form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.   T Yes  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,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
Large accelerated filer  o
Accelerated filer                 T
 
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   T No

As of November 4, 2010, the number of Class A common shares of beneficial interest outstanding was 169,130,592 and there were no Class B common shares outstanding.
 


 
 

 
 
Hersha Hospitality Trust
Table of Contents

     
Page  
         
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Item 1.
1  
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    2  
    4  
    5  
    6  
 
Item 2.
29  
 
Item 3.
41  
 
Item 4.
43  
44  
 
Item 1.
44  
 
Item 1A.
44  
 
Item 2.
44  
 
Item 3.
44  
 
Item 4.
44  
 
Item 5.
45  
 
Item 6.
47  
         
    48  

 
 


PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.

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

   
September 30, 2010
   
December 31, 2009
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $ 1,215,994     $ 938,954  
Investment in Unconsolidated Joint Ventures
    35,357       39,182  
Development Loans Receivable
    40,982       46,094  
Cash and Cash Equivalents
    18,454       11,404  
Escrow Deposits
    16,283       16,174  
Hotel Accounts Receivable, net of Allowance for Doubtful Accounts of $46 and $34
    12,988       7,103  
Deferred Financing Costs, net of Accumulated Amortization of $5,425 and $4,262
    7,151       8,696  
Due from Related Parties
    2,924       2,394  
Intangible Assets, net of Accumulated Amortization of $994 and $794
    7,974       7,542  
Other Assets
    17,003       12,428  
Assets Held for Sale, net of Accumulated Depreciation
    21,073       21,073  
                 
Total Assets
  $ 1,396,183     $ 1,111,044  
                 
Liabilities and Equity:
               
Line of Credit
  $ 115,700     $ 79,200  
Mortgages and Notes Payable, net of Unamortized Discount of $1,091 and $49
    646,476       645,351  
Accounts Payable, Accrued Expenses and Other Liabilities
    23,519       16,216  
Dividends and Distributions Payable
    8,366       4,293  
Due to Related Parties
    1,075       769  
Liabilities Related to Assets Held for Sale
    20,846       20,892  
                 
Total Liabilities
    815,982       766,721  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ 15,872     $ 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 September 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 September 30, 2010 and December 31, 2009, 139,830,060 and 57,682,917 Shares Issued and Outstanding at September 30, 2010 and December 31, 2009, respectively
    1,398       577  
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (424 )     (160 )
Additional Paid-in Capital
    759,733       487,481  
Distributions in Excess of Net Income
    (218,867 )     (185,725 )
Total Shareholders' Equity
    541,864       302,197  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    21,873       27,126  
Noncontrolling Interests - Consolidated Joint Ventures
    592       267  
Total Noncontrolling Interests
    22,465       27,393  
                 
Total Equity
    564,329       329,590  
                 
Total Liabilities and Equity
  $ 1,396,183     $ 1,111,044  

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

 
1


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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Revenue:
                       
Hotel Operating Revenues
  $ 79,601     $ 59,832     $ 203,473     $ 159,512  
Interest Income from Development Loans
    1,049       1,427       3,599       5,990  
Other Revenues
    91       104       290       340  
Total Revenues
    80,741       61,363       207,362       165,842  
                                 
Operating Expenses:
                               
Hotel Operating Expenses
    43,897       33,254       115,462       92,493  
Hotel Ground Rent
    364       293       1,010       876  
Real Estate and Personal Property Taxes and Property Insurance
    5,202       3,773       13,874       10,321  
General and Administrative
    1,967       1,511       6,704       4,361  
Stock Based Compensation
    1,869       579       4,025       1,500  
Acquisition and Terminated Transaction Costs
    1,213       32       4,771       76  
Loss from Impairment of Assets
    -       21,408       -       21,408  
Depreciation and Amortization
    13,327       10,878       38,065       31,983  
Total Operating Expenses
    67,839       71,728       183,911       163,018  
                                 
Operating Income (Loss)
    12,902       (10,365 )     23,451       2,824  
                                 
Interest Income
    12       49       69       159  
Interest Expense
    11,040       11,129       33,350       32,170  
Other Expense
    74       29       256       110  
Loss on Debt Extinguishment
    -       -       733       -  
Income (Loss) before (Loss) Income from Unconsolidated Joint Venture Investments and Discontinued Operations
    1,800       (21,474 )     (10,819 )     (29,297 )
                                 
Loss from Unconsolidated Joint Ventures
    (243 )     (606 )     (1,414 )     (2,330 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    -       -       4,008       -  
(Loss) Income from Unconsolidated Joint Venture Investments
    (243 )     (606 )     2,594       (2,330 )
                                 
Income (Loss) from Continuing Operations
    1,557       (22,080 )     (8,225 )     (31,627 )
                                 
Discontinued Operations (Note 12):
                               
Gain on Disposition of Hotel Properties
    360       1,868       360       1,868  
Loss on Impairment of Assets Held for Sale
    -       (17,683 )     -       (17,683 )
(Loss) Income from Discontinued Operations
    (315 )     (40 )     (1,163 )     308  
Income (Loss) from Discontinued Operations
    45       (15,855 )     (803 )     (15,507 )
                                 
Net Income (Loss)
    1,602       (37,935 )     (9,028 )     (47,134 )
                                 
