form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
x Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o 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 x
Accelerated filer                 o
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).
o Yes  x No
As of August 1, 2012, the number of Class A common shares of beneficial interest outstanding was 198,536,956 and there were no Class B common shares outstanding.
 


 
 

 

Hersha Hospitality Trust
Table of Contents

 
 
Page
 
 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
 
3
 
4
 
6
 
7
 
8
 
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. 34
Item 3.
Quantitative and Qualitative Disclosures About Market Risk. 49
Item 4.
Controls and Procedures. 51
PART II.  OTHER INFORMATION
 
Item 1.
51
 Item 1A.
52
Item 2.
52
Item 3.
52
Item 4.
52
Item 5.
52
Item 6.
52
 
 
 
 
53
 
 
2

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
June 30, 2012
   
December 31, 2011
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation, (including consolidation of variable interest entity assets of $90,134 and $0)
  $ 1,472,232     $ 1,340,876  
Investment in Unconsolidated Joint Ventures
    16,389       38,839  
Development Loans Receivable
    33,425       35,747  
Cash and Cash Equivalents
    33,291       24,568  
Escrow Deposits
    24,471       27,321  
Hotel Accounts Receivable, net of Allowance for Doubtful Accounts of $539 and $495
    13,330       11,353  
Deferred Financing Costs, net of Accumulated Amortization of $9,059 and $9,138
    7,618       9,023  
Due from Related Parties
    9,141       6,189  
Intangible Assets, net of Accumulated Amortization of $1,633 and $1,357
    9,415       8,013  
Deposits on Hotel Acquisitions
    34,500       19,500  
Other Assets
    14,980       15,651  
Hotel Assets Held for Sale
    -       93,829  
                 
Total Assets
  $ 1,668,792     $ 1,630,909  
                 
Liabilities and Equity:
               
Line of Credit
  $ 30,000     $ 51,000  
Mortgages and Notes Payable, (including consolidation of variable interest entity debt of $58,013 and $0)
    709,344       707,374  
Accounts Payable, Accrued Expenses and Other Liabilities
    32,451       31,140  
Dividends and Distributions Payable
    15,615       13,908  
Due to Related Parties
    4,383       2,932  
Liabilities Related to Assets Held for Sale
    -       61,758  
                 
Total Liabilities
    791,793       868,112  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ 16,175     $ 14,955  
                 
Equity:
               
Shareholders' Equity:
               
Preferred Shares:  8% Series A, $.01 Par Value, 29,000,000 shares authorized, 2,400,000 Shares Issued and Outstanding (Aggregate Liquidation Preference $60,000) at June 30, 2012 and December 31, 2011
    24       24  
Preferred Shares:  8% Series B, $.01 Par Value, 4,600,000 shares authorized, 4,600,000 Shares Issued and Outstanding (Aggregate Liquidation Preference $115,000) at June 30, 2012 and December 31, 2011
    46       46  
Common Shares:  Class A, $.01 Par Value,  300,000,000 Shares Authorized at June 30, 2012 and December 31, 2011,
   198,440,233 and 169,969,973 Shares Issued and Outstanding at June 30, 2012 and December 31, 2011, respectively
    1,984       1,699  
Common Shares:  Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (1,325 )     (1,151 )
Additional Paid-in Capital
    1,173,674       1,041,027  
Distributions in Excess of Net Income
    (330,858 )     (310,974 )
Total Shareholders' Equity
    843,545       730,671  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    16,366       16,864  
Noncontrolling Interests - Consolidated Joint Ventures
    -       307  
Noncontrolling Interests - Other
    913       -  
Total Noncontrolling Interests
    17,279       17,171  
                 
Total Equity
    860,824       747,842  
                 
Total Liabilities and Equity
  $ 1,668,792     $ 1,630,909  

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements
 
 
3

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2012
   
June 30,
2011
   
June 30,
2012
   
June 30,
2011
 
Revenue:
                       
Hotel Operating Revenues
  $ 96,136     $ 77,669     $ 160,989     $ 126,803  
Interest Income from Development Loans
    518       1,063       1,139       2,154  
Other Revenues
    52       85       114       150  
Total Revenues
    96,706       78,817       162,242       129,107  
                                 
Operating Expenses:
                               
