UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K /A
Amendment No. 1
 
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005
 
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

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each class
 
Name of each exchange on which registered
 
 
Class A Common Shares of Beneficial Interest, par value $.01 per share
 
American Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes     x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes     x No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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).
oYes     x No

The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant, as of June 30, 2005, was approximately $194.3 million.

As of March 15, 2006, the number of Class A Common Shares of Beneficial Interest outstanding was 20,379,463.

Documents Incorporated By Reference: None.
 




HERSHA HOSPITALITY TRUST

EXPLANATORY NOTE

This Amendment No. 1 on Form 10−K/A (“Amendment No. 1”) amends and restates the Annual Report on Form 10−K of Hersha Hospitality Trust (the “Company”), as filed by the Company on March 22, 2006 (the “Original Form 10−K”), and is being filed solely for the purposes of (1) including the information required by Part III of the Annual Report on Form 10-K, pursuant to General Instruction G(3); (2) replacing the Report of Independent Registered Public Accounting Firm of KPMG LLP regarding our audited financial statements; and (3) replacing the Report of Independent Registered Public Accounting Firm of KPMG LLP regarding Management’s Report on Internal Control Over Financial Reporting to make certain technical corrections thereto.

INDEX

   
Form 10-K
   
Report
Item No.
 
Page
     
 
PART II
 
     
Item 8.
3
Item 9A.
51
   
 
 
PART III
 
   
 
Item 10.
55
Item 11.
59
Item 12.
64
Item 13.
65
Item 14.
68
     
 
PART IV
 
     
Item 15.
70

ii


CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believes,” “anticipates,” “expects” and words of similar import. Such forward-looking statements relate to future events, our future financial performance, and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this report including, but not limited to those discussed in the sections entitled “Risk Factors,” “Growth Strategy” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” that could cause actual results to differ. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments, except as required by law.

PART II

Financial Statements and Supplementary Data


Hersha Hospitality Trust
 

   
Page
Hersha Hospitality Trust
   
Reports of Independent Auditors
 
4
Consolidated Balance Sheets as of December 31, 2005 and 2004
 
6
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
 
8
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003
 
10
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
 
11
Notes to Consolidated Financial Statements
 
13
Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 2005
 
96
 
3

 
Report of Independent Registered Public Accounting Firm


The Shareholders and Board of Trustees of

Hersha Hospitality Trust:


We have audited the accompanying consolidated balance sheets of Hersha Hospitality Trust and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for each of the years in the two-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hersha Hospitality Trust and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements for 2005 and 2004 taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 46 (R) Consolidation of Variable Interest Entities effective March 31, 2004.

 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Hersha Hospitality Trust and subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 17, 2006, expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.
 

/s/ KPMG LLP
 
Harrisburg, Pennsylvania

March 17, 2006
 
4

 
Report of Independent Auditors


To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania


We have audited the accompanying consolidated balance sheet of Hersha Hospitality Trust and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. These consolidated financial statements schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hersha Hospitality Trust and subsidiaries as of December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.


 
REZNICK GROUP, P.C.

 
Baltimore, Maryland
March 5, 2004, except for the effect
on 2003 amounts as described in
Note 12 as to which the date is
March 21, 2006
 
5


Part I. Financial Information
Item 1. Financial Statements


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

   
December 31,
 
December 31,
 
   
2005
 
2004
 
Assets:
         
Investment in Hotel Properties, net of Accumulated Depreciation
 
$
317,980
 
$
163,923
 
Investment in Joint Ventures
   
55,981
   
9,069
 
Development Loans Receivable from Related Parties
   
32,470
   
36,550
 
Cash and cash equivalents
   
8,780
   
20,614
 
Escrow Deposits
   
7,329
   
2,046
 
Notes Receivable
   
1,886
   
103
 
Hotel Accounts Receivable
   
2,211
   
1,776
 
Deferred Costs, net of Accumulated Amortization of $1,437 and $795
   
4,131
   
1,474
 
Due from Related Parties
   
2,779
   
4,482
 
Interest Rate Derivative
   
23
   
----
 
Intangible Assets, net of Accumulated Amortization of $478 and $368
   
4,681
   
640
 
Other Assets
   
13,697
   
1,586
 
Hotel Assets Held for Sale
   
3,407
   
18,758
 
               
Total Assets
 
$
455,355
 
$
261,021
 
               
Liabilities and Shareholders’ Equity:
             
