Hersha Hospitality 10-Q 6-30-2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2006
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____ to ____
 
COMMISSION FILE NUMBER: 001-14765
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Maryland
 
251811499
  
 
(State or Other Jurisdiction of Incorporation or Organization)
  
(I.R.S. Employer Identification No.)
  

 
148 Sheraton Drive, Box A
      
 
New Cumberland, Pennsylvania
  
17070
  
 
(Address of Registrant’s Principal Executive Offices)
  
(Zip Code)
  

Registrant’s telephone number, including area code: (717) 770-2405
 
Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
 
x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
o Yes   x No
 
As of June 30, 2006, the number of Class A common shares of beneficial interest outstanding was 27,967,214.
 
 

Hersha Hospitality Trust
Table of Contents for Form 10-Q Report

Item No.
    
Page
     
PART I.
2
       
 
Item 1.
2
       
   
2
       
   
4
       
   
6
       
   
8
       
 
Item 2.
36
       
 
Item 3.
46
       
 
Item 4.
48
     
PART II.
49
       
 
Item 1.
49
       
 
Item 1A.
50
       
 
Item 2.
49
       
 
Item 3.
49
       
 
Item 4.
49
       
 
Item 5.
49
       
 
Item 6.
49
 

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.
 
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2006 [UNAUDITED] AND DECEMBER 31, 2005
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
(UNAUDITED)
      
   
June 30,
2006
  
December 31, 2005
  
Assets:
          
Investment in Hotel Properties, net of Accumulated Depreciation
  
$
488,195
  
$
317,980
  
Investment in Joint Ventures
    
55,370
   
55,981
  
Development Loan Receivables from Related Parties
    
32,016
   
32,450
  
Cash and Cash Equivalents
    
4,846
   
8,780
 
Escrow Deposits
    
10,345
   
7,329
  
Hotel Accounts Receivable
    
5,512
   
2,211
  
Deferred Costs, net of Accumulated Amortization of $1,169 and $1,437
    
5,256
   
4,131
  
Due from Related Parties
    
3,785
   
2,799
  
Intangible Assets, net of Accumulated Amortization of $536 and $478
    
5,415
   
4,681
  
Other Assets
    
20,273
   
15,606
  
Hotel Assets Held for Sale
    
17,140
   
3,407
  
               
Total Assets
  
$
648,153
  
$
455,355
  
               
Liabilities and Shareholders’ Equity:
              
Line of Credit
  
$
32,034
  
$
-
  
Mortgages and Notes Payable
    
343,109
   
256,146
 
Capital Lease Payable
    
739
   
-
 
Accounts Payable and Accrued Expenses
    
10,559
   
6,969
 
Advance Deposits
    
389
   
130
 
Dividends and Distributions Payable
    
6,623
   
5,151
 
Due to Related Parties
    
4,881
   
4,655
 
Liabilities Related to Hotel Assets Held for Sale
    
10,289
   
375
 
                       
Total Liabilities
  
$
408,623
    
273,426
 

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

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2006 [UNAUDITED] AND DECEMBER 31, 2005
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
(UNAUDITED)
      
   
June 30, 2006
  
December 31, 2005
  
Minority Interests:
          
Common Units
  
$
26,379
  
$
15,147
  
Interest in Consolidated Joint Ventures
    
2,955
   
2,079
  
               
Total Minority Interests
    
29,334
   
17,226
  
               
Shareholder's Equity:
              
Preferred Shares - 8% Series A, $.01 Par Value, 10,000,000 Shares Authorized, 2,400,000 Shares Issued and Outstanding at June 30, 2006 and December 31, 2005 (Aggregate Liquidation Preference $60,000 at June 30, 2006 and December 31, 2005, Respectively)
    
24
   
24
 
               
Common Shares - Class A, $.01 Par Value, 50,000,000 Shares Authorized, 27,824,464 and 20,302,752 Shares Issued and Outstanding at June 30, 2006 and December 31, 2005, Respectively
    
278
   
203
 
               
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, None Issued and Outstanding
    
-
   
-
 
Accumulated Other Comprehensive Income
    
478
   
327
 
Additional Paid-in Capital
    
250,047
   
193,228
 
Distributions in Excess of Net Income
    
(40,631
)
  
(29,079
)
               
Total Shareholder's Equity
    
210,196
   
164,703
 
                 
Total Liabilities and Shareholders’ Equity
  
$
648,153
  
$
455,355
  

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


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED] 
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
Revenue:
                  
Hotel Operating Revenues
  
$
38,183
  
$
19,122
  
$
62,084
  
$
30,126
  
                           
Expenses:
                          
Hotel Operating Expenses
    
21,392
   
10,857
   
37,350
   
18,952
 
Land Lease
    
216
   
109
   
378
   
217
 
Real Estate and Personal Property Taxes and Property Insurance
    
1,460
   
837
   
2,947
   
1,611
 
General and Administrative
    
1,812
   
1,135
   
2,976
   
2,113
 
Depreciation and Amortization
    
4,609
   
2,096
   
8,405
   
3,751
 
Total Operating Expenses
    
29,489
   
15,034
   
52,056
   
26,644
 
                           
Operating Income
    
8,694
   
4,088
   
10,028
   
3,482
 
                           
Interest Income
    
322
   
64
   
480
   
101
 
Interest Income - Secured Loans Related Party
   
295
   
911
   
723
   
1,911
 
Other Revenue
    
230
   
159
   
424
   
203
 
Interest Expense
    
5,923
   
2,633
   
11,541
   
4,259
 
Debt Extinguishment
    
908
   
-
   
1,163
   
-
 
Income (loss) before income (loss) from Unconsolidated Joint Venture Investments, Minority Interests and Discontinued Operations
    
2,710
   
2,589
   
(1,049
)
  
1,438
 
                           
Income (loss) from Unconsolidated Joint Venture Investments
    
769
   
279
   
(341
)
  
328
 
                           
Income (Loss) before Minority Interests and Discontinued Operations
    
3,479
   
2,868
   
(1,390
)
  
1,766
 
                           
Income (Loss) allocated to Minority Interests in Continuing Operations
    
690
   
399
   
(325
)
  
157
 
Income (Loss) from Continuing Operations
    
2,789
   
2,469
   
(1,065
)
  
1,609
 
                       
Discontinued Operations (Note 12):
                          
Gain on Disposition of Hotel Properties
    
434
   
1,161
   
434
   
1,161
 
Income (Loss) from Discontinued Operations
    
153
   
125
   
123
   
9
 
Income from Discontinued Operations
    
587
   
1,286
   
557
   
1,170
 
                           
Net Income (Loss)
    
3,376
   
3,755
   
(508
)
  
2,779
 
Preferred Distributions
    
1,200
   
-
   
2,400
   
-
 
                           
Net Income (Loss) applicable to Common Shareholders
  
$
2,176
  
$
3,755
  
$
(2,908
)
$
2,779
  

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


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
Earnings Per Share:
                  
BASIC
                  
Income (loss) from continuing operations applicable to common shareholders
  
$
0.06
  
$
0.12
  
$
(0.15
)
$
0.08
  
Income from Discontinued Operations
  
$
0.03
  
$
0.07
  
$
0.02
  
$
0.06
  
                           
Net Income (Loss) applicable to common shareholders
  
$
0.09
  
$
0.19
  
$
(0.13
)
$
0.14
  
                           
DILUTED
                          
Income (loss) from continuing operations applicable to common shareholders
  
$
0.06
  
$
0.12
  
$
(0.15
) *
$
0.08
  
Income from Discontinued Operations
  
$
0.03
  
$
0.06
  
$
0.02
   *
$
0.06
  
                           
Net Income (Loss) applicable to common shareholders
  
$
0.09
  
$
0.18
  
$
(0.13
) *
$
0.14
  
                           
Weighted Average Common Shares Outstanding:
                          
Basic
   
25,469,708
   
20,293,169
   
22,903,225
   
20,292,167
 
Diluted
    
29,056,539
   
23,159,013
   
22,903,225
  *  
23,146,372
 

*
Partnership units and stock awards have been omitted from the denominator for the purpose of computing diluted earnings per share for the six months ended June 30, 2006 since the effect of including these amounts in the denominator would be anti -dilutive.

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


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

   
June 30, 2006
  
June 30, 2005
  
Operating activities:
          
Net (Loss) Income
 
$
(508
)
$
2,779
  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
              
Gain on disposition of hotel assets held for sale
    
(497
)
  
(1,323
)
Depreciation
    
8,591
    
4,370
 
Amortization
    
563
   
184
 
Debt Extinguishment
    
1,163
   
-
 
(Loss) income allocated to minority interests
    
(238
)
  
320
 
Equity in loss (income) of unconsolidated joint ventures
    
341
   
(328
)
Distributions from unconsolidated joint ventures
    
1,135
   
-
 
Gain recognized on change in fair value of derivative instrument
    
(65
)
  
(7
)
Stock based compensation expense
    
103
   
-
 
Change in assets and liabilities:
              
(Increase) decrease in:
              
Hotel accounts receivable
   
(3,217
)
  
(1,971
)
Escrow deposits
    
(1,326
)
  
(3,190
)
Other assets
    
870
   
(2,019
)
Due from related party
    
(986
)
  
(455
)
Increase (decrease) in:
              
Advance deposits
    
259
   
164
 
Due to related party
    
178
   
688
 
Accounts payable and accrued expenses
    
3,695
   
6,290
 
Net cash provided by operating activities
    
10,061
   
5,502
 
               
Investing activities:
              
Purchase of hotel property assets
    
(144,816
)
  
(135,448
)
Capital expenditures
    
(5,124
)
  
(1,222
)
Proceeds from disposition of hotel assets held for sale
    
3,665
   
5,570
 
Deposits on hotel acquisitions
    
(15,207
)
  
(6,700
)
Purchase of franchise fees
    
(48
)
  
(347
)
Investment in common stock of Trust entities
    
-
   
(1,548
)
Investments in notes receivable
    
-
   
(442
)
Repayment of notes receivable
    
1,843
   
-
 
Investment in development loans to related parties
    
(33,116
)
  
(17,032
)
Repayment of development loans to related parties
    
33,550
   
-
 
Distributions from unconsolidated joint venture
    
3,153
   
392
 
Investments in and advances to unconsolidated joint ventures
    
(4,018
)
  
-
 
Net cash used in investing activities
    
(160,118
)
  
(156,777
)

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


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

   
June 30, 2006
  
June 30, 2005
  
Financing activities:
          
Proceeds from borrowings under line of credit
    
115,702
   
97,825
 
Repayment of borrowings under line of credit
    
(83,668
)
  
(96,907
)
Principal repayment of mortgages and notes payable
    
(57,796
)
  
(1,881
)
Proceeds from mortgages and notes payable
    
119,933
   
150,191
 
Proceeds from settlement of interest rate derivative
    
79
   
-
 
Cash paid for deferred financing costs
    
(455
)
  
(2,292
)
Proceeds from issuance of common stock
    
63,766
   
-
 
Stock issuance costs
    
(413
)
  
-
 
Distributions to consolidated joint venture minority interest
    
(150
)
  
(73
)
Contributions from consolidated joint venture minority interest
    
-
   
198
 
Dividends paid on common shares
    
(7,336
)
  
(7,319
)
Dividends paid on preferred shares
    
(2,400
)
  
-
 
Distributions paid on common partnership units
    
(1,139
)
  
(1,023
)
Net cash provided by financing activities
    
146,123
   
138,719
 
               
Net decrease in Cash and Cash Equivalents
   
(3,934
)
  
(12,556
)
Cash and Cash Equivalents - beginning of period
    
8,780
   
20,614
 
               
Cash and Cash Equivalents - end of period
  
$
4,846
  
$
8,058
  

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


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Hersha Hospitality Trust (“we” or the “Company”) was formed in May 1998 as a self-administered, Maryland real estate investment trust (“REIT”) for Federal income tax purposes.
 
The Company owns a controlling general partnership interest in Hersha Hospitality Limited Partnership (the “Partnership”), which owns a 99% limited partnership interest in various subsidiary partnerships. Hersha Hospitality, LLC (“HHLLC”), a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships and the Partnership is the sole member of HHLLC.
 
The Partnership formed a wholly owned taxable REIT subsidiary, 44 New England Management Company (“44 New England” or “TRS Lessee”), to lease certain of the Company’s hotels.
 
As of June 30, 2006, the Company, through the Partnership and subsidiary partnerships, owned forty limited and full service hotels. All of the owned hotel facilities are leased to the Company’s taxable REIT subsidiary (“TRS”), 44 New England.
 
