage debt has a fixed interest rate of 8.25% and matures on February 10, 2015.  As a result of this extinguishment, we expensed $731 in unamortized deferred costs and fees, which is recorded in loss on debt extinguishment on the consolidated statement of operations for the three months ended March 31, 2010.

 
19


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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 in accordance with the requirements for qualification as a REIT under the Federal income tax laws, including HHMLP, as the property managers for hotels it leases from us pursuant to management agreements. HHMLP is owned, in part, by certain executives and affiliated trustees of the Company. 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 hotels.   For the three months ended March 31, 2010 and 2009, base management fees incurred totaled $1,216 and $1,067, 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, 2010 and 2009 was $3,197 and $2,774, 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 March 31, 2010 and 2009, the Company incurred accounting fees of $375 and $394, respectively.  For the three months ended March 31, 2010 and 2009, the Company incurred information technology fees of $84 and $83, 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, 2010 and 2009, we incurred fees of $40 and $42, respectively, which were capitalized with the cost of fixed asset additions.

 
20


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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, 2010 and 2009, we incurred charges of $406 and $41, respectively, for hotel supplies and capital expenditure purchases from Hersha Purchasing and Design, a hotel supply company owned, in part, by certain executives and affiliated trustees of the Company. Hotel supplies are expenses included in hotel operating expenses on our consolidated statements of operations. Approximately $12 and $32 is included in accounts payable at March 31, 2010 and December 31, 2009, respectively.

Due from Related Parties

The Due from Related Party balance as of March 31, 2010 and December 31, 2009 was approximately $4,614 and $2,394 respectively. The balances primarily consisted of accrued interest due on our development loans, and the remaining due from related party balances are receivables owed from our unconsolidated joint ventures.

Due to Related Parties

The Due to Related Parties balance as of March 31, 2010 and December 31, 2009 was approximately $282 and $769, respectively. The balances 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 ground lease with an original term of 75 years. Monthly payments as determined by the ground 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 ground 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 ground lease with an original term of 99 years.  Monthly payments are determined by the ground lease agreement and are due through the expiration in November 2103.  Each ground lease provides for rent increases at scheduled intervals. We record rent expense on a straight-line basis over the lives of the ground leases from the beginning of each lease term. For the three months ended March 31, 2010 and 2009, we incurred $292 and $292, respectively, of rent expense related to these ground leases.

 
21


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS

Fair Value Measurements

Our determination of fair value measurements are 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, we utilize 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, 2010, 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.

We incorporate credit valuation adjustments to appropriately reflect both our 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, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and its counterparties.  However, as of March 31, 2010, we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Derivative Instruments

We maintain an interest rate swap agreement that effectively fixed 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%.

 
22


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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 effectively fixed 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 $5,212 as of March 31, 2010.

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 interest rate cap matured on May 9, 2010 and was replaced by an interest rate cap with identical terms that matures on May 9, 2011.

The following table shows the estimated fair value of our derivatives at March 31, 2010 and December 31, 2009:

               
Estimated Fair Value
 
Date of Transaction
 
Hedged Debt
 
Type
 
Maturity Date
 
March 31,
2010
   
December 31,
2009
 
July 1, 2007
 
Variable Rate Mortgage - Hotel 373, New York, NY
 
Cap
 
May 9, 2010
    -       -  
December 31, 2008
 
Variable Rate Mortgage - Hilton Garden Inn, Edison, NJ
 
Swap
 
January 1, 2011
    (53 )     (53 )
January 9, 2009
 
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
 
Swap
 
January 10, 2011
    (112 )     (103 )
                $ (165 )   $ (156 )


The fair value of the derivative instrument liabilities is included in accounts payable, accrued expenses and other liabilities at March 31, 2010 and December 31, 2009.

The change in fair value of derivative instruments designated as cash flow hedges was a loss of $9 and a gain of $51 for the three months ended March 31, 2010 and 2009, respectively.  These unrealized gains and losses were reflected on our consolidated balance sheet in accumulated other comprehensive income. Hedge ineffectiveness of $0 and $1 on cash flow hedges was recognized in interest expense for the three months ended March 31, 2010 and 2009, respectively.

 
23


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [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 (the “2008 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 Plan, the Company made awards pursuant to the 2004 Equity Incentive Plan (the “2004 Plan”). Upon approval of the 2008 Plan by the Company’s shareholders on May 22, 2008, the Company terminated the 2004 Plan. Termination of the 2004 Plan did not have any effect on equity awards and grants previously made under that plan.

Executives

On August 5, 2009, the Company’s Compensation Committee awarded an aggregate of 354,250 performance shares pursuant to the 2008 Plan to our executive officers.  Performance shares are not considered to be outstanding at the time of grant, but are earned based on the Company’s Class A common shares maintaining a closing price in excess of defined thresholds over a defined period of time and then settled in an equivalent number of Class A common shares.  A portion of the performance shares may be earned upon completion of the performance period, subject to the discretion of the Compensation Committee.  Unearned performance shares expire on August 4, 2010.  On March 22, 2010, the second defined stock price threshold was met and an aggregate of 81,250 Class A common shares were issued upon settlement of an equivalent number of earned performance shares.  Compensation expense of $140 was incurred during the three months ended March 31, 2010 for the performance shares and is recorded in stock based compensation on the consolidated statement of operations.  Unearned compensation related to performance share awards as of March 31, 2010 and December 31, 2009 was $140 and $280, respectively.  Subsequent to March 31, 2010, the third defined stock price threshold was met and an aggregate of 78,000 performance shares were earned, pending certification by the Company’s Compensation Committee.

Compensation expense related to the restricted share awards consisting of restricted common shares issued to executives of the Company of $516 and $421 was incurred during the three months ended March 31, 2010 and 2009, respectively, and is recorded in stock based compensation on the statement of operations.  Unearned compensation related to the restricted share awards as of March 31, 2010 and December 31, 2009 was $3,848 and $4,334, respectively.  The following table is a summary of all unvested share awards issued to executives under the 2004 and 2008 Plans:

                     
Shares Vested
   
Unearned Compensation
 
Original Issuance Date
 
Shares Issued
   
Share Price on date of grant
 
Vesting Period
 
Vesting Schedule
 
March 31, 2010
   
December 31, 2009
   
March 31, 2010
   
December 31, 2009
 
June 1, 2006
    89,500     $ 9.40  
4 years
 
25%/year
    67,125       67,125     $ 34     $ 87  
June 1, 2007
    214,582     $ 12.32  
4 years
 
25%/year
    107,291       107,291       770       935  
June 2, 2008
    278,059     $ 8.97  
4 years
 
25%/year
    69,515       69,515       1,350       1,506  
September 30, 2008
    3,616     $ 7.44  
1-4 years
 
25-100%/year
    654       654       5       6  
June 1, 2009
    744,128     $ 2.80  
4 years
 
25%/year
    -       -       1,650       1,780  
September 25, 2009
    10,000     $ 3.06  
1 year
 
100%/year
    -       -       9       20  
March 25, 2010
    6,000     $ 5.02  
2 years
 
50%/year
    -       -       30       -  
Total
    1,345,885                     244,585       244,585     $ 3,848     $ 4,334  

 
24


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 10 — EARNINGS PER SHARE

The following table is a reconciliation of the income or loss (numerator) and the weighted average shares (denominator) used in the calculation of basic and diluted earnings per common share. The computation of basic and diluted earnings per share is presented below.

   
Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
Numerator:
           
BASIC AND DILUTED*
           
Loss from Continuing Operations
  $ (15,816 )   $ (10,507 )
Loss from Continuing Operations allocated to Noncontrolling Interests
    1,669