Line of Credit
 
$
----
 
$
1,027
 
Mortgages and Notes Payable
   
256,146
   
97,761
 
Capital Lease Payable
   
----
   
447
 
Accounts Payable and Accrued Expenses
   
6,969
   
5,400
 
Advance Deposits
   
130
   
108
 
Dividends and Distributions Payable
   
5,151
   
4,164
 
Due to Related Parties
   
4,655
   
129
 
Interest Rate Derivative
   
----
   
306
 
Debt and Capital Lease Payable Related to Hotel Assets Held for Sale
   
375
   
13,058
 
               
Total Liabilities
 
 
273,426
 
 
122,400
 

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

6

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

 
COMMITMENTS AND CONTINGENCIES
 
December 31,
 
December 31,
 
   
2005
 
2004
 
Minority Interest:
         
Common Units
 
$
15,147
 
$
16,779
 
Interest in Consolidated Joint Ventures
   
2,079
   
2,050
 
Total Minority Interest
 
 
17,226
 
 
18,829
 
Shareholders’ Equity:
             
Preferred Shares - 8% Series A, $.01 Par Value, 10,000,000 Shares Authorized, 2,400,000 and -0- Shares Issued and Outstanding at December 31, 2005 and December 31, 2004, Respectively (Aggregate Liquidation Preference $60,000 and $-0- at December 31, 2005 and December 31, 2004, respectively)
 
 
24
 
 
-
 
Common Shares - Class A, $.01 Par Value, 50,000,000 Shares Authorized, 20,302,752 and 20,289,983 Shares Issued and Outstanding at December 31, 2005 and December 31, 2004, Respectively
   
203
   
203
 
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, None Issued and Outstanding
   
-
   
-
 
Accumulated Other Comprehensive Income
   
327
   
33
 
Additional Paid-in Capital
   
193,228
   
135,363
 
Distributions in Excess of Net Earnings
   
(29,079
)
 
(15,807
)
Total Shareholders’ Equity
   
164,703
   
119,792
 
Total Liabilities and Shareholders’ Equity
 
$
455,355
 
$
261,021
 

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

7

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
   
2005
 
2004
 
2003
 
Revenue:
             
Percentage Lease Revenues - HHMLP
 
$
-
 
$
1,192
 
$
10,144
 
Percentage Lease Revenues - Other
   
-
   
-
   
960
 
Hotel Operating Revenues
   
80,899
   
47,339
   
4,731
 
Total Revenue
   
80,899
   
48,531
   
15,835
 
                     
Expenses:
                   
Hotel Operating Expenses
   
49,783
   
30,335
   
3,323
 
Land Lease
   
433
   
504
   
50
 
Real Estate and Personal Property Taxes and Property Insurance
   
4,346
   
3,104
   
1,309
 
General and Administrative
   
4,992
   
3,190
   
671
 
Prepayment Penalties - Debt
   
-
   
-
   
116
 
Compensation Expense related to Option Redemption
   
-
   
-
   
1,307
 
Unrecognized (Gain) loss on Derivatives
   
(13
)
 
62
    -  
Depreciation and Amortization
   
10,600
   
6,930
   
4,136
 
Total Operating Expenses
   
70,141
   
44,125
   
10,912
 
                     
Operating Income
   
10,758
   
4,406
   
4,923
 
Interest Income
   
359
   
241
   
86
 
Interest Income - Secured Loans Related Party
   
4,046
   
1,498
   
715
 
Interest Income - Secured Loans
   
137
   
693
   
-
 
Other Revenue
   
520
   
176
   
8
 
Interest Expense
   
14,094
   
6,167
   
4,250
 
Interest Expense - Related Party
   
-
   
-
   
60
 
Income before income from Unconsolidated Joint Venture Investments, Distributions to Preferred Unitholders, Minority Interests and Discontinued Operations
   
1,726
   
847
   
1,422
 
                     
Income (loss) from Unconsolidated Joint Venture Investments
   
457
   
481
   
(24
)
                     
Income before Distribution to Preferred Unitholders, Minority Interests and Discontinued Operations
   
2,183
   
1,328
   
1,398
 
                     
Distributions to Preferred Unitholders
   
-
   
499
   
1,195
 
Income Allocated to Minority Interest in Continuing Operations
   
-
   
105
   
104
 
Income from Continuing Operations
   
2,183
   
724
   
99
 
               
Discontinued Operations (Note 12):
                   
Gain on Disposition of Hotel Properties
   
1,161
   
-
   
-
 
(Loss) Income from Discontinued Operations - operations
   
(47
)
 
1,325
   
686
 
Income from discontinued operations
    1,114     1,325     686  
                     
Net Income
   
3,297
   
2,049
   
785
 
Preferred Distributions
   
1,920
   
-
   
-
 
                     
Net Income applicable to Common Shareholders
 
$
1,377
 
$
2,049
 
$
785
 
 
8

 
 