In addition to the wholly owned hotel properties, as of June 30, 2006, the Company owned joint venture interests in nineteen properties. The properties owned by the joint ventures are leased to a TRS owned by the joint venture or to an entity owned by the joint venture partners and 44 New England. The following table lists the properties owned by these joint ventures:
 
Joint Venture
  
Ownership
  
Property
  
Location
  
Lessee
                 
Unconsolidated Joint Ventures
                
Inn America Hospitality at Ewing, LLC
 
50.0%
 
Courtyard
 
Ewing/Princeton, NJ
 
Hersha Inn America TRS Inc.
HT CNL Metro Hotels, LP
 
33.3%
 
Hampton Inn
 
Chelsea/Manhattan, NY
 
Hersha/CNL TRS Inc
PRA Glastonbury, LLC
 
40.0%
 
Hilton Garden Inn
 
Glastonbury, CT
 
Hersha PRA TRS, Inc
PRA Suites at Glastonbury, LLC
 
40.0%
 
Homewood Suites
 
Glastonbury, CT
 
Hersha PRA LLC
Mystic Partners, LLC
 
66.7%
 
Marriott
 
Mystic, CT
 
Mystic Partners Leaseco, LLC
 
  
8.8%
  
Hilton
  
Hartford, CT
  
Mystic Partners Leaseco, LLC
 
  
66.7%
  
Courtyard
  
Norwich, CT
  
Mystic Partners Leaseco, LLC
 
  
66.7%
  
Courtyard
  
Warwick, RI
  
Mystic Partners Leaseco, LLC
 
  
66.7%
  
Residence Inn
  
Danbury, CT
  
Mystic Partners Leaseco, LLC
 
  
66.7%
  
Residence Inn
  
Mystic, CT
  
Mystic Partners Leaseco, LLC
 
  
44.7%
  
Residence Inn
  
Southington, CT
  
Mystic Partners Leaseco, LLC
 
  
66.7%
  
Springhill Suites
  
Waterford, CT
  
Mystic Partners Leaseco, LLC
 
 
15.0%
 
Marriott
 
Hartford, CT
 
Mystic Partners Leaseco, LLC
Hiren Boston, LLC
 
50.0%
 
Courtyard
 
South Boston, MA
 
South Bay Boston, LLC
SB Partners, LLC
 
50.0%
 
Holiday Inn Express
 
South Boston, MA
 
South Bay Sandeep, LLC
                 
Consolidated Joint Ventures
                
Logan Hospitality Associates, LLC
 
55.0%
 
Four Points - Sheraton
 
Revere/Boston, MA
 
Revere Hotel Group, LLC
LTD Associates One, LLC
 
75.0%
 
Springhill Suites
 
Williamsburg, VA
 
HT LTD Williamsburg One LLC
LTD Associates Two, LLC
 
75.0%
 
Residence Inn
 
Williamsburg, VA
 
HT LTD Williamsburg Two LLC
Affordable Hospitality Associates, LP
 
80.0%
 
Hampton Inn
 
Philadelphia, PA
 
Philly One TRS, LLC
 
Hersha Inn America TRS Inc; Hersha/CNL TRS Inc.; Hersha PRA TRS, Inc; South Bay Sandeep, LLC; and Revere Hotel Group, LLC, are each a TRS wholly-owned by their respective joint ventures. Mystic Partners, LLC owns an interest in nine hotel properties. Our interest in Mystic Partners, LLC is relative to our interest in each of the nine properties owned by the joint venture as defined in the joint venture’s governing documents. Each of the nine properties owned by Mystic Partners, LLC is leased to a separate entity that is consolidated in Mystic Partners Leaseco, LLC which is owned by 44 New England and our joint venture partner in Mystic Partners, LLC. Hersha PRA LLC, South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC, Philly One TRS, LLC, lease properties from each respective joint venture and are owned by 44 New England and our joint venture partner in each venture.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
44 New England and the joint venture TRS lessees lease the hotel properties pursuant to separate percentage lease agreements (the “Percentage Leases”) that provide for percentage rents based on the revenues of the hotels. Hersha Hospitality Management, LP (“HHMLP”) serves as the manager for all of the wholly owned assets and joint venture assets, except for the properties owned by Mystic Partners, LLC; Hiren Boston, LLC; SB Partners, LLC; LTD Associates One, LLC; and LTD Associates Two, LLC. These properties are managed by parties related to our partners in those joint ventures. HHMLP is owned in part by four 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 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. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or consolidated pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2005. In management’s opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of the Company and the consolidated results of its operations and its cash flows, are included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
 
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 or we maintain control of the asset through our voting interest in the entity. Control could also be demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the limited partners and the inability of the limited partners to replace the general partner.
 
We follow the provisions of Financial Accounting Standards Board FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (VIE’s), an interpretation of Accounting Research Bulletin No. 51 (ARB No. 51),” as revised.(“FIN 46R”). FIN 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in any variable interest entity (“VIE”) through means other than voting rights, and accordingly, should include the VIE in its consolidated financial statements.
 
In July of 2005, the Emerging Issues Task Force (EITF) agreed on a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate it. EITF Issue 04-5, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” (EITF 04-5), amends the guidance in AICPA Statement of Position No. 78-9, “Accounting for Investments in Real Estate Ventures” (SOP 78-9) and states that the presumption of general-partner control would be overcome only when the limited partners have either of two types of rights. The first type—referred to as “kick-out rights”—is the right to dissolve or liquidate the partnership or otherwise remove the general partner “without cause.” The second type—referred to as “participating rights”—is the right to effectively participate in significant decisions made in the ordinary course of the partnership’s business. The kick-out rights and the participating rights must be substantive in order to overcome the presumption of general-partner control. EITF 04-5’s guidance is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. The guidance will be effective for existing limited-partnership agreements no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. As of January 1, 2006, the Company has adopted EITF 04-5 for all partnerships. The adoption of EITF 04-5 did not have a material effect on its consolidated financial statements.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

Our investments and contractual relationships with the following entities have been evaluated to determine whether they meet the guidelines of consolidation in accordance with FIN 46: HHMLP; Logan Hospitality Associates, LLC; HT CNL Metro Hotels, LP; PRA Glastonbury, LLC; PRA Suites at Glastonbury, LLC; Hersha PRA LLC; Inn America Hospitality at Ewing, LLC; Mystic Partners, LLC; Mystic Partners Leaseco, LLC; Hiren Boston, LLC; South Bay Boston, LLC, SB Partners, LLC; LTD Associates One, LLC; HT LTD Williamsburg LLC; LTD Associates Two, LLC; HT LTD Williamsburg Two LLC; Hersha Statutory Trust I; Hersha Statutory Trust II; Affordable Hospitality Associates, LP; Philly One TRS, LLC; and Risingsam Hospitality, LLC, Risingsam Union Square, LLC, and Brisam Management, LLC.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Our examination consisted of reviewing the sufficiency of equity at risk, controlling financial interests, voting rights, and the obligation to absorb expected losses and expected gains, including residual returns. Based on our examination, each of the following entities were determined to be VIE’s: Mystic Partners, LLC; Mystic Partners Leaseco, LLC; Hersha PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC; Philly One TRS, 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. Also, Mystic Partners Leaseco, LLC; Hersha PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC; and Philly One TRS, LLC lease hotel properties from our joint venture interests and are variable interest entities. These entities are consolidated by the lessors, the primary beneficiaries of each entity. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs but HHLP is not the primary beneficiary in these entities. The accounts of Hersha Statutory Trust I and Hersha Statutory Trust II are not consolidated with and into HHLP.
 
We have consolidated the operations of the Logan Hospitality Associates, LLC; LTD Associates One, LLC; LTD Associates Two, LLC; and Affordable Hospitality Associates, LP joint ventures because each entity is a voting interest entity and the Company owns a majority voting interest in the venture.
 
Our investments in HT/CNL Metro Hotels, LP; PRA Glastonbury, LLC; PRA Suites at Glastonbury, LLC; Inn America Hospitality at Ewing, LLC; Hiren Boston, LLC; and SB Partners, LLC represent non-controlling ownership interests in the ventures. All of these entities are voting interest entities. These investments are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for our share of equity in income (loss), which is allocated in accordance with the provisions of the applicable partnership or joint venture agreements, and subsequent contributions or distributions in these entities.
 
We hold an investment in development loan receivables with Risingsam Union Square, LLC, Risingsam Hospitality, LLC, and Brisam Management, LLC. We have determined that each borrower has sufficient equity at risk, a controlling financial interest and an obligation to absorb expected losses and expected gains, including residual returns of the entity. These entities are voting interest entities and because we have no voting interest they are not consolidated.
 
We will continue to evaluate each of our investments and contractual relationships to determine if consolidation is required based upon the provisions of FIN 46.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Investment in Hotel Properties
 
Investment in hotel properties is stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method.
 
The estimated lives used to depreciate the hotel properties are as follows:
 
Building and Improvements
15 to 40 Years
 
 
Furniture, Fixtures and Equipment
5 to 7 Years
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition
 
We directly recognize revenue and expense for all consolidated hotels as “Hotel Operating Revenue” and “Hotel Operating Expense” when earned and incurred. Included in hotel operating revenues is primarily room revenues and revenue from other hotel operating departments. 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.
 
Stock Compensation
 
We apply Statement of Financial Accounting Standards No. 123R, “Share-Based Payments” (SFAS 123R) where by 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 cost is recognized over the period during which an employee is required to provide service in exchange for the award.
 
Minority Interest
 
Minority Interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income (Loss) is allocated to minority interest in accordance with the weighted average percentage ownership of the Partnership during the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted average percentage ownership of the Partnership during the period. Our ownership interest in the Partnership as of June 30, 2006 and 2005 was 88.9% and 87.7%, respectively.
 
We also maintain minority interests for the equity interest owned by third parties in Logan Hospitality Associates, LLC; LTD Associates One, LLC; LTD Associates Two, LLC; and Affordable Hospitality, LP. Third parties own a 45% interest in Logan Hospitality Associates, LLC; a 25% interest in each of LTD Associates One LLC and LTD Associates Two, LLC; and a 20% interest in Affordable Hospitality Associates, LP. We allocate the income (loss) of these joint ventures to the minority interest in consolidated joint venture account based upon the ownership of the entities, preferences in distributions of cash available and the terms of each ventures liquidation.
 
Shareholder’s Equity
 
On August 5, 2005, we completed a public offering of 2,400,000 of 8.00% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share. Net proceeds of the offering, less expenses and underwriters commissions, were approximately $57,750. Proceeds from the offering were used to finance the acquisition of the Company’s interests in Mystic Partners, LLC and SB Partners, LLC. The remaining net proceeds have been principally allocated to fund secured development loans and for general corporate purposes.
 
On April 28, 2006, we completed a public offering of 6,520,000 common shares at $9.00 per share. On May 9, 2006, the underwriter exercised its over-allotment option with respect to that offering, and we issued an additional 977,500 common shares at $9.00 per share. Proceeds to us, net of underwriting discounts and commissions and expenses, were approximately $63,400. Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $30,000 was used to repay indebtedness and approximately $19,500 was used to fund property acquisitions.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 1  - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Impairment of Long-Lived Assets
 
We review the carrying value of each hotel property in accordance with SFAS No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell.
 
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.
 
Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, the Company is permitted to lease hotels to a wholly owned taxable REIT subsidiary (“TRS”) and may continue to qualify as a REIT provided the TRS enters into management agreements with an “eligible independent contractor” who will manage the hotels leased by the TRS. The Company formed the TRS Lessee in 2003. The TRS Lessee currently leases 40 properties from the Partnership. The TRS Lessee is subject to taxation as a C-Corporation. The TRS Lessee had operating income for financial reporting purposes for the period ended June 30, 2006, however no income taxes are recorded in the Consolidated Statement of Operations because net operating loss carryforwards are sufficient to offset tax liabilities incurred as a result of this operating income.
 
Although the TRS Lessee is expected to operate at a profit for Federal income tax purposes in future periods, the value of the deferred tax asset is not able to be quantified with certainty. Therefore, no deferred tax assets have been recorded as we have not concluded that it is more likely than not that these deferred tax assets will be realizable.
 
Reclassification
 
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES

Investment in Hotel Properties consist of the following at June 30, 2006 and December 31, 2005:
 
   
June 30, 2006
  
December 31, 2005
  
           
Land
  
$
79,990
  
$
32,430
  
Buildings and Improvements
    
395,356
   
283,791
 
Furniture, Fixtures and Equipment
    
61,111
   
43,528
 
Construction in Progress
    
1,553
   
-
 
     
538,010
   
359,749
 
               
Less Accumulated Depreciation
    
(49,815
)
  
(41,769
)
               
Total Investment in Hotel Properties
  
$
488,195
  
$
317,980
  
 
2006 Transactions
 
The following acquisitions were made by HHLP, our operating partnership.
 
New Jersey and Pennsylvania Portfolio. On January 3, 2006, we acquired the 118-room Fairfield Inn & Suites in Mt. Laurel, New Jersey, the 103-room Fairfield Inn & Suites in Bethlehem, New Jersey, and the 118-room Langhorne Courtyard in Langhorne, Pennsylvania in one transaction, for a total purchase price of approximately $41,261 which included $250 in deposits included in the balance sheet on December 31, 2005. The total purchase price is subject to a post closing adjustment on June 30, 2007, which may increase the purchase price by an amount of up to $2,500.
 
Courtyard, Scranton, Pennsylvania. On February 1, 2006, we acquired the 120-room Courtyard in Scranton, Pennsylvania for approximately $8,817 in cash.
 
Residence Inn, Tyson’s Corner, Virginia. On February 2, 2006, we acquired the 96-room Residence Inn in Tyson’s Corner, Virginia for approximately $20,130 which included the assumption of $9,596 in debt.
 
Hampton Inn, Philadelphia, Pennsylvania. On February 15, 2006, we acquired an 80% interest in Affordable Hospitality Associates, LP, the owner of the land, improvements and certain personal property of the 250-room Hampton Inn (Center City) in Philadelphia for approximately $25,067 which included $3,000 in deposits included in the balance sheet on December 31, 2005. Our ownership interest entitles us to a 9.0% participating preferred return on our capital contribution.
 
Hilton Garden Inn, JFK Airport, New York. On February 16, 2006, we acquired 100% of the outstanding ownership interests in Metro JFK Associates, LLC, the owner of a leasehold interest in the land, improvements and certain personal property of the Hilton Garden Inn - JFK Airport, located in Jamaica, New York, for approximately $29,165. The purchase price includes the assumption of $13,000 in debt, $6,000 in newly issued units of our operating partnership, $5,000 in deposits that were on the balance sheet as of December 31, 2005, and cash.
 
KW Portfolio. On April 25, 2006 we acquired the 100-room Hawthorn Inn & Suites in Franklin, Massachusetts for $12,034. On May 1, 2006, we acquired the 96-room Residence Inn and the 84-room Comfort Inn for $14,811 and $4,838, respectively.
 
Holiday Inn Express, Cambridge, Massachusetts. On May 3, 2006, we acquired the 112-room Holiday Inn Express, Cambridge, Massachusetts for approximately $12,227.
 
Land- 39th and 8th Avenue. On June 28, 2006, we purchased land at 39th and 8th Avenue, New York City, for $21,774 plus closing costs and leased the land to Metro 39th Street Associates, LLC, a related party.
 
