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, 2011

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  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  o
Accelerated filer                 x
 
Non-accelerated filer    o
Small reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes  x No
 
As of August 4, 2011, the number of Class A common shares of beneficial interest outstanding was 169,884,428 and there were no Class B common shares outstanding.
 


 
 

 
 
Hersha Hospitality Trust
Table of Contents

     
Page
       
PART I.  FINANCIAL INFORMATION
 
Item 1.
 
Financial Statements.
 
      1
      2
      4
      5
      6
Item 2.
    33
Item 3.
    48
Item 4.
    50
PART II.  OTHER INFORMATION
 
Item 1.
    51
 Item 1A.
    51
Item 2.
    51
Item 3.
    51
Item 4.
    51
Item 5.
    51
Item 6.
    51
       
      52
 
 
 

 
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 [UNAUDITED] AND DECEMBER 31, 2010
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
 
   
June 30, 2011
   
December 31, 2010
 
Assets:
           
Investment in Hotel Properties, net of Accumulated Depreciation
  $ 1,346,914     $ 1,245,851  
Investment in Unconsolidated Joint Ventures
    39,171       35,561  
Development Loans Receivable
    42,968       41,653  
Cash and Cash Equivalents
    67,280       65,596  
Escrow Deposits
    26,183       17,384  
Hotel Accounts Receivable, net of allowance for doubtful accounts of $33 and $31
    14,361       9,611  
Deferred Financing Costs, net of Accumulated Amortization of $7,441 and $5,852
    9,289       10,204  
Due from Related Parties
    7,625       5,069  
Intangible Assets, net of Accumulated Amortization of $1,210 and $1,084
    7,940       7,934  
Other Assets
    34,947       18,414  
Hotel Assets Held for Sale
    2,886       -  
                 
Total Assets
  $ 1,599,564     $ 1,457,277  
                 
Liabilities and Equity:
               
Line of Credit
  $ 28,000     $ 46,000  
Mortgages and Notes Payable, net of unamortized discount of $879 and $983
    719,637       648,720  
Accounts Payable, Accrued Expenses and Other Liabilities
    27,458       28,601  
Dividends and Distributions Payable
    12,702       9,805  
Due to Related Parties
    1,260       939  
                 
Total Liabilities
    789,057       734,065  
                 
Redeemable Noncontrolling Interests - Common Units (Note 1)
  $ 17,068     $ 19,894  
                 
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, 2011 and December 31, 2010
    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, 2011 and none issued and outstanding at December 31, 2010
    46       -  
Common Shares:  Class A, $.01 Par Value,  300,000,000 Shares Authorized at June 30, 2011 and December 31, 2010, 169,546,878 and 169,205,638 Shares Issued and Outstanding at June 30, 2011 and December 31, 2010, respectively
    1,699       1,692  
Common Shares:  Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding
    -       -  
Accumulated Other Comprehensive Loss
    (630 )     (338 )
Additional Paid-in Capital
    1,036,850       918,215  
Distributions in Excess of Net Income
    (262,790 )     (236,159 )
Total Shareholders' Equity
    775,199       683,434  
                 
Noncontrolling Interests (Note 1):
               
Noncontrolling Interests - Common Units
    18,018       19,410  
Noncontrolling Interests - Consolidated Joint Ventures
    222       474  
Total Noncontrolling Interests
    18,240       19,884  
                 
Total Equity
    793,439       703,318  
                 
Total Liabilities and Equity
  $ 1,599,564     $ 1,457,277  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 
1

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Revenue:
                       
Hotel Operating Revenues
  $ 89,346     $ 74,453     $ 146,885     $ 123,550  
Interest Income from Development Loans
    1,063       1,176       2,154       2,550  
Other Revenues
    97       111       175       199  
Total Revenues
    90,506       75,740       149,214       126,299  
                                 
Operating Expenses:
                               
