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 June 30, 2010

OR

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

For the transition period from ____ to ____

COMMISSION FILE NUMBER: 001-14765

HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)

Maryland
 
251811499
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
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 August 4, 2010, the number of Class A common shares of beneficial interest outstanding was 139,230,044 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.
 
43
Item 4.
 
45
PART II.  OTHER INFORMATION
 
Item 1.
 
46
Item 1A.
 
46
Item 2.
 
46
Item 3.
 
46
Item 4.
 
46
Item 5.
 
46
Item 6.
 
47
 
 
 
 
 
 
48

 
2


PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2010 [UNAUDITED] AND DECEMBER 31, 2009
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
June 30, 2010
   
December 31, 2009
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $ 1,152,597     $ 938,954  
Investment in Unconsolidated Joint Ventures
    35,700       39,182  
Development Loans Receivable
    40,329       46,094  
Cash and Cash Equivalents
    17,949       11,404  
Escrow Deposits
    17,471       16,174  
Hotel Accounts Receivable, net of allowance for doubtful accounts of $64 and $34
    12,333       7,103  
Deferred Financing Costs, net of Accumulated Amortization of $4,760 and $4,262
    7,715       8,696  
Due from Related Parties
    3,507       2,394  
Intangible Assets, net of Accumulated Amortization of $927 and $803
    7,855       7,542  
Other Assets
    12,679       12,428  
Assets Held for Sale
    23,555       21,073  
                 
Total Assets
  $ 1,331,690     $ 1,111,044  
                 
Liabilities and Equity:
               
Line of Credit
  $ 44,700     $ 79,200  
Mortgages and Notes Payable, net of unamortized discount of $1,146 and $49
    648,196       645,351  
Accounts Payable, Accrued Expenses and Other Liabilities
    23,566       16,216  
Dividends and Distributions Payable
    8,362       4,293  
Due to Related Parties
    542       769  
Liabilities Related to Assets Held for Sale
    20,861       20,892  
                 
Total Liabilities
    746,227       766,721  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ 14,166     $ 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 June 30, 2010 and December 31, 2009
    24       24  
Common Shares - Class A, $.01 Par Value, 300,000,000 and 150,000,000 Shares Authorized at June 30, 2010 and December 31, 2009, 139,229,394 and 57,682,917 Shares Issued and Outstanding at June 30, 2010 and December 31, 2009, respectively
    1,392       577  
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (360 )     (160 )
Additional Paid-in Capital
    757,955       487,481  
Distributions in Excess of Net Income
    (212,015 )     (185,725 )
Total Shareholders' Equity
    546,996       302,197  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    23,801       27,126  
Noncontrolling Interests - Consolidated Joint Ventures
    500       267  
Total Noncontrolling Interests
    24,301       27,393  
                 
Total Equity
    571,297       329,590  
                 
Total Liabilities and Equity
  $ 1,331,690     $ 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 AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Revenue:
                       
Hotel Operating Revenues
  $ 74,564     $ 57,352     $ 123,718     $ 99,526  
Interest Income from Development Loans
    1,176       2,166       2,550       4,563  
Other Revenues
    188       161       353       390  
Total Revenues
    75,928       59,679       126,621       104,479  
                                 
Operating Expenses:
                               
Hotel Operating Expenses
    39,618       31,310       71,565       59,237  
Hotel Ground Rent
    354       291       646       583  
Real Estate and Personal Property Taxes and Property Insurance
    4,640       3,363       8,672       6,547  
General and Administrative
    1,903       1,371       4,737       2,850  
Stock Based Compensation
    1,499       499       2,156       921  
Acquisition and Terminated Transaction Costs
    222       37       3,558       44  
Depreciation and Amortization
    12,728       10,713       24,738       21,106  
Total Operating Expenses
    60,964       47,584       116,072       91,288  
                                 
Operating Income
    14,964       12,095       10,549       13,191  
                                 
Interest Income
    16       50       57       110  
Interest Expense
    10,953       10,811       22,310       21,041  
Other Expense
    86       31       178       81  
Loss on Debt Extinguishment
    2       -       733       -  
Income (Loss) before Income (Loss) from Unconsolidated Joint Venture Investments and Discontinued Operations
    3,939       1,303       (12,615 )     (7,821 )
                                 