(Income) Loss Allocated to Noncontrolling Interests
    (263 )     5,560       302       7,162  
Preferred Distributions
    (1,200 )     (1,200 )     (3,600 )     (3,600 )
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 139     $ (33,575 )   $ (12,326 )   $ (43,572 )

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

 
2


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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Earnings Per Share:
                       
BASIC
                       
Income (Loss) from Continuing Operations applicable to Common Shareholders
  $ -     $ (0.39 )   $ (0.09 )   $ (0.62 )
Income (Loss) from Discontinued Operations applicable to Common Shareholders
  $ -       (0.26 )     (0.01 )     (0.27 )
                                 
Net Income (Loss) applicable to Common Shareholders
  $ -     $ (0.65 )   $ (0.10 )   $ (0.89 )
                                 
DILUTED
                               
Income (Loss) from Continuing Operations applicable to Common Shareholders
  $ - *   $ (0.39 )*   $ (0.09 ) *   $ (0.62 )*
Income (Loss) from Discontinued Operations applicable to Common Shareholders
    - *     (0.26 )*     (0.01 ) *     (0.27 )*
                                 
Net Income (Loss) applicable to Common Shareholders
  $ - *   $ (0.65 )*   $ (0.10 ) *   $ (0.89 )*
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
    138,636,206       51,878,482       125,193,554       49,187,465  
Diluted
    142,066,649 *     51,878,482 *     125,193,554 *     49,187,465 *

*
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 September 30, 2010 and 2009 were 8,242,509 and 8,705,195, respectively.  Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the nine months ended September 30, 2010 and 2009 were 8,994,295 and 8,732,448, 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 nine months ended September 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 nine months ended September 30, 2010, there were a weighted average of 258,125 anti-dilutive unvested stock awards outstanding, a weighted average of 455,283 anti-dilutive contingently issuable share awards outstanding and a weighted average of 2,006,695 anti-dilutive options to acquire our common shares outstanding.  For the three and nine months ended September 30, 2009, there were no potentially dilutive securities to be considered for inclusion in the denominator for purpose of computing diluted earnings per share.

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

 
3


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS, EXCEPT 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
   
Distributions in Excess of Net Income
   
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 Interests
                            (1,813 )                     (1,813 )                             (1,813 )     1,813  
Unit Conversion
    -       23       -       10,203       -       -       10,226       (10,226 )     -       (10,226 )     -       -  
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 ($1.50 per share)
    -       -       -       -       -       (3,600 )     (3,600 )     -       -       -       (3,600 )     -  
Common Shares ($0.15 per share)
    -       -       -       -       -       (20,816 )     (20,816 )     -       -       -       (20,816 )        
Common Units ($0.15 per share)
    -       -       -       -       -       -       -       (869 )     -       (869 )     (869 )     (461 )
Dividend Reinvestment Plan
    -       -       -       9       -       -       9       -       -       -       9       -  
Stock Based Compensation
                                                    -                               -          
Restricted and Performance Share Award Grants
    -       4               441                       445                               445          
Restricted Share Award Vesting
    -       -       -       3,317       -       -       3,317       -       -       -       3,317       -  
Share Grants to Trustees
    -       -               125                       125                               125          
Comprehensive Loss:
                                                                                               
Other Comprehensive Income
    -       -       -       -       (264 )     -       (264 )     -       -       -       (264 )     -  
Net Loss
    -       -       -       -       -       (8,726 )     (8,726 )     (414 )     325       (89 )     (8,815 )     (213 )
Total Comprehensive Loss
                                                    (8,990 )     (414 )     325       (89 )     (9,079 )     (213 )
                                                                                                 
Balance at September 30, 2010
  $ 24     $ 1,398     $ -     $ 759,733     $ (424 )   $ (218,867 )   $ 541,864     $ 21,873     $ 592     $ 22,465     $ 564,329     $ 15,872  
                                                                                                 
                                                                                                 
Balance at December 31, 2008
  $ 24     $ 483     $ -     $ 463,772     $ (109 )   $ (114,207 )   $ 349,963     $ 34,781     $ 1,854     $ 36,635     $ 386,598     $ 18,739  
Unit Conversion
    -       -       -       255       -       -       255       (255 )     -       (255 )     -       -  
Common Share Issuance, net of costs
    -       73       -       17,648       -       -       17,721       -       -       -       17,721       -  
Dividends and Distribution declared:
                                                                                               
Distribution to noncontrolling interest in consolidated joint venture
    -       -       -       -       -       -       -       -       (124 )     (124 )     (124 )     -  
Preferred Shares ($1.50 per share)
    -       -       -       -       -       (3,600 )     (3,600 )     -       -       -       (3,600 )     -  
Common Shares ($0.28 per share)
    -       -       -       -       -       (13,973 )     (13,973 )     -       -       -       (13,973 )     -  
Common Units ($0.28 per share)
    -       -       -       -       -       -       -       (1,588 )     -       (1,588 )     (1,588 )     (858 )
Dividend Reinvestment Plan
    -       -       -       22       -       -       22       -       -       -       22       -  
Stock Based Compensation
                                                                                               
Restricted and Performance Share Award Grants
    -       8       -       62       -       -       70       -       -       -       70       -  
Restricted Share Award Vesting
    -       -       -       1,382       -       -       1,382       -       -       -       1,382       -  
Share Grants to Trustees
    -       -       -       85       -       -       85       -       -       -       85       -  
Disposition of Consolidated Joint Venture
    -       -       -       -       -       -       -       -       (1,391 )     (1,391 )     (1,391 )     -  
Comprehensive Loss:
                                                                                               