Hotel Operating Expenses
    46,541       39,518       84,109       71,396  
Hotel Ground Rent
    364       354       728       646  
Real Estate and Personal Property Taxes and Property Insurance
    5,425       4,685       10,540       8,761  
General and Administrative
    2,179       1,918       4,140       4,753  
Stock Based Compensation
    1,785       1,499       3,270       2,156  
Acquisition and Terminated Transaction Costs
    1,276       221       2,091       3,557  
Loss from Impairment of Assets
    -       17       -       30  
Depreciation and Amortization
    14,400       12,681       28,374       24,643  
Total Operating Expenses
    71,970       60,893       133,252       115,942  
                                 
Operating Income
    18,536       14,847       15,962       10,357  
                                 
Interest Income
    117       16       219       57  
Interest Expense
    11,588       11,341       22,211       23,034  
Other Expense
    283       86       567       178  
Loss on Debt Extinguishment
    34       1       34       732  
Income (Loss) before Income (Loss) from Unconsolidated Joint Venture Investments and Discontinued Operations
    6,748       3,435       (6,631 )     (13,530 )
                                 
Loss from Unconsolidated Joint Ventures
    (198 )     (131 )     (1,179 )     (1,171 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    2,757       2,190       2,757       4,008  
Income from Unconsolidated Joint Venture Investments
    2,559       2,059       1,578       2,837  
                                 
Income (Loss) from Continuing Operations
    9,307       5,494       (5,053 )     (10,693 )
                                 
Discontinued Operations  (Note 12):
                               
Income (Loss) from Discontinued Operations
    41       213       (17 )     63  
                                 
Net Income (Loss)
    9,348       5,707       (5,070 )     (10,630 )
                                 
Income (Loss) Allocated to Noncontrolling Interests
    459       1,151       (618 )     (564 )
Preferred Distributions
    2,299       1,200       3,499       2,400  
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 6,590     $ 3,356     $ (7,951 )   $ (12,466 )
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 
2

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Earnings Per Share:
                       
BASIC
                       
Income (Loss) from Continuing Operations applicable to Common Shareholders
  $ 0.04     $ 0.02     $ (0.05 )   $ (0.11 )
Income (Loss) from Discontinued Operations applicable to Common Shareholders
  $ 0.00       0.00     $ (0.00 )     0.00  
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 0.04     $ 0.02     $ (0.05 )   $ (0.11 )
                                 
DILUTED
                               
Income (Loss) from Continuing Operations  applicable to Common Shareholders
  $ 0.04 *   $ 0.02 *   $ (0.05 )  *   $ (0.11 )  *
Income (Loss) from Discontinued Operations applicable to Common Shareholders
  $ 0.00 *     0.00 *   $ (0.00 )  *     0.00 *
                                 
Net Income (Loss) applicable to Common Shareholders
  $ 0.04 *   $ 0.02 *   $ (0.05 )  *   $ (0.11 ) *
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
    168,672,936       137,200,796       168,504,893       118,360,826  
Diluted
    173,687,233 *     140,284,117 *     168,504,893 *     118,360,826 *
 
*
Income (loss) allocated to noncontrolling interest in Hersha Hospitality Limited Partnership has been excluded from the numerator and units of limited partnership interest in Hersha Hospitality Limited Partnership have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact. Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the three months ended June 30, 2011 and 2010 were 7,294,791 and 9,239,135, respectively. Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the six months ended June 30, 2011 and 2010 were 7,344,630 and 9,376,419, respectively.

Unvested stock awards, contingently issuable share awards and options to acquire our common shares have been omitted from the denominator for the purpose of computing diluted earnings per share for the six months ended June 30, 2011 and 2010, since the effect of including these awards in the denominator would be anti-dilutive to loss from continuing operations applicable to common shareholders.  For the six months ended June 30, 2011, there were 509,384 anti-dilutive unvested stock awards outstanding, 1,719,502 anti-dilutive contingently issuable share awards outstanding, and 2,882,867 anti-dilutive options to acquire our common shares outstanding.  For the six months ended June 30, 2010, there were 182,499 anti-dilutive unvested stock awards outstanding, 143,122 anti-dilutive contingently issuable share awards outstanding, and 1,916,814 anti-dilutive options to acquire our common shares outstanding.  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
3

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT PER SHARE AMOUNTS]
 
