Hersha Hospitality Trust
Annual Report 2012

Plain-text annual report

61503 Part 1_2011 Annual Layout 4/11/13 2:28 PM Page 1 (cid:13) H E R S H A (cid:13) www.hersha.com (cid:13) 2012 A H S R E h e r s h a h o s p i t a l i t y t r u s tH hersha hospitality trust report 201261503 Part 1_2011 Annual Layout 4/11/13 2:28 PM Page 2 T S U R T Y T I L A T I P S O H A H S R E H Hersha Hospitality Trust (HT) is a real estate investment trust (REIT) focused on the acquisition and aggressive asset management of upscale hotels in urban gateway markets. Hersha trades under the symbol HT on the New York Stock Exchange. As of March 31, 2013, the Company owned interests in 63 Upper Upscale, Upscale and Upper Midscale hotels totaling 9,129 rooms, primarily located in major metro and urban centers along the Northeast Corridor of the United States from Boston to New York City to Washington, D.C. as well as Miami and select markets in California. 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. Hersha Total Returns Since IPO in 1999 (1) 145.5% 141.7% 186.9% a h s r e h 102.4% 98.4% 94.5% 83.9% 70.4% 47.1% e d I n s it e o x R s s u o m p C 0 h ir 0 s e 0 k 2 r e ll B e a t h H E I T R A N y a w a W a l - M a o J o w D e u r d S t o I n r t e s n s s t ri a l L N S v S A U e g a o t e l e r H d I n E I T R x e W a lt y e n D i s . o C P & S 5 0 e 0 G E l e a l r e n -50.2% -7.9% c t ri c y n a o m p C r M o t o d r o F Hersha Portfolio by Location (2) Hersha Portfolio by Market Segment (2) New York City 43% Boston Metro & New England 15% Philadelphia Metro & Pennsylvania 14% Washington DC Metro 11% California & Arizona 7% New York & New Jersey Metro 6% Miami 4% Upper Midscale 51% Upscale Transient 29% Upscale Extended Stay 16% Upper Upscale 4% Hersha Portfolio by Hotel Brand (2) Hersha Portfolio by Destination (2) Hilton 29% Marriott 27% Intercontinental 23% Hyatt 9% Other 12% Major Metro 93% Destination 5% Secondary 2% (1) Total Returns from January 26, 1999 through December 31, 2012. Source: SNL Financial & Bloomberg. Index % weighted by Market Cap. Assumes dividends are reinvested. (2) Reflects continuing operations and pro-rata ownership share of 2012 EBITDA. Hersha’s Board of Trustees Hasu P. Shah Chairman, Hersha Hospitality Trust Jay H. Shah Chief Executive Officer, Hersha Hospitality Trust Donald J. Landry Lead Director, Hersha Hospitality Trust Former President & CEO, Sunburst Hospitality Inc. Michael A. Leven President and Chief Operating Officer Las Vegas Sands Corp. Thomas J. Hutchison III Former CEO, CNL Hotels & Resorts, Inc. Dianna F. Morgan Former Senior Vice President, Walt Disney World Co. Kiran P. Patel Chief Investment Officer, Hersha Group John M. Sabin Executive Vice President and CFO, Revolution LLC. and Case Foundation Hersha’s Management Team 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 Senior Vice President of Asset Management Robert C. Hazard III Senior Vice President of Acquisitions and Development Bennett Thomas Vice President of Finance and Sustainability Christopher C. Doyle Vice President of Asset Management (cid:13) (cid:13) (cid:13) WWW.HERSHA.COM 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” 61503 Part 2_2011 Annual Layout 4/11/13 2:35 PM Page 1 2012 Financial Highlights (In thousands, except per share data) Hotel Operating Results (a) Total Revenues Average Daily Rate Occupancy Revenue Per Available Room Year Ended December 31, 2012 2011 2010 2009 2008 458,138 432,792 373,356 324,473 378,338 157.58 73.1% 115.18 144.83 71.9% 104.12 136.22 69.9% 95.19 126.33 66.7% 84.21 139.48 71.4% 99.64 $ $ $ (a) Pertains to all hotels owned as of year end including the total results of hotels owned in a joint venture structure and assets held for sale. (In thousands, except per share data) Year Ended December 31, Hersha Hospitality Trust Operating Data: (Excluding Impairment Charges) (1) Total Revenues (Including Discontinued Operations) Net Income applicable to Common Shareholders Adjusted EBITDA(2) Adjusted Funds from Operations (3) Per Share Data: (Excluding Impairment Charges) (1) Basic/Diluted Earnings Per Common Share AFFO Distributions to Common Shareholders Balance Sheet Data: (as of December 31st) Total Assets Total Debt Noncontrolling Interest in Partnership Total Shareholder’s Equity $ $ $ 2012 2011 2010 2009 2008 364,690 8,376 143,291 76,046 329,868 (5,133 ) 132,969 68,710 283,597 ) (18,871 108,329 52,067 230,930 (17,382 ) 97,350 33,956 265,399 5,829 120,018 61,308 0.04 0.38 0.24 ) (0.03 0.38 0.23 ) (0.14 0.36 0.20 ) (0.35 0.57 0.33 0.07 1.15 0.72 1,707,679 792,708 30,805 829,828 1,630,909 820,132 31,819 730,671 1,457,277 694,720 39,304 683,434 1,111,044 745,443 41,859 302,197 1,178,405 743,781 53,520 349,963 (1) Operating and Per Share Data exclude charges recorded during 2009-2012 relating to impairment losses on development loans, land parcels, investment in unconsolidated joint ventures, several wholly owned hotel properties, and assets held for sale. (2) Adjusted Earnings Before Interest, Taxes, and Depreciation and Amortization (EBITDA) is a non-GAAP financial measure within the meaning of the Securities and Exchange Commission rules. Our Adjusted EBITDA computation may not be comparable to EBITDA or Adjusted EBITDA reported by other companies that interpret the definition of EBITDA differently than we do. Management believes Adjusted EBITDA to be a meaningful measure of a REIT's performance because it is widely followed by industry analysts, lenders and investors and that it should be considered along with, but not as an alternative to, net income, cash flow, FFO and AFFO as a measure of the company's operating performance. (3) 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 loss from impairment of assets and depreciation and amortization, and after adjustments for unconsolidated partnerships 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 acquisition and terminated transaction expenses, 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. 61503 Part 2_2011 Annual Layout 4/9/13 7:07 AM Page 2 h e r s h a h o s p i t a l i t y t r u s tHT Annual Report 2012 61503 Part 2_2011 Annual Layout 4/11/13 2:50 PM Page 3 Fellow Shareholders, Under the weight of macroeconomic pessimism in the headlines and focus instead on factors and leadership uncertainty in Washington, the evidence of the building momentum in the the economy in 2012 drew to a rather inelegant marketplace. Understanding that the developments close. The resilient private sector however, in the year were setting the table for a strong 2013 leveraging our powerful free enterprise system, and 2014, we took advantage of the continued showed signs of strength. For the first time in this dislocation in the pricing of hotel assets and built recovery, housing began to show a meaningful on our success making accretive acquisitions at improvement, and despite no significant changes in very attractive prices. In 2012 we purchased four the government’s fiscal policy, unemployment hotels in our core urban gateway markets and dropped below 8% and continues to move in the further expanded our reach in the Miami and New right direction. The list of bright spots culminated York markets by commencing work on new with the Dow ending the year up 7.3% and the S&P development projects that are slated to begin up 13%. Wages remained steady and inflation is delivering returns in 2013. We also used the time talked about only hypothetically. Energy prices early in the year to reinvest in our properties so that declined, and for the first time the prospect of as demand for hotel room nights was building, we energy independence in the United States is a real had freshly renovated hotels that are positioned to possibility. Additionally, American consumers outperform by way of rate and occupancy. reduced their debt burdens so that today US household debt is at its lowest levels in almost 30 The underlying strength that was exhibited years, creating the possibility of renewed flexibility in 2012 bodes well for the hotel industry recovery. in spending patterns for a majority of consumers in Last year the hotel sector showed continued the years ahead. progress posting 6% to 7% revenue growth and forecasts suggest that US RevPAR will nominally Last year, we chose to look through the exceed the peak of the last cycle in 2013 with an 61503 Part 2_2011 Annual Layout 4/11/13 2:51 PM Page 4 expectation that we are firmly in the middle of this cities of the United States. We have assembled a industry cycle. Considering that our portfolio of pure play portfolio of hotels in some of the highest hotels is already operating above the prior peak demand and fastest growing gateway markets in occupancy levels and that our growth going the U.S. Our six core markets, New York, Boston, forward will be derived almost entirely from pricing Philadelphia, Washington, DC, Miami and Los power, our prospects for outsized earnings growth Angeles, generate $3.5 trillion of GDP – close to are strong. Our revenue flow-through potential 25% of the total GDP of the United States. These combined with our strategic acquisitions of hotels cities have historically outperformed the rest of the in high demand urban markets positions us well to country and the current bifurcation in economic deliver strong returns in 2013. trends continues to heavily favor the cities where Clarity of Purpose we do business. Today, over 90% of our earnings are generated from our six core urban markets. Since the trough of the recession, we have Our strategy is focused on both high purchased over a billion dollars of hotel real estate demand markets and owning hotels that rely in our strategic core markets and simultaneously primarily on transient guests, that is guests sold 22 non-core hotels that were forecasted to travelling individually on business and leisure, achieve growth rates below our portfolio average. versus the groups, which are guests that are We reinvested the proceeds from the sales into travelling as a part of conferences or other group younger hotels with a higher return profile and at meetings. This defining distinction in our strategy the same time reduced the Company’s debt load, has served us well as the transient segment is further deleveraging our balance sheet, creating a recovering at a brisk pace, while the group segment more secure capital position and a flexible posture of the business continues to lag often trading for growth. pricing power for occupancy. Our urban transient strategy has enabled us to drive operational Our strategy execution has established excellence by remaining responsive to changes in Hersha as the leading owner of premier urban demand dynamics in our markets on a real time transient hotels in the high barrier to entry gateway basis. Our revenue management practices across 61503 Part 2_2011 Annual Layout 4/9/13 7:09 AM Page 5 HT Annual Report 2012 h e r s h a h o s p i t a l i t y t r u s t 61503 Part 2_2011 Annual Layout 4/9/13 7:10 AM Page 6 h e r s h a h o s p i t a l i t y t r u s tHT Annual Report 2012 61503 Part 2_2011 Annual Layout 4/11/13 2:51 PM Page 7 the portfolio have kept us agile and even in the look for opportunities to expand our presence in midst of natural disasters like Hurricane Sandy, those two attractive markets as well. New York enabled our portfolio to capture disproportionate maintains its position as one of the world’s most market share. successful hotel markets, and both the near-term and long-term outlooks inspire confidence. The We have a strong long-term conviction in Company is fully invested in three Manhattan our six gateway markets and we will continue to projects that will open in 2013, delivering properties build on our successes there. Last year, our two that include the Hyatt Union Square, the Hilton newest markets, Miami and Los Angeles, delivered Garden Inn Midtown East and the Hampton Inn very strong growth and those two markets remain Financial District. an important focus in the Company’s growth plans. With beachheads in both the Miami and Los Angeles markets now, the ability to “bolt on” Operational Leadership acquisitions is an attractive proposition. Adding This lodging cycle disproved the long held hotels to our portfolios in existing markets is a lower view that GDP growth is the most highly correlated risk approach to increase exposure to successful and sole indicator of lodging demand. It appears markets and allows us to broaden the scope of our that lodging demand and GDP growth may become proven managers with little or no additional decoupled in the short term when certain elements overhead. We are also looking forward to the of economic growth are present, even when overall delivery of the brand new addition of a 93 room growth appears less than sturdy. What we have tower of premium hotel rooms to our very found in the current instance is that corporate successful Cadillac Hotel, a Marriott Courtyard earnings and profits in most industries, specifically property, on Miami Beach. The new rooms tower is excluding construction and manufacturing, have expected to open later in 2013 in time to capture been quietly growing at an attractive pace resulting much of the busy season there. in significant cash reserves at many companies. Boston and Philadelphia are expected to and health insurance has kept corporations on the perform very well in 2013 and we will continue to sidelines in terms of hiring, they have been Although the uncertainty in the area of tax policy 61503 Part 2_2011 Annual Layout 4/11/13 2:52 PM Page 8 continuing to make capital investments that are result, in 2012 our portfolio delivered best-in-class driving business travel. Secondly, inbound year over year results. Portfolio-wide RevPAR for international travel has posted year over year the Company’s consolidated hotels increased by growth of between 4% and 5% and is forecasted to 8.1% to $123.22 in 2012. This was driven by continue to grow at a similar rate for the next improvement in both ADR and occupancy of 5.5% several years. Globally more people will emerge and 182 basis points, respectively. Total Hotel into the middle class than at any other time in revenues increased $73.3 million to $355.8 in 2012 history ushering in a golden era of inbound compared to 2011. Our ability to convert revenue visitation, as travel continues to become more increases into cash flow growth is unmatched in democratized. the public lodging sector. Our Hotel EBITDA increased by $27.2 million to $136.4 million despite In 2012, both of these factors combined to undertaking more capital investments than at any lead to the highest hotel room demand ever time in our history. We already generate industry- recorded. Last year more hotel rooms were rented leading absolute EBITDA margins that will continue in the United States than ever before in history. to rise in the coming years as our growth for the Our strategy was developed and executed to remainder of the cycle will be primarily ADR driven capture just these trends. A healthy corporate and as we realize the benefit of stabilization at our sector and increased international travel will newly developed and renovated hotels. benefit the six Hersha gateway markets disproportionately over the coming years as our Additionally, constrained supply growth has markets are the leading centers of commerce and remained an attractive feature in this recovery. The travel in the United States. slow pace of the economic recovery and strict financial restraints from the banking sector has Proving this point, last year our hotels served to limit construction financing in our markets, performed at the forefront of the industry. Since which are already capital intensive and very our portfolio was at peak occupancy levels, we were challenging for new development. Supply growth in able to maximize rate while controlling costs, the lodging sector is forecasted to remain below the maximizing each asset’s margin potential. As a long-term average growth rate for 2013 and into 2014. 61503 Part 2_2011 Annual Layout 4/9/13 7:13 AM Page 9 HT Annual Report 2012 h e r s h a h o s p i t a l i t y t r u s t 61503 Part 2_2011 Annual Layout 4/9/13 7:15 AM Page 10 h e r s h a h o s p i t a l i t y t r u s tHT Annual Report 2012 61503 Part 2_2011 Annual Layout 4/11/13 2:52 PM Page 11 Meeting the Future In 2013, we look forward to continuing our work of leading a company that has delivered Our high quality balance sheet and our thirteen years of total shareholder return ahead of demonstrated access to the capital markets almost every economic benchmark. We believe our provides us with an already strong financial strategic focus on high demand gateway markets foundation while we continue to lower our cost of combined with our owner operator model is well- capital. During 2012 we took steps to simplify our suited to the economic conditions in which we find balance sheet by purchasing or selling the majority ourselves today, and we will leverage the future of our joint venture assets and continuing our patterns of globalization and travel that trends efforts to reduce the Company’s exposure to today are predicting. We will continue to use our development loans. Additionally, we completed a expertise and leading know-how to create unique, new fully unsecured $550 million credit facility at an original and value enhancing opportunities tailored attractive interest rate and recently retired and to keep us at the leading edge of the industry and replaced a tranche of our existing preferred equity deliver strong shareholder value. at a coupon more than 100 basis points below the original coupon. Our balance sheet is as defensible We appreciate having you as fellow and flexible as ever and positions us to move shareholders and value the confidence that you forward with a confident and opportunistic outlook. have placed in us. We look forward to keeping you up to date on our progress throughout the year. As we consider what the future holds, with the team and Company that we have built, there is good reason to be optimistic about what lies ahead. Jay H. Shah Chief Executive Officer We are at a pivotal point in terms of the opportunity embedded within our portfolio. Our thoughtful and well-timed investment activity of the last several years will yield strong results in the coming year and we stand ready to reap the returns. Neil H. Shah President and Chief Operating Officer 61503 Part 2_2011 Annual Layout 4/11/13 2:58 PM Page 12 h e r s h a h o s p i t a l i t y t r u s tHT Hersha continued to advance its commitment to sustainability through EarthView, its triple bottom line program that aims to enhance the company’s environmental, social and economic impact. In its first year of Phase I, EarthView produced $750 thousand in savings for its same store portfolio while also reducing its carbon footprint by 10%, water footprint by 7% and waste output by 40%. For this work, Hersha received NAREIT’s 2012 Lodging & Resorts Leader in the Light award – the highest achievement in the lodging sector for 2012. This national award recognized Hersha and its EarthView program for superior and sustained portfolio-wide energy use practices and sustainability initiatives. Sustainability successes such as these led Cornell University's world-renowned School of Hotel Administration and The Statler Hotel at Cornell University to partner with EarthView. The Statler Hotel is implementing EarthView’s maintenance and operational initiatives, and adopting the program’s approach to calculating and measuring the impact of triple bottom line initiatives. In the coming year, EarthView and the Hersha team will begin a phased rollout of guest room energy management systems to reduce energy waste in un-occupied rooms. Our pilot tests indicate HVAC savings equating to greater than $850 thousand in just the first year of implementation for approximately 30 properties in the portfolio. As a triple bottom line program, EarthView also focuses on strengthening Hersha’s commitment to social growth and development by engaging in the communities our properties operate in and fostering business practices that promote the public good. Through our partnership with Clean the World, our properties have cumulatively donated over 310,000 bars of soap to international communities suffering from high incidences of hygiene related deaths which amounts to countless lives saved and also to approximately 11 tons of soap diverted from the waste stream. Locally, associates with our properties and our corporate offices have donated over 2,500 volunteer hours to an array of initiatives from community outreach projects with Ronald McDonald House Charities to mentorship programs with The United Way. Annual Report2012Hersha Hospitality Properties (1) (2) New York City & Region Hyatt Union Square, Greenwich Village Duane Street Hotel, Tribeca Hotel 373 Fifth Avenue, Midtown NU Hotel, Brooklyn Hilton Garden Inn, Tribeca Hampton Inn, Times Square South Hampton Inn, Herald Square Hampton Inn, Chelsea Hampton Inn, Seaport Hampton Inn, Downtown Holiday Inn, Wall Street Holiday Inn Express, Wall Street Holiday Inn Express, Times Square Holiday Inn Express, Madison Square Candlewood Suites, Times Square Sheraton Hotel, JFK International Airport Hilton Garden Inn, JFK International Airport Hyatt House, White Plains Hampton Inn Brookhaven, Long Island/Farmingville Holiday Inn Express, Long Island/Hauppauge Holiday Inn Express, Chester Boston & New England The Bulfinch Hotel, Boston Courtyard by Marriott, Boston/Brookline Courtyard by Marriott, South Boston Holiday Inn Express, Cambridge Holiday Inn Express, South Boston Residence Inn by Marriott, Framingham Residence Inn by Marriott, Norwood Hawthorn Suites, Franklin Connecticut & Rhode Island Marriott Downtown, Hartford Hilton Hotel, Hartford Mystic Marriott Hotel and Spa, Groton Courtyard by Marriott, Norwich Hampton Inn, West Haven Hampton Inn, Smithfield, RI (1) HT properties listing as of March 31st, 2013. (2) Scheduled to open April, 2013. Philadelphia & The Delaware Valley The Rittenhouse Hotel, Center City Philadelphia Hampton Inn, Center City Philadelphia Hyatt Place, King of Prussia/Valley Forge Holiday Inn Express, King of Prussia/Valley Forge Courtyard by Marriott, Langhorne/Oxford Valley Residence Inn by Marriott, Langhorne/Oxford Valley Holiday Inn Express, Langhorne/Oxford Valley Courtyard by Marriott, Ewing/Princeton, NJ Hyatt House, Bridgewater, NJ Courtyard by Marriott, Wilmington, DE Inn at Wilmington, Wilmington, DE Sheraton Wilmington South, Wilmington, DE Pennsylvania Hampton Inn & Suites, Hershey Holiday Inn Express, Hershey Residence Inn by Marriott, Carlisle TownePlace Suites by Marriott, Harrisburg Comfort Inn, Harrisburg Washington, D.C. Hampton Inn, Washington, D.C. Capitol Hill Hotel, Washington, D.C. Residence Inn by Marriott, Tyson's Corner Courtyard by Marriott, Alexandria Residence Inn by Marriott, Greenbelt, MD Hyatt House, Gaithersburg, MD Holiday Inn Express, Camp Springs, MD Miami Courtyard Miami Beach Oceanfront, Miami Beach California Courtyard by Marriott, Los Angeles Hyatt House, Pleasant Hill/Walnut Creek Hyatt House, Pleasanton/Dublin Hyatt House, Scottsdale, AZ HERSHA  HOSPITALITY  TRUST   CONSOLIDATED  FINANCIAL  STATEMENTS   INDEX   The  Annual  Report  contains  excerpts  from  our  Annual  Report  on  Form  10-­‐K  for  the  fiscal  year  ended  December   31,  2012,  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 2012 ANNUAL REPORT                                           PART I   Item  1.   Business   OVERVIEW   Hersha  Hospitality  Trust  is  a  self-­‐advised  Maryland  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  urban  and  central  business   districts,  primary  suburban  office  markets  and  stable  destination  and  secondary  markets  in  the  Northeastern   United  States,  Florida  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,  Florida  and  other  markets  with  similar  characteristics.    We  have  operated  and  intend   to  continue  to  operate  so  as  to  qualify  as  a  REIT  for  federal  income  tax  reporting  purposes.   In  addition  to  the  direct  acquisition  of  hotels,  historically  we  have  made  investments  in  hotels  through   joint  ventures  with  strategic  partners  or  through  equity  contributions,  secured  mezzanine  loans  and  land  leases.   Although  we  may  invest  in  hotels  through  joint  ventures,  secured  development  loans  and  land  leases,  we  are  not   actively  pursuing  additional  joint  venture  investments  and  do  not  expect  to  originate  any  new  secured  mezzanine   loans  or  enter  into  any  new  land  leases  as  part  of  our  hotel  investment  strategy  in  the  near  term.   We  seek  to  identify  acquisition  candidates  located  in  markets  with  economic,  demographic  and  supply   dynamics  favorable  to  hotel  owners  and  operators.  Through  our  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.   As  of  December  31,  2012,  our  portfolio  consisted  of  57  wholly  owned  limited  and  full  service  properties   with  a  total  of  7,616  rooms  and  interests  in  seven  limited  and  full  service  properties  owned  through  joint  venture   investments  with  a  total  of  1,605  rooms.      These  64  properties,  with  a  total  of  9,221  rooms,  are  located  in  Arizona,   California,  Connecticut,  Delaware,  District  of  Columbia,  Florida,  Maryland,  Massachusetts,  New  Jersey,  New  York,   Pennsylvania,  Rhode  Island  and  Virginia  and  operate  under  leading  brands,  owned  by  Marriott  International,  Inc.   (“Marriott”),  Hilton  Worldwide,  Inc.  (“Hilton”),  InterContinental  Hotels  Group  (“IHG”),  Hyatt  Corporation  (“Hyatt”),   Starwood  Hotels  and  Resorts  Worldwide,  Inc.  (“Starwood”)  or  Choice  Hotels  International,  Inc.  (“Choice”).    In   addition,  some  of  our  hotels  operate  as  independent  boutique  hotels.    As  of  December  31,  2012,  we  had  an   investment  of  $28.4  million  in  two  loans,  one  loan  which  is  collateralized  by  an  operating  hotel  and  one  of  which   relates  to  a  hotel  development  project.   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,  for  which   we  serve  as  general  partner.  As  of  December  31,  2012,  we  owned  an  approximate  96.5%  partnership  interest  in  our   operating  partnership.   Our  wholly-­‐owned  hotels  are  managed  by  Hersha  Hospitality  Management,  L.P.  (“HHMLP”),  a  privately   held,  qualified  management  company  owned  by  certain  of  our  trustees  and  executive  officers  and  other   unaffiliated  third  party  investors.    Third  party  qualified  management  companies  manage  the  hotels  that  we  own   through  joint  venture  interests.  We  lease  our  wholly-­‐owned  hotels  to  44  New  England  Management  Company  (“44   New  England”),  our  wholly-­‐owned  taxable  REIT  subsidiary  (“TRS”).  Each  of  the  hotels  that  we  own  through  a  joint   venture  investment  is  leased  to  another  TRS  that  is  owned  by  the  respective  joint  venture  or  an  entity  owned  in   part  by  44  New  England.   2 HERSHA 2012 ANNUAL REPORT                     Our  principal  executive  office  is  located  at  44  Hersha  Drive,  Harrisburg,  Pennsylvania  17102.  Our   telephone  number  is  (717)  236-­‐4400.  Our  website  address  is  www.hersha.com.  The  information  found  on,  or   otherwise  accessible  through,  our  website  is  not  incorporated  into,  and  does  not  form  a  part  of,  this  report.   AVAILABLE  INFORMATION   We  make  available  free  of  charge  through  our  website  (www.hersha.com)  our  code  of  ethics,  corporate   governance  guidelines  and  the  charters  of  the  committees  of  our  Board  of  Trustees  (Acquisition  Committee,  Audit   Committee,  Compensation  Committee,  Nominating  and  Corporate  Governance  Committee  and  Risk   Sub-­‐Committee  of  the  Audit  Committee).  We  also  make  available  through  our  website  our  annual  reports  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.   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   ·∙ maximizing  our  earnings  by  managing  costs  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.   ACQUISITIONS   We  selectively  acquire  high  quality  branded  upper-­‐upscale,  upscale,  mid-­‐scale  and  extended-­‐stay  hotels  in   metropolitan  markets  with  high  barriers-­‐to-­‐entry  and  independent  boutique  hotels  in  similar  markets.  Through  our   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,  Hilton  Garden  Inn,  Hampton  Inn,   Sheraton  Hotels  &  Resorts,  DoubleTree,  Embassy  Suites,  Hyatt  House,  Hyatt  Place,  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;   hotels  in  our  target  markets  where  we  can  realize  operating  efficiencies  and  economies  of  scale;  and   independent  boutique  hotels  in  similar  markets   Since  our  initial  public  offering  in  January  1999  and  through  December  31,  2012,  we  have  acquired,  wholly   3 HERSHA 2012 ANNUAL REPORT                     or  through  joint  ventures,  a  total  of  99  hotels,  including  28  hotels  acquired  from  entities  controlled  by  certain  of   our  trustees  and  executive  officers.  Of  the  28  acquisitions  from  entities  controlled  by  certain  of  our  trustees  and   executive  officers,  25  were  newly  constructed  or  substantially  renovated  by  these  entities  prior  to  our  acquisition.   We  take  advantage  of  our  relationships  with  entities  that  are  developing  or  substantially  renovating  hotels,   including  entities  controlled  by  certain  of  our  trustees  and  executive  officers,  to  identify  future  hotel  acquisitions   that  we  believe  may  be  attractive  to  us.  We  intend  to  continue  to  acquire  hotels  from  entities  controlled  by  certain   of  our  trustees  and  executive  officers  if  approved  by  a  majority  of  our  independent  trustees  in  accordance  with  our   related  party  transaction  policy.   