In addition, in June, the Company signed definitive agreements to purchase the 161-room Hampton Inn in Farmingville, New York and the seven story 133-room Holiday Inn Express in Hauppauge, New York for a total of $39.5 million.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (Continued)

The purchase price, including transaction costs, and the allocation of purchase price to land; building and improvements; furniture, fixtures and equipment; and franchise fees and loan costs is as follows:

Hotel
 
Location
  
Acquisition Date
 
Land
 
Buildings and Improvements
 
Furniture Fixtures and Equipment
 
Franchise Fees and Loan Costs
 
Leasehold Intangible
  
Total Purchase Price
 
Assumed Debt
 
NJ and PA Portfolio
          
1/3/2006
  
$
6,207
  
$
30,951
  
$
3,978
  
$
125
    
-
 
$
41,261
    
-
 
Courtyard by Marriott
    
Scranton, PA
    
2/1/2006
    
761
   
7,168
   
831
   
57
   
-
 
$
8,817
    
-
 
Residence Inn
    
Tyson’s Corner, VA
    
2/2/2006
    
11,233
   
7,306
   
1,390
   
201
   
-
 
$
20,130
    
9,596
 
Hilton Garden Inn
    
JFK Airport, NY
    
2/16/2006
    
N/A
   
25,001
   
3,621
   
317
   
226
 
$
29,165
    
13,000
 
KW Portfolio
    
Massachusetts
    
4/25/2006, 5/1/2006
    
4,708
   
22,863
   
3,919
   
193
   
-
 
$
31,683
    
9,020
 
Holiday Inn Express
    
Cambridge, Massachusetts
    
5/3/2006
    
1,956
   
9,827
   
444
   
-
   
-
 
$
12,227
    
-
 
8th Avenue
    
New York
    
6/28/2006
    
21,774
   
-
   
-
   
-
   
-
 
$
21,774
    
-
 
Total Wholly Owned Acquisitions
      
$
46,639
  
$
103,116
  
$
14,184
  
$
893
  
$
226
  
$
165,057
  
$
31,616
  
     
 
                                                  
Hampton Inn (Affordable Hospitality)
   
Philadelphia, PA
   
2/15/2006
  
$
2,928
  
$
21,062
  
$
3,029
  
$
117
  
$
-
  
$
27,136
  
$
873
  
Total Consolidated Joint Venture Acquisitions
$
2,928
  
$
21,062
  
$
3,029
  
$
117
  
$
-
  
$
27,136
  
$
873
  
     
 
                                                  
Total 2006 Acquisitions
      
$
49,567
  
$
124,178
  
$
17,213
  
$
1,010
  
$
226
  
$
192,193
  
$
32,489
  

All of the newly acquired wholly owned hotels are leased to the TRS Lessee and managed by HHMLP. The Hampton Inn, Philadelphia, Pennsylvania is leased to an entity that is owned by the TRS Lessee and our joint venture partner.
 
Included in the acquisition of the Hilton Garden Inn at the JFK Airport, New York, was a land lease for the underlying land with a remaining term of approximately 93 years. The remaining lease payments were determined to be below market value and as a result purchase price was allocated to an intangible asset with a value of $226. Included in the acquisition of the Courtyard by Marriott in Brookline, Massachusettes in 2005, was a prepaid land lease for the underlying land with a remaining term of approximately 90 years. This prepaid land lease is classified as an intangible asset with a value of $3,570. Both lease intangibles are recorded in other assets on the consolidated balance sheet and are being amortized over the remaining life of the leases.
 
The interest rate on the fixed rate debt assumed in the acquisitions of the KW Portfolio is 5.67% and was below the market rate of interest on the date of the acquisition. As a result, a discount of $354 was recorded and reduces the principal balance recorded in mortgages and notes payable. The discount is being amortized over the remaining life of the debt and is recorded as interest expense. Interest rates on debt assumed in the acquisition of Residence Inn, Tyson’s Corner, Virginia and Hilton Garden Inn, JFK Airport, New York were at market rates.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES (Continued)
 
Subsequent to June 30, 2006, we closed on the acquisition of the following property or entered into a contract for the following transaction:
 
Residence Inn, Norwood, Massachusetts. On July 27, 2006, we purchased the newly constructed 96-room Residence Inn in Norwood, Massachusetts for approximately $14,925. The purchase price includes the assumption of $8,000 in debt, $3,940 in newly issued units of our operating partnership, and $2,985 in cash.
 
Holiday Inn Conference Center, New Cumberland, Pennsylvania. We terminated our lease with 44 New England for the Holiday Inn Conference Center in New Cumberland, Pennyslvania. Effective July 1, 2006, we now lease the hotel to a third party, who has committed to purchase the property at the end of the five-year lease term.
 
Land - 41st Street, New York. On July 28, 2006, we purchased land at 440 West 41st Street, New York City, for $21,500 plus closing costs and leased the land to Metro Forty First Street, LLC, a related party.

The following condensed pro forma financial is presented as if the acquisitions of the KW Portfolio; Holiday Inn Express, Cambridge; NY and PA Portfolio; Courtyard by Marriott, Scranton, Pennsylvania; Residence Inn, Tyson’s Corner, Virginia; Hampton Inn, Philadelphia, Pennsylvania; Fairfield Inn, Laurel, Maryland; McIntosh Portfolio; Courtyard by Marriott, Brookline, Massachussettes; Springhill Suites, Williamsburg, Virginia; and Residence Inn, Williamsburg, Virginia had been consummated as of January 1, 2005. All of the other acquisitions listed above were either purchased without any operating history or did not have a full year's operating history in 2005. The condensed pro forma information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated at the beginning of the respective periods presented, nor does it purport to represent the results of operations for future periods.
           
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
Pro Forma Total Revenues
  
$
39,215
  
$
34,903
  
$
68,013
  
$
59,184
  
Pro Forma Income (Loss) from Continuing Operations
  
$
2,824
  
$
4,628
  
$
(311
)
$
2,989
  
Pro Forma Income (Loss) from Continuing Operations per Common Share-Basic
  
$
0.11
  
$
0.23
  
$
(0.01
)
$
0.15
  
Pro Forma Income (Loss) from Continuing Operations per Common Share-Diluted
  
$
0.11
  
$
0.23
  
$
(0.01
)
$
0.15
  
                           
Weighted Average Common Shares Outstanding
                          
Basic
   
25,469,708
   
20,293,169
   
22,903,225
   
20,292,167
 
Diluted
    
29,056,539
   
23,159,013
   
22,903,225
   
23,146,372
 


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
On August 29, 2003, HT/CNL Metro Hotels, LP purchased the Hampton Inn, (Manhattan) Chelsea, NY. We own a one-third equity interest in this joint venture partnership while CNL Hospitality Partners LP owns the remaining equity interests.
 
On November 13, 2003, we purchased a 40% joint venture interest in PRA Glastonbury, LLC. The only asset owned by PRA Glastonbury, LLC is the Hilton Garden Inn, Glastonbury, CT.
 
On July 1, 2004, we purchased a 50% joint venture interest in Inn America Hospitality at Ewing, LLC. The only asset owned by this entity is the Courtyard by Marriott, Ewing-Hopewell, NJ.
 
On July 1, 2005, we acquired a 49.9% interest in Hiren Boston. LLC (“Hiren”), the owner of a 164 room Courtyard by Marriott in South Boston, Massachusetts, for approximately $5,031, including settlement costs of approximately $331. This hotel is leased to South Bay Boston, LLC, a joint venture owned by 44 New England and our joint venture partner, and managed by an affiliate of our joint venture partner. Our joint venture partner and the manager of the property are unaffiliated with the Company. The Hiren joint venture agreement provides for a 10% preferred return during the first two years of the venture based on our equity interest in Hiren. Cash distributions will be made from cash available for distribution, first, to us to provide a 10% annual non-compounded return on our capital contributions and then to our joint venture partner to provide a 10% annual non-compounded return of their contributions. The 10% returns are not cumulative. Any remaining cash available for distribution will be distributed 50% to us. Subsequent to this initial two year period, cash distributions will be made 50% to us and 50% to our joint venture partners in Hiren. In accordance with AICPA Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” (SOP 78-9), Hiren will allocate income to HHLP and our joint venture partner consistent with the allocation of cash distributions and liquidating distributions.
 
On October 7, 2005, we acquired a 49.9% interest in SB Partners, LLC (“SB Partners”), the owner of a 118 room Holiday Inn Express in South Boston, Massachusetts, for approximately $2,250. This hotel will be leased to South Bay Sandeep, LLC, a TRS wholly owned by SB Partners, and managed by an affiliate of our joint venture partner. Our joint venture partner and the manager of the property are owned by certain members that have an interest in Hiren and are unaffiliated with the Company. The SB Partners joint venture agreement provides for a 10% preferred return during the first two years of the venture based on our equity interest in SB Partners. Cash distributions will be made from cash available for distribution, first, to us to provide a 10% annual non-compounded return on our capital contributions and then to our joint venture partner to provide a 10% annual non-compounded return of their contributions. The 10% returns are not cumulative. Any remaining cash available for distribution will be distributed 50% to us. Subsequent to this initial two year period, cash distributions will be made 50% to us and 50% to our joint venture partners in SB Partners. In accordance with SOP 78-9, SB Partners allocates income to us and our joint venture partner consistent with the allocation of cash distributions and liquidating distributions.
 
In June 2005, we entered into a joint venture with Waterford Hospitality and Mystic Hotel Investors, LLC (“MHI,” and together with Waterford, the “MHI Parties”), pursuant to which the parties agreed to establish Mystic Partners, LLC (“Mystic”). The MHI Parties contributed to Mystic Partners its membership interests in a portfolio of nine entities that own nine Marriott- or Hilton-branded hotels in Connecticut and Rhode Island. Aggregate fair value of the contributed properties was approximately $250,000. We contributed approximately $40,000 in cash to Mystic Partners in exchange for a 66.7% preferred equity interest in the seven stabilized hotel properties in the portfolio and a 50% preferred equity interest in the two newly-developed hotel properties in the portfolio, subject to minority interest participations in certain hotels.
 
On February 8, 2006, Mystic Partners closed on the acquisition of the 409 room Hartford Marriott in Hartford, Connecticut, the final hotel in the portfolio to be acquired by Mystic. The acquisition included the hotel, improvements, certain personal property and a pre-paid airspace sublease relating to airspace comprising a portion of the Hartford Convention Center. We contributed approximately $6,700 to Mystic Partners, and the Waterford Parties contributed its Membership Interests in the Owner of the Hartford Marriott. In conjunction with this closing, the Mystic Partners agreed to adjust each party’s equity ownership interest in the two development properties, the Hartford Hilton and the Hartford Marriott, as follows:
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (Continued)
 
   
Hersha
  
MHI Parties
  
Hartford Hilton
    
8.8
%
  
79.2
%
Hartford Marriott
    
15.0
%
  
81.0
%
 
Both the Hartford Hilton and the Hartford Marriott properties maintain minority interest ownership from unrelated third party investors for approximately 12.0% and 4.0%, respectively.
 
Additionally, the amendment provides us with the option to purchase up to a 50.0% equity ownership interest in Mystic Partners’ equity interest in the Hartford Hilton and the Hartford Marriott, respectively, at a price determined in accordance with the Amendment. Also, the Company entered into an agreement whereby we and MHI 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, 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 falls below the amount of the guarantee.
 
The Mystic Partners joint venture agreement provides for an 8.5% preferred return based on our preferred equity interest in the stabilized and newly-developed hotel properties. 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 the Waterford Parties to provide an 8.5% annual non-compounded return of their unreturned contributions. The 8.5% returns are not cumulative. Any remaining cash available for distribution will be distributed to us 56.7%, with respect to the net cash flow from the stabilized properties, 10.5% with respect to the net cash flow from the Hartford Marriott, and 7.0% with respect to the Hartford Hilton. In accordance with SOP 78-9, Mystic Partners will allocate income to us and the Waterford Parties consistent with the allocation of cash distributions and liquidating distributions.
 
The nine hotels acquired by Mystic through June 30, 2006 are:
 
Hotel Name
  
Location
  
Date Acquired
  
Owner
  
Hersha Ownership
  
Number of Rooms
Mystic Marriott Hotel & Spa
 
Mystic, CT
 
August 9, 2005
  
Exit 88 Hotel, LLC
  
66.7%
  
285
Danbury Residence Inn
 
Danbury, CT
 
August 9, 2005
  
Danbury Suites, LLC
  
66.7%
 
78
Southington Residence Inn
 
Southington, CT
 
August 9, 2005
  
Southington Suites, LLC and 790 West Street, LLC
  
44.7%
  
94
Norwich Courtyard by Marriott and Rosemont Suites
 
Norwich, CT
 
August 9, 2005
  
Norwich Hotel, LLC
  
66.7%
  
144
Warwick Courtyard by Marriott
 
Warwick, RI
 
August 9, 2005
  
Warwick Lodgings, LLC
  
66.7%
  
92
Waterford SpringHill Suites
 
Waterford, CT
 
August 9, 2005
  
Waterford Suites, LLC
  
66.7%
  
80
Mystic Residence Inn
  
Mystic, CT
 
September 15, 2005
  
Whitehall Mansion Partners, LLC
  
66.7%
  
133
Hartford Hilton
  
Hartford, CT
  
October 6, 2005
  
315 Trumbull Street, LLC
  
8.8%
  
393
Marriott Downtown
  
Hartford, CT
 
February 8, 2006
  
Adriaen’s Landing Hotel, LLC
  
15.0%
  
409


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
Each of the Mystic Partners hotel properties, except the Hartford Hilton, is under an Asset Management Agreement with 44 New England to provide asset management services. Fees for these services are paid monthly to 44 New England and recognized as income in the amount 1% of operating revenues, except for the Hartford Marriott which is 0.25% of operating revenues. Each property owned by the joint venture is managed by Waterford Hotel Group, Inc., an affiliate of MHI Parties. The property manager will receive a base fee of 3% or 4% of gross revenues of the property, depending on the property, and an incentive fee of 10% of net operating income less debt service after each of HHLP and the MHI Parties receive a 12.0% annual non-compounded return on its unreturned capital contributions.
 
On June 15, 2006, we acquired a 40.0% interest in PRA Suites at Glastonbury, LLC (“PRA Suites”), the owner of a 136 room Homewood Suites in Glastonbury, Connecticut, for approximately $2,480. This hotel will be leased to Hersha PRA LLC, an entity owned by 44 New England and our joint venture partner. The hotel will be managed HHMLP. Our joint venture partner include members that have an interest in PRA Glastonbury, LLC and are unaffiliated with the Company. The PRA Suites joint venture agreement provides for a 10% preferred return based on the equity interest in PRA Suites. Cash distributions will be made from cash available for distribution, first, to us to provide a 10% annual non-compounded return on our capital contributions and then to our joint venture partner to provide a 10% annual non-compounded return of their contributions. The 10% returns are not cumulative. Any remaining cash available for distribution will be distributed 40% to us. In accordance with SOP 78-9, SB Partners allocates income to us and our joint venture partner consistent with the allocation of cash distributions and liquidating distributions.
 
We account for our investment in the above mentioned unconsolidated joint ventures using the equity method of accounting.
 
As of June 30, 2006 and December 31, 2005 our investment in unconsolidated joint ventures consists of the following:
 
   
Percent Owned
  
June 30, 2006
  
December 31, 2005
  
               
HT/CNL Metro Hotels, LP
    
33.3
%
$
4,242
  
$
4,487
  
HT/PRA Glastonbury, LLC
    
40.0
%
  
565
   
2,379
 
Inn American Hospitality at Ewing, LLC
    
50.0
%
  
1,537
   
1,456
 
Hiren Boston, LLC
    
50.0
%
  
4,808
   
5,034
 
SB Partners, LLC
    
50.0
%
  
2,177
   
2,232
 
Mystic Partners, LLC
    
8.8%-66.7
%
  
39,529
   
40,393
 
PRA Suites at Glastonbury, LLC
    
40.0
%
  
2,512
   
-
 
         
$
55,370
  
$
55,981
  
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
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 June 30, 2006 and December 31, 2005 and for the three and six months ended June 30, 2006 and 2005.
 
