form10q.htm


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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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.
xYes oNo
 
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).
xYes oNo
 
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).
oYes xNo
 
As of May 1, 2013, the number of Class A common shares of beneficial interest outstanding was 202,554,624 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.
31
Item 3.
43
Item 4.
45
 
 
 
PART II.  OTHER INFORMATION
 
Item 1.
46
 Item 1A.
46
Item 2.
46
Item 3.
46
Item 4.
46
Item 5.
46
Item 6.
46
 
 
 
 
47
 
 
2


 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2013 [UNAUDITED] AND DECEMBER 31, 2012
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
March 31, 2013
   
December 31, 2012
 
Assets:
 
 
   
 
 
Investment in Hotel Properties, net of Accumulated Depreciation, (including consolidation of variable interest entity assets of $86,673 and $86,657)
  $ 1,469,719     $ 1,466,713  
Investment in Unconsolidated Joint Ventures
    14,257       16,007  
Development Loans Receivable
    15,282       28,425  
Cash and Cash Equivalents
    83,060       69,059  
Escrow Deposits
    31,523       26,792  
Hotel Accounts Receivable, net of allowance for doubtful accounts of $44 and $365
    11,185       11,538  
Deferred Financing Costs, net of Accumulated Amortization of $5,367 and $4,841
    7,987       8,695  
Due from Related Parties
    12,064       8,488  
Intangible Assets, net of Accumulated Amortization of $2,783 and $2,413
    8,334       8,698  
Deposits on Hotel Acquisitions
    40,236       37,750  
Other Assets
    25,069       25,514  
                 
Total Assets
  $ 1,718,716     $ 1,707,679  
                 
Liabilities and Equity:
               
Line of Credit
  $ -     $ -  
Unsecured Term Loan
    150,000       100,000  
Mortgages and Notes Payable, including net Unamortized Premium (including consolidation of variable interest entity debt of $56,864 and $57,256)
    656,058       692,708  
Accounts Payable, Accrued Expenses and Other Liabilities
    39,755       33,838  
Dividends and Distributions Payable
    15,223       15,621  
Due to Related Parties
    5,088       4,403  
                 
Total Liabilities
    866,124       846,570  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ -     $ 15,321  
                 
Equity:
               
Shareholders' Equity:
               
Preferred Shares: $.01 Par Value, 29,000,000 shares Authorized, 7,600,000 Series B and C Shares Issued and Oustanding at March 31, 2013 and 7,000,000 Series A and B shares Issued and Outstanding at December 31, 2012, with liquidation preferences of $25 per share (Note 1)
    76       70  
Common Shares:  Class A, $.01 Par Value,  300,000,000 Shares Authorized at March 31, 2013 and December 31, 2012, 202,553,150 and 198,672,356 Shares Issued and Outstanding at March 31, 2013 and December 31, 2012, respectively
    2,026       1,986  
Common Shares:  Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (1,630 )     (1,786 )
Additional Paid-in Capital
    1,194,839       1,178,292  
Distributions in Excess of Net Income
    (372,831 )     (348,734 )
Total Shareholders' Equity
    822,480       829,828  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    29,837       15,484  
Noncontrolling Interests - Consolidated Variable Interest Entity
    275       476  
Total Noncontrolling Interests
    30,112       15,960  
                 
Total Equity
    852,592       845,788  
                 
Total Liabilities and Equity
  $ 1,718,716     $ 1,707,679  

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

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
Three Months Ended
 
   
2013
   
2012
 
Revenue:
 
 
   
 
 
Hotel Operating Revenues
  $ 76,790     $ 64,854  
Interest Income from Development Loans
    146       621  
Other Revenues
    34       62  
Total Revenues
    76,970       65,537  
                 
Operating Expenses:
               
Hotel Operating Expenses
    48,364       40,350  
Gain on Insurance Settlements
    (403 )     -  
Hotel Ground Rent
    228       194  
Real Estate and Personal Property Taxes and Property Insurance
    6,666       5,110  
General and Administrative (including Share Based Payments of $2,388 and $2,133)
    4,996       5,168  
Acquisition and Terminated Transaction Costs
    3       958  
Depreciation and Amortization
    15,096       13,441  
Total Operating Expenses
    74,950       65,221  
                 
Operating Income
    2,020       316  
                 
Interest Income
    456       106  
Interest Expense
    10,420       11,482  
Other Expense
    205       236  
Loss on Debt Extinguishment
    261       6  
Loss before loss from Unconsolidated Joint Venture Investments, Income Taxes and Discontinued Operations
    (8,410 )     (11,302 )
                 
Loss from Unconsolidated Joint Venture Investments
    (396 )     (730 )
                 
Loss Before Income Taxes
    (8,806 )     (12,032 )
                 
Income Tax Benefit
    1,130       -  
                 
Loss from Continuing Operations
    (7,676 )     (12,032 )
                 
Discontinued Operations  (Note 12):
               
Gain on Disposition of Hotel Properties
    -       4,502  
Loss from Discontinued Operations
    -       (384 )
Income from Discontinued Operations
    -       4,118  
                 
Net Loss
    (7,676 )     (7,914 )
                 
Loss Allocated to Noncontrolling Interests
    673       741  
Preferred Distributions
    (3,844 )     (3,500 )
Extinguishment of Issuance Costs Upon Redemption of Series A Preferred Stock
    (2,250 )     -  
                 
Net Loss applicable to Common Shareholders
  $ (13,097 )   $ (10,673 )
 
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
 
 
4


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

   
2013
   
2012
 
Earnings Per Share:
 
 
   
 
 
BASIC
 
 
   
 
 
Loss from Continuing Operations applicable to Common Shareholders
  $ (0.07 )   $ (0.09 )
Income from Discontinued Operations applicable to Common Shareholders
  $ -     $ 0.03  
                 
Net Loss applicable to Common Shareholders
  $ (0.07 )   $ (0.06 )
                 
DILUTED
               
Loss from Continuing Operations applicable to Common Shareholders
  $ (0.07 )  *   $ (0.09 )  *
Income from Discontinued Operations applicable to Common Shareholders
  $ - *   $ 0.03 *
                 
Net Loss applicable to Common Shareholders
  $ (0.07 )  *   $ (0.06 )  *
                 
Weighted Average Common Shares Outstanding:
               