DISPOSITIONS   We  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  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  the  Acquisition  Committee  of  our  Board  of  Trustees,  consisting  solely  of  independent  trustees.  During   the  time  since  our  initial  public  offering  in  1999  through  December  31,  2012,  we  have  sold  a  total  of  42  hotels.   FINANCING   We  intend  to  finance  our  long-­‐term  growth  with  common  and  preferred  equity  issuances  and  debt   financing  having  staggered  maturities.  Our  debt  includes  unsecured  debt  provided  primarily  under  our  $400  million   unsecured  credit  facility  which  provides  for  a  $150  million  unsecured  term  loan  and  a  $250  million  unsecured   revolving  credit  facility  and  secured  mortgage  debt  in  our  hotel  properties.    We  anticipate  using  the  undrawn   portion  of  our  $400  million  senior  unsecured  credit  facility  to  pay  down  mortgage  debt  and  fund  future   acquisitions,  as  well  as  for  capital  improvements  and  working  capital  requirements.  Subject  to  market  conditions,   we  intend  to  repay  amounts  outstanding  under  the  revolving  line  of  credit  portion  of  our  credit  facility  from  time  to   time  with  proceeds  from  periodic  common  and  preferred  equity  issuances,  long-­‐term  debt  financings  and  cash   flows  from  operations.  When  purchasing  hotel  properties,  we  may  issue  common  and  preferred  limited   partnership  interests  in  our  operating  partnership  as  full  or  partial  consideration  to  sellers.   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:   We  anticipate  that  most  of  the  hotels  in  which  we  invest  will  be  operated  pursuant  to  franchise  licenses.   4 HERSHA 2012 ANNUAL REPORT           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.   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,  2012:   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  applicable  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.  For  the  year  ended  December  31,  2012  these  thresholds  were   not  met  and  incentive  management  fees  were  not  earned.    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.   EMPLOYEES   As  of  December  31,  2012,  we  had  46  employees  who  were  principally  engaged  in  managing  the  affairs  of   the  Company  unrelated  to  property  operations.  Our  relations  with  our  employees  are  satisfactory.   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  our   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  will  be  subject  to  certain     5 HERSHA 2012 ANNUAL REPORT                 state  and  local  taxes  on  our  income  and  property  and  to  federal  income  and  excise  taxes  on  our  undistributed   income.   We  own  interests  in  several  TRSs.  We  may  own  up  to  100%  of  the  stock  of  a  TRS.  A  TRS  is  a  taxable   corporation  that  may  lease  hotels  under  certain  circumstances.    Overall,  no  more  than  25%  of  the  value  of  our   assets  may  consist  of  securities  of  one  or  more  TRSs.  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  that  qualifies  as  an  "eligible  independent  contractor."  To  qualify  for  that  treatment,  the   manager  must  satisfy  the  following  requirements:   1.   2.   3.   4.   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;   such  manager  does  not  own,  directly  or  indirectly,  more  than  35%  of  our  shares;   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   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  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  hotels  as  individual   operating  segments  that  meet  the  aggregation  criteria  and  are  therefore  disclosed  as  one  reportable  segment.  See   “Note  1  Organization  and  Summary  of  Significant  Accounting  Policies”  in  Item  8  of  this  Annual  Report  on  Form  10-­‐K   for  segment  financial  information.   6 HERSHA 2012 ANNUAL REPORT             Item  2.   Properties   The  following  table  sets  forth  certain  information  with  respect  to  the  57  hotels  we  wholly  owned  as  of   December  31,  2012,  all  of  which  are  consolidated  on  the  Company’s  financial  statements.   *  Our  interests  in  these  hotels  are  subject  to  ground  leases  which,  in  most  cases,  require  monthly  rental  payment   as  determined  by  the  applicable  ground  lease  agreement.    These  ground  lease  agreements  typically  have  terms   of  between  75  and  99  years.   7 HERSHA 2012 ANNUAL REPORT       The  following  table  sets  forth  certain  information  with  respect  to  the  seven  hotels  we  owned  through   unconsolidated  joint  ventures  with  third  parties  as  of  December  31,  2012.   **     The  joint  ventures  interests  in  these  hotels  are  subject  to  ground  leases  which,  in  most  cases,  require  monthly   rental  payment  as  determined  by  the  applicable  ground  lease  agreements.    These  ground  lease  agreements   typically  have  terms  of  between  75  and  99  years.   ***  This  property  was  sold  on  February  1,  2013.   8 HERSHA 2012 ANNUAL REPORT   PART  II   Item  5.   Market  for  Registrant’s  Common  Equity,  Related  Stockholder  Matters  and  Issuer  Purchases  of   Equity  Securities   MARKET  INFORMATION   Our  common  shares  trade    on  the  New  York  Stock  Exchange  under  the  symbol  “HT.”    As  of  February  20,   2013,  the  last  reported  closing  price  per  common  share  on  the  New  York  Stock  Exchange  was  $5.26.  The  following   table  sets  forth  the  high  and  low  sales  price  per  common  share  reported  on  the  New  York  Stock  Exchange  as  traded   and  the  dividends  paid  on  the  common  shares  for  each  of  the  quarters  indicated.   SHAREHOLDER  INFORMATION   At  December  31,  2012  we  had  approximately  118  shareholders  of  record  of  our  common  shares.  Common   Units  (which  are  redeemable  by  holders  for  cash  or,  at  our  option,  for  common  shares  on  a  one  for  one  basis,   subject  to  certain  limitations)  were  held  by  approximately  40  entities  and  persons,  including  our  company.   9 HERSHA 2012 ANNUAL REPORT         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,  2007  and  ending  December  31,  2012,  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   REIT  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  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.   10 HERSHA 2012 ANNUAL REPORT     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)   11 HERSHA 2012 ANNUAL REPORT       HERSHA  HOSPITALITY  TRUST   SELECTED  FINANCIAL  DATA   (In  thousands,  except  per  share  data)   (1) Income  allocated  to  noncontrolling  interest  in  HHLP  has  been  excluded  from  the  numerator  and  Common   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.   12 HERSHA 2012 ANNUAL REPORT                                   Item  7.   Management’s  Discussion  and  Analysis  of  Financial  Condition  and  Results  of  Operations   Certain  statements  appearing  in  this  Item  7  are  forward-­‐looking  statements  within  the  meaning  of  the   federal  securities  laws.    Our  actual  results  may  differ  materially.  We  caution  you  not  to  place  undue  reliance  on  any   such  forward-­‐looking  statements.  See  “CAUTIONARY  FACTORS  THAT  MAY  AFFECT  FUTURE  RESULTS”  for  additional   information  regarding  our  forward-­‐looking  statements.   BACKGROUND   As  of  December  31,  2012,  we  owned  interests  in  64  hotels  in  major  urban  gateway  markets  including  New   York,  Washington,  Boston,  Philadelphia,  Los  Angeles  and  Miami,  including  57  wholly-­‐owned  hotels  and  interests  in   seven  hotels  owned  through  unconsolidated  joint  ventures.  We  have  elected  to  be  taxed  as  a  REIT  for  federal   income  tax  purposes,  beginning  with  the  taxable  year  ended  December  31,  1999.    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,  2012,  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.   OVERVIEW   In  2012,  lodging  fundamentals  in  those  markets  on  which  we  focus,  and  for  our  Company  in  particular,   continued  to  stabilize  following  the  economic  recession  that  began  in  2008  and  2009.    Throughout  2009,  the   decrease  in  lodging  demand  accelerated,  resulting  in  one  of  the  largest  RevPAR  declines  ever  in  the  modern  lodging   industry.    Early  in  2010,  fundamentals  in  the  U.S.  lodging  industry  began  showing  signs  of  improvement  with   demand  for  rooms  increasing  in  many  major  markets,  as  general  economic  indicators  began  to  experience   improvement.    As  a  result,  the  lodging  industry  experienced  increases  in  occupancy  in  the  early  and  middle  parts  of   2010,  and  with  increasing  demand,  rates  began  to  rebound  in  the  middle  and  latter  parts  of  2010  and  in  2011,   particularly  in  major  urban  markets  such  as  New  York,  Boston  and  Washington,  D.C.    These  positive  trends   continued,  strengthened  and  expanded  to  other  markets  during  the  latter  part  of  the  year,  resulting  in  continued   growth  in  ADR  and  RevPAR  during    2012.   During  this  same  period,  we  took  steps  to  better  position  our  portfolio  and  our  Company  to  take   advantage  of  the  anticipated  economic  recovery.        During  2012,  we  accessed  the  equity  capital  markets,  raising   approximately  $128,558  in  net  proceeds  from  the  sale  of  our  common  shares  and  also  replaced  our  $250,000   secured  credit  facility  with  a  new  $400,000  unsecured  credit  facility.    We  believe  these  improvements  to  our   overall  capitalization  improved  our  financial  stability  and  flexibility  coming  out  of  the  economic  downturn.   We  simultaneously  repositioned  our  portfolio  to  focus  more  on  high  barrier  to  entry  and  major  urban   markets.    In  2011  and  2012,  we  acquired  nine  hotels,  including  two  in  New  York,  one  in  Boston,  one  in  Los  Angeles,   one  in  Miami,  one  in  Philadelphia  and  one  in  Washington,  D.C.,  bringing  our  New  York  City  portfolio  to  16  hotels   comprising  a  substantial  portion  of  our  overall  portfolio  performance.    In  2012  we  closed  on  the  sale  of  18  hotels  in   secondary  and  tertiary  markets  that  we  determined  to  be  non-­‐core.    During  2011  and  continuing  in  2012,  we   executed  on  renovations  programs  at  a  number  of  properties,  accelerating  those  projects  in  our  core  markets  in  an   effort  to  take  advantage  of  what  we  expect  to  be  stronger  market  conditions  and  operating  fundamentals.    These   efforts  to  reposition  our  portfolio  yielded  positive  results  in  2012.    As  shown  on  the  tables  below  under  “Summary   of  Operating  Results,”  in  2012,  we  grew  occupancy  by  180  basis  points,  ADR  by  5.5%  and  RevPAR  by  8.1%  across   our  consolidated  hotels.    This  2012  growth  follows  our  2011  results,  a  year  in  which  we  grew  occupancy  by  40  basis   13 HERSHA 2012 ANNUAL REPORT               points,  ADR  6.5%  and  RevPAR  by  7.1%  across  our  consolidated  hotels.    Increases  were  similar  across  our  joint   venture  portfolio.   In  October  of  2012,  our  hotels  across  the  eastern  seaboard  experienced  the  effects  of  Hurricane  Sandy.   Most  of  our  hotels  in  these  markets  were  able  to  remain  open  and  continued  to  serve  our  guests  through  the   duration  of  the  storm.  Our  Holiday  Inn  Express  on  Water  Street  in  lower  Manhattan  experienced  flooding  and  was   forced  to  close.  We  anticipate  this  hotel  will  remain  closed  through  the  first  and  second  quarters  of  2013  while   restoration  is  in  process.  Five  of  our  other  lower  Manhattan  properties  lost  power  during  the  storm  and  were   forced  to  operate  on  limited  power  from  back-­‐up  generators  while  the  properties  were  without  power.  All  five  of   these  hotels  have  had  their  power  restored  and  resumed  operations  within  days  after  the  storm.  Our  hotel   redevelopment  project  at  32  Pearl  Street  in  lower  Manhattan  experienced  some  flooding  at  the  job  site  and   experienced  some  damage  to  the  project.  The  development  of  Hyatt  Union  Square,  for  which  we  are  under   agreement  to  acquire,  was  not  significantly  damaged  during  the  storm.  Both  projects  have  experienced  delays  due   to  time  required  to  repair  damage  caused  by  the  storm  and  the  availability  of  resources  in  lower  Manhattan  to   continue  construction  efforts.  The  continued  strength  in  business  transient  and  leisure  transient  customer  demand   in  Manhattan  has  partially  offset  the  losses  from  the  storm.    We  are  continuing  to  evaluate  the  financial  impact  of   Hurricane  Sandy  and  our  ability  to  recover,  through  our  Insurance  policies,  any  loss  due  to  interruption  of  business   or  damage  to  property.  See  Note  2,  “Investment  in  Hotel  Properties”  of  the  consolidated  financial  statements  for   additional  discussion  of  the  impact  of  Hurricane  Sandy  on  our  properties.   As  we  enter  2013,  we  believe  the  improvements  in  our  equity  and  debt  capitalization  and  repositioning  of   our  portfolio  better  enables  us  to  capitalize  on  further  stabilization  in  lodging  fundamentals.    During  2013,  we   expect  continued  improvements  in  ADR,  RevPAR  and  operating  margins,  led  by  hotels  in  our  core  urban  markets  of   New  York,  Boston,  Philadelphia,  Miami  and  Los  Angeles.    We  will  continue  to  seek  acquisition  opportunities  in   urban  centers  and  central  business  districts.    In  addition,  we  will  continue  to  look,  for  attractive  opportunities  to   dispose  of  properties  in  tertiary  markets  at  favorable  prices,  potentially  redeploying  that  capital  in  our  focus   markets.    We  do  not  expect  to  actively  pursue  acquisitions  made  through  joint  ventures  in  the  near  term;  however,   we  may  seek  to  buy  out,  or  sell  our  joint  venture  interest  to,  select  existing  joint  venture  partners.    We  do  not   expect  to  actively  pursue  additional  development  loans  or  land  leases  in  the  near  term.    While  property  joint   ventures,  development  loans  and  land  leases  played  an  important  role  in  our  growth  in  the  past,  we  do  not  expect   them  to  play  the  same  role  in  our  near-­‐term  future.   Although  we  are  planning  for  continued  stabilization  and  improvement  in  consumer  and  commercial   spending  and  lodging  demand  during  2013,  the  manner  in  which  the  economy  will  recover,  if  at  all,  is  not   predictable,  and  certain  core  economic  metrics,  including  unemployment,  are  not  rebounding  as  quickly  as  many   had  hoped.    In  addition,  the  availability  for  hotel  level  financing  for  the  acquisition  of  new  hotels  is  not  recovering   as  quickly  as  the  economy  or  broader  financial  markets.    As  a  result,  there  can  be  no  assurances  that  we  will  be   able  to  grow  hotel  revenues,  occupancy,  ADR  or  RevPAR  at  our  properties  as  we  hope.    Factors  that  might   contribute  to  less  than  anticipated  performance  include  those  described  under  the  heading  “Item  1A.  Risk  Factors”   and  other  documents  that  we  may  file  with  the  SEC  in  the  future.    We  will  continue  to  cautiously  monitor  recovery   in  lodging  demand  and  rates,  our  third  party  hotel  managers,  our  remaining  portfolio  of  hotel  development  loans   and  our  performance  generally.   SUMMARY  OF  OPERATING  RESULTS   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,  2012,  2011  and  2010.   14 HERSHA 2012 ANNUAL REPORT             RevPAR  for  the  year  ended  December  31,  2012  increased  8.1%  for  our  consolidated  hotels  when   compared  to  the  same  period  in  2011.    This  represents  a  growth  trend  in  RevPAR  which  is  primarily  due  to  the   improving  economic  conditions  in  2012  and  the  acquisition  of  hotel  properties  consummated  in  2012  that  are   accretive  to  RevPAR.   The  following  table  outlines  operating  results  for  the  three  years  ended  December  31,  2012,  2011  and   2010  for  hotels  we  own  through  an  unconsolidated  joint  venture  interest  (excluding  those  hotel  assets  which  are   currently  held  for  sale).  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  noncontrolling  interest  holders.                   For  our  unconsolidated  hotels,  RevPAR  for  the  year  ended  December  31,  2012  was  consistent  with  RevPAR   achieved  during  the  year  ended  December  31,  2011.    The  relatively  stable  results  in  RevPAR  during  the  year  of  2012   when  compared  to  the  year  of  2011  is  primarily  the  result  of  joint  venture  assets  that  have  been  sold  or  those  that   are  now  consolidated  for  financial  reporting  purposes  and  therefore  no  longer  contribute  to  the  operating  results   of  our  portfolio  of  unconsolidated  hotels.    Properties  such  as  the  Holiday  Inn  Express  29th  Street,  New  York,  NY,   which,  as  of  June  18,  2012,  is  no  longer  included  in  our  unconsolidated  joint  ventures,  tended  to  have  higher   occupancy  and  ADR  than  the  remaining  hotels  in  our  unconsolidated  joint  venture  hotel  portfolio,  resulting  in  the   lower  room  revenues  and  revenues  in  the  above  table.    When  compared  to  the  same  period  in  2011,  the  remaining   unconsolidated  joint  venture  hotels  follow  the  same  growth  trend  for  RevPAR  as  experienced  in  our  same  store   consolidated  hotels  reported  below  during  the  year  ended  December  31,  2012.   On  January  1,  2010,  we  acquired  our  joint  venture  partner’s  membership  interest  in  PRA  Glastonbury,  LLC,   the  owner  of  the  Hilton  Garden  Inn,  Glastonbury,  CT,  and  this  hotel  became  one  of  our  wholly-­‐owned  hotels.    As  a   result  of  this  transaction,  our  joint  venture  partner  acquired  our  membership  interest  in  PRA  Suites  at  Glastonbury,   LLC,  the  owner  of  the  Homewood  Suites,  Glastonbury,  CT.    In  addition,  this  table  excludes  the  operations  of  the   Courtyard  South  Boston,  MA  for  the  period  between  April  13,  2010  and  July  1,  2011.    On  April  13,  2010,  this  hotel   became  one  of  our  consolidated  joint  venture  properties  due  to  our  acquisition  of  the  mortgage  note  secured  by   Courtyard  South  Boston,  MA.    The  acquisition  of  this  mortgage  note  caused  us  to  be  the  primary  beneficiary  of  the   joint  venture  that  owns  the  Courtyard  South  Boston,  MA.    On  July  1,  2011,  Courtyard  South  Boston,  MA  transferred     15 HERSHA 2012 ANNUAL REPORT         back  to  an  unconsolidated  joint  venture  property  and  is  represented  for  six  months  worth  of  activity  in  the  table   above.   We  define  a  same  store  hotel  as  one  that  is  currently  consolidated  and  that  we  have  owned  in  whole  or   part  for  the  entire  period  being  reported  and  the  comparable  period  in  the  prior  year.    Based  on  this  definition,  for   the  years  ended  December  31,  2012  and  2011,  there  are  48  same  store  consolidated  hotels  and  40  same  store   consolidated  hotels  for  the  years  ended  December  31,  2011  and  2010.    The  following  table  outlines  operating   results  for  the  years  ended  December  31,  2012,  2011,  and  2010,  for  our  same  store  consolidated  hotels:   SAME  STORE  CONSOLIDATED  HOTELS:   COMPARISON  OF  THE  YEAR  ENDED  DECEMBER  31,  2012  TO  DECEMBER  31,  2011   (dollars  in  thousands,  except  per  share  data)   Revenue   Our  total  revenues  for  the  year  ended  December  31,  2012  consisted  of  hotel  operating  revenues,  interest   income  from  our  development  loan  program  and  other  revenue.  Hotel  operating  revenues  were  approximately   99.4%  and  98.7%  of  total  revenues  for  the  years  ended  December  31,  2012  and  2011,  respectively.    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  were  consolidated  in  our  financial  statements  during  the  period.  Hotel  operating   revenues  increased  $73,471,  or  26.0%,  from  $282,534  for  the  year  ended  December  31,  2011  to  $356,005  for  the   same  period  in  2012.    This  increase  in  hotel  operating  revenues  was  primarily  attributable  to  the  acquisitions   consummated  in  2012  and  2011  and  increases  in  hotel  operating  revenues  for  our  48  same  store  consolidated   hotels.     We  acquired  interests  in  the  following  four  consolidated  hotels  that  contributed  the  following  operating   revenues  for  the  year  ended  December  31,  2012. Revenues  for  all  hotels  were  recorded  from  the  date  of  acquisition  as  hotel  operating  revenues.    Further,   hotel  operating  revenues  for  the  year  ended  December  31,  2012  included  revenues  for  a  full  year  related  to  five   hotels  that  were  purchased  during  the  year  ended  December  31,  2011.  Hotels  acquired  during  the  year  ended   December  31,  2011  would  have  a  full  year  of  results  included  in  the  year  ended  December  31,  2012  but  not   necessarily  a  full  year  of  results  during  the  same  period  in  2011.  We  acquired  interests  in  the  following  five     16 HERSHA 2012 ANNUAL REPORT       consolidated  hotels  during  the  year  ended  December  31,  2011:   In  addition,  our  existing  portfolio  experienced  improvement  in  ADR  and  occupancy  during  the  year  ended   December  31,  2012  when  compared  to  the  same  period  in  2011.    Occupancy  in  our  consolidated  hotels  increased   180  basis  points  from  approximately  73.9%  during  the  year  ended  December  31,  2011  to  approximately  75.8%  for   the  same  period  in  2012.    ADR  improved  5.5%,  increasing  from  $154.15  for  the  year  ended  December  31,  2011  to   $162.65  during  the  same  period  in  2012.    These  improvements  were  due  to  improvements  in  lodging  trends  in  the   markets  in  which  our  hotels  are  located.   We  have  invested  in  hotel  development  projects  by  providing  mortgage  or  mezzanine  financing  to  hotel   developers  and  through  the  acquisition  of  land  that  is  then  leased  to  hotel  developers.    Effective  June  1,  2012,  we   amended  the  interest  rates  on  two  of  our  development  loans  from  11.0%  to  9.0%.    Prior  to  this  interest  income   was  earned  on  our  development  loans  at  rates  ranging  between  10.0%  and  11.0%.    Interest  income  from   development  loans  receivable  was  $1,998  for  the  year  ended  December  31,  2012  compared  to  $3,427  for  the  same   period  in  2011.   Of  the  $28,425  in  development  loans  receivable  outstanding  as  of  December  31,  2012,  $15,122,  or  53.2%,   is  invested  in  hotels  that  are  currently  operating  and  generating  revenue  and  $13,303,  or  46.8%,  is  invested  in  a   hotel  construction  project  to  develop  the  Hyatt  Union  Square  in  New  York,  NY,  which  has  made  significant  progress   toward  completion.  On  June  14,  2011,  in  connection  with  entering  into  a  purchase  and  sale  agreement  to  acquire   the  Hyatt  Union  Square  project,  we  ceased  accruing  interest  for  this  development  loan.    On  February  1,  2013  we   received  payments  of  principal  and  accrued  interest  on  the  development  loan  with  44  Lexington  Holding,  LLC  in  the   amount  of  $13,143,  leaving  the  development  loan  with  a  principal  balance  of  $1,979  as  of  February  1,  2013.       As  hotel  developers  are  engaged  in  constructing  new  hotels  or  renovating  existing  hotels  the  hotel   properties  are  typically  not  generating  revenue.    It  is  common  for  the  developers  to  require  construction  type  loans   to  finance  the  projects  whereby  interest  incurred  on  the  loan  is  not  paid  currently;  rather  it  is  added  to  the   principal  borrowed  and  repaid  at  maturity.    Prior  to  June  1,  2012,  one  of  our  development  loans,  which  is  a  loan  to   an  entity  affiliated  with  certain  of  our  non-­‐independent  trustees  and  executive  officers  allowed  the  borrower  to   elect,  quarterly,  to  pay  accrued  interest  in-­‐kind  by  adding  the  accrued  interest  to  the  principal  balance  of  the   loan.    Effective  June  1,  2012,  we  amended  the  development  loan  to  cease  the  buyer’s  election  to  pay  accrued   interest  in-­‐kind.    As  a  result,  a  total  of  $678  and  $2,094  in  accrued  interest  on  these  development  loans  was  added   to  principal  for  the  year  ended  December  31,  2012  and  2011,  respectively.   Other  revenue  consists  primarily  of  fees  earned  for  asset  management  services  provided  to  properties   owned  by  certain  of  our  unconsolidated  joint  ventures.    These  fees  are  earned  as  a  percentage  of  the  revenues  of   the  unconsolidated  joint  ventures’  hotels.    Other  revenues  were  $212  and  $333  for  the  years  ended  December  31,   2012  and  2011.   Expenses   Total  hotel  operating  expenses  increased  28.0%  to  approximately  $196,119  for  the  year  ended  December   17 HERSHA 2012 ANNUAL REPORT                 31,  2012  from  $153,227  for  the  year  ended  December  31,  2011.  Consistent  with  the  increase  in  hotel  operating   revenues,  hotel  operating  expenses  increased  primarily  due  to  the  acquisitions  consummated  since  the   comparable  period  in  2011,  as  mentioned  above.    The  acquisitions  also  resulted  in  an  increase  in  depreciation  and   amortization  to  $57,364  for  the  year  ended  December  31,  2012  from  $50,780  for  the  year  ended  December  31,   2011.  Similarly,  real  estate  and  personal  property  tax  and  property  insurance  increased  $3,465,  or  18.2%,  in  the   year  ended  December  31,  2012  when  compared  to  the  same  period  in  2011  due  to  our  acquisitions  along  with  a   general  overall  increase  in  tax  assessments  and  tax  rates  as  the  economy  improves.   General  and  administrative  expense  increased  by  approximately  $4,895  from  $18,532  in  2011  to  $23,427   in  2012.    Incentive  compensation  of  $2,349  earned  for  the  year  ended  December  31,  2012  was  accrued  in  the   fourth  quarter  of  2012.    Incentive  compensation  of  $1,747  earned  for  the  year  ended  December  31,  2011  was   accrued  in  the  fourth  quarter  of  2011.        General  and  administrative  expense  includes  expense  related  to  non-­‐cash   share  based  payments  issued  as  incentive  compensation  to  the  Company’s  trustees,  executives,  and   employees.    Expense  related  to  share  based  compensation  increased  $2,088  when  compared  to  expense  of   December  31,  2012  and  the  same  period  of  2011.    This  increase  in  share  based  compensation  expense  is  due   primarily  from  the  vesting  of  shares  and  restricted  share  issuances.    The  Compensation  Committee  adopted  the   2012  Annual  LTIP  which  included  $1,785  of  stock  based  compensation  expense  for  year  ended  December  31,   2012.    In  addition,  on  April  18,  2012,  the  Compensation  Committee  entered  into  amended  and  restated   employment  agreements  with  the  Company’s  executive  officers  therefore  having  $822  of  stock  based   compensation  for  the  year  ended  December  31,  2012.    Please  refer  to  “Note  9  –  Share  Based  Payments”  of  the   notes  to  the  consolidated  financial  statements  for  more  information  about  our  stock  based   compensation.    Increases  in  other  general  and  administrative  expenses  resulted  primarily  from  increases  in   employee  headcount  and  base  compensation.   Amounts  recorded  on  our  consolidated  statement  of  operations  for  acquisition  and  terminated  costs  will   fluctuate  from  period  to  period  based  on  our  acquisition  activities.    Acquisition  and  terminated  transaction  costs   decreased  $1,555  from  $2,742  for  the  year  ended  December  31,  2011  to  $1,187  for  the  year  ended  December  31,   2012  due  to  fewer  acquisitions  consummated  during  the  year  ended  December  31,  2012.    The  costs  incurred  in   2012  were  related  to  the  following  hotels:  $963  related  to  our  acquisition  of  The  Rittenhouse  Hotel,  Philadelphia,   PA;  $61  related  to  acquisition  of  Bulfinch,  Boston,  MA;  $67  related  to  our  acquisition  of  Holiday  Inn  Express   Manhattan,  NY;  $8  related  to  our  acquisition  of  Courtyard  Ewing,  NJ.    The  costs  incurred  in  2011  were  related  to   following  hotels:  Holiday  Inn  Express,  Water  Street,  NY;  Capitol  Hill  Suites  Washington,  DC;  Courtyard  Westside  LA,   CA;  Courtyard  Miami,  FL.    Acquisition  costs  typically  consist  of  transfer  taxes,  legal  fees  and  other  costs  associated   with  acquiring  a  hotel  property.    The  remaining  costs  related  to  transactions  that  were  terminated  during  the  year.   Operating  Income   Operating  income  for  the  year  ended  December  31,  2012  was  $56,756  compared  to  operating  income  of   $41,074  during  the  same  period  in  2011.    The  increase  in  operating  income  resulted  primarily  from  improved   performance  of  our  portfolio  and  acquisitions  that  have  occurred  in  2021.   