   
June 30,
  
December 31,
  
   
2006
  
2005
  
Balance Sheets
          
Assets
          
Investment in hotel property, net
  
$
276,973
  
$
182,708
  
Other assets
    
27,807
   
22,708
 
Total Assets
  
$
304,780
  
$
205,416
  
               
Liabilities and Equity
              
Mortgages and notes payable
  
$
226,938
  
$
166,564
  
Capital Leases
    
794
   
357
 
Other liabilities
    
13,730
    
8,021
  
Equity:
              
Hersha Hospitality Trust
    
55,370
   
55,981
 
Other
    
7,948
   
(25,507
)
               
Total Liabilities and Equity
  
$
304,780
  
$
205,416
  

 
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
Statements of Operations
                  
Room revenue
  
$
22,695
  
$
4,471
  
$
39,074
  
$
8,088
  
Other revenue
    
8,411
   
403
   
14,605
   
760
 
Operating expenses
    
(21,394
)
  
(2,477
)
  
(39,516
)
  
(4,799
)
Interest expense
    
(3,909
)
  
(620
)
  
(7,368
)
  
(1,207
)
Land Lease Expense
    
(96
)
  
-
   
(213
)
  
- 
  
Property taxes
    
(1,335
)
  
(294
)
  
(2,624
)
  
(558
)
State & Federal Income Taxes
    
(142
)
  
(128
)
  
(142
)
  
(154
)
Depreciation, amortization and other
    
(4,471
)
  
(643
)
  
(8,255
)
  
(1,283
)
Minority interest in earnings of consolidated subsidiaries
    
55
   
-
   
223
   
-
 
                           
Net income (loss)
  
$
(186
)
$
712
  
$
(4,216
)
$
847
  
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
 
Equity income (loss) recognized during the three and six months ended June 30, 2006 and 2005 for our Equity Investments in Unconsolidated Joint Ventures:
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
HT/CNL
 
$
193
  
$
115
  
$
231
  
$
153
  
HT/PRA Glastonbury
    
30
   
72
   
(229
)
  
73
 
Inn American Hospitality at Ewing, LLC
    
71
   
92
   
81
   
102
 
Hiren Boston, LLC
    
108
   
-
   
(226
)
  
-
 
S B Partners, LLC
    
76
   
-
   
(55
)
  
-
 
Mystic Partners, LLC
    
291
   
-
   
(143
)
  
-
 
PRA Suites at Glastonbury
    
-
   
-
             
                           
Total equity in income (loss)
  
$
769
  
$
279
  
$
(341
)
$
328
  
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 4 - DEVELOPMENT LOANS RECEIVABLE
 
We have approved mortgage lending to entities in which our executive officers and affiliated trustees own an interest to enable such entities to construct hotels and conduct related improvements on specific hotel projects at interest rates ranging from 8.0% to 10.0% (“Development Line Funding”). As of June 30, 2006 and December 31, 2005, we had Development Loans Receivable from Related Parties of $32,016 and $32,450, respectively. Interest income from these advances included in “Interest - Secured Loans Related Party,” was $295 and $743 for the three months ended June 30, 2006 and 2005, respectively, and $716 and $1,743 for the six months ended June 30, 2006 and 2005, respectively.
 
As of June 30, 2006, our development loans to related parties consist of the following:
 
Hotel Property
  
Borrower
  
Principal Outstanding 6/30/2006
  
Interest Rate
  
Interest Income Earned for the six months ended 6/30/2006
  
Interest Due and Accrued as of 6/30/2006
  
Maturity Date
  
Sheraton - JFK Airport, NY
   Risingsam Hospitality, LLC  
$
7,016
    
10
%
$
170
  
$
170
    
March 30, 2007
  
Hilton Garden Inn - Union Square, NY
   Risingsam Union Square, LLC    
10,000
   
10
%
  
54
   
54
   
May 31, 2007
  
Holiday Inn Express - 29th Street, NY
   Brisam Management, LLC    
15,000
   
10
%
  
56
   
56
   
May 31, 2007
  
         
$
32,016
        
$
280
  
$
280
        
 
As of December 31, 2005 our development loans to related parties consisted of the following:
 
Hotel Property
  
Borrower
  
Principal Outstanding 12/31/2005
  
Interest Rate
  
Interest Income Earned for the year ended 12/31/2005
  
Interest Due and Accrued as of 12/31/2005
  
Maturity Date
  
Boutique Hotel - 35th Street, New York, NY
   44 Fifth Avenue, LLC  
$
9,100
    
9
%
$
599
  
$
181
    
August 31, 2006
  
Hampton Inn - Seaport, New York, NY
   HPS Seaport, LLC and BCM, LLC    
13,000
   
10
%
  
908
   
734
   
March 31, 2006
  
Boutique Hotel - Tribeca, New York, NY
   5444 Associates, LP    
9,500
   
10
%
  
570
   
381
   
August 31, 2006
  
Hilton Garden Inn - JFK Airport, NY
   Metro Ten Hotels, LLC    
850
   
10
%
  
1,258
   
239
   
December 31, 2005
  
         
$
32,450
        
$
3,335
  
$
1,535
        

All outstanding loans as of December 31, 2005 were repaid during the first and second quarters of 2006.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 5 — OTHER ASSETS

Transaction Costs
 
Legal fees and other third party transaction costs incurred relative to entering into debt facilities, issuances of equity securities or acquiring interests in hotel properties are recorded in other assets prior to the closing of the respective transactions. Transaction costs included in other assets were $381 and $1,863 as of June 30, 2006 and December 31, 2005.
 
Deposits
 
Deposits paid in connection with the acquisition of hotels are recorded in other assets. As of June 30, 2006, we had $13,308 in interest bearing deposits and $1,898 in non-interest bearing deposits related to the acquisition of hotel properties. Interest bearing deposits as of June 30, 2006 consisted of a deposit of $7,328 bearing interest at a rate of 15.4% and a deposit of $5,980 bearing interest at a rate of 18.8%. As of December 31, 2005, we had $8,000 in interest bearing deposits and $250 in non-interest bearing deposits. The interest bearing deposits as of December 31, 2005 accrued interest at 8.0%.
 
Investment in Statutory Trusts
 
We had investments in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II of $1,548 as of June 30, 2006 and December 31, 2005. Our investment in the common stock of the statutory trust entities is accounted for under the equity method.
 
Notes Receivable
 
Notes receivable included in other assets were $43 as of June 30, 2006 and $1,886 as of December 31, 2005.
 
Other Assets
 
The remaining balance of other assets consists of accrued interest receivable, prepaid property taxes, prepaid insurance and other miscellaneous prepaid expenses.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 6 — DEBT

Mortgages and Notes Payable
 
The total mortgages payable balances at June 30, 2006, and December 31, 2005, were $291,561 and $204,598, respectively, and consisted of mortgages with fixed and variable interest rates ranging from 4.0% to 9.43%. In addition, we had mortgages on our held for sale properties of $ 10,289 and $-0- as of June 30, 2006 and December 31, 2005, respectively, which is classified in Liabilities Related to Hotel Assets Held for Sale on the consolidated balance sheets. The maturities for the outstanding mortgages ranged from August 2007 to January 2032. Aggregate interest expense incurred under the mortgages payable totaled $4,531 and $2,071 for the three months ended June 30, 2006 and 2005, respectively and $8,611 and $3,603 during the six months ended June 30, 2006 and 2005, respectively.
 
In the second quarter of 2005, HHLP issued two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements. The $25,774 note issued to Hersha Statutory Trust I will mature on June 30, 2035, but may be redeemed at HHLP’s option, in whole or in part, beginning on June 30, 2010 in accordance with the provisions of the indenture agreement. The $25,774 note issued to Hersha Statutory Trust II will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, beginning on July 30, 2010 in accordance with the provisions of the indenture agreement. The note issued to Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum through June 30, 2010, and the note issued to Hersha Statutory Trust II bears interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent to June 30, 2010 for notes issued to Hersha Statutory Trust I and July 30, 2010 for notes issued to Hersha Statutory Trust II, holders the notes bear interest at a variable rate of LIBOR plus 3.0% pre annum. Interest expense in the amount of $946 and $401 was recorded during the three months ended June 30, 2006 and 2005, respectively, and $1,870 and $401 for the six months ended June 30, 2006 and 2005, respectively.
 
Revolving Line of Credit
 
On January 17, 2006, we entered into a revolving credit loan and security agreement with Commerce Bank, N.A. with a maximum amount of $60,000. Outstanding borrowings under the line of credit bear interest at the Company’s option of either the bank’s prime rate of interest minus .50% or LIBOR available for the periods of 1, 2, 3, or 6 months plus 2.25%. The line of credit is collateralized by a first lien-security interest in all existing and future assets of HHLP, and title-insured, first-lien mortgages on the Holiday Inn Express, Harrisburg, PA, the Mainstay Suites and Sleep Inn, King of Prussia, PA, the Fairfield Inn, Laurel, MD, the Hampton Inn, Philadelphia, PA, and collateral assignment of all hotel management contracts from which HHLP or its affiliates derive revenue. The line of credit includes certain financial covenants and requires that we maintain (1) a minimum tangible net worth of $110.0 million; (2) a maximum accounts and other receivables from affiliates of $75.0 million; and (3) certain financial ratios. The line of credit expires on December 31, 2008 and replaced the Sovereign Bank Line of Credit. This revolving credit loan replaced both the secured and unsecured lines of credit that we previously maintained. As a result of the termination of the Sovereign Bank Line of Credit , we expensed $255 in unamortized deferred costs related to the origination of the Sovereign Bank Line of Credit.
 
The Company maintained a Line of Credit balance of $32,034 at June 30, 2006 and $-0- at December 31, 2005. The Company recorded interest expense of $264 and $63, for the three months ended June 30, 2006 and 2005, respectively, and $664 and $81, for the six months ended June 30, 2006 and 2005, respectively. The weighted average interest rate on our Line of Credit during the three months ended June 30, 2006 and 2005 was 7.33% and 5.83%, respectively, and was 7.13% and 5.58% for the six months ended June 30, 2006 and 2005, respectively.
 
On July 28, 2006, we amended our Commerce Line of Credit to increase the maximum borrowing amount from $60,000 to $85,000 and modified the interest rate terms to the option of either the bank’s prime rate of interest minus 0.75% or LIBOR available for the periods of 1,2,3, or 6 months plus 2.00%. Provisions of the amended line of credit allow for an increase of the principal amount of borrowings made available under the line of credit to a maximum aggregate amount of $100,000, depending upon certain conditions described in the agreement. Certain hotel acquisitions occurring subsequent to June 30, 2006 will be added as supplemental collateral for the increase in the line of credit.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 6 — DEBT (Continued)

Deferred Costs
 
Costs associated with entering into mortgages and notes payable and our revolving line of credit are deferred and amortized over the life of the debt instruments. Amortization of deferred cost is recorded in interest expense. As of June 30, 2006 deferred cost was $5,256, net of accumulated amortization of $1,169. Deferred cost was $4,131, net of accumulated amortization of $1,437, as of December 31, 2005. Amortization of deferred costs for the three and six months ended June 30, 2006 was $163 and $375, respectively. Amortization of deferred costs for the three and six months ended June 30, 2005 was $105 and $171, respectively.
 
Debt Extinguishment
 
As noted above, the Sovereign Bank Line of Credit was replaced by the Commerce Line of Credit in January 2006. As a result of this termination, we expensed $255 in unamortized deferred costs related to the origination of the Sovereign Bank Line of Credit, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the six months ended June 30, 2006.
 
On April 7, 2006, we repaid $21,900 on our mortgage with Merrill Lynch for the Hampton Inn Herald Square property as a result of a debt refinancing. The new debt of $26,500 has a fixed interest rate of 6.085% and a maturity date of May 1, 2016. As a result of this extinguishment, we expensed $534 in unamortized deferred costs and prepayment penalties, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the three and six months ended June 30, 2006.
 
On June 9, 2006, we repaid $34,200 on our mortgage with UBS for the McIntosh Portfolio, as a result of a debt refinancing. The new debt of $36,300 has a fixed interest rate of 6.33% and maturity date of June 11, 2016 for each of the loans associated with the McIntosh Portfolio. As a result of this extinguishment, we expensed $374 in unamortized deferred costs, which are included in the Debt Extinguishment caption on the face of the consolidated statements of operations for the three and six months ended June 30, 2006.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 
We are the sole general partner in the Partnership, which is indirectly the sole general partner of the subsidiary partnerships. The Company does not anticipate any losses as a result of our obligations as general partner in the Partnership.
 
Management Agreements
 
44 New England engages HHMLP as the property manager for hotels it leases from us pursuant to management agreements. Each management agreement provides for a five-year 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, 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 the TRS Lessee 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.
 
As of June 30, 2006, HHMLP managed all 40 hotels leased to the TRS Lessee, and we consolidated the financial statements of these 40 hotels in these financial statements. HHMLP also manages two consolidated joint venture hotel properties and four unconsolidated joint venture hotel properties in which we maintain an investment. For its services, HHMLP receives a base management fee, and if a hotel meets and exceeds certain thresholds, an additional incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. In addition, two of our consolidated joint venture hotel properties which are not managed by HHMLP pay an asset management fee to HHMLP each month equivalent to 1% of gross revenues. 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 hotel. For the three months ended June 30, 2006 and 2005, management fees incurred totaled $1,170 and $880, respectively, and for the six months ended June 20, 2006 and 2005, management fees incurred totaled $1,965 and $1,424, respectively. These fees are recorded as Hotel Operating Expenses.
 
Administrative Services Agreement
 
Prior to July 1, 2005, under the terms of an administrative service agreement, HHMLP provided accounting and reporting services for the Company. The terms of the agreement provided for us to pay HHMLP an annual fee of $10 per property (prorated from the time of acquisition) for each hotel in our portfolio. On July 1, 2005, the administrative service fee was replaced by monthly accounting and information technology fees for each of our wholly owned hotels. Monthly fees for accounting services are $2 per property and monthly information technology fees are $0.5 per property. For the three months ended June 30, 2006 and 2005, the Company incurred administrative services fees of $0 and $65, respectively, and for the six months ended June 30, 2006 and 2005, the Company incurred administrative fees of $0 and $130, respectively. For the three and six months ended June 30, 2006, the Company incurred accounting fees of $260 and $487 and information technology fees of $63 and $120. Administrative services fees, accounting fees, and information technology fees are included in General and Administrative expenses.
 