Hotel Operating Expenses
    50,994       39,444       91,345       70,747  
Hotel Ground Rent
    214       255       408       511  
Real Estate and Personal Property Taxes and Property Insurance
    5,168       4,860       10,279       9,422  
General and Administrative
    3,074       2,116       6,109       4,010  
Stock Based Compensation
    2,266       1,785       4,399       3,270  
Acquisition and Terminated Transaction Costs
    124       1,301       1,082       2,116  
Depreciation and Amortization
    14,144       12,612       27,585       24,748  
Total Operating Expenses
    75,984       62,373       141,207       114,824  
                                 
Operating Income
    20,722       16,444       21,035       14,283  
                                 
Interest Income
    345       117       452       219  
Interest Expense
    10,441       10,163       21,924       19,371  
Other Expense
    287       283       523       566  
Loss on Debt Extinguishment
    240       34       246       34  
Income (loss) before Income (loss) from Unconsolidated Joint Venture Investments and Discontinued Operations
    10,099       6,081       (1,206 )     (5,469 )
                                 
Income (loss) from Unconsolidated Joint Ventures
    414       (198 )     (316 )     (1,179 )
(Loss) gain from Remeasurement of Investment in Unconsolidated Joint Venture
    (224 )     2,757       (224 )     2,757  
Income (loss) from Unconsolidated Joint Venture Investments
    190       2,559       (540 )     1,578  
                                 
Income (loss) from Continuing Operations
    10,289       8,640       (1,746 )     (3,891 )
                                 
Discontinued Operations  (Note 12):
                               
Gain on Disposition of Hotel Properties
    6,950       -       11,452       -  
Income (loss) from Discontinued Operations
    150       708       (231 )     (1,179 )
Income (loss) from Discontinued Operations
    7,100       708       11,221       (1,179 )
                                 
Net Income (loss)
    17,389       9,348       9,475       (5,070 )
                                 
(Income) loss Allocated to Noncontrolling Interests
    (796 )     (459 )     (55 )     618  
Preferred Distributions
    (3,500 )     (2,299 )     (7,000 )     (3,499 )
                                 
Net Income (loss) applicable to Common Shareholders
  $ 13,093     $ 6,590     $ 2,420     $ (7,951 )

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
 
 
4


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2012
   
June 30,
2011
   
June 30,
2012
   
June 30,
2011
 
                         
Earnings Per Share:
                       
BASIC
                       
Income (loss) from Continuing Operations applicable to Common Shareholders
  $ 0.03     $ 0.04     $ (0.05 )   $ (0.04 )
Income (loss) from Discontinued Operations applicable to Common Shareholders
  $ 0.04       0.00     $ 0.06       (0.01 )
                                 
Net Income (loss) applicable to Common Shareholders
  $ 0.07     $ 0.04     $ 0.01     $ (0.05 )
                                 
DILUTED
                               
Income (loss) from Continuing Operations applicable to Common Shareholders
  $ 0.03 *   $ 0.04 *   $ (0.05 )  *   $ (0.04 )  *
Income (loss) from Discontinued Operations applicable to Common Shareholders
  $ 0.04 *     0.00 *   $ 0.06 *     (0.01 )  *
                                 
Net Income (loss) applicable to Common Shareholders
  $ 0.07 *   $ 0.04 *   $ 0.01 *   $ (0.05 )  *
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
    186,264,437       168,672,936       178,345,932       168,504,893  
Diluted
    189,011,990 *     173,687,233 *     178,345,932 *     168,504,893 *
                                 
 
*
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.  In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income (loss) from continuing operations applicable to common shareholders.

The following table summarizes potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
   
June 30, 2011
 
                         
Common Units of Limited Partnership Interest
    7,257,604       7,294,791       7,260,561       7,344,630  
Unvested Stock Awards Outstanding
    -       -       -       509,384  
Contingently Issuable Share Awards
    -       -       2,188,470       1,719,502  
Options to Acquire Common Shares Outstanding
    -       -       554,189       2,882,867  
Total potentially dilutive securities excluded from the denominator
    7,257,604       7,294,791       10,003,220       12,456,383  

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

 
5


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2012
   
June 30,
2011
   
June 30,
2012
   
June 30,
2011
 
Net income (loss)
  $ 17,389     $ 9,348     $ 9,475     $ (5,070 )
Other comprehensive income (loss)
                               