   
Shareholders' Equity
   
Noncontrolling Interests
         
Redeemable Noncontrolling Interests
 
   
Series A
Preferred Shares
   
Series B
Preferred Shares
   
Class A
Common Shares
   
Class B
Common Shares
   
Additional
Paid-In
Capital
   
Other
Comprehensive
Income
   
Distributions
in Excess
of Net
Earnings
   
Total Shareholders' Equity
   
Common Units
   
Consolidated Joint Ventures
   
Total Noncontrolling Interests
   
Total
Equity
   
Common Units
 
Balance at December 31, 2010
  $ 24     $ -     $ 1,692     $ -     $ 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, 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 )
Contribution by Noncontrolling Interests in consolidated joint venture
    -       -       -       -       -       -       -       -       -       342       342       342       -  
Deconsolidation of consolidated joint venture
    -       -       -       -       -       -       -       -               (322 )     (322 )     (322 )     -  
Dividend Reinvestment Plan
    -       -       -       -       7       -       -       7       -       -       -       7       -  
Stock Based Compensation
                                                                                                       
Grants
    -       -       6       -       1,471       -       -       1,477       -       -       -       1,477       -  
Amortization
    -       -       -       -       2,973       -       -       2,973       -       -       -       2,973       -  
Comprehensive Income (Loss):
                                                                                                       
Other Comprehenive Loss
    -       -       -       -       -       (292 )     -       (292 )     -       -       -       (292 )     -  
Net Loss
    -       -       -       -       -       -       (4,452 )     (4,452 )     (204 )     (272 )     (476 )     (4,928 )     (142 )
Total Comprehensive Loss
                                                            (4,744 )     (204 )     (272 )     (476 )     (5,220 )     (142 )
                                                                                                         
Balance at June 30, 2011
  $ 24     $ 46     $ 1,699     $ -     $ 1,036,850     $ (630 )   $ (262,790 )   $ 775,199     $ 18,018     $ 222     $ 18,240     $ 793,439     $ 17,068  
                                                                                                         
                                                                                                         
Balance at December 31, 2009
  $ 24     $ -     $ 577     $ -     $ 487,481     $ (160 )   $ (185,725 )   $ 302,197     $ 27,126     $ 267     $ 27,393     $ 329,590     $ 14,733  
                                                                                                         
Unit Conversion
    -       -       18       -       8,406       -       -       8,424       (8,424 )     -       (8,424 )     -       -  
Units Issued for Acquisitions
    -       -       -       -       -       -       -       -       6,256       -       6,256       6,256       -  
Common Share Issuance, net of costs
    -       -       794       -       259,970       -       -       260,764       -       -       -       260,764       -  
Dividends and Distribution declared:
                                                                                                       
Preferred Shares ($1.00 per share)
    -       -       -       -       -       -       (2,400 )     (2,400 )     -       -       -       (2,400 )     -  
Common Shares ($0.10 per share)
    -       -       -       -       -       -       (13,824 )     (13,824 )     -       -       -       (13,824 )     -  
Common Units ($0.10 per share)
    -       -       -       -       -       -       -       -       (620 )     -       (620 )     (620 )     (307 )
Dividend Reinvestment Plan
    -       -       -       -       6       -       -       6       -       -       -       6       -  
Stock Based Compensation
                                                                                                       
Grants
    -       -       3       -       122       -       -       125       -       -       -       -       -  
Amortization
    -       -       -       -       1,970       -       -       1,970       -       -       -       1,970       -  
Comprehensive Loss:
                                                                                                       
Other Comprehensive Income
    -       -       -       -       -       (200 )     -       (200 )     -       -       -       (200 )     -  
Net Loss
    -       -       -       -       -       -       (10,066 )     (10,066 )     (537 )     233       (304 )     (10,370 )     (260 )
Total Comprehensive Loss
                                                            (10,266 )     (537 )     233       (304 )     (10,570 )     (260 )
                                                                                                         
Balance at June 30, 2010
  $ 24     $ -     $ 1,392     $ -     $ 757,955     $ (360 )   $ (212,015 )   $ 546,996     $ 23,801     $ 500     $ 24,301     $ 571,172     $ 14,166  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
4

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS]
 
   
For the Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
Operating activities:
           
