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H E R S H A
www.hersha.com
h e r s h a h o s p i t a l i t y t r u s t
Annual Report
2008
H E R S H A
12968CVR_LA:12968CVR_LA 3/31/09 9:37 AM Page 2
H E R S H A
H E R S H A H O S P I T A L I T Y T R U S T ( H T )
H E R S H A
H E R S H A H O S P I T A L I T Y T R U S T ( H T )
Hersha Hospitality Trust (HT) is
a real estate investment trust
(REIT) focused on the
acquisition and aggressive
management of primarily select
Hersha Portfolio by Hotel Brand
(1)
Marriott 33%
Hilton 29%
Intercontinental 15%
Hyatt 15%
Other 8%
(1) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
service and extended stay
Hersha Portfolio by Market Segment
(2)
hotels in metropolitan markets.
Hersha trades under the
symbol HT on the New York
Stock Exchange. As of
December 31, 2008, the
Company owned interests in
76 upper upscale, upscale,
and midscale hotels
located predominantly
in the Northeastern United
States. Qualification as a REIT
under the Internal Revenue
Code enables the Company
to distribute income to
shareholders without federal
income tax liability to
the Company.
Upscale 52%
Midscale 46%
Upper Upscale 3%
(2) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
Hersha Portfolio by Destination
(3)
Major Metro 79%
Secondary 12%
Destination 9%
(3) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
Hersha Portfolio by Location
(4)
New York Metro & New Jersey 37%
Boston Metro & New England 22%
Philadelphia Metro & Mid-Atlantic 25%
Washington, DC Metro 10%
West Coast & Arizona 6%
(4) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
Board of Trustees
Hasu P. Shah
Chairman, Hersha Hospitality Trust
Jay H. Shah
Chief Executive Officer, Hersha Hospitality Trust
Michael A. Leven
President and COO, Las Vegas Sands Corp.
Donald J. Landry
Former CEO and President, Sunburst Hospitality, Inc.
John Sabin
Executive Vice President, Phoenix Health Systems, Inc.
Thomas S. Capello
Founder & Principal, First Capital Equities
Thomas J. Hutchison III
Former CEO, CNL Hotels & Resorts, Inc.
Kiran P. Patel
Chief Investment Officer, Hersha Group
Corporate Officers
Jay H. Shah
Chief Executive Officer
Neil H. Shah
President and Chief Operating Officer
Ashish R. Parikh
Chief Financial Officer
Michael R. Gillespie
Chief Accounting Officer
David L. Desfor
Treasurer and Corporate Secretary
William J. Walsh
Vice President of Asset Management
Robert C. Hazard III
Vice President of Acquisitions and Development
Corporate Headquarters
44 Hersha Drive
Harrisburg, PA 17102
Telephone: (717) 236-4400
Facsimile: (717) 774-7383
Philadelphia Executive Offices
Penn Mutual Towers
510 Walnut Street, 9th Floor
Philadelphia, PA 19106
Telephone: (215) 238-1046
Facsimile: (215) 238-0157
Independent Auditors
KPMG LLP
Certified Public Accountants
1601 Market Street
Philadelphia, PA 19103
Telephone: (267) 256-7000
Registrar & Stock Transfer Agent
American Stock Transfer & Trust Company
10150 Mallard Creek Drive, Suite 307
Charlotte, NC 28262
Telephone: (800) 829-8432
Legal Counsel
Hunton & Williams
Riverfront Plaza
951 East Byrd Street
Richmond, Virginia 23219
Telephone: (804) 788-8200
Common Stock Information
The Common Stock
of Hersha Hospitality
Trust is traded on the New York
Stock Exchange under the Symbol “HT”
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2008
Financial Highlights
(In thousands, except per share data)
Year Ended December 31,
hotel operating results
(a)
2008
2007
2006
2005
2004
Total Revenues
$
378,338
$
366,314
$
259,502
$
$
127,170
72,076
Average Daily Rate
Occupancy
Revenue Per Available Room
$
$
139.48
71.44%
99.64
$
$
134.12
73.07%
98.00
$
$
117.91
71.75%
84.60
$
$
106.18
71.32%
75.73
$
$
97.62
67.21%
65.61
(a) Pertains to all hotels owned as of year end including the total results of hotels owned in a joint venture structure.
(In thousands except per share data)
Year Ended December 31,
hersha hospitality trust
2008
2007
2006
2005
2004
Operating Data: (Excluding Impairment Charges) (1)
Total Revenues (Including Discontinued Operations)
Net Income applicable to Common Shareholders
Adjusted Funds from Operations (2)
$
265,399
5,829
61,308
Per Share Data: (Excluding Impairment Charges) (1)
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
AFFO
Distributions to Common Shareholders
$
0.07
0.07
1.15
0.72
$
$
248,813
13,047
56,001
$
153,887
298
29,888
$
0.22
0.22
1.21
0.72
)
(0.04
)
(0.04
0.97
0.72
$
$
89,466
1,377
15,567
0.04
0.04
0.67
0.72
$
$
58,511
2,049
11,571
0.12
0.12
0.57
0.72
Balance Sheet Data: (as of December 31)
Total Assets
Total Debt
Minority Interest in Partnership
Total Shareholder’s Equity
$
1,179,455
743,781
53,520
349,963
$
1,067,607
663,008
42,845
330,405
$
968,208
580,542
25,933
331,619
$
455,355
256,521
15,147
164,703
$
261,021
111,846
16,779
119,792
(1) Operating and Per Share Data exclude charges recorded during 2008 relating to an impairment loss on one of our development loans as well as
an investment in one of our unconsolidated joint ventures.
(2) Funds from Operations (FFO) as defined by NAREIT represents net income (loss) (computed in accordance with generally accepted accounting
principles), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-
cash items, such as depreciation and amortization, and after adjustments for unconsolidated partnerhips and joint ventures. We present Adjusted
Funds From Operations (AFFO), which reflects FFO in accordance with the NAREIT definition plus the following additional adjustments: adding
back write-offs of deferred financing costs on debt extinguishment, both for consolidated and unconsolidated properties, adding back amortization of
deferred financing costs, adding back non-cash stock expense, adding back impairment charges, adding back FFO attributed to our partners in
consolidated joint ventures, and making adjustments to ground lease payments, which are required by GAAP to be amortized on a straight-line basis
over the term of the lease, to reflect the actual lease payment.
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Annual Report 2008
Fellow Shareholders:
Although 2008 began with uncertainty and the possibility of a recession of ordinary pro-
portions, the economic crisis that unfolded in the latter part of the year altered the U.S.
economic landscape in dramatic fashion. With the fall of the financial sector, the economy
retreated to a primitive, binary place where only risk and safety mattered. Managerial con-
servatism and defensive attributes of business models carried little weight as we saw all
business sectors with otherwise dissimilar risk profiles, treated with similar disregard. The
trifecta of the credit, liquidity and confidence crisis sacked the public equity markets with
an intensity and velocity that was unprecedented in the experience of this country’s busi-
ness leadership.
Against this troubled backdrop, Hersha’s portfolio demonstrated its resiliency by deliver-
ing defensive outperformance for 2008. Our core consolidated portfolio of value-orient-
ed, focused service and upscale extended stay brands is strategically situated in high bar-
rier to entry, diverse urban and suburban markets in the northeastern U.S. Our total and
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hersha hospitality trust
Hampton Inn, Philadelphia, PA
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hersha hospitality trust
Residence Inn, Langhorne, PA
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Annual Report 2008
same store consolidated portfolio achieved 1.6% and 1.1% growth in revenue per avail-
able room (RevPAR), respectively, compared to negative RevPAR growth rates across the
broader hotel sector.
We made the decision in the Spring of 2008 to issue equity to further fortify our balance
sheet in preparation for a contraction. We issued 6.6 million common shares and 2.5 mil-
lion additional operating partnership units in the first half of 2008. For the year, the
Company generated $1.15 of AFFO per diluted common share down slightly from $1.22
a year ago.
Across the last several years, Hersha has assembled a high quality portfolio of young hotels
in high barrier to entry markets that are affiliated with industry leading brands such as
Marriott, Hilton and Hyatt. Our hotels are mid priced and offer compelling value to guests,
a true competitive advantage that is of particular importance today. The hotels are in loca-
tions with varied and robust demand generators, extensive travel infrastructure and a
strong mix of corporate and leisure travelers. We typically own hotels of a modest size
that can be optimally yield managed even during periods of constrained demand. These
factors combine to create less volatility in our cash flows, leading to a more stable business
platform.
Our acquisitions underwriting follows a strict discipline and in recent years we have
become even more selective. We remained conservative as hotel trading values were
skewed by new entrants in the marketplace with unsettling investment objectives. These
temporary players came bound with cyclical momentum, plentiful equity, inexpensive debt
and aggressive underwriting standards. The ensuing frenzy disrupted the otherwise order-
ly hotel transaction market.
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Annual Report 2008
We slowed our acquisitions activity considerably in 2008 buying only six hotels. Each hotel
had characteristics that made it defensive and resilient. The hotels added to our portfo-
lio’s balance between urban and suburban markets and serve demand generators that are
less susceptible to economic contractions such as military bases and educational institu-
tions. Our portfolio is purposefully diversified to include exposure to markets with less
volatile performance and a variety of demand generators. During expansion cycles, the
stability of suburban hotels goes largely unrecognized, but our experience shows that dur-
ing downturns, the consistent contribution of these hotels to our FFO is strategically very
desirable.
Our portfolio remains the youngest in the public hotel sector. In addition to enjoying
above portfolio average growth as these hotels ramp up, the youthfulness of the portfo-
lio affords us the opportunity to responsibly save on expensive capital expenditures dur-
ing this liquidity constrained time. Additionally, guests in our segment prefer newer hotels
allowing us to drive additional market share to our hotels during a contraction and allow-
ing us to better leverage the recovery when demand eventually returns.
Though you may already be aware, it is worth mentioning again here that 80% of the port-
folio is comprised primarily of market leading, branded focused service and upscale
extended stay hotels affiliated with the most highly recognized value oriented brands in
the market. Our experience has shown that this segment of hotels offers a value propo-
sition and broad distribution platform that is viewed favorably by corporate and leisure
guests during periods of economic dislocation. We have witnessed a meaningful “trade
down” effect during past contractions when typical luxury or full service hotel customers
are compelled by corporate travel policies or their personal sensitivities to seek out
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hersha hospitality trust
Residence Inn, Williamsburg, VA
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hersha hospitality trust
Duane Street Hotel - Tribeca, New York, NY
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Annual Report 2008
reasonably priced overnight accommodations for their travel.
Hersha’s value proposition is supported by the strength of our financial position. Our bal-
ance sheet strategy avoided overleveraging the Company. We took advantage of inexpen-
sively priced debt, but maintained overall leverage at healthy and sustainable levels. We
have no meaningful debt maturities until 2013. Additionally in 2008, the Company raised
$65 million in equity and increased its credit line from $100 million to $135 million giving
considerable support to our liquidity position. We also extended the term of the credit
facility for another three years and secured an additional one year extension option
beyond the base term.
Our model and our portfolio performance enabled our paying a consistent quarterly div-
idend during 2008 making Hersha the highest dividend yielding hotel company in the sec-
tor. You may recall that we were one of only two companies that did not cut its dividend
in the aftermath of 9/11. We believe that our consistent dividend provides our sharehold-
ers some peace of mind and a base level of return through the inevitable cycles of the
economy. As we move forward during this uncertain time, we will continue to review our
dividend payout quarterly to ensure that we are able to pay it responsibly without nega-
tively impacting our cash position.
An additional factor in our outperformance in 2008 and what will prove to be a significant
driver for our success in the eventual recovery is the experienced and passionate man-
agement teams that we are privileged to lead. In a time of unprecedented uncertainty,
management expertise becomes all the more critical as the playing field may shift on a day
to day basis. Our executive management team has a 30 year tradition of owning and oper-
ating hotels and 10 years of experience with the public capital markets. The operators that
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Annual Report 2008
we engage to manage our hotels are each best in class regional companies that are
experts in day to day, multi-unit operations. Our current asset management and opera-
tional strategy is based on taking full advantage of the control and responsiveness of our
franchisee managed hotel model as compared to the limited alignment often experienced
at brand managed hotels. The increased responsiveness and limited fixed costs in our
model allow us to defend against margin deterioration to a degree with which most hotel
companies cannot compete. Our cost containment programs, will allow us to post strong
margin performance despite the weak demand environment.
Hersha is certainly not immune to the recessionary pressures that the nation is facing, but
we feel that our battle tested and results driven management team will navigate our port-
folio of hotels through the rapidly changing market conditions and challenging objectives
during this downturn. We readily admit that we are operating with the most limited visi-
bility that we have ever experienced, but we are also confident that in time visibility will
return and eventually the economy will recover. Until then, we have made it our priority
to defend our margins, drive market share and to place ourselves in a position of strength
for when we emerge on the other side of the turmoil.
Collectively, management and members of the board of trustees are among the largest
shareholders of the company and we continue to add to our ownership positions. We
continue to increase our alignment with our public shareholders because we are encour-
aged by the company’s investment proposition and believe that it is well positioned to
deliver market leading returns.
We appreciate having you as fellow shareholders and value the confidence that you have
placed in us. We will continue to update you on our progress throughout the year.
Jay H. Shah
Chief Executive Officer
Neil H. Shah
Chief Operating Officer
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hersha hospitality trust
NU Hotel, Brooklyn, NY
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hersha hospitality trust
Hersha Hospitality Properties List
(1)
New York Metro Area
Duane Street Hotel, Manhattan/Tribeca
Hotel 373 Fifth Avenue, Manhattan/Midtown
Hampton Inn, Manhattan/Chelsea
Hampton Inn, Manhattan/Herald Square
Hampton Inn, Manhattan/Seaport
Holiday Inn Express, Manhattan/Madison Square
NU Hotel, Brooklyn
Sheraton Hotel, JFK International Airport
Hilton Garden Inn, JFK International Airport
Hyatt Summerfield Suites, White Plains
Hampton Inn Brookhaven, Long Island/Farmingville
Holiday Inn Express, Long Island/Hauppauge
Holiday Inn Express Hotel and Suites, Chester
New Jersey
Courtyard by Marriott, Ewing/Princeton
Hyatt Summerfield Suites, Bridgewater
Hilton Garden Inn, Edison/Raritan Center
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Boston Metro Area
Courtyard by Marriott, Boston/Brookline
Courtyard by Marriott, South Boston
Holiday Inn Express, Cambridge
Holiday Inn Express, South Boston
Sheraton Four Points, Boston/Logan Airport
Residence Inn by Marriott, Framingham
Residence Inn by Marriott, Norwood
Hawthorn Suites, Franklin
Massachusetts/Rhode Island
Residence Inn by Marriott, North Dartmouth
Comfort Inn, North Dartmouth
Courtyard by Marriott, Warwick, RI
Hampton Inn, Smithfield, RI
Connecticut
Marriott Downtown, Hartford
Hilton Hotel, Hartford
Hilton Garden Inn, Glastonbury
Homewood Suites, Glastonbury
Mystic Marriott Hotel and Spa, Groton
Residence Inn by Marriott, Mystic
SpringHill Suites, Waterford
Residence Inn by Marriott, Southington
Courtyard by Marriott, Norwich
Residence Inn by Marriott, Danbury
Holiday Inn, Norwich
(1) HT Properties Listing as of March 1, 2009
Philadelphia Metro Area/Delaware
Hampton Inn, Center City Philadelphia
Courtyard by Marriott, Langhorne/Oxford Valley
Residence Inn by Marriott, Langhorne/Oxford Valley
Holiday Inn Express, Langhorne/Oxford Valley
Holiday Inn Express, King of Prussia/Valley Forge
Mainstay Suites, King of Prussia/Valley Forge
Sleep Inn, King of Prussia/Valley Forge
Holiday Inn Express, Frazer/Malvern
Courtyard By Marriott, Wilmington
Inn at Wilmington, Wilmington
Pennsylvania
Hampton Inn & Suites, Hershey
Holiday Inn Express, Hershey
Fairfield Inn & Suites, Allentown/Bethlehem
Comfort Inn, West Hanover/Hershey
Hilton Garden Inn, Gettysburg
Residence Inn by Marriott, Carlisle
Holiday Inn Express Hotel and Suites, Harrisburg
TownePlace Suites, Harrisburg
Hampton Inn, Carlisle
Courtyard by Marriott, Scranton
Hampton Inn, Danville
Hampton Inn, Selinsgrove
Holiday Inn Express, New Columbia
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n
a
l
t
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d
i
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Washington D.C. Metro Area
Residence Inn by Marriott, Tyson's Corner, VA
Courtyard by Marriott, Alexandria, VA
Residence Inn by Marriott, Greenbelt, MD
Hyatt Summerfield Suites, Gaithersburg, MD
Fairfield Inn, Laurel, MD
Holiday Inn Express, Camp Springs, MD
Mainstay Suites, Frederick, MD
Comfort Inn, Frederick, MD
Virginia/North Carolina
Residence Inn by Marriott, Williamsburg, VA
Springhill Suites, Williamsburg, VA
Hyatt Summerfield Suites, Charlotte, NC
California
Hyatt Summerfield Suites, Pleasant Hill/Walnut Creek, CA
Hyatt Summerfield Suites, Pleasanton/Dublin, CA
Arizona
Hyatt Summerfield Suites, Scottsdale, AZ
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Annual Report 2008
2008
Financial Statements
H E R S H A H O S P I T A L I T Y T R U S T ( H T )
H E R S H A
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HERSHA HOSPITALITY TRUST
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Section
PART I
Item 1.
Item 2.
PART II
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Business
Properties
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Page
2
7
9
10
12
17
59
59
The Annual Report contains excerpts from our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and substantially conforms with the
version filed with the Securities and Exchange Commission (“SEC”). However, the Form 10-K also contains additional information. For a free copy of our Form
10-K, please contact:
Investor Relations
Hersha Hospitality Trust
44 Hersha Drive
Harrisburg, PA 17102
Our Form 10-K and other filings with the SEC are also available on our website, www.hersha.com. The most recent certifications by our chief executive officer
and chief financial officer pursuant to the Sarbanes-Oxley Act of 2002 are filed as exhibits to our Form 10-K.
1 HERSHA 2008 ANNUAL REPORT
12968_LB:12968_LB 3/26/09 10:31 AM Page 2
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements
containing the words, “believes,” “anticipates,” “expects” and words of similar import. Such forward-looking statements relate to
future events, our future financial performance, and involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the
various factors identified in this report including, but not limited to those discussed in the sections entitled “Risk Factors,”
“Growth Strategy” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” that could
cause actual results to differ. We disclaim any obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect future events or developments, except as required by
law.
PART I
Item 1. Business
OVERVIEW
Hersha Hospitality Trust is a self-advised Maryland statutory real estate investment trust that was organized in 1998 and
completed its initial public offering in January of 1999. Our common shares are traded on the New York Stock Exchange under
the symbol “HT”. We invest primarily in institutional grade hotels in central business districts, primary suburban office markets
and stable destination and secondary markets in the Northeastern United States and select markets on the West Coast. Our primary
strategy is to continue to acquire high quality, upscale, mid-scale and extended-stay hotels in metropolitan markets with high
barriers to entry in the Northeastern United States and other markets with similar characteristics. We are structured as a real estate
investment trust (“REIT”) for U.S. federal income tax reporting purposes.
As of December 31, 2008, our portfolio consisted of 58 wholly owned limited and full service properties and various
interests in 18 limited and full service properties owned through joint venture investments. Of the 18 limited and full service
properties owned through our investment in joint ventures investments, three are consolidated. These 76 properties, with a total of
9,556 rooms, are located in Arizona, California, Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, North
Carolina, Pennsylvania, Rhode Island and Virginia and operate under leading brands, such as Marriott ®, Courtyard by Marriott
®, Residence Inn ®, Fairfield Inn ®, Springhill Suites ®, TownePlace Suites ®, Hilton ®, Hilton Garden Inn ®, Hampton Inn
®, Homewood Suites ®, Hyatt Summerfield Suites ®, Holiday Inn ®, Holiday Inn Express ®, Comfort Inn ®, Mainstay Suites ®,
Sleep Inn ®, Four Points by Sheraton ®, Sheraton Hotel ®, and Hawthorn Suites ®. In addition, we own several hotels which
operate as independent boutique hotels.
We are structured as an umbrella partnership REIT, or UPREIT, and we own our hotels and our investments in joint
ventures through our operating partnership, Hersha Hospitality Limited Partnership, or HHLP, for which we serve as general
partner. Our hotels are managed by qualified independent management companies, including Hersha Hospitality Management,
L.P., or HHMLP. HHMLP is a private management company owned by certain of our trustees, officers and other third party
investors. We have leased all of our wholly owned hotels to 44 New England Management Company, or 44 New England, our
wholly-owned taxable REIT subsidiary, or TRS. In addition, all of the hotels we own through investments in joint ventures are
leased to TRSs owned by the respective venture or to corporations owned in part by our wholly owned TRS.
AVAILABLE INFORMATION
Our address is 44 Hersha Drive, Harrisburg, PA 17102. Our telephone number is (717) 236-4400. Our Internet website
address is: www.hersha.com. We make available free of charge through our website our code of ethics, annual report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such
documents are electronically filed with, or furnished to, the SEC. The information available on our website is not, and shall not be
deemed to be, a part of this report or incorporated into any other filings we make with the SEC.
2 HERSHA 2008 ANNUAL REPORT
12968_LB:12968_LB 3/26/09 10:31 AM Page 3
INVESTMENT IN HOTEL PROPERTIES
Our operating strategy focuses on increasing hotel performance for our portfolio. The key elements of this strategy are:
· working together with our hotel management companies to increase occupancy levels and revenue per available
room, or "RevPAR", through active property-level management, including intensive marketing efforts to tour
groups, corporate and government extended stay customers and other wholesale customers and expanded yield
management programs, which are calculated to better match room rates to room demand; and
·
positioning our hotels to capitalize on increased demand in the high quality, upper-upscale, upscale, mid-scale and
extended-stay lodging segment, which we believe can be expected to follow from improving economic conditions,
by managing costs and thereby maximizing earnings.