Change in fair value of derivative instruments
    (201 )     (274 )     (174 )     (292 )
Comprehensive income (loss)
    17,188       9,074       9,301       (5,362 )
Less:  Comprehensive (income) loss attributable to non controlling interests
    (796 )     (459 )     (55 )     618  
Comprehensive income (loss)  attributable to Common Shareholders
  $ 16,392     $ 8,615     $ 9,246     $ (4,744 )

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
 
 
6

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS]
 
                                                   
Noncontrolling Interests
         
Redeemable
Noncontrolling
Interests
 
   
Class A
Common
Shares
   
Class B
Common
Shares
   
Series A
Preferred
Shares
   
Series B
Preferred
Shares
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Distributions
in Excess
of Net
Earnings
   
Total
Shareholders'
Equity
   
Common
Units
   
Consolidated
Joint
Ventures
   
Consolidated
Variable
Interest
Entity
   
Total
Noncontrolling
Interests
   
Total
Equity
   
Common
Units
 
Balance at December 31, 2011
  $ 1,699     $ -     $ 24     $ 46     $ 1,041,027     $ (1,151 )   $ (310,974 )   $ 730,671     $ 16,864     $ 307     $ -     $ 17,171     $ 747,842     $ 14,955  
                                                                                                                 
Unit Conversion
    -       -       -       -       52       -       -       52       (52 )     -       -       (52 )     -       -  
Reallocation of Noncontrolling Interest
    -       -       -       -       (1,548 )     -       -       (1,548 )     -       -       -       -       (1,548 )     1,548  
Common Stock Issuance
                                                                                                               
Common Stock Offering, net of costs
    240       -       -       -       128,457       -       -       128,697       -       -       -       -       128,697       -  
Common Stock Option Cancellation
    25       -       -       -       (25 )     -       -       -       -       -       -       -       -       -  
Dividends and Distributions declared:
                                                                                                               
Common Stock ($0.12 per share)
    -       -       -       -       -       -       (22,304 )     (22,304 )     -       -       -       -       (22,304 )     -  
Preferred Stock ($1.00 per Series A share)
    -       -       -       -       -       -       (2,400 )     (2,400 )     -       -       -       -       (2,400 )     -  
Preferred Stock ($1.00 per Series B share)
    -       -       -       -       -               (4,600 )     (4,600 )     -       -       -       -       (4,600 )     -  
Common Units ($0.12 per share)
    -       -       -       -       -       -       -       -       (503 )     -       -       (503 )     (503 )     (369 )
Dividend Reinvestment Plan
    -       -       -       -       8       -       -       8       -       -       -       -       8       -  
Stock Based Compensation
                                                                                                               
Restricted and Performance Share
  Award Grants
    20       -       -       -       2,454       -       -       2,474       -       -       -       -       2,474       -  
Restricted Share Award Amortization
    -       -       -       -       3,249       -       -       3,249       -       -               -       3,249       -  
Consolidation of Variable Interest Entity
    -       -       -       -       -       -       -       -       -       -       956       956       956          
Deconsolidation of Consolidated Joint Ventures
                            -       -       -       -       -       -       (307 )     -       (307 )     (307 )     -  
Change in Fair Value of Derivative Instruments
    -       -       -               -       (174 )     -       (174 )     -       -       -       -       (174 )     -  
Net Income
    -       -       -               -       -       9,420       9,420       57       -       (43 )     14       9,434       41  
                                                                                                                 
Balance at June 30, 2012
  $ 1,984     $ -     $ 24     $ 46     $ 1,173,674     $ (1,325 )   $ (330,858 )   $ 843,545     $ 16,366     $ -     $ 913     $ 17,279     $ 860,824     $ 16,175  
                                                                                                                 
                                                                                                                 
Balance at December 31, 2010
  $ 1,692     $ -     $ 24     $ -     $ 918,215     $ (338 )   $ (236,159 )   $ 683,434     $ 19,410     $ 474     $ -     $ 19,884     $ 703,318     $ 19,894  
                                                                                                                 
Unit Conversion
    1       -       -       -       477       -       -       478       (707 )     -       -       (707 )     (229 )     229  
Reallocation of Noncontrolling Interest
    -       -       -       -       2,593       -       -       2,593       (13 )     -       -       (13 )     2,580       (2,578 )
Preferred Stock Offering
                                                                                                               