Net loss
  $ (5,070 )   $ (10,630 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation
    28,315       24,698  
Amortization
    1,927       1,363  
Debt extinguishment
    -       580  
Development loan interest added to principal
    (1,315 )     (1,235 )
Equity in income of unconsolidated joint ventures
    (1,578 )     (2,837 )
Loss recognized on change in fair value of derivative instrument
    14       5  
Stock based compensation expense
    3,270       2,156  
Change in assets and liabilities:
               
(Increase) decrease in:
               
Hotel accounts receivable
    (4,596 )     (4,602 )
Escrows
    (2,374 )     756  
Other assets
    902       1,391  
Due from related parties
    (1,236 )     (952 )
Increase (decrease) in:
               
Due to related parties
    321       (528 )
Accounts Payable, Accrued Expenses and Other Liabilities
    (823 )     5,394  
Net cash provided by operating activities
    17,757       15,559  
                 
Investing activities:
               
Purchase of hotel property assets
    (100,770 )     (187,355 )
Deposits on hotel acquisitions
    (21,250 )     (1,500 )
Capital expenditures
    (12,862 )     (3,850 )
Cash paid for hotel development project
    (1,547 )     (3,441 )
Advances to capital expenditure escrows
    (2,858 )     (2,053 )
Repayments from and advances to unconsolidated joint ventures
    13,406       (13,750 )
Investment in notes receivable from unconsolidated joint venture
    (1,320 )     -  
Cash paid for franchise fee intangible
    (40 )     -  
Net cash used in investing activities
    (127,241 )     (211,949 )
                 
Financing activities:
               
Repayments of borrowings under line of credit, net
    (18,000 )     (34,500 )
Principal repayment of mortgages and notes payable
    (3,419 )     (41,283 )
Proceeds from mortgages and notes payable
    41,778       31,510  
Cash paid for deferred financing costs
    (273 )     (85 )
Proceeds from issuance of preferred stock, net
    111,160       -  
Proceeds from issuance of common stock, net
    -       260,764  
Acquisition of interest rate cap
    -       (394 )
Dividends paid on common shares
    (16,941 )     (9,741 )
Dividends paid on preferred shares
    (2,400 )     (2,400 )
Distributions paid on common partnership units
    (737 )     (936 )
Net cash provided by financing activities
    111,168       202,935  
                 
Net increase in cash and cash equivalents
    1,684       6,545  
Cash and cash equivalents - beginning of period
    65,596       11,404  
                 
Cash and cash equivalents - end of period
  $ 67,280     $ 17,949  
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
5

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 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, 2010, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as certain footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to the rules of the SEC.

We are a self-advised Maryland real estate investment trust that was organized in May 1998 and completed our initial public offering in January 1999. Our common shares are traded on the New York Stock Exchange under the symbol “HT.” We own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (“HHLP”), for which we serve as general partner. As of June 30, 2011, we owned an approximate 95.8% 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 $18,018 as of June 30, 2011 and $19,410 as of December 31, 2010.  As of June 30, 2011, there were 4,209,660 Nonredeemable Common Units outstanding with a fair market value of $23,448, based on the price per share of our common shares on the New York Stock Exchange on such date.  These units are only redeemable by the unit holders for cash or, at our option, common shares on a one-for-one basis.

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, 2011, there were 3,064,252 Redeemable Common Units outstanding with a redemption value equal to the fair value of the Redeemable Common Units, or $17,068.  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, 2011, 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 $13,273.  As of December 31, 2010, the Redeemable Common Units were valued on the consolidated balance sheets at redemption value since the Redeemable Common Units redemption value of $19,894 was greater than historical cost of $13,521.

 
6

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [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.

Shareholders’ Equity

On May 18, 2011, we completed a public offering of 4,600,000 8% Series B Cumulative Convertible Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, including 600,000 Preferred Shares subject to an overallotment option exercised by the underwriters.  Net proceeds of the offering, less expenses and underwriters commissions, were approximately $111,160.  Proceeds from the offering were used to reduce some of the indebtedness outstanding under our revolving line of credit facility and the purchase of Courtyard by Marriot, Westside, Los Angeles, CA.