 
 
2005
 
 
2004
   
2003
 
Basic and diluted earnings per share
                 
Income from continuing operations applicable to commonshareholders
 
$
0.01
 
$
0.04
 
$
0.02
 
Discontinued operations
 
$
0.06
 
$
0.09
 
$
0.15
 
                     
Net Income applicable to common shareholders
 
$
0.07
 
$
0.13
 
$
0.17
 
                     
Weighted Average Common Shares Outstanding
                   
Basic
   
20,293,554
   
16,391,805
   
4,614,316
 
Diluted
   
20,335,181
   
16,391,805
   
4,614,316
 
 
9

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
[IN THOUSANDS, EXCEPT SHARES]

    _____________    _____________    _____________       
Accumulated
 
Distributions
     
   
Class A
 
Class B
 
Series A
 
Additional
 
Other
 
in Excess
     
   
Common Shares
 
Common Shares
 
Preferred Shares
 
Paid-In
 
Comprehensive
 
of Net
     
   
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Capital
 
Income
 
Earnings
 
Total
 
Balance at December 31, 2002
   
2,576,863
 
$
26
   
-
 
$
-
   
-
 
$
-
 
$
13,679
 
$
-
 
$
(2,327
)
$
11,378
 
Common Stock Issuance
   
9,775,000
   
98
   
-
   
-
   
-
   
-
   
82,990
   
-
   
-
   
83,088
 
Issuance Costs
   
0
   
-
   
-
   
-
   
-
   
-
   
(5,826
)
 
-
   
-
   
(5,826
)
Dividend Reinvestment Plan
   
3,212
   
-
   
-
   
-
   
-
   
-
   
24
   
-
   
-
   
24
 
Stock based compensation expense
   
-
   
-
   
-
   
-
   
-
   
-
   
279
   
-
   
-
   
279
 
Reallocation of minority interest due to equity issuance
   
-
   
-
   
-
   
-
   
-
   
-
   
(14,650
)
 
-
   
-
   
(14,650
)
Dividends declared ($0.72 per share)
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(3,618
)
 
(3,618
)
Net Income
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
785
   
785
 
Balance at December 31, 2003
   
12,355,075
 
 
124
    -     -     -  
 
 -
 
 
76,496
   
-
 
 
(5,160
)
 
71,460
 
Common Stock Issuance
   
3,900,000
   
39
   
-
   
-
   
-
   
-
   
36,504
   
-
   
-
   
36,543
 
Unit Conversion
   
4,032,460
   
40
   
-
   
-
   
-
   
-
   
24,820
   
-
   
-
   
24,860
 
Issuance Costs
   
-
   
-
   
-
   
-
   
-
   
-
   
(324
)
 
-
   
-
   
(324
)
Dividend Reinvestment Plan
   
2,448
   
-
                           
22
   
-
   
-
   
22
 
Reallocation of minority interest due to equity issuance
   
-
   
-
   
-
   
-
   
-
   
-
   
(2,155
)
 
-
   
-
   
(2,155
)
Dividends declared ($0.72 per share)
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(12,696
)
 
(12,696
)
Comprehensive Income:
                                                             
Change in fair value of hedge instruments
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
33
   
-
   
33
 
Net Income
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
2,049
   
2,049
 
Total Comprehensive Income
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
2,082
 
Balance at December 31, 2004
   
20,289,983
 
 
203
   
   
                 
 
 
 
 
135,363
 
 
33
 
 
(15,807
)
 
119,792
 
Unit Conversion     8,155      -      -      -      -      -      46      -      -     46  
Common Stock Issuance Costs
   
-
   
-
   
-
   
-
   
-
   
-
   
(30
)
 
-
   
-
   
(30
)
Dividend Reinvestment Plan
   
2,519
   
-
   
-
   
-
   
-
   
-
   
24
   
-
   
-
   
24
 
Preferred Stock Issuance
   
-
   
-
   
-
   
-
   
2,400,000
   
24
   
58,086
   
-
   
-
   
58,110
 
Preferred Stock Issuance Costs
   
-
   
-
   
-
   
-
   
-
   
-
   
(360
)
 
-
   
-
   
(360
)
Dividends declared:
                                                             
Common Stock ($0.72 per share)
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(14,649
)
 
(14,649
)
Preferred Stock ($0.89 per share)
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(1,920
)
 
(1,920
)
2004 Equity Incentive Plan Awards
   
2,095
   
-
   
-
   
-
   
-
   
-
   
99
   
-
         
99
 
Comprehensive Income:
                                                             
Change in fair value of hedge instruments
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
294
   