Basic
    197,029,017       170,427,428  
Diluted
    197,029,017 *     170,427,428 *
 
*
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
 
   
March 31, 2013
   
March 31, 2012
 
   
 
   
 
 
Common Units of Limited Partnership Interest
    7,100,844       7,263,518  
Unvested Stock Awards Outstanding
    1,779,890       239,588  
Contingently Issuable Share Awards
    3,027,599       1,996,157  
Options to Acquire Common Shares Outstanding
    -       544,189  
Total potentially dilutive securities excluded from the denominator
    11,908,333       10,043,452  

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
5


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
2013
   
2012
 
Net loss
    (7,676 )     (7,914 )
Other comprehensive loss
               
Change in fair value of derivative instruments
    452       295  
Less: Reclassification adjustment for change in fair value of derivative instruments included in net income
    (296 )     (268 )
                 
Comprehensive loss
    (7,520 )     (7,887 )
Less: Comprehensive loss attributable to noncontrolling interests
    673       741  
Comprehensive loss attributable to common shareholders
  $ (6,847 )   $ (7,146 )
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
6


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS]
 
   
Shareholders' Equity
   
Noncontrolling Interests
   
Redeemable Noncontrolling Interests
 
   
Class A
Common Shares
   
Class B
Common Shares
   
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, 2012
  $ 1,986       -       70     $ 1,178,292     $ (1,786 )   $ (348,734 )   $ 829,828       15,484     $ -     $ 476     $ 15,960     $ 845,788     $ 15,321  
Unit Conversion
    1       -       -       69       -       -       70       (70 )     -       -       (70 )     -       -  
Reclassification of Noncontrolling Interest
    -       -       -       -       -       -       -       15,251       -       -       15,251       15,251       (15,251 )
Preferred Stock
                                                                                    -                  
Preferred Stock Offering, net of costs
    -       -       30       72,389       -       -       72,419       -       -       -       -       72,419       -  
Preferred Stock Redemption
    -       -       (24 )     (59,976 )     -       -       (60,000 )     -       -       -       -       (60,000 )     -  
Dividends and Distributions declared:
                                                                                    -                  
Common Stock ($0.06 per share)
    -       -       -       -       -       (13,250 )     (13,250 )     -       -       -       -       (13,250 )     -  
Preferred Stock
    -       -       -       -       -       (3,844 )     (3,844 )     -       -       -       -       (3,844 )     -  
Common Units ($0.06 per share)
    -       -       -       -       -       -       -       (426 )     -       -       (426 )     (426 )     -  
Dividend Reinvestment Plan
    -       -       -       10       -       -       10       -       -       -       -       10       -  
Stock Based Compensation
                                                                                    -                  
Grants
    39       -       -       (39 )     -       -       -       -       -       -       -       -       -  
Amortization
    -       -       -       4,094       -       -       4,094       -       -       -       -       4,094       -  
Change in Fair Value of Derivative Instruments
    -       -       -       -       156       -       156       -       -       -       -       156       -  
Net Loss
    -       -       -       -       -       (7,003 )     (7,003 )     (402 )     -       (201 )     (603 )     (7,606 )     (70 )
Balance at March 31, 2013
  $ 2,026     $ -     $ 76     $ 1,194,839     $ (1,630 )   $ (372,831 )   $ 822,480       29,837     $ -     $ 275     $ 30,112     $ 852,592     $ -  
                                                                                                         
Balance at December 31, 2011
  $ 1,699     $ -     $ 70     $ 1,041,027     $ (1,151 )   $ (310,974 )   $ 730,671       16,864     $ 307     $ -     $ 17,171     $ 747,842     $ 14,955  
Unit Conversion
    -       -       -       31       -       -       31       (34 )     -       -       (34 )     (3 )     -  
Reallocation of Noncontrolling Interest
    -       -       -       (2,152 )     -       -       (2,152 )     -       -       -       -       (2,152 )     2,152  
Common Stock Option Cancellation
    25       -       -       (25 )     -               -       -       -       -       -                  
Dividends and Distributions declared:
                                                                                                       
Common Stock ($0.06 per share)
    -       -       -       -       -       (10,398 )     (10,398 )     -       -       -       -       (10,398 )     -  
Preferred Stock
    -       -       -       -       -       (3,500 )     (3,500 )     -       -       -       -       (3,500 )     -  
Common Units ($0.06 per share)
    -                       -       -       -       -       (252 )     -       -       (252 )     (252 )     (184 )
Dividend Reinvestment Plan
    1       -       -       4       -       -       5       -       -       -       -       5       -  
Stock Based Compensation
                                                                                                       
Grants
    8       -       -       2,294       -       -       2,302       -       -       -       -       2,302       -  
Amortization
    -       -       -       1,288       -       -       1,288       -       -       -       -       1,288       -  
Change in Fair Value of Derivative Instruments
    -       -       -       -       27       -       27       -       -       -       -       27       -  
Net Income
    -       -       -       -       -       (7,173 )     (7,173 )     (263 )     (287 )     -       (550 )     (7,723 )     (191 )
Balance at March 31, 2012
  $ 1,733     $ -       70     $ 1,042,467     $ (1,124 )   $ (332,045 )   $ 711,101       16,315     $ 20     $ -     $ 16,335     $ 727,436     $ 16,732  

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 THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS]

   
2013
   
2012
 
Operating activities:
 
 
   
 
 
Net loss
  $ (7,676 )   $ (7,914 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Gain on disposition of hotel properties
    -       (4,502 )
Deferred income taxes
    (1,130 )     -  
Depreciation
    14,741       13,294  
Amortization
    720       1,220  
Debt extinguishment
    207       6  
Development loan interest added to principal
    -       (401 )
Equity in loss of unconsolidated joint ventures
    396       730  
Distributions from unconsolidated joint ventures
    -       1,000  
Loss recognized on change in fair value of derivative instrument
    7       96  
Stock based compensation expense
    2,388       2,133  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    353       (172 )
Escrows
    (3,091 )     (1,439 )
Other assets
    940       1,432  
Due from related parties
    (3,576 )     (2,599 )
Increase (decrease) in:
               