Other Comprehensive Income
    -       -       -       -       (51 )     -       (51 )     -       -       -       (51 )     -  
Net Loss
    -       -       -       -       -       (39,972 )     (39,972 )     (4,609 )     (63 )     (4,672 )     (44,644 )     (2,490 )
Total Comprehensive Loss
                                                    (40,023 )     (4,609 )     (63 )     (4,672 )     (44,695 )     (2,490 )
                                                                                                 
Balance at September 30, 2009
  $ 24     $ 564     $ -     $ 483,226     $ (160 )   $ (171,752 )   $ 311,902     $ 28,329     $ 276     $ 28,605     $ 340,507     $ 15,391  

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

 
4


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 [UNAUDITED]
[IN THOUSANDS]

   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
 
             
Net loss
  $ (9,028 )   $ (47,134 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Gain on disposition of hotel properties
    (360 )     (1,868 )
Impairment of development loans receivable and assets held for sale
    -       39,091  
Acquisition and terminated transaction costs
    4,620       -  
Depreciation
    37,957       33,095  
Amortization of intangible assets and deferred costs
    2,069       1,718  
Debt extinguishment
    580       -  
Development loan interest added to principal
    (1,888 )     (2,649 )
Equity in (income) loss of unconsolidated joint venture investments
    (2,594 )     2,330  
Distributions from unconsolidated joint venture investments
    -       400  
Loss (gain) recognized on change in fair value of derivative instrument
    9       (173 )
Stock based compensation
    4,025       1,500  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (5,071 )     (2,993 )
Escrow deposits
    (109 )     (3,184 )
Other assets
    (2,855 )     (4,277 )
Due from related parties
    (369 )     1,432  
Increase (decrease) in:
               
Due to related parties
    5       (1,262 )
Accounts payable, accrued expenses and other liabilities
    5,192       (1,767 )
Net cash provided by operating activities
    32,183       14,259  
                 
Investing activities:
               
Purchase of hotel property assets
    (265,375 )     (5,994 )
Deposits on hotel acquistions
    (1,500 )     -  
Capital expenditures
    (5,227 )     (5,237 )
Cash paid for hotel development project
    (5,790 )     -  
Proceeds from disposition of hotel properties
    2,876       8,495  
Cash paid for franchise fee intangible
    -       (126 )
Investment in development loans receivable
    -       (2,000 )
Distributions from unconsolidated joint ventures
    100       -  
Investment in unconsolidated joint ventures
    (13,750 )     (492 )
Net cash used in investing activities
    (288,666 )     (5,354 )
                 
Financing activities:
               
Proceeds from (repayments of) borrowings under line of credit, net
    36,500       (8,421 )
Principal repayment of mortgages and notes payable
    (43,098 )     (36,395 )
Proceeds from mortgages and notes payable
    31,510       42,138  
Cash paid for deferred financing costs
    (85 )     (17 )
Proceeds from issuance of common shares, net of issuance costs
    260,764       17,716  
Acquisiton of interest rate cap
    (395 )     -  
Distributions to noncontrolling interests in consolidated joint venture
    -       (124 )
Dividends paid on common shares
    (16,699 )     (19,819 )
Dividends paid on preferred shares
    (3,600 )     (3,600 )
Distributions paid on common units
    (1,364 )     (3,586 )
Net cash provided by (used in) financing activities
    263,533       (12,108 )
                 
Net increase (decrease) in cash and cash equivalents
    7,050       (3,203 )
Cash and cash equivalents - beginning of period
    11,404       15,697  
                 
Cash and cash equivalents - end of period
  $ 18,454     $ 12,494  

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

 
5


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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 a self-advised Maryland real estate investment trust that was organized in May 1998 and completed our initial public offering in January 1999. Our common shares are traded on the New York Stock Exchange under the symbol “HT.” We own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (“HHLP”), for which we serve as general partner. As of September 30, 2010, we owned an approximate 94.6% partnership interest in our operating partnership, including a 1.0% general partnership interest.
 
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.

Subsequent to September 30, 2010, we completed a public offering on October 22, 2010 in which 28,750,000 common shares, including 3,750,000 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 $160,017 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.  HHLP used the net proceeds of this offering to reduce some of the indebtedness outstanding under our revolving line of credit facility and secured debt on several of our existing assets and intends to use the remainder for general corporate purposes, including repayment of debt and and future acquisitions.

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.

 
6


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

NOTE 1 — BASIS OF PRESENTATION (CONTINUED)

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 $21,873 as of September 30, 2010 and $27,126 as of December 31, 2009.  As of September 30, 2010, there were 4,958,706 Nonredeemable Common Units outstanding with a fair market value of $25,686, 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.

As of September 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 $15,872.  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 September 30, 2010, the Redeemable Common Units were valued on the consolidated balance sheets at redemption value since the Redeemable Common Units redemption value was greater than historical cost of $14,060.  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 and 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 its investments and contractual relationships to determine whether they met 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.