-
   
294
 
Net Income
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
3,297
   
3,297
 
Total Comprehensive Income     -     -     -     -     -     -     -     -     -     3,591  
Balance at December 31, 2005     20,302,752   $ 203     -   $ -     2,400,000   $ 24    $ 193,228   $ 327   $ (29,079 ) $ 164,703  

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
 
10

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
   
2005
 
2004
 
2003
 
Operating activities:
             
Net Income
 
$
3,297
 
$
2,049
 
$
785
 
Adjustments to reconcile net income to net cash provided by operating activities:
                   
Gain on disposition of hotel assets
   
(1,323
)
 
-
   
-
 
Depreciation
   
10,696
   
6,959
   
4,681
 
Amortization
   
672
   
241
   
109
 
Income allocated to minority interests
   
154
   
348
   
821
 
Equity in income (loss) of unconsolidated joint ventures
   
(457
)
 
(481
)
 
24
 
Distributions from unconsolidated joint ventures
   
1,249
   
-
   
-
 
Gain recognized on change in fair value of derivative instrument
   
(13
)
 
-
   
-
 
Stock based compensation expense
   
99
   
-
   
279
 
Change in assets and liabilities:
                   
(Increase) decrease in:
                   
Hotel accounts receivable
   
(435
)
 
(1,553
)
 
(223
)
Escrow and lease deposits
   
(1,074
)
 
113
   
(411
)
Lease payments receivable - related party
   
-
   
2,590
   
(28
)
Lease payments receivable - other
   
-
   
-
   
233
 
Other assets
   
(1,923
)
 
(894
)
 
(423
)
Due from related party
   
(1,431
)
 
(811
)
 
62
 
Increase (decrease) in:
                   
Deposits Payable
   
-
   
-
   
(1,000
)
Advance deposits
   
22
   
108
   
-
 
Due to related party
   
4,419
   
(290
)
 
(884
)
Preferred distributions payable
   
-
   
-
   
499
 
Accounts payable and accrued expenses
   
1,461
   
3,769
   
669
 
Net cash provided by operating activities
   
15,413
   
12,148
   
5,193
 
                     
Investing activities:
                   
Purchase of hotel property assets
   
(135,059
)
 
(51,516
)
 
(31,943
)
Capital expenditures
   
(2,958
)
 
(2,494
)
 
-
 
Proceeds from disposition of hotel assets held for sale
   
6,288
   
-
   
-
 
Deposits on hotel acquisitions
   
(8,250
)
 
-
   
-
 
Investment in common stock of Trust entities
   
(1,548
)
 
-
   
-
 
Purchase of franchise fees
   
(302
)
 
-
   
(127
)
Investments in notes receivable
   
(1,166
)
 
(13,939
)
 
(15,000
)
Repayment of notes receivable
   
83
   
15,133
   
-
 
Repayment of development loans to related parties
   
30,725 
   
-
   
-
 
Investment in development loans to related parties
   
(31,345
)
 
(20,550
)
 
(4,700
)
Advances and capital contributions to unconsolidated joint ventures
   
(47,704
)
 
(5,012
)
 
(6,600
)
Net used in investing activities
   
(191,236
)
 
(78,378
)
 
(58,370
)
 
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
11

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
 
   
2005
 
2004
 
2003
 
Financing activities:
             
Proceeds from borrowings under line of credit
   
171,111
   
45,365
   
19,411
 
Repayment of borrowings under line of credit
   
(172,138
)
 
(44,338
)
 
(23,214
)
Principal repayment of mortgages and notes payable
   
(6,189
)
 
(7,283
)
 
(19,608
)
Proceeds from mortgages and notes payable
   
133,692
   
37,375
   
29,907
 
Cash paid for interest rate cap
   
(23
)
 
-
   
-
 
Cash paid for deferred financing costs
   
(2,460
)
 
(325
)
 
(139
)
Cash received from sale of common stock, net
   
(30
)
 
38,279
   
77,262
 
Cash received from sale of preferred stock, net
   
57,750
   
-
   
-
 
Cash received from sale of Series A Preferred Units
   
-
   
-
   
17,080
 
Redemption of common partnership units
   
-
   
(8,951
)
 
(1,449
)
Preferred distributions paid on Series A Preferred Units
   
-
   
(499
)
 
-
 
Distributions to consolidated joint venture interest
    198     -     -  
Contributions from consolidated joint venture interest
  (317 )   -     -  
Dividends paid on common shares
   
(14,599
)
 
(11,267
)
 
(1,834
)
Dividends paid on preferred shares
   
(947
)
 
-
   
-
 
Distributions paid on common partnership units
   
(2,059
)
 
(2,219
)
 
(3,672
)
Net cash provided by financing activities
   
163,989
   
46,137
   
93,744
 
                     
Net (decrease) increase in cash and cash equivalents
   
(11,834
)
 
(20,093
)
 
40,567
 
Cash and cash equivalents - beginning of year
   
20,614
   
40,707
   
140
 
                     
Cash and cash equivalents - end of year
 
$
8,780
 
$
20,614
 
$
40,707
 

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

12

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[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.