Interest  Expense   Interest  expense  increased  $3,489  from  $40,478  for  the  year  ended  December  31,  2011  to  $43,967  for  the   year  ended  December  31,  2012.  The  increase  in  interest  expense  is  due  primarily  to  the  new  debt  and  associated   interest  expense  for  the  acquired  properties  during  2012  offset  partially  by  lower  borrowing  costs  on  our   outstanding  debt.   Unconsolidated  Joint  Venture  Investments   We  incurred  a  loss  from  the  operations  of  our  unconsolidated  joint  ventures  of  $232  for  the  year  ended     18 HERSHA 2012 ANNUAL REPORT                   December  31,  2012  compared  to  income  of  $210  for  2011.    In  addition,  during  the  year  ended  December  31,  2012,   we  recorded  a  loss  of  $1,668  as  a  result  of  the  remeasurement  of  our  interest  in  the  Inn  America  Hospitality  at   Ewing,  LLC  joint  venture,  the  owner  of  the  Courtyard  by  Marriott,  in  Ewing,  NJ,  and  a  loss  of  $224  recorded  as  a   result  of  the  remeasurement  of  our  interest  in  the  Metro  29th  Street  Associates,  LLC  joint  venture,  the  owner  of  the   Holiday  Inn  Express,  in  New  York,  NY.   During  the  year  ended  December  31,  2011,  as  a  result  of  the  remeasurement  of  our  interest  in  the  Hiren   Boston,  LLC  joint  venture,  the  owner  of  the  Courtyard  by  Marriott,  in  South  Boston,  MA,  we  recorded  gains  of   $2,757.    Also,  as  noted  above,  we  entered  into  two  purchase  and  sale  agreements  to  dispose  of  18  non-­‐core  hotel   properties,  four  of  which  are  owned  in  part  by  the  Company  through  an  unconsolidated  joint  venture.    As  a  result   of  entering  into  these  purchase  and  sale  agreements,  during  the  year  ended  December  31,  2011,  we  recorded  an   impairment  loss  of  approximately  $1,677  for  those  assets  where  our  investment  in  the  joint  venture  exceeds  the   anticipated  net  proceeds  distributable  to  us  based  on  the  purchase  price  in  year-­‐end  2011.   Income  Tax  Benefit   During  the  year  ended  December  31,  2012,  the  Company  evaluated  the  recoverability  of  its  deferred  tax   assets,  and  accordingly  reversed  its  valuation  allowance  against  a  portion  of  its  deferred  tax  asset,  resulting  in  an   income  tax  benefit  of  $3,355.   Discontinued  Operations   During  the  years  ended  December  31,  2012  and  2011,  we  reclassified  the  operating  results  of  18  non-­‐core   hotel  properties,  two  land  parcels  located  at  585  Eighth  Avenue,  New  York,  NY,  and  Nevins  Street,  Brooklyn,  NY,   Comfort  Inn,  West  Hanover,  PA,  and  the  Comfort  Inn,  North  Dartmouth,  MA,  to  discontinued  operations  in  the   statement  of  operations.  During  2012,  we  closed  on  the  sale  of  the  non-­‐core  portfolio,  the  land  parcel  at  585  Eighth   Avenue,  New  York,  NY,  and  the  Comfort  Inn,  North  Dartmouth,  MA,  recognizing    a  gain  on  sale  of  approximately   $11,231.    During  2011,  we  closed  on  the  sale  of  the  land  parcel  at  Nevins  Street,  NY,  and  the  Comfort  Inn,  West   Hanover,  PA  recognizing  a  gain  on  sale  of  approximately  $991.    Also  in  2011,  we  recorded  an  impairment  loss  of   approximately  $30,248  on  the  non-­‐core  portfolio  for  those  consolidated  assets  for  which  we  anticipated  net   proceeds  to  not  exceed  the  carrying  value.   We  recorded  a  loss  from  discontinued  operations  of  approximately  $232  during  the  twelve  months  ended   December  31,  2012,  compared  to  income  of  approximately  $1,040  during  the  twelve  months  ended  December   31,2011,  primarily  due  to  operations  from  the  discontinued  assets  being  included  for  a  full  year  during  2011,  as   compared  to  a  partial  year  until  the  date  of  sale  during  2012.    See  “Note  12  –  Discontinued  Operations”  for  more   information.   Net  Income/Loss   Net  income  applicable  to  common  shareholders  for  the  year  ended  December  31,  2012  was  $8,376   compared  to  net  loss  applicable  to  common  shareholders  of  $35,733  for  the  same  period  in  2011.   During  the  year  ended  December  31,  2011,  we  issued  4,600,000  preferred  shares  which  increased  our   preferred  dividend  $3,501  for  the  year  ended  December  31,  2012.    See  “Note  1  –  Organization  And  Summary  Of   Significant  Accounting  Policies”  of  the  notes  to  the  consolidated  financial  statements  for  the  years  ended   December  31,  2012  and  2011  for  more  information.   19 HERSHA 2012 ANNUAL REPORT                           COMPARISON  OF  THE  YEAR  ENDED  DECEMBER  31,  2011  TO  DECEMBER  31,  2010   (dollars  in  thousands,  except  per  share  data)   Revenue   Our  total  revenues  for  the  year  ended  December  31,  2011  consisted  of  hotel  operating  revenues,  interest   income  from  our  development  loan  program,  and  other  revenue.    Hotel  operating  revenues  increased  $46,343,  or   19.6%,  from  $236,191  for  the  year  ended  December  31,  2010  to  $282,534  for  the  same  period  in  2011.    This   increase  in  hotel  operating  revenues  was  primarily  attributable  to  the  acquisitions  consummated  in  2011  and   2010  and  increases  in  revenues  in  our  same  store  consolidated  hotels.   We  acquired  interests  in  the  following  five  consolidated  hotels  that  contributed  the  following  operating   revenues  for  the  year  ended  December  31,  2011:   Revenues  for  all  hotels  were  recorded  from  the  date  of  acquisition  as  hotel  operating  revenues.  Further,   hotel  operating  revenues  for  the  year  ended  December  31,  2011  included  revenues  for  a  full  year  related  to  six   hotels  that  were  purchased  during  the  year  ended  December  31,  2010.  Hotels  acquired  during  the  year  ended   December  31,  2010  would  have  a  full  year  of  results  included  in  the  year  ended  December  31,  2011  but  not   necessarily  a  full  year  of  results  during  the  same  period  in  2010.    We  acquired  interests  in  the  following  six   consolidated  hotels  during  the  year  ended  December  31,  2010:   In  addition,  our  existing  portfolio  experienced  improvement  in  ADR  and  occupancy  during  the  year  ended   December  31,  2011  when  compared  to  the  same  period  in  2010.    Occupancy  in  our  consolidated  hotels  increased   40  basis  points  from  approximately  73.5%  during  the  year  ended  December  31,  2010  to  approximately  73.9%  for   the  same  period  in  2011.    ADR  improved  6.5%  increasing  from  $144.73  for  the  year  ended  December  31,  2010  to   $154.15  during  the  same  period  in  2011.    These  improvements  were  due  to  improvements  in  lodging  trends  in  the   markets  in  which  we  operate.   We  have  invested  in  hotel  development  projects  by  providing  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  11.0%.    Interest  income  from  development  loans   receivable  was  $3,427  for  the  year  ended  December  31,  2011  compared  to  $4,686  for  the  same  period  in  2010.   20 HERSHA 2012 ANNUAL REPORT           As  hotel  developers  are  engaged  in  constructing  new  hotels  or  renovating  existing  hotels  the  hotel   properties  are  typically  not  generating  revenue.    It  is  common  for  the  developers  to  require  construction  type  loans   to  finance  the  projects  whereby  interest  incurred  on  the  loan  is  not  paid  currently;  rather  it  is  added  to  the   principal  borrowed  and  repaid  at  maturity.    Currently,  one  of  our  development  loans,  which  is  a  loan  to  an  entity   affiliated  with  certain  of  our  non-­‐independent  trustees  and  executive  officers,  allows  the  borrower  to  elect,   quarterly,  to  pay  accrued  interest  in-­‐kind  by  adding  the  accrued  interest  to  the  principal  balance  of  the  loan.    As  a   result,  a  total  of  $2,094  and  $2,559  in  accrued  interest  on  these  development  loans  was  added  to  principal  for  the   year  ended  December  31,  2011  and  2010,  respectively.   Other  revenue  consists  primarily  of  fees  earned  for  asset  management  services  provided  to  properties   owned  by  certain  of  our  unconsolidated  joint  ventures.    These  fees  are  earned  as  a  percentage  of  the  revenues  of   the  unconsolidated  joint  ventures’  hotels.    Other  revenues  were  $333  and  $325  for  the  years  ended  December  31,   2011  and  2010.   Expenses   Total  hotel  operating  expenses  increased  17.9%  to  approximately  $153,227  for  the  year  ended  December   31,  2011  from  $129,978  for  the  year  ended  December  31,  2010.  Consistent  with  the  increase  in  hotel  operating   revenues,  hotel  operating  expenses  increased  primarily  due  to  the  acquisitions  consummated  since  the   comparable  period  in  2010,  as  mentioned  above.  In  addition,  hotel  operating  expense  increased  due  to  an  increase   in  bad  debt  expense  resulting  from  the  bankruptcy  of  an  airline  customer  with  outstanding  receivable  balances  at   two  of  our  hotel  properties.  The  acquisitions  also  resulted  in  an  increase  in  depreciation  and  amortization  to   $50,780  for  the  year  ended  December  31,  2011  from  $43,946  for  the  year  ended  December  31,  2010.  Similarly,  real   estate  and  personal  property  tax  and  property  insurance  increased  $2,138,  or  12.8%,  in  the  year  ended  December   31,  2011  when  compared  to  the  same  period  in  2010  due  to  our  acquisitions  along  with  a  general  overall  increase   in  tax  assessments  and  tax  rates  as  the  economy  improves.   General  and  administrative  expense  increased  by  approximately  $1,670  from  $16,862  in  2010  to  $18,532   in  2011.    General  and  administrative  expense  includes  expense  related  to  non-­‐cash  shared  based  payments  issued   as  incentive  compensation  to  the  company’s  trustees,  executives,  and  employees.    Non-­‐cash  stock  based   compensation  expense  increased  $941  when  comparing  the  year  ended  December  31,  2011  to  the  same  period  in   2010.    Please  refer  to  “Note  9  –  Share  Based  Payments”  of  the  notes  to  the  consolidated  financial  statements  for   more  information  about  our  stock  based  compensation.   Incentive  compensation  of  $1,747  earned  for  the  year  ended  December  31,  2011  was  accrued  during  the   quarter  ended  December  31,  2011.    Incentive  compensation  of  $1,720  earned  for  the  year  ended  December  31,   2010  was  accrued  in  the  fourth  quarter  of  2010.      Discretionary  incentive  compensation  related  to  the  2009  fiscal   year  was  determined  subsequent  to  December  31,  2009.    As  result,  incentive  compensation  of  $1,256  earned  for   the  year  ended  December  31,  2009  was  recorded  in  2010.      An  increase  in  employee  headcount  and  base   compensation  offsets  the  decrease  in  incentive  compensation  in  2011,  due  to  the  2009  and  2010  incentive   compensation  being  recorded  in  2010.   Amounts  recorded  on  our  consolidated  statement  of  operations  for  acquisition  and  terminated  costs  will   fluctuate  from  period  to  period  based  on  our  acquisition  activities.    Acquisition  and  terminated  transaction  costs   decreased  $2,060  from  $4,802  for  the  year  ended  December  31,  2010  to  $2,742  for  the  year  ended  December  31,   2011  due  to  fewer  acquisitions  consummated  during  the  period  ended  December  31,  2011.    The  costs  incurred  in   2011  were  related  to  the  following  hotels:  $716  related  to  our  acquisition  of  Holiday  Inn  Express  Water  Street,  NY;   $1,043  related  to  acquisition  of  Capitol  Hill  Suites  Washington,  DC;  $165  related  to  our  acquisition  of  Courtyard   Westside  LA,  CA;  $236  related  to  our  acquisition  of  Courtyard  Miami,  FL.    The  costs  incurred  in  2010  were  related   to  following  hotels:  Hilton  Garden  Inn,  Glastonbury,  CT;  Hampton  Inn  Times  Square,  New  York,  NY;  Holiday  Inn   Express,  Times  Square,  New  York,  NY;  Candlewood  Suites  Times  Square,  New  York,  NY;  Holiday  Inn  Wall  Street,   21 HERSHA 2012 ANNUAL REPORT             New  York,  NY;  and  Hampton  Inn,  Washington,  DC.    Acquisition  costs  typically  consist  of  transfer  taxes,  legal  fees   and  other  costs  associated  with  acquiring  a  hotel  property.    The  remaining  costs  related  to  transactions  that  were   terminated  during  the  year.   Operating  Income   Operating  income  for  the  year  ended  December  31,  2011  was  $41,074  compared  to  operating  income  of   $27,749  during  the  same  period  in  2010.    The  increase  in  operating  income  resulted  primarily  from  improved   performance  of  our  portfolio  and  acquisitions  that  have  occurred  in  2011.   Interest  Expense   Interest  expense  increased  $856  from  $39,622  for  the  year  ended  December  31,  2010  to  $40,478  for  the   year  ended  December  31,  2011.  On  April  30,  2012,  the  Company  sold  the  land  parcel  and  improvements  located  at   585  Eighth  Avenue,  New  York,  NY.    Therefore,  interest  expense  associated  with  this  debt  encumbering  this   property  was  reclassified  to  discontinued  operations  in  the  statement  of  operations  for  the  years  ended  December   31,  2011  and  2010.    See  “Note  12  –  Discontinued  Operations”  of  the  notes  to  the  consolidated  financial  statements   for  the  years  ended  December  31,  2011  and  2010  for  more  information.    This  is  offset  by  the  new  debt  and   associated  interest  expense  for  the  acquired  properties  during  2011.   Unconsolidated  Joint  Venture  Investments   We  recorded  income  from  the  operations  of  our  unconsolidated  joint  ventures  of  $210  for  the  year  ended   December  31,  2011  compared  to  a  loss  of  $1,751  for  2010.    In  addition,  as  a  result  of  the  remeasurement  of  our   interest  in  the  Hiren  Boston,  LLC  joint  venture,  the  owner  of  the  Courtyard  by  Marriott,  in  South  Boston,  MA,  we   recorded  gains  of  $2,757  and  $2,190  for  the  year  ended  December  31,  2011  and  2010,  respectively.  In  2010,  we   also  recorded  a  $1,818  gain  on  the  remeasurement  of  our  interest  in  an  unconsolidated  joint  venture  that  owned   the  Hilton  Garden  Inn  in  Glastonbury,  CT.    Also,  as  a  result  of  entering  into  the  purchase  and  sale  agreements  for   the  sale  of  our  non-­‐core  hotels,  we  have  recorded  an  impairment  loss  of  approximately  $1,677  for  those  assets   where  our  investment  in  the  joint  venture  exceeds  the  anticipated  net  proceeds  distributable  to  us  based  on  the   purchase  price.    See  “Note  12-­‐Discontinued  Operations”  of  the  notes  to  the  consolidated  financial  statements  for   the  year  ended  December  31,  2011  and  2010  for  more  information.   Discontinued  Operations   During  the  years  ended  December  31,  2011  and  2010,  we  reclassified  the  operating  results  of  18  non-­‐core   hotel  properties,  two  land  parcels  located  at  585  Eighth  Avenue,  New  York,  NY,  and  Nevins  Street,  Brooklyn,  NY,   Comfort  Inn,  West  Hanover,  PA,  Comfort  Inn,  North  Dartmouth,  MA,    and  Holiday  Inn  Express,  New  Columbia,  PA   to  discontinued  operations  in  the  statement  of  operations.  During  2011,  we  closed  on  the  sale  of  the  land  parcel  at   Nevins  Street,  NY,  and  the  Comfort  Inn,  West  Hanover,  PA  incurring  a  gain  on  sale  of  approximately  $991.    Also  in   2011,  we  recorded  an  impairment  loss  of  approximately  $30,248  on  the  non-­‐core  portfolio  for  those  consolidated   assets  for  which  we  anticipated  net  proceeds  to  not  exceed  the  carrying  value.    This  portfolio  was  sold  in   2012.    During  2010,  we  closed  on  the  sale  of  Holiday  Inn  Express,  New  Columbia,  PA  incurring  a  gain  on  sale  of   approximately  $347.    In  2010,  we  also  recorded  impairment  loss  of  approximately  $2,433  on  the  Comfort  Inn,   North  Dartmouth,  MA,  the  land  parcel  located  at  585  Eighth  Avenue  and  the  land  parcel  located  on  Nevins  Street,   NY,  as  we  determined  the  carrying  value  at  the  time  did  not  exceed  fair  value.    Each  of  these  properties  were  sold   in  2011  or  2012.   We  recorded  a  gain  from  discontinued  operations  of  approximately  $1,040  of  during  the  twelve  months   ended  December  31,  2011,  compared  to  loss  of  approximately  $4,327  during  the  twelve  months  ended  December     22 HERSHA 2012 ANNUAL REPORT                     31,  2010,  primarily  due  to  improved  performance  of  the  discontinued  assets  during  2011  and  partially  due  to   operations  from  the  discontinued  assets  being  included  for  a  full  year  during  2010,  as  compared  to  a  partial  year   until  the  date  of  sale  during  2011.   Net  Income/Loss   Net  loss  applicable  to  common  shareholders  for  the  year  ended  December  31,  2011  was  $35,733   compared  to  net  loss  applicable  to  common  shareholders  of  $21,157  for  the  same  period  in  2010.   During  the  year  ended  December  31,  2011,  we  issued  4,600,000  preferred  shares  which  increased  our   preferred  dividend  $5,699  for  the  year  ended  December  31,  2011  when  compared  to  2010.    See  “Note  1  –   Organization  And  Summary  Of  Significant  Accounting  Policies”  of  the  notes  to  the  consolidated  financial   statements  for  the  years  ended  December  31,  2011  and  2010  for  more  information.   LIQUIDITY,  CAPITAL  RESOURCES,  AND  EQUITY  OFFERINGS   (dollars  in  thousands,  except  per  share  data)   Potential  Sources  of  Capital   The  ability  to  originate  or  refinance  existing  loans  has  become  and  continues  to  be  very  restrictive  for  all   borrowers,  even  for  those  borrowers  that  have  strong  balance  sheets.    While  we  maintain  a  portfolio  of  what  we   believe  to  be  high  quality  assets  and  we  believe  our  leverage  to  be  at  acceptable  levels,  the  market  for  new  debt   origination  and  refinancing  of  existing  debt  remains  challenging  and  visibility  on  the  length  of  debt  terms,  the  loan   to  value  parameters  and  loan  pricing  on  new  debt  originations  is  limited.    In  the  current  economic  environment,   the  fair  market  value  of  certain  of  our  hotel  properties  may  have  declined  causing  an  individual  hotel  property’s   indebtedness  as  a  percentage  of  the  property’s  fair  market  value  to  exceed  the  percentage  our  Board  of  Trustees   intended  at  the  time  we  acquired  the  property.   Our  organizational  documents  do  not  limit  the  amount  of  indebtedness  that  we  may  incur.    Our  ability  to   incur  additional  debt  is  dependent  upon  a  number  of  factors,  including  the  current  state  of  the  overall  credit   markets,  our  degree  of  leverage  and  borrowing  restrictions  imposed  by  existing  lenders.    Our  ability  to  raise  funds   through  the  issuance  of  debt  and  equity  securities  is  dependent  upon,  among  other  things,  capital  market  volatility,   risk  tolerance  of  investors,  general  market  conditions  for  REITs  and  market  perceptions  related  to  the  Company’s   ability  to  generate  cash  flow  and  positive  returns  on  its  investments.   In  addition,  our  mortgage  indebtedness  contains  various  financial  and  non-­‐financial  covenants  customarily   found  in  secured,  nonrecourse  financing  arrangements.    If  the  specified  criteria  are  not  satisfied,  the  lender  may  be   able  to  escrow  cash  flow  generated  by  the  property  securing  the  applicable  mortgage  loan.    We  have  determined   that  certain  debt  service  coverage  ratio  covenants  contained  in  the  loan  agreements  securing  a  number  of  our   hotel  properties  were  not  met  as  of  December  31,  2012.    Pursuant  to  the  loan  agreements,  certain  lenders  have   elected  to  escrow  the  operating  cash  flow  for  these  properties.    However,  these  covenants  do  not  constitute  an   event  of  default  for  these  loans.    Future  deterioration  in  market  conditions  could  cause  restrictions  in  our  access  to   the  cash  flow  of  additional  properties.   On  November  5,  2012,  we  entered  into  a  new  $400,000  senior  unsecured  credit  facility.    The  $400,000   credit  facility  provides  for  a  $250,000  senior  unsecured  revolving  line  of  credit  and  a  $150,000  senior  unsecured   term  loan.    Our  previous  $250,000  secured  credit  facility  was  terminated  and  replaced  by  the  new  credit  facility,   and,  as  a  result,  all  amounts  outstanding  under  our  previous  credit  facility  were  repaid  with  borrowings  from  our   new  credit  facility.    The  $400,000  credit  facility  expires  on  November  5,  2015,  and,  provided  no  event  of  default  has   occurred  and  remains  uncured,  we  may  request  that  the  lenders  renew  the  credit  facility  for  two  additional   one-­‐year  periods.    The  credit  facility  is  also  expandable  to  $550,000  at  our  request,  subject  to  the  satisfaction  of   23 HERSHA 2012 ANNUAL REPORT                 certain  conditions.    On  January  3,  2013,  we  drew  an  additional  $50,000  in  unsecured  term  debt  on  our  credit   facility,  making  the  total  outstanding  unsecured  term  debt  balance  $150,000.   As  of  December  31,  2012,  the  outstanding  unsecured  term  loan  balance  under  the  $400,000  credit  facility   was  $100,000  and  the  revolving  line  of  credit  balance  was  $0.    As  of  December  31,  2012,  our  remaining  borrowing   capacity  under  the  $400,000  credit  facility  was  $236,478,  which  is  based  on  certain  operating  metrics  of   unencumbered  hotel  properties  designated  as  borrowing  base  assets.    We  intend  to  repay  indebtedness  incurred   under  the  $400,000  credit  facility  from  time  to  time,  for  acquisitions  or  otherwise,  out  of  cash  flow  and  from  the   proceeds  of  issuances  of  additional  common  and  preferred  shares  and  potentially  other  securities.   We  will  continue  to  monitor  our  debt  maturities  to  manage  our  liquidity  needs.    However,  no  assurances   can  be  given  that  we  will  be  successful  in  refinancing  all  or  a  portion  of  our  future  debt  obligations  due  to  factors   beyond  our  control  or  that,  if  refinanced,  the  terms  of  such  debt  will  not  vary  from  the  existing  terms.  As  of   December  31,  2012,  we  have  $8,070  indebtedness  payable  on  or  before  December  31,  2013.    We  used  borrowings   provided  under  the  unsecured  term  loan  portion  of  the  $400,000  credit  facility  to  repay  mortgages  on  seven  hotel   properties  during  the  fourth  quarter  of  2012.    We  currently  expect  that  cash  requirements  for  all  debt  that  is  not   refinanced  by  our  existing  lenders  of  for  which  the  maturity  date  is  not  extended  will  be  met  through  a   combination  of  cash  on  hand,  refinancing  the  existing  debt  with  new  lenders,  draws  on  the  $250,000  revolving  line   of  credit  portion  of  our  $400,000  credit  facility  and  the  issuance  of  our  securities.   On  May  8,  2012,  we  closed  on  a  public  offering  in  which  we  issued  and  sold  24,000,000  common  shares   through  several  underwriters  for  net  proceeds  to  us  of  approximately  $128,558.    Immediately  upon  the  closing  the   offering,  we  contributed  all  of  the  net  proceeds  of  the  offering  to  HHLP  in  exchange  for  additional  Common  Units  in   HHLP.    HHLP  used  the  net  proceeds  of  this  offering  to  reduce  some  of  the  indebtedness  outstanding  under  our   revolving  line  of  credit  facility  and  for  general  corporate  purposes,  including  the  funding  of  future  acquisitions.   Development  Loans  Receivable   As  of  December  31,  2012,  we  have  $28,425  in  development  loan  principal  receivable  and  $348  in  accrued   interest  receivable  on  these  loans.    We  may  convert  the  principal  and  interest  due  to  us  on  those  development   loans  that  are  not  extended  into  equity  interests  in  the  hotels  developed  by  entering  into  purchase  and  sale   agreements  to  acquire  hotel  properties  from  developers  of  their  affiliates  that  allow  us  to  pay  a  portion  of  the   purchase  price  by  forgiving  and  cancelling  amounts  owed  to  us  under  development  loans,  allowing  us  to  reduce  the   amount  of  cash  required  to  fund  these  acquisitions.    See  “Note  4  –  Development  Loan  Receivable,”  for  further   information.   Acquisitions   During  the  year  ended  December  31,  2012,  we  acquired  the  following  wholly-­‐owned  hotel  properties:   24 HERSHA 2012 ANNUAL REPORT                   We  intend  to  invest  in  additional  hotels  only  as  suitable  opportunities  arise  and  adequate  sources  of   financing  are  available.  We  expect  that  future  investments  in  hotels  will  depend  on  and  will  be  financed  by,  in   whole  or  in  part,  our  existing  cash,  the  proceeds  from  additional  issuances  of  common  or  preferred  shares,   proceeds  from  the  sale  of  assets,  issuances  of  Common  Units,  issuances  of  preferred  units  or  other  securities  or   borrowings.   Operating  Liquidity  and  Capital  Expenditures   We  expect  to  meet  our  short-­‐term  liquidity  requirements  generally  through  net  cash  provided  by   operations,  existing  cash  balances  and,  if  necessary,  short-­‐term  borrowings  under  the  $250,000  unsecured   revolving  line  of  credit  portion  of  our  $400,000  credit  facility.    We  believe  that  the  net  cash  provided  by  operations   in  the  coming  year,  the  additional  $50,000  draw  of  our  unsecured  term  loan,  and  borrowings  drawn  on  the   $250,000  revolving  line  of  credit  portion  of  our  $400,000  credit  facility  will  be  adequate  to  fund  the  Company’s   operating  requirements,  monthly  recurring  debt  service  and  the  payment  of  dividends  in  accordance  with  REIT   requirements  of  the  federal  income  tax  laws.   To  qualify  as  a  REIT,  we  must  distribute  annually  at  least  90%  of  our  taxable  income.  This  distribution   requirement  limits  our  ability  to  retain  earnings  and  requires  us  to  raise  additional  capital  in  order  to  grow  our   business  and  acquire  additional  hotel  properties.  However,  there  is  no  assurance  that  we  will  be  able  to  borrow   funds  or  raise  additional  equity  capital  on  terms  acceptable  to  us,  if  at  all.  In  addition,  we  cannot  guarantee  that  we   will  continue  to  make  distributions  to  our  shareholders  at  the  current  rate  or  at  all.  Due  to  the  seasonality  of  our   business,  cash  provided  by  operating  activities  fluctuates  significantly  from  quarter  to  quarter.  However,  we   believe  that,  based  on  our  current  estimates,  which  include  the  addition  of  cash  provided  by  hotels  acquired  during   2012,  our  cash  provided  by  operating  activities  will  be  sufficient  over  the  next  12  months  to  fund  the  payment  of   our  dividend  at  its  current  level.  However,  our  Board  of  Trustees  continues  to  evaluate  the  dividend  policy  in  the   context  of  our  overall  liquidity  and  market  conditions  and  may  elect  to  reduce  or  suspend  these  distributions.  Cash   provided  by  operating  activities  for  the  year  ended  December  31,  2012  was  $71,756  and  cash  used  for  the  payment   of  distributions  and  dividends  for  the  year  ended  December  31,  2012  was  $60,127.   We  also  project  that  our  operating  cash  flow  and  available  borrowings  under  the  $250,000  revolving  line   of  credit  as  portion  of  our  $400,000  credit  facility  will  be  sufficient  to  satisfy  our  liquidity  and  other  capital  needs   over  the  next  twelve  to  eighteen  months.   Our  long-­‐term  liquidity  requirements  consist  primarily  of  the  costs  of  acquiring  additional  hotel  properties,   renovation  and  other  non-­‐recurring  capital  expenditures  that  need  to  be  made  periodically  with  respect  to  hotel   properties  and  scheduled  debt  repayments.  We  will  seek  to  satisfy  these  long-­‐term  liquidity  requirements  through   various  sources  of  capital,  including  borrowings  under  the  $250,000  revolving  line  of  credit  portion  of  our  $400,000   credit  facility  and  through  secured,  non-­‐recourse  mortgage  financings  with  respect  to  our  unencumbered  hotel   properties.  In  addition,  we  may  seek  to  raise  capital  through  public  or  private  offerings  of  our  securities.  Certain   factors  may  have  a  material  adverse  effect  on  our  ability  to  access  these  capital  sources,  including  our  degree  of   leverage,  the  value  of  our  unencumbered  hotel  properties  and  borrowing  restrictions  imposed  by  lenders  or   franchisors.  We  will  continue  to  analyze  which  source  of  capital  is  most  advantageous  to  us  at  any  particular  point   in  time,  but  financing  may  not  be  consistently  available  to  us  on  terms  that  are  attractive,  or  at  all.   