Loss from Unconsolidated Joint Ventures
    (131 )     (395 )     (1,171 )     (1,724 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    2,190       -       4,008       -  
Income (Loss) from Unconsolidated Joint Venture Investments
    2,059       (395 )     2,837       (1,724 )
                                 
Income (Loss) from Continuing Operations
    5,998       908       (9,778 )     (9,545 )
                                 
Discontinued Operations  (Note 12):
                               
Income from Discontinued Operations
    (291 )     576       (852 )     346  
                                 
Net Income (Loss)
    5,707       1,484       (10,630 )     (9,199 )
                                 
(Income) Loss Allocated to Noncontrolling Interests
    (1,151 )     (451 )     564       1,602  
Preferred Distributions
    (1,200 )     (1,200 )     (2,400 )     (2,400 )
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 3,356     $ (167 )   $ (12,466 )   $ (9,997 )
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 
4


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Earnings Per Share:
                       
BASIC
                       
Income (Loss) from Continuing Operations applicable to Common Shareholders
  $ 0.02     $ (0.01 )   $ (0.10 )   $ (0.22 )
Income (Loss) from Discontinued Operations applicable to Common Shareholders
    0.00       0.01       (0.01 )     0.01  
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 0.02     $ 0.00     $ (0.11 )   $ (0.21 )
                                 
DILUTED
                               
Income (Loss) from Continuing Operations applicable to Common Shareholders
  $ 0.02 *   $ (0.01 )  *   $ (0.10 )  *   $ (0.22 ) *
Income (Loss) from Discontinued Operations applicable to Common Shareholders
    0.00 *     0.01 *     (0.01 )  *     0.01 *
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 0.02 *   $ 0.00 *   $ (0.11 )  *   $ (0.21 ) *
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
    137,200,796       47,964,818       118,360,826       47,876,175  
Diluted
    140,351,846 *     47,964,818 *     118,360,826 *     47,876,175 *

*
Income (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 June 30, 2010 and 2009 were 9,239,135 and 8,746,300, respectively.  Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the six months ended June 30, 2010 and 2009 were 9,376,419 and 8,746,300, respectively.

Unvested stock awards, contingently issuable share 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 six months ended June 30, 2010, 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 six months ended June 30, 2010, there were 185,251 anti-dilutive unvested stock awards outstanding, 181,694 anti-dilutive contingently issuable share awards outstanding and 1,916,814 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 SIX MONTHS ENDED JUNE 30, 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
   
Accumulated Other Comprehensive (Loss ) 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  
                                                                                                 
Unit Conversion
    -       18       -       8,406       -       -       8,424       (8,424 )     -       (8,424 )     -       -  
Units Issued for Acquisitions
    -       -       -       -       -       -       -       6,256       -       6,256       6,256          
Common Share Issuance, net of costs
    -       794       -       259,970       -       -       260,764       -       -       -       260,764       -  
Dividends and Distribution declared:
                                                                                               
Preferred Shares ($1.00 per share)
    -       -       -       -       -       (2,400 )     (2,400 )     -       -       -       (2,400 )     -  
Common Shares ($0.10 per share)
    -       -       -       -       -       (13,824 )     (13,824 )     -       -       -       (13,824 )        
Common Units ($0.10 per share)
    -       -       -       -       -       -       -       (620 )     -       (620 )     (620 )     (307 )
Dividend Reinvestment Plan
    -       -       -       6       -       -       6       -       -       -       6       -  
Stock Based Compensation
                                                    -                                          
Restricted Share Award Grants
    -       3               (3 )                     -                                          
Restricted Share Award Vesting
    -       -       -       1,970       -       -       1,970       -       -       -       1,970       -  
Share Grants to Trustees
    -       -               125                       125                               125          
Comprehensive Loss:
                                                                                               
Other Comprehensive Income
    -       -       -       -       (200 )     -       (200 )     -       -       -       (200 )     -  
Net Loss
    -       -       -       -       -       (10,066 )     (10,066 )     (537 )     233       (304 )     (10,370 )     (260 )
Total Comprehensive Loss
                                                    (10,266 )     (537 )     233       (304 )     (10,570 )     (260 )
                                                                                                 