On January 16, 2003, the Partnership formed a wholly owned taxable REIT subsidiary, 44 New England Management Company (“44 New England” or “TRS Lessee”), to lease certain of the Company’s hotels.

On April 21, 2003, May 21, 2003 and August 29, 2003, CNL Hospitality Partnership, LP (“CNL”) purchased $10,000, $5,000 and $4,027, respectively, of convertible preferred units of limited partnership interest in the Partnership (the “Series A Preferred Units”). Net of offering expenses, the Partnership received proceeds of $17,023. On April 16, 2004, CNL exercised its conversion right and redeemed all of its convertible preferred units in exchange for 2,816,460 shares of common stock.

On October 21, 2003, we completed a public offering of 9,775,000 common shares at $8.50 per share. Proceeds to the Company, net of underwriting discounts and commissions, structuring fees and expenses, were approximately $77,262. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership. Of the net offering proceeds, approximately $10,400 was used to fund limited partner redemptions and approximately $24,000 was used to repay indebtedness. The remaining net proceeds were used principally to fund acquisitions and for general corporate purposes.

On September 24, 2004, we completed a public offering of 3,500,000 common shares at $9.37 per share. On September 30, 2004, the underwriter exercised its over-allotment option on these shares, and we issued an additional 400,000 common shares at $9.37 per share. Proceeds to the Company, net of underwriting discounts and commissions and expenses, were approximately $36,317. 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 $5,000 was used to repay indebtedness. The remaining net proceeds have been principally allocated to fund secured development loans, acquisitions and for general corporate purposes.

On August 5, 2005, the Company completed a public offering of 2,400,000 of its 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.

As of December 31, 2005, the Company, through the Partnership and subsidiary partnerships, owned thirty-one limited and full service hotels.   All of the owned hotel facilities are leased to the Company’s taxable REIT subsidiary (“TRS”), 44 New England. Prior to April 1, 2004, eight owned hotels were leased to Hersha Hospitality Management, LP (“HHMLP”), a Pennsylvania limited partnership. As of April 1, 2004, the Company terminated these eight leases with HHMLP and leased the hotels to 44 New England.

In addition to the wholly owned hotel properties, as of December 31, 2005, the Company owned joint venture interests in sixteen 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:

13

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
Ownership
 
Property
 
Location
 
Lessee
                 
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
Mystic Partners. LLC
 
66.7%
 
Marriott
 
Mystic, CT
 
Mystic Partners Leaseco, LLC
   
44.0%
 
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
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
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

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 eight hotel properties. Each of the eight 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 the Company’s joint venture partner in Mystic Partners, LLC. South Bay Boston, LLC; HT LTD Williamsburg LLC; and HT LTD Williamsburg Two LTD LLC lease properties from each respective joint venture and are owned by 44 New England and the Company’s joint venture partner in each venture.

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. HHMLP serves as the manager for all of the 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.

14



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Principles of Consolidation and Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned TRS Lessee. All significant inter-company amounts have been eliminated.

Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company as general partner of the Partnership. Properties owned in joint ventures are also consolidated if the determination is made that we are the primary beneficiary in a variable interest entity or we maintain control of the asset through our voting interest in the entity. Control is 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.

The Financial Accounting Standards Board issued FASB Interpretation No. 46, (“FIN 46”) “Consolidation of Variable Interest Entities (VIE’s), an interpretation of Accounting Research Bulletin No. 51 (ARB No. 51),” in January 2003 and a further interpretation of FIN 46 in December 2003 (“FIN 46-R” and FIN 46, collectively “FIN 46”). FIN 46 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. We have adopted FIN 46 effective as of March 31, 2004.

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; 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; HPS Seaport LLC & BCM, LLC; 44 Fifth Avenue, LLC; 5444 Associates, LP; Metro Ten Hotels, LLC; and PRA Suites at Glastonbury, LLC.

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 a VIE, except Mystic Partners, LLC; Mystic Partners Leaseco, LLC; South Bay Boston, LLC; HT LTD Williamsburg LLC; HT LTD Williamsburg Two LTD LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II.