As of December 31, 2008, we had 58 wholly owned limited and full service properties, with a total of 6,514 rooms.
INVESTMENT IN JOINT VENTURES
In addition to the direct acquisition of hotels, we may make investments in hotels through joint ventures with strategic
partners. We seek to identify acquisition candidates located in markets with economic, demographic and supply dynamics
favorable to hotel owners and operators.
As of December 31, 2008, we maintain ownership interests in 18 hotels with a total of 3,042 rooms through joint
ventures with third parties. Of the 18 hotels owned through interests in joint ventures, three are consolidated.
DEVELOPMENT LOANS AND LAND LEASES
We take advantage of our relationships with hotel developers, including entities controlled by our officers or affiliated
trustees, to identify development and renovation projects that may be attractive to us. While these developers bear the risk of
construction, we invest in hotel development projects by providing secured first mortgage or mezzanine financing to hotel
developers and through the acquisition of land that is then leased to hotel developers. In many instances, we maintain a first right
of refusal or right of first offer to purchase, at fair market value, the hotel for which we have provided development loan financing
or land leases.
As of December 31, 2008, we had an investment of $81.5 million in loans to eleven hotel development projects and a net
investment of $23.4 million in three parcels of land leased to hotel developers.
ACQUISITIONS
Our primary growth strategy is to selectively acquire high quality, upper- upscale, upscale, mid-scale and extended-stay
hotels in metropolitan markets with high barriers-to-entry. Through our extensive due diligence process, we select those
acquisition targets where we believe selective capital improvements and intensive management will increase the hotel’s ability to
attract key demand segments, enhance hotel operations and increase long-term value. We believe that current market conditions
are creating opportunities to acquire hotels at attractive prices. In executing our disciplined acquisition program, we will consider
acquiring hotels that meet the following additional criteria:
·
·
·
nationally-franchised hotels operating under popular brands, such as Marriott Hotels & Resorts, Hilton Hotels, Courtyard
by Marriott, Residence Inn by Marriott, Spring Hill Suites by Marriott, Hilton Garden Inn, Homewood Suites by Hilton,
Hampton Inn, Sheraton Hotels & Resorts, DoubleTree, Embassy Suites, Hyatt Summerfield Suites, TownePlace Suites
and Holiday Inn Express;
hotels in locations with significant barriers-to-entry, such as high development costs, limited availability of land and
lengthy entitlement processes; and
hotels in our target markets where we can realize operating efficiencies and economies of scale.
In the ordinary course of our business, we are actively considering hotel acquisition opportunities. Since our initial public
offering in 1999, we have acquired, wholly or through joint ventures, a total of 84 hotels, including 27 hotels acquired from
entities controlled by our officers or trustees. Of the 27 acquisitions from these entities, 24 were newly-constructed or newly-
renovated by these entities prior to our acquisition. Only independent trustees vote on related party acquisitions, and a majority
must approve the terms of all related party asset purchases.
3 HERSHA 2008 ANNUAL REPORT
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DISPOSITIONS
We will evaluate our hotels on a periodic basis to determine if these hotels continue to satisfy our investment criteria. We
may sell hotels opportunistically based upon management’s forecast and review of the cash flow potential for the hotel and re-
deploy the proceeds into debt reduction, development loans or acquisitions of hotels. We utilize several criteria to determine the
long-term potential of our hotels. Hotels are identified for sale based upon management’s forecast of the strength of the hotel’s
cash flows and its ability to remain accretive to our portfolio. Our decision to sell an asset is often predicated upon the size of the
hotel, strength of the franchise, property condition and related costs to renovate the property, strength of market demand
generators, projected supply of hotel rooms in the market, probability of increased valuation and geographic profile of the hotel.
All asset sales are comprehensively reviewed by our Board of Trustees, including our independent trustees. A majority of the
independent trustees must approve the terms of all asset sales. Since our initial public offering in 1999, we have sold a total of 18
hotels.
FINANCING
The relative stability of the mid-scale and upscale segment of the limited service lodging industry allows us to increase
returns to our shareholders through the prudent application of leverage. Our debt policy is to limit indebtedness to less than 67%
of the fair market values at the time of acquisition for the hotels in which we invest. We may employ a higher amount of leverage
at a specific hotel to achieve a desired return when warranted by that hotel's historical operating performance and may use greater
leverage across our portfolio if and when warranted by prevailing market conditions.
PROPERTY MANAGEMENT
We work closely with our hotel management companies to operate our hotels and increase same hotel performance for
our portfolio. Through our TRS and our investment in joint ventures, we have retained the following management companies to
operate our hotels, as of December 31, 2008:
Manager
HHMLP
Waterford Hotel Group
LodgeWorks
Jiten Management
Marriott
Total
Wholly Owned
Joint Ventures
Total
Hotels
50
-
-
7
1
58
Rooms
5,306
-
1,005
-
203
6,514
Hotels
7
9
-
-
2
18
Rooms
1,052
1,708
-
282
-
Hotels
57
9
7
2
1
Rooms
6,358
1,708
1,005
282
203
3,042
76
9,556
Each management agreement provides for a set term and is subject to early termination upon the occurrence of defaults
and certain other events described therein. As required under the REIT qualification rules, all managers, including HHMLP, must
qualify as an “eligible independent contractor” during the term of the management agreements.
Under the management agreements, the manager generally pays the operating expenses of our hotels. All operating
expenses or other expenses incurred by the manager 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.
Our managers are not obligated to advance any of their own funds for operating expenses of a hotel or to incur any liability in
connection with operating a hotel.
For their services, the managers receive a base management fee, and if a hotel meets and exceeds certain thresholds, an
additional incentive management fee. The base management fee for a hotel is due monthly and is generally equal to 3% of the
gross revenues associated with that hotel for the related month.
CAPITAL IMPROVEMENTS, RENOVATION AND REFURBISHMENT
We have established capital reserves for our hotels to maintain the hotels in a condition that complies with their
respective franchise licenses among other requirements. In addition, we may upgrade the hotels in order to capitalize on
opportunities to increase revenue, and, as deemed necessary by our management, to seek to meet competitive conditions and
preserve asset quality. We will also renovate hotels when we believe the investment in renovations will provide an attractive
return to us through increased revenues and profitability and is in the best interests of our shareholders. We maintain a capital
expenditures policy by which replacements and renovations are monitored to determine whether they qualify as capital
improvements. All items that are deemed to be repairs and maintenance costs are expensed and recorded in Hotel Operating
Expenses.
4 HERSHA 2008 ANNUAL REPORT
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OPERATING PRACTICES
Our managers utilize centralized accounting and data processing systems, which facilitate financial statement and budget
preparation, payroll management, quality control and other support functions for the on-site hotel management team. Our
managers also provide centralized control over purchasing and project management (which can create economies of scale in
purchasing) while emphasizing local discretion within specific guidelines.
DISTRIBUTIONS
We have made forty consecutive quarterly distributions to the holders of our common shares since our initial public
offering in January 1999 and intend to continue to make regular quarterly distributions to our shareholders as approved by our
Board of Trustees. The following table sets forth distribution information for the last two calendar years.
Class A
Common and Limited
Partnership Unit Per
Share Distribution
Amount
$
$
$
$
0.18
0.18
0.18
0.18
$
$
$
$
0.18
0.18
0.18
0.18
Record Date
Payment Date
Series A Preferred
Per Share
Distribution
Amount
3/31/2008
6/30/2008
9/30/2008
1/5/2009
3/30/2007
6/29/2007
9/28/2007
1/5/2008
4/16/2008
7/16/2008
10/16/2008
1/16/2009
$
$
$
$
0.50
0.50
0.50
0.50
4/17/2007
7/17/2007
10/16/2007
1/16/2008
$
$
$
$
0.50
0.50
0.50
0.50
Quarter to which
Distribution Relates
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Record Date
Payment Date
4/1/2008
7/1/2008
10/1/2008
1/1/2009
4/1/2007
7/1/2007
10/1/2007
1/1/2008
4/15/2008
7/15/2008
10/15/2008
1/15/2009
4/16/2007
7/16/2007
10/15/2007
1/15/2008
Our Board of Trustees will determine the amount of our future distributions in its sole discretion and its decision will
depend on a number of factors, including the amount of funds from operations, our partnership’s financial condition, debt service
requirements, capital expenditure requirements for our hotels, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the trustees deem relevant. Our ability to make distributions will depend on the profitability and
cash flow available from our hotels. There can be no assurance we will continue to pay distributions at the rates above or any
other rate. Additionally, we may, if necessary and allowable, pay taxable dividends of our shares or debt securities to meet the
distribution requirements.
SEASONALITY
Our hotels’ operations historically have been seasonal in nature, reflecting higher occupancy rates during the second and
third quarters. This seasonality can be expected to cause fluctuations in our quarterly operating revenues and profitability. Hotel
revenue is generally greater in the second and third quarters than in the first and fourth quarters. There are no assurances we will
be able to continue to make quarterly distributions at the current rate.
COMPETITION
The upscale and mid-scale, limited service segment of the hotel business is highly competitive. Among many other
factors, our hotels compete on the basis of location, room rates, quality, service levels, reputation, and reservation systems. There
are many competitors in our market segments and new hotels are always being constructed. Additions to supply create new
competitors, in some cases without corresponding increases in demand for hotel rooms.
We also compete for hotel acquisitions with entities that have investment objectives similar to ours. This competition
could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property
owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
EMPLOYEES
As of December 31, 2008, we had 24 employees who were principally engaged in managing the affairs of the company
unrelated to property management. Our relations with our employees are satisfactory.
5 HERSHA 2008 ANNUAL REPORT
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FRANCHISE AGREEMENTS
We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of
a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing
programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized
reservation systems. Most of our hotels operate under franchise licenses from national hotel franchisors, including:
Franchisor
Marriott International
Hilton Hotels Corporation
Intercontinental Hotel Group
Global Hyatt Corporation
Starwood Hotels
Choice Hotels International
Franchise
Marriott, Residence Inn, Springhill Suites, Courtyard by Marriott, Fairfield Inn, TownePlace Suites
Hilton, Hilton Garden Inn, Hampton Inn, Homewood Suites
Holiday Inn, Holiday Inn Express, Holiday Inn Express & Suites
Hyatt Summerfield Suites, Hawthorn Suites
Four Points by Sheraton, Sheraton Hotels
Comfort Inn, Comfort Suites, Sleep Inn, Mainstay Suites
We anticipate that most of the hotels in which we invest will be operated pursuant to franchise licenses.
The franchise licenses generally specify certain management, operational, record-keeping, accounting, reporting and
marketing standards and procedures with which the franchisee must comply. The franchise licenses obligate our lessees to comply
with the franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services that may be provided by our lessees, display of
signage, and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common
areas. In general, the franchise licenses require us to pay the franchisor a fee typically ranging between 6.0% and 9.3% of our
hotel revenues.
TAX STATUS
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with
our taxable year ended December 31, 1999. As long as we qualify for taxation as a REIT, we generally will not be subject to
Federal income tax on the portion of our income that is currently distributed to shareholders. If we fail to qualify as a REIT in any
taxable year and do not qualify for certain statutory relief provisions, we will be subject to Federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate tax rates. Even if we qualify for taxation as a
REIT, we may be subject to certain state and local taxes on our income and property and to Federal income and excise taxes on
our undistributed income.
We may own up to 100% of one or more TRSs. A TRS is a taxable corporation that may lease hotels under certain
circumstances, provide services to us, and perform activities such as third party management, development, and other independent
business activities. Overall, no more than 25% of the value of our assets may consist of securities of one or more TRS. In addition,
no more than 25% of our gross income for any year may consist of dividends from one or more TRSs and income from certain
non-real estate related sources.
A TRS is permitted to lease hotels from us as long as the hotels are operated on behalf of the TRS by a third party
manager who satisfies the following requirements:
1. such manager is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging
facilities” for any person unrelated to us and the TRS;
2. such manager does not own, directly or indirectly, more than 35% of our shares;
3. no more than 35% of such manager is owned, directly or indirectly, by one or more persons owning 35% or more of our
shares; and
4. we do not directly or indirectly derive any income from such manager.
The deductibility of interest paid or accrued by a TRS to us is limited to assure that the TRS is subject to an appropriate
level of corporate taxation. A 100% excise tax is imposed on transactions between a TRS and us or our tenants that are not on an
arm’s-length basis.
FINANCIAL INFORMATION ABOUT SEGMENTS
We are in the business of acquiring equity interests in hotels, and we manage our business in one reportable segment. See
Item 8 of this Annual Report on Form 10-K for segment financial information.
6 HERSHA 2008 ANNUAL REPORT
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Item 2. Properties
The following table sets forth certain information with respect to the 58 hotels we wholly owned as of December 31,
2008 which are consolidated on the Company’s financial statements.
Name
Comfort Inn
Courtyard
Fairfield Inn
Hampton Inn
Hawthorn Suites
Hilton Garden Inn
Holiday Inn
Holiday Inn Express
Holiday Inn Express & Suites
Independent
Mainstay
Residence Inn
Sleep Inn
Sheraton Hotel
Summerfield Suites
TownePlace Suites
TOTAL ROOMS
Location
North Dartmouth, MA
Harrisburg, PA
Frederick, MD
Alexandria, VA
Scranton, PA
Langhorne, PA
Brookline/Boston, MA
Wilmington, DE
Bethlehem, PA
Laurel, MD
Brookhaven, NY
Chelsea/Manhattan, NY
Hershey, PA
Carlisle,PA
Danville, PA
Selinsgrove, PA
Herald Square, Manhattan, NY
Philadelphia, PA
Seaport, NY
Smithfield, RI
Franklin, MA
JFK Airport, NY
Edison, NJ
Gettysburg, PA
Norwich, CT
Hauppauge, NY
Cambridge, MA
Hershey, PA
New Columbia, PA
Malvern, PA
Oxford Valley, PA
Chester, NY
Camp Springs, MD
Harrisburg, PA
King of Prussia, PA
Wilmington, DE
Fifth Ave, NY
TriBeCa, NY
Brooklyn, NY
Valley Forge, PA
Frederick, MD
North Dartmouth, MA
Tysons Corner, VA
Framingham, MA
Greenbelt, MD
Norwood, MA
Langhorne, PA
Carlisle,PA
Valley Forge, PA
JFK Airport, NY
White Plains, NY
Bridgewater, NJ
Gaithersburg, MD
Pleasant Hill, CA
Pleasanton, CA
Scottsdale, AZ
Charlotte, NC
Harrisburg, PA
Year Opened
Number of Rooms
1986
1998
2004
2006
1996
2002
2003
1999
1997
1999
2002
2003
1999
1997
1998
1996
2005
2001
2006
2008
1999
2005
2003
2004
2006
2001
1997
1997
1997
2004
2004
2006
2008
1997
2004
1999
2007
2008
2008
2000
2001
2002
1984
2000
2002
2006
2007
2007
2000
2008
2000
1998
1998
2003
1998
1999
1989
2008
84
81
73
203
120
118
188
78
103
109
161
144
110
95
72
75
136
250
65
101
100
188
132
88
134
133
112
85
81
88
88
80
127
77
155
71
70
45
93
69
72
96
96
125
120
96
100
78
87
150
159
128
140
142
128
164
144
107
6,514
7 HERSHA 2008 ANNUAL REPORT
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The following table sets forth certain information with respect to the 18 hotels we owned through joint ventures with
third parties as of December 31, 2008. Of the 18 properties owned through interests in joint ventures, three are consolidated.
Name
Courtyard
Four Points - Sheraton
Hilton
Homewood Suites
Marriott
Residence Inn
Holiday Inn Express
Hilton Garden Inn
Springhill Suites
TOTAL ROOMS
Location
Norwich, CT
South Boston, MA
Warwick, RI
Ewing/Princeton, NJ
Revere/Boston, MA
Hartford, CT
Glastonbury, CT
Mystic, CT
Hartford, CT
Danbury, CT
Mystic, CT
Southington, CT
Williamsburg, VA
South Boston, MA
Manhattan, NY
Glastonbury, CT
Waterford, CT
Williamsburg, VA
Year Opened
Number of
Rooms
HHLP
Ownership
in Asset
HHLP
Preferred
Return
Consolidated/
Unconsolidated
1997
2005
2003
2004
2001
2005
2006
2001
2005
1999
1996
2002
2002
1998
2006
2003
1998
2002
144
164
92
130
180
393
136
285
409
78
133
94
108
118
228
150
80
120
3,042
66.7%
50.0%
66.7%
50.0%
55.0%
8.8%
48.0%
66.7%
15.0%
66.7%
66.7%
44.7%
75.0%
50.0%
50.0%
48.0%
66.7%
75.0%
8.5% Unconsolidated
N/A Unconsolidated
8.5% Unconsolidated
11.0% Unconsolidated
12.0% Consolidated
8.5% Unconsolidated
10.0% Unconsolidated
8.5% Unconsolidated
8.5% Unconsolidated
8.5% Unconsolidated
8.5% Unconsolidated
8.5% Unconsolidated
12.0% Consolidated
N/A Unconsolidated
N/A Unconsolidated
11.0% Unconsolidated
8.5% Unconsolidated
12.0% Consolidated
8 HERSHA 2008 ANNUAL REPORT
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
SHARE PERFORMANCE GRAPH
The following graph compares the yearly change in our cumulative total shareholder return on our common shares for the
period beginning December 31, 2003 and ending December 31, 2008, with the yearly changes in the Standard & Poor’s 500 Stock
Index (the S&P 500 Index), the Russell 2000 Index, and the SNL Hotel REITs Index (“Hotel REIT Index”) for the same period,
assuming a base share price of $100.00 for our common shares, the S&P 500 Index, the Russell 2000 Index and the Hotel REIT
Index for comparative purposes. The Hotel REIT Index is comprised of eleven publicly traded REITs which focus on investments
in hotel properties. Total shareholder return equals appreciation in stock price plus dividends paid and assumes that all dividends
are reinvested. The performance graph is not indicative of future investment performance. We do not make or endorse any
predictions as to future share price performance:
Hersha Hospitality Trust
Russell 2000
SNL Hotel REITs Index
S&P 500
Period Ending December 31,
2003
2004
2005
2006
2007
$
100.00
100.00
100.00
100.00
$
122.25
118.33
132.65
110.88
$
103.64
123.72
145.65
116.32
$
140.21
146.44
187.33
134.69
$
123.21
144.15
145.80
142.09
2008
$
44.98
95.44
58.32
89.52
Total Return Performance
250
200
e
u
l
a
V
x
e
d
n
I
150
100
50
0
12/31/2003
12/30/2004
12/30/2005
12/31/2006
12/31/2007
12/31/2008
Hersha
Russell 2000
SNL US REIT Hotel
S&P 500
9 HERSHA 2008 ANNUAL REPORT
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Item 6. Selected Financial Data
The following sets forth selected financial and operating data on a historical consolidated basis. The following data
should be read in conjunction with the financial statements and notes thereto and Management’s Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form 10-K. Where applicable, the operating results of
certain real estate assets which have been sold or otherwise qualify as held for disposition are included in discontinued operations
for all periods presented.
HERSHA HOSPITALITY TRUST
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Revenue:
Hotel Operating Revenues
2008
2007
2006
2005
2004
$ 250,464
$ 229,461
$ 132,354
$ 65,493
$ 33,228
Interest Income From Development Loans
7,890
6,046
2,487
3,940
2,191
Land Lease Revenue
Hotel Lease Revenue
Other Revenues
Total Revenue
Operating Expenses:
Hotel Operating Expenses
Hotel Ground Rent
Land Lease Expense
5,363
4,860
2,071
-
-
-
-
-
1,054
980
737
529
-
1,192
176
264,771
241,347
137,649
69,962
36,787
144,972
130,910
76,694
38,573
19,875
1,040
856
804
2,939
2,721
1,189
433
-
3,374
4,909
41
-
504
-
2,129
3,118
-
-
4,754
30,380
Real Estate and Personal Property Taxes and Property Insurance
12,953
11,349
5,979
General and Administrative
Acquisition and Terminated Transaction Costs
Impairment of Development Loan Receivable and Other Asset
8,714
7,953
5,820
380
149
316
21,004
-
-
Depreciation and Amortization
Total Operating Expenses
Operating Income
Interest Income
Interest expense
Other Expense
Loss on Debt Extinguishment
(Loss) Income before income (loss) from Unconsolidated Joint Venture Investments,
Distributions to Preferred Unitholders, Minority Interests
and Discontinued Operations
Income from Unconsolidated Joint Venture Investments
Impairment on Unconsolidated Joint Venture Assets
Net (Loss) Income from Unconsolidated Joint Venture Investments
(Loss) Income Before Distribution to Preferred Unitholders, Minority Interest
and Discontinued Operations
40,998
33,863
18,420
233,000
187,801
109,222
8,336
55,666
31,771
53,546
28,427
14,296
6,407
306
686
43,156
42,115
129
83
1,568
-
1,182
25,123
102
1,485
602
12,167
12
-
241
4,155
12
-
(12,776)
12,034
2,899
2,719
2,481
1,373
3,476
1,799
457
481
(1,890)
-
-
-
-
(517)
3,476
1,799
457
481
(13,293)
15,510
4,698
3,176
2,962
Distributions to Preferred Unitholders
-
-
-
-
(Loss) Income Allocated to Minority Interest in Continuing Operations
(2,053)
1,773
579
122
3,054
499
307
2,156
(11,240)
13,737
4,119
(Loss) Income from Continuing Operations
Discontinued Operations, net of minority interest:
Gain on Disposition of Hotel Properties
(Loss) Income from Discontinued Operations
Income from Discontinued Operations
Net (Loss) Income
Preferred Distributions
Net (Loss) Income applicable to Common Shareholders
2,452
3,745
693
1,161
-
(20)
365
286
2,432
4,110
979
(918)
243
(107)
(107)
(8,808)
17,847
5,098
3,297
2,049
4,800
$ (13,608)
4,800
$ 13,047
4,800
$ 298
1,920
$ 1,377
-
$ 2,049
Basic (Loss) Income from Continuing Operations applicable to Common Shareholders
Diluted (Loss) Income from Continuing Operations applicable to Common Shareholders (1)
Dividends declared per Common Share
$ (0.36)
$ 0.22
$ (0.03)
$
0.06
$
0.13
(0.36)
0.22
(0.03)
0.72
0.72
0.72
0.06
0.72
0.13
0.72
10 HERSHA 2008 ANNUAL REPORT
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Balance Sheet Data
Net investment in hotel properties
Assets Held for Sale
Minority interest in Partnership
Shareholder's equity
Total assets
Total debt
Debt related to Assets Held for Sale
Other Data
Funds from Operations (2)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Weighted average shares outstanding
Basic
Diluted (1)
2008
2007
2006
2005
2004
$ 982,082
$ 893,297
$ 807,784
$ 317,980
$
163,923
-
-
-
3,407
53,520
42,845
25,933
15,147
349,963
330,405
331,619
164,703
1,179,455
1,067,607
968,208
455,355
743,781
663,008
580,542
256,146
-
-
-
375
18,758
16,779
119,792
261,021
98,788
13,058
$ 31,441
$ 49,822
$ 25,936
$ 14,495
$ 10,539
$ 53,894
$ 59,300
$ 27,217
$ 15,002
$ 12,148
$ (114,870)
$ (46,027)
$ (413,881)
$ (190,825)
$ (78,378)
$ 64,346
$ (11,262)
$ 388,200
$ 163,989
$ 46,137
45,184,127
45,184,127
40,718,724
40,718,724
27,118,264
27,118,264
20,293,554
20,299,937
16,391,805
16,391,805
(1) Income allocated to minority interest in the Partnership has been excluded from the numerator and Partnership units
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.