Balance at June 30, 2010
  $ 24     $ 1,392     $ -     $ 757,955     $ (360 )   $ (212,015 )   $ 546,996     $ 23,801     $ 500     $ 24,301     $ 571,297     $ 14,166  
                                                                                                 
                                                                                                 
Balance at December 31, 2008
  $ 24     $ 483     $ -     $ 463,772     $ (109 )   $ (114,207 )   $ 349,963     $ 34,781     $ 1,854     $ 36,635     $ 386,598     $ 18,739  
                                                                                                 
Common Share Issuance, net of costs
    -       1       -       129       -       -       130               -       -       130          
Dividends and Distribution declared:
                                                                                               
Preferred Stock ($1.00 per share)
    -       -       -       -       -       (2,400 )     (2,400 )     -       -       -       (2,400 )     -  
Common Stock ($0.23 per share)
    -       -       -       -       -       (11,149 )     (11,149 )     -       -       -       (11,149 )     -  
Common Units ($0.23 per share)
    -       -       -       -       -       -       -       (1,307 )     -       (1,307 )     (1,307 )     (705 )
Dividend Reinvestment Plan
    -       -       -       19       -       -       19       -       -       -       19       -  
Stock Based Compensation
                                                                                               
Restricted Share Award Grants
    -       7       -       (7 )     -       -       -       -       -       -       -          
Restricted Share Award Vesting
    -       -       -       873                       873       -       -       -       873       -  
Share Grants to Trustees
    -       -       -       84       -       -       84       -       -       -       84       -  
Comprehensive Income (Loss):
                                                                                               
Other Comprehensive Income
    -       -       -       -       35       -       35       -               -       35       -  
Net Loss
    -       -       -       -       -       (7,597 )     (7,597 )     (903 )     (214 )     (1,117 )     (8,714 )     (485 )
Total Comprehensive Loss
                                                    (7,562 )     (903 )     (214 )     (1,117 )     (8,679 )     (485 )
                                                                                                 
Balance at June 30, 2009
  $ 24     $ 491     $ -     $ 464,870     $ (74 )   $ (135,353 )   $ 329,958     $ 32,571     $ 1,640     $ 34,211     $ 364,169     $ 17,549  

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 SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS]

   
For the Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
 
             
Net loss
  $ (10,630 )   $ (9,199 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Acquisition and terminated transaction costs
    3,438       -  
Depreciation
    24,698       22,084  
Amortization of intangible assets and deferred costs
    1,363       1,177  
Debt extinguishment
    580       -  
Development loan interest added to principal
    (1,235 )     (2,061 )
Equity in (income) loss of unconsolidated joint venture investments
    (2,837 )     1,724  
Distributions from unconsolidated joint venture investments
    -       400  
Loss (gain) recognized on change in fair value of derivative instrument
    5       (151 )
Stock based compensation
    2,156       921  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (4,602 )     (2,230 )
Escrow deposits
    (1,297 )     (1,244 )
Other assets
    1,391       (3,290 )
Due from related parties
    (952 )     1,061  
Increase (decrease) in:
               
Due to related parties
    (528 )     (1,125 )
Accounts payable, accrued expenses and other liabilities
    5,394       1,233  
Net cash provided by operating activities
    16,944       9,300  
                 
Investing activities:
               
Purchase of hotel property assets
    (190,793 )     (4,794 )
Deposits on hotel acquistions
    (1,500 )     -  
Capital expenditures
    (3,850 )     (4,033 )
Cash paid for hotel development project
    (3,441 )     -  
Investment in development loans receivable
    -       (2,000 )
Distributions from unconsolidated joint venture investments
    -       100  
Advances and capital contributions to joint venture investments
    (13,750 )     (753 )
Net cash used in investing activities
    (213,334 )     (11,480 )
                 
Financing activities:
               
(Repayments of) proceeds from borrowings under line of credit, net
    (34,500 )     25,100  
Principal repayment of mortgages and notes payable
    (41,283 )     (3,313 )
Proceeds from mortgages and notes payable
    31,510       182  
Cash paid for deferred financing costs
    (85 )     (11 )
Proceeds from issuance of common shares, net of issuance costs
    260,764       131  
Acquisiton of interest rate cap
    (394 )     -  
Dividends paid on common shares
    (9,741 )     (17,366 )
Dividends paid on preferred shares
    (2,400 )     (2,400 )
Distributions paid on common units
    (936 )     (3,149 )
Net cash provided by (used in) financing activities
    202,935       (826 )
                 
Net increase (decrease) in cash and cash equivalents
    6,545       (3,006 )
Cash and cash equivalents - beginning of period
    11,404       15,697  
                 
Cash and cash equivalents - end of period
  $ 17,949     $ 12,691  

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 AND SIX MONTHS ENDED JUNE 30, 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 and six months ended June 30, 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 HHLP in exchange for additional common units of limited partnership in HHLP.