Preferred Stock Offering, net of costs
    -       -       -       46       111,114       -       -       111,160       -       -       -       -       111,160       -  
Dividends and Distributions declared:
                                                                                                               
Common Stock ($0.11 per share)
    -       -       -       -       -       -       (18,680 )     (18,680 )     -       -       -       -       (18,680 )     -  
Preferred Stock ($1.00 per Series A share)
    -       -       -       -       -       -       (2,400 )     (2,400 )     -       -       -       -       (2,400 )     -  
Preferred Stock ($0.24 per Series B share)
                                                    (1,099 )     (1,099 )                     -       -       (1,099 )     -  
Common Units ($0.11 per share)
    -       -       -       -       -       -       -       -       (468 )     -       -       (468 )     (468 )     (335 )
Dividend Reinvestment Plan
    -       -       -       -       7       -       -       7       -       -       -       -       7       -  
Stock Based Compensation
                                                                                                               
Restricted and Performance Share
  Award Grants
    6       -       -       -       1,471       -       -       1,477       -       -       -       1,477       -          
Restricted Share Award Amortization
    -       -       -       -       2,973       -       -       2,973       -       -       -       -       2,973       -  
Contribution by Noncontrolling Interests in
   Consolidated Joint Venture
    -       -       -       -       -       -       -       -       -       342       -       342       342       -  
Deconsolidation of Consolidated Joint Ventures
    -       -       -       -       -       -       -       -       -       (322 )     -       (322 )     (322 )     -  
Change in Fair Value of Derivative Instruments
    -       -       -       -       -       (292 )     -       (292 )     -       -       -       -       (292 )     -  
Net Loss
    -       -       -       -       -       -       (4,452 )     (4,452 )     (204 )     (272 )     -       (476 )     (4,928 )     (142 )
                                                                                                                 
Balance at June 30, 2011
  $ 1,699     $ -     $ 24     $ 46     $ 1,036,850     $ (630 )   $ (262,790 )   $ 775,199     $ 18,018     $ 222     $ -     $ 19,717     $ 791,962     $ 17,068  
 
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
 
 
 
7

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS]
 
   
2012
   
2011
 
Operating activities:
           
Net income (loss)
  $ 9,475     $ (5,070 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Gain on disposition of hotel properties
    (11,452 )     -  
Depreciation
    27,127       28,315  
Amortization
    1,982       1,927  
Debt extinguishment
    7       -  
Development loan interest added to principal
    (678 )     (1,315 )
Equity in loss (income) of unconsolidated joint ventures
    540       (1,578 )
Distributions of earnings from unconsolidated joint ventures
    1,132       -  
Loss recognized on change in fair value of derivative instrument
    218       14  
Stock based compensation expense
    4,399       3,270  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (1,989 )     (4,596 )
Escrows
    (2,023 )     (2,374 )
Other assets
    95       902  
Due from related parties
    (4,583 )     (1,236 )
Increase (decrease) in:
               
Due to related parties
    1,366       321  
Accounts Payable, Accrued Expenses and Other Liabilities
    367       (823 )
Net cash provided by operating activities
    25,983       17,757  
                 
Investing activities:
               
Purchase of hotel property assets
    (68,008 )     (100,770 )
Deposits on hotel acquisitions
    (15,500 )     (21,250 )
Capital expenditures
    (18,582 )     (12,862 )
Cash paid for hotel development projects
    (5,956 )     (1,547 )
Proceeds from disposition of hotel properties and investment in unconsolidated joint ventures
    63,921       -  
Net changes in capital expenditure escrows
    (2,044 )     (2,858 )
Advances to unconsolidated joint ventures
    (130 )     -  
Distributions of capital from unconsolidated joint ventures
    287       13,406  
Repayment of development loans receivable
    3,000       -  
Investment in notes receivable from unconsolidated joint venture
    (150 )     (1,320 )
Repayment of notes receivable from unconsolidated joint venture
    1,720       -  
Cash paid for franchise fee intangible
    -       (40 )
Net cash used in investing activities
    (41,442 )     (127,241 )
                 
Financing activities:
               