Due to related parties
    685       402  
Accounts Payable, Accrued Expenses and Other Liabilities
    7,265       1,231  
Net cash provided by operating activities
    12,229       4,517  
                 
Investing activities:
               
Purchase of hotel property assets
    -       (40,885 )
Deposits on hotel acquisitions, net
    (2,486 )     (6,500 )
Capital expenditures
    (12,603 )     (12,192 )
Cash paid for hotel development projects
    (4,916 )     (648 )
Proceeds from disposition of hotel properties and investment in unconsolidated joint venture
    -       41,642  
Net changes in capital expenditure escrows
    (1,792 )     (2,113 )
Repayments from and advances to unconsolidated joint ventures, net
    -       (127 )
Proceeds from insurance claims
    400       -  
Repayment of development loans receivable
    13,143       39  
Repayments from and investment in notes receivable from unconsolidated joint venture, net
    -       (150 )
Distributions from unconsolidated joint venture
    1,353       -  
Net cash used in investing activities
    (6,901 )     (20,934 )
                 
Financing activities:
               
Proceeds from (repayments of) borrowings under line of credit, net
    -       36,667  
Proceeds from unsecured term loan borrowing
    50,000       -  
Principal repayment of mortgages and notes payable
    (41,288 )     (32,035 )
Proceeds from mortgages and notes payable
    5,000       27,194  
Cash paid for deferred financing costs
    (80 )     (26 )
Proceeds from issuance of preferred stock, net
    72,419       -  
Redemption of Preferred Stock
    (60,000 )     -  
Settlement of interest rate cap
    (565 )     -  
Dividends paid on common shares
    (11,910 )     (10,194 )
Dividends paid on preferred shares
    (4,473 )     (3,500 )
Distributions paid on common partnership units
    (430 )     (436 )
Net cash provided by financing activities
    8,673       17,670  
                 
Net  increase (decrease) in cash and cash equivalents
    14,001       1,253  
Cash and cash equivalents - beginning of period
    69,059       24,568  
                 
Cash and cash equivalents - end of period
  $ 83,060     $ 25,821  
 
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 MONTHS ENDED MARCH 31, 2013 AND 2012 [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 a fair presentation, have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 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, 2012, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, 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 Securities and Exchange Commission.

We are a self-administed 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 March 31, 2013, we owned an approximate 96.6% 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 interest in HHLP (“Common Units”) that are nonredeemable (“Nonredeemable Common Units”) as equity. The noncontrolling interest of Nonredeemable Common Units totaled $29,837 as of March 31, 2013 and $15,484 as of December 31, 2012.  As of March 31, 2013, there were 7,094,716 Nonredeemable Common Units outstanding with a fair market value of $41,433, based on the price per share of our common shares on the NYSE on such date. In accordance with the partnership agreement of the Partnership, 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.
 
Prior to February 1, 2013, certain Common Units (“Redeemable Common Units”) had 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 served as collateral contained a provision that could have resulted in a net cash settlement outside of the control of the Company. As a result, prior to February 1, 2013, the Redeemable Common Units were classified in the mezzanine section of the consolidated balance sheets as they did not meet the requirements for equity classification under US GAAP. The carrying value of the Redeemable Common Units equaled the greater of carrying value based on the accumulation of historical cost or the redemption value.  As of February 1, 2013, the aforementioned pledge and security agreement is no longer in effect and the Common Units subject t to the pledge and security agreement have been released and such Common Units are treated as Nonredeemable Common Units.  As of March 31, 2013, there were no outstanding Units designated as Redeemable Common Units. As of December 31, 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 $11,753.

Net income or loss attributed to Nonredeemable Common Units and Redeemable Common Units, as well as the net income or loss related to the noncontrolling interests of our consolidated joint ventures and consolidated variable interest entity, is included in net income or loss in the consolidated statements of operations. Net income or loss attributed to the Common Units and the noncontrolling interests of our consolidated joint ventures and consolidated variable interest entity is excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.

 
9


 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)
 
Shareholders’ Equity

On February 25, 2013, we completed a public offering of 3,000,000 6.875% Series C Cumulative Redeemable Preferred Shares. These shares have a par value of $0.01 per share with a $25.00 liquidation preference per share. Net proceeds of the offering, after deducting the underwriting discount and the offering expenses payable by us, were approximately $72,419. We utilized the net proceeds of the offering to redeem all outstanding 8.00% Series A Cumulative Redeemable Preferred Shares on March 28, 2013, and for general corporate purposes.

On March 28, 2013, we redeemed all of our issued and outstanding 8.00% Series A Cumulative Redeemable Preferred Shares. The shares were redeemed at a per share redemption price of $25.00 together with accrued and unpaid dividends to the redemption date for an aggregate per share redemption price of $25.4056.  Dividends ceased accruing on the Series A Preferred Shares on March 28, 2013.

Terms and conditions of the preferred shares outstanding at March 31, 2013 and December 31, 2012 are summarized as follows:

 
 
Shares Outstanding
   
 
   
 
   
Dividend Per Share
Three Months Ended
 
Series
 
March 31, 2013
   
December 31, 2012
   
Liquidation
Preference
   
Distribution
Rate
   
March 31, 2013
   
March 31, 2012
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Series A
    -       2,400,000     $ 60,000       8.000 %   $ 0.50     $ 0.50  
Series B
    4,600,000       4,600,000       115,000       8.000 %     0.50       0.50  
Series C
    3,000,000       -       75,000       6.875 %     0.1862       -  
 
    7,600,000       7,000,000     $ 250,000                          

 
10


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at March 31, 2013 and December 31, 2012:
 
   
March 31, 2013
   
December 31, 2012
 
   
 
   
 
 
Land
  $ 305,286     $ 305,286  
Buildings and Improvements
    1,222,591       1,214,865  
Furniture, Fixtures and Equipment
    176,924       171,892  
Construction in Progress
    45,488       40,572  
      1,750,289       1,732,615  
                 
Less Accumulated Depreciation
    (280,570 )     (265,902 )
                 
Total Investment in Hotel Properties
  $ 1,469,719     $ 1,466,713  

Acquisitions

On April 9, 2013, subsequent to the end of the first quarter, we completed the acquisition of the real property and improvements for Hyatt Union Square hotel in New York, NY from Risingsam Union Square LLC.  Consideration was given in exchange for the property including $36,000 paid in cash to the seller, the cancellation by the Company of a development loan in the original principal amount of $10,000 and $3,303 of accrued interest on the loan.  In addition, the Company paid off the existing construction financing and entered into a new $55,000 mortgage loan which bears interest at one month U.S. dollar LIBOR plus 4.19% and matures in April 2016.  On the same date, we entered into an interest rate cap.  See “Note 8 – Fair Value Measurements and Derivative Instruments” for more information. 