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 common units of limited partnership in HHLP.

Aggregate offering-related expenses associated with these two public offerings were approximately $953, resulting in net proceeds after expenses of $260,764.
 
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 $23,801 as of June 30, 2010 and $27,126 as of December 31, 2009.  As of June 30, 2010, there were 5,472,056 Nonredeemable Common Units outstanding with a fair market value of $24,734, 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

 
8


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 — BASIS OF PRESENTATION (CONTINUED)

of carrying value based on the accumulation of historical cost or the redemption value.

As of June 30, 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 $13,850.  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 June 30, 2010, the Redeemable Common Units were valued on the consolidated balance sheets at historical cost since the Redeemable Common Units redemption value was less than historical cost of $14,166.  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 AND SIX MONTHS ENDED JUNE 30, 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 June 30, 2010 and December 31, 2009:
 
   
June 30, 2010
   
December 31, 2009
 
             
Land
  $ 207,386     $ 161,449  
Buildings and Improvements
    987,002       814,461  
Furniture, Fixtures and Equipment
    140,120       122,174  
Construction in Progress
    3,441       -  
      1,337,949       1,098,084  
                 
Less Accumulated Depreciation
    (185,352 )     (159,130 )
                 
Total Investment in Hotel Properties
  $ 1,152,597     $ 938,954  

Acquisitions

During the six months ended June 30, 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     $ 27     $ 17,129     $ 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       105       58,371       -  
Candlewood Suites, Times Square, NY
 
2/9/2010
    10,281       36,687       4,298       96       51,362       -  
Holiday Inn, Wall Street, NY
 
5/7/2010
    12,152       21,100       1,567       57       34,876       -  
Total
      $ 46,097     $ 155,518     $ 16,105     $ 374     $ 218,094     $ 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.

On May 7, 2010, we entered into a contribution agreement with an unrelated third party and closed on the acquisition of 100% of the membership interests in Maiden Hotel LLC, the owner of the Wall Street Holiday Inn, New York, NY. The aggregate purchase price paid for the membership interests in Maiden Hotel LLC was approximately $34,876. The purchase price paid included the issuance of 200,000 Common Units, valued at $957, the settlement of $7,839 of existing mezzanine

 
10


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

financing and accrued interest income, $57 in franchise fees and the payment of approximately $26,023 in cash provided, in part, from borrowings under our existing line of credit. The property was purchased unencumbered of debt.  In addition, we paid closing costs of $151 and acquired approximately $511 in net working capital.

Included in the consolidated statements of operations for the three and six months ended June 30, 2010 for the 2010 acqusitions are total revenues of $11,218 and $15,411, respectively, and total net income of $2,856 and loss of $191, respectively.

   
Three Months Ended,
   
Six Months Ended,
 
   
June 30, 2010
   
June 30, 2010
 
Hotel
 
Revenue
   
Net Income (Loss)
   
Revenue
   
Net Income (Loss)
 
Hilton Garden Inn, Glastonbury, CT
  $ 1,338     $ (56 )   $ 2,428     $ (132 )
Hampton Inn, Holiday Inn Express, Candlewood Suites, Times Square, NY
    8,849       2,954       11,952       (17 )
Holiday Inn, Wall Street, NY
    1,031       (42 )     1,031       (42 )
Total
  $ 11,218     $ 2,856     $ 15,411     $ (191 )

Construction in Progress

On April 2, 2010, we commenced renovations to convert two of our existing adjoining hotel properties in King of Prussia, PA into a Hyatt Place.  The hotels previously operated as a Mainstay Suites and a Sleep Inn and were closed at the time renovations commenced.  As such, we ceased recording depreciation expense on the two existing properties and we are capitalizing the cost of construction, including interest, as construction in progress in investments in hotel properties on the consolidated balance sheet.  As of June 30, 2010, we have capitalized $3,441 in renovation costs, including $22 in capitalized interest.