We  have  increased  our  spending  on  capital  improvements  during  the  year  ended  December  31,  2012   when  compared  to  the  same  period  in  2011.    During  the  year  ended  December  31,  2012  we  spent  $28,443  on   capital  expenditures  to  renovate,  improve  or  replace  assets  at  our  hotels.    This  compares  to  $26,201  during  the   same  period  in  2011.    Our  increase  in  capital  expenditures  is  a  result  of  complying  with  brand  mandated   improvements  and  initiating  projects  that  we  believe  will  generate  a  return  on  investment  as  we  enter  a  period  of   recovery  in  the  lodging  sector.    We  expect  further  expansion  of  our  capital  expenditures  in  2013  in  an  effort  to   invest  in  projects  that  we  believe  will  generate  additional  returns  as  economic  conditions  improve.   25 HERSHA 2012 ANNUAL REPORT                 In  addition  to  capital  reserves  required  under  certain  loan  agreements  and  capital  expenditures  to   renovate,  improve  or  replace  assets  at  our  hotels,  we  have  three  ongoing  hotel  development  projects.    We  are   constructing  an  additional  hotel  tower  at  our  Courtyard  by  Marriott  in  Miami  Beach,  FL.    We  are  also  completing   the  construction  of  a  Hampton  Inn  in  lower  Manhattan,  New  York,  NY.    During  the  year  ended  December  31,  2012   we  spent  $10,171  on  hotel  development  projects.    This  compares  to  $32,120  during  the  same  period  in   2011.    Finally,  we  have  entered  into  a  purchase  and  sale  agreement  to  acquire  the  Hyatt  Union  Square,  New  York,   NY  upon  completion  of  construction  for  an  approximate  purchase  price  of  $104,303.    While  this  purchase  and  sale   agreement  secures  the  Company’s  right  to  acquire  the  completed  hotel,  the  Company  is  not  assuming  any   significant  construction  risk,  including  the  risk  of  schedule  and  cost  overruns.    These  projects  will  require  significant   capital  which  we  expect  to  fund  with  various  sources  of  capital,  including  available  borrowings  under  the  $250,000   revolving  line  of  credit  portion  of  our  credit  facility  and  through  secured,  non-­‐recourse  mortgage  financings.    In   addition,  we  may  seek  to  raise  capital  through  public  or  private  offerings  of  our  securities  to  fund  these  capital   improvements.   We  may  spend  additional  amounts,  if  necessary,  to  comply  with  the  reasonable  requirements  of  any   franchise  license  under  which  any  of  our  hotels  operate  and  otherwise  to  the  extent  we  deem  such  expenditures  to   be  in  our  best  interests.  We  are  also  obligated  to  fund  the  cost  of  certain  capital  improvements  to  our  hotels.  We   expect  to  use  operating  cash  flow,  borrowings  under  the  $250,000  revolving  line  of  credit  portion  of  our  credit   facility,  and  proceeds  from  issuances  of  our  securities  to  pay  for  the  cost  of  capital  improvements  and  any   furniture,  fixture  and  equipment  requirements  in  excess  of  the  set  aside  referenced  above.   CASH  FLOW  ANALYSIS   (dollars  in  thousands,  except  per  share  data)   Comparison  of  the  Years  Ended  December  31,  2012  and  December  31,  2011   Net  cash  provided  by  operating  activities  increased  $13,088,  from  $58,668  for  the  year  ended  December   31,  2011  to  $71,756  for  2012.    Net  income,  adjusted  for  non-­‐cash  items  such  as  gain  on  disposition  of  hotel   properties,  impairment  of  assets,  benefit  for  income  taxes,  depreciation  and  amortization,  non-­‐cash  debt   extinguishment,  development  loan  interest  income  added  to  principal,  interest  in  income  from  unconsolidated   joint  ventures,  loss  recognized  on  change  in  fair  value  of  derivative  instruments  and  stock  based  compensation   increased  $16,556  for  the  year  ended  December  31,  2012  when  compared  to  2011.    This  is  primarily  due  to  cash   provided  by  properties  acquired  over  the  past  eighteen  months  and  improving  operating  results  within  our  existing   portfolio.    In  addition,  acquisition  and  terminated  transaction  costs  incurred  for  the  year  ended  December  31,  2012   decreased  $1,555  when  compared  to  the  same  period  in  2011.    Offsetting  the  increases  in  cash  provided  by  these   operating  activities  was  an  increase  in  net  cash  used  in  funding  working  capital  assets,  such  as  payments  into   escrows,  and  repaying  working  capital  liabilities,  such  as  accounts  payable  and  accrued  expenses.   Net  cash  used  in  investing  activities  for  the  year  ended  December  31,  2012  decreased  $174,941,  from   $230,758  for  year  ended  December  31,  2011  compared  to  $55,817  for  2012.    During  the  2012  fiscal  year,  we  closed   on  the  sale  of  18  hotel  properties  and  one  land  parcel  generating  net  proceeds  $63,722.    In  addition,  spending  on   the  purchase  of  hotel  properties  and  development  projects  was  $99,512  lower  during  2012  compared  to  2011.    We   also  received  cash  from  the  repayment  of  development  loans  and  notes  receivable  during  the  year  ended   December  31,  2012.    Offsetting  these  amounts  were  a  decrease  in  distributions  from  our  unconsolidated  joint   ventures  for  the  year  ended  2012  when  compared  to  the  year  ended  2011.   Net  cash  provided  by  financing  activities  for  year  ended  December  31,  2012  was  $28,552  compared  to   $131,062  during  the  same  period  in  2011.    Net  repayments  of  mortgages  and  notes  payable  increased  $151,868   during  the  year  ended  2012  when  compared  to  the  same  period  in  2011,  which  was  funded  in  part  with  borrowings   under  the  $100,000  unsecured  term  loan  portion  of  our  $400,000  credit  facility.    Net  repayments  on  our  revolving   credit  facility  were  $56,000  higher  during  the  year  ended  December  31,  2012  than  in  2011.    Offsetting  this  increase   in  cash  used  to  repay  the  line  of  credit  and  mortgages  and  notes  payable  were  proceeds  from  our  common  stock     26 HERSHA 2012 ANNUAL REPORT                 offering.    During  the  second  quarter  of  2012,  we  completed  an  offering  of  common  shares  with  net  proceeds  of   $128,558.    During  the  second  quarter  of  2011,  we  completed  an  offering  of  preferred  shares  with  net  proceeds  of   $110,977.    These  offerings  have  increased  our  preferred  dividend  obligations  and  common  dividend  payments   causing  a  net  increase  in  total  dividends  and  distributions  paid  of  $12,995  when  comparing  the  years  ended   December  31,  2012  to  2011.   Comparison  of  the  Years  Ended  December  31,  2011  and  December  31,  2010   Net  cash  provided  by  operating  activities  increased  $16,182,  from  $42,486  for  the  year  ended  December   31,  2010  to  $58,668  for  2011.    Net  income,  adjusted  for  non-­‐cash  items  such  as  gain  on  disposition  of  hotel   properties,  impairment  of  assets,  depreciation  and  amortization,  non-­‐cash  debt  extinguishment,  development  loan   interest  income  added  to  principal,  interest  in  income  from  unconsolidated  joint  ventures,  loss  recognized  on   change  in  fair  value  of  derivative  instruments  and  stock  based  compensation  increased  $24,028  for  the  year  ended   December  31,  2011  when  compared  to  2010.    This  is  primarily  due  to  cash  provided  by  properties  acquired  over   the  past  eighteen  months  and  improving  operating  results  within  our  existing  portfolio.    In  addition,  acquisition  and   terminated  transaction  costs  incurred  for  the  year  ended  December  31,  2011  decreased  $2,060  when  compared  to   the  same  period  in  2010.    Offsetting  the  increases  in  cash  provided  by  these  operating  activities  was  an  increase  in   net  cash  used  in  funding  working  capital  assets,  such  as  payments  into  escrows,  and  repaying  working  capital   liabilities,  such  as  accounts  payable  and  accrued  expenses.   Net  cash  used  in  investing  activities  for  the  year  ended  December  31,  2011  decreased  $79,809,  from   $310,567  for  year  ended  December  31,  2010  compared  to  $230,758  for  2011.    During  2011,  we  used  $167,149  to   acquire  five  hotel  properties.    This  compares  to  $260,755  to  acquire  seven  properties  during  the  same  period  in   2010.    In  2011  we  also  received  $13,285  from  one  of  our  unconsolidated  joint  ventures  as  a  result  of  it  refinancing   its  debt.    Offsetting  these  decreases  in  cash  used  in  investing  activities  was  an  increase  to  $26,222  in  capital   expenditures  and  hotel  development  projects  for  the  year  ended  2011  when  compared  to  the  year  ended   2010.    We  have  also  funded  $18,000  in  deposits  for  the  acquisition  of  additional  hotel  properties  and  invested   $1,570  in  a  note  receivable  from  an  unconsolidated  joint  venture  which  will  be  used  by  the  venture  to  fund  a   renovation.   Net  cash  provided  by  financing  activities  for  year  ended  December  31,  2011  was  $131,062  compared  to   $322,273  during  the  same  period  in  2010.    During  the  year  ended  2010  we  completed  three  equity  offerings  with   net  proceeds  of  $420,441.    During  the  year  ended  2011,  we  completed  an  offering  of  preferred  shares  with  net   proceeds  of  $110,977.    These  offerings  and  an  additional  equity  offering  in  October  2010  increased  our  share  count   and  preferred  dividend  obligations  causing  a  net  increase  in  total  dividends  and  distributions  paid  of  $16,879  when   comparing  the  year  ended  2011  to  the  year  ended  2010.      Offsetting  the  proceeds  from  these  offerings  in  2010  and   2011  were  net  proceeds  of  $5,000  on  our  credit  facility  during  2010  compared  to  net  repayments  of  $33,200  during   the  same  period  in  2011.    Net  proceeds  on  our  mortgages  and  notes  payable  were  $63,085  during  the  year  ended   December  31,  2011  compared  to  net  repayments  of  $30,305  during  the  same  period  in  2010.   OFF  BALANCE  SHEET  ARRANGEMENTS   The  Company  does  not  have  off  balance  sheet  arrangements  that  have  or  are  reasonably  likely  to  have  a   current  or  future  effect  on  our  financial  condition,  revenues  or  expenses,  results  of  operations,  liquidity,  capital   expenditures  or  capital  resources.   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     27 HERSHA 2012 ANNUAL REPORT                     income-­‐producing  real  estate  historically  has  not  depreciated  on  the  basis  determined  under  GAAP.  We  calculate   FFO  applicable  to  common  shares  and  Common  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  loss  from  impairment  of  assets  and  depreciation   and  amortization,  and  after  adjustments  for  unconsolidated  partnerships  and  joint  ventures.  Our  interpretation  of   the  NAREIT  definition  is  that  noncontrolling  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  shareholders,  includes  loss  from  the  impairment  of  certain  depreciable  assets,  our  investment  in   unconsolidated  joint  ventures  and  land,  depreciation  and  amortization  expenses,  gains  or  losses  on  property  sales,   noncontrolling  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.    We  determined  that  the  loss  from  the   impairment  of  certain  depreciable  assets  including  investments  in  unconsolidated  joint  ventures  and  land,  was   driven  by  a  measurable  decrease  in  the  fair  value  of  certain  hotel  properties  and  other  assets  as  determined  by  our   analysis  of  those  assets  in  accordance  with  applicable  GAAP.    As  such,  these  impairments  have  been  eliminated   from  net  loss  to  determine  FFO.   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  the  Company’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   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  Common  Units  because  our  Common  Units  are   redeemable  for  common  shares.  We  believe  it  is  meaningful  for  the  investor  to  understand  FFO  applicable  to  all   common  shares  and  Common  Units.   28 HERSHA 2012 ANNUAL REPORT           The  following  table  reconciles  FFO  for  the  periods  presented  to  the  most  directly  comparable  GAAP   measure,  net  income,  for  the  same  periods  (dollars  in  thousands):   (1) (2) (3) Adjustment  made  to  deduct  FFO  related  to  the  noncontrolling  interest  in  our  consolidated  joint  ventures.   Represents  the  portion  of  net  income  and  depreciation  allocated  to  our  joint  venture  partners.   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.   Adjustment  made  to  add  our  interest  in  real  estate  related  depreciation  and  amortization  of  our   unconsolidated  joint  ventures.  Allocation  of  depreciation  and  amortization  is  consistent  with  allocation  of   income  and  loss.   Certain  amounts  related  to  depreciation  and  amortization  and  depreciation  and  amortization  from   discontinued  operations  in  the  prior  year  FFO  reconciliation  have  been  recast  to  conform  to  the  current  year   presentation.    In  addition,  based  on  guidance  provided  by  NAREIT,  we  have  eliminated  loss  from  the  impairment  of   certain  depreciable  assets,  including  investments  in  unconsolidated  joint  ventures  and  land,  from  net  loss  to  arrive   at  FFO  in  each  year  presented.   INFLATION   Operators  of  hotel  properties,  in  general,  possess  the  ability  to  adjust  room  rates  daily  to  reflact  the   effects  of  inflation.    However,  competitive  pressures  may  limit  the  ability  of  our  management  companies  to  raise   room  rates.   29 HERSHA 2012 ANNUAL REPORT           CRITICAL  ACCOUNTING  POLICIES  AND  ESTIMATES   Our  discussion  and  analysis  of  our  financial  condition  and  results  of  operations  are  based  upon  our   consolidated  financial  statements,  which  have  been  prepared  in  accordance  with  accounting  principles  generally   accepted  in  the  United  States.  The  preparation  of  these  financial  statements  requires  us  to  make  estimates  and   judgments  that  affect  the  reported  amounts  of  assets,  liabilities,  revenues  and  expenses,  and  related  disclosure  of   contingent  assets  and  liabilities.   On  an  on-­‐going  basis,  estimates  are  evaluated  by  us,  including  those  related  to  carrying  value  of   investments  in  hotel  properties.  Our  estimates  are  based  upon  historical  experience  and  on  various  other   assumptions  we  believe  to  be  reasonable  under  the  circumstances,  the  results  of  which  form  the  basis  for  making   judgments  about  the  carrying  values  of  assets  and  liabilities  that  are  not  readily  apparent  from  other  sources.   Actual  results  may  differ  from  these  estimates  under  different  assumptions  or  conditions.   We  believe  the  following  critical  accounting  policies  affect  our  more  significant  judgments  and  estimates   used  in  the  preparation  of  our  consolidated  financial  statements:   Revenue  Recognition   Approximately  95%  of  our  revenues  are  derived  from  hotel  room  revenues  and  revenue  from  other  hotel   operating  departments.  We  directly  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.  All  revenues  are  recorded  on  an  accrual  basis,  as  earned.  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.   Revenue  for  interest  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.   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  hotel  revenue  and  are  recorded  in  the   period  earned.   Investment  in  Hotel  Properties   Investments  in  hotel  properties  are  recorded  at  cost.  Improvements  and  replacements  are  capitalized   when  they  extend  the  useful  life  of  the  asset.  Costs  of  repairs  and  maintenance  are  expensed  as  incurred.   Depreciation  is  computed  using  the  straight-­‐line  method  over  the  estimated  useful  life  of  up  to  40  years  for   buildings  and  improvements,  two  to  seven  years  for  furniture,  fixtures  and  equipment.  We  are  required  to  make   subjective  assessments  as  to  the  useful  lives  of  our  properties  for  purposes  of  determining  the  amount  of   depreciation  to  record  on  an  annual  basis  with  respect  to  our  investments  in  hotel  properties.  These  assessments   have  a  direct  impact  on  our  net  income  because  if  we  were  to  shorten  the  expected  useful  lives  of  our  investments   in  hotel  properties  we  would  depreciate  these  investments  over  fewer  years,  resulting  in  more  depreciation   expense  and  lower  net  income  on  an  annual  basis.   30 HERSHA 2012 ANNUAL REPORT                       Most  identifiable  assets,  liabilities,  noncontrolling  interests,  and  goodwill  related  to  hotel  properties   acquired  in  a  business  combination  are  recorded  at  full  fair  value.    Estimating  techniques  and  assumptions  used  in   determining  fair  values  involve  significant  estimates  and  judgments.    These  estimates  and  judgments  have  a  direct   impact  on  the  carrying  value  of  our  assets  and  liabilities  which  can  directly  impact  the  amount  of  depreciation   expense  recorded  on  an  annual  basis  and  could  have  an  impact  on  our  assessment  of  potential  impairment  of  our   investment  in  hotel  properties.   The  operations  related  to  properties  that  have  been  sold  or  properties  that  are  intended  to  be  sold  are   presented  as  discontinued  operations  in  the  statement  of  operations  for  all  periods  presented,  and  properties   intended  to  be  sold  are  designated  as  “held  for  sale”  on  the  balance  sheet.   Based  on  the  occurrence  of  certain  events  or  changes  in  circumstances,  we  review  the  recoverability  of   the  property’s  carrying  value.  Such  events  or  changes  in  circumstances  include the following: ·∙ ·∙ ·∙ ·∙ ·∙ ·∙ a  significant  decrease  in  the  market  price  of  a  long-­‐lived  asset;   a  significant  adverse  change  in  the  extent  or  manner  in  which  a  long-­‐lived  asset  is  being  used  or  in  its   physical  condition;   a  significant  adverse  change  in  legal  factors  or  in  the  business  climate  that  could  affect  the  value  of  a   long-­‐lived  asset,  including  an  adverse  action  or  assessment  by  a  regulator;   an  accumulation  of  costs  significantly  in  excess  of  the  amount  originally  expected  for  the  acquisition   or  construction  of  a  long-­‐lived  asset;   a  current-­‐period  operating  or  cash  flow  loss  combined  with  a  history  of  operating  or  cash  flow  losses   or  a  projection  or  forecast  that  demonstrates  continuing  losses  associated  with  the  use  of  a  long-­‐lived   asset;  and   a  current  expectation  that,  it  is  more  likely  than  not  that,  a  long-­‐lived  asset  will  be  sold  or  otherwise   disposed  of  significantly  before  the  end  of  its  previously  estimated  useful  life.   We  review  our  portfolio  on  an  on-­‐going  basis  to  evaluate  the  existence  of  any  of  the  aforementioned   events  or  changes  in  circumstances  that  would  require  us  to  test  for  recoverability.  In  general,  our  review  of   recoverability  is  based  on  an  estimate  of  the  future  undiscounted  cash  flows,  excluding  interest  charges,  expected   to  result  from  the  property’s  use  and  eventual  disposition.  These  estimates  consider  factors  such  as  expected   future  operating  income,  market  and  other  applicable  trends  and  residual  value  expected,  as  well  as  the  effects  of   hotel  demand,  competition  and  other  factors.  If  impairment  exists  due  to  the  inability  to  recover  the  carrying  value   of  a  property,  an  impairment  loss  is  recorded  to  the  extent  that  the  carrying  value  exceeds  the  estimated  fair  value   of  the  property.  We  are  required  to  make  subjective  assessments  as  to  whether  there  are  impairments  in  the   values  of  our  investments  in  hotel  properties.   As  of  December  31,  2012,  based  on  our  analysis,  we  have  determined  that  the  future  cash  flow  of  each  of   the  properties  in  our  portfolio  is  sufficient  to  recover  its  carrying  value.   Investment  in  Joint  Ventures   Properties  owned  in  joint  ventures  are  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  or   other  rights  in  the  operation  of  the  entity.  To  determine  if  we  are  the  primary  beneficiary  of  a  VIE,  we  evaluate   whether  we  have  a  controlling  financial  interest  in  that  VIE.    An  enterprise  is  deemed  to  have  a  controlling  financial   interest  if  it  has  i)  the  power  to  direct  the  activities  of  a  variable  interest  entity  that  most  significantly  impact  the   entity’s  economic  performance,  and  ii)  the  obligation  to  absorb  losses  of  the  VIE  that  could  be  significant  to  the  VIE   or  the  rights  to  receive  benefits  from  the  VIE  that  could  be  significant  to  the  VIE.  Control  can  also  be  demonstrated   by  the  ability  of  a  member  to  manage  day-­‐to-­‐day  operations,  refinance  debt  and  sell  the  assets  of  the  partnerships   without  the  consent  of  the  other  member  and  the  inability  of  the  members  to  replace  the  managing  member.  This   31 HERSHA 2012 ANNUAL REPORT             evaluation  requires  significant  judgment.   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  nominal  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  that  is  other  than   temporary.  When  an  impairment  indicator  is  present,  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.  Subsequent  changes  in  estimates  could  impact  the  determination  of  whether  impairment   exists.  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  accounts  for  the  credit  risk  associated  with  its  development  loans  receivable  by  monitoring   the  portfolio  for  indications  of  impairment.    Our  methodology  consists  of  the  following:   ·∙ ·∙ Identifying  loans  for  individual  review.  In  general,  these  consist  of  development  loans  that  are  not   performing  in  accordance  with  the  contractual  terms  of  the  loan.   Assessing  whether  the  loans  identified  for  review  are  impaired.  That  is,  whether  it  is  probable  that  all   amounts  will  not  be  collected  according  to  the  contractual  terms  of  the  loan  agreement.    We   determine  the  amount  of  impairment  by  calculating  the  estimated  fair  value,  discounted  cash  flows  or   the  value  of  the  underlying  collateral.   Any  charge  to  earnings  necessary  based  on  our  review  is  recorded  on  our  income  statement  as  an   impairment  of  a  development  loan  receivable.    Our  assessment  of  impairment  is  based  on  information  known  at   the  time  of  the  review.  Changes  in  factors  underlying  the  assessment  could  have  a  material  impact  on  the  amount   of  impairment  to  be  charged  against  earnings.  Such  changes  could  impact  future  results.   Based  on  our  reviews,  we  determined  that  it  is  probable  that  all  amounts  will  be  collected  according  to  the   contractual  terms  of  each  of  our  development  loan  agreements.   Accounting  for  Derivative  Financial  Investments  and  Hedging  Activities   We  use  derivatives  to  hedge,  fix  and  cap  interest  rate  risk  and  we  account  for  our  derivative  and  hedging   activities  by  recording  all  derivative  instruments  at  fair  value  on  the  balance  sheet.  Derivative  instruments   designated  in  a  hedge  relationship  to  mitigate  exposure  to  variability  in  expected  future  cash  flows,  or  other  types   of  forecasted  transactions,  are  considered  cash  flow  hedges.  We  formally  document  all  relationships  between   hedging  instruments  and  hedged  items,  as  well  as  our  risk-­‐management  objective  and  strategy  for  undertaking   each  hedge  transaction.  Cash  flow  hedges  that  are  considered  highly  effective  are  accounted  for  by  recording  the   fair  value  of  the  derivative  instrument  on  the  balance  sheet  as  either  an  asset  or  liability,  with  a  corresponding   amount  recorded  in  other  comprehensive  income  within  shareholders’  equity.  Amounts  are  reclassified  from  other   32 HERSHA 2012 ANNUAL REPORT                   comprehensive  income  to  the  income  statements  in  the  period  or  periods  the  hedged  forecasted  transaction   affects  earnings.   Under  cash  flow  hedges,  derivative  gains  and  losses  not  considered  highly  effective  in  hedging  the  change   in  expected  cash  flows  of  the  hedged  item  are  recognized  immediately  in  the  income  statement.  For  hedge   transactions  that  do  not  qualify  for  the  short-­‐cut  method,  at  the  hedge’s  inception  and  on  a  regular  basis   thereafter,  a  formal  assessment  is  performed  to  determine  whether  changes  in  the  cash  flows  of  the  derivative   instruments  have  been  highly  effective  in  offsetting  changes  in  cash  flows  of  the  hedged  items  and  whether  they   are  expected  to  be  highly  effective  in  the  future.   RECENTLY  ISSUED  ACCOUNTING  STANDARDS   Effective  January  1,  2012,  we  adopted  ASC  Update  No.  2011-­‐05  concerning  the  presentation  of   comprehensive  income.  The  amendment  provides  guidance  to  improve  comparability,  consistency,  and   transparency  of  financial  reporting.  The  amendment  also  eliminates  the  option  to  present  components  of  other   comprehensive  income  as  part  of  the  statement  of  changes  in  stockholders’  equity.  Instead,  entities  will  be   required  to  present  all  non-­‐owner  changes  in  stockholders’  equity  as  either  a  single  continuous  statement  of   comprehensive  income  or  in  two  separate  but  consecutive  statements,  for  which  we  have  elected  to  present  two   separate  but  consecutive  statements.   RELATED  PARTY  TRANSACTIONS   We  have  entered  into  a  number  of  transactions  and  arrangements  that  involve  related  parties.  For  a   description  of  the  transactions  and  arrangements,  please  see  Note  7,  “Commitments  and  Contingencies  and   Related  Party  Transactions,”  to  the  consolidated  financial  statements.   CONTRACTUAL  OBLIGATIONS  AND  COMMERCIAL  COMMITMENTS   The  following  table  summarizes  our  contractual  obligations  and  commitments  to  make  future  payments   under  contracts,  such  as  debt  and  lease  agreements,  as  of  December  31,  2012.   (1) On  January  3,  2013,  we  funded  the  remaining  $50,000  tranche  of  the  unsecured  term  loan  portion  of  our   credit  facility,  which  was  used  to  pay  off  mortgage  indebtedness  for  one  of  our  hotel  properties.   33 HERSHA 2012 ANNUAL REPORT               Item  7A.     Quantitative  and  Qualitative  Disclosures  About  Market  Risk  (in  thousands,  except  per  share  data)   Our  primary  market  risk  exposure  is  to  changes  in  interest  rates  on  our  variable  rate  debt.  As  of  December   31,  2012,  we  are  exposed  to  interest  rate  risk  with  respect  to  variable  rate  borrowings  under  our  $400,000  credit   facility  and  certain  variable  rate  mortgages  and  notes  payable.  As  of  December  31,  2012,  we  had  total  variable  rate   debt  outstanding  of  $70,548  with  a  weighted  average  interest  rate  of  3.44%.    The  effect  of  a  100  basis  point   increase  or  decrease  in  the  interest  rate  on  our  variable  rate  debt  outstanding  as  of  December  31,  2012  would  be   an  increase  or  decrease  in  our  interest  expense  for  the  twelve  months  ended  December  31,  2012  of  $1,143.                                  Our  interest  rate  risk  objectives  are  to  limit  the  impact  of  interest  rate  fluctuations  on  earnings  and  cash   flows  and  to  lower  our  overall  borrowing  costs.  To  achieve  these  objectives,  we  manage  our  exposure  to   fluctuations  in  market  interest  rates  for  a  portion  of  our  borrowings  through  the  use  of  fixed  rate  debt  instruments   to  the  extent  that  reasonably  favorable  rates  are  obtainable  with  such  arrangements.  We  have  also  entered  into   derivative  financial  instruments  such  as  interest  rate  swaps  or  caps,  and  in  the  future  may  enter  into  treasury   options  or  locks,  to  mitigate  our  interest  rate  risk  on  a  related  financial  instrument  or  to  effectively  lock  the  interest   rate  on  a  portion  of  our  variable  rate  debt.  As  of  December  31,  2012,  we  have  an  interest  rate  cap  related  to  debt   on  the  Hotel  373,  New  York,  NY  and  our  two  subordinated  notes  payable,  and  we  have  six  interest  rate  swaps   related  to  debt  on  the  Holiday  Inn  Express  Times  Square,  New  York,  NY,  Courtyard  by  Marriott,  Westside,  Los   Angeles,  CA,  Capitol  Hill  Hotel,  Washington  DC,  Courtyard  by  Marriott,  Miami  Beach,  FL,  and  our  corporate  credit   facility.    