Franchise Agreements
 
The 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 lessees and charged to expenses as incurred. Franchise fee expense for the three months ended June 30, 2006 and 2005, was $2,580 and $1,435, respectively, and for the six months ended June 30, 2006 and 2005, was $4,340 and $2,365, respectively. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 
Acquisitions from Affiliates
 
We have acquired from entities owned or controlled by certain of our executive officers and our related party trustees, newly-developed or newly-renovated hotels that do not have an operating history that would allow us to make purchase price decisions based on historical performance. In buying these hotels, we previously utilized, a “re-pricing” methodology that, in effect, adjusted the initial purchase price for the hotel, one or two years after we initially purchased the hotel, based on the actual operating performance of the hotel during the twelve months prior to the repricing. As part of our lease termination agreement with HHMLP, the original sellers of all of these properties, HHMLP and the Company have waived their respective rights to any and all purchase price adjustments for all properties. In the future, we do not intend to use any re-pricing methodology in acquisitions from entities controlled by our officers and trustees.
 
We have entered into an option agreement with each of our officers and related party trustees such that we obtain a first right of refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them. This right of first refusal would apply to each party until one year after such party ceases to be an officer or related party trustee of our Company. Since our initial public offering in 1999, we have acquired, wholly or through joint ventures, a total of 60 hotels, including 19 hotels acquired from entities controlled by our officers or trustees.  Of the 19 acquisitions from these entities, 16 were newly-constructed or newly-renovated by these entities prior to our acquisition. 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 negotiated with the Acquisition Committee. At the discretion of the independent trustees, the Board of Trustees has hired an independent accounting firm to provide our Board of Trustees with an “Agreed Upon Procedures” report for certain acquisitions and dispositions to related parties.
 
Hotel Supplies
 
For the three months ended June 30, 2006 and 2005, we incurred expenses of $434 and $478, respectively, and for the six months ended June 30, 2006 and 2005, we incurred expenses of $685 and $718, respectively, for hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating Expenses. Approximately $0 and $52 is included in accounts payable at June 30, 2006 and December 31, 2005.
 
Capital Expenditure Fees
 
Beginning April 1, 2006, HHMLP began to charge a 5% fee on all capital expenditures and pending renovation projects at the properties as compensation for procurement services related to capital expenditures and for project management of renovation projects. For the three and six months ended June 30, 2006, we incurred fees of $57 which were capitalized in with the cost of fixed asset additions.
 
Due From Related Parties
 
The Due from Related Party balance as of June 30, 2006 and December 31, 2005 was approximately $3,785 and $2,799, respectively. The balance as of June 30, 2006 and December 31, 2005 consisted of accrued interest due on our development loans and receivables owed from our unconsolidated joint ventures.
 
Due to Related Parties
 
The due to related party balance as of June 30, 2006 and December 31, 2005, totaled $4,881 and $4,655, respectively. The due to related party balances at June 30, 2006 and December 31, 2005 consisted of monies payable to HHMLP for administrative, management, and benefit related fees.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
 
Land Leases
 
In conjunction with the acquisition of the Hilton Garden Inn, Edison, NJ, we assumed a land lease from a third party with an original term of 75 years. Monthly payments as determined by the lease agreement are due through the expiration in August 2074. On February 16, 2006, in conjunction with the acquisition of the Hilton Garden Inn, JFK Airport, NY, we assumed a land lease with an original term of 99 years. Monthly payments as determined by the lease agreement are due through the expiration in July of 2100. Both land leases provide rent increases at scheduled intervals. We record rent expense on a straight-line basis over the life of the lease from the beginning of the lease term. For the three months ended June 30, 2006 and 2005, we incurred $216 and $109, respectively, and for the six months ended June 30, 2006 and 2005,we incurred $378 and $217, respectively, in lease expense under the agreements.
 
On January 6, 2005, we purchased land in Carlisle, PA for $700 plus closing costs from a related party entity and leased the land to 44 Carlisle Associates, L.P., a related party. In July 2005, 44 Carlisle Associates, L.P. exercised their option to purchase the land from us. The purchase price consisted of $700 for the land plus all fees and expenses.
 
On February 18, 2005, we purchased land at the Bradley International Airport, Windsor Locks, CT for $1,000 plus closing costs and leased the land to 44 Windsor Locks Associates, LLC, a related party. In addition to the purchase price, the terms of the lease required 44 Windsor Locks Associates, LLC to post a $350 deposit. In July 2005, 44 Windsor Locks Associates, LLC exercised their option to purchase the land from us. The purchase price consisted of $1,000 for the land plus all fees and expenses, and the $350 deposit was returned.


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 8 - DERIVATIVE INSTRUMENTS

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.
 
On July 1, 2005, the Company acquired an interest rate cap with a notional amount of $34,230 to hedge against the variability in cash flows on a variable interest rate debt instrument. The principal of the variable interest rate debt being hedged equals the notional amount of the interest rate cap. The interest rate cap effectively fixes interest payments when LIBOR exceeds 5.0%. On June 12, 2006, we terminated this interest rate cap due to the refinancing of the associated interest rate debt instrument to a fixed rate. We received $79 in cash and reclassified $58 in reduction to interest expense as a result of the termination of this cap.
 
At June 30, 2006, the fair value of the interest rate swap was $160 and is included in other assets on the face of the consolidated balance sheets. At December 31, 2005, the fair value of the interest rate cap was $23 and is included in other assets and the fair value of the interest rate swap was $0. The change in net unrealized gains/losses of $92 and $130 for the three months ended June 30, 2006 and 2005, respectively, for derivatives designated as cash flow hedges. The change in net unrealized gains/losses of $209 and $100 for the six months ended June 30, 2006 and 2005, respectively, for derivatives designed as cash flow hedges. Hedge ineffectiveness of $3 and $3 on cash flow hedges was recognized in unrealized gain/loss on derivatives during the three months ended June 30, 2006 and 2005, respectively. Hedge ineffectiveness of $7 and $7 on cash flow hedges was recognized in unrealized gain/loss on derivatives during the six months ended June 30, 2006 and 2005, respectively. Hedge ineffectiveness is included in interest expense on the face of the consolidated statements of operations.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 9 - SHARE-BASED PAYMENTS

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”). SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion No. 25”) and its related implementation guidance. SFAS No. 123R requires companies to record compensation expense for share-based payments to employees, including grants of employee stock options and stock awards, at fair value. Effective April 1, 2005, the Company has adopted SFAS 123R. No stock-based payments were outstanding at the time SFAS 123R was adopted. In 2004, the Company established the Hersha Hospitality Trust 2004 Equity Incentive Plan which provides for the grant of stock options, stock appreciation rights, stock awards, performance shares and incentive awards. The maximum number of shares of common stock that can be issued under this plan is 1.5 million shares. No share-based payments were granted under this plan during the year ended December 31, 2004.
 
On June 1, 2005, the Compensation Committee of the Board of Trustees granted 71,000 restricted share awards to executives. The restricted share awards vest 25% each year over four years and compensation expense is recognized ratably over the four year vesting period based on the fair value of the shares on the date of grant. The fair value of the restricted share awards on the grant date was $9.60 per share. For the quarter ended June 30, 2006, 25% of these restricted share awards became vested.
 
On June 1, 2006, the Compensation Committee of the Board of Trustees granted 89,500 restricted share awards to executives. The restricted share awards vest 25% each year over four years and compensation expense is recognized ratably over the four year vesting period based on the fair value of the shares on the date of grant. The fair value of the restricted share awards on the grant date was $9.40 per share. For the quarter ended June 30, 2006, none of these restricted share awards became vested.
 
A summary of the stock awards issued under the 2004 Equity Incentive Plan are as follows:
 
Date of Award Issuance
  
Shares Issued
  
Shares Vested at 6/30/2006
  
Unearned Compensation at 6/30/2006
  
Period until Full Vesting
  
June 1, 2005
    
71,000
   
17,750
 
$
497
    
3 years
  
June 1, 2006
    
89,500
   
-
   
824
   
4 years
  
     
160,500
   
17,750
 
$
1,321
        
 
Compensation expense of $60 and $14 was incurred during the three months ended June 30, 2006 and 2005, respectively, and $103 and $14 for the six months ended June 30, 2006 and 2005, respectively, related to the restricted share awards and is recorded in general and administrative expense on the statement of operations. Unearned compensation as of June 30, 2006 and December 31, 2005 was $1,321 and $582, respectively.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 10 — EARNINGS PER SHARE

The following table is a reconciliation of the income (numerator) and weighted average shares (denominator) used in the calculation of basic earnings per common share and diluted earnings per common share in accordance with SFAS No. 128, Earnings Per Share.The computation of basic and diluted earnings per share is presented below.
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
Numerator:
                  
BASIC
                  
Income (Loss) from Continuing Operations
  
$
2,789
  
$
2,469
  
$
(1,065
)
$
1,609
  
Distributions to 8.0% Series A Preferred Shareholders
    
(1,200
)
  
-
   
(2,400
)
  
-
 
Income (loss) from continuing operations applicable to common shareholders
    
1,589
   
2,469
   
(3,465
)
  
1,609
 
                           
Income from Discontinued Operations
    
587
   
1,286
   
557
   
1,170
 
                           
Net Income (Loss) applicable to common shareholders
  
$
2,176
  
$
3,755
  
$
(2,908
)
$
2,779
  
                           
DILUTED
                          
Income (Loss) from Continuing Operations
  
$
2,789
  
$
2,469
  
$
(1,065
)
$
1,609
  
Allocation of income (loss) to minority interest in continuing operations
    
390
   
346
   
-
 
 *
  
225
 
Distributions to 8.0% Series A Preferred Shareholders
    
(1,200
)
  
-
   
(2,400
)
  
-
 
Income (loss) from continuing operations applicable to common shareholders
    
1,979
   
2,815
   
(3,465
)
  
1,834
 
Income from Discontinued Operations
    
587
   
1,286
   
557
   
1,170
 
Allocation of income (loss) to minority interest in discontinued operations
    
81
   
180
   
- 
  *  
163
 
Income from Discontinured Operations
    
668
   
1,466
   
557 
    
1,333
 
                           
Net Income (Loss) applicable to common shareholders
  
$
2,647
  
$
4,281
  
$
(2,908
)
$
3,167
  
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 10 — EARNINGS PER SHARE (Continued)

   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
Denominator:
          
 
      
Weighted average number of common shares - basic
    
25,469,708
   
20,293,169
    
22,903,225
   
20,292,167
  
Effect of dilutive securities:
                          
Stock awards
    
94,654
   
23,407
    
-
 *  
11,768
  
Partnership units
    
3,492,177
   
2,842,437
    
-
 *  
2,842,437
  
                           
Weighted average number of common shares - diluted
    
29,056,539
   
23,159,013
   
22,903,225
   
23,146,372
 
                           
                           
Earnings Per Share:
                          
BASIC
                          
Income (loss) from continuing operations applicable to common shareholders
  
$
0.06
  
$
0.12
  
$
(0.15
)
$
0.08
  
Income from Discontinued Operations
    
0.03
   
0.07
   
0.02
   
0.06
 
                           
Net Income (Loss) applicable to common shareholders
  
$
0.09
  
$
0.19
  
$
(0.13
)
$
0.14
  
                           
DILUTED
                          
Income (loss) from continuing operations applicable to common shareholders
  
$
0.06
  
$
0.12
  
$
(0.15
)*
$
0.08
  
Income from Discontinued Operations
    
0.03
   
0.06
   
0.02
 *  
0.06
 
                           
Net Income (Loss) applicable to common shareholders
  
$
0.09
  
$
0.18
  
$
(0.13
)*
$
0.14
  

*
Partnership units and stock awards have been omitted from the denominator for the purpose of computing diluted earnings per share for the six months ended June 30, 2006 since the effect of including these amounts in the denominator would be anti -dilutive.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
NOTE 11 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING ACTIVITIES
 
Interest paid during the six months ended June 30, 2006 and 2005 totaled $11,320 and $4,403, respectively.
 
The following additional non-cash investing and financing activities occurred during the six months ended June 30, 2006 and 2005:
 
   
Six Months Ended June 30,
 
   
2006
  
2005
  
Common shares issued as part of the Dividend Reinvestment Plan
  
$
13
  
$
12
  
Issuance of Stock to the Board of Trustees
    
46
   
-
 
Issuance of Stock Awards
    
841
   
682
 
Compensation Expense from vesting of Stock Awards
    
103
   
14
 
Issuance of Common LP Units
    
6,000
   
-
 
Relocation to minority interest as a result of issuance of Common LP Units
    
6,621
   
-
 
Debt assumed in hotel property acquisition
    
31,616
   
-
 
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 12 — DISCONTINUED OPERATIONS

We follow the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires, among other things, that the operating results of certain real estate assets which have been sold, or otherwise qualify as held for disposition (as defined by SFAS No. 144), be included in discontinued operations in the statements of operations for all periods presented.
 
On May 13, 2005, we completed the disposition of the Doubletree Club, Jamaica, NY and the Holiday Inn Express, Long Island City, NY in a sale of the land, improvements and certain personal property to unaffiliated buyers for $20,500, plus transaction costs. Assets sold had a net book value of $18,806 and were classified as assets held for sale on the balance sheet. Debt related to assets held for sale of $12,952 was assumed by the buyers. A note receivable for $1,700 was received as part of the proceeds from the sale of the Doubletree Club and was repaid as of June 30, 2006. Interest payments were due quarterly with repayment of the principal due upon maturity. Gain on the sale of the two properties was $1,323, of which $162 was allocated to minority interest in HHLP.
 
In September of 2005, our Board of Trustees authorized management of the Company to sell the Holiday Inn Express, Hartford, CT and this asset is classified as “held for sale” on the Company’s Consolidated Balance Sheet as of December 31, 2005. The operating results for this hotel have been reclassified to discontinued operations in the statements of operations for the three and six months ended June 30, 2006 and June 30, 2005. The hotel was acquired by the Company in January 2004 and was sold on April 12, 2006. Proceeds from the sale were $3,600, and the gain on the sale was $497, of which $63 was allocated to minority interest in HHLP.
 
In March of 2006, our Board of Trustees authorized management of the Company to sell four properties located in metropolitan Atlanta, Georgia. These four properties are the Holiday Inn Express, Duluth, Comfort Suites, Duluth, Hampton Inn, Newnan and the Hampton Inn Peachtree City. These assets are classified as “held for sale” on the Company’s Consolidated Balance Sheet as of June 30, 2006. The operating results for these hotels have been reclassified to discontinued operations in the statements of operations for the three and six months ended June 30, 2006 and 2005. These hotels were acquired by the Company in April and May 2000.
 