(2) See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds From
Operations” for an explanation of FFO, why we believe FFO is a meaningful measure of our operating performance and a
reconciliation of FFO to net income calculated in accordance with GAAP.
11 HERSHA 2008 ANNUAL REPORT
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All statements contained in this section that are not historical facts are based on current expectations. Words such as
“believes”, “expects”, “anticipate”, “intends”, “plans” and “estimates” and variations of such words and similar words also
identify forward-looking statements. Our actual results may differ materially. We caution you not to place undue reliance on any
such forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new
information, subsequent events or any other circumstances.
GENERAL
As of December 31, 2008, we owned interests in 76 hotels in the eastern United States including interests in 18 hotels
owned through joint ventures. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead,
we must lease our hotels to a third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to
manage the hotels. As of December 31, 2008 we have leased all of our hotels to a wholly-owned TRS, a joint venture owned
TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities
have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We
intend to lease all newly acquired hotels to a TRS.
The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly
receives all revenue from, and funds all expenses relating to hotel operations. The TRS is also subject to income tax on its
earnings.
During the year ended December 31, 2008, the U.S. economy has been influenced by financial market turmoil, growing
unemployment and declining consumer sentiment. As a result, the lodging industry is experiencing slowing growth or negative
growth which could have a negative impact on our future results of operations and financial condition. For the year ended
December 31, 2008, we have seen increases in Average Daily Rate (“ADR”) and Revenue Per Available Room (“RevPAR”), in
part, as a result of our strategy of investing in high quality upscale hotels in high barrier to entry markets, including gateway
markets such as the New York City metro market. While we have seen increases in ADR and RevPAR in 2008, these increases
were not at the levels realized in the previous year and we saw decreases in these measures in the fourth quarter of 2008.
The turmoil in the financial markets has caused credit to significantly tighten making it more difficult for hotel
developers to obtain financing for development projects or for hotels without an operating history. This could have a negative
impact on the collectability of our portfolio of development loans receivable. We monitor this portfolio to determine the
collectability of the loan principal and interest accrued. We will continue to monitor this portfolio on an on-going basis. For more
information, please see “Note 4 – Development Loans Receivable and Land Leases.”
In addition, the tightening credit markets have made it more difficult to finance the acquisition of new hotel properties or
refinance existing hotel properties that do not have a history of profitable operations. We monitor the maturity dates of our debt
obligations and take steps in advance of the debt becoming due to extend or refinance the obligations. Please refer to “Item
7A. Quantitative and Qualitative Disclosures About Market Risk” for a discussion of our debt maturities.
The following table outlines operating results for the Company’s portfolio of wholly owned hotels and those owned
through joint venture interests that are consolidated in our financial statements for the three years ended December 31, 2008, 2007
and 2006:
CONSOLIDATED HOTELS:
Year Ended
2008
Year Ended
2007
2008
vs. 2007
% Variance
Year Ended
2006
2007
vs. 2006
% Variance
Rooms Available
Rooms Occupied
Occupancy
Average Daily Rate (ADR)
Revenue Per Available Room (RevPAR)
2,423,433
1,742,468
71.90%
136.59
98.21
$
$
2,248,253
1,656,158
73.66%
131.26
96.69
$
$
7.8%
5.2%
(1.8%)
4.1%
1.6%
1,472,318
1,065,825
72.39%
116.23
84.14
$
$
Room Revenues
Hotel Operating Revenues
Hotel Operating Revenues from Discontinued Operations
237,995,147
250,463,773
$
$
$
-
$
$
$
217,393,817
229,460,728
6,684,522
9.5%
9.2%
N/A
$
$
$
123,882,745
132,354,355
15,847,421
52.7%
55.4%
1.3%
12.9%
14.9%
75.5%
73.4%
N/A
12 HERSHA 2008 ANNUAL REPORT
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The following table outlines operating results for the three years ended December 31, 2008, 2007 and 2006 for hotels we
own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property
including our interest and the interests of our joint venture partners and other minority interest holders.
UNCONSOLIDATED JOINT VENTURES:
Rooms Available
Rooms Occupied
Occupancy
Average Daily Rate (ADR)
Revenue Per Available Room (RevPAR)
Year Ended
2008
Year Ended
2007
963,892
677,485
70.29%
146.91
103.26
$
$
954,114
682,169
71.50%
144.51
103.32
$
$
2008
vs. 2007
% Variance
Year Ended
2006
2007
vs. 2006
% Variance
1.0%
(0.7%)
(1.2%)
1.7%
(0.1%)
879,384
613,272
69.74%
132.54
92.43
$
$
8.5%
11.2%
1.8%
9.0%
11.8%
21.3%
17.0%
Room Revenues
Total Revenues
$
$
99,530,317
127,874,193
$
$
98,580,629
130,167,451
1.0%
(1.8%)
$
$
81,285,744
111,301,348
Revenue per available room (“RevPAR”) for the year ended December 31, 2008 increased 1.6% for our consolidated
hotels and decreased 0.1% for our unconsolidated hotels when compared to the same period in 2007. This represents a
deceleration in the rate of increase in RevPAR when compared to the increase experienced during the year ended December 31,
2007 over the same period in 2006. The deceleration of our growth in RevPAR is primarily due to deteriorating economic
conditions in 2008 and the stabilization of hotel properties acquired in the previous years.
The increase in revenue per available room (“RevPAR”) during the year ended December 31, 2007 was due primarily to
the Company’s broadened strategic portfolio focus on stronger central business districts and primary suburban office parks; the
size of the recent acquisitions as a percentage of the portfolio; franchise affiliations with stronger brands, such as Hyatt
Summerfield Suite, Hilton Garden Inn, Residence Inn and Courtyard by Marriott; and a focus on improving the average daily rate
(“ADR”). The increase in both rooms and total revenue can be attributed primarily to the hotels acquired during the respective
periods.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2008 TO DECEMBER 31, 2007
(dollars in thousands, except per share data)
Revenue
Our total revenues for the year ended December 31, 2008 consisted of hotel operating revenues, interest income from our
development loan program, land lease revenue, and other revenue. Hotel operating revenues are recorded for wholly owned hotels
that are leased to our wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial
statements. Hotel operating revenues increased $21,003, or 9.2%, from $229,461 for the year ended December 31, 2007 to
$250,464 for the same period in 2008. The increase in revenues is primarily attributable to the acquisitions consummated in 2008
and improved RevPAR and occupancy at certain of our hotels. We acquired interests in the following six consolidated hotels since
December 31, 2007:
Brand
Location
Duane Street Hotel (TriBeCa)
TownePlace Suites
Sheraton Hotel
Holiday Inn Express
nu Hotel
Hampton Inn & Suites
New York, NY
Harrisburg, PA
JFK Airport, Jamaica, NY
Camp Springs, MD
Brooklyn, NY
Smithfield, RI
Acquisition
Date
1/4/2008
5/8/2008
6/13/2008
6/26/2008
7/7/2008*
8/1/2008
Rooms
45
107
150
127
93
101
2008
Total Revenue
$ 3,688
1,755
3,931
1,313
2,314
848
623
$ 13,849
*The property was purchased on 1/14/2008, but did not open for business until 7/7/2008.
13 HERSHA 2008 ANNUAL REPORT
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Revenues for all six hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel
operating revenues for the year ended December 31, 2008 included revenues for a full year related to the following six hotels that
were purchased during the year ended December 31, 2007:
Brand
Residence Inn
Residence Inn
Holiday Inn Express
Hampton Inn
Independent
Holiday Inn
Location
Langhorne, PA
Carlisle, PA
Chester, NY
Seaport, NY
373 Fifth Avenue
Norwich, CT
Acquisition
Date
1/8/2007
1/10/2007
1/25/2007
2/1/2007
6/1/2007
7/1/2007
Rooms
100
78
80
65
70
134
2008
Total Revenue
$ 4,062
2,417
2,337
5,833
4,562
3,297
2007
Total Revenue
$ 3,352
2,091
2,367
5,200
3,051
1,689
527
$ 22,508
$ 17,750
We invest in hotel development projects by providing secured first mortgage or mezzanine financing to hotel developers
and through the acquisition of land that is then leased to hotel developers. Interest income is earned on our development loans at
rates ranging between 10.0% and 20.0%. Interest income from development loans receivable was $7,890 for the year ended
December 31, 2008 compared to $6,046 for the same period in 2007. The average balance of development loans receivable
outstanding in 2008 was higher than the average balance outstanding in 2007. This resulted in a $1,844, or 30.5% increase in
interest income. For one of our development loans to an unaffiliated developer, we recorded an impairment charge as of
December 31, 2008 for the remaining principal of $18,748, which is net of unamortized discount and loan fees in the amount of
$1,252. The loan was deemed to be fully impaired when the developer was unable to obtain additional construction financing to
complete the project and consequently defaulted under his senior mortgage loan. The project, located in Brooklyn, New York,
NY, was to include hotel, residential and retail components, however, the land acquisition financing and our loan were not
sufficient to fund the ongoing construction. A receivable for uncollected interest income of $569, which is net of unrecognized
deferred loan fees of $143, was also recorded as an impairment charge. In connection with the development loan, we also hold an
option to acquire an interest in the hotel upon completion of the development project. This option was valued at $1,687 at its
inception and is deemed to be fully impaired. The total impairment charge recorded during the year ended December 31, 2008
related to this development loan and option was $21,004.
In 2006 we acquired two parcels of land, and in 2007 we acquired an additional two parcels of land, which are being
leased to hotel developers. The hotel developers are owned in part by certain executives and affiliated trustees of the
Company. Our net investment in these parcels is approximately $23,366. Each land parcel is leased at a minimum rental rate of
10% of our net investment in the land. Additional rents are paid by the lessee for the principal and interest on the mortgage, real
estate taxes and insurance. During the year ended December 31, 2008, we recorded $5,363 in land lease revenue from these
parcels. We incurred $2,939 in expense related to these land leases resulting in a contribution of $2,424 to our operating income
during the year ended December 31, 2008.
Other revenue consists primarily of fees earned for asset management services provided to properties owned by two of
our unconsolidated joint ventures. Other revenues increased from $980 for the year ended December 31, 2007 to $1,054 during
the year ended December 31, 2008.
For the year ended December 31, 2008, interest income decreased $380 compared to the same period in 2007. Increased
levels of interest income in 2007 resulted from higher levels of interest bearing deposits related to the acquisition of hotel
properties during 2007.
Expenses
Total hotel operating expenses increased 10.7% to approximately $144,972 for the year ended December 31, 2008 from
$130,910 for the year ended December 31, 2007. Consistent with the increase in hotel operating revenues, hotel operating
expenses increased primarily due to the acquisitions consummated since the comparable period in 2007, as mentioned above. The
acquisitions also resulted in an increase in depreciation and amortization from $33,863 for the year ended December 31, 2007 to
$40,998 for the year ended December 31, 2008. Similarly, real estate and personal property tax and property insurance increased
$1,604, or 14.1%, in the year ended December 31, 2008 when compared to the same period in 2007.
General and administrative expense increased by approximately $761 from $7,953 in 2007 to $8,714 in 2008. General
and administrative expenses increased primarily to increased stock based compensation costs associated with the issuance of
additional stock awards in June 2008.
14 HERSHA 2008 ANNUAL REPORT
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Unconsolidated Joint Venture Investments
Through our investment in the Mystic Partners joint venture, we have an 8.8% interest in the Hilton Hotel in Hartford,
CT. In 2008, the Company determined that its interest in this hotel was impaired. As of December 31, 2008, the Company
recorded an impairment loss of approximately $1,890 which represents our entire investment in the hotel. Offsetting this loss was
approximately $1,373 in income from our unconsolidated joint venture investments. The net of the impairment charge and
income from our unconsolidated joint ventures is a net loss of approximately $517. For the year ended December 31, 2007,
approximately $3,476 in income from unconsolidated joint venture investments was recorded, resulting in a decrease of $3,993
over the same period in 2008.
During 2007, we acquired joint venture interests in the following property:
Joint Venture
Metro 29th Street Associates, LLC
Brand
Holiday Inn Express
Name
Manhattan-New York, NY
Acquisition
Date
2/1/2007
Rooms
228
Ownership
%
50.0%
Hersha
Preferred
Equity
Return
N/A
Net Income/Loss
Net loss applicable to common shareholders for year ended December 31, 2008 was $13,608 compared to net income
applicable to common shareholders of $13,047 for the same period in 2007.
Operating income for the year ended December 31, 2008 was $31,771 compared to operating income of $53,546 during
the same period in 2007. The $21,775, or 40.7%, decrease in operating income was primarily the result of the impairment charge
of $21,004 related to our investment in a development loan and an option to acquire the hotel property upon completion, noted
above. This impairment charge was recorded during the fourth quarter of 2008.
The weighted average minority interest ownership in our operating partnership increased from 11.83% for the year ended
December 31, 2007 to 15.10% for the year ended December 31, 2008. This change is a result of the issuance of units in our
operating partnership as consideration for the acquisition of hotel properties and is partially offset by the issuance of 6,600,000 of
our common shares in May of 2008. Interest expense, increased $1,041 from $42,115 for the year ended December 31, 2007 to
$43,156 for the year ended December 31, 2008. The increase in interest expense is the result of mortgages placed on newly
acquired properties and increased average balances on our line of credit.
Included in net loss applicable to common shareholders for the year ended December 31, 2008 is $2,432 in income from
discontinued operations compared to $4,110 in income during the same period in 2007. Discontinued operations was driven
primarily by a gain of $2,452 resulting from the sale of the Holiday Inn Conference Center in New Cumberland, PA in October
2008 and a gain of $3,745 results from the sale of the Fairfield Inn, Mt. Laurel, NJ and Hampton Inn, Linden, NJ in November
2007.
FUNDS FROM OPERATIONS
(in thousands, except share data)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a
non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate
historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and
Partnership units in accordance with the April 2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper.
The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding extraordinary items as
defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as
depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our interpretation of the
NAREIT definition is that minority interest in net income (loss) should be added back to (deducted from) net income (loss) as part
of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do
not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common
shares, includes depreciation and amortization expenses, gains or losses on property sales, minority interest and preferred
dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our
property operations.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of Hersha’s performance or to cash flow as a measure of liquidity or ability to make
distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of
the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry
analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint
ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and
15 HERSHA 2008 ANNUAL REPORT
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unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a
detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to
common shares and Partnership units because our Partnership units are redeemable for common shares. We believe it is
meaningful for the investor to understand FFO applicable to all common shares and Partnership units. The following table
reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods.
Net (loss) income applicable to common shares
(Loss) income allocated to minority interest
(Loss) income of discontinued operations allocated to minority interest
Loss (income) from unconsolidated joint ventures
Gain on sale of assets
Depreciation and amortization
Depreciation and amortization from discontinued operations
FFO related to the minority interests in consolidated joint ventures (1)
Funds from consolidated hotel operations
applicable to common shares and Partnership units
Income from Unconsolidated Joint Venture Investments
Impairment of Investment in Unconsolidated Joint Ventures
(Loss) Income from Unconsolidated Joint Ventures
Add:
Depreciation and amortization of purchase price
in excess of historical cost (2)
Interest in deferred financing costs written off
in unconsolidated joint venture debt extinguishment
Interest in depreciation and amortization
of unconsolidated joint venture (3)
Funds from unconsolidated joint ventures operations
applicable to common shares and Partnership units
Funds from Operations
applicable to common shares and Partnership units
Weighted Average Common Shares and Units Outstanding
Basic
Diluted
December 31, 2008
Twelve Months Ending
December 31, 2007
December 31, 2006
$
(13,608)
(2,053)
(4)
517
(2,452)
40,998
420
(240)
$
13,047
1,773
49
(3,476)
(3,745)
33,863
1,267
(652)
$
298
579
37
(1,799)
(693)
18,420
1,850
(714)
23,578
1,373
(1,890)
(517)
2,093
-
6,287
7,863
42,126
3,476
-
3,476
2,055
(2,858)
5,023
7,696
17,978
1,799
-
1,799
1,817
(207)
4,549
7,958
$
31,441
$
49,822
$
25,936
45,184,127
53,218,864
40,718,724
46,183,394
27,118,264
30,672,675
(1) Adjustment made to deduct FFO related to the minority interest in our consolidated joint ventures. Represents the portion
of net income and depreciation allocated to our joint venture partners.
(2) Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint
venture at the time of our investment.
(3) Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint
ventures.
Comparison of the year ended December 31, 2008 to December 31, 2007
FFO was $31,441 for the year ended December 31, 2008, which was a decrease of $18,381 or 36.9%, over FFO in the
comparable period in 2007, which was $49,822. The decrease in FFO was primarily a result of an impairment of development
loan receivable and other asset of $21,004 and an impairment of our interest in an unconsolidated joint venture of $1,890.
FFO was also negatively impacted by increases in our interest expense during the year ended December 31, 2008.
Comparison of the year ended December 31, 2007 to December 31, 2006
For the year ended December 31, 2007, FFO increased $23,886, or 92.1% over the same period in 2006. The increase in
FFO was primarily a result of growth in the lodging industry and the markets where our properties are located, the benefits of
acquiring assets and interests in joint ventures since December 31, 2005 and continued stabilization and maturation of the existing
portfolio.
FFO was negatively impacted by increases in our interest expense during the year ended December 31, 2007.
16 HERSHA 2008 ANNUAL REPORT
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Item 8.
Financial Statements and Supplementary Data
Hersha Hospitality Trust
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 2008
Page
18
19
20
22
23
24
56
17 HERSHA 2008 ANNUAL REPORT
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Report of Independent Registered Public Accounting Firm
The Board of Trustees and Stockholders of
Hersha Hospitality Trust:
We have audited the accompanying consolidated balance sheets of Hersha Hospitality Trust and subsidiaries as of December 31,
2008 and 2007, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the responsibility of Hersha Hospitality Trust’s
management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement
schedule based on our audits. We did not audit the financial statements of Mystic Partners, LLC an equity method investee
company (See note 3) as of and for the year ended December 31, 2006. The Company's equity in earnings of Mystic Partners,
LLC was $1,691,000 for the year ended December 31, 2006. The 2006 financial statements of Mystic Partners, LLC were audited
by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mystic
Partners as of and for the year ended December 31, 2006, is based on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinions.