Subsequent  to  December  31,  2012,  we  repaid  the  mortgage  secured  by  the  Holiday  Inn  Express  Times   Square  in  New  York,  NY,  and  terminated  the  interest  rate  swaps  associated  with  this  mortgage.    We  do  not  intend   to  enter  into  derivative  or  interest  rate  transactions  for  speculative  purposes.   As  of  December  31,  2012  all  of  our  outstanding  consolidated  long-­‐term  indebtedness  is  subject  to  fixed   rates  or  effectively  capped,  including  borrowings  under  our  revolving  credit  facility.   Changes  in  market  interest  rates  on  our  fixed-­‐rate  debt  impact  the  fair  value  of  the  debt,  but  such  changes   have  no  impact  on  interest  expense  incurred.  If  interest  rates  rise  100  basis  points  and  our  fixed  rate  debt  balance   remains  constant,  we  expect  the  fair  value  of  our  debt  to  decrease.  The  sensitivity  analysis  related  to  our  fixed-­‐rate   debt  assumes  an  immediate  100  basis  point  move  in  interest  rates  from  their  December  31,  2012  levels,  with  all   other  variables  held  constant.  A  100  basis  point  increase  in  market  interest  rates  would  cause  the  fair  value  of  our   fixed-­‐rate  debt  outstanding  at  December  31,  2012  to  be  approximately  $719,512  and  a  100  basis  point  decrease  in   market  interest  rates  would  cause  the  fair  value  of  our  fixed-­‐rate  debt  outstanding  at  December  31,  2012  to  be   approximately  $769,190.   We  regularly  review  interest  rate  exposure  on  our  outstanding  borrowings  in  an  effort  to  minimize  the  risk   of  interest  rate  fluctuations.  For  debt  obligations  outstanding  as  of  December  31,  2012,  the  following  table   presents  expected  principal  repayments  and  related  weighted  average  interest  rates  by  expected  maturity  dates   (in  thousands):   The  table  incorporates  only  those  exposures  that  existed  as  of  December  31,  2012,  and  does  not  consider   exposure  or  positions  that  could  arise  after  that  date.  As  a  result,  our  ultimate  realized  gain  or  loss  with  respect  to   interest  rate  fluctuations  will  depend  on  the  exposures  that  arise  during  the  future  period,  prevailing  interest  rates,   and  our  hedging  strategies  at  that  time.   34 HERSHA 2012 ANNUAL REPORT           The  following  table  illustrates  expected  principal  repayments  and  certain  adjustments  to  reflect:   ●   ●   the  Company’s  exercise  of  each  of  the  extension  options  within  its  discretion  or  upon  lender  approval,   and   the  lender’s  extension  of  the  maturity  of  the  revolving  line  of  credit  extension  option.   (1) (2) (3) (4) (5) (6) Adjustments  include  amortization  of  principal  scheduled  to  occur  subsequent  to  December  31,  2012   through  maturity  date  and  extended  maturity  date  if  options  are  exercised.   Represents  mortgage  debt  on  the  Courtyard  Miami  Beach  Oceanfront.  The  loan  is  schedule  to  mature  in   July  2016  and  contains  a  one  year  extension  option.  The  initial  funding  is  $45.0  million,  with  three   additional  draws  of  $5.0  million  each  every  90  days  to  fund  the  construction  of  the  new  93-­‐room  ocean   front  tower.   Represents  mortgage  debt  on  the  Courtyard,  Los  Angeles,  CA,  which  contains  a  one-­‐year  extension  option,   subject  to  the  lender's  approval  in  its  discretion,  effectively  extending  the  maturity  from  September  2015   to  September  2016.   Represents  mortgage  debt  on  the  Capitol  Hill  Hotel,  Washington  DC,  which  contains  a  two-­‐year  extension   option,  which  is  subject  to  the  lender's  approval  in  its  discretion,  effectively  extending  the  maturity  from   February  2015  to  February  2017.   Represents  the  paydown  of  the  mortgage  debt  on  the  Holiday  Inn  Express  -­‐  Times  Square  in  January  2013.   Represents  borrowings  under  the  $150  million  unsecured  term  loan  portion  of  the  $400  million  unsecured   credit  facility.    This  credit  facility  contains  two  one-­‐year  extension  options,  which  are  subject  to  the   lenders'  approval  in  their  discretion.    If  approved,  the  maturity  could  be  extended  from  November  2015  to   November  2017.  The  adjusted  2017  amount  reflects  an  additional  $50  million  drawn  on  the  term  loan  on   January  3,  2013.   35 HERSHA 2012 ANNUAL REPORT             Item  8.     Financial  Statements  and  Supplementary  Data   Hersha  Hospitality  Trust   36 HERSHA 2012 ANNUAL REPORT     Report  of  Independent  Registered  Public  Accounting  Firm   The  Board  of  Trustees  and  Shareholders  of   Hersha  Hospitality  Trust:   We  have  audited  the  accompanying  consolidated  balance  sheets  of  Hersha  Hospitality  Trust  and  subsidiaries  as  of   December  31,  2012  and  2011,  and  the  related  consolidated  statements  of  operations,  comprehensive  income   (loss),  equity,  and  cash  flows  for  each  of  the  years  in  the  three-­‐year  period  ended  December  31,  2012.  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  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  opinion.   In  our  opinion,  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,  2012  and  2011,  and  the  results  of   their  operations  and  their  cash  flows  for  each  of  the  years  in  the  three-­‐year  period  ended  December  31,  2012,  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,  2012,  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  February  22,  2013,  expressed   an  unqualified  opinion  on  the  effectiveness  of  the  Company’s  internal  control  over  financial  reporting.   /s/  KPMG  LLP   Philadelphia,  Pennsylvania   February  22,  2013   37 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  BALANCE  SHEETS   AS  OF  DECEMBER  31,  2012  AND  2011   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   The  Accompanying  Notes  Are  an  Integral  Part  of  These  Consolidated  Financial  Statements.   38 HERSHA 2012 ANNUAL REPORT   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  STATEMENT  OF  OPERATIONS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   The  Accompanying  Notes  Are  an  Integral  Part  of  These  Consolidated  Financial  Statements.   39 HERSHA 2012 ANNUAL REPORT HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  STATEMENT  OF  OPERATIONS  (CONTINUED)   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   *   Income  (loss)  allocated  to  noncontrolling  interest  in  Hersha  Hospitality  Limited  Partnership  has  been   excluded  from  the  numerator  and  operating  partnership  units  held  by  the  limited  partners  of  Hersha   Hospitality  Limited  Partnership  (“Common  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.    In  addition,  potentially  dilutive  common  shares,  if  any,   have  been  excluded  from  the  denominator  if  they  are  anti-­‐dilutive  to  income  (loss)  from  continuing   operations  applicable  to  common  shareholders.   The  following  table  summarizes  potentially  dilutive  securities  that  have  been  excluded  from  the   denominator  for  the  purpose  of  computing  diluted  earnings  per  share:   The  Accompanying  Notes  are  an  Integral  Part  of  These  Consolidated  Financial  Statements.   40 HERSHA 2012 ANNUAL REPORT       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  STATEMENTS  OF  COMPREHENSIVE  INCOME  (LOSS)   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   The  Accompanying  Notes  are  an  Integral  Part  of  These  Consolidated  Financial  Statements.   41 HERSHA 2012 ANNUAL REPORT HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  STATEMENTS  OF  EQUITY   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  PER  SHARE  AMOUNTS]   The  Accompanying  Notes  Are  an  Integral  Part  of  These  Consolidated  Financial  Statements.   42 HERSHA 2012 ANNUAL REPORT   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS]   The  Accompanying  Notes  Are  an  Integral  Part  of  These  Consolidated  Financial  Statements. 43 HERSHA 2012 ANNUAL REPORT   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS]   The  Accompanying  Notes  Are  an  Integral  Part  of  These  Consolidated  Financial  Statements.   44 HERSHA 2012 ANNUAL REPORT       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  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.  We  have  elected  to  be  taxed  and  expect  to  continue  to  elect  to  be  taxed  as  a  real  estate   investment  trust,  or  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  owns  a  taxable  REIT  subsidiary  (“TRS”),  44  New  England  Management  Company  (“44  New   England”  or  “TRS  Lessee”),  to  lease  certain  of  the  Company’s  hotels.   Hersha’s  common  shares  of  beneficial  interest  trade  on  the  New  York  Stock  Exchange  (“the  NYSE”)  under  the  ticker   symbol  "HT",  its  8.0%  Series  A  preferred  shares  of  beneficial  interest  trade  on  the  NYSE  under  the  ticker  symbol  "HT   PR  A”,  and  its  8.0%  Series  B  preferred  shares  of  beneficial  interest  trade  on  the  NYSE  under  the  ticker  symbol  “HT   PR  B.”   As  of  December  31,  2012,  the  Company,  through  the  Partnership  and  subsidiary  partnerships,  wholly  owned  57   limited  and  full  service  hotels.  All  of  the  wholly  owned  hotel  facilities  are  leased  to  the  Company’s  TRS,  44  New   England.   In  addition  to  the  wholly  owned  hotel  properties,  as  of  December  31,  2012,  the  Company  owned  joint  venture   interests  in  another  seven  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:   Mystic  Partners,  LLC  owns  an  interest  in  five  hotel  properties.  Our  interest  in  Mystic  Partners,  LLC  is  relative  to  our   interest  in  each  of  the  five  properties  owned  by  the  joint  venture  as  defined  in  the  joint  venture’s  governing   documents.  Each  of  the  five  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  three  of  the  Company’s  executive  officers,  two  of  its   trustees  and  other  third  party  investors.   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.   45 HERSHA 2012 ANNUAL REPORT                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   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  when  the  general  partner  has   the  power  to  impact  the  economic  performance  of  the  partnership,  which  includes  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.  Entities  are  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  or  other  rights  in  the   operation  of  the  entity.  To  determine  if  we  are  the  primary  beneficiary  of  a  VIE,  we  evaluate  whether  we  have  a   controlling  financial  interest  in  that  VIE.  An  enterprise  is  deemed  to  have  a  controlling  financial  interest  if  it  has  i)   the  power  to  direct  the  activities  of  a  variable  interest  entity  that  most  significantly  impact  the  entity’s  economic   performance,  and  ii)  the  obligation  to  absorb  losses  of  the  VIE  that  could  be  significant  to  the  VIE  or  the  rights  to   receive  benefits  from  the  VIE  that  could  be  significant  to  the  VIE.  Control  can  also  be  demonstrated  by  the  ability  of   a  member  to  manage  day-­‐to-­‐day  operations,  refinance  debt  and  sell  the  assets  of  the  partnerships  without  the   consent  of  the  other  member  and  the  inability  of  the  members  to  replace  the  managing  member.  Based  on  our   examination,  the  following  entities  were  determined  to  be  VIE’s:  Mystic  Partners,  LLC;  Mystic  Partners  Leaseco,   LLC;  South  Bay  Boston,  LLC;  Brisam  Management  DE,  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  $9,751  as  of  December  31,  2012.  Also,  Mystic  Partners  Leaseco,  LLC;  and   South  Bay  Boston,  LLC  lease  hotel  properties  from  our  joint  venture  interests  and  are  VIEs.  These  entities  are   consolidated  by  the  lessors,  the  primary  beneficiaries  of  each  entity.  Brisam  Management  DE,  LLC  is  consolidated  in   our  financial  statements,  as  we  are  considered  to  be  the  primary  beneficiary.  Hersha  Statutory  Trust  I  and  Hersha   Statutory  Trust  II  are  VIEs  but  HHLP  is  not  the  primary  beneficiary  in  these  entities.  Accordingly,  the  accounts  of   Hersha  Statutory  Trust  I  and  Hersha  Statutory  Trust  II  are  not  consolidated  with  and  into  HHLP.   We  allocate  resources  and  assess  operating  performance  based  on  individual  hotels  and  consider  each  one  of  our   hotels  to  be  an  operating  segment.  All  of  our  individual  operating  segments  meet  the  aggregation  criteria.  All  of   our  other  real  estate  investment  activities  are  immaterial  and  meet  the  aggregation  criteria,  and  thus,  we  report   one  segment:  investment  in  hotel  properties.   Use  of  Estimates   The  preparation  of  financial  statements  in  conformity  with  accounting  principles  generally  accepted  in  the  United   States  (US  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     46 HERSHA 2012 ANNUAL REPORT                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   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  fair  value  allocations  were  determined  using  Level  3  inputs,  which  are  typically  unobservable  and  are   based  on  our  own  assumptions,  as  there  is  little,  if  any,  related  market  activity.  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   2  to  7  Years   The  Company  periodically  reviews  the  carrying  value  of  each  hotel  to  determine  if  circumstances  indicate   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.  Based  on  the  properties   undiscounted  future  cash  flows,  the  Company  will  determine  if  the  investment  in  such  hotel  is  recoverable.  If   impairment  is  indicated,  an  adjustment  will  be  made  to  reduce  the  carrying  value  of  the  hotel  to  reflect  the  hotel  at   fair  value.   We  consider  a  hotel  to  be  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  an  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  nominal  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  indicate  impairment  to  the  carrying  value  of  the  investment  that  is  other  than   temporary.  When  an  impairment  indicator  is  present,  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.   47 HERSHA 2012 ANNUAL REPORT                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   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  on  an  on-­‐going  basis.  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  the  borrowers  generally  are  not  VIEs,   or  in  the  limited  instances  where  we  have  determined  that  the  borrower  is  a  VIE,  our  interest  does  not  represent  a   controlling  financial  interest.  Accordingly,  we  do  not  consolidate  the  operating  results  of  the  borrower  in  our   consolidated  financial  statements.  Our  evaluation  of  this  determination  was  made  by  reviewing  the  sufficiency  of   the  borrower’s  equity  at  risk,  the  rights  of  the  borrower,  and  which  party  has  i)  the  power  to  direct  the  activities  of   a  variable  interest  entity  that  most  significantly  impact  the  entity’s  economic  performance,  and  ii)  the  obligation  to   absorb  losses  of  the  VIE  that  could  be  significant  to  the  VIE  or  the  rights  to  receive  benefits  from  the  VIE  that  could   be  significant  to  the  VIE.  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.   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.   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  Financing  Costs   Deferred  financing  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  and  interest  receivable  on  development  loans  made  to  related  parties.  Due     48 HERSHA 2012 ANNUAL REPORT                               HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   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.   Development  Project  Capitalization   We  have  opportunistically  engaged  in  the  development  of  hotel  assets.  We  capitalize  expenditures  related  to  hotel   development  projects  and  renovations,  including  indirect  costs  such  as  interest  expense,  real  estate  taxes,  and   utilities  related  to  hotel  development  projects  and  renovations.   Noncontrolling  Interest   Noncontrolling  interest  in  the  Partnership  represents  the  limited  partner’s  proportionate  share  of  the  equity  of  the   Partnership.  Income  (loss)  is  allocated  to  noncontrolling  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,  2012,  2011  and  2010   was  96.5%,  95.9%,  and  95.8%,  respectively.   We  define  a  noncontrolling  interest  as  the  portion  of  equity  in  a  subsidiary  not  attributable,  directly  or  indirectly,  to   a  parent.  Such  noncontrolling  interests  are  reported  on  the  consolidated  balance  sheets  within  equity,  but   separately  from  the  shareholders’  equity.  Revenues,  expenses  and  net  income  or  loss  attributable  to  both  the   Company  and  noncontrolling  interests  are  reported  on  the  consolidated  statements  of  operations.   In  accordance  with  US  GAAP,  we  classify  securities  that  are  redeemable  for  cash  or  other  assets  at  the  option  of  the   holder,  or  not  solely  within  the  control  of  the  issuer,  outside  of  permanent  equity  in  the  consolidated  balance   sheet.  The  Company  makes  this  determination  based  on  terms  in  applicable  agreements,  specifically  in  relation  to   redemption  provisions.  Additionally,  with  respect  to  noncontrolling  interests  for  which  the  Company  has  a  choice   to  settle  the  contract  by  delivery  of  its  own  shares,  the  Company  considers  the  guidance  in  US  GAAP  to  evaluate   whether  the  Company  controls  the  actions  or  events  necessary  to  issue  the  maximum  number  of  common  shares   that  could  be  required  to  be  delivered  at  the  time  of  settlement  of  the  contract.   We  classify  the  noncontrolling  interests  of  our  consolidated  joint  ventures  and  certain  Common  Units   (“Nonredeemable  Common  Units”)  as  equity.  The  noncontrolling  interests  of  Nonredeemable  Common  Units   totaled  $15,484  as  of  December  31,  2012  and  $16,862  as  of  December  31,  2011.  As  of  December  31,  2012,  there   were  4,048,254  Nonredeemable  Common  Units  outstanding  with  a  fair  market  value  of  $20,241,  based  on  the   price  per  share  of  our  common  shares  on  the  NYSE  on  such  date.  In  accordance  with  the  partnership  agreement  of   the  Partnership,  holders  of  these  units  may  redeem  them  for  cash  unless  we,  in  our  sole  and  absolute  discretion,   elect  to  issue  common  shares  on  a  one-­‐for-­‐one  basis  in  lieu  of  paying  cash.   Prior  to  February  1,  2013,  certain  Common  Units  (“Redeemable  Common  Units”)  had  been  pledged  as  collateral  in   connection  with  a  pledge  and  security  agreement  entered  into  by  the  Company  and  the  holders  of  the  Redeemable   Common  Units.  The  redemption  feature  contained  in  the  pledge  and  security  agreement  where  the   49 HERSHA 2012 ANNUAL REPORT                             HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   Redeemable  Common  Units  served  as  collateral  contains  a  provision  that  could  result  in  a  net  cash  settlement   outside  of  the  control  of  the  Company.  As  a  result,  prior  to  February  1,  2013,  the  Redeemable  Common  Units  were   classified  in  the  mezzanine  section  of  the  consolidated  balance  sheets  as  they  do  not  meet  the  requirements  for   equity  classification  under  US  GAAP.  Effective  February  1,  2013,  the  aforementioned  pledge  and  security   agreement  is  no  longer  in  place  and  therefore  these  Common  Units  will  be  treated  as  Nonredeemable  Common   Units  in  future  filings.  The  carrying  value  of  the  Redeemable  Common  Units  equals  the  greater  of  carrying  value   based  on  the  accumulation  of  historical  cost  or  the  redemption  value.  As  of  December  31,  2012,  there  were   3,064,252  Redeemable  Common  Units  outstanding  with  a  redemption  value  equal  to  the  fair  value  of  the   Redeemable  Common  Units,  or  $15,321.  The  redemption  value  of  the  Redeemable  Common  Units  is  based  on  the   price  per  share  of  our  common  shares  on  the  NYSE  on  such  date.  As  of  December  31,  2012,  the  Redeemable   Common  Units  were  valued  on  the  consolidated  balance  sheets  at  redemption  value  since  the  Redeemable   Common  Units  redemption  value  was  greater  than  historical  cost  of  $11,753.  As  of  December  31,  2011,  the   Redeemable  Common  Units  were  valued  on  the  consolidated  balance  sheets  at  redemption  value  since  the   Redeemable  Common  Units  redemption  value  was  greater  than  historical  cost  of  $12,402.   Net  income  or  loss  attributed  to  Nonredeemable  Common  Units  and  Redeemable  Common  Units  (collectively,   “Common  Units”),  as  well  as  the  net  income  or  loss  related  to  the  noncontrolling  interests  of  our  consolidated  joint   ventures  and  consolidated  variable  interest  entity,  is  included  in  net  income  or  loss  in  the  consolidated  statements   of  operations.  Net  income  or  loss  attributed  to  the  Common  Units  and  the  noncontrolling  interests  of  our   consolidated  joint  ventures  and  consolidated  variable  interest  entity  is  excluded  from  net  income  or  loss  applicable   to  common  shareholders  in  the  consolidated  statements  of  operations.   Shareholders’  Equity   On  December  20,  2012,  our  Board  of  Trustees  approved  the  repurchase  of  up  to  an  aggregate  of  $75,000,000  of   common  stock.  The  program  is  expected  to  continue  through  December  31,  2013.  As  of  December  31,  2012,  we  did   not  repurchase  any  shares  pursuant  to  the  share  repurchase  program.   On  May  8,  2012,  we  closed  on  a  public  offering  in  which  we  issued  and  sold  24,000,000  common  shares  through   several  underwriters  for  net  proceeds  to  us  of  approximately  $128,558.  Immediately  upon  the  closing  the  offering,   we  contributed  all  of  the  net  proceeds  of  the  offering  to  HHLP  in  exchange  for  additional  Common  Units.  HHLP   used  the  net  proceeds  of  this  offering  to  reduce  some  of  the  indebtedness  outstanding  under  our  revolving  line  of   credit  facility  and  for  general  corporate  purposes,  including  the  funding  of  future  acquisitions.   On  August  4,  2009,  we  entered  into  a  purchase  agreement  with  Real  Estate  Investment  Group  L.P.  (“REIG”),   pursuant  to  which  we  sold  5,700,000  common  shares  at  a  price  of  $2.50  per  share  to  REIG  for  gross  proceeds  of   $14,250.  We  also  granted  REIG  the  option  to  buy  up  to  an  additional  5,700,000  common  shares  at  a  price  of  $3.00   per  share,  which  was  exercisable  through  August  4,  2014.  On  February  13,  2012,  pursuant  to  the  terms  of  the   original  option,  we  called  in  and  canceled  the  option  granted  to  REIG  in  exchange  for  the  issuance  of  2,521,561   common  shares  with  an  aggregate  value  equal  to  $13,566.  This  amount  equals  the  volume  weighted  average  price   per  common  share  for  the  20  trading  days  prior  to  the  exercise  of  the  option,  less  the  $3.00  option  price,  multiplied   by  the  5,700,000  common  shares  remaining  under  the  option.   On  May  18,  2011,  we  completed  a  public  offering  of  4,600,000  8.00%  Series  B  Cumulative  Redeemable  Preferred   Shares  (“Series  B  Preferred  Shares”),  liquidation  preference  $25.00  per  share,  including  600,000  Series  B  Preferred   Shares  subject  to  an  overallotment  option  exercised  by  the  underwriters.  Net  proceeds  of  the  offering,  less   expenses  and  underwriters  commissions,  were  approximately  $110,977.  Net  proceeds  from  the  offering  were  used   to  reduce  some  of  the  indebtedness  outstanding  under  our  revolving  line  of  credit  facility  and  to  fund  a  portion  of   the  purchase  price  of  Courtyard  by  Marriott,  Westside,  Los  Angeles,  CA,  which  was  acquired  on  May  19,  2011.   50 HERSHA 2012 ANNUAL REPORT                     HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   On  January  21,  2010,  we  completed  a  public  offering  in  which  51,750,000  common  shares,  including  6,750,000   common  shares  subject  to  an  overallotment  option  exercised  by  the  underwriters,  were  sold  by  us  through  several   underwriters  for  net  proceeds  to  us  of  approximately  $148,955  before  the  payment  of  offering-­‐related  expenses.   Immediately  upon  closing  the  offering,  we  contributed  all  of  the  net  proceeds  of  the  offering  to  HHLP  in  exchange   for  additional  Common  Units.   On  March  24,  2010,  we  completed  a  public  offering  in  which  27,600,000  common  shares,  including  3,600,000   common  shares  subject  to  an  overallotment  option  exercised  by  the  underwriters,  were  sold  by  us  through  several   underwriters  for  net  proceeds  to  us  of  approximately  $112,762  before  the  payment  of  offering-­‐related  expenses.   Immediately  upon  closing  the  offering,  we  contributed  all  of  the  net  proceeds  of  the  offering  to  the  Partnership  in   exchange  for  additional  Common  Units.   On  October  22,  2010,  we  completed  a  public  offering  in  which  28,750,000  common  shares,  including  3,750,000   common  shares  subject  to  an  overallotment  option  exercised  by  the  underwriters,  were  sold  by  us  through  several   underwriters  for  net  proceeds  to  us  of  approximately  $160,017  before  the  payment  of  offering-­‐related  expenses.   Immediately  upon  closing  the  offering,  we  contributed  all  of  the  net  proceeds  of  the  offering  to  HHLP  in  exchange   for  additional  Common  Units.  HHLP  used  the  net  proceeds  of  this  offering  to  reduce  some  of  the  indebtedness   outstanding  under  our  revolving  line  of  credit  facility  and  secured  debt  on  several  of  our  existing  assets  and  intends   to  use  the  remainder  for  general  corporate  purposes,  including  repayment  of  debt  and  future  acquisitions.   Stock  Based  Compensation   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.  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.  The  compensation  cost  related   to  performance  awards  that  are  contingent  upon  market  based  criteria  being  met  is  recorded  at  the  fair  value  of   the  award  on  the  date  of  the  grant  and  amortized  over  the  performance  period.   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.   51 HERSHA 2012 ANNUAL REPORT                           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  1  –  ORGANIZATION  AND  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (continued)   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  hotel  revenue  and  are  recorded  in  the  period   earned  to  the  extent  of  the  noncontrolling  interest  ownership.   Income  Taxes   The  Company  qualifies  as  a  REIT  under  applicable  provisions  of  the  Internal  Revenue  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.   The  Company  may  recognize  a  tax  benefit  from  an  uncertain  tax  position  when  it  is  more-­‐likely-­‐than-­‐not  (defined   as  a  likelihood  of  more  than  50%)  that  the  position  will  be  sustained  upon  examination,  including  resolutions  of  any   related  appeals  or  litigation  processes,  based  on  the  technical  merits.  If  a  tax  position  does  not  meet  the   more-­‐likely-­‐than-­‐not  recognition  threshold,  despite  the  Company’s  belief  that  its  filing  position  is  supportable,  the   benefit  of  that  tax  position  is  not  recognized  in  the  statements  of  operations.  The  Company  recognizes  interest  and   penalties,  as  applicable,  related  to  unrecognized  tax  benefits  as  a  component  of  income  tax  expense.  The  Company   recognizes  unrecognized  tax  benefits  in  the  period  that  the  uncertainty  is  eliminated  by  either  affirmative   agreement  of  the  uncertain  tax  position  by  the  applicable  taxing  authority,  or  by  expiration  of  the  applicable   statute  of  limitation.  For  the  years  ended  December  31,  2012,  2011  and  2010,  the  Company  did  not  record  any   uncertain  tax  positions.  As  of  December  31,  2012,  with  few  exceptions,  the  Company  is  subject  to  tax  examinations   by  U.S.  federal,  state,  and  local  income  tax  authorities  for  years  2003  through  2012.   Reclassification   Certain  amounts  in  the  prior  year  financial  statements  have  been  reclassified  to  conform  to  the  current  year   presentation.   Recent  Accounting  Pronouncements   Effective  January  1,  2012,  we  adopted  ASC  Update  No.  2011-­‐05  concerning  the  presentation  of  comprehensive   income.  The  amendment  provides  guidance  to  improve  comparability,  consistency,  and  transparency  of  financial   reporting.  The  amendment  also  eliminates  the  option  to  present  components  of  other  comprehensive  income  as   part  of  the  statement  of  changes  in  stockholders’  equity.  Instead,  entities  will  be  required  to  present  all  non-­‐owner   changes  in  stockholders’  equity  as  either  a  single  continuous  statement  of  comprehensive  income  or  in  two   separate  but  consecutive  statements,  for  which  we  have  elected  to  present  two  separate  but  consecutive   statements. 