Reclassification

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

 
7

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [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, 2011 and December 31, 2010: 
 
   
June 30, 2011
   
December 31, 2010
 
             
Land
  $ 262,784     $ 233,869  
Buildings and Improvements
    1,132,366       1,057,344  
Furniture, Fixtures and Equipment
    166,284       150,723  
Construction in Progress
    16,848       15,301  
      1,578,282       1,457,237  
                 
Less Accumulated Depreciation
    (231,368 )     (211,386 )
                 
Total Investment in Hotel Properties
  $ 1,346,914     $ 1,245,851  

Acquisitions

During the six months ended June 30, 2011, we acquired the following wholly owned hotel properties:

Hotel
 
Acquisition Date
 
Land
   
Buildings and
Improvements
   
Furniture
 Fixtures and
Equipment
   
Franchise
Fees, Loan
Costs, and
Leasehold
Intangible
   
Total Purchase
Price
   
Fair Value of
Assumed Debt
 
Holiday Inn Express,
     Water Street, New York, NY
 
3/25/2011
  $ 7,341     $ 28,591     $ 2,704     $ 28     $ 38,664     $ -  
Capitol Hill Suites,
     Washington, DC
 
4/15/2011
  $ 8,095     $ 35,141     $ 4,264     $ 254     $ 47,754     $ 32,500  
Courtyard by Marriot,
   Westside, Los Angeles, CA
 
5/19/2011
  $ 13,489     $ 27,025     $ 6,486     $ 148     $ 47,148     $ -  
                                                     
Total
      $ 28,925     $ 90,757     $ 13,454     $ 430     $ 133,566     $ 32,500  
 
 
8

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (continued)
 
Included in the consolidated statements of operations for the three and six months ended June 30, 2011 are total revenues of $4,702 and $4,809, respectively, and total net loss of $442 and $1,126, respectively, which represents the results of operations of the Holiday Inn Express Water Street, New York, NY, Capitol Hill Suites, Washington, DC and the Courtyard by Marriot, Westside, Los Angeles, CA since the date of acquisition of our 100% interest in the hotels, described above.

   
Three Months Ended June 30,
2011
   
Six Months Ended June 30,
2011
 
Hotel
 
Revenue
   
Net Income (Loss)
   
Revenue
   
Net (Loss) Income
 
Holiday Inn Express, Water Street, New York, NY
  $ 1,665     $ 348     $ 1,772     $ (336 )
Capitol Hill Suites, Washington, DC
    1,770       (971 )     1,770       (971 )
Courtyard by Marriot, Westside, Los Angeles, CA
    1,267       181       1,267       181  
Total
  $ 4,702     $ (442 )   $ 4,809     $ (1,126 )

Pro Forma Results (Unaudited)

The following condensed pro forma financial data is presented as if all acquisitions completed since January 1, 2010 had been completed on January 1, 2010.  Properties acquired without any operating history are excluded from the condensed pro forma operating results.  The condensed pro forma information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2010 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,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Pro Forma Total Revenues
  $ 92,026     $ 84,634     $ 155,025     $ 144,867  
Pro Forma Income (Loss) from Continuing Operations
  $ 9,726     $ 6,698     $ (3,972 )   $ (7,247 )
Income (Loss) from Discontinued Operations
    41       213       (17 )     63  
Pro Forma Net Income (Loss)
    9,767       6,911       (3,989 )     (7,184 )
(Loss) Income allocated to Noncontrolling Interest
    (476 )     (1,208 )     573       311  
Preferred Distributions
    (2,299 )     (1,200 )     (3,499 )     (2,400 )
Pro Forma Net Income (Loss) applicable to Common Shareholders
  $ 6,992     $ 4,503     $ (6,915 )   $ (9,273 )
                                 
Pro Forma Income (Loss) applicable to Common Shareholders per Common Share
                               
Basic
  $ 0.04     $ 0.03     $ (0.04 )   $ (0.08 )
Diluted
  $ 0.04     $ 0.03     $ (0.04 )   $ (0.08 )
                                 
Weighted Average Common Shares Outstanding
                               
Basic
    168,672,936       137,200,796       168,504,893       118,360,826  
Diluted
    173,687,233       140,284,117       168,504,893       118,360,826  
 
 
9

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (continued)
 
Renovation
 
On December 28, 2010, we closed on the acquisition of a parcel of land, which includes a multi-story vacant building from an unrelated third party in New Castle, DE.  The total purchase price for the parcel of land and the improvements was $15,301, which was paid in cash.  We have begun the process of converting this building into a Sheraton branded hotel.  As of June 30, 2011 we have spent $1,547 in conversion cost.