Proceeds from borrowings under line of credit, net
    (21,000 )     (18,000 )
Principal repayment of mortgages and notes payable
    (100,927 )     (3,419 )
Proceeds from mortgages and notes payable
    45,999       41,778  
Cash paid for deferred financing costs
    (57 )     (273 )
Proceeds from issuance of common stock, net
    128,697       111,160  
Acquisition of interest rate derivative
    (69 )     -  
Dividends paid on common shares
    (20,589 )     (16,941 )
Dividends paid on preferred shares
    (7,000 )     (2,400 )
Distributions paid on common partnership units
    (872 )     (737 )
Net cash provided by financing activities
    24,182       111,168  
                 
Net increase in cash and cash equivalents
    8,723       1,684  
Cash and cash equivalents - beginning of period
    24,568       65,596  
                 
Cash and cash equivalents - end of period
  $ 33,291     $ 67,280  

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

 
8


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hersha Hospitality Trust (“we,” “us,” “our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for fair presentation, have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 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, 2011, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, 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 the sole general partner.  As of June 30, 2012, we owned an approximate 96.5% partnership interest in our operating partnership, including a 1.0% general partnership interest.

Noncontrolling Interest

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 $16,366 as of June 30, 2012 and $16,864 as of December 31, 2011.  As of June 30, 2012, there were 4,193,254 Nonredeemable Common Units outstanding with a fair market value of $22,140, based on the price per share of our common shares on the New York Stock Exchange on such date.  In accordance with HHLP's partnership agreement, holders of these units may redeem them for cash unless we, in our sole and absolute discretion, elect to issue common shares on a one-for-one basis in lieu of paying 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 June 30, 2012, there were 3,064,252 Redeemable Common Units outstanding with a redemption value equal to the fair value of the Redeemable Common Units, or $16,175.  The redemption value of the Redeemable Common Units is based on the price per share of our common shares on the NYSE on such date.  As of June 30, 2012, 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 $12,076.  As of December 31, 2011, the Redeemable Common Units were valued on the consolidated balance sheets at redemption value of $14,955 since the Redeemable Common Units redemption value was greater than historical cost of $12,402.
 
 
 
9

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)

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

Shareholder’s Equity

On May 8, 2012, we closed on a public offering in which we issued and sold 24,000,000 common shares through several underwriters for net proceeds to us of approximately $128,697.  Immediately upon the 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 for general corporate purposes, including the funding of future acquisitions.

On August 4, 2009, we entered into a purchase agreement with Real Estate Investment Group L.P. (“REIG”), pursuant to which we sold 5,700,000 common shares at a price of $2.50 per share to REIG for gross proceeds of $14,250. We also granted REIG the option to buy up to an additional 5,700,000 common shares at a price of $3.00 per share, which was exercisable through August 4, 2014. On February 13, 2012, pursuant to the terms of the original option, we called in and canceled the option granted to REIG in exchange for the issuance of 2,521,561 common shares with an aggregate value equal to $13,566. This amount equals the volume weighted average price per common share for the 20 trading days prior to the exercise of the option, less the $3.00 option price, multiplied by the 5,700,000 common shares remaining under the option.

Recent Accounting Pronouncements

Effective January 1, 2012, we adopted ASC Update No. 2011-05 concerning the presentation of comprehensive income. The amendment provides guidance to improve comparability, consistency, and transparency of financial reporting.  The amendment also eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Instead, entities will be required to present all non-owner changes in stockholders’ equity as either a single continuous statement of comprehensive income or in two separate but consecutive statements, for which we have elected to present two separate but consecutive statements.
 
Out of Period Adjustment
 
In the second quarter of 2012, we recorded an adjustment impacting gain on disposition of hotel properties that increased net income by $1,950. This adjustment was made after completing an analysis that determined a liability for deferred land rent payable was not properly written off when a hotel property was sold during the first quarter of 2012. After evaluating the quantitative and qualitative effects of this adjustment, we have concluded that the impact on the Company's prior interim period and current, interim period consolidated financial statements was not material.
 