 
7

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

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES

Investment in Hotel Properties is net of accumulated depreciation and consists of the following at September 30, 2010 and December 31, 2009:

   
September 30, 2010
   
December 31, 2009
 
             
Land
  $ 216,722     $ 161,449  
Buildings and Improvements
    1,048,427       814,461  
Furniture, Fixtures and Equipment
    147,586       122,174  
      1,412,735       1,098,084  
                 
Less Accumulated Depreciation
    (196,741 )     (159,130 )
                 
Total Investment in Hotel Properties
  $ 1,215,994     $ 938,954  

Acquisitions

During the nine months ended September 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       -  
Hampton Inn,
Washington, DC
 
9/1/2010
    9,335       58,048       5,605       108       73,096       -  
                                                     
Total
      $ 55,432     $ 213,566     $ 21,710     $ 482     $ 291,190     $ 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 $160,790 in cash 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.

 
8

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

NOTE 2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

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 financing and accrued interest income, and the payment of approximately $26,080 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.

On September 1, 2010, we entered into a purchase and sale agreement with an unrelated third party and closed on the acquisition of the Hampton Inn, Washington, DC.  The total purchase price for this hotel was $73,096, which was paid in cash provided by borrowings under our revolving line of credit.  In addition, we paid closing costs of $1,188 and acquired approximately $304 in net working capital assets.

As shown in the table below, included in the consolidated statements of operations for the three and nine months ended September 30, 2010 are total revenues of $13,862 and $29,273, respectively, and total net income of $2,744 and $2,553, respectively, for the hotels we acquired a 100% interest in since January 1, 2010.  These amounts represent the results of operations for such hotels since the date of acquisition of our 100% interest in such hotels.
 
   
Three Months Ended,
   
Nine Months Ended,
 
   
September 30, 2010
   
September 30, 2010
 
Hotel
 
Revenue
   
Net Income (Loss)
   
Revenue
   
Net Income (Loss)
 
Hilton Garden Inn,
Glastonbury, CT
  $ 1,341     $ 12     $ 3,769     $ (120 )
Hampton Inn, Holiday Inn Express, Candlewood Suites,
Times Square, NY
    9,794       3,233       21,746       3,216  
Holiday Inn,
Wall Street, NY
    1,574       339       2,605       297  
Hampton Inn,
Washington, DC
    1,153       (840 )     1,153       (840 )
Total
  $ 13,862     $ 2,744     $ 29,273     $ 2,553  

 
9


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 completed since January 1, 2010 had been completed on 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 on January 1, 2009 at the beginning of the year presented, nor does it purport to represent the results of operations for future periods.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Pro Forma Total Revenues
  $ 82,892     $ 72,335     $ 215,967     $ 188,130  
                                 
Pro Forma Income (Loss) from Continuing Operations
  $ 2,339     $ (18,700 )   $ (5,113 )   $ (28,102 )
Income (Loss) from Discontinued Operations
    45       (15,856 )     (803 )     (15,507 )
Pro Forma Net Income (Loss)
    2,384       (34,556 )     (5,916 )     (43,609 )
(Income) Loss allocated to Noncontrolling Interest
    (307 )     5,152       93       6,876  
Preferred Distributions
    (1,200 )     (1,200 )     (3,600 )     (3,600 )
Pro Forma Income (Loss) applicable to Common Shareholders
  $ 877     $ (30,604 )   $ (9,423 )   $ (40,333 )
                                 
Pro Forma Income (Loss) applicable to Common Shareholders per Common Share
                               
Basic
  $ 0.01     $ (0.59 )   $ (0.08 )   $ (0.82 )
Diluted
  $ 0.01     $ (0.59 )   $ (0.08 )   $ (0.82 )
                                 
Weighted Average Common Shares Outstanding
                               
Basic
    138,636,206       51,878,482       125,193,554       49,187,465  
Diluted
    142,066,649       51,878,482       125,193,554       49,187,465  

Renovation

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 capitalized the cost of construction, including interest, during the period of time the hotel was under renovation.  On August 17, 2010, the renovations were completed and the hotel opened.  We capitalized approximately $5,711 in renovation costs, which are included in Investment in Hotel Properties on the consolidated balance sheet.

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 historical operating results of the hotel properties, we believe no amounts will be paid.  Due to uncertainty of the amounts that may ultimately be paid, no accrual has been recorded on the consolidated balance sheet for any amounts due as of September 30, 2010, 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.

 
10


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, 2010 and December 31, 2009, our investment in unconsolidated joint ventures consists of the following:

Joint Venture
 
Hotel Properties
 
Percent Owned
   
Preferred Return
   
September 30,
2010
   
December 31,
2009
 
                             
Inn American Hospitality
at Ewing, LLC
 
Courtyard by Marriott,
Ewing, NJ
    50.0 %  
11.0% cumulative
    $ 182     $ 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       1,950       1,934  
Mystic Partners, LLC
 
Hilton and Marriott branded
hotels in CT and RI
    8.8%-66.7 %  
8.5% non-cumulative
      25,801       27,043  
Metro 29th Street
Associates, LLC
 
Holiday Inn Express,
New York, NY
    50.0 %   N/A       7,424       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  
                      $ 35,357     $ 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.