As of June 30, 2006, Debt and Capital Lease Payable related to the assets Held for Sale was $10,289 and consisted of mortgages on the four properties in Georgia. As of December 31, 2005, liabilities held for sale as of the date was $375 and related to the Holiday Inn Express, Hartford, CT, capital lease which was extinguished with the sale of the property in April 2006.
 
In addition, during 2004, in conjunction with the acquisition of the Holiday Inn Express, Hartford, CT, we assumed a land lease from a third party with an original term of 99 years. Monthly payments as determined by the lease agreement are due through the expiration in September 2101. For the three months ended June 30, 2006 and 2005, we incurred $10 and $75 in lease expense under this agreement, and for the six months ended June 30, 2006 and 2005, we incurred $85 and $150 in lease expense under this agreement, which have been reclassified to discontinued operations in the statement of operations.
 
We allocate interest and capital lease expense to discontinued operations for debt that is to be assumed or that is required to be repaid as a result of the disposal transaction. We allocated $228 and $340 of interest and capital lease expense to discontinued operations for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, we allocated $465 and $780, respectively, of interest and capital lease expenses to discontinued operations.
 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

NOTE 12 — DISCONTINUED OPERATIONS

Assets Held for Sale consisted of the following at June 30, 2006 and December 31, 2005:

   
June 30, 2006
  
December 31, 2005
  
           
Land
  
$
2,008
  
$
-
  
Buildings and Improvements
    
16,593
   
2,644
 
Furniture, Fixtures and Equipment
    
3,457
   
1,119
 
Deferred Costs
    
235
   
-
 
     
22,293
   
3,763
 
               
Less Accumulated Depreciation
    
(5,153
)
  
(356
)
               
Total Investment in Hotel Properties
  
$
17,140
  
$
3,407
  
               
 
The following table sets forth the components of discontinued operations for the three and six months ended June 30, 2006 and 2005:
 
   
Three Months Ended June 30,
  
Six Months Ended June 30,
 
Revenue:
  
2006
  
2005
  
2006
  
2005
  
Hotel Operating Revenues
  
$
1,596
  
$
2,588
  
$
3,549
  
$
5,641
  
                           
Expenses:
                          
Interest and Capital Lease Expense
    
228
   
340
   
465
   
780
 
Hotel Operating Expenses
    
1,120
   
1,573
   
2,426
   
3,780
 
Land Lease
    
10
   
75
   
85
   
150
 
Real Estate and Personal Property Taxes and Property Insurance
    
64
   
125
   
174
   
263
 
General and Administrative
    
-
   
18
   
-
   
36
 
Depreciation and Amortization
    
-
   
315
   
258
   
622
 
                           
Total Expenses
  
$
1,422
  
$
2,446
  
$
3,408
  
$
5,631
  
                           
Income (Loss) from Discontinued Operations before Minority Interest
    
174
   
142
   
141
   
10
 
Allocation to Minority Interest
    
21
   
17
   
18
   
1
 
                           
Income (Loss) from Discontinued Operations
  
$
153
  
$
125
  
$
123
  
$
9
  
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
All statements contained in this section that are not historical facts are based on current expectations. Words such as “believes”, “expects”, “anticipates”, “intends”, “plans” and “estimates” and variations of such words and similar words also identify forward-looking statements. Our actual results may differ materially, including the following: economic conditions generally and the real estate market specifically; the effect of threats of terrorism and increased security precautions on travel patterns and demand for hotels; the threatened or actual outbreak of hostilities and international political instability; governmental actions; legislative/regulatory changes, including changes to laws governing the taxation of REITs; level of proceeds from asset sales; cash available for capital expenditures; availability of capital; ability to refinance debt; rising interest rates; rising insurance premiums; competition; supply and demand for hotel rooms in our current and proposed market areas, including the existing and continuing weakness in business travel and lower-than expected daily room rates; other factors that may influence the travel industry, including health, safety and economic factors; and changes in generally accepted accounting principles, policies and guidelines applicable to REITs. Additional risks are discussed in the Company’s filings with the Securities and Exchange Commission. We caution you not to place undue reliance on any such forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.
 
General
 
As of June 30, 2006, we owned interests in 59 hotels in the eastern United States including 19 hotels owned through joint ventures. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels. In 2001, the REIT rules were modified, allowing a hotel REIT to lease its hotels to a taxable REIT subsidiary, or TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. Accordingly, as of June 30, 2006, we have leased 40 of our hotels to a wholly-owned TRS, which pays qualifying rent, and the TRS has entered into management contracts with HHMLP with respect to those hotels. We intend to lease all newly acquired hotels to a TRS. As of June 30, 2006, we also owned interests in 19 hotels through joint ventures and those hotels are leased to TRSs that are wholly owned by those joint ventures or to entities that are owned jointly by our TRS Lessee and our partners in the joint venture. The hotels owned by the joint ventures are managed, pursuant to the terms of certain management agreements, by HHMLP or management companies affiliated with our joint venture partners. As all of our hotels have been leased to the TRS Lessee or a joint venture TRS, we are participating more directly in the operating performance of our hotels. The TRSs directly receive all revenue from, and are required to fund all expenses relating to, hotel operations. The TRSs are also subject to income tax on their earnings.
 
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 and six months ended June 30, 2006 and 2005.
 
CONSOLIDATED HOTELS
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
% Variance
  
2006
  
2005
  
% Variance
  
                           
Rooms Available
    
395,501
   
217,289
         
734,858
   
399,419
       
Rooms Occupied
    
312,111
   
168,805
         
528,860
   
274,576
       
Occupancy
    
78.92
%
  
77.69
%
  
1.6
%
  
71.97
%
  
68.74
%
  
4.7
%
Average Daily Rate (ADR)
  
$
112.97
  
$
102.62
    
10.1
%
$
107.58
  
$
97.71
    
10.1
%
Revenue Per Available Room (RevPAR)
  
$
89.15
  
$
79.72
    
11.8
%
$
77.42
  
$
67.17
    
15.3
%
                                       
Room Revenues
  
$
35,260,531
  
$
17,323,236
        
$
56,896,337
  
$
26,829,077
        
Food & Beverage
  
$
2,133,964
  
$
1,466,021
        
$
3,874,111
  
$
2,694,772
        
Other Revenues
  
$
788,472
  
$
333,180
        
$
1,313,926
  
$
602,151
        
Total Revenues
  
$
38,182,967
  
$
19,122,437
        
$
62,084,374
  
$
30,126,000
        
Discontinued Assets
  
$
1,596,257
  
$
2,588,163
        
$
3,548,930
  
$
5,640,977
        
 

The following table outlines operating results for the three and six months ended June 30, 2006 and 2005 for hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and minority interests.
 

UNCONSOLIDATED JOINT VENTURES:

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
% Variance
  
2006
  
2005
  
% Variance
  
                           
Rooms Available
    
221,599
   
38,584
         
423,227
   
76,744
       
Rooms Occupied
    
166,101
   
32,681
         
300,048
   
61,241
       
Occupancy
    
74.96
%
  
84.70
%
  
-11.5
%
  
70.90
%
  
79.80
%
  
-11.2
%
Average Daily Rate (ADR)
  
$
136.52
  
$
136.81
    
-.2
%
$
130.54
  
$
132.07
    
-1.2
%
Revenue Per Available Room (RevPAR)
  
$
102.33
  
$
115.88
    
-11.7
%
$
92.55
  
$
105.39
    
-12.2
%
                                       
Room Revenues
  
$
22,676,247
  
$
4,471,000
        
$
39,168,576
  
$
8,088,000
        
Food & Beverage
  
$
6,474,281
  
$
340,484
        
$
10,884,401
  
$
606,308
        
Other Revenues
  
$
1,955,957
  
$
62,671
        
$
3,625,723
  
$
153,885
        
Total Revenues
  
$
31,106,485
  
$
4,874,155
        
$
53,678,700
  
$
8,848,193
        

The following table outlines operating results for the three and six months ended June 30, 2006 and 2005 for our entire portfolio of hotels, which includes wholly owned hotels, hotels we own through joint venture interests that are consolidated in our financial statements, and hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and minority interests.
 

ALL HOTELS (INCLUDES CONSOLIDATED HOTELS AND UNCONSOLIDATED JOINT VENTURE ASSETS):

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
% Variance
  
2006
  
2005
  
% Variance
  
                           
Rooms Available
    
617,100
   
255,873
         
1,158,085
   
476,163
       
Rooms Occupied
    
478,212
   
201,486
         
828,908
   
335,817
       
Occupancy
    
77.49
%
  
78.74
%
  
-1.6
%
  
71.58
%
  
70.53
%
  
1.5
%
Average Daily Rate (ADR)
  
$
121.15
  
$
108.17
    
12.0
%
$
115.89
  
$
103.98
    
11.5
%
Revenue Per Available Room (RevPAR)
  
$
93.89
  
$
85.18
    
10.2
%
$
82.95
  
$
73.33
    
13.1
%
                                       
Room Revenues
  
$
57,936,778
  
$
21,794,236
        
$
96,064,913
  
$
34,917,077
        
Food & Beverage
  
$
8,608,245
  
$
1,806,505
        
$
14,758,512
  
$
3,301,080
        
Other Revenues
  
$
2,744,429
  
$
395,851
        
$
4,939,649
  
$
756,036
        
Total Revenues
  
$
69,289,452
  
$
23,996,592
        
$
115,763,074
  
$
38,974,193
        
Discontinued Assets
  
$
1,596,257
  
$
2,588,163
        
$
3,548,930
  
$
5,640,977
        

Comparison of the three month period ended June 30, 2006 to June 30, 2005 (in thousands, except per share data).
 
Revenue
 
Our total revenues for the three month period ended June 30, 2006 consisted of hotel operating revenues for hotels leased to our wholly owned TRS, 44 New England, and hotels owned through joint venture interests which are consolidated in our financial statements. Our total revenues were approximately $38,183 representing an increase of $19,061 or 99.7% compared to total revenues of $19,122 for the three month period ended June 30, 2005. The increase in revenues is primarily attributable to the acquisitions consummated since the comparable period in 2005 and improved performance at certain of our hotels. Since June 30, 2005, the Company has acquired interests in the following thirteen hotels:
 
 
Brand
  
Location
  
Rooms
  
Acquisition Date
Holiday Inn Express
  
Cambridge, MA
  
112
  
May 3, 2006
Residence Inn
  
North Dartmouth, MA
  
96
  
May 1, 2006
Comfort Inn
  
North Dartmouth, MA
  
84
  
May 1, 2006
Hawthorne Suites
  
Franklin, MA
  
100
  
April 25, 2006
Hilton Garden Inn
  
JFK Airport, NY
  
188
  
February 16, 2006
Hampton Inn
  
Philadelphia, PA
  
250
  
February 15, 2006
Residence Inn
  
Tysons Corner, VA
  
96
  
February 2, 2006
Courtyard
  
Scranton, PA
  
120
  
February 1, 2006
Courtyard
  
Langhorne, PA
  
118
  
January 3, 2006
Fairfield Inn
  
Mt. Laurel, NJ
  
118
  
January 3, 2006
Fairfield Inn
  
Bethlehem, PA
  
103
  
January 3, 2006
Residence Inn
  
Williamsburg, VA
  
108
  
November 22, 2005
Springhill Suites
  
Williamsburg, VA
  
120
  
November 22, 2005

 
Revenues for all thirteen hotels were recorded from the date of acquisition as Hotel Operating Revenues. Further, the second quarter of 2006 included revenues for a full quarter related to the following six hotels that were purchased in May and June of 2005.
 
Brand
  
Location
  
Rooms
  
Acquisition Date
Courtyard
  
Wilmington, DE
  
78
  
June 17, 2005
Independent
  
Wilmington, DE
  
71
  
June 17, 2005
Courtyard
  
Brookline/Boston, MA
188
  
June 16, 2005
Holiday Inn Express
  
Oxford Valley, PA
  
88
  
May 26, 2005
Holiday Inn Express
  
Malvern, PA
  
88
  
May 24, 2005
Holiday Inn Express & Suites
  
King of Prussia, PA
  
155
  
May 23, 2005

 
The income from our unconsolidated joint ventures is accounted for utilizing the equity method of accounting, and our portion of the net income from the 15 hotels in these joint ventures is recorded as “Income from Unconsolidated Joint Venture Investments” in our Statement of Operations. Our joint venture agreements contain provisions that define the cash distributions and liquidating distributions and income is allocated to us consistent with those provisions. Income from unconsolidated joint venture investments increased $490 from $279 for the three months ended June 30, 2005 to $769 for the three months ended June 30, 2006. Since June 30, 2005, we have acquired unconsolidated joint venture interests in the following properties:
 
Joint Venture
  
Brand
  
Name
  
Rooms
  
Ownership %
 
Hersha Preferred Equity Return
 
Acquisition Date
PRA Suites at Glastonbury, LLC
  
Homewood Suites
  
Glastonbury, CT
  
136
  
40.0%
  
10.00%
  
June 15, 2006
Mystic Partners, LLC
  
Marriott
  
Mystic, CT
  
285
  
66.7%
  
8.50%
  
August 9, 2005
Mystic Partners, LLC
  
Courtyard
  
Norwich, CT
  
144
  
66.7%
  
8.50%
  
August 9, 2005
Mystic Partners, LLC
  
Courtyard
  
Warwick, RI
  
92
  
66.7%
  
8.50%
  
August 9, 2005
Mystic Partners, LLC
  
Residence Inn
  
Danbury, CT
  
78
  
66.7%
  
8.50%
  
August 9, 2005
Mystic Partners, LLC
  
Residence Inn
  
Southington, CT
  
94
  
44.7%
  
8.50%
  
August 9, 2005
Mystic Partners, LLC
  
Springhill Suites
  
Waterford, CT
  
80
  
66.7%
  
8.50%
  
August 9, 2005
Mystic Partners, LLC
  
Residence Inn
  
Mystic, CT
  
133
  
66.7%
  
8.50%
  
September 15, 2005
Mystic Partners, LLC
  
Hilton
  
Hartford, CT
 
393
  
8.8%
  
8.50%
  
October 6, 2005
Mystic Partners, LLC
  
Marriott
  
Hartford, CT
 
409
  
15.0%
  
8.50%
  
February 8, 2006
SB Partners, LLC
  
Holiday Inn Express
  
South Boston, MA
  
118
  
50.0%
  
10.00%
  
October 7, 2005
Hiren Boston, LLC
  
Courtyard
  
South Boston, MA
  
164
  
50.0%
  
10.00%
  
July 1, 2005


For the three months ended June 30, 2006, interest income increased $258 compared to the same period in 2005. This increase was the result of interest earned on proceeds from the offering of our common stock, which was completed in the second quarter of 2006, and an increase in escrow deposits. Proceeds were invested in short term accounts until utilized for the acquisition of hotel properties and the funding of development loans. Interest income -secured loans related party for the three months ended June 30, 2006 decreased $616 from $911 for the three months ended June 30, 2005 to $295 during the same period in 2006, due primarily to a decrease in the average balance development loans receivable during the period. Other revenue increased approximately $71 for the three months ended June 30, 2006 compared to the same period in 2005 as a result of fees earned for asset management services provided to properties owned by some of our unconsolidated joint ventures.
 