Asset Development and Renovation

We have opportunistically engaged in development of hotel assets. We capitalize expenditures related to hotel development projects and renovations, including indirect costs such as interest expense, real estate taxes and utilities related to hotel development projects and renovations.

On July 22, 2011, the Company completed the acquisition of the real property and improvements located at 32 Pearl Street, New York, NY, anticipated to become a Hampton Inn, from an unaffiliated seller for a total purchase price of $28,300. The property is a re-development project which was initiated in 2008. Since the date of acquisition and through March 31, 2013, we have spent $4,140 in development costs, including $503 in property tax expense. All such costs have been capitalized.

The Company continues 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. Since commencement of construction and through March 31, 2013, we have spent $9,408 in construction costs. All such costs have been capitalized.

In October 2012, Hurricane Sandy affected numerous hotel operations within our portfolio. Two hotels within our portfolio were significantly impacted by this natural disaster; one hotel which was inoperable (Holiday Inn Express Water Street, New York, NY) and one hotel development project which has incurred delays in construction (Hampton Inn, Pearl Street, New York, NY). We have recorded estimated property losses of $1,586 on the Holiday Inn Express Water Street and a corresponding insurance claim receivable of $1,486.  This hotel re-opened in April 2013.  We have recorded estimated property losses of $1,997 on the Hampton Inn Pearl Street and a corresponding insurance claim receivable of $1,897, and we expect this hotel to open in September 2013.  Of the $3,383 that we estimate to receive from the property insurance claim, $400 was received as of March 31, 2013.

 
11


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of March 31, 2013 and December 31, 2012 our investment in unconsolidated joint ventures consisted of the following:

 
 
 
 
Percent
   
Preferred
   
March 31,
   
December 31,
 
Joint Venture
 
Hotel Properties
 
Owned
   
Return
   
2013
   
2012
 
 
 
 
 
 
   
 
   
 
   
 
 
SB Partners, LLC
 
Holiday Inn Express, South Boston, MA
    50.0 %   N/A     $ 1,175     $ 1,292  
Hiren Boston, LLC
 
Courtyard by Marriott, South Boston, MA
    50.0 %   N/A       4,795       4,964  
Mystic Partners, LLC
 
Hilton and Marriott branded hotels in CT and RI
    8.8%-66.7 %  
8.5%
non-cumulative
      8,287       9,751  
 
 
 
                  $ 14,257     $ 16,007  

On February 1, 2013, the Company closed on the sale of its interest in one of the unconsolidated joint venture properties owned in part by Mystic Partners, LLC to its joint venture partner. As our investment in this unconsolidated joint venture equated the net proceeds distributed to us, we did not record a gain or loss in connection with the sale of this hotel.
 
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.
 
Loss recognized during the three months ended March 31, 2013 and 2012, for our investments in unconsolidated joint ventures is as follows:

   
Three Months Ended March 31,
 
   
2013
   
2012
 
SB Partners, LLC
  $ (117 )   $ (122 )
Hiren Boston, LLC
    (169 )     (138 )
Mystic Partners, LLC
    (110 )     (113 )
Metro 29th Street Associates, LLC
    -       (357 )
Loss from Unconsolidated Joint Venture Investments
  $ (396 )   $ (730 )

 
12

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012.

Balance Sheets
 
 
   
 
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Assets
 
 
   
 
 
Investment in hotel properties, net
  $ 117,135     $ 118,506  
Other Assets
    20,991       20,709  
Assets Held For Sale
    -       5,875  
Total Assets
  $ 138,126     $ 145,090  
                 
Liabilities and Equity
               
Mortgages and notes payable
  $ 119,059     $ 119,236  
Other liabilities
    37,310       36,292  
Liabilities Related to Assets Held For Sale
    -       6,071  
Equity:
               
Hersha Hospitality Trust
    26,166       28,581  
Joint Venture Partner(s)
    (44,409 )     (45,090 )
Total Equity
    (18,243 )     (16,509 )
                 
Total Liabilities and Equity
  $ 138,126     $ 145,090  
 
Statements of Operations
               
   
Three Months Ended March 31,
 
      2013       2012  
Room Revenue
  $ 12,338     $ 15,404  
Other Revenue
    5,285       5,334  
Operating Expenses
    (13,023 )     (14,866 )
Interest Expense
    (1,869 )     (2,115 )
Lease Expense
    (247 )     (1,699 )
Property Taxes and Insurance
    (743 )     (1,097 )
General and Administrative
    (1,452 )     (1,487 )
Depreciation and Amortization
    (1,609 )     (1,783 )
Loss Allocated to Noncontrolling Interests
    (24 )     (2,569 )
                 
Net loss From Continuing Operations
    (1,344 )     (4,878 )
Income from Discontinued Operations
    (55 )     106  
Gain on Disposition of Hotel Properties
    1,162       15,530  
                 
Net (Loss) Income
  $ (237 )   $ 10,758  

 
13


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
 
The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures’ equity to the Company’s investment in the unconsolidated joint ventures as presented on the Company’s balance sheets as of March 31, 2013 and December 31, 2012.

   
March 31,
   
December 31,
 
   
2013
   
2012
 
Company's share of equity recorded on the joint ventures' financial statements
  $ 26,166     $ 28,581  
Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in unconsoldiated joint ventures(1)
    (11,909 )     (12,574 )
Investment in Unconsolidated Joint Ventures
  $ 14,257     $ 16,007  

(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 reflects 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.
 