We have terminated all of the existing leases with HHMLP, effective April 1, 2004. Due to the termination of the leases and the funding of sufficient equity by the partners of HHMLP, we have determined that HHMLP is a voting interest entity and we have no ownership interest in that entity. Therefore we have not consolidated the financial statements of HHMLP with ours effective as of April 1, 2004.

We have consolidated the operations of the Logan Hospitality Associates, LLC; LTD Associates One, LLC; and LTD Associates Two, LLC joint ventures because each entity is a voting interest entity and the Company owns a majority voting interest in the venture.

Our investments in HT/CNL Metro Hotels, LP; PRA 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 net equity in income (loss), which is allocated in accordance with the provisions of the applicable partnership or joint venture agreements.

We hold an investment in development loan receivables with HPS Seaport LLC & BCM, LLC; 44 Fifth Avenue, LLC; 5444 Associates, LP; Metro Ten Hotels, LLC; and PRA Suites at Glastonbury, 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.

15



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
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; South Bay Boston, LLC; HT LTD Williamsburg LLC; and HT LTD Williamsburg Two LTD 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.

During the second quarter of 2005, we formed Hersha Statutory Trust I and Hersha Statutory Trust II, Delaware statutory trusts (collectively, the “Hersha Statutory Trusts”), to collectively issue $50,000 of trust preferred securities in private placements. We acquired, for $1,548, residual interests (common securities) in the Hersha Statutory Trusts. Preferred equity securities of $25,000 issued by Hersha Statutory Trust I will mature on June 30, 2035, and the remaining $25,000 preferred equity securities issued by Hersha Statutory Trust II will mature on July 30, 2035, at par. The preferred equity securities issued by Hersha Statutory Trust I and Hersha Statutory Trust II may be redeemed by the trusts beginning on June 30, 2010 and July 30, 2010, respectively. The holders of both the preferred equity and common securities will receive quarterly distributions from the Hersha Statutory Trusts, at a fixed rate of 7.34% per annum through June 30, 2010 for Hersha Statutory Trust I and 7.173% per annum through July 30, 2010 for Hersha Statutory Trust II. Subsequent to June 30, 2010, for Hersha Statutory Trust I and July 30, 2010 for Hersha Statutory Trust II, holders of the trusts preferred equity and common securities will receive quarterly distributions at a variable rate of LIBOR plus 3.0% per annum. The Hersha Statutory Trusts used the proceeds from the issuance of the preferred and common securities to acquire $51,548 of junior subordinated notes from HHLP pursuant to indenture agreements. The note acquired by Hersha Statutory Trust I will mature on June 30, 2035, but may be redeemed at our option, in whole or in part, beginning on June 30, 2010 in accordance with the provisions of the indenture agreement. The note acquired by 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 acquired by Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum through June 30, 2010 and the note acquired by 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 Hersha Statutory Trust I and July 30, 2010 for Hersha Statutory Trust II, holders the notes bear interest at a variable rate of LIBOR plus 3.0% per annum.

The Hersha Statutory Trusts are VIEs under FIN 46, because the equity holders at risk hold no substantial decision-making rights. Because HHLP is not the primary beneficiary in the Hersha Statutory Trusts, the accounts of the trusts are not consolidated with and into HHLP. HHLP’s investment in the Hersha Statutory Trusts is accounted for using the equity method of accounting and is presented on our consolidated balance sheet in other assets.

The proceeds received by HHLP in exchange for the notes were used to fund acquisitions of hotel properties, pay down outstanding borrowings under our revolving credit facility and for general corporate purposes. The notes are presented on our consolidated balance sheet in Mortgages and Notes Payable.

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.

16



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
The estimated lives used to depreciate the hotel properties are as follows:

Building and Improvements
15 to 40 Years
   
Furniture and Fixtures
5 to 7 Years

Revenue Recognition

We directly recognize revenue and expense for all hotels leased through 44 New England as “Hotel Operating Revenue” and “Hotel Operating Expense” when earned and 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.

Earnings Per Common Share

We compute earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.”

Minority Interest

Minority Interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income (Loss) is allocated to minority interest in accordance with the weighted average percentage ownership of the Partnership during the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted average percentage ownership of the Partnership during the period. Our ownership interest in the Partnership as of December 31, 2005, 2004 and 2003 was 87.8%, 87.7% and 65.1%, respectively.

We also maintain minority interests for the equity interest owned by third parties in Logan Hospitality Associates, LLC; LTD Associates One, LLC; and LTD Associates Two, LLC. Third parties own a 45% interest in Logan Hospitality Associates, LLC and a 25% interest in each of LTD Associates One LLC and LTD Associates Two, LLC. We allocate these joint venture’s income (loss) to the minority interest in consolidated joint venture account based upon the ownership of the entities.