 
10

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at June 30, 2012 and December 31, 2011:
 
   
June 30, 2012
   
December 31, 2011
 
             
Land
  $ 304,336     $ 278,442  
Buildings and Improvements
    1,200,936       1,090,280  
Furniture, Fixtures and Equipment
    166,388       151,600  
Construction in Progress
    37,593       31,638  
      1,709,253       1,551,960  
                 
Less Accumulated Depreciation
    (237,021 )     (211,084 )
                 
Total Investment in Hotel Properties
  $ 1,472,232     $ 1,340,876  

Acquisitions

During the six months ended June 30, 2012, we acquired the following wholly-owned properties:
 
Hotel
 
Acquisition
Date
 
Land
   
Buildings and Improvements
   
Furniture
Fixtures and
Equipment
   
Franchise Fees,
Loan Costs, and
Leasehold
Intangible
   
Leasehold
Liability
   
Acquisition
Costs
   
Total Purchase
Price
   
Fair Value of
Assumed Debt
 
The Rittenhouse Hotel, Philadelphia, PA*
 
3/1/2012
  $ 7,119     $ 29,605     $ 3,580     $ 2,156     $ (827 )   $ 952     $ 42,585     $ -  
Bulfinch Hotel, Boston, MA*
 
5/7/2012
    1,456       14,954       1,790       -       -       69       18,269     $ -  
Holiday Inn Express, New York, NY*
 
6/18/2012
    30,329       57,016       2,856       98       -       -       90,299     $ 73,038  
                                                                     
Total
      $ 38,904     $ 101,575     $ 8,226     $ 2,254     $ (827 )   $ 1,021     $ 151,153     $ 73,038  

*The fair values for the assets and liabilities acquired in 2012 are preliminary as the Company continues to finalize their acquisition date fair value determination.

On June 18, 2012, the Company purchased , from an unaffiliated seller, the remaining 50% ownership in Metro 29th Street Associates, LLC (“Metro 29th”), the lessee of the Holiday Inn Express, New York, NY.  Consideration given for this interest in Metro 29th included $10,000 cash and the forgiveness of approximately $800 of accrued interest payable under a mezzanine loan made by the Company to an affiliate of the seller.  Brisam Management DE, LLC (“Brisam”), as the owner of the land, building and improvements leased by Metro 29th, is considered a variable interest entity and, based on our evaluation, we are the primary beneficiary of this variable interest entity and therefore Brisam, is consolidated in our financial statements.  As a result, included in our consolidated financial statements is approximately $90,201 in investment in hotel properties and an aggregate of $73,038 in first mortgage and mezzanine debt.  On the date we acquired the remaining interest in Metro 29th, we determined that the stated rate of interest on the first mortgage debt was above market and, accordingly, recorded a $3,436 premium.   Also included in this transaction was an option to acquire the equity interests in the entity owning the real estate assets or the real estate assets from Brisam for nominal consideration. The option is exercisable by the Company after September 1, 2016 or before that date in the event of certain specified events.  This option may be put to the Company by the Seller at any time.  On June 29, 2012, the Company repaid the $15,000 mezzanine debt.
 
 
11

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

As shown in the table below, included in the consolidated statements of operations for the three and six months ended June 30, 2012 are total revenues of $7,003 and $8,485, respectively, and total net income of $531 and net loss of $774, respectively, for acquired hotels we have consolidated  since the date of acquisition.   These amounts represent the results of operations for these hotels since the date of acquisition:

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2012
   
June 30, 2012
 
Hotel
 
Revenue
   
Net
Income
   
Revenue
   
Net
(Loss)
Income
 
The Rittenhouse Hotel, Philadelphia, PA
  $ 5,718     $ 131     $ 7,200     $ (1,174 )
Bulfinch Hotel, Boston, MA
    728       217       728       217  
Holiday Inn Express, New York, NY
    557       183       557       183  
                                 
Total
  $ 7,003     $ 531     $ 8,485     $ (774 )

Pro Forma Results (Unaudited)

The following condensed pro forma financial data are presented as if all acquisitions completed since January 1, 2012 and 2011 had been completed on January 1, 2011 and 2010.  Properties acquired without any operating history are excluded from the condensed pro forma operating results.  The condensed pro forma financial data are not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2012 and 2011 at the beginning of the year presented, nor does it purport to represent the results of operations for future periods.
 