 
11

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

NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

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 are included in our consolidated statement of operations for the period from April 13, 2010 through September 30, 2010 and its balance sheet is included in our consolidated balance sheet as of September 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 nine months ended September 30, 2010 and 2009 for our investments in unconsolidated joint ventures is as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Inn American Hospitality at Ewing, LLC
  $ (81 )   $ (36 )   $ (177 )   $ (98 )
Hiren Boston, LLC
    -       (159 )     -       (376 )
SB Partners, LLC
    80       44       15       (98 )
Mystic Partners, LLC
    (413 )     (417 )     (1,243 )     (1,274 )
Metro 29th Street Associates, LLC
    171       (43 )     (9 )     (401 )
PRA Glastonbury, LLC
    -       7       -       (80 )
PRA Suites at Glastonbury, LLC
    -       (2 )     -       (3 )
Loss from Unconsolidated Joint Ventures
    (243 )     (606 )     (1,414 )     (2,330 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    -       -       4,008       -  
Net (loss) income from Investment in Unconsolidated Joint Ventures
  $ (243 )   $ (606 )   $ 2,594     $ (2,330 )

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

Balance Sheets
           
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Assets
           
Investment in hotel properties, net
  $ 144,643     $ 196,842  
Other Assets
    28,775       28,473  
Total Assets
  $ 173,418     $ 225,315  
                 
Liabilities and Deficit
               
Mortgages and notes payable
  $ 175,645     $ 218,116  
Other liabilities
    23,662       18,219  
Equity (Deficit):
               
Hersha Hospitality Trust
    37,681       44,178  
Joint Venture Partner(s)
    (63,570 )     (55,198 )
Total Deficit
    (25,889 )     (11,020 )
                 
Total Liabilities and Equity
  $ 173,418     $ 225,315  

 
12


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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
   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Room Revenue
  $ 20,666     $ 22,157     $ 56,476     $ 60,706  
Other Revenue
    4,772       5,029       15,409       16,424  
Operating Expenses
    (16,170 )     (17,180 )     (47,199 )     (50,960 )
Interest Expense
    (2,923 )     (3,599 )     (9,074 )     (10,915 )
Lease Expense
    (1,332 )     (1,503 )     (4,030 )     (4,245 )
Property Taxes and Insurance
    (1,603 )     (1,704 )     (5,358 )     (4,975 )
Federal & State Income Taxes
    -       19       -       -  
Depreciation and Amortization
    (2,506 )     (3,540 )     (8,402 )     (10,753 )
Loss Allocated to Noncontrolling Interests
    115       -       441       -  
General and Administrative
    (1,842 )     (1,973 )     (5,297 )     (5,602 )
                                 
Net loss
  $ (823 )   $ (2,294 )   $ (7,034 )   $ (10,320 )

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 September 30, 2010 and December 31, 2009.

   
September 30,
   
December 31,
 
   
2010
   
2009
 
Company's Share
  $ 37,681     $ 44,178  
Excess Investment (1)
    (2,324 )     (4,996 )
Investment in Joint Venture
  $ 35,357     $ 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.

 
13


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 2010, no such loans were originated by us.  Interest income from development loans was $1,049 and $1,427 for the three months ended September 30, 2010 and 2009, respectively.  Interest income from development loans was $3,599 and $5,990 for the nine months ended September 30, 2010 and 2009, respectively.  Accrued interest on our development loans receivable was $2,597 as of September 30, 2010 and $2,451 as of December 31, 2009.  Accrued interest on our development loans receivable as of September 30, 2010 does not include cumulative interest income of $4,982 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 9/30/2010
   
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
    12,585 (2)     11,591       11 % December 31, 2010 *
Hyatt Union Square - New York, NY
 
Risingsam Union Square, LLC
    12,397 (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
 
 
  $ 40,982     $ 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
September 30, 2010
   
Nine Months Ended
September 30, 2010
   
Cumulative Interest Income Paid In-Kind
 
44 Lexington Holding, LLC
  $ 344     $ 994     $ 2,585  
Risingsam Union Square, LLC
    309       894       2,397  
                         
Total
  $ 653     $ 1,888     $ 4,982  

 
14


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

NOTE 5 — OTHER ASSETS

Other Assets consisted of the following at September 30, 2010 and December 31, 2009:

   
September 30, 2010
   
December 31, 2009
 
             
Transaction Costs
  $ 2,163     $ 292  
Investment in Statutory Trusts
    1,548       1,548  
Notes Receivable
    -       1,412  
Deposits on Hotel Acquisitions
    1,500       20  
Prepaid Expenses
    6,386       4,468  
Interest Receivable from Development Loans to Non-Related Parties
    1,563       1,573  
Deposit on Property Improvement Plans
    168       167  
Hotel Purchase Option
    933       933  
Other
    2,742       2,015  
    $ 17,003     $ 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 September 30, 2010 and December 31, 2009, we had $1,500 and $20, respectively, 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 $1,034 and $878 as of September 30, 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.

 
15


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

NOTE 6 — DEBT

Mortgages Payable

We had total mortgages payable at September 30, 2010, and December 31, 2009, of $615,462 and $614,401, respectively.  These balances consisted of mortgages with fixed and variable interest rates, which ranged from 2.26% to 8.25% as of September 30, 2010. Aggregate interest expense incurred under the mortgage loans payable totaled $9,443 and $9,138 for the three months ended September 30, 2010 and 2009, respectively, and $28,279 and $26,201 for the nine months ended September 30, 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 September 30, 2010 we were in compliance with all events of default covenants under the applicable loan agreements.  As of September 30, 2010, the maturities for the outstanding mortgage loans ranged from January 2011 to September 2023.