 
14

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 – DEVELOPMENT LOANS RECEIVABLE

Development Loans

Historically, we provided first mortgage and mezzanine loans to hotel developers, including entities in which certain of our executive officers and non-independent trustees own an interest that enabled such entities to construct hotels and conduct related improvements on specific hotel projects. These loans were initially originated as part of our acquisition strategy. During the three months ended March 31, 2013, no such loans were originated by us. Interest income from development loans was $146 and $621 for the three months ended March 31, 2013 and 2012, respectively. Accrued interest on our development loans receivable was $29 as of March 31, 2013 and $348 as of December 31, 2012. Accrued interest on our development loans receivable does not include cumulative interest income which has been accrued and paid in kind by adding it to the principal balance of certain loans as indicated in the table below.

As of March 31, 2013 and December 31, 2012, our development loans receivable consisted of the following:

Hotel Property
 
Borrower
 
Principal
Outstanding
March 31, 2013
   
Principal
Outstanding
December 31,
2012
   
Interest
Rate
     
Maturity Date
 
Operational Hotels
 
 
 
 
   
 
   
 
     
 
 
Hyatt 48Lex - New York, NY
 
44 Lexington Holding, LLC
  $ 1,979 (1)   $ 15,122       9 % (2)     N/A *
   
 
                                 
Construction Hotels
 
 
                                 
Hyatt Union Square - New York, NY (3)
 
Risingsam Union Square, LLC
    13,303       13,303       10 %       N/A  
   
 
                                 
Total Development Loans Receivable
 
 
  $ 15,282     $ 28,425                    
 
*
Indicates borrower is a related party

 
(1)
Hyatt 48 Lex was paid off in full in April 2013 and we have no development loan receivables outstanding upon this settlement.
 
(2)
Prior to June 1, 2012, the development loan to 44 Lexington Holding LLC allowed the borrower to elect, quarterly, to pay accrued interest in-kind by adding the accrued interest to the principal balance of the loan.  Effective June 1, 2012, we amended the development loan with 44 Lexington Holding LLC to cease the buyer’s election to pay accrued interest in-kind.  Interest of $401 was added to principal during the three months ended March 31, 2012.
 
(3)
On April 9, 2013, we completed the acquisition of the real property and improvements for Hyatt Union Square hotel in New York, NY from Risingsam Union Square LLC.  Consideration given in exchange for the property including $36,000 paid in cash to the seller, the cancellation by the Company of a development loan in the original principal amount of $10,000 and $3,303 of accrued interest on the loan.  In addition, the Company paid off the existing construction financing and entered into a new mortgage loan.  See “Note 2 –Investment In Hotel Properties” for additional discussion of this transaction.

 
15


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 – OTHER ASSETS AND DEPOSITS ON HOTEL ACQUISITIONS

Other Assets consisted of the following at March 31, 2013 and December 31, 2012:
 
 
 
March 31, 2013
   
December 31, 2012
 
 
 
 
   
 
 
Transaction Costs
  $ 209     $ 339  
Acquisition of Hyatt Union Square
    3,788       3,120  
Investment in Statutory Trusts
    1,548       1,548  
Prepaid Expenses
    6,498       8,654  
Insurance Claims Receivable
    5,726       3,883  
Deferred Tax Asset
    3,773       3,355  
Other
    3,527       4,615  
 
  $ 25,069     $ 25,514  

Transaction Costs - Transaction costs include legal fees and other third party transaction costs incurred relative to entering into debt facilities, issuances of equity securities, and other costs which are recorded in other assets prior to the closing of the respective transactions.

Acquisition of Hyatt Union Square - On April 9, 2013, we completed the acquisition of the real property and improvements for Hyatt Union Square hotel in New York, NY.  Included in the acquisition of Hyatt Union Square above are costs we incurred for preliminary development of the hotel.

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.

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

Insurance Claims Receivable – as noted in “Note 2 – Investment in Hotel Properties,” we recorded an insurance claim receivable due to the property damage that occurred at several of our hotel properties as a result of Hurricane Sandy in October 2012.

Deferred Tax Asset - We have approximately $3,773 of net deferred tax assets as of March 31, 2013. We have considered various factors, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies in determining a valuation allowance for our deferred tax assets, and we believe that it is more likely than not that we will be able to realize the $3,773 of net deferred tax assets in the future.

Deposits on Hotel Acquisitions

As of March 31, 2013, we had $22,000 in non-interest bearing deposits on the acquisition of the Hyatt Union Square, New York, NY.  On April 9, 2013, we closed on the acquisition of this property.  Please see “Note 2 – Investment in Hotel Properties” for more information.  As of March 31, 2013, we had an additional $15,486 in interest bearing deposits related to the future acquisition of Hilton Garden Inn -52nd Street, New York, NY and $2,750 in interest bearing deposits related to the potential acquisition of another hotel property.  As of December 31, 2012, we had $21,000 in non-interest bearing deposits on the future acquisition of the Hyatt Union Square, New York, NY.  As of December 31, 2012, we had an additional $15,000 in interest bearing deposits related to the future acquisition of Hilton Garden Inn -52nd Street, New York, NY and $1,750 in interest bearing deposits related to the potential acquisition of another hotel property. On October 24, 2012, we entered into an agreement for the future acquisition of the Hilton Garden Inn – 52nd Street, New York, NY. See below for more information on this agreement.

On October 24, 2012, we entered into a purchase and sale agreement to acquire the Hilton Garden Inn – 52nd Street in New York, NY for total consideration of $74,000. As of March 31, 2013, we had provided $15,486 to the seller as a deposit earning 10% per annum and we may fund an additional $2,000 deposit earning 10% per annum. The total consideration to the seller will consist of this $17,000 interest bearing deposit, an additional $15,000 cash to be paid to the seller upon closing and the assumption or extinguishment of a mortgage loan secured by the hotel in the original aggregate principal amount of $42,000. The transaction is expected to close shortly after the developer completes the hotel’s construction, which is anticipated for the fourth quarter of 2013. While this purchase and sale agreement secures the Company’s right to acquire the completed hotel, the Company is not assuming any significant construction risk, including the risk of schedule and cost overruns.
 