In our opinion, based on our audits and the report of other auditors related to 2006, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of Hersha Hospitality Trust and subsidiaries as of December
31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Hersha Hospitality Trust and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 5, 2009, expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 5, 2009
18 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
Assets:
Investment in Hotel Properties, net of Accumulated Depreciation
Investment in Joint Ventures
Development Loans Receivable
Cash and Cash Equivalents
Escrow Deposits
Hotel Accounts Receivable, net of allowance for doubtful accounts of $120 and $47
Deferred Costs, net of Accumulated Amortization of $3,606 and $3,252
Due from Related Parties
Intangible Assets, net of Accumulated Amortization of $595 and $764
Other Assets
December 31, 2008
December 31, 2007
$
982,082
46,283
81,500
15,697
12,404
6,870
9,157
4,645
7,300
13,517
$
893,297
51,851
58,183
12,327
13,706
7,287
8,048
1,256
5,619
16,033
Total Assets
$
1,179,455
$
1,067,607
Liabilities and Shareholders’ Equity:
Line of Credit
Mortgages and Notes Payable, net of unamortized discount of $61 and $72
Accounts Payable, Accrued Expenses and Other Liabilities
Dividends and Distributions Payable
Due to Related Parties
Total Liabilities
Minority Interests:
Common Units
Interest in Consolidated Joint Ventures
Total Minority Interests
Shareholders' Equity:
$
88,421
655,360
17,745
11,240
1,352
$
43,700
619,308
17,728
9,688
2,025
774,118
692,449
$
53,520
1,854
$
42,845
1,908
55,374
44,753
Preferred Shares - 8% Series A, $.01 Par Value, 2,400,000 Shares Issued and Outstanding at
December 31, 2008 and 2007 (Aggregate Liquidation Preference $60,000)
Common Shares - Class A, $.01 Par Value, 80,000,000 Shares Authorized, 48,276,222
and 41,203,612 Shares Issued and Outstanding at December 31, 2008 and 2007,
respectively
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and
Outstanding
Accumulated Other Comprehensive Loss
Additional Paid-in Capital
Distributions in Excess of Net Income
Total Shareholders' Equity
24
483
-
(109)
463,772
(114,207)
349,963
24
412
-
(23)
397,127
(67,135)
330,405
Total Liabilities and Shareholders’ Equity
$
1,179,455
$
1,067,607
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
19 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
Revenue:
Hotel Operating Revenues
Interest Income from Development Loans
Land Lease Revenue
Other Revenues
Total Revenues
Operating Expenses:
Hotel Operating Expenses
Hotel Ground Rent
Land Lease Expense
Real Estate and Personal Property
Taxes and Property Insurance
General and Administrative
Acquisition and Terminated Transaction Costs
Impairment of Development Loan Receivable and Other Asset
Depreciation and Amortization
Total Operating Expenses
Operating Income
Interest Income
Interest Expense
Other Expense
Loss on Debt Extinguishment
(Loss) Income before (loss) income from
Unconsolidated Joint Venture Investments,
Minority Interests and Discontinued Operations
Unconsolidated Joint Ventures
Income from Unconsolidated
Joint Venture Investments
Impairment of Investment in Unconsolidated Joint Venture
(Loss) Income from Unconsolidated
Joint Venture Investments
(Loss) Income before Minority Interests and
Discontinued Operations
(Loss) Income allocated to Minority Interests in
Continuing Operations
(Loss) Income from Continuing Operations
Discontinued Operations, net of minority interests
(Note 12):
Gain on Disposition of Hotel Properties
(Loss) Income from Discontinued Operations
Income from Discontinued Operations
Net (Loss) Income
Preferred Distributions
Net (Loss) Income applicable to
Common Shareholders
2008
2007
2006
$
250,464
7,890
5,363
1,054
264,771
144,972
1,040
2,939
12,953
8,714
380
21,004
40,998
233,000
31,771
306
43,156
129
1,568
(12,776)
1,373
(1,890)
(517)
(13,293)
(2,053)
(11,240)
2,452
(20)
2,432
(8,808)
4,800
$
229,461
6,046
4,860
980
241,347
130,910
856
2,721
11,349
7,953
149
-
33,863
187,801
53,546
686
42,115
83
-
12,034
3,476
-
3,476
15,510
1,773
13,737
3,745
365
4,110
17,847
4,800
$
132,354
2,487
2,071
737
137,649
76,694
804
1,189
5,979
5,820
316
-
18,420
109,222
28,427
1,182
25,123
102
1,485
2,899
1,799
-
1,799
4,698
579
4,119
693
286
979
5,098
4,800
$
(13,608)
$
13,047
$
298
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
20 HERSHA 2008 ANNUAL REPORT
12968_LB:12968_LB 3/26/09 10:31 AM Page 21
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Earnings Per Share:
BASIC
(Loss) income from continuing operations
applicable to common shareholders
Income from
Discontinued Operations
Net (loss) income applicable
to common shareholders
DILUTED
(Loss) income from continuing operations
applicable to common shareholders
Income from
Discontinued Operations
Net (loss) income applicable
to common shareholders
2008
2007
2006
$ (0.36)
$ 0.22
$ (0.03)
0.05
0.10
0.04
$ (0.31)
$ 0.32
$ 0.01
$ (0.36) * $ 0.22 *
$ (0.03) *
0.05 *
0.10 *
0.04 *
$ (0.31) *
$ 0.32 *
$ 0.01 *
Weighted Average Common Shares Outstanding:
Basic
Diluted
45,184,127
45,184,127
*
40,718,724
40,718,724
*
27,118,264
27,118,264
*
* Income allocated to minority interest in the Partnership has been excluded from the numerator and OP Units 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 OP Units outstanding for the years ended December 31,
2008, 2007 and 2006 were 8,034,737, 5,464,670 and 3,554,361, respectively. Unvested stock awards have been omitted from the
denominator for the purpose of computing diluted earnings per share for the years ended December 31, 2008, 2007 and 2006 since
the effect of including these awards in the denominator would be anti-dilutive to income from continuing operations applicable to
common shareholders.
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
21 HERSHA 2008 ANNUAL REPORT
12968_LB:12968_LB 3/26/09 10:31 AM Page 22
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN THOUSANDS, EXCEPT SHARES]
Balance at December 31, 2005
Common Stock Issuance
Issuance Costs
Unit Conversion
Reallocation of Minority Interest
Dividends declared:
Common Stock ($0.72 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted Share Award Grants
Restricted Share Award Vesting
Share Grants to Trustees
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Income
Total Comprehensive Income
Balance at December 31, 2006
Unit Conversion
Unit Conversion Costs
Reallocation of Minority Interest
Dividends declared:
Common Stock ($0.72 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted Share Award Grants
Restricted Share Award Vesting
Share Grants to Trustees
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Income
Total Comprehensive Income
Balance at December 31, 2007
Common Stock Issuance
Issuance Costs
Unit Conversion
Reallocation of Minority Interest
Dividends declared:
Common Stock ($0.72 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted Share Award Grants
Restricted Share Award Vesting
Share Grants to Trustees
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2008
Class A
Common Shares
Shares
20,373,752
20,118,750
-
82,077
Dollars
203
201
-
1
Class B
Common Shares
Shares
-
-
-
-
Dollars
-
-
-
-
Series A
Preferred Shares
Shares
2,400,000
Dollars
-
-
-
-
-
-
-
-
-
-
-
-
2,400,000
-
-
-
-
-
-
-
-
-
-
-
24
$
-
-
-
$
381,592
2,366
(142)
12,422
233
$
-
-
-
$
(50,635)
-
-
-
Additional
Paid-In
Capital
Other
Comprehensive
Income
24
-
-
-
-
-
-
-
-
-
-
-
-
193,228
191,875
(1,061)
649
(3,467)
-
-
29
-
293
46
-
-
327
-
-
-
-
-
-
-
-
(94)
-
Distributions
in Excess
of Net
Earnings
(29,079)
-
-
-
Total
164,703
192,076
(1,061)
650
(3,467)
(21,854)
(4,800)
-
(21,854)
(4,800)
29
-
-
-
5,098
-
293
46
(94)
5,098
5,004
331,619
$
2,369
(142)
12,422
(29,547)
(4,800)
-
(29,547)
(4,800)
30
-
-
-
-
-
-
768
95
(256)
17,847
17,591
330,405
$
62,073
(228)
1,372
1,966
(33,464)
(4,800)
-
(33,464)
(4,800)
31
-
-
-
-
1,411
91
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(256)
-
-
17,847
$
(23)
$
(67,135)
-
-
-
-
-
-
-
-
-
-
29
-
766
94
-
-
397,127
62,007
(228)
1,370
1,966
-
-
31
(3)
1,411
91
-
-
-
$
-
2,400,000
$
24
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,871
89,500
-
5,000
-
-
40,671,950
306,460
-
-
-
-
2,620
214,582
-
8,000
-
-
-
-
-
-
-
-
-
-
-
$
405
3
-
-
-
-
-
-
-
1
2
1
41,203,612
6,600,000
$
412
66
175,843
-
-
-
5,092
281,675
-
10,000
-
-
2
3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
48,276,222
$
483
-
$
-
2,400,000
$
24
$
463,772
$
(109)
$
(114,207)
(86)
-
-
(8,808)
(86)
(8,808)
(8,894)
349,963
$
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
22 HERSHA 2008 ANNUAL REPORT
12968_LB:12968_LB 3/26/09 10:31 AM Page 23
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Gain on disposition of hotel assets held for sale
Impairment of development loan receivable and other asset
Depreciation
Amortization
Debt extinguishment
Income allocated to minority interests
Equity in loss (income) of unconsolidated joint ventures
Distributions from unconsolidated joint ventures
Loss (gain) recognized on change in fair value of derivative instrument
Stock based compensation expense
Change in assets and liabilities:
(Increase) decrease in:
Hotel accounts receivable
Escrows
Other assets
Due from related party
Increase (decrease) in:
Due to related party
Accounts payable and accrued expenses
Net cash provided by operating activities
Investing activities:
Purchase of hotel property assets
Capital expenditures
Proceeds from disposition of hotel assets held for sale
Deposits on hotel acquisitions
Cash paid for franchise fee intangible
Investment in notes receivable
Repayment of notes receivable
Investment in development loans receivable
Repayment of development loans receivable
Distributions from unconsolidated joint venture
Advances and capital contributions to unconsolidated joint ventures
Net cash used in investing activities
Financing activities:
Proceeds from (repayments of) borrowings under line of credit, net
Principal repayment of mortgages and notes payable
Proceeds from mortgages and notes payable
Settlement of interest rate derivative
Cash paid for deferred financing costs
Proceeds from issuance of common stock, net
Stock issuance costs related to conversion of partnership units
Distributions to partners in consolidated joint ventures
Dividends paid on common shares
Dividends paid on preferred shares
Distributions paid on common partnership units
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
2008
2007
2006
$
(8,808)
$
17,847
$
5,098
(2,888)
21,004
41,219
1,958
1,587
(1,621)
517
3,036
71
1,502
420
1,302
(1,132)
(3,251)
(1,115)
93
53,894
(63,626)
(19,226)
6,456
-
(57)
-
1,350
(64,200)
22,416
2,113
(96)
(114,870)
44,721
(57,421)
59,156
-
(1,244)
61,845
-
-
(32,169)
(4,800)
(5,742)
64,346
3,370
12,327
(4,248)
-
34,963
1,812
-
2,323
(3,476)
4,501
(89)
852
(2,500)
1,845
(261)
3,691
(1,291)
3,331
59,300
(32,658)
(16,773)
11,905
-
(11)
-
34
(65,700)
53,000
6,485
(2,309)
(46,027)
19,700
(20,717)
28,543
-
(286)
-
(143)
(526)
(29,424)
(4,800)
(3,609)
(11,262)
2,011
10,316
(784)
-
20,131
1,118
1,485
706
(1,799)
4,578
(197)
339
(1,731)
(87)
(2,781)
(2,131)
(1,448)
4,720
27,217
(395,359)
(11,020)
9,800
(2,100)
(46)
(1,057)
1,909
(51,616)
37,050
2,767
(4,209)
(413,881)
24,000
(80,222)
280,205
79
(1,224)
191,015
-
(221)
(18,174)
(4,800)
(2,458)
388,200
1,536
8,780
Cash and cash equivalents - end of year
$
15,697
$
12,327
$
10,316
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
23 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hersha Hospitality Trust (“we” or the “Company”) was formed in May 1998 as a self-administered, Maryland real estate
investment trust (“REIT”) for federal income tax purposes.
The Company owns a controlling general partnership interest in Hersha Hospitality Limited Partnership (“HHLP” or the
“Partnership”), which owns a 99% limited partnership interest in various subsidiary partnerships. Hersha Hospitality, LLC
(“HHLLC”), a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships and the
Partnership is the sole member of HHLLC.
The Partnership formed a wholly owned taxable REIT subsidiary, 44 New England Management Company (“44 New England” or
“TRS Lessee”), to lease certain of the Company’s hotels.
On May 5, 2008, we transferred the listing of our common shares of beneficial interest and 8.0% Series A preferred shares of
beneficial interest from the American Stock Exchange to the New York Stock Exchange (the “NYSE”). Hersha’s common shares
now trade on the NYSE under the ticker symbol "HT" and its Series A preferred shares now trade on the NYSE under the ticker
symbol "HT PR A."
As of December 31, 2008, the Company, through the Partnership and subsidiary partnerships, wholly owned fifty-eight limited
and full service hotels. All of the wholly owned hotel facilities are leased to the Company’s taxable REIT subsidiary (“TRS”), 44
New England.
In addition to the wholly owned hotel properties, as of December 31, 2008, the Company owned joint venture interests in another
eighteen properties. The properties owned by the joint ventures are leased to a TRS owned by the joint venture or to an entity
owned by the joint venture partners and 44 New England. The following table lists the properties owned by these joint ventures:
Joint Venture
Ownership
Property
Location
Lessee/Sublessee
Unconsolidated Joint Ventures
Inn America Hospitality at Ewing, LLC
PRA Glastonbury, LLC
PRA Suites at Glastonbury, LLC
Mystic Partners, LLC
Hiren Boston, LLC
SB Partners, LLC
Metro 29th Street Associates, LLC.
Consolidated Joint Ventures
Logan Hospitality Associates, LLC
LTD Associates One, LLC
LTD Associates Two, LLC
50.0%
48.0%
48.0%
66.7%
8.8%
66.7%
66.7%
66.7%
66.7%
44.7%
66.7%
15.0%
50.0%
50.0%
50.0%
55.0%
75.0%
75.0%
Courtyard
Hilton Garden Inn
Homewood Suites
Marriott
Hilton
Courtyard
Courtyard
Residence Inn
Residence Inn
Residence Inn
Springhill Suites
Marriott
Courtyard
Holiday Inn Express
Holiday Inn Express
Ewing/Princeton, NJ
Glastonbury, CT
Glastonbury, CT
Mystic, CT
Hartford, CT
Norwich, CT
Warwick, RI
Danbury, CT
Mystic, CT
Southington, CT
Waterford, CT
Hartford, CT
South Boston, MA
South Boston, MA
New York, NY
Hersha Inn America TRS Inc.
Hersha PRA TRS, Inc
Hersha PRA LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
South Bay Boston, LLC
South Bay Sandeep, LLC
Metro 29th Sublessee, LLC
Four Points – Sheraton
Springhill Suites
Residence Inn
Revere/Boston, MA
Williamsburg, VA
Williamsburg, VA
Revere Hotel Group, LLC
HT LTD Williamsburg One LLC
HT LTD Williamsburg Two LLC
Mystic Partners, LLC owns an interest in nine hotel properties. Our interest in Mystic Partners, LLC is relative to our interest in
each of the nine properties owned by the joint venture as defined in the joint venture’s governing documents. Each of the nine
properties owned by Mystic Partners, LLC is leased to a separate entity that is consolidated in Mystic Partners Leaseco, LLC
which is owned by 44 New England and our joint venture partner in Mystic Partners, LLC.
The properties are managed by eligible independent management companies, including Hersha Hospitality Management, LP
(“HHMLP”). HHMLP is owned in part by four of the Company’s executive officers, two of its trustees and other third party
investors.
24 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned
TRS Lessee. All significant inter-company amounts have been eliminated.
Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company
as general partner of the Partnership. Properties owned in joint ventures are also consolidated if the determination is made that we
are the primary beneficiary in a variable interest entity (VIE) or we maintain control of the asset through our voting interest in the
entity. Control can be demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell
the assets of the partnerships without the consent of the limited partners and the inability of the limited partners to replace the
general partner. Control can be demonstrated by the limited partners if the limited partners have the right to dissolve or liquidate
the partnership or otherwise remove the general partner without cause or have rights to participate in the significant decisions
made in the ordinary course of the partnership’s business.
We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines of consolidation.
Our examination consists of reviewing the sufficiency of equity at risk, controlling financial interests, voting rights, and the
obligation to absorb expected losses and expected gains, including residual returns. Based on our examination, the following
entities were determined to be VIE’s: Mystic Partners, LLC; Mystic Partners Leaseco, LLC; Hersha PRA LLC; South Bay
Boston, LLC; HT LTD Williamsburg One LLC; HT LTD Williamsburg Two LLC; Metro 29th Sublessee, LLC; Hersha Statutory
Trust I; and Hersha Statutory Trust II. Mystic Partners, LLC is a VIE entity, however because we are not the primary beneficiary
it is not consolidated by the Company. Our maximum exposure to losses due to our investment in Mystic Partners, LLC is limited
to our investment in the joint venture which is $27,977 as of December 31, 2008. Also, Mystic Partners Leaseco, LLC; Hersha
PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg One LLC; HT LTD Williamsburg Two LLC, and Metro 29th
Sublessee, LLC lease hotel properties from our joint venture interests and are variable interest entities. These entities are
consolidated by the lessors, the primary beneficiaries of each entity. Hersha Statutory Trust I and Hersha Statutory Trust II are
VIEs but HHLP is not the primary beneficiary in these entities. The accounts of Hersha Statutory Trust I and Hersha Statutory
Trust II are not consolidated with and into HHLP.
We have consolidated the operations of the Logan Hospitality Associates, LLC; LTD Associates One, LLC; and LTD Associates
Two, LLC joint ventures because each entity is a voting interest entity and the Company owns a majority voting interest in the
venture.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP)
requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Although we believe the assumptions and estimates we made are reasonable and appropriate, as discussed in the applicable
sections throughout these Consolidated Financial Statements, different assumptions and estimates could materially impact our
reported results. The current economic environment has increased the degree of uncertainty inherent in these estimates and
assumptions and changes in market conditions could impact our future operating results.
Investment in Hotel Properties
The Company allocates the purchase price of hotel properties acquired based on the fair value of the acquired real estate, furniture,
fixtures and equipment, and intangible assets and the fair value of liabilities assumed, including debt. The Company’s investments
in hotel properties are carried at cost and are depreciated using the straight-line method over the following estimated useful lives:
Building and Improvements
Furniture, Fixtures and Equipment
7 to 40 Years
5 to 7 Years
25 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company periodically reviews the carrying value of each hotel to determine if circumstances exist indicating impairment to
the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support
the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest
charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash
flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value.
In accordance with the provisions of Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” a hotel is considered held for sale when management and our independent trustees commit to
a plan to sell the property, the property is available for sale, management engages in active program to locate a buyer for the
property and it is probable the sale will be completed within a year of the initiation of the plan to sell.
Investment in Unconsolidated Joint Ventures
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or our
voting interest in a voting interest entity, the equity method of accounting is used. Under this method, the investment, originally
recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliates as they occur rather than as dividends
or other distributions are received, limited to the extent of our investment in, advances to and commitments for the investee.
Pursuant to our joint venture agreements, allocations of profits and losses of some of our investments in unconsolidated joint
ventures may be allocated disproportionately as compared to the ownership percentages due to specified preferred return rate
thresholds.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if
circumstances exist indicating impairment to the carrying value of the investment. When an impairment indicator is present, we
will review the recoverability of our investment. It the investment’s carrying value is not considered recoverable, we will estimate
the fair value of the investment. Our estimate of fair value takes into consideration factors such as expected future operating
income, trends and prospects, as well as the effects of demand, competition and other factors. This determination requires
significant estimates by management, including the expected cash flows to be generated by the assets owned and operated by the
joint venture. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount over the fair
value of our investment in the unconsolidated joint venture.
Development Loans Receivable
The Company provides secured first-mortgage and mezzanine financing to hotel developers. Development loans receivable are
recorded at cost and are reviewed for potential impairment at each balance sheet date. The Company’s development loans
receivable are each secured by various hotel or hotel development properties or partnership interests in hotel or hotel development
properties. We have determined that development loans receivable do not constitute a financial interest in a VIE and do not
consolidate the operating results of the borrower in our consolidated financial statements. Our evaluation consists of reviewing
the sufficiency of the borrower’s equity at risk, controlling financial interests in the borrower, voting rights of the borrower, and
the borrower’s obligation to absorb expected losses and expected gains, including residual returns. The analysis utilized by the
Company in evaluating the development loans receivable involves considerable management judgment and assumptions.
A development loan receivable is considered impaired when it becomes probable, based on current information, that the Company
will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured
by comparing the recorded amount of the loan to the present value of the expected cash flows or the fair value of the collateral. If
a loan was deemed to be impaired, the Company would record a charge to income for any shortfall.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand and in banks plus short-term investments with an initial maturity of three
months or less when purchased.
Escrow Deposits
Escrow deposits include reserves for debt service, real estate taxes, and insurance and reserves for furniture, fixtures, and
equipment replacements, as required by certain mortgage debt agreement restrictions and provisions.
26 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Hotel Accounts Receivable
Hotel accounts receivable consists primarily of meeting and banquet room rental and hotel guest receivables. The Company
generally does not require collateral. Ongoing credit evaluations are performed and an allowance for potential losses from
uncollectible accounts is provided against the portion of accounts receivable that is estimated to be uncollectible.
Deferred Costs
Deferred loan costs are recorded at cost and amortized over the terms of the related indebtedness using the effective interest
method.
Due from/to Related Parties
Due from/to Related Parties represents current receivables and payables resulting from transactions related to hotel management
and project management with affiliated entities. Due from related parties results primarily from advances of shared costs incurred.
Due to affiliates results primarily from hotel management and project management fees incurred. Both due to and due from related
parties are generally settled within a period not to exceed one year.
Intangible Assets
Intangible assets consist of leasehold intangibles for above-market and below-market value of in-place leases and deferred
franchise fees. The leasehold intangibles are amortized over the remaining lease term. Deferred franchise fees are amortized using
the straight-line method over the life of the franchise agreement.
Minority Interest
Minority interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income
(Loss) is allocated to minority interest in accordance with the weighted average percentage ownership of the Partnership during
the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted
average percentage ownership of the Partnership during the period. Our ownership interest in the Partnership as of December 31,
2008, 2007 and 2006 was 84.5%, 86.4% and 91.4%, respectively. At December 31, 2008, there were 8,746,300 units outstanding
with a fair market value of $26,239 which has been determined using the Company’s stock price at December 31, 2008.
The Company revalues the minority interest associated with the Partnership units each quarter to maintain a proportional
relationship between the book value of equity associated with common shareholders relative to that of the Unit holders since both
have equivalent rights and Units are convertible into shares of common stock on a one-for-one basis.
We also maintain minority interests for the equity interest owned by third parties in Logan Hospitality Associates, LLC; LTD
Associates One, LLC; and LTD Associates Two, LLC. Third parties own a 45% interest in Logan Hospitality Associates, LLC
and a 25% interest in each of LTD Associates One LLC and LTD Associates Two, LLC. We allocate the income (loss) of these
joint ventures to the minority interest in consolidated joint ventures based upon the ownership of the entities, preferences in
distributions of cash available and the terms of each venture agreement.
Shareholders’ Equity
On May 16, 2008, we completed a public offering of 6,000,000 common shares at $9.90 per share. On May 20, 2008, the
underwriters exercised a portion of their over-allotment option with respect to that offering, and we issued an additional 600,000
common shares at $9.90 per share. Proceeds to us, net of underwriting discounts and commissions and expenses, were
approximately $61,845. Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the
Partnership in exchange for additional Partnership interests. The net offering proceeds were used to repay indebtedness.
