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H E R S H A
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www.hersha.com
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2012
A
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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
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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%
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-50.2%
-7.9%
c t ri c
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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
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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
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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
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H E R S H A
(cid:13)
www.hersha.com
(cid:13)
2012
A
H
S
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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