 
16

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 – DEBT

Mortgages

We had total mortgages payable at March 31, 2013 and December 31, 2012 of $604,510 and $641,160, respectively. These balances consisted of mortgages with fixed and variable interest rates, which ranged from 3.79% to 8.25% as of March 31, 2013. Included in these balances are net premiums of $3,035 and $3,245 as of March 31, 2013 and December 31, 2012, respectively, which are amortized over the remaining life of the loans. Aggregate interest expense incurred under the mortgage loans payable totaled $8,294 and $10,254 during the three months ended March 31, 2013 and 2012, 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. We have determined that certain debt service coverage ratio covenants contained in the loan agreements securing 6 of our hotel properties were not met as of March 31, 2013. Pursuant to these loan agreements, the lender has elected to escrow the operating cash flow for a number of these properties. However, these covenants do not constitute an event of default for these loans.

As of March 31, 2013, the maturity dates for the outstanding mortgage loans ranged from August 2013 to February 2018.

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, prior to maturity in accordance with the provisions of the indenture agreements.  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.  The weighted average interest rate on our two junior subordinated notes payable during the three months ended March 31, 2013 and 2012 was 3.31% and 3.55%, respectively.  Interest expense in the amount of $426 and $458 was recorded for the three months ended March 31, 2013 and 2012, respectively.

Credit Facilities

On November 5, 2012, we entered into a senior unsecured credit agreement with Citigroup Global Markets Inc. and various other lenders. The credit facility provides for a $400,000 senior unsecured credit facility consisting of a $250,000 senior unsecured revolving line of credit, and a $150,000 senior unsecured term loan. Our previous $250,000 secured credit facility was terminated and replaced by the $400,000 unsecured credit facility, and, as a result, all amounts outstanding under our $250,000 secured credit facility were repaid with borrowings from our $400,000 unsecured credit facility. The $400,000 unsecured credit facility expires on November 5, 2015, and, provided no event of default has occurred and remains uncured, we may request that the lenders renew the credit facility for two additional one-year periods. The credit facility is also expandable to $550,000 at our request, subject to the satisfaction of certain conditions.

The amount that we can borrow at any given time on our credit facility is governed by certain operating metrics of designated unencumbered hotel properties known as borrowing base assets. As of March 31, 2013, the following hotel properties were borrowing base assets:

 
17

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 – DEBT (CONTINUED)

- Holiday Inn Express, Hershey, PA
- Hampton Inn, Smithfield, RI
- Holiday Inn Express, Cambridge, MA
- Hampton Inn, West Haven, CT
- Holiday Inn Express, Camp Springs, MD
- Hampton Inn, Times Square, NY
- Holiday Inn, Wall Street, NY
- Hampton Inn, Hershey, PA
- Holiday Inn Express, Times Square, NY
- Hampton Inn, Philadelphia, PA
- Residence Inn, Norwood, MA
- Hampton Inn, Washington, DC
- Residence Inn, Langhorne, PA
- Hyatt Place, King of Prussia, PA
- Residence Inn, Carlisle, PA
- Nu Hotel, Brooklyn, NY
- Residence Inn, Framingham, MA
- Towneplace Suites, Harrisburg, PA
- Sheraton, Wilmington South, DE
- Rittenhouse Hotel, Philadelphia, PA
- Sheraton Hotel, JFK Airport, New York, NY
- Bulfinch Hotel, Boston, MA
- Candlewood Suites, Times Square, NY
- Holiday Inn Express (Water Street), New York, NY

The interest rate for the new credit facility will be based on a pricing grid with a range of one month U.S. LIBOR plus 1.75% to 2.65%. As of March 31, 2013, we borrowed $150,000 in unsecured term loans under the new credit facility, and concurrently entered into interest rate swaps which effectively fix the interest rate on these term loans to 3.19% or 3.25%. See “Note 8 – Fair Value Measurements and Derivative Instruments” for more information.

The credit agreement providing for the $400,000 revolving credit facility includes certain financial covenants and requires that we maintain: (1) a minimum tangible net worth of $1,000,000, which is calculated by adding back accumulated depreciation to the recorded value of our investment in hotel properties and subtracting certain intangible assets and debt and is subject to increases under certain circumstances; (2) annual distributions not to exceed 95% of adjusted funds from operations; and (3) certain financial ratios, including the following:

 
·
a fixed charge coverage ratio of not less than 1.40 to 1.00, which increases to 1.45 to 1.00 as of July 1, 2013 and further increase to 1.50 to 1.00 as of January 1, 2014;
 
·
a maximum leverage ratio of not more than 60%; and
 
·
a maximum secured debt leverage ratio of 55%, which decreases to 50% as of October 1, 2013 and further decreases 45% as of October 1, 2014.

The Company is in compliance with each of the covenants listed above as of March 31, 2013. As of March 31, 2013, our remaining borrowing capacity under the new credit facility was $215,061, based on our current borrowing base assets.

As of March 31, 2013, the outstanding unsecured term loan balance under the $400,000 credit facility was $150,000 and we had no outstanding borrowings on the revolving line of credit. As of December 31, 2012, the outstanding unsecured term loan was $100,000 and the revolving line of credit had no balance outstanding.
 
The Company recorded interest expense of $1,063 and $858 related to borrowings drawn on each of the aforementioned credit facilities, for the three months ended March 31, 2013 and 2012, respectively. The weighted average interest rate on our credit facilities during the three months ended March 31, 2013 and 2012 was 3.25% and 4.63%, respectively.
 
On November 5, 2010, we entered into a Revolving Credit Loan and Security Agreement with T.D. Bank, NA and various other lenders, which provided for a senior secured revolving credit facility 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 the swing line loans. The $250,000 revolving credit facility was collateralized by a first lien-security interest in all existing and future unencumbered 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 several hotel properties.

Capitalized Interest

We utilize mortgage debt and our $400,000 revolving credit facility to finance on-going capital improvement projects at our hotels. Interest incurred on mortgages and the revolving credit facility that relates to our capital improvement projects is capitalized through the date when the assets are placed in service. For the three months ended March 31, 2013 and 2012, we capitalized $278 and $363, respectively, of interest expense related to these projects.

 
18

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 – DEBT (CONTINUED)

Deferred Financing Costs

Costs associated with entering into mortgages and notes payable and our revolving line of credit are deferred and amortized over the life of the debt instruments. Amortization of deferred financing costs is recorded in interest expense.   As of March 31, 2013, deferred costs were $7,987, net of accumulated amortization of $5,367. Amortization of deferred costs for the three months ended March 31, 2013 and 2012 was $616 and $1,017, respectively.
 