Expenses
 
Total hotel operating expenses increased 97.0% to approximately $21,392 for the three month period ended June 30, 2006 from $10,857 for the three month period ended June 30, 2005. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since the comparable period in 2005 as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization from $2,096 for the three months ended June 30, 2005 to $4,609 for the three months ended June 30, 2006. Similarly, real estate and personal property tax and property insurance increased $623, or 74.4%, in the three months ended June 30, 2006 when compared to the same period in 2005.
 
General and administrative expense increased by approximately $677 from $1,135 in 2005 to $1,812 in 2006. General and administrative expenses increased primarily due to higher compensation expense related to our increase in asset management and accounting staff.
 
Net Income
 
Net income applicable to common shareholders for the three month period ended June 30, 2006 was approximately $2,176 compared to net income applicable to common shareholders of $3,755 for the same period in 2005.

Operating income for the three months ended June 30, 2006 was $8,694 compared to operating income of $4,088 during the same period in 2005. The $4,606, or 112.7%, increase in operating income resulted from improved performance of our portfolio and acquisitions that have increased the scale of our operations enabling us to leverage the absorption of administrative costs.

The increase in our operating income was offset by increases in interest expense, which increased $3,290 from $2,633 for the three months ended June 30, 2005 to $5,923 for the three months ended June 30, 2006. The increase in interest expense is the result of our issuance of $51,548 of notes payable in the second quarter of 2005 and mortgages placed on newly acquired properties. Also in the second quarter of 2006, we refinanced $56,125 in variable rate debt, replacing it with $62,800 fixed rate debt. As a result of terminating the variable rate debt we incurred $908 in costs due to early termination fees and to write-off deferred loan costs associated with the retired debt.
 
Net income applicable to common shareholders was also negatively impacted by $1,200 in preferred dividends resulting from our issuance of 8.0% Series A cumulative redeemable preferred shares in the third quarter of 2005.

Included in net income applicable to common shareholders for the three months ended June 30, 2006 is $153 income from discontinued operations compared to $125 income during the same period in 2005. Discontinued operations results from the operations of hotel properties that we have sold and the hotel properties we have committed to sell. Also included in net income applicable to common shareholders for the three months ended June 30, 2006 is a gain of $434 resulting from the sale of the Holiday Inn Express in Hartford, CT which had been held for sale. Included in net income applicable to common shareholders for the three months ended June 30, 2005 is a gain of $1,161 resulting from the sale of Doubletree Club, Jamaica, NY and the Holiday Inn Express, Hunters Point, NY.


Comparison of the six month period ended June 30, 2006 to June 30, 2005.
 
Revenue
 
Our total revenues for the six month period ended June 30, 2006 consisted of hotel operating revenues for hotels leased to our wholly owned TRS, 44 New England, and hotels owned through joint venture interests which are consolidated in our financial statements. Our total revenues were approximately $62,084 representing an increase of $31,958 or 106.1% compared to total revenues of $30,126 for the six month period ended June 30, 2005. The increase in revenues is primarily attributable to the acquisitions consummated since the comparable period in 2005 and improved performance at certain of our hotels. As noted above, we have acquired interests in thirteen hotels since June 30, 2005. Revenues for all thirteen hotels were recorded from the date of acquisition as Hotel Operating Revenues. Further, hotel operating revenue for the six months ended June 30, 2006 included revenues for a full six months related to three hotels that were purchased in June 2005, three hotels that were purchased in May 2005, one hotel that was purchased in April 2005 and one hotel that was purchased in January of 2005.
 
Income from unconsolidated joint venture investments decreased $669 from income of $328 for the six months ended June 30, 2005 to a loss of $341 for the six months ended June 30, 2006. Since June 30, 2005, we have acquired unconsolidated joint venture interests in twelve properties. The loss for the six months ended June 30, 2006 is primarily driven by newly constructed and newly renovated properties owned by our joint ventures that are still in the ramp up phase of their life cycle.
 
For the six months ended June 30, 2006, interest income increased $379 compared to the same period in 2005. This increase was the result of interest earned on proceeds from the offering of our common stock, which was completed in the second quarter of 2006, and an increase in interest income on our escrow deposits. Interest income -secured loans related party for the six months ended June 30, 2006 decreased $1,188 from $1,911 for the six months ended June 30, 2005 to $723 during the same period in 2006, due primarily to a decrease in the average balance of development loans receivable during the period. Other revenue increased approximately $221 for the six months ended June 30, 2006 compared to the same period in 2005 as a result of fees earned for asset management services provided to hotels owned by some of our unconsolidated joint ventures.
 
Expenses
 
Total hotel operating expenses increased 97.1% to approximately $37,350 for the six months ended June 30, 2006 from $18,952 for the six month period ended June 30, 2005. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since the comparable period in 2005 as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization from $3,751 for the six months ended June 30, 2005 to $8,405 for the six months ended June 30, 2006. Similarly, real estate and personal property tax and property insurance increased $1,336, or 82.9%, in the six months ended June 30, 2006 when compared to the same period in 2005.
 
General and administrative expense increased by approximately $863 from $2,113 in 2005 to $2,976 in 2006. General and administrative expenses increased primarily due to higher compensation expense related to our increase in asset management and accounting staff.
 
Net Income
 
Net loss applicable to common shareholders for the six months ended June 30, 2006 was approximately $2,908 compared to net income applicable to common shareholders of $2,779 for the same period in 2005.

Operating income for the six months ended June 30, 2006 was $10,028 compared to operating income of $3,482 during the same period in 2005. The $6,546, or 188.0%, increase in operating income resulted from improved performance of our portfolio and acquisitions that have increased the scale of our operations enabling us to leverage the absorption of administrative costs.

The increase in our operating income was offset by increases in interest expense, which increased $7,282 from $4,259 for the three months ended June 30, 2005 to $11,541 for the six months ended June 30, 2006. The increase in interest expense is the result of our issuance of $51,548 of notes payable in the second quarter of 2005 and mortgages placed on newly acquired properties. Also in the six months ended June 30, 2006, we refinanced $56,125 in variable rate debt, replacing it with $62,800 fixed rate debt, and replaced our line of credit with an increased credit facility. As a result of terminating the variable rate debt and line of credit, we incurred $1,163 in debt extinguishment expense due to early termination fees and to write-off deferred loan costs associated with the retired debt and credit facility.
 

Net income applicable to common shareholders was also negatively impacted by $2,400 in preferred dividends resulting from our issuance of 8.0% Series A cumulative redeemable preferred shares in the third quarter of 2005.

Included in net income applicable to common shareholders for the six months ended June 30, 2006 is $123 income from discontinued operations compared to $9 income during the same period in 2005. Discontinued operations results from the operations of two properties that were sold in June of 2005 and April 2006 and the hotel properties we have committed to sell. Also included in net income applicable to common shareholders for the six months ended June 30, 2006 is a gain of $434 resulting from the sale of the Holiday Inn Express in Hartford, CT which had been held for sale. Included in net income applicable to common shareholders for the three months ended June 30, 2005 is a gain of $1,161 resulting from the sale of Doubletree Club, Jamaica, NY and the Holiday Inn Express, Hunters Point, NY.

Liquidity and Capital Resources
 
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 our line of credit. We believe that the net cash provided by operations will be adequate to fund the Company’s operating requirements, debt service and the payment of dividends in accordance with REIT requirements of the federal income tax laws. We expect to meet our long-term liquidity requirements, such as scheduled debt maturities and property acquisitions, through long-term secured and unsecured borrowings, the issuance of additional equity securities or, in connection with acquisitions of hotel properties, the issuance of units of operating partnership interest in our operating partnership subsidiary.

In the second quarter of 2005, HHLP issued two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts, pursuant to indenture agreements. The $25,774 note issued to Hersha Statutory Trust I will mature on June 30, 2035, but may be redeemed at HHLP’s option, in whole or in part, beginning on June 30, 2010 in accordance with the provisions of the indenture agreement. The $25,774 note issued to Hersha Statutory Trust II will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, beginning on July 30, 2010 in accordance with the provisions of the indenture agreement. The note issued to Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum through June 30, 2010 and the note issued to Hersha Statutory Trust II bears interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent to June 30, 2010 for notes issued to Hersha Statutory Trust I and July 30, 2010 for notes issued to Hersha Statutory Trust II, holders the notes bear interest at a variable rate of LIBOR plus 3.0% pre annum. Interest expense in the amount of $946 and $401 was recorded during the three months ended June 30, 2006 and 2005, respectively, and $1,870 and $401 for the six months ended June 30, 2006 and 2005, respectively.

On August 5, 2005, we completed a public offering of 2.4 million of 8.00% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share. Net proceeds of the offering, less expenses and underwriters commissions, were approximately $57,750. Proceeds from the offering were used to finance the acquisition of the Company’s interests in Mystic Partners, LLC (“Mystic”) and SB Partners, LLC (“SB Partners”). The remaining net proceeds have been principally allocated to fund secured development loans and for general corporate purposes.

On April 28, 2006, we completed a public offering of 6,520,000 common shares at $9.00 per share. On May 9, 2006, the underwriter exercised its over-allotment option with respect to this offering, and we issued an additional 977,500 common shares at $9.00 per share. Proceeds to the Company, net of underwriting discounts and commissions and expenses, were approximately $63,400. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $30,000 was used to repay indebtedness and approximately $19,500 was used to fund property acquisitions.

On January 17, 2006, we entered into a revolving credit loan and security agreement with Commerce Bank, N.A. with a maximum amount of $60,000. Outstanding borrowings under the line of credit bear interest at the Company’s option of either the bank’s prime rate of interest minus .50% or LIBOR available for the periods of 1, 2, 3, or 6 months plus 2.25%. The line of credit is collateralized by a first lien-security interest in all existing and future assets of HHLP, and title-insured, first-lien mortgages on the Holiday Inn Express, Harrisburg, PA, the Mainstay Suites and Sleep Inn, King of Prussia, PA, the Fairfield Inn, Laurel, MD, the Hampton Inn, Philadelphia, PA, and collateral assignment of all hotel management contracts from which HHLP or its affiliates derive revenues. The line of credit expires on December 31, 2008 and replaced the Sovereign Bank Line of Credit. On July 28, 2006, we amended our Commerce Line of Credit to increase the maximum borrowing amount from $60,000 to $85,000 and modified the interest rate terms to the option of either the bank’s prime rate of interest minus 0.75% or LIBOR available for the periods of 1,2,3, or 6 months plus 2.00%. Provisions of the amended line of credit allow for an increase of the principal amount of borrowings made available under the line of credit to a maximum aggregate amount of $100,000, depending upon certain conditions described in the agreement. Certain hotel acquisitions occurring subsequent to June 30, 2006 will be added as supplemental collateral for the increase in the line of credit.
 

In the second quarter of 2006, we refinanced $56,125 in variable rate debt, replacing it with $62,800 fixed rate debt.
 
We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. Our bylaws require the approval of a majority of our Board of Trustees, including a majority of the independent trustees, to acquire any additional hotel in which one of our trustees or officers, or any of their affiliates, has an interest (other than solely as a result of his status as our trustee, officer or shareholder). 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 shares, issuances of operating partnership units or other securities or borrowings. We make available to the TRS of our hotels 4% (6% for full service properties) of gross revenues per quarter, on a cumulative basis, for periodic replacement or refurbishment of furniture, fixtures and equipment at each of our hotels. We believe that a 4% (6% for full service hotels) reserve is a prudent estimate for future capital expenditure requirements. We intend to spend amounts in excess of the obligated 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 will use undistributed cash or borrowings under credit facilities 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
 
Net cash provided by operating activities for the six months ended June 30, 2006 and 2005 was $10,061 and $5,502 respectively. The increase in net cash provided by operating activities was primarily the result of an increase in the number of hotels owned and operated over the same period in 2005. Also, operating cash distributions from unconsolidated joint ventures of $1,135 were received during the three months ended June 30, 2006. A net increase in working capital assets resulted in increased cash provided by operating activities over the same period in 2005.

Net cash used in investing activities for the six months ended June 30, 2006 and 2005 increased $3,341, from $156,777 in the six months ended June 30, 2005 compared to $160,118 for the six months ended June 30, 2006. Net cash used for the purchase of hotel properties and advances and capital contributions for unconsolidated joint ventures increased $13,386 in the six months ended June 30, 2006 over the same period in 2005. In addition, cash used for deposits on hotel acquisitions that closed subsequent quarter end increased $8,507 and capital expenditures increased $3,902 as part of our on going acquisition and renovation programs. These uses of cash were partially offset by an increase in the repayments of development loans to related parties, net of additional investments, of $17,466. Cash provided by return of investment distributions from unconsolidated joint ventures during the six months ended June 30, 2006 increased $2,761 over the same period in 2005.

Net cash provided by financing activities for the six months ended June 30, 2006 was $146,123 compared to cash provided by financing activities of $138,719 for the six month period ended June 30, 2005. This was, in part the result of $63,353 in net proceeds from our offering of common stock in the second quarter of 2006. Also, net borrowings under our line of credit were $32,034 during the six months ended June 30, 2006, compared to net of borrowings under our line of credit of $918 during the same period in 2005. The increase in net cash provided by financing activities for the six months ended June 30, 2006 was partially offset by a decrease in net proceeds from mortgages and notes payable of $86,173 in 2006 when compared to net proceeds from mortgages and notes payable in 2005. In the second quarter of 2005, the company entered into $51,548 of notes payable with Hersha Statutory Trust I and Hersha Statutory Trust II. Also, dividends paid of $2,400 were paid in the six months ended June 30, 2006 due to the issuance of preferred shares in the third quarter of 2005.
 
Funds From Operations
 
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Partnership units in accordance with the April 2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our interpretation of the NAREIT definition is that minority interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.


The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shares, includes depreciation and amortization expenses, gains or losses on property sales, minority interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations.

FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of Hersha’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Partnership units because our Partnership units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Partnership units.

The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods.
 

(in thousands, except share data)
 
   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2006
  
June 30, 2005
  
June 30, 2006
  
June 30, 2005
  
                   
Net income (loss) applicable to common shares
  
$
2,176
  
$
3,755
  
$
(2,908
)
$
2,779
  
Income (loss) allocated to minority interest (1)
    
690
   
399
   
(325
)
  
157
 
Income (loss) of discontinued operations allocated to minority interest
    
21
   
17
   
18
   
1
 
(Income) loss from unconsolidated joint ventures
    
(769
)
  
(279
)
  
341
   
(328
)
Gain on sale of assets
    
(434
)
  
(1,161
)
  
(434
)
  
(1,161
)
Depreciation and amortization
   
4,609
   
2,096
   
8,405
   
3,751
 
FFO related to the minority interests in consolidated joint ventures (2)
    
(454
)
  
(257
)
  
(313
)
  
(216
)
Funds from consolidated hotel operations applicable to common shares and Partnership units
    
5,839
   
4,570
   
4,784
   
4,983
 
                           
Income (Loss) from Unconsolidated Joint Ventures
    
769
   
279
   
(341
)
  
328
 
Depreciation and amortization of purchase price in excess of historical cost (3)
    
446
   
-
   
921
   
-
 
Interest in depreciation and amortization of unconsolidated joint ventures (4)
    
1,553
   
259
   
2,573
   
516
 
Funds from unconsolidated joint ventures operations applicable to common shares and Partnership units
    
2,768
   
538
   
3,153
   
844
 
     
 
   
 
   
 
   
 
 
Funds from operations applicable to common shares and Partnership units
  
$
8,607
  
$
5,108
  
$
7,937
  
$
5,827
  
                           
Weighted Average Common Shares
                          
Basic
   
25,469,708
   
20,293,169
   
22,903,225
   
20,292,167
 
Diluted
    
29,056,539
   
23,159,013
   
22,903,225
   
23,146,372
 
 
 

(1)
Income (loss) allocated to minority interest includes both income (loss) allocated to minority interests in our consolidated joint ventures and income (loss) allocated to minority interests in the Partnership. FFO related to the minority interests in consolidated joint ventures is deducted below.
(2)
Adjustment made to deduct FFO related to the minority interest in our consolidated joint ventures which represents the portion of net income and depreciation allocated to our joint venture partners.
(3)
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.
(4)
Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint ventures. The allocation of depreciation and amoritzation is consistent with the allocation of income and loss.
 
FFO was $8,607 for the three month period ended June 30, 2006, which was an increase of $3,499, over FFO in the comparable period in 2005, which was $5,108. FFO was $7,937 for the six month period ended June 30, 2006, which was an increase of $2,110, over FFO in the comparable period in 2005, which was $5,827. The increase in FFO was primarily a result of a strengthened economy; the benefits of acquiring assets and interests in joint ventures since June 30, 2005; continued stabilization and maturation of the existing portfolio; an increase in business travel and continued attention to the average daily rate.
 
FFO was negatively impacted by increases in our interest expense and dividends paid to our preferred shareholders and debt extinguishment charges incurred during the period ended June 30, 2006.
 
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, all estimates are evaluated by us, including those related to carrying value of investments in hotel properties. All 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

We directly recognize revenue and expense for all consolidated hotels as “Hotel Operating Revenue” and “Hotel Operating Expense” when earned and incurred. Included in hotel operating revenues is primarily room revenues and revenue from other hotel operating departments. 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.
 
Stock Compensation

We apply Statement of Financial Accounting Standards No. 123R, “Share-Based Payments” (SFAS 123R) whereby we measure the cost of employee service received in exchange for an award of equity instruments based on the grant -date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award. We granted 71,000 shares of Stock Awards in the second quarter of 2005, at a fair value of $9.60 per share vesting over four years, and an additional 89,500 shares of Stock Awards in the second quarter of 2006 at a fair value of $9.40 per share vesting over four years. This resulted in $60 and $14 in compensation expense for the three months ended June 30, 2006 and June 30, 2005, respectively, and $103 and $14 for the six months ended June 30, 2006 and 2005. One-fourth of the 71,000 shares issued in the second quarter of 2005 became vested on June 1, 2006, and none of the restricted shares issued in the second quarter of 2006 were vested as of June 30, 2006.

Allowance for Doubtful Accounts

Accounts receivable are charged to bad debt expense when they are determined to be uncollectible based upon a periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debts.  Our evaluation of the adequacy of the allowance for doubtful accounts is based on known or inherent credit risks, economic conditions in the markets our hotels operate, past experience, and other factors. This evaluation requires judgment and is inherently subjective. Deterioration in the quality of our hotel accounts receivable or other receivables could require us to record additional allowance.

Derivatives

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 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. During the three and six months ended June 30, 2006, these derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

As of June 30, 2006, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.


Investment in Unconsolidated Joint Ventures

The equity method of accounting is used for joint ventures in which we have the ability to exercise significant influence. 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 then as dividends or other distributions are received, limited to the extent of our investment in, advances to and commitments for the investee.

Evaluation of Consolidation Criteria for Investments in Joint Ventures and Other Contractual Relationaships

We evaluate our investments and contractual relationships to determine (a) if the investment or relationship is with a Variable Interest Entitie (VIE) and (b) if the entity is required to be consolidated with us in accordance withthe Financial Accounting Standards Board issued FASB Interpretation No. 46, (“FIN 46R”) “Consolidation of Variable Interest Entities (VIE’s), an interpretation of Accounting Research Bulletin No. 51 (ARB No. 51),” as amended. FIN 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in any VIE through means other than voting rights, and accordingly, should include the VIE in its consolidated financial statements.

In addition to other contractual relationships, our investments in development loans receivable and joint ventures are evaluated to determine whether they meet the guidelines of consolidation in accordance with FIN 46R: Our examination consists of reviewing the sufficiency of equity at risk, controlling financial interests, voting rights, and the obligation to absorb expected losses and expected gains, including residual returns. The estimation of an entities expected future losses, expected gains, and residual returns requires significant judgment. We will continue to evaluate each of our investments and contractual relationships to determine if consolidation is required based upon the provisions of FIN 46R.

Impairment of Long-Lived Assets.

We review the carrying value of each hotel property in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or if depreciation periods should be modified. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell.

We would record an impairment charge if we believe an investment in hotel property has been impaired such that future undiscounted cash flows would not recover the book basis of the investment in the hotel property. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s carrying value, thereby possibly requiring an impairment charge in the future. We have reviewed each of our hotel properties at June 30, 2006 for impairment and, based on our estimate of each hotel’s future undiscounted cash flows, determined that no impairment existed at any of our hotels.
 
Inflation

Operators of hotels in general possess the ability to adjust room rates. However, competitive pressures may limit the hotel operator’s ability to raise room rates in the face of inflation.

Seasonality

Our hotels’ operations historically have been seasonal in nature, reflecting higher occupancy rates during the second and third quarters. This seasonality can be expected to cause fluctuations in our quarterly lease revenue to the extent that we receive percentage rent.
 
Subsequent Events
 
On May 25, 2006, our Board of Trustees declared quarterly cash dividends of $0.18 per common share and unit of limited partnership interest in our operating partnership for the quarter ending June 30, 2006. The common share dividend and limited partnership unit distribution were paid on July 17, 2006 to shareholders and unitholders of record on June 30, 2006. The quarterly dividend pertaining to the Series A Preferred Shares for the first quarter of 2006 was declared on May 25, 2006 to shareholders of record on July 1, 2006 at a rate of $0.50 per share. The dividend was paid on July 17, 2006.
 
In July, we signed an agreement to purchase the remaining two-thirds interest in the joint venture that owns the 144-room Hampton Inn Manhattan-Chelsea from our joint-venture partner, CNL Hotels & Resorts, Inc for $25.4 million.

In July, we exercised our right of first refusal to purchase the 96-room Residence Inn in Norwood, Massachusetts for $14.9 million. The brand new hotel opened on July 27, 2006.
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 
 
Our primary market risk exposure is to changes in interest rates on our variable rate Line of Credit and other floating rate debt. At June 30, 2006, we maintained a balance of $32,034 under our Line of Credit. The total floating rate mortgages payable of $29,622 had a current weighted average interest rate of 8.31%. The total fixed rate mortgages payable of $323,776 had a current weighted average interest rate of 6.55%. The carrying value of all of our fixed rate debt approximates fair value.
 
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 may enter into derivative financial instruments such as interest rate swaps or caps and 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. Currently, we have one interest rate swap related to debt on the Four Points by Sheraton, Revere. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
 
Approximately 91.6% of our outstanding mortgages payable are subject to fixed rates, including the debt whose rate is fixed through a derivative instrument, while approximately 8.4% of our outstanding mortgages payable are subject to floating rates. The total weighted average interest rate on our debt and Line of Credit as of June 30, 2006 was approximately 6.81%. If the interest rate for our Line of Credit and other variable rate debt was 100 basis points higher or lower during the period ended June 30, 2005, our interest expense for the three month and six month period ended June 30, 2006 would have been increased or decreased by approximately $144 and $163, respectively.
 
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 at June 30, 2006, the following table presents expected principal repayments and related weighted average interest rates by expected maturity dates (in thousands):
 
   
2006
  
2007
  
2008
  
2009
  
2010
  
Thereafter
  
Total
  
Fixed Rate Debt
  
$
2,069
  
$
5,603
  
$
21,201
  
$
17,109
  
$
28,015
  
$
249,779
  
$
323,776
  
Average Interest Rate
    
6.54
%
  
6.52
%
  
6.53
%
  
6.52
%
  
6.30
%
  
6.30
%
  
6.45
%
Floating Rate Debt
  
$
287
  
$
395
  
$
13,661
  
$
427
  
$
12,280
  
$
2,572
  
$
29,622
  
Average Interest Rate
    
8.31
%
  
8.32
%
  
7.75
%
  
7.75
%
  
7.75
%
  
7.75
%
  
7.94
%
 
The table incorporates only those exposures that existed as of June 30, 2006 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.
 
At June 30, 2006, the fair value of the interest rate swap was $160 and is included in other assets on the consolidated balance sheets. At December 31, 2005, the fair value of the interest rate cap was $23 and is included in other assets and the fair value of the interest rate swap was $0. The change in net unrealized gains/losses of $92 and $130 for the three months ended June 30, 2006 and 2005, respectively, for derivatives designated as cash flow hedges. The change in net unrealized gains/losses of $209 and $100 for the six months ended June 30, 2006 and 2005, respectively, for derivatives designed as cash flow hedges. Hedge ineffectiveness of $3 and $3 on cash flow hedges was recognized in unrealized gain/loss on derivatives during the three months ended June 30, 2006 and 2005, respectively, and is included in interest expense on the consolidated statements of operations. Hedge ineffectiveness of $7 and $7 on cash flow hedges was recognized in unrealized gain/loss on derivatives during the six months ended June 30, 2006 and 2005, respectively, and is included in interest expense on the consolidated statements of operations. On June 12, 2006, we terminated the interest rate cap due to the refinancing of the associated interest rate debt instrument to a fixed rate. We received $79 in cash and reclassified $58 in reduction to interest expense as a result of the termination of this cap.
 
 
Item 4. Controls and Procedures.
 
Disclosure Controls and Procedures
 
The Company’s management, under the supervision of and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) 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 such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective and reasonably designed to ensure that all material information relating to the Company required to be included in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
 
Changes in Internal Control Over Financial Reporting
 
In connection with our annual assessment of internal control over financial reporting, management identified certain material weaknesses in internal control, which are described in our Annual Report on Form 10-K for the year ended December 31, 2005. In response to the material weaknesses identified by the Company, the Company and HHMLP have taken certain remedial measures in response to identified material weaknesses. To date, the remedial measures occurring during the quarter ended June 30, 2006 include the following:

·
HHMLP is seeking to hire additional senior accounting professionals. The Company intends to continue its oversight of the internal control improvements being implemented by HHMLP and other third party service providers.

·
The Company is working with HHMLP to establish additional and more rigorous procedures to be performed by HHMLP to prepare and review financial information prior to release to the Company for inclusion in the consolidated financial statements.

·
HHMLP, in cooperation with the Company, is taking steps to better inform and train hotel level accounting employees regarding controls over revenue accounting, account reconciliations and account analysis.
 
Except as described above, there was no change in our internal control over financial reporting during the quarter ended June 30, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
 
None.
 
Item 1A. Risk Factors.
 
None.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3. Default Upon Senior Securities.
 
None.
 
Item 4. Submission of Matters to a Vote of Security Holders. 
 
The annual meeting of the shareholders (the “Annual Meeting”) of the Company was held on Thursday, May 25, 2006. At the Annual Meeting, the shareholders of the Company voted as follows:
 
1) The election of the following Class II trustees to serve until the annual meeting of shareholders in 2007:
 
TRUSTEE
  
FOR
  
AGAINST
  
WITHHOLD
  
BROKER NON-VOTES
  
Donald J. Landry
    
18,506,123
    
0
    
282,039
    
0
  
Thomas S. Capello
    
18,509,554
    
0
    
278,608
    
0
  
Jay H. Shah
    
18,484,126
    
0
    
304,036
    
0
  

 
2) The ratification of the appointment of KPMG LLP to serve as independent auditors of the Company to serve for 2006:
 
FOR
  
AGAINST
  
WITHHOLD
  
BROKER NON-VOTES
18,724,132
  
53,276
  
10,754
  
0

Item 5. Other Information.
 
None.
 
Item 6. Exhibits.
 
(a) Exhibits Required by Item 601 of Regulation S-K.
 
10.1
Contribution Agreement, dated as of May 3, 2006, by and among Kiran P. Patel, Hasu P.  Shah, Bharat C. Mehta, Kanti D. Patel, 44 Cambridge Associates LLC and Hersha Hospitality Limited Partnership (filed as Exhibit 10.1 to the Current Report on Form 8-K filed May 8, 2006 (SEC File No. 001-14765) and incorporated by reference herein.

10.2
Purchase and Sale Agreement, dated July 11, 2006, by and between CNL Hospitality Partners, LP and Hersha Hospitality Limited Partnership (filed as Exhibit 10.1 to the Current Report on Form 8-K filed July 17, 2006 (SEC File No. 001-14765) and incorporated by reference herein.


Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
HERSHA HOSPITALITY TRUST
 
 
(Registrant)
 
 
 
August 9, 2006
 
/s/ Ashish R. Parikh
 
 
Ashish R. Parikh
 
 
Chief Financial Officer
 
 
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