52 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  2  -­‐  INVESTMENT  IN  HOTEL  PROPERTIES     Investment  in  hotel  properties  consists  of  the  following  at  December  31,  2012  and  2011:   Depreciation  expense  was  $55,956,  $55,336  and  $51,823  (including  depreciation  on  assets  held  for  sale)  for  the   years  ended  December  31,  2012,  2011,  and  2010,  respectively.   Acquisitions   During  the  year  ended  December  31,  2012,  we  acquired  the  following  wholly-­‐owned  hotel  and  hotel  development   properties:   On  August  13,  2012,  the  Company  purchased,  from  an  unaffiliated  seller,  the  remaining  50%  ownership  in  Inn   America  Hospitality  at  Ewing,  LLC  (“Inn  at  Ewing”),  the  owner  of  the  Courtyard  by  Marriot,  Ewing,  NJ.  Consideration   given  for  this  interest  in  Inn  at  Ewing  included  the  assumption  of  the  property’s  mortgage  debt  of  $12,875.   On  June  18,  2012,  the  Company  purchased,  from  an  unaffiliated  seller,  the  remaining  50%  ownership  interest  in   Metro  29th  Street  Associates,  LLC  (“Metro  29th”),  the  lessee  of  the  Holiday  Inn  Express,  New  York,  NY.   Consideration  given  for  this  interest  in  Metro  29th  included  $10,000  cash  and  the  forgiveness  of  approximately   $800  of  accrued  interest  payable  under  a  mezzanine  loan  made  by  the  Company  to  an  affiliate  of  the  seller.  Brisam   Management  DE,  LLC  (“Brisam”),  as  the  owner  of  the  land,  building  and  improvements  leased  by  Metro  29th,  is   considered  a  variable  interest  entity  and,  based  on  our  evaluation,  we  determined  that  we  are  the  primary   beneficiary  of  this  variable  interest  entity  and  therefore  Brisam  is  consolidated  in  our  financial  statements.  As  a   result,  we  included  in  our  consolidated  financial  statements  approximately  $90,201  in  investment  in  hotel   properties  and  an  aggregate  of  $73,038  in  first  mortgage  and  mezzanine  debt  at  acquisition.  On  the  date  we   acquired  the  remaining  interest  in  Metro  29th,  we  determined  that  the  stated  rate  of  interest  on  the  first  mortgage   debt  was  above  market  and,  accordingly,  recorded  a  $3,436  premium.  Also  included  in  this  transaction  was  an   option  to  acquire  the  equity  interests  in  the  entity  owning  the  real  estate  assets  or  the  real  estate  assets     53 HERSHA 2012 ANNUAL REPORT                 HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  2  -­‐  INVESTMENT  IN  HOTEL  PROPERTIES  (continued)   from  Brisam  for  nominal  consideration.  The  option  is  exercisable  by  the  Company  after  September  1,  2016  or   before  that  date  in  the  event  of  certain  specified  events.  This  option  may  be  put  to  the  Company  by  the  Seller  at   any  time.  On  June  29,  2012,  the  Company  repaid  the  $15,000  mezzanine  debt.   As  shown  in  the  table  below,  included  in  the  consolidated  statements  of  operations  for  the  year  ended  December   31,  2012  are  total  revenues  of  $31,476  and  total  net  income  of  $1,085  for  hotels  we  have  acquired  and   consolidated  since  the  date  of  acquisition.  These  amounts  represent  the  results  of  operations  for  these  hotels  since   the  date  of  acquisition:   During  the  year  ended  December  31,  2011  we  acquired  the  following  wholly  owned  hotel  properties:   As  shown  in  the  table  below,  included  in  the  consolidated  statements  of  operations  for  the  year  ended  December   31,  2012  are  total  revenues  of  $48,084  and  total  net  income  of  $2,573  and  for  the  year  ended  December  31,  2011   are  total  revenues  of  $19,476  and  total  net  loss  of  $684  for  hotels  we  have  acquired  and  consolidated  since  the   date  of  acquisition.  These  amounts  represent  the  results  of  operations  for  these  hotels  since  the  date  of   acquisition:   54 HERSHA 2012 ANNUAL REPORT                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  2  -­‐  INVESTMENT  IN  HOTEL  PROPERTIES  (continued)   Pro  Forma  Results  (Unaudited)   The  following  condensed  pro  forma  financial  data  are  presented  as  if  all  acquisitions  completed  since  January  1,   2012  and  2011  had  been  completed  on  January  1,  2011  and  2010.  Properties  acquired  without  any  operating   history  are  excluded  from  the  condensed  pro  forma  operating  results.  The  condensed  pro  forma  financial  data  are   not  necessarily  indicative  of  what  actual  results  of  operations  of  the  Company  would  have  been  assuming  the   acquisitions  had  been  consummated  on  January  1,  2012  and  2011  at  the  beginning  of  the  year  presented,  nor  does   it  purport  to  represent  the  results  of  operations  for  future  periods.   Asset  Development  and  Renovation   We  have  opportunistically  engaged  in  development  of  hotel  assets.  We  capitalize  expenditures  related  to  hotel   development  projects  and  renovations,  including  indirect  costs  such  as  interest  expense,  real  estate  taxes  and   utilities  related  to  hotel  development  projects  and  renovations.   On  July  22,  2011,  the  Company  completed  the  acquisition  of  the  real  property  and  improvements  located  at  32   Pearl  Street,  New  York,  NY  from  an  unaffiliated  seller  for  a  total  purchase  price  of  $28,300.  The  property  is  a   re-­‐development  project  which  was  initiated  in  2008.  The  Company  acquired  the  real  property  and  the   improvements  for  cash  and  by  cancelling  an  $8,000  development  loan  on  the  re-­‐development  project  made  to  the   seller  and  by  cancelling  $300  of  accrued  interest  receivable  from  the  seller.  Since  the  date  of  acquisition  and   through  December  31,  2012,  we  have  spent  $5,937  in  development  costs,  including  $420  in  property  tax  expense.     All  such  costs  have  been  capitalized.   During  the  first  quarter  of  2012,  the  Company  commenced  construction  of  an  additional  oceanfront  tower,   additional  meeting  space  and  structured  parking  on  a  land  parcel  adjacent  to  the  Courtyard  by  Marriott,  Miami,   Florida,  a  hotel  acquired  on  November  16,  2011.  See  “Note  6  –  Debt”  for  information  on  the  financing  of  this   construction.  This  land  parcel  was  included  in  the  acquisition  of  the  hotel.  Since  commencement  of  construction   and  through  December  31,  2012,  we  have  spent  $6,029  in  construction  costs.  All  such  costs  have  been  capitalized.   55 HERSHA 2012 ANNUAL REPORT                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  2  -­‐  INVESTMENT  IN  HOTEL  PROPERTIES  (continued)   In  October  2012,  Hurricane  Sandy  affected  numerous  hotel  operations  within  our  portfolio.  Two  hotels  within  our   portfolio  were  significantly  impacted  by  this  natural  disaster;  one  hotel  which  is  currently  inoperable  (Holiday  Inn   Express  Water  Street,  New  York,  NY)  and  one  hotel  development  project  which  has  incurred  delays  in  construction   (Hampton  Inn,  Pearl  Street,  New  York,  NY).  We  have  recorded  estimated  property  losses  of  $1,586  on  the  Holiday   Inn  Express  Water  Street  and  a  corresponding  insurance  claim  receivable  of  $1,486,  and  we  expect  this  hotel  to   re-­‐open  in  June  2013.  We  have  recorded  estimated  property  losses  of  $1,997  on  the  Hampton  Inn  Pearl  Street  and   a  corresponding  insurance  claim  receivable  of  $1,897,  and  we  expect  this  hotel  to  open  in  September  2013.   56 HERSHA 2012 ANNUAL REPORT     HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  3  –  INVESTMENT  IN  UNCONSOLIDATED  JOINT  VENTURES   As  of  December  31,  2012  and  December  31,  2011  our  investment  in  unconsolidated  joint  ventures  consisted  of  the   following:   On  February  1,  2013,  the  Company  closed  on  the  sale  of  one  of  the  unconsolidated  joint  venture  properties  owned   in  part  by  Mystic  Partners,  LLC.  As  our  investment  in  this  unconsolidated  joint  venture  equated  the  net  proceeds   distributed  to  us,  we  will  not  record  a  gain  or  loss  in  connection  with  the  sale  of  this  hotel.   As  noted  in  “Note  2  –  Investment  in  Hotel  Properties,”  on  August  13,  2012,  the  Company  purchased  the  remaining   50%  ownership  interest  in  Inn  America  Hospitality  at  Ewing,  the  lessee  of  the  Courtyard  by  Marriot,  Ewing,  NJ.  As   such,  we  ceased  to  account  for  our  investment  in  Inn  America  Hospitality  at  Ewing  under  the  equity  method  of   accounting  as  of  August  10,  2012  because  it  became  a  consolidated  subsidiary.  Our  interest  in  Inn  America   Hospitality  at  Ewing,  which  consisted  of  our  investment  in  Inn  America  Hospitality  at  Ewing  and  a  receivable,  was   remeasured  and  as  a  result  based  on  the  appraised  value  of  the  hotel,  we  recorded  a  loss  of  approximately  $1,668   during  the  twelve  months  ended  December  31,  2012.   As  noted  in  “Note  2  –  Investment  in  Hotel  Properties,”  on  June  18,  2012,  the  Company  purchased  the  remaining   50%  ownership  interest  in  Metro  29th,  the  lessee  of  the  Holiday  Inn  Express,  Manhattan,  New  York,  NY.  As  such,   we  ceased  to  account  for  our  investment  in  Metro  29th  under  the  equity  method  of  accounting  as  of  June  18,  2012   because  it  became  a  consolidated  subsidiary.  Our  interest  in  Metro  29th  was  remeasured,  and  as  a  result,  we   recorded  a  loss  of  approximately  $224.   Fair  value  for  our  previously  held  investments  in  Inn  America  Hospitality  at  Ewing  and  Metro  29th  was  determined   through  the  use  of  an  income  approach  and  was  measured  using  Level  3  inputs.  The  income  approach  estimates  an   income  stream  for  a  hotel  property  (typically  5  years)  and  discounts  this  income  plus  a  reversion  (presumed  sale)   into  a  present  value  at  a  risk  adjusted  rate.  RevPAR  growth  assumptions  utilized  in  this  approach  are  derived  from   market  transactions  as  well  as  other  financial  and  industry  data.  The  terminal  cap  rate  and  discount  rate  are   significant  inputs  to  this  valuation.  The  fair  value  measurements  determined  during  the  year  included  RevPAR   growth  assumptions  ranging  between  3%  and  8%,  terminal  cap  rates  ranging  between  8.5%  and  9.5%,  and  discount   rates  of  10.5%.  Changes  in  these  inputs  could  result  in  a  significant  change  in  the  valuation  of  our  original  joint   venture  investments  and  a  change  in  the  loss  from  remeasurement  of  investment  in  unconsolidated  joint  venture   recognized  during  the  period.   On  August  15,  2011,  the  Company  entered  into  two  purchase  and  sale  agreements  to  dispose  of  a  portfolio  of  18   non-­‐core  hotel  properties,  four  of  which  are  owned  in  part  by  the  Company  through  an  unconsolidated  joint   venture.  As  a  result  of  entering  into  these  purchase  and  sale  agreements,  during  the  twelve  months  ended   December  31,  2011,  we  recorded  an  impairment  loss  of  approximately  $1,677  for  those  hotel  properties  for  which     57 HERSHA 2012 ANNUAL REPORT                                           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  3  –  INVESTMENT  IN  UNCONSOLIDATED  JOINT  VENTURES  (continued)   our  investment  in  the  unconsolidated  joint  venture  did  not  exceed  the  net  proceeds  distributable  to  us  on  the  sale   of  the  hotel  properties  held  by  the  joint  venture  based  on  the  purchase  price.  On  February  23,  2012,  the  Company   closed  on  the  sale  of  14  of  these  non-­‐core  hotel  properties,  including  three  of  the  unconsolidated  joint  venture   hotel  properties.  On  May  8,  2012,  the  Company  closed  on  the  remaining  four  non-­‐core  hotel  properties,  including   one  of  the  unconsolidated  joint  venture  hotel  properties.  As  our  investment  in  these  unconsolidated  joint  ventures   equated  the  net  proceeds  distributed  to  us,  we  did  not  record  a  gain  or  loss  in  connection  with  the  sale  of  these   hotel  properties.  See  “Note  12  –  Discontinued  Operations”  for  more  information.   Income  or  loss  from  our  unconsolidated  joint  ventures  is  allocated  to  us  and  our  joint  venture  partners  consistent   with  the  allocation  of  cash  distributions  in  accordance  with  the  joint  venture  agreements.  Any  difference  between   the  carrying  amount  of  these  investments  and  the  underlying  equity  in  net  assets  is  amortized  over  the  expected   useful  lives  of  the  properties  and  other  intangible  assets.   Income  (loss)  recognized  during  the  years  ended  December  31,  2012,  2011,  and  2010,  for  our  Investments  in   Unconsolidated  Joint  Ventures  is  as  follows:   On  June  20,  2011,  Hiren  Boston,  LLC  refinanced  its  debt  with  a  third  party  institutional  lender  and,  as  a  result,  our   mortgage  interest  in  the  property  was  terminated  and  the  outstanding  principal  balance  of  $13,750  was  repaid  to   us  in  full.  We  have  determined  that  we  were  no  longer  the  primary  beneficiary  of  Hiren  Boston,  LLC  and  it  is  no   longer  a  consolidated  subsidiary  of  the  Company  and  we  have  begun  to  account  for  our  investment  in  Hiren   Boston,  LLC  under  the  equity  method  of  accounting.  Our  interest  in  Hiren  Boston,  LLC  has  been  remeasured  and,  as   a  result,  we  have  recorded  a  gain  of  approximately  $2,757  for  the  twelve  months  ended  December  31,  2011.  The   fair  value  of  our  interest  in  Hiren  Boston,  LLC  was  based  on  a  third  party  appraisal,  which  utilized  the  market   approach.   On  April  13,  2010,  we  purchased  a  mortgage  loan  secured  by  the  Courtyard  by  Marriott,  South  Boston,  MA  from   Hiren  Boston,  LLC’s  lender  for  a  purchase  price  of  $13,750.  As  a  result  of  the  purchase  of  this  mortgage  loan,  we   determined  that  we  were  the  primary  beneficiary  of  Hiren  Boston,  LLC  and,  as  such,  we  ceased  to  account  for  our   investment  in  Hiren  Boston,  LLC  under  the  equity  method  of  accounting  and  began  accounting  for  Hiren  Boston,   LLC  as  a  consolidated  subsidiary.  Our  interest  in  Hiren  Boston,  LLC  was  remeasured,  and  as  a  result,  during  the   twelve  months  ended  December  31,  2010  we  recorded  a  gain  of  approximately  $2,190.   On  January  1,  2010,  we  acquired  our  joint  venture  partner’s  52.0%  membership  interest  in  PRA  Glastonbury,  LLC,   the  owner  of  the  Hilton  Garden  Inn,  Glastonbury,  CT,  and  this  hotel  became  one  of  our  wholly-­‐owned  hotels.  Due   to  the  increase  in  our  ownership  interest  in  PRA  Glastonbury,  LLC,  the  value  of  our  existing  48.0%  interest  was   remeasured  resulting  in  a  $1,818  gain  which  was  recorded  upon  our  acquisition  of  the  remaining  interests  in  the   Hilton  Garden  Inn,  Glastonbury,  CT.   58 HERSHA 2012 ANNUAL REPORT                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  3  –  INVESTMENT  IN  UNCONSOLIDATED  JOINT  VENTURES  (continued)   The  Mystic  Partners,  LLC  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  three   properties.  Mystic  Partners,  LLC  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,  LLC  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,  LLC  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.   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,  2012  and   December  31,  2011  and  for  the  years  ended  December  31,  2012,  2011,  and  2010.   59 HERSHA 2012 ANNUAL REPORT                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  3  –  INVESTMENT  IN  UNCONSOLIDATED  JOINT  VENTURES  (continued)   The  following  table  is  a  reconciliation  of  the  Company’s  share  in  the  unconsolidated  joint  ventures’  equity  to  the   Company’s  investment  in  the  unconsolidated  joint  ventures  as  presented  on  the  Company’s  balance  sheets  as  of   December  31,  2012  and  2011.   (1) Adjustment  to  reconcile  the  Company's  share  of  equity  recorded  on  the  joint  ventures'  financial   statements  to  our  investment  in  unconsolidated  joint  ventures  consists  of  the  following:   • • • cumulative  impairment  of  our  investment  in  joint  ventures  not  reflected  on  the  joint  ventures'  financial   statements,   our  basis  in  the  investment  in  joint  ventures  not  recorded  on  the  joint  ventures'  financial  statements,  and   accumulated  amortization  of  our  equity  in  joint  ventures  that  reflects  our  portion  of  the  excess  of  the  fair   value  of  joint  ventures'  assets  on  the  date  of  our  investment  over  the  carrying  value  of  the  assets  recorded   on   the   joint   ventures   financial   statements.   This   excess   investment   is   amortized   over   the   life   of   the   properties,   and   the   amortization   is   included   in   Income   (Loss)   from   Unconsolidated   Joint   Venture   Investments  on  our  consolidated  statement  of  operations. 60 HERSHA 2012 ANNUAL REPORT           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  4  –  DEVELOPMENT  LOANS  RECEIVABLE   Development  Loans   Historically,  we  provided  first  mortgage  and  mezzanine  loans  to  hotel  developers,  including  entities  in  which   certain  of  our  executive  officers  and  non-­‐independent  trustees  own  an  interest  that  enabled  such  entities  to   construct  hotels  and  conduct  related  improvements  on  specific  hotel  projects  at  interest  rates  ranging  from  9%  to   11%.  These  loans  were  initially  originated  as  part  of  our  acquisition  strategy.  During  the  year  ended  December  31,   2012,  no  such  loans  were  originated  by  us.  Interest  income  from  development  loans  was  $1,998,  $3,427  and   $4,686  for  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively.  Accrued  interest  on  our   development  loans  receivable  was  $348  as  of  December  31,  2012  and  $3,096  as  of  December  31,  2011.  Accrued   interest  on  our  development  loans  receivable  as  of  December  31,  2012  does  not  include  cumulative  interest   income  of  $8,425  which  has  been  accrued  and  paid  in  kind  by  adding  it  to  the  principal  balance  of  certain  loans  as   indicated  in  the  table  below.   As  of  December  31,  2012  and  2011,  our  development  loans  receivable  consisted  of  the  following:   *   (1)   (2)   (3)   Indicates  borrower  is  a  related  party   Represents   current   maturity   date   in   effect.   Agreements   for   our   development   loans   receivable   typically   allow  for  multiple  one-­‐year  extensions  which  can  be  exercised  by  the  borrower  if  the  loan  is  not  in  default.   As   these   loans   typically   finance   hotel   development   projects,   it   is   common   for   the   borrower   to   exercise   their  options  to  extend  the  loans,  in  whole  or  in  part,  until  the  project  has  been  completed  and  the  project   provides  cash  flow  to  the  developer  or  is  refinanced  by  the  developer.   Effective  June  1,  2012,  we  amended  the  interest  rates  on  the  development  loans  for  Hersha  Woodbridge   Associates,  LLC,  and  44  Lexington  Holding  LLC  from  11%  to  9%.   Prior  to  June  1,  2012,  the  following  development  loans  allowed  the  borrower  to  elect,  quarterly,  to  pay   accrued  interest  in-­‐kind  by  adding  the  accrued  interest  to  the  principal  balance  of  the  loan.  Effective  June   1,  2012,  we  amended  the  development  loan  with  44  Lexington  Holding  LLC  to  cease  the  buyer’s  election   to  pay  accrued  interest  in-­‐kind.   61 HERSHA 2012 ANNUAL REPORT                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  4  –  DEVELOPMENT  LOANS  RECEIVABLE  (continued)   (4)   Subsequent   to   December   31,   2012,   we   received   payments   of   principal   and   accrued   interest   on   the   development  loan  with  44  Lexington  Holding,  LLC  in  the  amount  of  $13,143,  leaving  the  development  loan   with  a  principal  balance  of  $1,979  as  of  February  1,  2013.   On  June  14,  2011,  we  entered  into  a  purchase  and  sale  agreement  to  acquire  the  Hyatt  Union  Square  hotel   in  New  York,  NY  for  total  consideration  of  $104,303.  The  consideration  to  the  seller  will  consist  of  $36,000   to  be  paid  to  the  seller  in  cash,  the  cancellation  by  the  Company  of  a  $10,000  development  loan,  and   $3,303  of  accrued  interest  on  the  loan  and  the  assumption  by  the  Company  of  two  mortgage  loans   secured  by  the  hotel  in  the  original  aggregate  principal  amount  of  $55,000.  In  accordance  with  terms  of   the  purchase  and  sale  agreement,  we  have  ceased  accruing  interest  on  this  $10,000  development  loan  as   of  June  14,  2011.   Advances  and  repayments  on  our  development  loans  receivable  consisted  of  the  following  for  the  years   ended  December  31,  2012,  2011,  and  2010:   62 HERSHA 2012 ANNUAL REPORT                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  5  –  OTHER  ASSETS  AND  DEPOSITS  ON  HOTEL  ACQUISITIONS   Other  Assets   Other  Assets  consisted  of  the  following  at  December  31,  2012  and  2011:   Transaction  Costs  -­‐  Transaction  costs  include  legal  fees  and  other  third  party  transaction  costs  incurred  relative  to   entering  into  debt  facilities,  issuances  of  equity  securities,  and  other  costs  which  are  recorded  in  other  assets  prior   to  the  closing  of  the  respective  transactions.   Investment  in  Statutory  Trusts  -­‐  We  have  an  investment  in  the  common  stock  of  Hersha  Statutory  Trust  I  and   Hersha  Statutory  Trust  II.  Our  investment  is  accounted  for  under  the  equity  method.   Prepaid  Expenses  -­‐  Prepaid  expenses  include  amounts  paid  for  property  tax,  insurance  and  other  expenditures  that   will  be  expensed  in  the  next  twelve  months.   Interest  Receivable  from  Development  Loans  to  Non-­‐Related  Parties–  Interest  receivable  from  development  loans   to  non-­‐related  parties  represents  interest  income  receivable  from  loans  extended  to  non-­‐related  parties  that  are   used  to  enable  such  entities  to  construct  hotels  and  conduct  related  improvements  on  specific  hotel  projects.  As   noted  in  “Note  2  –  Investment  in  Hotel  Properties,”  our  acquisition  of  the  remaining  50%  interest  in  Metro  29th  on   June  18,  2012,  included  the  forgiveness  of  approximately  $800  of  accrued  interest  payable  under  a  mezzanine  loan   made  by  the  Company  an  affiliate  of  the  seller.  This  excludes  interest  receivable  from  development  loans  extended   to  related  parties  in  the  amounts  of  $348  and  $1,859  as  of  December  31,  2012  and  December  31,  2011,   respectively,  which  is  included  in  due  from  related  parties  on  the  consolidated  balance  sheets.   Hotel  Purchase  Option  –  As  of  December  31,  2011,  we  had  an  option  to  acquire  a  49%  interest  in  the  entity  that   owns  the  Holiday  Inn  Express,  New  York,  NY.  As  noted  in  “Note  2  –  Investment  in  Hotel  Properties,”  we  acquired   the  remaining  50%  interest  in  Metro  29th,  the  lessee  of  the  Holiday  Inn  Express,  New  York,  NY  on  June  18,  2012.   The  original  option  was  canceled  as  a  result.   Insurance  Claims  Receivable  –  as  noted  in  “Note  2  –  Investment  in  Hotel  Properties,”  we  recorded  an  insurance   claim  receivable  due  to  the  property  damage  occurred  at  several  of  our  hotel  properties  as  a  result  of  Hurricane   Sandy  in  October  2012.   Deferred  Tax  Asset  -­‐  We  have  approximately  $3,355  of  net  deferred  tax  assets  as  of  December  31,  2012.  We  have   considered  various  factors,  including  future  reversals  of  existing  taxable  temporary  differences,  future  projected   taxable  income  and  tax  planning  strategies  in  determining  a  valuation  allowance  for  our  deferred  tax  assets,  and   we  believe  that  it  is  more  likely  than  not  that  we  will  be  able  to  realize  the  $3,355  of  net  deferred  tax  assets  in  the   future.  See  “Note  14  –  Income  Taxes”  for  more  information.   63 HERSHA 2012 ANNUAL REPORT                                                     HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  5  –  OTHER  ASSETS  AND  DEPOSITS  ON  HOTEL  ACQUISITIONS  (continued)   Deposits  on  Hotel  Acquisitions   As  of  December  31,  2012,  we  had  $21,000  in  non-­‐interest  bearing  deposits  on  the  future  acquisition  of  the  Hyatt   Union  Square,  New  York,  NY.  Please  see  “Note  4  –  Development  Loans  Receivable”  for  more  information  on  the   Union  Square  deposits.  As  of  December  31,  2012,  we  had  $15,000  in  interest  bearing  deposits  related  to  the  future   acquisition  of  Hilton  Garden  Inn  -­‐52nd  Street,  New  York,  NY  and  $1,750  in  interest  bearing  deposits  related  to  the   potential  acquisition  of  another  hotel  property.  On  October  24,  2012,  we  entered  into  an  agreement  for  the  future   acquisition  of  the  Hilton  Garden  Inn  –  52nd  Street,  New  York,  NY.  See  below  for  more  information  on  this   agreement.  As  of  December  31,  2011,  we  had  $19,500  in  non-­‐interest  bearing  deposits  related  to  the  acquisition  of   hotel  properties,  of  which  $19,000  is  related  to  the  deposit  on  Hyatt  Union  Square,  New  York,  NY.   On  October  24,  2012,  we  entered  into  a  purchase  and  sale  agreement  to  acquire  the  Hilton  Garden  Inn  –  52nd   Street  in  New  York,  NY  for  total  consideration  of  $74,000.  As  of  December  31,  2012  we  had  provided  $15,000  to   the  seller  as  a  deposit  earning  10%  per  annum  and  we  may  fund  an  additional  $2,000  deposit  earning  10%  per   annum,  subsequent  to  December  31,  2012.  The  total  consideration  to  the  seller  will  consist  of  this  $17,000  interest   bearing  deposit,  an  additional  $15,000  cash  to  be  paid  to  the  seller  upon  closing  and  the  assumption  of  a  mortgage   loan  secured  by  the  hotel  in  the  aggregate  principal  amount  of  $42,000.  The  transaction  is  expected  to  close  shortly   after  the  developer  completes  the  hotel’s  construction,  which  is  anticipated  for  the  fourth  quarter  of  2013.  While   this  purchase  and  sale  agreement  secures  the  Company’s  right  to  acquire  the  completed  hotel,  the  Company  is  not   assuming  any  significant  construction  risk,  including  the  risk  of  schedule  and  cost  overruns.   64 HERSHA 2012 ANNUAL REPORT             HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  6  -­‐  DEBT   Mortgages  and  Notes  Payable   We  had  total  mortgages  payable  at  December  31,  2012,  and  December  31,  2011  of  $641,160  and  $717,367   (including  $61,758  in  outstanding  mortgage  indebtedness  related  to  assets  held  for  sale),  respectively.  These   balances  consisted  of  mortgages  with  fixed  and  variable  interest  rates,  which  ranged  from  3.19%  to  8.25%  as  of   December  31,  2012.  Included  in  these  balances  are  net  premiums  of  $3,245  and  $667  as  of  December  31,  2012  and   December  31,  2011,  respectively,  which  are  amortized  over  the  remaining  life  of  the  loans.  Aggregate  interest   expense  incurred  under  the  mortgage  loans  payable  totaled  $38,343,  $39,786,  and  $37,600  during  2012,  2011,  and   2010,  respectively.   Our  mortgage  indebtedness  contains  various  financial  and  non-­‐financial  covenants  customarily  found  in  secured,   non-­‐recourse  financing  arrangements.  Our  mortgage  loans  payable  typically  require  that  specified  debt  service   coverage  ratios  be  maintained  with  respect  to  the  financed  properties  before  we  can  exercise  certain  rights  under   the  loan  agreements  relating  to  such  properties.  If  the  specified  criteria  are  not  satisfied,  the  lender  may  be  able  to   escrow  cash  flow  generated  by  the  property  securing  the  applicable  mortgage  loan.  We  have  determined  that   certain  debt  service  coverage  ratio  covenants  contained  in  the  loan  agreements  securing  6  of  our  hotel  properties   were  not  met  as  of  December  31,  2012.  Pursuant  to  these  loan  agreements,  the  lender  has  elected  to  escrow  the   operating  cash  flow  for  a  number  of  these  properties.  However,  these  covenants  do  not  constitute  an  event  of   default  for  these  loans.  As  of  December  31,  2012,  we  were  in  compliance  with  all  events  of  default  covenants   under  the  applicable  loan  agreements.  As  noted  in  “Note  12  –  Discontinued  Operations,”  the  Comfort  Inn,  North   Dartmouth,  MA,  ceased  operations  on  March  31,  2011.  Effective  March  30,  2012,  we  transferred  title  to  the   property  to  the  lender.  At  the  time  of  transfer,  the  remaining  principal  and  accrued  interest  due  on  the  mortgage   loan  payable  related  to  this  asset  were  $2,940  and  $166,  respectively.   