Debt Payoff

On January 3, 2013, we funded an additional $50,000 in unsecured term loan borrowings under our $400,000 unsecured credit facility which was used to pay off the balance of the mortgage loan secured by the Holiday Inn Express, Times Square, New York, NY.  This mortgage was also subject to an interest rate swap, which was derecognized as a cash flow hedge as of December 31, 2012 due to this payoff.  As a result of this payoff, we expensed $261 in unamortized deferred financing costs and fees, which are included in the Loss on Debt Extinguishment caption of the consolidated statements of operations for year to date March 31, 2013.

 
19


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 
Management Agreements

Our wholly-owned taxable REIT subsidiary ("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 trustees of the Company. Our management agreements with HHMLP provide for five-year terms and are subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties are reimbursed or borne by our TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel. Management agreements with other unaffiliated hotel management companies have similar terms.

For its services, HHMLP receives a base management fee and, if a hotel exceeds certain thresholds, an incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal year and is based upon the financial performance of the hotels. For the three months ended March 31, 2013 and 2012, base management fees incurred totaled $2,266 and $2,099, respectively, and are recorded as Hotel Operating Expenses. For the three months ended March 31, 2013 and 2012, we did not incur incentive management fees.

Franchise Agreements

Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms, but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as incurred. Franchise fee expense for the three months ended March 31, 2013 and 2012 were $5,160 and $4,852, respectively, and are recorded in Hotel Operating Expenses. 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 between $2 and $3 per property and monthly information technology fees range from $1 to $2 per property. For the three months ended March 31, 2013 and 2012, the Company incurred accounting fees of $426 and $472, respectively. For the three months ended March 31, 2013 and 2012, the Company incurred information technology fees of $125 and $138, respectively. Accounting fees and information technology fees are included in Hotel Operating Expenses.

Capital Expenditure Fees

HHMLP charges a 5% fee on all capital expenditures and pending renovation projects at the properties as compensation for procurement services related to capital expenditures and for project management of renovation projects. For the three months ended March 31, 2013 and 2012, we incurred fees of $452 and $496, respectively, which were capitalized with the cost of fixed asset additions.

Acquisitions from Affiliates

We have entered into an option agreement with each of our officers and certain 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 the 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.

 
20

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)

Hotel Supplies

For the three months ended March 31, 2013 and 2012, we incurred charges for hotel supplies of $36 and $18, respectively. For the three months ended March 31, 2013 and 2012, we incurred charges for capital expenditure purchases of $5,815 and $5,002, respectively. These purchases were made from Hersha Purchasing and Design, a hotel supply company owned, in part, by certain executives and 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 $6 and $5 is included in accounts payable at March 31, 2013 and December 31, 2012, respectively.

Due From Related Parties

The due from related parties balance as of March 31, 2013 and December 31, 2012 was approximately $12,064 and $8,488, respectively. The balances primarily consisted of accrued interest due on our development loans and working capital deposits made to Hersha affiliates.

Due to Related Parties

The balance due to related parties as of March 31, 2013 and December 31, 2012 was approximately $5,088 and $4,403, respectively. The balances consisted of amounts payable to HHMLP for administrative, management, and benefit related fees.
 
Hotel Ground Rent

For the three months ended March 31, 2013 and 2012, we incurred $228 and $194, respectively, of rent expense payable pursuant to ground leases related to certain hotel properties.
 
 
21

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 - DERIVATIVES

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 liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

As of March 31, 2013, 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 March 31, 2013 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Fair Value
 
Hedged Debt
 
Type
 
Strike Rate
 
Index
 
Effective Date
 
Maturity Date
 
Notional Amount
 
March 31, 2013
   
December 31, 2012
 
HIE Times Square, New York, NY
 
Swap
  1.240%  
1-Month LIBOR + 4.00%
 
May 31, 2011
 
June 1, 2014
  $ -     -       (530 )
CY LA Westside, Culver City, LA
 
Swap
  1.097%  
1-Month LIBOR + 3.85%
 
September 29, 2011
 
September 29, 2015
  $ 30,000     (520 )     (559 )
CHH, Washington, DC
 
Swap
  0.540%  
1-Month LIBOR + 3.25%
 
February 1, 2012
 
February 1, 2015
  $ 27,423     (128 )     (143 )
Hotel 373, New York, NY
 
Cap
  2.000%  
1-Month LIBOR + 3.85%
 
May 24, 2012
 
June 1, 2015
  $ 18,744     3       6  
CY Miami, FL
 
Swap
  0.820%  
1-Month LIBOR + 3.50%
 
July 2, 2012
 
July 1, 2016
  $ 55,000     (619 )     (658 )
Subordinated Notes Payable
 
Cap
  2.000%  
3-Month LIBOR
 
July 30, 2012
 
July 30, 2014
  $ 51,548     -       -  
Unsecured Term Loan
 
Swap
  0.545%  
1-Month LIBOR + 2.65%
 
November 5, 2012
 
November 5, 2016
  $ 100,000     (95 )     (135 )
Unsecured Term Loan
 
Swap
  0.600%  
1-Month LIBOR + 2.65%
 
December 18, 2012
 
November 5, 2016
  $ 50,000     (144 )     (167 )
 
 
 
     
 
 
 
 
 
          (1,503 )     (2,186 )
 
On January 7, 2013, the Company repaid the mortgage secured by the Holiday Inn Express Times Square in New York, NY and paid $565 to settle its obligation under the swap. Due to the timing of this transaction, the hedge relationship on our interest rate swap was derecognized as of December 31, 2012.

On April 9, 2013, we entered into an interest rate cap that effectively fixes interest payment when 1 month-U.S. dollar LIBOR exceeds 2.00% on a variable rate mortgage on Hyatt Union Square, New York, NY. The notional amount of the interest rate cap is $55,000 and equals the principal of the variable rate mortgage being hedged. This interest rate cap matures on April 9, 2016. Please see “Note 2-Investments in Hotel Properties” for more information.

 
22

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 – DERIVATIVES (CONTINUED)

The fair value of our interest rate caps is included in other assets at March 31, 2013 and December 31, 2012 and the fair value of our interest rate swaps is included in accounts payable, accrued expenses and other liabilities at March 31, 2013 and December 31, 2012.