   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Pro Forma Total Revenues
  $ 103,049     $ 93,726     $ 171,998     $ 160,984  
                                 
Pro Forma Income (Loss) from Continuing Operations
  $ 10,595     $ 9,343     $ (4,924 )   $ (5,305 )
Income (loss) from Discontinued Operations
    7,100       708       11,221       (1,179 )
Pro Forma Net Income (loss)
    17,695       10,051       6,297       (6,484 )
Loss allocated to Noncontrolling Interest
    (807 )     (488 )     1,188       677  
Preferred Distributions
    (3,500 )     (2,299 )     (7,000 )     (3,499 )
Pro Forma Net Income (loss) applicable to Common Shareholders
  $ 13,388     $ 7,264     $ 485     $ (9,306 )
                                 
Pro Forma Loss applicable to Common Shareholders per Common Share
                               
Basic
  $ 0.07     $ 0.04     $ 0.00     $ (0.06 )
Diluted
  $ 0.07     $ 0.04     $ 0.00     $ (0.06 )
                                 
Weighted Average Common Shares Outstanding
    186,264,437       168,672,936       178,345,932       168,504,893  
Basic
    189,011,990       173,687,233       178,345,932       168,504,893  
Diluted
                               

Asset Development

On July 22, 2011, the Company completed the acquisition of the real property and improvements located at 32 Pearl Street, New York, NY from an unaffiliated seller for a total purchase price of $28,300.  The property is a re-development project which was initiated in 2008. The Company acquired the real property and the improvements for cash and by cancelling an $8,000 development loan on the re-development project made to the seller and by cancelling $300 of accrued interest receivable from the seller.  We have begun the process of re-developing this building into a Hampton Inn.   As of June 30, 2012, we have spent $5,555 in development costs.
 
During the first quarter of 2012, the Company commenced construction of an additional oceanfront tower, additional meeting space and structured parking on a land parcel adjacent to the Courtyard by Marriott, Miami, Florida, a hotel acquired on November 16, 2011. See Note 6  Debt for information on the financing of this construction. This land parcel was included in the acquisition of the hotel.  As of June 30, 2012, we have spent $2,314 in construction costs.
 
 
12


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of June 30, 2012 and December 31, 2011 our investment in unconsolidated joint ventures consisted of the following:

       
Percent
   
Preferred
   
June 30,
   
December 31,
 
Joint Venture
 
Hotel Properties
 
Owned
   
Return
   
2012
   
2011
 
                             
Inn American Hospitality at Ewing, LLC
 
Courtyard by Marriott, Ewing, NJ
    50.0 %  
11.0% cumulative
    $ -     $ -  
SB Partners, LLC
 
Holiday Inn Express, South Boston, MA
    50.0 %     N/A       1,361       1,681  
Hiren Boston, LLC
 
Courtyard by Marriott, South Boston, MA
    50.0 %     N/A       4,989       5,035  
Mystic Partners, LLC
 
Hilton and Marriott branded hotels in CT and RI
    8.8%-66.7 %  
8.5%
non-cumulative
      10,039       23,762  
Metro 29th Street Associates, LLC
 
Holiday Inn Express, New York, NY
    50.0 %     N/A       -       8,361  
                        $ 16,389     $ 38,839  

As noted in Note 2 – “Investment in Hotel Properties,” on June 18, 2012, the Company purchased the remaining 50% ownership in Metro 29th, the lessee of the Holiday Inn Express, Manhattan, New York, NY. As such, we ceased to account for our investment in Metro 29th under the equity method of accounting as it is a consolidated subsidiary.  Our interest in Metro 29th was remeasured, and as a result, during the three and six months ended June 30, 2012, we recorded a loss of approximately $224.

On August 15, 2011, the Company entered into two purchase and sale agreements to dispose of a portfolio of 18 non-core hotel properties, four of which are owned in part by the Company through an unconsolidated joint venture.  As a result of entering into these purchase and sale agreements, during the twelve months ended December 31, 2011, we recorded an impairment loss of approximately $1,677 for those hotel properties for which our investment in the unconsolidated joint venture did not exceed the net proceeds distributable to us on the sale of the hotel properties held by the joint venture based on the purchase price. On February 23, 2012, the Company closed on the sale of 14 of these non-core hotel properties, including three of the unconsolidated joint venture hotel properties.  On May 8, 2012, the Company closed on the remaining four non-core hotel properties, including one of the unconsolidated joint venture hotel properties.  As our investment in these unconsolidated joint ventures equated the net proceeds distributed to us, we did not record a gain or loss in connection with the sale of these hotel properties.  See “Note 12 – Discontinued Operations” for more information.
 
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 (loss) recognized during the three and six months ended June 30, 2012 and 2011, for our investments in unconsolidated joint ventures is as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Inn American Hospitality at Ewing, LLC
  $ -     $ -     $ -     $ (28 )
Hiren Boston, LLC