Subordinated Notes Payable

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.  Effective July 30, 2010, the $25,774 notes issued to Hersha Statutory Trust I and Hersha Statutory Trust II, bear interest at a variable rate of LIBOR plus 3% per annum.  This rate resets two business days prior to each quarterly payment.  For the period July 30, 2010, to October 29, 2010, we incurred interest expense at a variable rate of 3.475%.  Prior to this, the $25,774 note issued to Hersha Statutory Trust I incurred 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 incurred interest at a fixed rate of 7.173% per annum through July 30, 2010. On April 19, 2010, we purchased an interest rate cap that effectively limits interest payments when LIBOR exceeds 2.00% on our two subordinated notes payable.  See “Note 8 -  Fair Value Measurements and Derivative Instruments” for more information. Interest expense in the amount of $615 and $945 was recorded for the three months ended September 30, 2010 and 2009, respectively and $2,491 and $2,821 was recorded for the nine months ended September 30, 2010 and 2009, respectively.

Other Notes Payable

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 $312 as of September 30, 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 our option, the interest rate on loans provided under the line of credit is either (i) the Wall Street Journal variable prime rate plus 1.50% per annum or (ii) LIBOR plus three and one-half percent (3.5%) per annum, subject to a minimum rate of 4.25%.

 
16


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 2010:
 
 
- Hampton Inn, Danville, PA
- Residence Inn, Langhorne, PA
- Hampton Inn, Philadelphia, PA
- Residence Inn, Norwood, MA
- Holiday Inn, Norwich, CT
- Sheraton Hotel, JFK Airport, New York, NY
- Holiday Inn Express, Camp Springs, PA
- Holiday Inn Express, Times Square, NY
- Holiday Inn Express and Suites, Harrisburg, PA
- Hampton Inn, Washington, DC
- Hyatt Place, King of Prussia, PA
 

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) 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;
-
an 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 September 30, 2010.

The outstanding principal balance under the line of credit was $115,700 at September 30, 2010 and $79,200 at December 31, 2009. The Company recorded interest expense of $768 and $780 related to the line of credit borrowings for the three months ended September 30, 2010 and 2009, respectively, and $1,951 and $2,518 for the nine months ended September 30, 2010 and 2009, respectively.  The weighted average interest rate on our line of credit during the three months ended September 30, 2010 and 2009 was 4.28% and 3.25%, respectively, and for the nine months ended September 30, 2010 and 2009 was 4.28% and 3.25%, respectively.  As of September 30, 2010 we had $6,927 in irrevocable letters of credit issued and our remaining borrowing capacity under the facility was $12,373.

Subsequent to September 30, 2010, we entered into a Revolving Credit Loan and Security Agreement on November 5, 2010 with T.D. Bank, NA and various other lenders.  The credit agreement provides for a revolving line of credit in the principal amount of up to $250,000, including a sub-limit of $25,000 for irrevocable stand-by letters of credit and a $10,000 sub-limit for swing line loans.  On November 5, 2010, our previous line of credit was terminated and replaced by the new line of credit and as a result all amounts outstanding under our previous credit facility were repaid with borrowings from our new credit facility.  As of November 5, 2010, a total of $73,000 of borrowings were outstanding under the new line of credit.  Subject to available borrowing capacity, additional borrowings under the line of credit provided by T.D. Bank, NA may be used for working capital and general corporate purposes and for the future purchase of additional hotels.  The line of credit expires on November 5, 2013, 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.

The line of credit is collateralized by first-lien mortgages on 13 hotel properties and other assets.
 
At our option, the interest rate on loans provided under the line of credit will be either (i) the prime rate (as defined in the new credit agreement) plus an applicable margin ranging between 150 and 175 basis points per annum or (ii) LIBOR (as defined in the new credit agreement) plus an applicable margin ranging between 350 and 375 basis points per year, subject to a LIBOR floor of 75 basis points per year.

 
17


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

NOTE 6 — DEBT (CONTINUED)

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 $500,000, which is subject to increases under certain circumstances; (2) 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 fixed charge coverage ratio of not less than 1.25 to 1.00 which will increase to 1.35 to 1.00 as of October 1, 2011, and 1.45 to 1.00 as of October 1, 2012; and
-
a total funded liabilities to gross asset value ratio of not more than 0.65 to 1.00

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 September 30, 2010, the carrying value and estimated fair value of the Company’s debt was $783,022 and $787,898, 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 September 30, 2010, deferred financing costs were $7,151 net of accumulated amortization of $5,425. 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 September 30, 2010 and 2009 was $559 and $486, respectively, and for the nine months ended September 30, 2010 and 2009 was $1,635 and $1,553, respectively.

Debt Extinguishment and Principal Paydowns

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 $733 in unamortized deferred costs and fees, which is recorded in loss on debt extinguishment on the consolidated statement of operations for the nine months ended September 30, 2010.

On April 1, 2010, we repaid the outstanding principal balances on mortgage obligations for three of our properties. These properties had an aggregate outstanding balance of approximately $8,201 at the time of payment, accrued interest at 8.94% and matured on April 1, 2010.