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 any amounts due, if any, 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 AND SIX MONTHS ENDED JUNE 30, 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 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.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Pro Forma Total Revenues
  $ 76,504     $ 63,273     $ 129,626     $ 111,109  
                                 
Pro Forma Income (Loss) from Continuing Operations
  $ 6,076     $ 582     $ (9,693 )   $ (11,846 )
(Loss) Income from Discontinued Operations
    (291 )     576       (852 )     346  
Pro Forma Net Income (Loss)
    5,785       1,158       (10,545 )     (11,500 )
(Income) Loss allocated to Noncontrolling Interest
    (1,156 )     (401 )     558       1,958  
Preferred Distributions
    (1,200 )     (1,200 )     (2,400 )     (2,400 )
Pro Forma Income (Loss) applicable to Common Shareholders
  $ 3,429     $ (443 )   $ (12,387 )   $ (11,942 )
                                 
Pro Forma Income (Loss) applicable to Common Shareholders per Common Share
                               
Basic
  $ 0.02     $ (0.01 )   $ (0.10 )   $ (0.25 )
Diluted
  $ 0.02     $ (0.01 )   $ (0.10 )   $ (0.25 )
                                 
Weighted Average Common Shares Outstanding
                               
Basic
    137,200,796       47,964,818       118,360,826       47,876,175  
Diluted
    140,351,846       47,964,818       118,360,826       47,876,175  

 
12


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 June 30, 2010 and December 31, 2009, our investment in unconsolidated joint ventures consists of the following:
 
Joint Venture
 
Hotel Properties
 
Percent Owned
   
Preferred Return
   
June 30, 2010
   
December 31, 2009
 
                             
Inn American Hospitality at Ewing, LLC
 
Courtyard by Marriott, Ewing, NJ
    50.0 %  
11.0% cumulative
    $ 363     $ 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       1,870       1,934  
Mystic Partners, LLC
 
Hilton and Marriott branded hotels in CT and RI
    8.8%-66.7 %  
8.5% non-cumulative
      26,214       27,043  
Metro 29th Street Associates, LLC
 
Holiday Inn Express, New York, NY
    50.0 %   N/A       7,253       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  
                      $ 35,700     $ 39,182  

* As of December 31, 2009, we had determined that our 50% interest in Hiren Boston, LLC, was fully impaired and our investment in the unconsolidated joint venture had been written down to $0.

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.

Hiren Boston, LLC, a joint venture that owns the 164-room Courtyard by Marriot located in South Boston, MA, had been pursuing discussions with its lender to refinance a $16,200 mortgage loan secured by the hotel property, which had originally matured in September 2009. On April 13, 2010, we purchased this mortgage loan from the lender, which had an unamortized principal balance of $15,628, for a purchase price of $13,750, and amended the terms of the note.  As amended, this $13,750 mortgage loan now requires the joint venture to make monthly interest payments beginning on May 1, 2010, bears interest at a fixed rate of 10% per annum and matures on April 13, 2012. As a result of the purchase of this mortgage loan, we have determined that we are the primary beneficiary of Hiren Boston, LLC.  As of April 13, 2010, we no longer accounted for our investment in Hiren Boston, LLC under the equity method of accounting and began accounting for Hiren Boston, LLC as a consolidated subsidiary.  Hiren Boston, LLC’s results of operations

 
13


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

are included in our consolidated statement of operations for the period from April 13, 2010 through June 30, 2010 and its balance sheet is included in our consolidated balance sheet as of June 30, 2010.  Our interest in Hiren Boston, LLC was remeasured, and as a result, we recorded a gain of approximately $2,190.