Stock Based Compensation
We apply Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123R) whereby we measure
the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the
award.
27 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The compensation cost is amortized on a straight line basis over the period during which an employee is required to provide
service in exchange for the award.
Derivatives and Hedging
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate
movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate
caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-
rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal
amount. Interest rate caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to
increases in variable interest rates.
Revenue Recognition
We recognize revenue and expense for all consolidated hotels as hotel operating revenue and hotel operating expense when earned
and incurred. These revenues are recorded net of any sales or occupancy taxes collected from our guests. We participate in
frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs,
as incurred.
Interest income on development loan financing is recorded in the period earned based on the interest rate of the loan and
outstanding balance during the period. Development loans receivable and accrued interest on the development loans receivable are
evaluated to determine if outstanding balances are collectible. Interest is recorded only if it is determined the outstanding loan
balance and accrued interest balance are collectible.
We lease land to hotel developers under fixed lease agreements. In addition to base rents, these lease agreements contain
provisions that require the lessee to reimburse real estate taxes, debt service and other impositions. Base rents and reimbursements
for real estate taxes, debt service and other impositions are recorded in land lease revenue on an accrual basis. Expenses for real
estate taxes, interest expense, and other costs that are reimbursed under the land leases are recorded in land lease expense when
they are incurred.
Other revenues consist primarily of fees earned for asset management services provided to hotels we own through unconsolidated
joint ventures. Fees are earned as a percentage of the hotels revenue and are recorded in the period earned to the extent of the
minority interest ownership.
Income Taxes
The Company qualifies as a REIT under applicable provisions of the Internal Revenue Code (Code), as amended, and intends to
continue to qualify as a REIT. In general, under such provisions, a trust which has made the required election and, in the taxable
year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income will not be subject to
Federal income tax to the extent of the income which it distributes. Earnings and profits, which determine the taxability of
dividends to shareholders, differ from net income reported for financial reporting purposes due primarily to differences in
depreciation of hotel properties for Federal income tax purposes.
Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability method. Under this
method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and
liabilities of the TRS Lessee and their respective tax bases and for their operating loss and tax credit carry forwards based on
enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized
only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including
tax planning strategies and other factors.
Although the TRS Lessee is expected to operate at a profit for Federal income tax purposes in future periods, the utilization of the
deferred tax asset is not determinable. Therefore, any deferred tax assets have been reserved as we have not concluded that it is
more likely than not that these deferred tax assets will be realizable.
28 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassification
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
SFAS No. 141R
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS
No. 141R”). SFAS No. 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a
business combination to be recorded at “full fair value.” SFAS No. 141R is effective for fiscal years beginning after December 15,
2008. The Company has not determined whether the adoption of SFAS No. 141R will have a material effect on the Company’s
financial statements. Adoption of SFAS No.141R on January 1, 2009 could have a material effect on the Company’s financial
statements and the Company’s future financial results to the extent the Company acquires significant amounts of real estate assets.
Costs related to future acquisitions will be expensed as incurred compared to the Company’s current practice of capitalizing such
costs and amortizing them over the useful life of the acquired assets. In addition, to the extent the Company enters into acquisition
agreements with earn-out provisions, a liability may be recorded at the time of acquisition based on an estimate of the earn-out to
be paid compared to our current practice of recording a liability for the earn-out when amounts are probable and determinable.
SFAS No. 160
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 requires noncontrolling interests (previously referred to as
minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling
interest holders. No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of this statement will
result in minority interest to be reclassified as a component of shareholders’ equity.
SFAS No. 161
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial reporting. The objective of the guidance is to provide
users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how
derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after
November 15, 2008. The Company has determined that the adoption of SFAS No. 161 will not have a material effect on the
Company’s financial statements.
FSP EITF 03-6-1
In June 2008, the FASB issued FASB Staff Position on Emerging Issues Task Force Issue 03-6, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the computation of earnings per share (“EPS”) pursuant to the
two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including
interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of FSP EITF 03-
6-1. Early application is not permitted. We expect that the adoption of this FSP will not impact our financial position or net
income.
29 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties consist of the following at December 31, 2008 and 2007:
Land
Buildings and Improvements
Furniture, Fixtures and Equipment
Construction in Progress
December 31, 2008
December 31, 2007
$
184,879
802,760
121,991
-
1,109,630
$
172,061
706,038
105,979
1,541
985,619
Less Accumulated Depreciation
(127,548)
(92,322)
Total Investment in Hotel Properties
$
982,082
$
893,297
Depreciation expense was $41,219, $34,895 and $20,120 for the years ended December 31, 2008, 2007 and 2006, respectively.
During the year ended December 31, 2008 we acquired the following wholly owned hotel properties:
Hotel
Duane Street Hotel,
TriBeCa, New York, NY
nu Hotel,
Brooklyn, NY
TownePlace Suites,
Harrisburg, PA
Sheraton Hotel,
JFK Airport, Jamaica, NY
Holiday Inn Express,
Camp Springs, MD
Hampton Inn,
Smithfield, RI
Total 2008
Wholly Owned Acquisitions
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
1/4/2008
$ 8,213
$ 12,869
$ 2,793
$ -
$ 23,875
$ -
1/14/2008
-
17,343
-
-
17,343
-
5/8/2008
1,238
10,182
1,792
42
13,254
-
6/13/2008
-
27,584
4,413
2,893
34,890
23,800
6/26/2008
1,629
11,115
931
5
13,680
-
8/1/2008
2,057
9,502
1,156
102
12,817
6,990
$ 13,137
$ 88,595
$ 11,085
$ 3,042
$ 115,859
$ 30,790
In connection with the acquisitions made during the year ended December 31, 2008, we acquired $344 in working capital assets
and assumed $662 in working capital liabilities.
Interest rates on debt assumed in the acquisitions of the Sheraton Hotel, JFK Airport, Jamaica, NY and the Hampton Inn,
Smithfield, RI were at market rates. In connection with the acquisition of the Sheraton Hotel, the Company assumed a $23,800
variable rate mortgage which accrued interest at LIBOR plus 2.00% per annum. This debt was repaid in October 2008 with
borrowings from our revolving line of credit, and this property now serves as collateral for borrowings under our revolving line of
credit. In connection with the acquisition of the Sheraton Hotel, we assumed a lease for the underlying land with a remaining term
of approximately 94 years. The remaining lease payments were determined to be below market value and, as a result, $2,171 of
the purchase price was allocated to a leasehold intangible asset. This asset is recorded in intangible assets on the consolidated
balance sheet and is being amortized over the remaining life of the lease.
In connection with the acquisition of the Duane Street Hotel, the Company entered into a $15,000 fixed rate mortgage with
interest at 7.15%. The mortgage matures in February 2018 and is interest only for the first three years. Upon acquisition of the nu
Hotel, located in Brooklyn, NY, we commenced renovations to fit out the building prior to its opening. Costs associated with the
building while it was being renovated, including interest, were capitalized. On July 7, 2008, the property opened and all
renovation costs were capitalized to building and improvements and furniture, fixtures and equipment and are being depreciated
over the useful lives of these assets. In connection with the acquisition of the nu Hotel the Company entered into an $18,000
variable rate mortgage debt facility with interest at LIBOR plus 2.00%. Principal of $13,240 was drawn on the date of
acquisition, while the remainder of the balance has been drawn as renovations progressed and as interest was incurred. The
mortgage requires the payment of interest only and matures in January of 2011.
30 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (continued)
In connection with the acquisition of the Hampton Inn, Smithfield, RI, the Company assumed a $6,990 fixed rate mortgage which
accrues interest at 6.98%. The mortgage matures in December 12, 2016. In connection with the acquisition of the property, the
sellers provided a $500 note payable which accrued interest at a rate of 7.00% per annum. This note was repaid prior to
September 30, 2008.
The Duane Street Hotel, New York, NY was acquired from entities that are owned by certain of the Company’s executives and
affiliated trustees. Included in the consideration paid for the Duane Street Hotel were 779,585 units of limited partnership interest
(“OP Units”) in Hersha Hospitality Limited Partnership ("HHLP" or the “Partnership”), our operating partnership subsidiary,
valued at $6,862. The OP Units were issued to certain executives and affiliated trustees of the Company. The Sheraton Hotel,
JFK Airport, Jamaica, NY, was acquired from entities that are owned by certain of the Company’s executives and affiliated
trustees and an unrelated third party. Included in the consideration paid for the Sheraton Hotel were 1,177,306 OP Units in HHLP
valued at $10,596. The OP Units were issued to certain executives and affiliated trustees of the Company and an unrelated third
party. The Holiday Inn Express, Camp Springs, MD, was acquired from entities that are owned by certain of the Company’s
executives and affiliated trustees and an unrelated third party. Included in the consideration paid for the Holiday Inn Express were
540,337 OP Units in HHLP valued at $4,166. The OP Units were issued to certain executives and affiliated trustees of the
Company and an unrelated third party.
Our newly acquired hotels are leased to our wholly-owned taxable REIT subsidiary (“TRS”), 44 New England Management
Company and all are managed by Hersha Hospitality Management, LP (“HHMLP”). HHMLP is owned by three of the
Company’s executives, two of its affiliated trustees and other investors that are not affiliated with the Company.
During the year ended December 31, 2007 we acquired the following wholly owned hotel properties:
Hotel
Residence Inn,
Langhorne, PA
Residence Inn,
Carlisle, PA
Holiday Inn Express,
Chester, NY
Hampton Inn - Seaport,
New York, NY
Hotel 373 and Starbucks Lease - 5th
Avenue, New York, NY
Nevins Street,
Brooklyn, NY
Holiday Inn,
Norwich, CT
Total 2007
Wholly Owned Acquisitions
Acquisition
Date
Land
Buildings and
Improvements
Furniture
Fixtures and
Equipment
Franchise Fees
and Loan Costs
Total Purchase
Price
Fair Value of
Assumed Debt
1/8/2007
$ 1,463
$ 12,125
$ 2,170
$ 50
$ 15,808
$ -
1/10/2007
1,015
7,511
1,330
89
9,945
7,000
1/25/2007
1,500
6,701
1,031
126
9,358
6,700
2/1/2007
7,816
19,056
1,729
1,036
29,637
20,202
6/1/2007
14,239
16,801
3,294
11
34,345
22,000
6/11/2007 &
7/11/2007
10,650
-
-
269
10,919
6,500
7/1/2007
1,984
12,037
2,041
67
16,129
8,162
$ 38,667
$ 74,231
$ 11,595
$ 1,648
$ 126,141
$ 70,564
Interest rates on debt assumed in the acquisition of the Residence Inn, Carlisle, PA and the Holiday Inn Express & Suites, Chester,
NY were at market rates. We assumed $19,250 in debt with the acquisition of the Hampton Inn-Seaport, New York, NY bearing
interest at a fixed rate of 6.36% which was determined on the date of acquisition to be above market rates. We recorded a
premium of $952 related to the assumption of this debt. In the acquisition of Hotel 373 – 5th Avenue, New York, NY, we
assumed $22,000 in variable rate debt bearing interest at LIBOR plus 2.00% and an interest rate cap which effectively caps
interest on this debt at 7.75%. The debt matures and the interest rate cap terminates on April 9, 2009. The interest rate cap had a
fair value of $15 on the date of acquisition. We assumed $6,500 in variable rate debt bearing interest at LIBOR plus 2.70% with
the acquisition of a parcel of land on Nevins Street in Brooklyn, NY. This parcel of land is being leased to a hotel developer that
is owned in part by certain executives and affiliated trustees of the Company. Lease income on the land includes payment of debt
service on the assumed debt. We assumed $8,162 in debt with the acquisition of the Holiday Inn, Norwich, CT which was repaid
on July 30, 2007.
The Residence Inn, Carlisle, PA and the Hampton Inn-Seaport, New York, NY were acquired from entities that are owned by
certain of the Company’s executives and affiliated trustees. Included in the consideration paid for the Residence Inn, Carlisle, PA
31 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (continued)
were 119,818 OP Units in HHLP valued at $1,330. The OP Units were issued to sellers that are not affiliated with the
Company. Consideration paid for the Hampton Inn-Seaport, New York, NY, included 15,016 OP Units valued at $168 and an
$8,208 note payable. The OP Units and note payable were issued to certain executives and affiliated trustees of the Company.
On May 24, 2007, the note payable was fully repaid. Interest expense of $203 was incurred on the notes payable during the year
ended December 31, 2007. Included in the consideration paid for the Hotel 373 – 5th Avenue, New York, NY were 1,000,000 OP
Units valued at $12,320. The OP Units were issued to a seller that is not affiliated with the Company. Consideration paid for the
Holiday Inn, Norwich, CT, included 659,312 OP Units valued at $7,800. The OP Units were issued to certain executives and
affiliated trustees of the Company.
On January 8, 2007, we closed on the acquisition of the Residence Inn, Langhorne, PA. The purchase agreement for this
acquisition contained certain provisions that entitle the seller to an earn-out payment of up to $1,000 based on the net operating
income of the property, as defined in the purchase agreement. The earn-out period expired on July 31, 2008. Based on results for
this property through July 31, 2008, a $1,000 earn-out was paid in October 2008. This additional purchase price was capitalized
to land, building and improvements, and furniture, fixtures and equipment and is being depreciated over the useful lives of these
assets.
The purchase agreements for some of our acquisitions contain certain provisions that entitle the seller to an earn-out payment
based on the Net Operating Income of the properties, as defined in each purchase agreement. The following table summarizes our
existing earn-out provisions:
Acquisition
Date
Acquisition Name
Maximum Earn-Out
Payment Amount
Earn-Out Period
Expiration
12/28/2006
Summerfield Suites Portfolio
6/26/2008 Holiday Inn Express, Camp Springs, MD
8/1/2008 Hampton Inn & Suites, Smithfield, RI
$ 6,000,000
December 31, 2009
1,905,000
December 31, 2010
1,515,000
December 31, 2010
We are currently unable to determine whether amounts will be paid under these three earn-out provisions since significant time
remains until the expiration of the earn-out periods. Due to uncertainty of the amounts that will ultimately be paid, no accrual has
been recorded on the consolidated balance sheet for amounts due under these earn-out provisions. In the event amounts are
payable under these provisions, payments made will be recorded as additional consideration given for the properties.
On February 15, 2006, we acquired an 80% joint venture interest in an entity that owns the Hampton Inn, Philadelphia, PA. The
entity that sold the 80% interest was owned, in part, by certain executives and affiliated trustees of the Company. On October 1,
2007, we acquired the remaining 20% interest from our joint venture partners. The following is the allocation of purchase price for
each step of the acquisition:
Acquisition
Date
Land
Buildings and
Improvements
Furniture
Fixtures and
Equipment
Franchise Fees
and Loan Costs
Total
Acquisition of 80% Interest
2/15/2006
$ 2,928
$ 21,062
$ 3,029
$ 117
$ 27,136
Acquisition of Remaining 20% Interest
10/1/2007
744
4,850
790
-
6,384
32 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (continued)
Consideration paid for the remaining 20% interest in the Hampton Inn, Philadelphia, PA consisted of 406,877 OP Units valued at
$4,162, which were issued to certain executives and affiliated trustees of the Company. Prior to the acquisition of the remaining
20% interest, the Hampton Inn, Philadelphia, PA was reported as a consolidated joint venture and its assets and liabilities were
included in the Company’s consolidated balance sheet and non-controlling interest of $588 was reported as Minority Interests. As
a result of acquiring the remaining 20% interest in the venture, our investment in hotel properties was increased as follows:
Purchase Price
Less:
Net book value included in consolidated financial
statements prior to acquisition
Step-up in value included in consolidated financial
statements after acquisition
Land
Buildings and
Improvements
Furniture
Fixtures and
Equipment
Total
$ 744
$ 4,850
$ 790
$ 6,384
(193)
(2,396)
(220)
(2,809)
$
551
$
2,454
$
570
$
3,575
Pro Forma Operating Results (Unaudited)
The following condensed pro forma financial data is presented as if all 2008 and 2007 acquisitions had been consummated as of
January 1, 2007. Properties acquired without any operating history are excluded from the condensed pro forma operating results.
The condensed pro forma information is not necessarily indicative of what actual results of operations of the Company would
have been assuming the acquisitions had been consummated at the beginning of the year presented, nor does it purport to
represent the results of operations for future periods.
Pro Forma Total Revenues
Pro Forma (Loss) income from Continuing Operations applicable to Common Shareholders
Income from Discontinued Operations
Pro Forma Net (Loss) income
Preferred Distributions
Pro Forma Net (Loss) income applicable to Common Shareholders
Pro Forma (Loss) income
applicable to Common Shareholders per Common Share
Basic
Diluted
Weighted Average Common Shares Outstanding
Basic
Diluted
For the Year Ended December 31,
2008
$
266,728
2007
$
243,681
$
$
(11,115)
2,432
(8,683)
4,800
(13,483)
13,220
4,110
17,330
4,800
12,530
$
$
$
$
(0.30)
(0.30)
$
$
0.31
0.31
45,184,127
45,184,127
40,718,724
40,718,724
33 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of December 31, 2008 and December 31, 2007 our investment in unconsolidated joint ventures consisted of the following:
Joint Venture
Hotel Properties
Percent
Owned
Preferred
Return
December 31,
2008
2007
PRA Glastonbury, LLC
Inn American Hospitality at Ewing, LLC
Hilton Garden Inn, Glastonbury, CT
Courtyard by Marriott, Ewing, NJ
48%*
50.0%
11.0% cumulative
11.0% cumulative
$ 738
736
$ 945
1,016
Hiren Boston, LLC
SB Partners, LLC
Mystic Partners, LLC
PRA Suites at Glastonbury, LLC
Metro 29th Street Associates, LLC
Courtyard by Marriott, Boston, MA
Holiday Inn Express, Boston, MA
Hilton and Marriott branded hotels in CT and RI
Homewood Suites, Glastonbury, CT
Holiday Inn Express, New York, NY
50.0%
50.0%
8.8%-66.7%
48%*
50.0%
N/A
N/A
8.5% non-cumulative
10.0% non-cumulative
N/A
3,960
2,091
27,977
2,800
7,981
$ 46,283
4,148
2,010
32,928
2,808
7,996
$ 51,851
* Percent owned was 40.0% through March 31, 2007. On April 1, 2007 our percent owned increased to 48.0%.
On February 1, 2007 we acquired a 50.0% interest in Metro 29th Street Associates, LLC (“Metro 29th”), the lessee of the 228
room Holiday Inn Express-Manhattan, New York, NY, for approximately $6,817. Metro 29th holds a twenty five year lease with
certain renewal options at the end of the lease term. We also acquired an option to acquire a 50% interest in the entity that owns
the Holiday Inn Express-Manhattan. The option is exercisable after February 1, 2012 or upon termination of Metro 29th Street’s
lease of the hotel and expires at the end of the lease term. The fair value of the option was $933 at the time of acquisition and is
recorded in other assets on our consolidated balance sheet. We issued 694,766 OP Units valued at $7,747 for our interest in Metro
29th and the option. Metro 29th Street entered into an agreement with Metro 29th Sublessee, LLC, a joint venture owned by 44
New England and our joint venture partner, to sublease the hotel property. The hotel is managed by HHMLP.
On April 1, 2007, we increased our investment in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT,
and PRA Suites at Glastonbury, LLC, the owner of the Homewood Suites, Glastonbury, CT by acquiring an additional 8%
preferred interest from our partner in each venture. The purchase prices for our additional equity interests were $780 and $716 for
PRA Glastonbury, LLC and PRA Suites at Glastonbury, LLC, respectively.
During the year ended December 31, 2008, we determined that our investment in the Hartford Hilton, part of the Mystic Partners
joint venture portfolio, was impaired. As a result, the Company recorded an impairment charge of $1,890 which is included as
impairment of investment in unconsolidated joint venture on the Company’s consolidated statements of operations. This charge
reduced our investment in the Hartford Hilton to $0.
34 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
Income from our unconsolidated joint ventures is allocated to us and our joint venture partners consistent with the allocation of
cash distributions in accordance with the joint venture agreements. Any difference between the carrying amount of these
investments and the underlying equity in net assets is amortized over the expected useful lives of the properties and other
intangible assets. Income (loss) recognized during the years ended December 31, 2008, 2007, and 2006 for our Investments in
Unconsolidated Joint Ventures is as follows:
PRA Glastonbury, LLC
Inn American Hospitality at Ewing, LLC
Hiren Boston, LLC
SB Partners, LLC
Mystic Partners, LLC
PRA Suites at Glastonbury, LLC
Metro 29th Street Associates, LLC
HT/CNL Metro Hotels, LP
Income from Unconsolidated Joint Venture Investments
Less: Impairment of Investment in Unconsolidated Joint Venture
Twelve Months Ended
12/31/2008
$
94
20
(189)
80
(345)
(8)
1,721
-
1,373
(1,890)
12/31/2007
$
47
73
304
191
1,612
(7)
1,256
-
3,476
-
12/31/2006
$
(257)
160
(167)
(24)
1,691
(2)
-
398
1,799
-
Net (Loss) Income from Unconsolidated Joint Venture Investments
$
(517)
$
3,476
$
1,799
The SB Partners and Hiren Boston joint venture agreements provided for a 10% preferred return during the first two years of the
ventures based on our equity interest in the ventures. The preferred return period expired on July 1, 2007 for Hiren and October 1,
2007 for SB Partners. Subsequent to this initial two year period, cash distributions are made 50% to us and 50% to our joint
venture partners in the ventures.
The Mystic Partners joint venture agreement provides for an 8.5% non-cumulative preferred return based on our contributed
equity interest in the venture. Cash distributions will be made from cash available for distribution, first, to us to provide an 8.5%
annual non-compounded return on our unreturned capital contributions and then to our joint venture partner to provide an 8.5%
annual non-compounded return of their unreturned contributions. Any remaining cash available for distribution will be distributed
to us 10.5% with respect to the net cash flow from the Hartford Marriott, 7.0% with respect to the Hartford Hilton and 56.7%,
with respect to the remaining seven properties. Mystic Partners allocates income to us and our joint venture partner consistent with
the allocation of cash distributions in accordance with the joint venture agreements.