The net change in fair value of derivative instruments designated as cash flow hedges was a gain of $156 and a gain of $27 for the three months ended March 31, 2013 and 2012, respectively. These unrealized gains were reflected on our consolidated balance sheet in accumulated other comprehensive income.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate derivative. The change in net unrealized gains/losses on cash flow hedges reflects a reclassification of $296 of net unrealized gains/losses from accumulated other comprehensive income as an increase to interest expense for the three months ended March 31, 2013. For the next twelve months ending March 31, 2014, the Company estimates that an additional $1,159 will be reclassified as an increase to interest expense.

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. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the fair value hierarchy.  As of March 31, 2013, the carrying value and estimated fair value of the Company’s debt were $806,058 and $828,734, respectively.  As of December 31, 2012, the carrying value and estimated fair value of the Company’s debt were $792,708 and $814,451, respectively.
 
 
23

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 9 – SHARE BASED PAYMENTS
 
In May 2011, the Company established and our shareholders approved the Hersha Hospitality Trust 2012 Equity Incentive Plan (the “2012 Plan”) for the purpose of attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the Company.

Executives & Employees

Annual Long Term Equity Incentive Programs

To further align the interests of the Company’s executives with those of shareholders, the Compensation Committee grants annual long term equity incentive awards that are both “performance based” and “time based.”

Stock based compensation expense related to the 2012 Annual LTIP, 2011 Annual LTIP, and 2010 Annual LTIP of $968 and $933 was incurred during the three months ended March 31, 2013 and 2012, respectively.  Unearned compensation related to the 2012 Annual LTIP, 2011 Annual LTIP, and 2010 Annual LTIP as of March 31, 2013 and December 31, 2012 was $2,955 and $1,072, respectively. The following table is a summary of all unvested share awards issued to executives under the 2012 Annual LTIP, 2011 Annual LTIP, and 2010 Annual LTIP:

 
 
 
   
 
 
 
 
 
 
Shares Vested
   
Unearned Compensation
 
Original Issuance
Date
 
Shares
Issued
   
Share Price
on date of
grant
 
Vesting
Period
 
Vesting
Schedule
 
March 31, 2013
   
December 31, 2012
   
March 31, 2013
   
December 31, 2012
 
March 20, 2013 (2012 Annual LTIP)
    779,045     $ 5.95  
 3 years
 
25%/year (1)
    194,759       -     $ 2,084     $ -  
March 26, 2012 (2011 Annual LTIP)
    748,927     $ 5.45  
 3 years
 
25%/year (1)
    374,462       374,462       736       892  
March 30, 2011 (2010 Annual LTIP)
    440,669     $ 5.98  
 3 years
 
25%/year (1)
    330,500       330,500       135       180  
 
               
 
 
 
    899,721       704,962     $ 2,955     $ 1,072  
 
(1)
25% of the issued shares vested immediately upon issuance.  In general, the remaining shares vest 25% on the first through third anniversaries of the date of issuance (subject to continuous employment through the applicable vesting date).

Multi-Year LTIP

On May 7, 2010, the Compensation Committee adopted the 2010 Multi-Year LTIP.  This program had a three-year performance period, which commenced on January 1, 2010 and ended on December 31, 2012.  The common shares issuable under this program were 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 Compensation Committee of the Board of Trustees concluded that the performance criteria for this program had been met and 3,051,862 common shares were issued under this program during the three months ended March 31, 2013, of which 1,525,931 vested immediately with the remaining shares to vest on December 31, 2013. The share price on the date of grant was $5.95.  The Company accounts for these grants as market based awards where the Company estimates unearned compensation at the grant date fair value which is then amortized into compensation cost over the vesting period, which ends on December 31, 2013.  Stock based compensation expense of $798 and $798 was recorded for the three months ended March 31, 2013 and 2012, respectively, for the Multi-Year LTIP.  Unearned compensation related to the multi-year program as of March 31, 2013 and December 31, 2012, respectively, was $2,394 and $3,192.

 
24

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 9 – SHARE BASED PAYMENTS (CONTINUED)
 
Restricted Share Awards

In addition to stock based compensation expense related to awards under the Multi-Year LTIP, the 2010 Annual LTIP, the 2011 Annual LTIP and the 2012 Annual LTIP, stock based compensation expense related to restricted common shares issued to executives and employees of the Company of $489 and $351 was incurred during the three months ended March, 31, 2013 and 2012, respectively.  Unearned compensation related to the restricted share awards as of March 31, 2013 and December 31, 2012 was $4,931 and $5,420, respectively.  The following table is a summary of all unvested share awards issued to executives under the 2012 Plan and prior to equity incentive plans:
 
 
 
   
 
 
 
 
 
 
Shares Vested
   
Unearned Compensation
 
Original Issuance
Date
 
Shares
Issued
   
Share Price
on date of
grant
 
Vesting
Period
 
Vesting
Schedule
 
March 31, 2013
   
December 31, 2012
   
March 31, 2013
   
December 31, 2012
 
June 1, 2009
    744,128     $ 2.80  
 4 years
 
25%/year
    558,305       558,305       87       217  
June 1, 2010
    182,308     $ 4.63  
 2-3 years
 
25-50%/year
    139,522       139,522       33       82  
June 30, 2011
    17,692     $ 5.57  
 2-4 years
 
25-50%/year
    4,958       4,958       44       51  
April 18, 2012
    1,035,595     $ 5.47  
 5 years
 
33% Year 3, 4, 5
(1)   -       -       4,568       4,842  
June 29, 2012
    52,703     $ 5.28  
 2-4 years
 
25-50%/year
    -       -       199       228  
Total
    2,032,426          
 
 
 
    702,785       702,785     $ 4,931     $ 5,420  
 
 
(1)
On April 18, 2012, the Company entered into amended and restated employment agreements with the Company’s executive officers.  To induce the executives to agree to the substantial reduction in benefits upon certain terminations following a change of control as described in the agreements, the Company awarded an aggregate of 1,035,595 restricted common shares to the executives pursuant to the 2012 Plan.  None of these restricted common shares will vest prior to the third anniversary of the date of issuance.  Thereafter, 33.3% of each award of restricted common shares will vest on each of the third, fourth and fifth anniversaries of the date of issuance.  Vesting will acce