Subsequent to September 30, 2010, we repaid the following outstanding mortgages:

Date of Repayment
 
Property
 
Principal Repayment Amount
   
Interest Rate
 
Maturity Date
 
Unamortized Deferrred Fees & Expenses
 
October 22, 2010
 
Hampton Inn, Hershey, PA
  $ 2,660    
30 Day LIBOR + 2.75
%
June 2014
  $ -  
October 25, 2010
 
TownePlace Suites, Harrisburg, PA
    8,972    
30 Day LIBOR + 2.50
%
July 2011
    26  
October 27, 2010
 
Hilton Garden Inn Edison, NJ
    5,122     4.37 %*
January 2011
    52  

* We maintained an interest rate swap on this variable rate mortgage, which effectively fixed our interest at a rate of 4.37%. This interest rate swap was terminated on October 27, 2010, prior to the swap’s maturity date, and as a result, we repaid the fair value of the interest rate swap of $21.

 
18


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 2010 and 2009, base management fees incurred totaled $2,113 and $1,567, respectively, and for the nine months ended September 30, 2010 and 2009, base management fees incurred totaled $5,310 and $4,174, respectively, and are recorded as Hotel Operating Expenses.

Franchise Agreements

Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as incurred.  Franchise fee expense for the three months ended September 30, 2010 and 2009 was $5,414 and $4,017, respectively and for the nine months ended September 30, 2010 and 2009 was $13,640 and $10,687, respectively. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.

Accounting and Information Technology Fees

Each of the wholly owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and information technology fee.   Monthly fees for accounting services are $2 per property and monthly information technology fees are $0.5 per property. In addition, each of the wholly owned hotels not managed by HHMLP, but for which the accounting is provided by HHMLP incurs a monthly accounting fee of $3.  For the three months ended September 30, 2010 and 2009, the Company incurred accounting fees of $385 and $358, respectively.  For the nine months ended September 30, 2010 and 2009, the Company incurred accounting fees of $1,143 and $1,103, respectively.   For the three months ended September 30, 2010 and 2009, the Company incurred information technology fees of $83 and $79, respectively.  For the nine months ended September 30, 2010 and 2009, the Company incurred information technology fees of $251 and $245, 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 September 30, 2010 and 2009, we incurred fees of $58 and $45, respectively, and for the nine months ended September 30, 2010 and 2009, we incurred fees of $165 and $125, respectively, which were capitalized with the cost of fixed asset additions.

 
19


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 2010 and 2009, we incurred charges for hotel supplies of $23 and $18, respectively and for the nine months ended September 30, 2010 and 2009, we incurred charges of $67 and $65, respectively.  For the three months ended September 30, 2010 and 2009, we incurred charges for capital expenditure purchases of $1,207 and $177 respectively, and for the nine months ended September 30, 2010 and 2009, we incurred charges of $3,740 and $662, respectively. These purchases were made 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, and capital expenditure purchases are included in investment in hotel properties on our consolidated balance sheets. Approximately $7 and $32 is included in accounts payable at September 30, 2010 and December 31, 2009, respectively.

Due from Related Parties

The due from related parties balance as of September 30, 2010 and December 31, 2009 was approximately $2,924 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 September 30, 2010 and December 31, 2009 was approximately $1,075 and $769, respectively. The balances consisted of amounts payable to HHMLP for administrative, management, and benefit related fees.

Hotel Ground Rent

For the three months ended September 30, 2010 and 2009, we incurred $364 and $293, respectively, of rent expense payable pursuant to ground leases related to certain hotel properties.  For the nine months ended September 30, 2010 and 2009, we incurred $1,010 and $876, respectively, of rent expense to ground leases related to certain hotel properties.

 
20


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 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 the counterparties.  However, as of September 30, 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 fixes the interest rate on a variable rate mortgage on the nu Hotel, Brooklyn, NY, which bears interest at one month U.S. dollar LIBOR plus 2.0%.  Under the terms of the interest rate swap, we pay fixed rate interest of 1.1925% on the $18,000 notional amount and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest on the mortgage debt at a rate of 3.1925%.

 
21

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 fixes the interest rate on a variable rate mortgage, bearing interest at one month U.S. dollar LIBOR plus 3.0%, originated upon the refinance of the debt associated with the Hilton Garden Inn, Edison, NJ.  Under the terms of this interest rate swap, we pay fixed rate interest of 1.37% and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest at a rate of 4.37%.  The notional amount amortizes in tandem with the amortization of the underlying hedged debt and is $5,135 as of September 30, 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 a new interest rate cap with identical terms that matures on May 9, 2011.

On April 19, 2010, we purchased an interest rate cap of $379 that effectively limits variable rate interest payments on the subordinated notes payable to Hersha Statutory Trust I and Hersha Statutory Trust II when LIBOR exceeds 2.00%. The notional amount of the interest rate cap is $51,548 and equals the principal of the variable interest rate debt being hedged. The effective date of the interest rate cap is July 30, 2010, which correlates with the end of the fixed interest rate period on the notes payable.

The following table shows the estimated fair value of our derivatives at September 30, 2010 and December 31, 2009:

               
Estimated Fair Value
 
Date of Transaction
 
Hedged Debt
 
Type
 
Maturity Date
 
September 30, 2010
   
December 31, 2009
 
            May 9, 2010
 
Variable Rate Mortgage - Hotel 373, New York, NY
 
Cap
 
May 9, 2011
  $ -     $ -  
December 31, 2008
 
Variable Rate Mortgage - Hilton Garden Inn, Edison, NJ
 
Swap
 
January 1, 2011
    (20 )     (53 )
     January 9, 2009
 
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
 
Swap
 
January 10, 2011
    (46 )     (103 )
        April 19, 2010
 
Subordinated Notes Payable
 
Cap
 
July 30, 2012
    30       -  
                $ (36 )   $ (156 )

The fair value of our interest rate caps is included in other assets and the fair value of our interest rate swaps is included in accounts payable, accrued expenses and other liabilities at September 30, 2010 and December 31, 2009.