Hotel Closing

Effective March 31, 2011, we ceased operations at the Comfort Inn, located in North Dartmouth, MA and are in the process of conveying the asset to the lender.  The closure of the property coincided with the expiration of its franchise agreement.  The property has a carrying value of $1,980, as of June 30, 2011, which approximates its fair value.  See “Note 6 – Debt” for additional discussion regarding the closure of this property.

 
10

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
We account for our investment in the following unconsolidated joint ventures using the equity method of accounting.  As of June 30, 2011 and December 31, 2010, our investment in unconsolidated joint ventures consists of the following:

Joint Venture
 
Hotel Properties
 
Percent
Owned
   
Preferred
Return
   
June 30,
2011
   
December 31,
2010
 
                             
Inn American Hospitality
  at Ewing, LLC
 
Courtyard by Marriott,
  Ewing, NJ
    50.0 %    
11.0% cumulative
    $ -     $ 28  
SB Partners, LLC
 
Holiday Inn Express,
  South Boston, MA
    50.0 %     N/A       1,663       1,852  
Hiren Boston, LLC
 
Courtyard by Marriott,
  South Boston, MA
    50.0 %     N/A       4,871       -  
Mystic Partners, LLC
 
Hilton and Marriott branded
  hotels in CT and RI
    8.8%-66.7 %    
8.5%
non-cumulative
      24,973       25,935  
Metro 29th Street
  Associates, LLC
 
Holiday Inn Express,
  New York, NY
    50.0 %     N/A       7,664       7,746  
                        $ 39,171     $ 35,561  
 
On April 13, 2010, we purchased a mortgage loan secured by the Courtyard by Marriot, South Boston, MA from Hiren Boston, LLC’s lender for a purchase price of $13,750.  As a result of the purchase of this mortgage loan, we determined that we were the primary beneficiary of Hiren Boston, LLC and, as such, we ceased to account for our investment in Hiren Boston, LLC under the equity method of accounting and began accounting for Hiren Boston, LLC as a consolidated subsidiary.  Our interest in Hiren Boston, LLC was remeasured, and as a result, we recorded a gain of approximately $2,190 during the three months ended June 30, 2010.

On June 20, 2011, Hiren Boston, LLC refinanced its debt with a third party institutional lender and, as a result, our mortgage interest in the property was terminated and the outstanding principal balance of $13,750 was repaid to us in full.  We have determined that we are no longer the primary beneficiary of Hiren Boston, LLC and it is no longer a consolidated subsidiary of the Company and we have begun to account for our investment in Hiren Boston, LLC under the equity method of accounting.  Our interest in Hiren Boston, LLC has been remeasured and, as a result, we have recorded a gain of approximately $2,757 for the three and six months ended June 30, 2011.  The fair value of our interest in Hiren Boston, LLC was based on a third party appraisal, which utilized the market approach.

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 recognized during the three and six months ended June 30, 2011 and 2010 for our investments in unconsolidated joint ventures is as follows:

 
11

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Inn American Hospitality at Ewing, LLC
    -       1       (28 )     (96 )
SB Partners, LLC
    30       79       (194 )     (65 )
Hiren Boston, LLC
    -       -       -       -  
Mystic Partners, LLC
    (449 )     (415 )     (875 )     (830 )
Metro 29th Street Associates, LLC
    221       204       (82 )     (180 )
      (198 )     (131 )     (1,179 )     (1,171 )
Gain from Remeasurement of Investment in Unconsolidated Joint Venture
    2,757       2,190       2,757       4,008  
                                 
Income from Unconsolidated Joint Venture Investments
  $ 2,559     $ 2,059     $ 1,578     $ 2,837  
 
On January 1, 2010, we acquired our joint venture partner’s 52.0% membership interest in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT, and this hotel became one of our wholly-owned hotels. Due to the increase in our ownership interest in PRA Glastonbury, LLC, the value of our existing 48.0% interest was remeasured resulting in a $1,818 gain which was recorded upon our acquisition of the remaining interests in the Hilton Garden Inn, Glastonbury, CT.