Each of the Mystic Partners hotel properties, except the Hartford Hilton, is under an Asset Management Agreement with 44 New
England to provide asset management services. Fees for these services are paid monthly to 44 New England and recognized as
income in the amount of 1% of operating revenues, except for the Hartford Marriott which is 0.25% of operating revenues.
The Company and our joint venture partner in Mystic Partners jointly and severally guarantee the performance of the terms of a
loan to Adriaen’s Landing Hotel, LLC, owner of the Hartford Marriott, in the amount of $50,000, and 315 Trumbull Street
Associates, LLC, owner of the Hartford Hilton, in the amount of $27,000, if at any time during the term of the note and during
such time as the net worth of Mystic Partners falls below the amount of the guarantee. We have determined that the probability of
incurring loss under this guarantee is remote and the value attributed to the guarantee is de minimis.
35 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE 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, including the Company’s share,
related to the unconsolidated joint ventures discussed above as of December 31, 2008 and December 31, 2007 and for the years
ended December 31, 2008, 2007, and 2006.
Balance Sheets
Investment in hotel properties, net
Other Assets
Total Assets
Liabilities and Equity
Mortgages and notes payable
Other liabilities
Equity:
Hersha Hospitality Trust
Joint Venture Partner(s)
Total Equity
December 31,
2008
$
209,468
25,334
234,802
$
December 31,
2007
$
$
229,829
30,000
259,829
$
219,889
11,636
$
221,398
12,305
44,938
(41,661)
3,277
47,311
(21,185)
26,126
Total Liabilities and Equity
$
234,802
$
259,829
The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures to the Company’s investment
in the unconsolidated joint ventures as presented on the Company’s balance sheets as of December 31, 2008 and 2007.
Company's Share
Excess Investment (1)
Investment in Joint Venture
December 31,
2008
$
44,938
1,345
46,283
December 31,
2007
$
47,311
4,540
51,851
$
$
(1) Excess investment represents the unamortized difference between the Company's investment and the Company's share of
the equity in the underlying net investment in the partnerships. The excess investment is amortized over the life of the
properties, and the amortization is included in Net (Loss) Income from Unconsolidated Joint Venture Investments.
Statements of Operations
Room Revenue
Other Revenue
Operating Expenses
Interest Expense
Debt Extinguishment
Loss on Impairment of Building and Equipment
Lease Expense
Property Taxes and Insurance
Federal and State Income Taxes
General and Administrative
Depreciation and Amortization
Twelve Months Ended
12/31/2008
12/31/2007
12/31/2006
$
99,530
28,344
(82,327)
(13,442)
-
(9,171)
(5,538)
(6,459)
121
(7,835)
(16,171)
$
98,581
31,586
(81,873)
(15,421)
(2,858)
-
(5,332)
(6,159)
(141)
(7,446)
(16,680)
$
81,285
30,016
(74,370)
(15,687)
(517)
-
(393)
(5,537)
(224)
(7,264)
(16,993)
Net loss
$
(12,948)
$
(5,743)
$
(9,684)
36 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 4 - DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES
We have approved first mortgage and mezzanine lending to hotel developers, including entities in which our executive officers
and affiliated trustees own an interest, to enable such entities to construct hotels and conduct related improvements on specific
hotel projects at interest rates ranging from 10% to 20%. As of December 31, 2008 and December 31, 2007, we had Development
Loans Receivable of $81,500 and $58,183, respectively. Interest income from development loans was $7,890, $6,046, and $2,487
for the years ended December 31, 2008, 2007, and 2006, respectively. Accrued interest on our development loans receivable was
$2,785 as of December 31, 2008 and $1,591 as of December 31, 2007.
As of December 31, 2008 and 2007, our development loans receivable consisted of the following:
Hotel Property
Sheraton - JFK Airport, NY
Hampton Inn & Suites - West Haven, CT
Hilton Garden Inn - New York, NY
Hampton Inn - Smithfield, RI
Homewood Suites - Newtown, PA
Union Square Hotel - Union Square, NY
Hyatt Place - Manhattan, NY
Lexington Avenue Hotel - Manhattan, NY
Renaissance by Marriott - Woodbridge, NJ
32 Pearl - Manhattan, NY
Greenwich Street Courtyard - Manhattan, NY
Independent Hotel - New York, NY
Hilton Garden Inn - Dover, DE
Hilton Garden Inn/Homewood Suites - Brooklyn, NY
Borrower
Risingsam Hospitality, LLC
44 West Haven Hospitality, LLC
York Street LLC
44 Hersha Smithfield, LLC
Reese Hotels, LLC
Risingsam Union Square, LLC
Brisam East 52, LLC
44 Lexington Holding, LLC
Hersha Woodbridge Associates, LLC
SC Waterview, LLC
Brisam Greenwich, LLC
Maiden Hotel, LLC
44 Aasha Hospitality Associates, LLC
167 Johnson Street, LLC
Tranche 1
Tranche 2
Discount
Total Hilton Garden Inn/Homewood Suites - Brooklyn, NY
Principal
Outstanding
12/31/2008
-
$
2,000
15,000
-
500
10,000
10,000
10,000
5,000
8,000
10,000
10,000
1,000
-
-
-
-
Principal
Outstanding
12/31/2007
Interest
Rate
$
10%
10%
11%
10%
11%
10%
10%
11%
11%
10%
10%
20%
10%
11%
13.5%
10,016
2,000
15,000
2,000
700
10,000
-
-
-
-
-
-
-
11,000
9,000
(1,533)
18,467
Maturity Date **
October 9, 2008
October 9, 2009 *
May 31, 2009
October 9, 2008 *
November 14, 2009
May 31, 2009
January 16, 2010
May 30, 2009 *
April 1, 2009 *
July 4, 2009
September 12, 2009
March 8, 2009
November 1, 2009 *
Total Development Loans Receivable
$
81,500
$
58,183
* Indicates borrower is a related party
** Represents current maturity date in effect. Agreements for our development loans receivable typically allow for two one-year
extensions which can be exercised by the borrower if the loan is not in default.
We monitor our portfolio of development loans on an on-going basis to determine collectability of the loan principal and accrued
interest. As part of our review we determined that the developer of the Hilton Garden Inn/Homewood Suites – Brooklyn, NY has
failed to make payments to the senior lender on the property’s first mortgage. After discussions with the developer and the senior
lender, we have determined that the fair value of the loan receivable and discount is $0 as of December 31, 2008. As a result, we
incurred an impairment charge for the remaining principal of $18,748, which is net of unamortized discount in the amount of
$1,252. A receivable for uncollected interest income of $569, which is net of unrecognized deferred loan fees of $143, was also
recorded as an impairment charge.
Advances and repayments on our development loans receivable consisted of the following for the years ended December 31,
2008, 2007, and 2006:
2008
2007
2006
Balance at January 1,
New Advances
Repayments
Discount recorded
Amortization of discount
Impairment of Development Loan Receivable, net of discount
Balance at December 31,
$
$
$
58,183
64,200
(22,416)
-
281
(18,748)
81,500
47,016
65,700
(53,000)
(1,687)
154
-
58,183
32,450
51,616
(37,050)
-
-
-
47,016
$
$
$
37 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 4 - DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES (continued)
We acquire land and improvements and lease them to entities, including entities in which our executive officers and affiliated
trustees own an interest, to enable such entities to construct hotels and related improvements on the leased land. The land is
leased under fixed lease agreements which earn rents at a minimum rental rate of 10% of our net investment in the leased
property. Additional rents are paid by the lessee for the interest on the mortgage, real estate taxes and insurance. Revenues from
our land leases are recorded in land lease revenue on our consolidated statement of operations. All expenses related to the land
leases are recorded in operating expenses as land lease expense. Leased land and improvements are included in investment in
hotel properties on our consolidated balance sheet. As of December 31, 2008 and 2007 our investment in leased land and
improvements consists of the following:
Location
Land
Improvements
Other
Total
Investment
Debt
Net Investment
Acquisition/
Lease Date
Lessee
Investment In Leased Properties
440 West 41st Street,
New York, NY
39th Street and 8th Avenue,
New York, NY
Nevins Street,
Brooklyn, NY
$ 10,735
$ 11,051
$ 196
$ 21,982
$ 12,100
$ 9,882
7/28/2006
21,774
-
541
22,315
13,250
9,065
10,650
-
269
10,919
6,500
4,419
6/28/2006
6/11/2007 &
7/11/2007
Metro Forty First
Street, LLC
Metro 39th Street
Associates, LLC
H Nevins Street
Associates, LLC
*
Total
$ 43,159
$ 11,051
$ 1,006
$ 55,216
$ 31,850
$ 23,366
* Indicates lessee is a related party
38 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 5 — OTHER ASSETS
Other Assets consisted of the following at December 31, 2008 and 2007:
2008
2007
Transaction Costs
Investment in Statutory Trusts
Notes Receivable
Due from Lessees
Prepaid Expenses
Interest due on Development Loans to Non-Related Parties
Deposits on Property Improvement Plans
Hotel Purchase Option
Other
$
$
237
1,548
1,267
1,907
3,182
2,024
149
933
2,270
13,517
209
1,548
2,581
1,986
3,402
1,456
640
2,620
1,591
16,033
$
$
Transaction Costs - Transaction costs include legal fees and other third party transaction costs incurred relative to entering into
debt facilities, issuances of equity securities or acquiring interests in hotel properties are recorded in other assets prior to the
closing of the respective transactions.
Investment in Statutory Trusts - We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory
Trust II. Our investment is accounted for under the equity method.
Notes Receivable – Notes receivable as of December 31, 2007 includes a loan made to one of our unconsolidated joint venture
partners in the amount of $1,120 bearing interest at 13.5% with a maturity date of December 27, 2008. Notes receivable as of
December 31, 2007 also included $1,350 extended in November and December 2006 to the purchaser of the Holiday Inn Express,
Duluth, GA; Comfort Suites, Duluth, GA; Hampton Inn, Newnan, GA; and the Hampton Inn Peachtree City, GA (collectively the
“Atlanta Portfolio”). The Atlanta Portfolio notes receivables were repaid in September 2008. Notes receivable as of December
31, 2008 includes a loan made to one of our unconsolidated joint venture partners in the amount of $1,267 bearing interest at 11%
with a maturity date of December 31, 2009.
Due from Lessees - Due from lessees represent rents due under our land lease and hotel lease agreements.
Prepaid Expense - Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed
in the next twelve months.
Interest due on Development Loans – Interest due on development loans represents interest income due from loans extended to
non-related parties that are used to enable such entities to construct hotels and conduct related improvements on specific hotel
projects. This excludes interest due on development loans from loans extended to related parties in the amounts of $761 and $135,
as of December 31, 2008 and 2007, respectively, which is included in the Due from Related Parties caption on the face of the
consolidated balance sheets.
Deposits on Property Improvement Plans – Deposits on property improvement plans consists of amounts advanced to HHMLP
that is to be used to fund capital expenditures as part of our property improvement programs at certain properties.
Hotel Purchase Option – We have options to acquire interests in two hotel properties at fixed purchase prices. An option valued
at $1,687 is for the development property related to the impaired development loan receivable noted in Footnote 4. We
determined that the fair value of this option as of December 31, 2008 is $0. Therefore, we recorded an impairment charge for the
option value of $1,687, which is included in Impairment of Development Loan Receivable and Other Asset on the Company’s
consolidated statements of operations.
39 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 - DEBT
Mortgages and Notes Payable
The total mortgages payable balance at December 31, 2008, and December 31, 2007, was $603,538 and $567,507, respectively,
and consisted of mortgages with fixed and variable interest rates ranging from 4.0% to 8.94%. The maturities for the outstanding
mortgages ranged from July 2009 to January 2032. Aggregate interest expense incurred under the mortgages payable totaled
$34,855, $33,767 and $20,579 during 2008, 2007 and 2006, respectively. The mortgages are secured by first deeds of trust on
various hotel properties with a combined net book value of $919,815 and $829,008 as of December 31, 2008, and 2007,
respectively. Our indebtedness contains various financial and non-financial event of default covenants customarily found in
financing arrangements. Our mortgages 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. As of December 31, 2008 we were in
compliance with all event of default covenants under the applicable loan agreement.
We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to
indenture agreements. The $25,774 note issued to Hersha Statutory Trust I will mature on June 30, 2035, but may be redeemed at
our option, in whole or in part, beginning on June 30, 2010 in accordance with the provisions of the indenture agreement. The
$25,774 note issued to Hersha Statutory Trust II will mature on July 30, 2035, but may be redeemed at our option, in whole or in
part, beginning on July 30, 2010 in accordance with the provisions of the indenture agreement. The note issued to Hersha
Statutory Trust I bears interest at a fixed rate of 7.34% per annum through June 30, 2010, and the note issued to Hersha Statutory
Trust II bears interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent to June 30, 2010 for notes issued to
Hersha Statutory Trust I and July 30, 2010 for notes issued to Hersha Statutory Trust II, the notes bear interest at a variable rate of
LIBOR plus 3.0% per annum. Interest expense in amount of $3,729, $3,793, and $3,766 was recorded during the years ended
December 31, 2008, 2007, and 2006, respectively.
As part of the acquisition of the Hyatt Summerfield Suites Portfolio, HHLP entered into a management agreement with
Lodgeworks, L.P. (“Lodgeworks”). Lodgeworks extended an interest-free loan to HHLP for working capital contributions that
are due at either the termination or expiration of the management agreement. Because the interest rate on the note payable is
below the market rate of interest at the date of the acquisition, a discount was recorded on the note payable. The discount reduced
the principal balances recorded in the mortgages and notes payable and is being amortized over the remaining life of the loan and
is recorded as interest expense. The balance of the note payable, net of unamortized discount, was $274 as of December 31, 2008
and $253 as of December 31, 2007.
Aggregate annual principal payments for the Company’s mortgages and notes payable for the five years following December 31,
2008 and thereafter are as follows:
Year Ending December 31,
Amount
2009
2010
2011
2012
2013
Thereafter
Unamortized Discount
72,196
21,833
41,587
11,938
25,265
482,602
(61)
655,360
$
The loan agreements for two debt obligations totaling $34,100, which mature during the next twelve months, contain extension
options that can be exercised at our discretion, effectively extending the maturity of $12,100 to 2011 and extending the maturity of
$22,000 to 2012. As of December 31, 2008, mortgages and notes payable and borrowings under our line of credit had a carrying
value of $743,842, which exceeded the fair value by approximately $48,511 due to an increase in market borrowing rates.
40 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 – DEBT (continued)
Revolving Line of Credit
On October 14, 2008, we entered into a Revolving Credit Loan and Security Agreement with T.D. Bank, NA and various other
lenders. The credit agreement provides for a revolving line of credit in the principal amount of up to $175,000, including a sub-
limit of $25,000 for irrevocable stand-by letters of credit. The existing bank group has committed $135,000, and the credit
agreement is structured to allow for an increase of an additional $40,000 under the line of credit, provided that additional
collateral is supplied.
On October 14, 2008, our previous line of credit was terminated and replaced by the new line of credit and as a result all amounts
outstanding under our previous credit facility were repaid with borrowings from our new credit facility. Additional borrowings
under the line of credit provided by T.D. Bank, NA may be used for working capital and general corporate purposes, including
payment of distributions or dividends and for the future purchase of additional hotels. The line of credit expires on December 31,
2011, and, provided no event of default has occurred and remains uncured, we may request that T.D. Bank, NA and the other
lenders renew the line of credit for an additional one-year period.
At HHLP’s option, the interest rate on the line of credit is either (i) the Wall Street Journal variable prime rate per annum or (ii)
LIBOR available for the periods of 1, 2, 3, or 6 months plus two and one half percent (2.5%) per annum. Our interest rate swap
agreement entered into on February 1, 2008 which fixed the interest rate on a $40,000 portion of our existing line of credit
remains in place. See Note 8 for more information on this interest rate swap.
The line of credit is collateralized by a first lien-security interest in all existing and future assets of HHLP, a collateral assignment
of all hotel management contracts of the management companies in the event of default, and title-insured, first-lien mortgages on
the following properties:
- Fairfield Inn, Laurel, MD
- Hampton Inn, Danville, PA
- Hampton Inn, Philadelphia, PA
- Holiday Inn, Norwich, CT
- Holiday Inn Express, Camp Springs, MD
- Holiday Inn Express and Suites, Harrisburg, PA
- Holiday Inn Express, Hershey, PA
- Holiday Inn Express, New Columbia, PA
- Mainstay Suites and Sleep Inn, King of Prussia, PA
- Residence Inn, Langhorne, PA
- Residence Inn, Norwood, MA
- Sheraton Hotel, JFK Airport, New York, NY
The credit agreement providing for the line of credit includes certain financial covenants and requires that we maintain (1) a
minimum tangible net worth of $300,000; (2) a maximum accounts and other receivables from affiliates of $125,000; (3) annual
distributions not to exceed 95% of adjusted funds from operations; (4) maximum variable rate indebtedness to total debt of 30%;
and (5) certain financial ratios, including the following:
·
·
·
a debt service coverage ratio of not less than 1.35 to 1.00;
a total funded liabilities to gross asset value ratio of not more than 0.67 to 1.00; and
a EBITDA to debt service ratio of not less than 1.40 to 1.00;
The Company maintained a line of credit balance of $88,421 at December 31, 2008 and $43,700 at December 31, 2007. The
Company recorded interest expense of $3,094, $4,239 and $2,134 related to the line of credit borrowings, for the years ended
December 31, 2008, 2007, and 2006, respectively. The weighted average interest rate on our Line of Credit during the years ended
December 31, 2008, 2007, and 2006 was 5.07%, 7.30%, and 7.33%, respectively. As of December 31, 2008 our remaining
borrowing capacity under the Line of Credit was $42,143.
Capitalized Interest
We utilize mortgage debt and our revolving line of credit to finance on-going capital improvement projects at our
properties. Interest incurred on mortgages and the revolving line of credit that relates to our capital improvement projects is
capitalized through the date when the assets are placed in service. For the years ended December 31, 2008 and 2007, we
capitalized $544 and $389, respectively, of interest expense related to these projects.
41 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 – DEBT (continued)
Deferred 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 costs is recorded in interest expense. As of December 31, 2008, deferred
costs were $9,157, net of accumulated amortization of $3,606. Deferred costs were $8,048, net of accumulated amortization of
$3,252, as of December 31, 2007. Amortization of deferred costs for the years ended December 31, 2008, 2007, and 2006 was
$2,030, $1,724 and $944, respectively.
Debt Extinguishment
On July 1, 2008, we settled on the defeasance of loans associated with four of our properties. These mortgage loans had an
aggregate outstanding principal balance of approximately $11,028 as of June 30, 2008. As a result of this extinguishment, we
expensed $1,399 in unamortized deferred costs and defeasance premiums for three of the four properties, which are included in
the Debt Extinguishment caption on the consolidated statements of operations for the year ended December 31, 2008 and now
serve as collateral for our revolving credit facility entered into on October 14, 2008. The fourth property, the
Holiday Inn Conference Center, New Cumberland, PA was sold on October 30, 2008 and $19 in unamortized deferred costs
expensed as a result of the debt extinguishment is included in the Income (Loss) from Discontinued Operations caption on the
consolidated statements of operations for the year ended December 31, 2008.
On September 30, 2008, we repaid $8,188 on our mortgage with M&T Bank for the Holiday Inn Express, Cambridge property as
a result of debt refinancing. The new debt of $11,000 has a fixed interest rate of 6.625% and a maturity date of September 30,
2023. As a result of this extinguishment, we expensed $17 in unamortized deferred costs, which are included in the Loss on Debt
Extinguishment caption on the consolidated statements of operations for the year ended December 31, 2008.
On October 14, 2008, we replaced our previous line of credit with Commerce Bank and various other lenders with a new credit
facility with T.D. Bank, NA and various other lenders. As a result of the termination of the existing line of credit, we expensed
$152 in unamortized deferred costs related to the origination of the original Commerce Bank Line of Credit, which are included in
the Loss on Debt Extinguishment caption on the consolidated statements of operations for the year ended December 31, 2008.
In January 2006, we replaced our line of credit with Sovereign Bank and various other lenders with a line of credit with
Commerce Bank and various other lenders. As a result of this termination, we expensed $255 in unamortized deferred costs
related to the origination of the Sovereign Bank line of credit, which are included in the Loss on Debt Extinguishment caption on
the consolidated statements of operations for the year ended December 31, 2006.
On April 7, 2006, we repaid $21,900 on our mortgage with Merrill Lynch for the Hampton Inn Herald Square property as a result
of a debt refinancing. The new debt of $26,500 has a fixed interest rate of 6.085% and a maturity date of May 1, 2016. As a result
of this extinguishment, we expensed $534 in unamortized deferred costs and prepayment penalties, which are included in the Loss
on Debt Extinguishment caption on the consolidated statements of operations for the year ended December 31, 2006.
On June 9, 2006, we repaid $34,200 on our mortgage with UBS for the McIntosh Portfolio, as a result of a debt refinancing. The
new debt of $36,300 has a fixed interest rate of 6.33% and maturity date of June 11, 2016 for each of the loans associated with the
McIntosh Portfolio. As a result of this extinguishment, we expensed $374 in unamortized deferred costs, which are included in the
Loss on Debt Extinguishment caption on the consolidated statements of operations for the year ended December 31, 2006.
On September 9, 2006, we repaid $8,287 on our mortgage with South New Hampshire Bank for the Residence Inn, Norwood,
using proceeds from a draw on our line of credit with Commerce Bank. In connection with the mortgage assumption, the seller
agreed to reimburse all pre-payment related fees associated with this payoff.
On December 27, 2006, we repaid $12,907 on our mortgage with GE Capital for the Hilton Garden Inn, JFK, NY property as a
result of a debt payoff. The new debt of $21,000 was acquired on March 7, 2007 and has a fixed interest rate of 5.82% and a
maturity date of March 1, 2017. As a result of this extinguishment, we expensed $322 in prepayment penalties, which are
included in the Loss on Debt Extinguishment caption on the consolidated statements of operations for the year ended December
31, 2006.