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. Income and loss recognized during the three and six months ended June 30, 2010 and 2009 for our investments in unconsolidated joint ventures is as follows:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Inn American Hospitality at Ewing, LLC
  $ 1     $ 12     $ (96 )   $ (63 )
Hiren Boston, LLC
    -       15       -       (217 )
SB Partners, LLC
    79       21       (65 )     (141 )
Mystic Partners, LLC
    (415 )     (449 )     (830 )     (857 )
Metro 29th Street Associates, LLC
    204       14       (180 )     (357 )
PRA Glastonbury, LLC
    -       (6 )     -       (87 )
PRA Suites at Glastonbury, LLC
    -       (2 )     -       (2 )
Loss from Unconsolidated Joint Ventures
    (131 )     (395 )     (1,171 )     (1,724 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    2,190       -       4,008       -  
Net income (loss) from Investment in Unconsolidated Joint Ventures
  $ 2,059     $ (395 )   $ 2,837     $ (1,724 )

The following tables set forth the total assets, liabilities, equity and components of net income, including the Company’s share, related to the unconsolidated joint ventures discussed above as of June 30, 2010 and December 31, 2009 and for the three and six months ended June 30, 2010 and 2009.

Balance Sheets
           
   
June 30, 2010
   
December 31, 2009
 
Assets
           
Investment in hotel properties, net
  $ 145,605     $ 196,842  
Other Assets
    27,001       28,473  
Total Assets
  $ 172,606     $ 225,315  
                 
Liabilities and Deficit
               
Mortgages and notes payable
  $ 175,928     $ 218,116  
Other liabilities
    21,429       18,219  
Equity (Deficit):
               
Hersha Hospitality Trust
    37,515       44,178  
Joint Venture Partner(s)
    (62,266 )     (55,198 )
Total Deficit
    (24,751 )     (11,020 )
                 
Total Liabilities and Equity
  $ 172,606     $ 225,315  

 
14


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

Statements of Operations
                       
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Room Revenue
  $ 20,226     $ 21,444     $ 35,810     $ 38,550  
Other Revenue
    5,919       6,082       10,637       11,395  
Operating Expenses
    (16,108 )     (17,209 )     (31,029 )     (33,781 )
Interest Expense
    (2,760 )     (4,083 )     (6,151 )     (7,316 )
Lease Expense
    (1,324 )     (1,378 )     (2,698 )     (2,743 )
Property Taxes and Insurance
    (2,209 )     (1,630 )     (3,755 )     (3,271 )
Federal & State Income Taxes
    -       (19 )     -       (19 )
Depreciation and Amortization
    (2,774 )     (3,625 )     (5,896 )     (7,213 )
Loss Allocated to Noncontrolling Interests
    97       -       326       -  
General and Administrative
    (1,657 )     (1,796 )     (3,455 )     (3,629 )
                                 
Net income (loss)
  $ (590 )   $ (2,214 )   $ (6,211 )   $ (8,027 )

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 June 30, 2010 and December 31, 2009.

   
June 30, 2010
   
December 31, 2009
 
Company's Share
  $ 37,515     $ 44,178  
Excess Investment (1)
    (1,815 )     (4,996 )
Investment in Joint Venture
  $ 35,700     $ 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 AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 — DEVELOPMENT LOANS RECEIVABLE

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 six months ended June 30, 2010, no such loans were originated by us.  Interest income from development loans was $1,176 and $2,166 for the three months ended June 30, 2010 and 2009, respectively.  Interest income from development loans was $2,550 and $4,563 for the six months ended June 30, 2010 and 2009, respectively.  Accrued interest on our development loans receivable was $2,715 as of June 30, 2010 and $2,451 as of December 31, 2009.  Accrued interest on our development loans receivable as of June 30, 2010 does not include cumulative interest income of $4,329 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 6/30/2010
   
Principal Outstanding 12/31/2009
   
Interest Rate
 
Maturity Date (1)
Operational Hotels
                       
Holiday Inn - New York, NY
 
Maiden Hotel, LLC
    -     $ 7,000       20 %  
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, 2011*
Hilton Garden Inn - Dover, DE
 
44 Aasha Hospitality Associates, LLC
    1,000       1,000       10 %
November 1, 2010*
                               
Construction Hotels
                             
Hyatt 48Lex - New York, NY
 
44 Lexington Holding, LLC
    12,241 (2)     11,591       11 %
December 31, 2010*
Hyatt Union Square - New York, NY
 
Risingsam Union Square, LLC
    12,088 (2)     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
 
 
  $ 40,329     $ 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 June 30, 2010
   
Six Months Ended June 30, 2010
   
Cumulative Interest Income Paid In-Kind
 
44 Lexington Holding, LLC
  $ 331     $ 650     $ 2,241  
Risingsam Union Square, LLC