The change in fair value of derivative instruments designated as cash flow hedges was a loss of $67 and a loss of $86 for the three months ended September 30, 2010 and 2009, respectively, and a loss of $264 and a loss of $51 for the nine months ended September 30, 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 on cash flow hedges was recognized in interest expense for the three months ended September 30, 2010 and 2009, and $0 and $1 was recognized in interest expense for the nine months ended September 30, 2010 and 2009, respectively.

 
22


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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

2010 Long-Term Equity Incentive

On May 7, 2010, the Compensation Committee adopted an annual long-term equity incentive plan for the executive officers, pursuant to which the executive officers are eligible to earn equity awards in the form of stock awards or performance shares.  The equity awards for 2010 will be made pursuant to the 2008 Plan or any other equity incentive plan approved by the Company’s shareholders.  Half of the award will be made, subject to the sole discretion of the Committee, if the executive officer is employed by the Company on the date awards are determined, and the remainder of the award will be based on absolute and relative RevPar growth, with 25% of the award based on RevPAR growth in 2010 on an absolute basis and 25% of the award based on RevPAR growth in 2010 relative to a group of peer companies.  The number of shares to be issued will be determined by dividing the dollar value of the award by the 20-day volume weighted average closing price of the Company’s common shares on the New York Stock Exchange as of December 31 for the applicable performance year.  The Company accounts for these grants as performance awards for which the Company assesses the probability of achievement of the grant at the end of each period.  Stock based compensation expense of $79 and $139 was recorded for the three and nine months ended September 30, 2010, respectively, for the equity awards potentially issuable pursuant to the 2010 long-term equity incentive program.

Multi-Year Long-Term Equity Incentive

On May 7, 2010, the Compensation Committee also adopted a multi-year long-term equity incentive plan.  This plan has a three-year performance period, which commenced on January 1, 2010 and will end on December 31, 2012.  The awards to be granted are based upon the Company’s achievement of a certain level of (1) absolute total shareholder return (75% of the award), and (2) relative total shareholder return as compared to the Company’s peer group (25% of the award).  The number of equity awards to be issued under this program are determined by dividing the dollar value of the award by the 20-day volume weighted average closing price of the Company’s common shares on the New York Stock Exchange as of December 31, 2009.  If shares are issued under this program, half will vest immediately on December 31, 2012 while the other half will vest on December 31, 2013 if the executive remains employed by the Company.  The Company accounts for these grants as market based awards where the Company estimates unearned compensation at the grant date fair value which is amortized into compensation cost over the vesting period.  The fair value of these market based awards is estimated using a simulation or Monte Carlo method. For the purpose of the simulation, on the grant date we made the following assumptions:

 
·
volatility of our shares within a range of 53% to 71% over three year performance period which is calculated based on the volatility of our stock price over the last three years and an implied volatility;
 
·
volatility of our peer groups shares within a range of 15% to 117% over three year performance period which is calculated based on the volatility of our peers’ stock prices over the last three years and an implied volatility; and
 
·
risk-free interest rates ranging from 0.13% to 1.34%, which reflects the yield on zero-coupon risk free instruments ranging from 3 months to 3 years maturity.

Stock based compensation expense of $799 and $1,286 was recorded for the three and nine months ended September 30, 2010, respectively, for the multi-year long-term equity incentive program.  Unearned compensation related to the multi-year program as of September 30, 2010 was $10,373.

 
23


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

NOTE 9 — SHARE-BASED PAYMENTS (CONTINUED)

Performance Share Awards

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 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 common shares.  As of September 30, 2010, the performance shares have been earned in full and a total of 354,250 commons shares have been issued upon settlement of the performance shares.  On March 22, 2010, an aggregate of 81,250 common shares were issued upon settlement of an equivalent number of earned performance shares.  On May 18, 2010, an aggregate of 78,000 common shares were issued upon settlement of an equivalent number of earned performance shares.  On September 13, 2010, the Compensation Committee determined that the remaining performance shares had been earned and the Company issued an aggregate of 86,666 common shares upon settlement of an equivalent number of earned performance shares.  The Company accounts for these grants as market based awards where the Company estimates the unearned compensation at grant date fair value which is amortized into compensation cost over the vesting of the performance share awards.  Stock based compensation expense of $480 and $725 was incurred during the three and nine months ended September 30, 2010, respectively.  Stock based compensation expense of $70 was recorded for the three and nine months ended September 30, 2009, respectively.  Unearned compensation related to the awards as of December 31, 2009 was $280.

Restricted Share Awards

Stock based compensation expense related to the restricted share awards, consisting of restricted common shares issued to executives of the Company, of $512 and $509 was incurred during the three months ended September 30, 2010 and 2009, respectively, and $1,751 and $1,382 was incurred during the nine months ended September 30, 2010 and 2009, respectively. Unearned compensation related to the restricted share awards as of September 30, 2010 and December 31, 2009 was $3,472 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