42 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
We are the sole general partner in our operating partnership subsidiary, HHLP, which is indirectly the sole general partner of the
subsidiary partnerships. At December 31, 2008, there were 8,746,300 non-controlling OP Units outstanding with a fair market
value of $26,239, based on the price per share of our common shares on the New York Stock Exchange on such date. These units
are redeemable by the unitholders for cash or, at our option, common shares on a one-for-one basis.
Management Agreements
Our wholly owned TRS, 44 New England, engages eligible independent contractors pursuant to REIT qualifications, including
HHMLP, as the property managers for hotels it leases from us pursuant to management agreements. 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 years ended December 31, 2008, 2007
and 2006, base management fees incurred totaled $6,136, $5,571 and $4,361, respectively and are recorded as Hotel Operating
Expenses. For the years ended December 31, 2008, 2007 and 2006, incentive management fees of $363, $0, and $0, respectively
were recorded as Hotel Operating Expenses.
Franchise Agreements
Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise
agreements have 10 to 20 year terms but may be terminated by either the franchisee or franchisor on certain anniversary dates
specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and
advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the hotels
and charged to expense as incurred. Franchise fee expense for the years ended December 31, 2008, 2007, and 2006 was $17,041,
$16,333 and $9,773 respectively. The initial fees incurred to enter into the franchise agreements are amortized over the life of the
franchise agreements.
Administrative Services Agreement
Each of the wholly owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly
accounting and information technology fee. Monthly fees for accounting services are $2 per property and monthly information
technology fees are $0.5 per property. In addition, each of the wholly owned hotels not managed by HHMLP, but for which the
accounting is provided by HHMLP incurs a monthly accounting fee of $3. For the years ended December 31, 2008, 2007 and
2006, the Company incurred accounting fees of $1,426, $1,408 and $1,053, respectively. For the years ended December 31, 2008,
2007 and 2006, the Company incurred information technology fees of $316, $276 and $251, respectively. Administrative services
fees, accounting fees, and information technology fees are included in General and Administrative expenses.
Capital Expenditure Fees
Beginning April 1, 2006, HHMLP began to charge 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 years ended December 31, 2008, 2007 and 2006, we incurred fees of $271, $292, and $155, respectively, which
were capitalized in with the cost of fixed asset additions.
43 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (continued)
Acquisitions from Affiliates
We have entered into an option agreement with each of our officers and affiliated trustees such that we obtain a right of first
refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market
value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of our
Company. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase
prices and all material terms of the purchase of hotels from related parties are approved by the Acquisition Committee.
Hotel Supplies
For the years ended December 31, 2008, 2007 and 2006, we incurred expenses of $1,588, $2,113 and $1,686, respectively, for
hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating
Expenses. Approximately $39 and $149 is included in accounts payable at December 31, 2008 and 2007.
Due From Related Parties
The Due from Related Party balance as of December 31, 2008 and December 31, 2007 was approximately $4,645 and $1,256,
respectively. The balances primarily consisted of accrued interest due on our development loans, and the remaining due from
related party balance are receivables owed from our unconsolidated joint ventures.
Due to Related Parties
The Due to Related Parties balance as of December 31, 2008 and December 31, 2007 was approximately $1,352 and $2,025,
respectively. The balances consisted of amounts payable to HHMLP for administrative, management, and benefit related fees.
Hotel Ground Rent
During 2003, in conjunction with the acquisition of the Hilton Garden Inn, Edison, NJ, we assumed a land lease from a third party
with an original term of 75 years. Monthly payments as determined by the lease agreement are due through the expiration in
August 2074. On February 16, 2006, in conjunction with the acquisition of the Hilton Garden Inn, JFK Airport, we assumed a
land lease with an original term of 99 years. Monthly payments are determined by the lease agreement and are due through the
expiration in July 2100. On June 13, 2008, in conjunction with the acquisition of the Sheraton Hotel, JFK Airport, we assumed a
land lease with an original term of 99 years. Monthly payments are determined by the lease agreement and are due through the
expiration in November 2103. Each land leases provide rent increases at scheduled intervals. We record rent expense on a
straight-line basis over the life of the lease from the beginning of the lease term. For the years ended December 31, 2008, 2007
and 2006, we incurred $1,040, $856, and $804 respectively, in hotel ground rent from continuing operations under the agreements.
Future minimum lease payments (without reflecting future applicable Consumer Price Index increases) under these agreements
are as follows:
Year Ending December 31,
Amount
Litigation
$
2009
2010
2011
2012
2013
Thereafter
$
891
905
935
975
981
93,160
97,847
We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other
than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse
effect on our liquidity, results of operations or business or financial condition.
44 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”) which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157
applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements;
the standard does not require any new fair value measurements of reported balances.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair
value measurement should be determined 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, SFAS No. 157 establishes a fair
value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the
ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and
yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability,
which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the
determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
As of December 31, 2008, 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.
To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect
both its 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, the Company has considered the impact of
netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair
value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current
credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2008, the
Company has assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative
positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As
a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value
hierarchy.
Derivative Instruments
On January 15, 2008, we entered into an interest rate swap agreement that fixes the interest rate on the variable rate mortgage,
bearing interest at one month U.S. dollar LIBOR plus 2.0%, originated to finance the acquisition of the nu Hotel, Brooklyn,
NY. Under the terms of this interest rate swap, we pay fixed rate interest of 3.245% on the $13,240 notional amount and we
receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest at a rate of 5.245%. On
January 12, 2009, we entered into a new interest rate swap agreement for this variable rate mortgage, bearing interest at one month
U.S. LIBOR plus 2.0%.
45 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (continued)
Under the terms of this interest rate swap, we pay fixed rate interest of 1.1925% up to a $18,000 notional amount and we receive
floating rate interest equal to the one month U.S. LIBOR, effectively fixing our interest at a rate of 3.1925%. This interest rate
swap matures on January 10, 2011.
On February 1, 2008, we entered into an interest rate swap agreement that fixes the interest rate on a $40,000 portion of our
floating revolving credit facility with Commerce Bank, which bears interest at one month U.S. dollar LIBOR plus 2.0%. Under
the terms of this interest rate swap, we pay fixed rate interest of 2.6275% on the $40,000 notional amount and we receive floating
rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest on this portion of the line of credit at a rate
of 4.6275%. This interest rate swap agreement matured on February 1, 2009, and we did not replace it with another agreement.
On December 31, 2008, we entered into an interest rate swap agreement that fixes the interest rate on a variable rate mortgage,
bearing interest at one month U.S. dollar LIBOR plus 3.0%, originated upon the refinance of the debt associated with the Hilton
Garden Inn, Edison, NJ. Under the terms of this interest rate swap, we pay fixed rate interest of 1.37% and we receive floating
rate interest equal to the one month U.S. dollar LIBOR, effectively fixing our interest at a rate of 4.37%. The notional amount
amortizes in tandem with the amortization of the underlying hedged debt and is $7,300 as of December 31, 2008.
We maintain an interest rate cap that effectively fixes interest payments when LIBOR exceeds 5.75% on our debt financing Hotel
373, New York, NY. The notional amount of the interest rate cap is $22,000 and equals the principal of the variable interest rate
debt being hedged.
We maintain an interest rate swap that fixes our interest rate on a variable rate mortgage on the Sheraton Four Points, Revere,
MA. Under the terms of this interest rate swap, we pay fixed rate interest of 4.73% of the notional amount and we receive floating
rate interest equal to the one month U.S. dollar LIBOR. The notional amount amortizes in tandem with the amortization of the
underlying hedged debt and is $7,619 as of December 31, 2008. We entered into this interest rate swap in July of 2004 and
designated it as a cash flow hedge in November of 2004 when the fair value of the swap was a liability of $342, causing
ineffectiveness in the hedge relationship. Prior to January 1, 2008, the hedge relationship was deemed to be effective and the
change in fair value related to the effective portion of the interest rate swap was recorded in Accumulated Other Comprehensive
Income on the Balance Sheet. Subsequent to January 1, 2008, the hedge relationship was no longer deemed to be effective. The
change in fair value of this interest rate swap for the year ended December 31, 2008 was a loss of $52 and was recorded in Interest
Expense on the Statement of Operations.
At December 31, 2008 and December 31, 2007, the fair value of the interest rate swaps and cap were:
Date of Transaction
Hedged Debt
July 2, 2004
July 1, 2007
January 15, 2008
February 1, 2008
December 31, 2008
Variable Rate Mortgage - Sheraton Four Points, Revere, MA
Variable Rate Mortgage - Hotel 373, New York, NY
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
Revolving Variable Rate Credit Facility
Variable Rate Mortgage - Hilton Garden Inn, Edison, NJ
Type
Swap
Cap
Swap
Swap
Swap
Maturity Date
July 23, 2009
April 9, 2009
January 12, 2009
February 1, 2009
January 1, 2011
December 31, 2008
December 31, 2007
Value
$
(172)
-
$
(6)
(74)
(25)
(277)
$
$
(119)
(120)
1
-
-
The fair value of the derivative instrument is included in Accounts Payable, Accrued Expenses and Other Liabilities at December
31, 2008 and December 31, 2007.
The change in fair value of derivative instruments designated as cash flow hedges was a loss of $86, $256, and $94 for the years
ended December 31, 2008, 2007, and 2006, respectively. These unrealized losses were reflected on our Balance Sheet in
Accumulated Other Comprehensive Income. Hedge ineffectiveness of $1, $15, and $14 on cash flow hedges was recognized in
interest expense for the years ended December 31, 2008, 2007, and 2006, respectively.
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 debt. The change in net unrealized gains/losses on cash flow hedges
reflects a reclassification of $13 of net unrealized gains/losses from accumulated other comprehensive income as a reduction to
interest expense during 2008. During 2009, the Company estimates that an additional $37 will be reclassified as a reduction to
interest expense.
46 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 9 - SHARE-BASED PAYMENTS
In May 2008, the Company established the Hersha Hospitality Trust 2008 Equity Incentive Plan (the “2008 Plan”) for the purpose
of attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the
Company. Prior to the 2008 Plan, the Company made awards pursuant to the 2004 Equity Incentive Plan (the “2004 Plan”). Upon
approval of the 2008 Plan by the Company’s shareholders on May 22, 2008, the Company terminated the 2004 Plan. Termination
of the 2004 Plan did not have any effect on equity awards and grants previously made under that plan.
Executives
Compensation expense related to restricted stock awards issued to executives of the Company of $1,411, $766 and $293 was
incurred during the years ended December 31, 2008, 2007 and 2006, respectively, related to the restricted share awards and is
recorded in general and administrative expense on the statement of operations. Unearned compensation as of December 31, 2008
and 2007 was $4,118 and $3,008, respectively. The following table is a summary of all of the grants issued to executives under
the 2004 and 2008 Plans:
Shares Vested
December 31,
Unearned Compensation
December 31,
Original Issuance
Date
June 1, 2005
June 1, 2006
June 1, 2007
June 2, 2008
September 30, 2008
Shares Issued
71,000
89,500
214,582
278,059
3,616
656,757
Share Price
on date of
grant
$ 9.60
$ 9.40
$ 12.32
$ 8.97
$ 7.44
Vesting
Period
4 years
4 years
4 years
4 years
1-4 years
Vesting
Schedule
25%/year
25%/year
25%/year
25%/year
25-100%/year
2008
53,250
44,750
53,645
-
-
2007
35,500
22,375
-
-
-
2008
$ 71
298
1,597
2,130
22
2007
$ 242
508
2,258
-
-
151,645
57,875
$ 4,118
$ 3,008
Trustees
Compensation expense related to stock awards issued to the Board of Trustees of $91, $86, and $45 was incurred during the years
ended December 31, 2008, 2007, and 2006. All shares issued to the Board of Trustees are immediately vested. The following
table is a summary of all of the grants issued to trustees under the 2004 and 2008 Plans:
Date of Award Issuance
March 1, 2005
January 3, 2006
January 2, 2007
July 2, 2007
January 2, 2008
June 2, 2008
January 2, 2009
Shares Issued
2,095
5,000
4,000
4,000
4,000
6,000
12,500
37,595
Share Price on
date of grant
$ 11.97
9.12
11.44
12.12
9.33
8.97
2.96
47 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 10 - EARNINGS PER SHARE
The following table is a reconciliation of the income (numerator) and weighted average shares (denominator) used in the
calculation of basic earnings per common share and diluted earnings per common share in accordance with SFAS No. 128,
Earnings Per Share. The computation of basic and diluted earnings per share is presented below.
2008
Year Ended December 31,
2007
2006
Numerator:
BASIC
(Loss) income from Continuing Operations
Dividends paid on unvested restricted shares
Distributions to 8.0% Series A Preferred Shareholders
(Loss) income from continuing operations
applicable to common shareholders
Income from Discontinued Operations
Net (Loss) income applicable to common shareholders
$ (11,240)
(329)
(4,800)
$ 13,737
(197)
(4,800)
$ 4,119
(95)
(4,800)
(16,369)
2,432
$ (13,937)
8,740
4,110
$ 12,850
(776)
979
$ 203
DILUTED*
(Loss) income from Continuing Operations
Dividends paid on unvested restricted shares
Distributions to 8.0% Series A Preferred Shareholders
(Loss) income from continuing operations
applicable to common shareholders
Income from Discontinued Operations
Net (Loss) income applicable to common shareholders
Denominator:
Weighted average number of common shares - basic
Effect of dilutive securities:
Unvested stock awards
$ (11,240)
(329)
(4,800)
$ 13,737
(197)
(4,800)
$ 4,119
(95)
(4,800)
(16,369)
2,432
$ (13,937)
8,740
4,110
$ 12,850
(776)
979
$ 203
45,184,127
40,718,724
27,118,264
- **
-
**
-
**
Weighted average number of common shares - diluted*
45,184,127
40,718,724
27,118,264
Earnings Per Share:
BASIC
(Loss) income from continuing operations applicable to
common shareholders
Income from Discontinued Operations
$ (0.36)
$ 0.05
$ 0.22
$ 0.10
$ (0.03)
$ 0.04
Net (loss) income applicable to common shareholders
$ (0.31)
$ 0.32
$ 0.01
DILUTED*
(Loss) income from continuing operations applicable to
common shareholders
Income from Discontinued Operations
$ (0.36)
$ 0.05
$ 0.22
$ 0.10
$ (0.03)
$ 0.04
Net (loss) income applicable to common shareholders
$ (0.31)
$ 0.32
$ 0.01
* Income allocated to minority interest in the Partnership has been excluded from the numerator and OP Units 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 OP Units outstanding for years ended December 31, 2008,
2007 and 2006 were 8,034,737, 5,464,670 and 3,554,361, respectively.
** Unvested stock awards have been omitted from the denominator for the purpose of computing diluted earnings per share for
the years ended December 31, 2008, 2007 and 2006 since the effect of including these awards in the denominator would be anti-
dilutive to income from continuing operations applicable to common shareholders.
48 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 11 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING ACTIVITIES
Interest paid in 2008, 2007 and 2006 totaled $41,797, $40,594, and $25,349, respectively. The following non-cash investing and
financing activities occurred during 2008, 2007 and 2006:
Common Shares issued as part of the Dividend Reinvestment Plan
$
31
$
30
$
29
2008
2007
2006
Issuance of Common Shares to the Board of Trustees
Issuance of OP Units for acquisitions of hotel properties
Debt assumed in acquisition of hotel properties
Issuance of OP Units for acquisition of unconsolidated joint venture
Issuance of OP Units for acquisition of option to acquire interest in hotel property
Conversion of OP Units to Common Shares
Reallocation to minority interest
Issuance of notes receivable in disposition of hotel properties held for sale
91
21,624
30,790
-
-
1,372
1,966
-
95
25,781
70,564
6,817
933
2,369
12,422
-
46
9,940
101,900
-
-
650
3,467
1,350
49 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 12 - DISCONTINUED OPERATIONS
We follow the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires,
among other things, that the operating results of certain real estate assets which have been sold, or otherwise qualify as held for
disposition (as defined by SFAS No. 144), be included in discontinued operations in the statements of operations for all periods
presented.
In September of 2005, our Board of Trustees authorized management of the Company to sell the Holiday Inn Express, Hartford,
CT. The operating results for this hotel were reclassified to discontinued operations in the statements of operations in the
statements of operations for the year ended December 31, 2006. The hotel was acquired by the Company in January 2004 and was
sold on April 12, 2006. Proceeds from the sale were $3,600, and the gain on the sale was $497, of which $61 was allocated to
minority interest in HHLP. During 2004, in conjunction with the acquisition of the Holiday Inn Express, Hartford, CT, we
assumed a land lease from a third party with an original term of 99 years. Monthly payments as determined by the lease agreement
were due through the expiration in September 2101. Subsequent to the sale of this property in the second quarter of 2006, we did
not incur further lease expense. For the year ended December 31, 2006, we incurred $85 in hotel ground rent under this
agreement, which have been reclassified to discontinued operations in the statement of operations. The lease was assumed by the
purchaser of this property.
In March of 2006, our Board of Trustees authorized management of the Company to sell four properties located in metropolitan
Atlanta, Georgia. These four properties are the Holiday Inn Express, Duluth, Comfort Suites, Duluth, Hampton Inn, Newnan and
the Hampton Inn Peachtree City. The operating results for these hotels were reclassified to discontinued operations in the
statements of operations for the year ended December 31, 2006. These hotels were acquired by the Company in April and May
2000 and were sold during November and December 2006. Proceeds from the sales were $18,100, and the gain on the sale was
$290, of which $33 was allocated to minority interest in HHLP. Notes receivable in the aggregate amount of $1,350 were received
as part of the proceeds of the sale of the Atlanta Portfolio and were repaid in September 2008.
In September of 2007, our Board of Trustees authorized management of the Company to sell the Hampton Inn, Linden, NJ
(Hampton Inn) and Fairfield Inn, Mt. Laurel, NJ (Fairfield Inn). The Company acquired the Hampton Inn in October 2003 and
the Fairfield Inn in January 2006. The operating results for these hotels have been reclassified to discontinued operations in the
statements of operations for the years ended December 31, 2007 and 2006. Proceeds from the sales were $29,500, and the gain on
the sale was $4,248, of which $503 was allocated to minority interest in HHLP.
In October 2008, the Company sold the Holiday Inn Conference Center, New Cumberland, PA (Holiday Inn). Beginning on July
1, 2006, the Company leased this hotel to an unrelated party and the lease agreement contained a purchase provision by the
lessee. Prior to July 1, 2006, this hotel was leased to our wholly owned TRS and operating revenues and expenses of the hotel
were recorded in hotel operating revenues and hotel operating expenses. The operating results for this hotel have been reclassified
to discontinued operations in the statements of operations for the years ended December 31, 2008, 2007 and 2006. Proceeds from
the sale of this property were $6,456 and the gain on this sale was $2,888, of which $436 was allocated to minority interest in
HHLP.
We allocate interest and capital lease expense to discontinued operations for debt that is to be assumed or that is required to be
repaid as a result of the disposal transaction. We allocated $145, $1,276 and $2,215 of interest and capital lease expense to
discontinued operations for the years ended December 31, 2008, 2007, and 2006, respectively.
50 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 12 - DISCONTINUED OPERATIONS (continued)
The following table sets forth the components of discontinued operations (excluding the gains on sale) for the years ended
December 31, 2008, 2007 and 2006:
Revenue:
Hotel Operating Revenues
Hotel Lease Revenue
Total Revenue
Expenses:
2008
2007
2006
$
-
628
628
$
6,685
781
7,466
$
15,847
391
16,238
Interest and Capital Lease Expense
Hotel Operating Expenses
Hotel Ground Rent
Real Estate and Personal Property Taxes and Property Insurance
General and Administrative
Loss on Debt Extinguishment
Depreciation and Amortization
Total Expenses
Loss (Income) from Discontinued Operations before Minority Interest
Allocation to Minority Interest
145
-
-
65
3
19
420
652
(24)
4
1,276
3,999
-
510
-
-
1,267
7,052
414
(49)
2,215
10,799
85
966
-
-
1,850
15,915
323
(37)
(Loss) Income from Discontinued Operations
$
(20)
$
365
$
286
51 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 13 - SHAREHOLDERS’ EQUITY AND MINORITY INTEREST IN PARTNERSHIP
Common Shares
The Company’s common shares are duly authorized, fully paid and non-assessable. Common shareholders are entitled to receive
dividends if and when authorized and declared by the Board of Trustees of the Company out of assets legally available and to
share ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation,
dissolution or winding up after payment of, or adequate provision for, all known debts and liabilities of the Company.
Preferred Shares
The Declaration of Trust authorizes our Board of Trustees to classify any unissued preferred shares and to reclassify any
previously classified but unissued preferred shares of any series from time to time in one or more series, as authorized by the
Board of Trustees. Prior to issuance of shares of each series, the Board of Trustees is required by Maryland REIT Law and our
Declaration of Trust to set for each such series, subject to the provisions of our Declaration of Trust regarding the restriction on
transfer of shares of beneficial interest, the terms, the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Thus,
our Board of Trustees could authorize the issuance of additional preferred shares with terms and conditions which could have the
effect of delaying, deferring or preventing a transaction or a change in control in us that might involve a premium price for holders
of common shares or otherwise be in their best interest.
Common Partnership Units
Units of interest in our limited partnership, or OP Units are issued in connection with the acquisition of wholly owned hotels and
joint venture interests in hotel properties. The total number of OP Units outstanding as of December 31, 2008, 2007 and 2006 was
8,746,300; 6,424,915; and 3,835,586, respectively. These units can be converted to common shares which are issuable to the
limited partners upon exercise of their redemption rights. The number of shares issuable upon exercise of the redemption rights
will be adjusted upon the occurrence of stock splits, mergers, consolidation or similar pro rata share transactions, that otherwise
would have the effect of diluting the ownership interest of the limited partners or our shareholders. During 2008 and 2007,
175,843 and 306,460 common units were converted to Class A Common Shares, respectively.