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 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 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.
 
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.
 
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. There were no income taxes recorded in the Statement of Operations.

17



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
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 31 properties from the Partnership. The TRS Lessee is subject to taxation as a C-Corporation. The TRS Lessee had an operating loss for financial reporting purposes for the period ended December 31, 2005. 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.

Cash Equivalents

The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.

Escrow Deposits

We are obligated to maintain reserve funds for items such as capital expenditures at hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment), property taxes and insurance pursuant to mortgage agreements with participating lenders.

Accounts Receivable

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.

Development Loan Receivables and Notes Receivable

The Company has invested in development loan receivables and notes receivable in connection with hotel property transactions. Interest income is recognized on the notes receivable when earned based upon the terms of the related notes. Fees and costs incurred are amortized over the term of the related notes. The ultimate repayment of the notes is subject to a number of variables, including the performance and value of the underlying real property. The carrying amount of the notes receivable approximates its fair value in consideration of interest rates, market conditions and other qualitative factors.

Deferred Costs and Intangibles

Deferred Costs consist of loan acquisition fees. Intangibles consist of franchise fees, goodwill and an intangible asset related to the acquisition of leases at rates below market value. Deferred costs and intangibles are carried at cost net of accumulated amortization. Amortization of loan acquisition fees is computed using the straight-line method over the term of the related debt. Amortization of franchise fees and the lease related intangible asset is computed using the straight-line method over the term of the related agreement.

Goodwill of $412, net of accumulated amortization of $353, resulted from the acquisition of the Holiday Inn Hotel and Conference Center, Harrisburg, Pennsylvania. We have not recognized amortization expense on goodwill subsequent to December 31, 2001. We test goodwill for impairment at least annually and have not recognized any impairment during the three years ended December 31, 2005.

Advertising and Marketing

Advertising and marketing costs are expensed as incurred and totaled $1,459, $1,034 and $143 for the years ended December 31, 2005, 2004 and December 31, 2003, respectively, related to the hotels consolidated in these financial statements. In connection with our franchise agreements, a portion of the franchise fees paid is for marketing services.

18



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

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

We intend to pay distributions that, at a minimum, will be sufficient for us to maintain our REIT status.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents, rent receivable and note receivable arising from our normal business activities. We place our cash and cash equivalents with high credit quality financial institutions. We require collateral to support our financial instruments. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution. At December 31, 2005, we maintained funds at financial institutions that exceeded federally insured amounts.

Fair Value of Financial Instruments

At December 31, 2005 and 2004, financial instruments include cash and cash equivalents, development loans receivable, notes receivable, accounts payable, accrued expenses, loans to and from related parties, notes payable, a line of credit and mortgages payable. The fair values of cash and cash equivalents, development loans receivable, notes receivable and accounts payable and accrued expenses approximate carrying value because of the short-term nature of these instruments. The carrying value of loans with related parties approximates fair value. The carrying value of the mortgages payable and the line of credit approximates fair value since the interest rates approximate the interest rates currently offered for similar debt with similar maturities.

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 and 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 limit the Company’s exposure to increasing interest payments when interest rates increase. During 2005 and 2004, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. As of December 31, 2005 and 2004, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations.

The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

Reclassification

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
 
19

 

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

  
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consist of the following at December 31, 2005 and 2004:


   
2005
 
2004
 
           
Land
 
$
32,430
 
$
13,865
 
Buildings and improvements
   
283,791
   
146,910
 
Furniture, fixtures and equipment
   
43,528
   
30,131
 
     
359,749
 
 
190,906
 
Less accumulated depreciation
   
(41,769
)
 
(26,983
)
   
$
317,980
 
$
163,923
 

Depreciation expense was $10,540, $7,356 and $4,681 for the years ended December 31, 2005, 2004 and 2003, respectively.

No hotels were sold in 2004 and 2003. In 2005, we sold the following hotels for the approximate amounts indicated.

   
No. of
Rooms
 
Sales Price
 
 
         
Doubletree Club, JFK International Airport, NY
 
110
 
$
11,500
 
Holiday Inn Express, Long Island City, NY
 
79
 
$
9,000
 
         
$
20,500
 

The following summarizes the number of hotels owned excluding those owned in joint ventures for the periods presented:


   
2005
 
2004
 
2003
 
Hotels owned at beginning of year
   
25
   
20
   
18
 
Acquisitions
   
8
   
5
   
2
 
Hotels Sold
   
2
   
-
   
-
 
Hotels owned at end of year
   
31
   
25
   
20
 
 
During the years ended December 31, 2005, 2004 and 2003, we acquired the following hotel properties, including closing costs:
 