As  of  December  31,  2012,  the  maturity  dates  for  the  outstanding  mortgage  loans  ranged  from  August  2013  to   February  2018.   Subordinated  Notes  Payable   We  have  two  junior  subordinated  notes  payable  in  the  aggregate  amount  of  $51,548  to  the  Hersha  Statutory  Trusts   pursuant  to  indenture  agreements  which  will  mature  on  July  30,  2035,  but  may  be  redeemed  at  our  option,  in   whole  or  in  part,  prior  to  maturity  in  accordance  with  the  provisions  of  the  indenture  agreement.  Effective  July  30,   2010,  the  $25,774  notes  issued  to  Hersha  Statutory  Trust  I  and  Hersha  Statutory  Trust  II,  bear  interest  at  a  variable   rate  of  LIBOR  plus  3%  per  annum.  This  rate  resets  two  business  days  prior  to  each  quarterly  payment.  Prior  to  this,   the  $25,774  note  issued  to  Hersha  Statutory  Trust  I  incurred  interest  at  a  fixed  rate  of  7.34%  per  annum  through   July  30,  2010,  and  the  $25,774  note  issued  to  Hersha  Statutory  Trust  II  incurred  interest  at  a  fixed  rate  of  7.173%   per  annum  through  July  30,  2010.  The  weighted  average  interest  rate  on  our  two  junior  subordinated  notes   payable  during  the  years  ended  December  31,  2012,  2011,  and  2010  was  3.51%,  3.35%,  and  5.69%,  respectively.   Interest  expense  in  the  amount  of  $1,810,  $1,727,  and  $2,934  was  recorded  for  the  years  ended  2012,  2011,  and   2010,  respectively.   Aggregate  annual  principal  payments  for  the  Company’s  credit  facility  and  mortgages  and  notes  payable  for  the   five  years  following  December  31,  2012  and  thereafter  are  as  follows:   65 HERSHA 2012 ANNUAL REPORT                           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  6  –  DEBT  (continued)   Credit  Facilities   On  November  5,  2012,  we  entered  into  a  senior  unsecured  credit  agreement  with  Citigroup  Global  Markets  Inc.   and  various  other  lenders.  The  credit  facility  provides  for  a  $400,000  senior  unsecured  credit  facility  consisting  of  a   $250,000  senior  unsecured  revolving  line  of  credit,  and  a  $150,000  senior  unsecured  term  loan.  Our  previous   $250,000  secured  credit  facility  was  terminated  and  replaced  by  the  $400,000  unsecured  credit  facility,  and,  as  a   result,  all  amounts  outstanding  under  our  $250,000  secured  credit  facility  were  repaid  with  borrowings  from  our   $400,000  unsecured  credit  facility.  The  $400,000  unsecured  credit  facility  expires  on  November  5,  2015,  and,   provided  no  event  of  default  has  occurred  and  remains  uncured,  we  may  request  that  the  lenders  renew  the  credit   facility  for  two  additional  one-­‐year  periods.  The  credit  facility  is  also  expandable  to  $550,000  at  our  request,   subject  to  the  satisfaction  of  certain  conditions.   The  amount  that  we  can  borrow  at  any  given  time  on  our  credit  facility  is  governed  by  certain  operating  metrics  of   designated  unencumbered  hotel  properties  known  as  borrowing  base  assets.  As  of  December  31,  2012,  the   following  hotel  properties  were  borrowing  base  assets:   The  interest  rate  for  the  new  credit  facility  will  be  based  on  a  pricing  grid  with  a  range  of  one  month  U.S.  LIBOR  plus   1.75%  to  2.65%.  As  of  December  31,  2012,  we  borrowed  $100,000  in  unsecured  term  loans  under  the  new  credit   facility,  and  concurrently  entered  into  interest  rate  swaps  which  effectively  fix  the  interest  rate  on  these  term  loans   to  3.19%.  See  “Footnote  8  –  Fair  Value  Measurements  and  Derivative  Instruments”  for  more  information.   The  credit  agreement  providing  for  the  $400,000  revolving  credit  facility  includes  certain  financial  covenants  and   requires  that  we  maintain:  (1)  a  minimum  tangible  net  worth  of  $1,000,000,  which  is  subject  to  increases  under   certain  circumstances;  (2)  annual  distributions  not  to  exceed  95%  of  adjusted  funds  from  operations;  and  (3)     66 HERSHA 2012 ANNUAL REPORT                                                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  6  –  DEBT  (continued)   certain  financial  ratios,  including  the  following:   ·∙ a  fixed  charge  coverage  ratio  of  not  less  than  1.40  to  1.00,  which  increases  to  1.45  to  1.00  as  of  July  1,  2013   and  further  increase  to  1.50  to  1.00  as  of  January  1,  2014;   a  maximum  leverage  ratio  of  not  more  than  0.60  to  1.00;  and   a  maximum  secured  debt  leverage  ratio  of  0.55  to  1.00,  which  decreases  to  0.50  to  1.00  as  of  October  1,  2013   and  further  decreases  0.45  to  1.00  as  of  October  1,  2014.   ·∙ ·∙ The  Company  is  in  compliance  with  each  of  the  covenants  listed  above  as  of  December  31,  2012.  As  of  December   31,  2012  our  remaining  borrowing  capacity  under  the  new  credit  facility  was  $236,478,  based  on  our  current   borrowing  base  assets.   As  of  December  31,  2012,  the  outstanding  unsecured  term  loan  balance  under  the  $400,000  credit  facility  was   $100,000  and  the  revolving  line  of  credit  balance  was  $0.  As  of  December  31,  2011,  the  outstanding  principal   balance  under  the  previous  $250,000  revolving  credit  facility  was  $51,000.  On  January  3,  2013,  we  funded  the   remaining  $50,000  tranche  of  the  unsecured  term  loan  portion  of  our  credit  facility.   The  Company  recorded  interest  expense  of  $2,405,  $2,103,  and  $2,737  related  to  borrowings  drawn  on  each  of  the   aforementioned  credit  facilities,  for  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively.  The   weighted  average  interest  rate  on  our  credit  facilities  during  the  years  ended  December  31,  2012,  2011,  and  2010   was  4.57%,  4.43%,  and  4.29%,  respectively,  excluding  the  unsecured  term  loan.  For  the  period  of  November  5,   2012  to  December  31,  2012,  the  weighted  average  interest  rate  on  our  new  credit  facility  was  3.19%.   On  November  5,  2010,  we  entered  into  a  Revolving  Credit  Loan  and  Security  Agreement  with  T.D.  Bank,  NA  and   various  other  lenders,  which  provided  for  a  senior  secured  revolving  credit  facility  in  the  principal  amount  of  up  to   $250,000,  including  a  sub-­‐limit  of  $25,000  for  irrevocable  stand-­‐by  letters  of  credit  and  a  $10,000  sub-­‐limit  for  the   swing  line  loans.  The  $250,000  revolving  credit  facility  was  collateralized  by  a  first  lien-­‐security  interest  in  all   existing  and  future  unencumbered  assets  of  HHLP,  a  collateral  assignment  of  all  hotel  management  contracts  of  the   management  companies  in  the  event  of  default,  and  title-­‐insured,  first-­‐lien  mortgages  on  several  hotel  properties.   Prior  to  November  5,  2010,  we  maintained  a  Revolving  Credit  Loan  and  Security  Agreement  with  T.D.  Bank,  NA  and   various  other  lenders,  which  provided  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  bank  group  had  committed  $135,000,   and  the  credit  agreement  was  structured  to  allow  for  an  increase  of  an  additional  $40,000  under  the  line  of  credit,   provided  that  additional  collateral  was  supplied  and  additional  lenders  joined  the  bank  group.   Capitalized  Interest   We  utilize  mortgage  debt  and  our  $400,000  revolving  credit  facility  to  finance  on-­‐going  capital  improvement   projects  at  our  hotels.  Interest  incurred  on  mortgages  and  the  revolving  credit  facility  that  relates  to  our  capital   improvement  projects  is  capitalized  through  the  date  when  the  assets  are  placed  in  service.  For  the  years  ended   December  31,  2012,  2011,  and  2010,  we  capitalized  $1,542,  $1,372  and  $46,  respectively,  of  interest  expense   related  to  these  projects.   Deferred  Financing  Costs   Costs  associated  with  entering  into  mortgages  and  notes  payable  and  our  revolving  line  of  credit  are  deferred  and   amortized  over  the  life  of  the  debt  instruments.  Amortization  of  deferred  financing  costs  is  recorded  in  interest   expense.     As  of  December  31,  2012,  deferred  costs  were  $8,695,  net  of  accumulated  amortization  of  $4,841.   67 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  6  –  DEBT  (continued)   Amortization  of  deferred  costs  for  the  years  ended  December  31,  2012,  2011,  and  2010  was  $2,991,  $3,535  and   $2,381  respectively.   New  Debt/Refinance   On  January  31,  2012,  we  repaid  outstanding  mortgage  debt  with  an  original  principal  balance  of  $32,500  secured   by  the  Capitol  Hill  Suites,  Washington,  D.C.,  incurring  a  loss  on  debt  extinguishment  of  approximately  $7,  and   simultaneously  entered  into  a  new  mortgage  obligation  of  $27,500.  The  new  mortgage  debt  bears  interest  at  a   variable  rate  of  one  month  U.S.  dollar  LIBOR  plus  3.25%  and  matures  on  February  1,  2015.  On  the  same  date,  we   entered  into  an  interest  rate  swap  that  effectively  fixes  the  interest  at  3.79%  per  annum.   On  May  9,  2012,  we  repaid  outstanding  mortgage  debt  with  a  principal  balance  of  $29,730  secured  by  the   Courtyard  by  Marriott,  Miami,  FL.  On  July  2,  2012,  we  entered  into  a  new  mortgage  with  an  initial  obligation  of   $45,000,  with  three  additional  draws  of  $5,000  every  90  days  to  fund  the  construction  of  the  new  oceanfront  tower   as  described  in  “Note  2  –  Investment  in  Hotel  Properties”.  The  new  mortgage  debt  bears  interest  at  a  variable  rate   of  one  month  U.S.  LIBOR  plus  3.50%  and  matures  on  July  1,  2016.  Also  on  July  2,  2012,  we  entered  into  an  interest   rate  swap  that  effectively  fixes  the  interest  at  4.32%  per  annum.   On  May  23,  2012,  we  repaid  outstanding  mortgage  debt  with  an  original  principal  balance  of  $22,000  secured  by   the  Hotel  373,  Fifth  Avenue,  NY,  and  on  May  24,  2012  entered  into  a  new  mortgage  obligation  of  $19,000,  incurring   a  loss  on  debt  extinguishment  of  approximately  $66.  The  new  mortgage  debt  bears  interest  at  a  variable  rate  of   one  month  U.S.  dollar  LIBOR  plus  3.85%  and  matures  on  June  1,  2017.  In  conjunction  with  this  refinancing,  we   entered  into  an  interest  rate  cap  that  matures  on  June  1,  2015  that  effectively  fixes  the  interest  when  LIBOR   exceeds  5.85%  per  annum.   As  a  result  of  our  acquisition  of  the  remaining  50%  ownership  interest  in  Metro  29th  on  June  18,  2012,  first   mortgage  debt  with  a  principal  balance  of  $54,602  secured  by  the  Holiday  Inn  Express,  New  York,  NY  is  included  on   our  consolidated  balance  sheet.  This  debt  bears  interest  at  a  fixed  rate  of  6.50%  and  matures  on  November  5,   2016.  In  addition,  we  consolidated  mezzanine  debt  with  a  principal  balance  of  $15,000.  We  repaid  this  mezzanine   debt  on  June  29,  2012  and  incurred  a  loss  on  debt  extinguishment  of  approximately  $176.   On  August  10,  2012,  as  a  result  of  our  acquisition  of  the  remaining  50%  ownership  interest  in  Inn  America   Hospitality  at  Ewing,  we  repaid  outstanding  mortgage  debt  with  a  principal  balance  of  $12,875  secured  by  the   Courtyard  by  Marriot,  Ewing,  NJ,  and  incurred  a  loss  on  debt  extinguishment  of  approximately  $69.  On  August  13,   we  entered  into  a  $9,150  revolving  line  of  credit  secured  by  the  property.  The  new  revolving  line  of  credit  bears   interest  at  a  variable  rate  of  one  month  LIBOR  plus  3.50%  with  a  floor  of  4.25%  and  matures  on  August  13,  2014.  As   of  December  31,  2012,  we  had  no  debt  outstanding  under  this  line  of  credit.   On  September  29,  2011,  we  entered  into  a  $30,000  mortgage  loan  secured  by  our  Courtyard  by  Marriott,  Westside,   Los  Angeles,  CA,  property.  Previously,  this  property  was  included  as  collateral  on  our  revolving  credit  facility.  The   new  mortgage  loan  bears  interest  at  a  variable  rate  of  one  month  U.S.  dollar  LIBOR  plus  3.85%  with  a  floor  of  0.75%   and  matures  on  September  29,  2015.  As  a  result  of  this  new  debt,  we  capitalized  $404  in  deferred  financing  costs.   On  the  same  date,  we  entered  into  an  interest  rate  swap  that  effectively  fixes  the  interest  at  4.947%.  See  “Note  8  –   Fair  Value  Measurements  and  Derivative  Instruments”  for  more  information.   Also,  on  September  29,  2011,  we  refinanced  the  $11,913  mortgage  loan  secured  by  a  land  parcel  located  on  Eighth   Avenue,  New  York,  NY.  The  new  mortgage  loan  bears  interest  at  a  variable  rate  of  Wall  Street  Journal  Prime  Rate   plus  1.0%,  at  no  time  less  than  6.0%  or  more  than  16.0%  and  matures  on  July  1,  2013.  As  a  result  of  this     68 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  6  –  DEBT  (continued)   refinancing,  we  capitalized  $152  in  deferred  financing  costs.  As  noted  in  “Note  12  –  Discontinued  Operations,”  this   land  parcel  was  disposed  of  in  April  2012  and  as  such  the  mortgage  associated  with  this  land  parcel  was  paid  off  in   its  entirety.   Debt  Payoffs   As  previously  mentioned,  we  replaced  our  previous  $250,000  secured  credit  facility  with  a  new  $400,000   unsecured  credit  facility  with  Citigroup  Global  Markets  Inc.  and  various  other  lenders  on  November  5,  2012.   Concurrently  with  this  closing,  we  funded  $100,000  in  unsecured  term  loan  borrowings.  These  borrowings  were   used  to  pay  off  in  full  the  balance  on  seven  mortgage  loans  on  hotel  properties.  As  a  result  of  terminating  our   previous  $250,000  secured  credit  facility  and  extinguishing  the  debt  on  these  seven  properties,  we  expensed   $2,476  in  unamortized  deferred  financing  costs  and  fees,  which  are  included  in  the  Loss  of  Debt  Extinguishment   caption  on  the  consolidated  statements  of  operations  for  the  year  ended  December  31,  2012.  On  January  3,  2013,   we  funded  an  additional  $50,000  in  unsecured  term  loan  borrowings  under  our  $400,000  unsecured  credit  facility   which  were  used  to  payoff  the  balance  of  the  mortgage  loan  secured  by  the  Holiday  Inn  Express,  Times  Square,   New  York,  NY.  This  mortgage  was  also  subject  to  an  interest  rate  swap,  which  was  derecognized  as  a  cash  flow   hedge  as  of  December  31,  2012  due  to  this  payoff.  See  “Footnote  8  –  Fair  Value  Measurements  and  Derivative   Instruments”  for  more  information.   During  2010,  we  repaid  seven  mortgages  and  two  notes  payable.  In  addition,  we  replaced  our  previous  $175,000   secured  credit  facility  with  a  $250,000  secured  credit  facility  with  T.D.  Bank,  NA  and  various  other  lenders.  As  a   result  of  these  extinguishments,  we  expensed  $932  in  unamortized  deferred  financing  costs  and  fees,  which  are   included  in  the  Loss  on  Debt  Extinguishment  caption  on  the  consolidated  statements  of  operations  for  the  year   ended  December  31,  2010.   69 HERSHA 2012 ANNUAL REPORT                           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  7  –  COMMITMENTS  AND  CONTINGENCIES  AND  RELATED  PARTY  TRANSACTIONS   Management  Agreements   Our  wholly-­‐owned  taxable  REIT  subsidiary  ("TRS"),  44  New  England,  engages  eligible  independent  contractors  in   accordance  with  the  requirements  for  qualification  as  a  REIT  under  the  Federal  income  tax  laws,  including  HHMLP,   as  the  property  managers  for  hotels  it  leases  from  us  pursuant  to  management  agreements.  HHMLP  is  owned,  in   part,  by  certain  executives  and  trustees  of  the  Company.  Our  management  agreements  with  HHMLP  provide  for   five-­‐year  terms  and  are  subject  to  early  termination  upon  the  occurrence  of  defaults  and  certain  other  events   described  therein.  As  required  under  the  REIT  qualification  rules,  HHMLP  must  qualify  as  an  “eligible  independent   contractor”  during  the  term  of  the  management  agreements.  Under  the  management  agreements,  HHMLP   generally  pays  the  operating  expenses  of  our  hotels.  All  operating  expenses  or  other  expenses  incurred  by  HHMLP   in  performing  its  authorized  duties  are  reimbursed  or  borne  by  our  TRS  to  the  extent  the  operating  expenses  or   other  expenses  are  incurred  within  the  limits  of  the  applicable  approved  hotel  operating  budget.  HHMLP  is  not   obligated  to  advance  any  of  its  own  funds  for  operating  expenses  of  a  hotel  or  to  incur  any  liability  in  connection   with  operating  a  hotel.  Management  agreements  with  other  unaffiliated  hotel  management  companies  have   similar  terms.   For  its  services,  HHMLP  receives  a  base  management  fee  and,  if  a  hotel  exceeds  certain  thresholds,  an  incentive   management  fee.  The  base  management  fee  for  a  hotel  is  due  monthly  and  is  equal  to  3%  of  gross  revenues   associated  with  each  hotel  managed  for  the  related  month.  The  incentive  management  fee,  if  any,  for  a  hotel  is  due   annually  in  arrears  on  the  ninetieth  day  following  the  end  of  each  fiscal  year  and  is  based  upon  the  financial   performance  of  the  hotels.  For  the  years  ended  December  31,  2012,  2011  and  2010,  base  management  fees   incurred  totaled  $10,781,  $9,190  and  $7,099,  respectively  and  are  recorded  as  Hotel  Operating  Expenses.  For  the   years  ended  December  31,  2012,  2011  and  2010,  we  did  not  incur  incentive  management  fees.   On  December  3,  2010,  we  terminated  the  management  agreement  held  with  Marriott  International  Inc.  for  the   management  services  they  provided  for  the  Courtyard  by  Marriott,  Alexandria,  VA.  In  connection  with  this   termination,  we  paid  $250  in  termination  fees.  Effective  December  4,  2010,  this  hotel  is  now  managed  by  HHMLP.   Also,  between  December  31,  2010  and  December  31,  2011,  we  terminated  the  management  agreement  held  with   Lodgeworks,  L.P.  for  the  management  services  they  provided  for  seven  Hyatt  Summerfield  Suites  properties.  In   connection  with  this  termination,  we  repaid  $498  as  repayment  of  the  interest  free  loan  due  to  Lodgeworks,  L.P.  as   a  result  of  our  acquisition  of  the  Hyatt  Summerfield  Suites  portfolio.   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,  2012,  2011  and  2010  was  $24,278,  $22,729  and  $18,560  respectively,  and  are   recorded  in  Hotel  Operating  Expenses.  The  initial  fees  incurred  to  enter  into  the  franchise  agreements  are   amortized  over  the  life  of  the  franchise  agreements.   Accounting  and  Information  Technology  Fees   Each  of  the  wholly-­‐owned  hotels  and  consolidated  joint  venture  hotel  properties  managed  by  HHMLP  incurs  a   monthly  accounting  and  information  technology  fee.  Monthly  fees  for  accounting  services  are  between  $2  and  $3     70 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  7  –  COMMITMENTS  AND  CONTINGENCIES  AND  RELATED  PARTY  TRANSACTIONS  (continued)   per  property  and  monthly  information  technology  fees  range  from  $1  to  $2  per  property.  For  the  years  ended   December  31,  2012,  2011  and  2010,  the  Company  incurred  accounting  fees  of  $1,741,  $1,822  and  $1,537,   respectively.  For  the  years  ended  December  31,  2012,  2011  and  2010,  the  Company  incurred  information   technology  fees  of  $509,  $460  and  $347,  respectively.  Accounting  fees  and  information  technology  fees  are   included  in  Hotel  Operating  Expenses.   Capital  Expenditure  Fees   HHMLP  charges  a  5%  fee  on  all  capital  expenditures  and  pending  renovation  projects  at  the  properties  as   compensation  for  procurement  services  related  to  capital  expenditures  and  for  project  management  of  renovation   projects.  For  the  years  ended  December  31,  2012,  2011  and  2010,  we  incurred  fees  of  $1,076,  $1,208  and  $257,   respectively,  which  were  capitalized  with  the  cost  of  fixed  asset  additions.   Acquisitions  from  Affiliates   We  have  entered  into  an  option  agreement  with  each  of  our  officers  and  certain  trustees  such  that  we  obtain  a   right  of  first  refusal  to  purchase  any  hotel  owned  or  developed  in  the  future  by  these  individuals  or  entities   controlled  by  them  at  fair  market  value.  This  right  of  first  refusal  would  apply  to  each  party  until  one  year  after   such  party  ceases  to  be  an  officer  or  trustee  of  the  Company.  Our  Acquisition  Committee  of  the  Board  of  Trustees  is   comprised  solely  of  independent  trustees,  and  the  purchase  prices  and  all  material  terms  of  the  purchase  of  hotels   from  related  parties  are  approved  by  the  Acquisition  Committee.   Hotel  Supplies   For  the  years  ended  December  31,  2012,  2011,  and  2010,  we  incurred  charges  for  hotel  supplies  of  $149,  $143  and   $156,  respectively.  For  the  years  ended  December  31,  2012,  2011  and  2010,  we  incurred  charges  for  capital   expenditure  purchases  of  $11,809,  $18,404  and  $6,755,  respectively.  These  purchases  were  made  from  Hersha   Purchasing  and  Design,  a  hotel  supply  company  owned,  in  part,  by  certain  executives  and  trustees  of  the  Company.   Hotel  supplies  are  expenses  included  in  Hotel  Operating  Expenses  on  our  consolidated  statements  of  operations,   and  capital  expenditure  purchases  are  included  in  investment  in  hotel  properties  on  our  consolidated  balance   sheets.  Approximately  $5  and  $26  is  included  in  accounts  payable  at  December  31,  2012  and  2011,  respectively.   Due  From  Related  Parties   The  due  from  related  parties  balance  as  of  December  31,  2012  and  2011  was  approximately  $8,488  and  $6,189,   respectively.  The  balances  primarily  consisted  of  accrued  interest  due  on  our  development  loans,  working  capital   deposits  made  to  HHMLP,  and  the  remaining  due  from  related  party  balances  are  receivables  owed  from  our   unconsolidated  joint  ventures.   Due  to  Related  Parties   The  balance  due  to  related  parties  as  of  December  31,  2012  and  2011  was  approximately  $4,403  and  $2,932,   respectively.  The  balances  consisted  of  amounts  payable  to  HHMLP  for  administrative,  management,  and  benefit   related  fees.   71 HERSHA 2012 ANNUAL REPORT                           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  7  –  COMMITMENTS  AND  CONTINGENCIES  AND  RELATED  PARTY  TRANSACTIONS  (continued)   Hotel  Ground  Rent   For  the  years  ended  December  31,  2012,  2011,  and  2010,  we  incurred  $835,  $877  and  $941,  respectively,  of  rent     expense  payable  pursuant  to  ground  leases  related  to  certain  hotel  properties.   Future  minimum  lease  payments  (without  reflecting  future  applicable  Consumer  Price  Index  increases)  under  these   agreements  are  as  follows:   Litigation   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.   72 HERSHA 2012 ANNUAL REPORT                                     HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  8  –  FAIR  VALUE  MEASUREMENTS  AND  DERIVATIVE  INSTRUMENTS   Fair  Value  Measurements   Our  determination  of  fair  value  measurements  are  based  on  the  assumptions  that  market  participants  would  use  in   pricing  the  asset  or  liability.  As  a  basis  for  considering  market  participant  assumptions  in  fair  value  measurements,   we  utilize  a  fair  value  hierarchy  that  distinguishes  between  market  participant  assumptions  based  on  market  data   obtained  from  sources  independent  of  the  reporting  entity  (observable  inputs  that  are  classified  within  Levels  1   and  2  of  the  hierarchy)  and  the  reporting  entity’s  own  assumptions  about  market  participant  assumptions   (unobservable  inputs  classified  within  Level  3  of  the  hierarchy).   Level  1  inputs  utilize  quoted  prices  (unadjusted)  in  active  markets  for  identical  assets  or  liabilities  that  the  Company   has  the  ability  to  access.  Level  2  inputs  are  inputs  other  than  quoted  prices  included  in  Level  1  that  are  observable   for  the  asset  or  liability,  either  directly  or  indirectly.  Level  2  inputs  may  include  quoted  prices  for  similar  assets  and   liabilities  in  active  markets,  as  well  as  inputs  that  are  observable  for  the  asset  or  liability  (other  than  quoted  prices),   such  as  interest  rates,  foreign  exchange  rates  and  yield  curves  that  are  observable  at  commonly  quoted  intervals.   Level  3  inputs  are  unobservable  inputs  for  the  asset  or  liabilities,  which  are  typically  based  on  an  entity’s  own   assumptions,  as  there  is  little,  if  any,  related  market  activity.  In  instances  where  the  determination  of  the  fair  value   measurement  is  based  on  inputs  from  different  levels  of  the  fair  value  hierarchy,  the  level  in  the  fair  value   hierarchy  within  which  the  entire  fair  value  measurement  falls  is  based  on  the  lowest  level  input  that  is  significant   to  the  fair  value  measurement  in  its  entirety.  The  Company’s  assessment  of  the  significance  of  a  particular  input  to   the  fair  value  measurement  in  its  entirety  requires  judgment,  and  considers  factors  specific  to  the  asset  or  liability.   As  of  December  31,  2012,  the  Company’s  derivative  instruments  represented  the  only  financial  instruments   measured  at  fair  value.  Currently,  the  Company  uses  derivative  instruments,  such  as  interest  rate  swaps  and  caps,   to  manage  its  interest  rate  risk.  The  valuation  of  these  instruments  is  determined  using  widely  accepted  valuation   techniques,  including  discounted  cash  flow  analysis  on  the  expected  cash  flows  of  each  derivative.  This  analysis   reflects  the  contractual  terms  of  the  derivatives,  including  the  period  to  maturity,  and  uses  observable   market-­‐based  inputs.   We  incorporate  credit  valuation  adjustments  to  appropriately  reflect  both  our  own  nonperformance  risk  and  the   respective  counterparty’s  nonperformance  risk  in  the  fair  value  measurements.  In  adjusting  the  fair  value  of  its   derivative  contracts  for  the  effect  of  nonperformance  risk,  we  have  considered  the  impact  of  netting  and  any   applicable  credit  enhancements,  such  as  collateral  postings,  thresholds,  mutual  puts  and  guarantees.   Although  we  have  determined  that  the  majority  of  the  inputs  used  to  value  our  derivatives  fall  within  Level  2  of  the   fair  value  hierarchy,  the  credit  valuation  adjustments  associated  with  our  derivatives  utilize  Level  3  inputs,  such  as   estimates  of  current  credit  spreads,  to  evaluate  the  likelihood  of  default  by  us  and  the  counterparties.  However,  as   of  December  31,  2012  we  have  assessed  the  significance  of  the  effect  of  the  credit  valuation  adjustments  on  the   overall  valuation  of  our  derivative  positions  and  have  determined  that  the  credit  valuation  adjustments  are  not   significant  to  the  overall  valuation  of  our  derivatives.  As  a  result,  we  have  determined  that  our  derivative  valuations   in  their  entirety  are  classified  in  Level  2  of  the  fair  value  hierarchy.   73 HERSHA 2012 ANNUAL REPORT                                 HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  8  –  FAIR  VALUE  MEASUREMENTS  AND  DERIVATIVE  INSTRUMENTS  (continued)   Derivative  Instruments   On  January  3,  2013,  we  funded  the  remaining  $50,000  tranche  of  the  $150,000  unsecured  term  loan  portion  of  our   $400,000  unsecured  credit  facility.  On  December  18,  2012,  we  entered  into  a  forward  looking  swap  with  an   effective  date  of  December  18,  2012.  This  swap  effectively  fixes  the  interest  rate  on  the  unsecured  term  loan,   bearing  interest  at  one  month  U.S.  dollar  LIBOR  plus  2.65%.  Under  the  terms  of  this  interest  rate  swap,  we  pay   fixed  rate  of  interest  of  3.25%  per  annum.  This  swap  matures  on  November  5,  2016.   Also,  on  January  7,  2013,  the  Company  repaid  the  mortgage  secured  by  the  Holiday  Inn  Express  Times  Square  in   New  York,  NY.  Due  to  the  timing  of  this  transaction,  the  hedge  relationship  on  our  interest  rate  swap  was   derecognized  as  of  December  31,  2012.  Therefore,  the  accumulated  other  comprehensive  loss  on  this  swap  as  of   December  31,  2012,  was  reclassified.  We  recorded  $530  in  Loss  on  Debt  Extinguishment  on  the  Statement  of   Operations.   The  fair  value  of  our  interest  rate  caps  is  included  in  other  assets  at  December  31,  2012  and  2011  and  the  fair  value   of  our  interest  rate  swaps  is  included  in  accounts  payable,  accrued  expenses  and  other  liabilities  at  December  31,   2012  and  2011.   