The following tables set forth the total assets, liabilities, equity and components of net income (loss), including the Company’s share, related to the unconsolidated joint ventures discussed above as of June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010:

   
June 30,
2011
   
December 31,
2010
 
Assets
           
Investment in hotel properties, net
  $ 162,050     $ 144,675  
Other Assets
    29,936       27,970  
Total Assets
  $ 191,986     $ 172,645  
                 
Liabilities and Equity
               
Mortgages and notes payable
  $ 171,433     $ 156,976  
Other liabilities
    40,430       37,797  
Equity:
               
Hersha Hospitality Trust
    42,136       38,394  
Joint Venture Partner(s)
    (62,013 )     (60,522 )
Total Equity
    (19,877 )     (22,128 )
                 
Total Liabilities and Equity
  $ 191,986     $ 172,645  
 
 
12

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Room Revenue
  $ 20,373     $ 20,226     $ 36,344     $ 35,810  
Other Revenue
    6,201       5,919       10,839       10,637  
Operating Expenses
    (16,538 )     (16,108 )     (31,314 )     (31,029 )
Interest Expense
    (2,438 )     (2,760 )     (4,850 )     (6,151 )
Lease Expense
    (1,319 )     (1,324 )     (2,625 )     (2,698 )
Property Taxes and Insurance
    (1,458 )     (2,209 )     (2,899 )     (3,755 )
General and Administrative
    (1,730 )     (1,657 )     (3,390 )     (3,455 )
Loss Allocated to Noncontrolling Interests
    (64 )     97       (42 )     326  
Depreciation and Amortization
    (2,009 )     (2,774 )     (3,988 )     (5,896 )
                                 
Net Income (loss)
  $ 1,018     $ (590 )   $ (1,925 )   $ (6,211 )
 
The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures’ equity to the Company’s investment in the unconsolidated joint ventures as presented on the Company’s balance sheets as of June 30, 2011 and December 31, 2010:
 
   
June 30,
2011
   
December 31,
2010
 
Company's share of equity recorded on the joint ventures' financial statements
  $ 42,136     $ 38,394  
Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in unconsoldiated joint ventures(1)
    (2,965 )     (2,833 )
Investment in Unconsolidated Joint Ventures
  $ 39,171     $ 35,561  
 
 
(1)
Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:
 
●      
cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements;
●      
our basis in the investment in joint ventures not recorded on the joint ventures' financial statements; and
●      
accumulated amortization of our equity in joint ventures that reflect our portion of the excess of the fair value of joint ventures' assets on the date of our investment over the carrying value of the assets recorded on the joint ventures’ financial statements.  This excess investment is amortized over the life of the properties, and the amortization is included in Income from Unconsolidated Joint Venture Investments on our consolidated statement of operations.
  
 
13

 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 - DEVELOPMENT LOANS RECEIVABLE
 
Historically, we provided first mortgage and mezzanine loans to hotel developers, including entities in which certain of our executive officers and trustees own an interest, that enabled such entities to construct hotels and conduct related improvements on specific hotel projects at interest rates ranging from 10% to 11%.  These loans were initially originated as part of our acquisition strategy.  During the six months ended June 30, 2011, no such loans were originated by us.  Interest income from development loans was $1,063 and $1,176 for the three months ended June 30, 2011 and 2010, respectively.   Interest income from development loans was $2,154 and $2,550 for the six months ended June 30, 2011 and 2010, respectively.   Accrued interest on our development loans receivable was $3,727 and $3,013 as of June 30, 2011 and December 31, 2010, respectively.  Accrued interest on our development loans receivable as of June 30, 2011 does not include cumulative interest income of $6,968 which has been accrued and paid in-kind by adding it to the principal balance of certain loans as indicated in the table below.
 
Hotel Property
 
Borrower
 
Principal
Outstanding
June 30,
2011
     
Principal
Outstanding
December 31,
2010
   
Interest Rate
 
Maturity Date (1)
 
Operational Hotels