52 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 14 - INCOME TAXES
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year
ended December 31, 1999. To qualify as a REIT, the Company must meet a number of organizational and operational
requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders. It
is the Company’s current intention to adhere to these requirements and maintain the Company’s qualification for taxation as a
REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that
is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be
subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able
to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed
taxable income.
Taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income
taxes. 44 New England Company, a 100% owned taxable REIT subsidiary, and Revere Hotel Group LLC, a 55% owned taxable
REIT subsidiary, (collectively “Consolidated TRS”) are both entities subject to income taxes at the applicable federal, state and
local tax rates.
In 2008, 2007 and 2006, 44 New England Management Company generated net operating losses (income) of $2,554, $707 and
($420), respectively. In 2008, 2007 and 2006, Revere Hotel Group LLC generated net operating losses of $265, $313, $521,
respectively. The Company did not record an income tax expense (benefit) for the net operating losses generated in 2008, 2007 or
2006.
There was no income tax expense (benefit) recognized by the Consolidated TRS for 2008, 2007 and 2006.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory
federal income tax rate to pretax income as a result of the following differences:
Computed "Expected" federal tax expense (benefit) of TRS, at 35%
State income taxes, net of federal income tax effect
Changes in valuation allowance
2008
For the year ended December 31,
2007
$
2006
$
$
(1,251)
(181)
1,432
(270)
(66)
336
(451)
(6)
457
Total income tax expense
$
-
$
-
$
-
The components of consolidated TRS’s deferred tax assets as of December 31, 2008 and 2007 were as follows:
as of December 31,
2008
2007
Deferred tax assets:
Net operating loss carryforward
Depreciation
Net deferred tax assets
Valuation allowance
Deferred tax assets
$
3,185
(29)
3,156
(3,156)
-
$
$
1,743
(19)
1,724
(1,724)
$
-
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Based on the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the
Consolidated TRS will not realize the benefits of these deferred tax assets at December 31, 2008.
53 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 14 - INCOME TAXES (continued)
Earnings and profits, which will determine the taxability of dividends to shareholders, will differ from net income reported for
financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to
compute depreciation. The following table sets forth certain per share information regarding the Company’s common and
preferred share distributions for the years ended December 31, 2008, 2007 and 2006.
Preferred Shares - 8% Series A
Ordinary income
Capital Gain Distribution
Common Shares - Class A
Ordinary income
Return of Capital
Capital Gain Distribution
2008
2007
2006
86.46%
13.54%
81.98%
18.02%
83.05%
16.95%
44.61%
48.40%
6.99%
48.25%
41.14%
10.61%
28.27%
65.85%
5.88%
54 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Total Revenues
Total Expenses
(Loss) Income from Unconsolidated Joint Ventures
(Loss) Income before Minority Interests and Discontinued Operations
(Loss) Income Allocated to Minority Holders in Continuing Operations
(Loss) Income from Continuing Operations
(Loss) Income from Discontinued Operations (including Gain on Disposition of Hotel Properties)
Net (Loss) Income
Preferred Distributions
Net (Loss) Income applicable to Common Shareholders
Basic and diluted earnings per share:
Year Ended December 31, 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
55,607
$
71,363
$
75,933
$
62,174
58,642
(738)
(3,773)
(990)
(2,783)
(96)
(2,879)
62,757
1,360
9,966
1,738
8,228
(3)
8,225
69,855
1,629
7,707
1,417
6,290
45
6,335
86,599
(2,768)
(27,193)
(4,218)
(22,975)
2,486
(20,489)
1,200
(4,079)
$
$
1,200
7,025
1,200
5,135
$
1,200
(21,689)
$
(Loss) Income from continuing operations applicable to common shareholders
$
(0.10)
$
0.16
$
0.11
$
(0.51)
Discontinued Operations
Net Loss (Income) applicable to Common Shareholders
Weighted Average Common Shares Outstanding
Basic
Diluted
Total Revenues
Total Expenses
(Loss) Income from Unconsolidated Joint Ventures
(Loss) Income before Minority Interests and Discontinued Operations
(Loss) Income Allocated to Minority Holders in Continuing Operations
(Loss) Income from Continuing Operations
(Loss) Income from Discontinued Operations (including Gain on Disposition of Hotel Properties)
Net (Loss) Income
Preferred Distributions
Net (Loss) Income applicable to Common Shareholders
Basic and diluted earnings per share:
-
-
-
0.05
$
(0.10)
$
0.16
$
0.11
$
(0.46)
40,891,140
40,891,140
44,253,641
44,253,641
47,764,168
47,764,168
47,770,780
47,770,780
Year Ended December 31, 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
47,466
$
64,529
$
68,712
$
61,326
51,687
(838)
(5,059)
(981)
(4,078)
(160)
(4,238)
57,414
1,741
8,856
1,164
7,692
103
7,795
60,658
1,680
9,734
1,376
8,358
138
8,496
60,240
893
1,979
214
1,765
4,029
5,794
1,200
(5,438)
$
$
1,200
6,595
1,200
7,296
$
1,200
4,594
$
(Loss) Income from continuing operations applicable to common shareholders
$
(0.13)
$
0.16
$
0.18
$
0.01
Discontinued Operations
Net (Loss) Income applicable to Common Shareholders
Weighted Average Common Shares Outstanding
Basic
Diluted
-
-
-
0.10
$
(0.13)
$
0.16
$
0.18
$
0.11
40,537,851
40,537,851
40,642,569
40,842,382
40,807,626
40,807,626
40,882,090
40,882,685
55 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2008
[IN THOUSANDS]
Initial Costs
Costs Capitalized Subsequent
to Acquisition
Gross Amounts at which Carrried
at Close of Period
Accumulated
Depreciation
Net Book Value
Description
Encumbrances
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Total
Buildings &
Improvements*
Land, Buildings
& Improvements
Date of
Acquisition
Hampton Inn, Carlisle, PA
$
(3,477)
$
300
$
3,109
$
200
$
2,170
$
500
$
5,279
$
5,779
$
(1,507)
$
4,272
06/01/97
Holiday Inn Exp, Hershey,
PA
Holiday Inn Exp, New
Columbia, PA
Comfort Inn, Harrisburg,
PA
Hampton Inn, Selinsgrove,
PA
Hampton Inn, Danville, PA
HIE & Suites, Harrisburg,
PA
Hampton Inn, Hershey, PA
Mainstay Suites, Frederick,
MD
Mainstay Suites &
Sleep Inn, KOP, PA
Hilton Garden Inn, Edison,
NJ
Sheraton Four Points,
Revere, MA
Residence Inn,
Framingham, MA
-
-
(2,113)
(2,905)
-
(2,994)
(2,537)
(7,300)
(8,148)
426
94
-
157
300
213
807
262
1,133
-
70
2,645
2,510
2,720
2,511
2,787
1,934
5,714
1,049
7,294
12,159
14,996
(8,848)
1,325
12,737
Comfort Inn, Frederick, MD
Hilton Garden Inn,
Gettysburg, PA
(3,257)
(5,031)
450
745
4,342
6,116
Hampton Inn, NYC, NY
(26,250)
5,472
23,280
Residence Inn, Greenbelt,
MD
Fairfield Inn, Laurel, MD
Holiday Inn Exp,
Langhorne, PA
Holiday Inn Exp, Malvern,
PA
(12,047)
2,615
14,815
-
(6,499)
(4,038)
927
1,088
2,639
6,120
6,573
5,324
Holiday Inn Exp, KOP, PA
(12,849)
2,557
13,339
Courtyard Inn, Wilmington,
DE
McIntosh Inn, Wilmington,
DE
Residence Inn,
Williamsburg, VA
Springhill Suites,
Williamsburg, VA
-
(12,631)
988
898
10,295
4,515
(7,610)
1,911
11,625
(5,182)
1,430
10,293
Courtyard Inn, Brookline,
MA
(38,913)
Courtyard Inn, Scranton, PA
(6,208)
-
761
47,414
7,193
410
66
214
93
99
81
4
3,429
771
1,184
2,356
1,170
1,083
1,365
171
2,989
836
160
214
250
399
294
811
433
6,074
6,910
(1,726)
5,184
10/01/97
3,281
3,441
(900)
2,541
12/01/97
3,904
4,118
(1,051)
3,067
05/15/98
4,867
5,117
(1,574)
3,543
09/12/96
3,957
4,356
(1,066)
3,290
08/28/97
3,017
3,311
(790)
2,521
03/06/98
7,079
7,890
(1,592)
6,298
01/01/00
4,038
4,471
(712)
3,759
01/01/02
-
-
-
-
-
-
-
-
-
-
654
-
-
-
13
(13)
-
-
323
331
355
768
90
31
106
182
992
58
90
246
689
766
606
60
242
1,099
1,133
7,617
8,750
(1,433)
7,317
06/01/01
-
70
12,490
12,490
(1,639)
10,851
10/01/04
15,351
15,421
(3,720)
11,701
02/23/04
1,325
13,505
14,830
(1,659)
13,171
03/26/04
450
745
5,472
2,615
927
1,088
3,293
2,557
988
898
1,924
1,417
-
761
4,432
4,882
6,147
6,892
(523)
(692)
4,359
05/27/04
6,200
07/23/04
23,386
28,858
(2,308)
26,550
04/01/05
14,997
17,612
(1,702)
15,910
07/16/04
7,112
8,039
6,631
7,719
5,414
8,707
(766)
(610)
(489)
7,273
01/31/05
7,109
05/26/05
8,218
05/24/05
13,585
16,142
(1,250)
14,892
05/23/05
10,984
11,972
(1,041)
10,931
06/17/05
5,281
6,179
(529)
5,650
06/17/05
12,231
14,155
(2,208)
11,947
11/22/05
10,353
11,770
(1,783)
9,987
11/22/05
47,656
47,656
(4,218)
43,438
06/15/05
8,292
9,053
(667)
8,386
02/01/06
56 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2008 (continued)
[IN THOUSANDS]
Initial Costs
Costs Capitalized Subsequent
to Acquisition
Gross Amounts at which Carrried
at Close of Period
Accumulated
Depreciation
Net Book Value
Description
Encumbrances
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Total
Buildings &
Improvements*
Land, Buildings
& Improvements
Date of
Acquisition
$
(15,343)
$
3,064
$
16,068
$
-
$
91
$
3,064
$
16,159
$
19,223
$
(1,200)
$
18,023
01/03/06
Courtyard Inn, Langhorne,
PA
Fairfield Inn, Bethlehem,
PA
Residence Inn, Tyson's
Corner, VA
Hilton Garden Inn,
JFK Airport, NY
Hawthorne Suites,
Franklin, MA
Comfort Inn, Dartmouth,
MA
Residence Inn, Dartmouth,
MA
Holiday Inn Exp,
Cambridge, MA
Residence Inn, Norwood,
MA
Hampton Inn, Brookhaven,
NY
Holiday Inn Exp, Hauppage,
NY
Residence Inn, Langhorne,
PA
(6,132)
1,399
6,778
(9,044)
4,283
14,475
(21,000)
-
25,018
(8,430)
1,872
(3,090)
902
8,968
3,525
(8,880)
1,933
10,434
(10,972)
1,956
9,793
-
1,970
11,761
(14,778)
3,130
17,345
(10,133)
2,737
14,080
-
-
-
-
-
-
-
-
-
-
-
1,463
12,094
94
Hampton Inn, Chelsea, NY
(36,000)
8,905
33,500
Hyatt Summerfield Suites,
Bridgewater, NJ
Hyatt Summerfield Suites,
Charlotte, NC
Hyatt Summerfield Suites,
Gaithersburg, MD
Hyatt Summerfield Suites,
Pleasant Hills, CA
Hyatt Summerfield Suites,
Pleasanton, CA
Hyatt Summerfield Suites,
Scottsdale, AZ
Hyatt Summerfield Suites,
White Plains, NY
(14,492)
3,373
19,685
(7,330)
770
7,315
(13,720)
2,912
16,001
(20,160)
6,216
17,229
(14,490)
3,941
12,560
(16,778)
3,060
19,968
(33,030)
8,823
30,273
HIE & Suites, Chester, NY
Residence Inn, Carlisle, PA
(6,700)
(6,958)
1,500
1,015
6,671
7,511
Hampton Inn, Seaport, NY
(19,218)
7,816
19,040
Hotel 373-5th Ave, NYC,
NY
Holiday Inn, Norwich, CT
Sheraton Hotel, JFK
Airport, NY
Hampton Inn, Philadelphia,
PA
(22,000)
14,239
16,778
-
-
-
1,984
12,037
-
27,315
3,490
24,382
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
328
282
423
113
497
188
503
152
863
685
889
613
159
1,608
309
137
142
163
154
43
24
143
78
123
52
1,399
4,283
7,106
8,505
(581)
7,924
01/03/06
14,757
19,040
(1,084)
17,956
02/02/06
-
25,441
25,441
(1,868)
23,573
02/16/06
9,081
10,953
4,022
4,924
10,622
12,555
10,296
12,252
11,913
13,883
(622)
(328)
(706)
(716)
(725)
10,331
04/25/06
4,596
05/01/06
11,849
05/01/06
11,536
05/03/06
13,158
07/27/06
18,208
21,338
(1,081)
20,257
09/06/06
14,765
17,502
12,983
14,540
(899)
(624)
16,603
09/01/06
13,916
01/08/07
34,113
43,018
(1,999)
41,019
09/29/06
19,844
23,217
8,923
9,693
16,310
19,222
17,366
23,582
12,702
16,643
(995)
(565)
(865)
(872)
(639)
22,222
12/28/06
9,128
12/28/06
18,357
12/28/06
22,710
12/28/06
16,004
12/28/06
20,131
23,191
(1,011)
22,180
12/28/06
30,427
39,250
(1,528)
37,722
12/28/06
1,872
902
1,933
1,956
1,970
3,130
2,737
1,557
8,905
3,373
770
2,912
6,216
3,941
3,060
8,823
1,500
1,015
7,816
6,714
8,214
7,535
8,550
19,183
26,999
14,239
16,856
31,095
1,984
12,160
14,144
-
27,367
27,367
(322)
(374)
(922)
(671)
(460)
(374)
7,892
01/25/07
8,176
01/10/07
26,077
02/01/07
30,424
06/01/07
13,684
07/01/07
26,993
06/13/08
2,798
3,490
27,180
30,670
(4,420)
26,250
02/15/06
57 HERSHA 2008 ANNUAL REPORT
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2008 (continued)
[IN THOUSANDS]
Initial Costs
Costs Capitalized Subsequent
to Acquisition
Gross Amounts at which Carrried
at Close of Period
Accumulated
Depreciation
Net Book Value
Description
Encumbrances
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Total
Buildings &
Improvements*
Land, Buildings
& Improvements
Date of
Acquisition
Duane Street, Tribeca, NY
$
(15,000)
$
8,213
$
12,869
$
-
$
287
$
8,213
$
13,156
$
21,369
$
(334)
$
21,035
01/04/08
NU Hotel, Brooklyn, NY
(17,818)
-
22,042
Towneplace Suites,
Harrisburg, PA
Holiday Inn Express, Camp
Springs, MD
Hampton Inn, Smithfield,
RI
Courtyard Inn, Alexandria,
VA
(9,250)
1,237
10,136
-
1,629
11,094
(6,943)
2,057
9,486
(25,000)
6,376
26,089
8th Ave Land, NYC, NY
(13,250)
21,575
-
(12,100)
10,735
11,051
(6,500)
10,650
-
41st Street Facility, NYC,
NY
Nevins Street Land,
Brooklyn, NY
Total Investment in Real
Estate
-
-
-
-
-
-
-
-
2
37
115
17
214
198
(1)
-
-
22,044
22,044
10,173
11,410
11,209
12,838
9,503
11,560
1,237
1,629
2,057
6,376
(263)
(165)
(146)
(99)
21,781
01/14/08
11,245
05/08/08
12,692
06/26/08
11,461
08/01/08
26,303
32,679
(1,520)
31,159
09/29/06
21,575
198
21,773
10,735
11,050
21,785
(12)
(679)
21,761
06/28/06
21,106
07/28/06
10,650
-
10,650
-
10,650
06/11/07 &
07/11/07
$
(603,376)
$
182,793
$
766,780
$
2,086
$
35,980
$
184,879
$
802,760
$
987,639
$
(67,824)
$
919,815
*Assets are depreciated over a 7 to 40 year life, upon which the latest income statement is computed.
2008
2007
2006
Reconciliation of Real Estate
Balance at beginning of year
Additions during the year
Dispositions during the year
Total Real Estate
Reconciliation of Accumulated Depreciation
Balance at beginning of year
Depreciation for year
Accumulated depreciation on assets sold
Balance at the end of year
$
$
$
$
$
$
878,099
114,596
(5,056)
987,639
49,091
20,965
(2,232)
67,824
776,609
125,175
(23,685)
878,099
33,373
17,252
(1,534)
49,091
$
$
$
$
$
$
318,865
479,028
(21,284)
776,609
21,727
14,390
(2,744)
33,373
The aggregate cost of land, buildings and improvements for Federal income tax purposes for the years ended December 31, 2008,
2007 and 2006 is approximately $894,596, $817,805, and $676,415, respectively.
Depreciation is computed for buildings and improvements using a useful life for these assets of 7 to 40 years.
58 HERSHA 2008 ANNUAL REPORT
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Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i)
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated
and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding disclosure. A control system cannot provide absolute assurance, however, that the objectives of the
controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected.
(b)
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined within Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the processes
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles, and includes policies and procedures that:
·
·
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness in internal control over financial reporting is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the
criteria contained in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission as of December 31, 2008. Based on that evaluation, management has concluded that, as of December
31, 2008, the Company’s internal control over financial reporting was effective based on those criteria. The effectiveness of our
internal control over financial reporting as of December 31, 2008 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
59 HERSHA 2008 ANNUAL REPORT
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(c)
Audit Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders of
Hersha Hospitality Trust:
We have audited Hersha Hospitality Trust and subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Hersha Hospitality Trust's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hersha Hospitality Trust maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Hersha Hospitality Trust and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2008, and our report dated March 5, 2009 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 5, 2009
60 HERSHA 2008 ANNUAL REPORT
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(d)
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2008, that have
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
61 HERSHA 2008 ANNUAL REPORT
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H E R S H A
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H E R S H A
12968CVR_LA:12968CVR_LA 3/31/09 9:37 AM Page 2
H E R S H A
H E R S H A H O S P I T A L I T Y T R U S T ( H T )
H E R S H A
H E R S H A H O S P I T A L I T Y T R U S T ( H T )
Hersha Hospitality Trust (HT) is
a real estate investment trust
(REIT) focused on the
acquisition and aggressive
management of primarily select
Hersha Portfolio by Hotel Brand
(1)
Marriott 33%
Hilton 29%
Intercontinental 15%
Hyatt 15%
Other 8%
(1) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
service and extended stay
Hersha Portfolio by Market Segment
(2)
hotels in metropolitan markets.
Hersha trades under the
symbol HT on the New York
Stock Exchange. As of
December 31, 2008, the
Company owned interests in
76 upper upscale, upscale,
and midscale hotels
located predominantly
in the Northeastern United
States. Qualification as a REIT
under the Internal Revenue
Code enables the Company
to distribute income to
shareholders without federal
income tax liability to
the Company.
Upscale 52%
Midscale 46%
Upper Upscale 3%
(2) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
Hersha Portfolio by Destination
(3)
Major Metro 79%
Secondary 12%
Destination 9%
(3) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
Hersha Portfolio by Location
(4)
New York Metro & New Jersey 37%
Boston Metro & New England 22%
Philadelphia Metro & Mid-Atlantic 25%
Washington, DC Metro 10%
West Coast & Arizona 6%
(4) Based on pro-rata ownership share of 2008 EBITDA excluding preferred returns.
Board of Trustees
Hasu P. Shah
Chairman, Hersha Hospitality Trust
Jay H. Shah
Chief Executive Officer, Hersha Hospitality Trust
Michael A. Leven
President and COO, Las Vegas Sands Corp.
Donald J. Landry
Former CEO and President, Sunburst Hospitality, Inc.
John Sabin
Executive Vice President, Phoenix Health Systems, Inc.
Thomas S. Capello
Founder & Principal, First Capital Equities
Thomas J. Hutchison III
Former CEO, CNL Hotels & Resorts, Inc.
Kiran P. Patel
Chief Investment Officer, Hersha Group
Corporate Officers
Jay H. Shah
Chief Executive Officer
Neil H. Shah
President and Chief Operating Officer
Ashish R. Parikh
Chief Financial Officer
Michael R. Gillespie
Chief Accounting Officer
David L. Desfor
Treasurer and Corporate Secretary
William J. Walsh
Vice President of Asset Management
Robert C. Hazard III
Vice President of Acquisitions and Development
Corporate Headquarters
44 Hersha Drive
Harrisburg, PA 17102
Telephone: (717) 236-4400
Facsimile: (717) 774-7383
Philadelphia Executive Offices
Penn Mutual Towers
510 Walnut Street, 9th Floor
Philadelphia, PA 19106
Telephone: (215) 238-1046
Facsimile: (215) 238-0157
Independent Auditors
KPMG LLP
Certified Public Accountants
1601 Market Street
Philadelphia, PA 19103
Telephone: (267) 256-7000
Registrar & Stock Transfer Agent
American Stock Transfer & Trust Company
10150 Mallard Creek Drive, Suite 307
Charlotte, NC 28262
Telephone: (800) 829-8432
Legal Counsel
Hunton & Williams
Riverfront Plaza
951 East Byrd Street
Richmond, Virginia 23219
Telephone: (804) 788-8200
Common Stock Information
The Common Stock
of Hersha Hospitality
Trust is traded on the New York
Stock Exchange under the Symbol “HT”
12968CVR_LA:12968CVR_LA 3/31/09 9:37 AM Page 1
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H E R S H A
www.hersha.com
h e r s h a h o s p i t a l i t y t r u s t
Annual Report
2008
H E R S H A