The  change  in  fair  value  of  derivative  instruments  designated  as  cash  flow  hedges  was  a  loss  of  $635,  a  loss  of  $813,   and  a  loss  of  $178  for  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively.  These  unrealized  losses   were  reflected  on  our  consolidated  balance  sheet  in  accumulated  other  comprehensive  Income.   Amounts  reported  in  accumulated  other  comprehensive  income  related  to  derivatives  will  be  reclassified  to   interest  expense  as  interest  payments  are  made  on  the  Company’s  variable-­‐rate  debt.  The  change  in  net  unrealized   gains/losses  on  cash  flow  hedges  reflects  a  reclassification  of  $1,707  of  net  unrealized  gains/losses  from   accumulated  other  comprehensive  income  as  an  increase  to  interest  expense  during  2012.  During  2013,  the   Company  estimates  that  an  additional  $1,196  will  be  reclassified  as  an  increase  to  interest  expense.   Fair  Value  of  Debt   The  Company  estimates  the  fair  value  of  its  fixed  rate  debt  and  the  credit  spreads  over  variable  market  rates  on  its   variable  rate  debt  by  discounting  the  future  cash  flows  of  each  instrument  at  estimated  market  rates  or  credit   spreads  consistent  with  the  maturity  of  the  debt  obligation  with  similar  credit  policies.  Credit  spreads  take  into   consideration  general  market  conditions  and  maturity.  The  inputs  utilized  in  estimating  the  fair  value  of  debt  are   classified  in  Level  2  of  the  fair  value  hierarchy.  As  of  December  31,  2012,  the  carrying  value  and  estimated  fair  value   of  the  Company’s  debt  was  $792,708  and  $814,451,  respectively.  As  of  December  31,  2011,  the  carrying  value  and   estimated  fair  value  of  the  Company’s  debt  was  $758,374  and  $785,453  respectively  (excluding  outstanding   mortgage  indebtedness  related  to  assets  held  for  sale).   74 HERSHA 2012 ANNUAL REPORT                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  9  –  SHARE  BASED  PAYMENTS   In  May  2011,  the  Company  established  and  its  shareholders  approved  the  Hersha  Hospitality  Trust  2012  Equity   Incentive  Plan  (the  “2012  Plan”)  for  the  purpose  of  attracting  and  retaining  executive  officers,  employees,  trustees   and  other  persons  and  entities  that  provide  services  to  the  Company.   Executives  &  Employees   Annual  Long  Term  Equity  Incentive  Programs   To  further  align  the  interests  of  the  Company’s  executives  with  those  of  shareholders,  the  Compensation   Committee  grants  annual  long  term  equity  incentive  awards  that  are  both  “performance  based”  and  “time  based.”   On  April  16,  2012,  the  Compensation  Committee  adopted  the  2012  Annual  LTIP  for  the  executive  officers,  pursuant   to  which  the  executive  officers  are  eligible  to  earn  equity  awards  in  the  form  of  stock  awards  or  performance  share   awards  issuable  pursuant  to  the  2012  Plan.  Shares  are  earned  under  the  2012  Annual  LTIP  based  on  achieving  a   threshold,  target  or  maximum  level  of  performance  in  the  performance  of  RevPAR  growth  in  certain  defined  areas.   The  Company  accounts  for  these  grants  as  performance  awards  for  which  the  Company  assesses  the  probable   achievement  of  the  performance  conditions  at  the  end  of  each  period.  Stock  based  compensation  of  $1,785  was   recorded  for  the  year  ended  December  31,  2012,  for  awards  under  the  2012  Annual  LTIP  and  is  included  in  general   and  administrative  expense  in  the  consolidated  statements  of  operations.  As  of  December  31,  2012,  no  common   shares  have  been  issued  in  accordance  with  awards  under  the  2012  Plan  to  the  executive  officers  in  settlement  of   2012  Annual  LTIP  awards.   Stock  based  compensation  expense  related  to  awards  under  the  2011  Annual  LTIP  and  2010  Annual  LTIP  of  $2,140,   $2,179,  and  $1,314  was  recorded  for  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively.  Unearned   compensation  related  to  awards  under  the  2011  Annual  LTIP  and  the  2010  Annual  LTIP  as  of  December  31,  2012   and  2011,  respectively  was  $1,072  and  $605,  respectively.  The  following  table  is  a  summary  of  all  unvested  share   awards  issued  to  executives  under  the  2011  Annual  LTIP  and  2010  Annual  LTIP:   (1) 25%  of  the  issued  shares  vested  immediately  upon  issuance.  In  general,  the  remaining  shares  vest  25%  on   the  first  through  third  anniversaries  of  the  date  of  issuance  (subject  to  continuous  employment  through   the  applicable  vesting  date).   Multi-­‐Year  LTIP   On  May  7,  2010,  the  Compensation  Committee  adopted  the  Multi-­‐Year  LTIP.  This  program  has  a  three-­‐year   performance  period,  which  commenced  on  January  1,  2010  and  will  end  on  December  31,  2012.  The  common   shares  issuable  pursuant  to  the  2012  Plan  in  settlement  of  equity  awards  granted  under  this  program  are  based   upon  the  Company’s  achievement  of  a  certain  level  of  (1)  absolute  total  shareholder  return  (75%  of  the  award),   and  (2)  relative  total  shareholder  return  as  compared  to  the  Company’s  peer  group  (25%  of  the  award).  As  of   December  31,  2012,  no  common  shares  have  been  issued  in  accordance  with  the  2012  Plan  to  the  executive     75 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  9  –  SHARE  BASED  PAYMENTS  (continued)   officers  in  settlement  of  Multi-­‐Year  LTIP  awards.  The  Company  accounts  for  these  grants  as  market  based  awards   where  the  Company  estimated  unearned  compensation  at  the  grant  date  fair  value  which  is  then  amortized  into   compensation  cost  over  the  vesting  period,  which  ends  on  December  31,  2013.  Stock  based  compensation  expense   of  $3,192,  $3,192,  and  $2,084  was  recorded  for  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively,   for  the  Multi-­‐Year  LTIP.  Unearned  compensation  related  to  the  multi-­‐year  program  as  of  December  31,  2012  and   2011,  respectively  was  $3,192  and  $6,383.   Performance  Share  Awards   Performance  shares  granted  in  the  third  quarter  of  2009  were  earned  in  their  entirety  based  on  the  Company’s   common  shares  maintaining  a  closing  price  in  excess  of  defined  thresholds  over  a  defined  period  of  time  and  then   settled  in  an  equivalent  number  of  common  shares.  The  Company  accounted  for  these  grants  as  market  based   awards  where  the  Company  estimated  the  unearned  compensation  at  grant  date  fair  value  which  was  amortized   into  compensation  cost  over  the  performance  period,  which  ended  on  August  4,  2010.  Stock  based  compensation   expense  of  $725  was  incurred  during  the  year  ended  December  31,  2010  for  the  performance  share  awards.   Restricted  Share  Awards   In  addition  to  stock  based  compensation  expense  related  to  awards  under  the  Multi-­‐Year  LTIP,  the  2010  Annual   LTIP,  the  2011  Annual  LTIP  and  the  2012  Annual  LTIP,  stock  based  compensation  expense  related  to  restricted   common  shares  issued  to  executives  and  employees  of  the  Company  of  $1,911,  $1,662,  and  $2,230  was  incurred   for  the  years  ended  December  31,  2012,  2011,  and  2010  respectively.  Unearned  compensation  related  to  the   restricted  share  awards  as  of  December  31,  2012  and  2011  was  $5,420  and  $1,370,  respectively.  The  following   table  is  a  summary  of  all  unvested  share  awards  issued  to  executives  under  the  2012  Plan  and  prior  to  equity   incentive  plans:   (1) On  April  18,  2012,  the  Company  entered  into  amended  and  restated  employment  agreements  with  the   Company’s  executive  officers.  To  induce  the  executives  to  agree  to  the  substantial  reduction  in  benefits   upon  certain  terminations  following  a  change  of  control  as  described  in  the  agreements,  the  Company   awarded  an  aggregate  of  1,035,595  restricted  common  shares  to  the  executives  pursuant  to  the  2012   Plan.  None  of  these  restricted  common  shares  will  vest  prior  to  the  third  anniversary  of  the  date  of   issuance.  Thereafter,  33.3%  of  each  award  of  restricted  common  shares  will  vest  on  each  of  the  third,   fourth  and  fifth  anniversaries  of  the  date  of  issuance.  Vesting  will  accelerate  upon  a  change  of  control  or   if  the  relevant  executive’s  employment  with  the  Company  were  to  terminate  for  any  reason  other  than   for  cause  (as  defined  in  the  agreements).   76 HERSHA 2012 ANNUAL REPORT                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  9  –  SHARE  BASED  PAYMENTS  (continued)   Trustees   Annual  Retainer   The  Compensation  Committee  approved  a  program  that  allows  the  Company’s  trustees  to  make  a  voluntary   election  to  receive  any  portion  of  the  annual  cash  retainer  in  the  form  of  common  equity  valued  at  a  25%  premium   to  the  cash  that  would  have  been  received.  As  a  result,  we  issued  20,118  shares  on  March  26,  2012  which  was   determined  by  dividing  the  dollar  value  of  the  award  by  the  20-­‐day  volume  weighted  average  closing  price  of  the   Company’s  common  shares  on  the  New  York  Stock  Exchange  as  of  December  31,  2011.  Shares  issued  under  this   program  on  March  26,  2012  become  fully  vested  on  December  31,  2012.  On  December  28,  2012,  we  issued  32,417   shares  which  do  not  fully  vest  until  December  31,  2013.  Compensation  expense  incurred  for  the  years  ended   December  31,  2012,  2011,  and  2010  respectively,  was  $66,  $111  and  $0  which  was  offset  by  forfeitures  as  of   December  31,  2012  and  2011,  respectively,  of  $40  and  $33.  Unearned  compensation  related  to  the  annual  retainer   shares  as  of  December  31,  2012  was  $160.  The  following  table  is  a  summary  of  all  unvested  share  awards  issued  to   trustees  in  lieu  of  annual  cash  retainer:   Multi-­‐Year  Long-­‐Term  Equity  Incentives   On  March  30,  2011,  the  Company  issued  an  aggregate  of  12,600  restricted  common  shares,  1,800  to  each   non-­‐management  trustee,  33%  vested  on  December  31,  2011,  33%  vest  on  December  31,  2012,  and  the  remaining   33%  vest  on  December  31,  2013.  On  June  5,  2012,  the  Company  issued  an  aggregate  of  12,600  restricted  common   shares  1,800  to  non-­‐management  trustees,  33%  of  which  will  vest  on  each  of  December  31,  2012,  2013  and  2014.   On  December  28,  2012,  the  Company  issued  an  aggregate  of  12,000  restricted  common  shares,  2,000  to   non-­‐management  trustees,  following  the  same  vesting  schedules  as  noted  above.  Compensation  expense  for  2011   multi-­‐year  long  term  equity  incentive  and  2012  multi-­‐year  long-­‐term  equity  incentive  incurred  for  the  years  ended   December  31,  2012,  2011,  and  2010,  respectively,  was  $43,  $21,  and  $0  which  is  offset  by  $3  as  of  December  31,   2012  for  forfeitures.  Unearned  compensation  related  to  the  multi-­‐year  long  term  equity  incentives  was  $113  and   $43  as  of  December  31,  2012  and  2011,  respectively.   Share  Awards   Compensation  expense  related  to  share  awards  issued  to  the  Board  of  Trustees  of  $402,  $322,  and  $264  was   incurred  during  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively  and  is  recorded  in  stock  based   compensation  on  the  statement  of  operations.  Share  awards  issued  to  the  Board  of  Trustees  are  immediately   vested.  On  June  5,  2012,  an  aggregate  34,400  shares  were  issued  to  the  Board  of  Trustees  at  a  price  on  the  date  of   grant  of  $4.99.  On  December  28,  2012,  an  aggregate  46,677  shares  were  issued  to  the  Board  of  Trustees  at  a  price   on  the  date  of  grant  of  $4.93.   Non-­‐employees   The  Company  issues  share  based  awards  as  compensation  to  non-­‐employees  for  services  provided  to  the  Company   and  consists  primarily  of  restricted  common  shares.  The  Company  recorded  stock  based  compensation  expense  of     77 HERSHA 2012 ANNUAL REPORT                                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  9  –  SHARE  BASED  PAYMENTS  (continued)   $139,  $104,  and  $32  for  the  years  ended  December  31,  2012,  2011,  and  2010,  respectively.  Unearned   compensation  related  to  the  restricted  share  awards  as  of  December  31,  2012  and  2011  was  $74  and  $70,   respectively.  The  following  table  is  a  summary  of  all  unvested  share  awards  issued  to  non-­‐employees  under  the   2008  and  2012  Plan:   78 HERSHA 2012 ANNUAL REPORT               HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  10  –  EARNINGS  PER  SHARE   The  following  table  is  a  reconciliation  of  the  income  or  loss  (numerator)  and  the  weighted  average  shares   (denominator)  used  in  the  calculation  of  basic  and  diluted  earnings  per  common  share.  The  computation  of  basic   and  diluted  earnings  per  share  is  presented  below.   *   Income   (loss)   allocated   to   noncontrolling   interest   in   Hersha   Hospitality   Limited   Partnership   has   been   excluded   from   the   numerator   and   Common   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.   In   addition,   potentially   dilutive   common   shares,   if   any,  have  been  excluded  from  the  denominator  if  they  are  anti-­‐dilutive  to  income  (loss)  from  continuing   operations  applicable  to  common  shareholders.   The  following  table  summarizes  potentially  dilutive  securities  that  have  been  excluded  from  the  denominator  for   the  purpose  of  computing  diluted  earnings  per  share:   79 HERSHA 2012 ANNUAL REPORT                                                                   HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  11  –  CASH  FLOW  DISCLOSURES  AND  NON-­‐CASH  INVESTING  AND  FINANCING  ACTIVITIES   Interest  paid  in  2012,  2011  and  2010  totaled  $41,744,  $42,726  and  $43,756,  respectively.  The  following  non-­‐cash   investing  and  financing  activities  occurred  during  2012,  2011  and  2010:   80 HERSHA 2012 ANNUAL REPORT           HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  12  –  DISCONTINUED  OPERATIONS   The  operating  results  of  certain  real  estate  assets  which  have  been  sold  or  otherwise  qualify  as  held  for  sale  are   included  in  discontinued  operations  in  the  statements  of  operations  for  all  periods  presented.   Assets  Held  for  Sale   The  Company  had  no  assets  held  for  sale  as  of  December  31,  2012.  Assets  held  for  sale  and  liabilities  related  to   assets  held  for  sale  consisted  of  the  following  as  of  December  31,  2011:   The  following  table  sets  forth  the  components  of  discontinued  operations  for  the  years  ended  December  31,  2012,   2011  and  2010:   We  allocate  to  income  or  loss  from  discontinued  operations  interest  expense  related  to  debt  that  is  to  be  assumed   or  that  is  required  to  be  repaid  as  a  result  of  the  disposal  transaction.   81 HERSHA 2012 ANNUAL REPORT                                                                                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  12  –  DISCONTINUED  OPERATIONS  (continued)   Disposed  Assets   The  following  real  estate  assets  were  sold  between  the  period  of  January  1,  2010  to  December  31,  2012.  Our  Board   of  Trustees  authorized  management  of  the  Company  to  sell  each  of  these  assets  prior  to  the  final  disposition.   Based  on  their  disposition  date,  the  operating  results  for  these  hotels  were  reclassified  to  discontinued  operations   for  the  years  ended  December  31,  2012,  2011,  and  2010.   (1)   On  August  15,  2011,  the  Company  entered  into  two  purchase  and  sale  agreements  to  dispose  of  a  portfolio   of  18  non-­‐core  hotel  properties,  four  of  which  are  owned  in  part  by  the  Company  through  an  unconsolidated   joint  venture,  for  an  aggregate  purchase  price  of  approximately  $155,000.  In  May  2011,  our  Board  of   Trustees  authorized  management  of  the  Company  to  sell  this  portfolio.  The  18  non-­‐core  hotel  properties  in   the  portfolio  were  acquired  by  the  Company  between  1998  and  2006;   On  February  23,  2012,  the  Company  closed  on  the  sale  of  14  of  these  non-­‐core  hotel  properties,  including   three  hotel  properties  owned  in  part  by  the  Company  through  an  unconsolidated  joint  venture,  and  closed   on  the  remaining  4  properties,  on  May  8,  2012,  including  one  hotel  property  owned  in  part  by  the  Company   through  an  unconsolidated  joint  venture.  The  operating  results  for  the  consolidated  assets  were  reclassified   to  discontinued  operations  in  the  statement  of  operations  for  the  years  ended  December  31,  2012,  2011,   and  2010.  The  18  assets  were  sold  for  a  total  sales  price  of  $155,000,  reduced  the  Company’s  consolidated   mortgage  debt  by  $61,298  and  generated  a  gain  on  sale  of  approximately  $4,910.  As  a  result  of  entering  into   these  purchase  and  sale  agreements  for  the  18  non-­‐core  assets  mentioned  above,  we  recorded  an   impairment  loss  in  2011  of  approximately  $30,248  for  those  consolidated  assets  for  which  the  anticipated   net  proceeds  did  not  exceed  the  carrying  value.   (2)   On  March  30,  2012,  we  transferred  the  title  to  the  Comfort  Inn,  located  in  North  Dartmouth,  to  the  lender.   Previously,   we   had   ceased   operations   at   this   property   on   March   31,   2011.   The   operating   results   were   reclassified  to  discontinued  operations  in  the  statements  of  operations  for  the  years  ended  December  31,   2012,   2011,   and   2010.   The   transfer   of   the   title   resulted   in   a   gain   of   approximately   $1,216,   since   the   outstanding  mortgage  loan  payable  exceeded  the  net  book  value  of  the  property.   Impairment  of  Assets  Previously  Held  for  Sale   We  determined  that  the  carrying  value  of  the  following  properties  exceeded  fair  value  and  as  such  we  recorded  an   impairment  charge  as  noted  below  during  the  year  ended  December  31,  2010.  The  fair  value  of  these  properties   was  determined  using  Level  3  inputs,  which  are  typically  unobservable  and  are  based  on  our  own  assumptions,  as   there  is  little,  if  any,  related  market  activity.  The  land  parcel  located  on  39th  Street  and  8th  Avenue  was  sold  in   April  2012,  the  title  for  the  Comfort  Inn,  North  Dartmouth  hotel  property  was  transferred  to  the  lender  in  March   2012,  and  the  land  parcel  located  on  Nevins  Street,  Brooklyn,  NY,  was  sold  in  December  2011.   82 HERSHA 2012 ANNUAL REPORT                     HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  12  –  DISCONTINUED  OPERATIONS  (continued)   83 HERSHA 2012 ANNUAL REPORT       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  13  –  SHAREHOLDERS’  EQUITY  AND  NONCONTROLLING  INTERESTS  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  Units   Common  Units  are  issued  in  connection  with  the  acquisition  of  wholly  owned  hotels  and  joint  venture  interests  in   hotel  properties.  The  total  number  of  Common  Units  outstanding  as  of  December  31,  2012,  2011  and  2010  was   7,112,506,  7,270,316  and  7,418,912,  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  2012,  2011  and  2010,  157,810,  195,000  and  2,934,511  Common  Units   were  converted  to  Class  A  Common  Shares,  respectively.  The  Company  issued  46,404  units  in  connection  with  the   acquisition  of  the  Courtyard  by  Marriott,  Miami,  FL  during  2011.  No  units  were  issued  for  acquisitions  during  2012   and  2010.   84 HERSHA 2012 ANNUAL REPORT                               HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  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  Internal  Revenue  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  REIT  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  is  subject  to  income  taxes  at  the  applicable  federal,  state  and  local  tax  rates.  In   2012,  2011  and  2010,  44  New  England  generated  net  operating  income  (losses)  of  $2,310,  ($17,790),  and  ($4,726),   and  recognized  Income  tax  expense  (benefit)  of  ($3,355),  0,  and  0,  respectively.   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:   The  components  of  consolidated  TRS’s  net  deferred  tax  asset  as  of  December  31,  2012  and  2011  were  as  follows:   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  limitations  related  to  the  utilization  of   certain  tax  attribute  carryforwards,  Management  recorded  a  valuation  allowance  of  approximately  $804  as  these   attributes  are  not  more  likely  than  not  to  be  realized  prior  to  their  expiration.  Based  on  the  level  of  historical   taxable  income  and  projections  for  future  taxable  income  over  the  periods  in  which  the  remaining  deferred  tax   assets  are  deductible,  Management  believes  it  is  more  likely  than  not  that  these  deferred  tax  assets  will  be   realized.   85 HERSHA 2012 ANNUAL REPORT                                                         HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  14  –  INCOME  TAXES  (continued)   As  of  December  31,  2012,  we  have  gross  federal  net  operating  loss  carry  forwards  of  $12,452  which  expire  over   various  periods  from  2023  through  2030.   Earnings  and  profits,  which  will  determine  the  taxability  of  distributions  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,   2012,  2011  and  2010.   86 HERSHA 2012 ANNUAL REPORT             HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   NOTES  TO  THE  CONSOLIDATED  FINANCIAL  STATEMENTS   FOR  THE  YEARS  ENDED  DECEMBER  31,  2012,  2011,  AND  2010   [IN  THOUSANDS,  EXCEPT  SHARE/UNIT  AND  PER  SHARE  AMOUNTS]   NOTE  15  –  SELECTED  QUARTERLY  FINANCIAL  DATA  (UNAUDITED)   In  the  second  quarter  of  2012,  we  recorded  an  adjustment  impacting  gain  on  disposition  of  hotel  properties  that   increased  net  income  by  $1,950.  This  adjustment  was  made  after  completing  an  analysis  that  determined  a  liability   for  deferred  land  rent  payable  was  not  properly  written  off  when  a  hotel  property  was  sold  during  the  first  quarter   of  2012.  After  evaluating  the  quantitative  and  qualitative  effects  of  this  adjustment,  we  have  concluded  that  the   impact  on  the  Company’s  first  quarter  and  second  quarter  consolidated  financial  statements  was  not  material.   87 HERSHA 2012 ANNUAL REPORT                     HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   SCHEDULE  III  –  REAL  ESTATE  AND  ACCUMULATED  DEPRECIATION  AS  OF  DECEMBER  31,  2012   [IN  THOUSANDS]   (1)   Costs  capitalized  subsequent  to  acquisition  include  reductions  of  asset  value  due  to  impairment.   88 HERSHA 2012 ANNUAL REPORT                       HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   SCHEDULE  III  –  REAL  ESTATE  AND  ACCUMULATED  DEPRECIATION  AS  OF  DECEMBER  31,  2012   [IN  THOUSANDS]  (continued)   (1)   Costs  capitalized  subsequent  to  acquisition  include  reductions  of  asset  value  due  to  impairment.   ∗ Assets  are  depreciated  over  a  7  to  40  year  life,  upon  which  the  latest  income  statement  is  computed   The  aggregate  cost  of  land,  buildings  and  improvements  for  Federal  income  tax  purposes  for  the  years   ended  December  31,  2012,  2011  and  2010  is  approximately  $1,278,318,  $1,362,064,  and  $1,183,694   respectively.   Depreciation  is  computed  for  buildings  and  improvements  using  a  useful  life  for  these  assets  of  7  to  40   years.   See  Accompanying  Report  of  Independent  Registered  Public  Accounting  Firm   89 HERSHA 2012 ANNUAL REPORT                                 HERSHA  HOSPITALITY  TRUST  AND  SUBSIDIARIES   SCHEDULE  III  –  REAL  ESTATE  AND  ACCUMULATED  DEPRECIATION  AS  OF  DECEMBER  31,  2012   [IN  THOUSANDS]  (continued)   90 HERSHA 2012 ANNUAL REPORT                   Item  9.   Changes  in  and  Disagreements  with  Accountants  on  Accounting  and  Financial  Disclosure   None.   Item  9A.   Controls  and  Procedures   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.   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.   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,  2012.  Based  on   that  evaluation,  management  has  concluded  that,  as  of  December  31,  2012,  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,  2012  has  been  audited  by  KPMG  LLP,  an  independent  registered  public  accounting   firm,  as  stated  in  their  attestation  report  which  is  included  herein.   91 HERSHA 2012 ANNUAL REPORT                               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,  2012,  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  Annual   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,  2012,  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,   2012  and  2011,  and  the  related  consolidated  statements  of  operations,  comprehensive  income  (loss),  equity,  and   cash  flows  for  each  of  the  years  in  the  three-­‐year  period  ended  December  31,  2012,  and  our  report  dated  February   22,  2013  expressed  an  unqualified  opinion  on  those  consolidated  financial  statements.   /s/  KPMG  LLP   Philadelphia,  Pennsylvania   February  22,  2013   92 HERSHA 2012 ANNUAL REPORT                                             CHANGES  IN  INTERNAL  CONTROL  OVER  FINANCIAL  REPORTING   There  were  no  changes  in  our  internal  control  over  financial  reporting  during  the  quarter  ended  December   31,  2012,  that  have  materially  affected,  or  are  reasonably  likely  to  materially  affect,  our  internal  control  over   financial  reporting.   93 HERSHA 2012 ANNUAL REPORT       61503 Part 1_2011 Annual Layout 4/11/13 2:28 PM Page 2 T S U R T Y T I L A T I P S O H A H S R E H Hersha Hospitality Trust (HT) is a real estate investment trust (REIT) focused on the acquisition and aggressive asset management of upscale hotels in urban gateway markets. Hersha trades under the symbol HT on the New York Stock Exchange. As of March 31, 2013, the Company owned interests in 63 Upper Upscale, Upscale and Upper Midscale hotels totaling 9,129 rooms, primarily located in major metro and urban centers along the Northeast Corridor of the United States from Boston to New York City to Washington, D.C. as well as Miami and select markets in California. 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. Hersha Total Returns Since IPO in 1999 (1) 145.5% 141.7% 186.9% a h s r e h 102.4% 98.4% 94.5% 83.9% 70.4% 47.1% e d I n s it e o x R s s u o m p C 0 h ir 0 s e 0 k 2 r e ll B e a t h H E I T R A N y a w a W a l - M a o J o w D e u r d S t o I n r t e s n s s t ri a l L N S v S A U e g a o t e l e r H d I n E I T R x e W a lt y e n D i s . o C P & S 5 0 e 0 G E l e a l r e n -50.2% -7.9% c t ri c y n a o m p C r M o t o d r o F Hersha Portfolio by Location (2) Hersha Portfolio by Market Segment (2) New York City 43% Boston Metro & New England 15% Philadelphia Metro & Pennsylvania 14% Washington DC Metro 11% California & Arizona 7% New York & New Jersey Metro 6% Miami 4% Upper Midscale 51% Upscale Transient 29% Upscale Extended Stay 16% Upper Upscale 4% Hersha Portfolio by Hotel Brand (2) Hersha Portfolio by Destination (2) Hilton 29% Marriott 27% Intercontinental 23% Hyatt 9% Other 12% Major Metro 93% Destination 5% Secondary 2% (1) Total Returns from January 26, 1999 through December 31, 2012. Source: SNL Financial & Bloomberg. Index % weighted by Market Cap. Assumes dividends are reinvested. (2) Reflects continuing operations and pro-rata ownership share of 2012 EBITDA. Hersha’s Board of Trustees Hasu P. Shah Chairman, Hersha Hospitality Trust Jay H. Shah Chief Executive Officer, Hersha Hospitality Trust Donald J. Landry Lead Director, Hersha Hospitality Trust Former President & CEO, Sunburst Hospitality Inc. Michael A. Leven President and Chief Operating Officer Las Vegas Sands Corp. Thomas J. Hutchison III Former CEO, CNL Hotels & Resorts, Inc. Dianna F. Morgan Former Senior Vice President, Walt Disney World Co. Kiran P. Patel Chief Investment Officer, Hersha Group John M. Sabin Executive Vice President and CFO, Revolution LLC. and Case Foundation Hersha’s Management Team 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 Senior Vice President of Asset Management Robert C. Hazard III Senior Vice President of Acquisitions and Development Bennett Thomas Vice President of Finance and Sustainability (cid:13) (cid:13) (cid:13) WWW.HERSHA.COM 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” 61503 Part 1_2011 Annual Layout 4/11/13 2:28 PM Page 1 (cid:13) H E R S H A (cid:13) www.hersha.com (cid:13) 2012 A H S R E h e r s h a h o s p i t a l i t y t r u s tH hersha hospitality trust annual report 2012

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