20



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 2 - INVESTMENTS IN HOTEL PROPERTIES (Continued)

Hotel
 
Location
 
Rooms
 
Acquisition Date
 
Land
 
Buildings and Improvements
 
Furniture Fixtures and Equipment
 
Franchise Fees and Loan Costs
 
Leasehold Intangible
 
Total Purchase Price
 
Assumed Debt
 
Fairfield Inn
   
Laurel, MD
   
109
   
1/31/05
 
$
927
 
$
6,120
 
$
344
 
$
44
   
-
 
$
7,435
 
-
 
Hampton Inn
   
New York, NY
   
136
   
4/1/05
   
5,472
   
23,497
   
2,364
   
547
   
-
   
31,880
   
16,500
 
McIntosh Portfolio
         
480
   
May and June 2005
   
8,171
   
40,046
   
1,572
   
776
   
-
   
50,565
   
-
 
Courtyard by Marriott
   
Brookline, MA
   
188
   
6/16/05
   
N/A
 
 
47,414
 
 
3,760
 
 
259
 
 
3,570
 
 
55,003
   
-
 
2005 TOTAL
   
 
   
913
       
$
14,570
 
$
117,077
 
$
8,040
 
$
1,626
 
$
3,570
 
$
144,883
 
$
16,500
 
Holiday Inn Express
   
Hartford, CT
   
96
   
1/14/04
 
$
N/A
 
$
2,565
 
$
960
 
$
12
   
-
 
$
3,537
 
$
500
 
Residence Inn
   
Framingham, MA
   
125
   
3/26/04
   
1,325
   
12,705
   
1,875
   
50
   
-
   
15,955
   
-
 
Comfort Inn
   
Frederick, MD
   
73
   
5/27/04
   
450
   
4,329
   
584
   
50
   
-
   
5,413
   
3,715
 
Residence Inn
   
Greenbelt, MD
   
120
   
7/16/04
   
2,615
   
14,792
   
2,040
   
50
   
-
   
19,497
   
-
 
Hilton Garden Inn
   
Gettysburg, PA
   
88
   
7/23/04
   
745
   
6,111
   
805
   
60
   
-
   
7,721
   
5,450
 
2004 TOTAL
   
 
   
502
       
$
5,135
 
$
40,502
 
$
6,264
 
$
222
 
$
-
 
$
52,123
 
$
9,665
 
Hampton Inn
   
Linden, NJ
   
149
   
10/1/03
   
1,211
   
11,961
   
2,200
   
75
   
-
   
15,447
   
-
 
Hilton Garden Inn
   
Edison, NJ
   
132
   
10/1/03
   
-
   
12,159
   
2,600
   
65
   
-
   
14,824
   
-
 
2003 TOTAL
   
 
   
281
       
$
1,211
 
$
24,120
 
$
4,800
 
$
140
 
$
-
 
$
30,271
 
$
-
 
 
The above acquisitions were accounted for as purchases, and the results of such acquisitions are included in the Company’s consolidated statements of operations from the dates of acquisition. No goodwill arose in the transactions. A $10,500 note receivable with the sellers was applied for the purchase of the Hampton Inn, New York, NY.

On February 23, 2004, we purchased a 55% joint venture interest in Logan Hospitality Associates, LLC, the owner of the Sheraton Four Point, Revere, MA. We have determined that we have a majority voting interest in this joint venture and that it qualifies for consolidation as it is a voting interest entity.

On November 22, 2005, we purchased a 75% joint venture interest in LTD Associates One, LLC (LTD One) and LTD Associates Two, LLC (LTD Two), the owners of the Springhill Suites and Residence Inn, Williamsburg, VA, respectively. We have determined that we have a majority voting interest in these joint ventures and that they qualify for consolidation as they are voting interest entities.

The consolidated assets of these properties included in our balance sheet as of December 31, 2005 and 2004 are as follows:

21



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

 
NOTE 2 - INVESTMENTS IN HOTEL PROPERTIES (Continued)
 
Hotel
 
Location 
 
Rooms
 
Acquisition Date
 
Land
 
Buildings and Improvements
 
Fixtures and Equipment
 
Fees and Loan Costs
 
Total Assets
 
Assumed Debt
 
                                       
Springhill Suites (LTD One)
   
Williamsburg, VA
   
120
   
11/22/2005
 
$
1,430
 
$
10,293
 
$
2,676
 
$
182
 
$
14,581
 
$
5,797
 
Residence Inn (LTD Two)
   
Williamsburg, VA
   
108
   
11/22/2005
   
1,911
   
11,624
   
2,200
   
239
   
15,974
   
8,514
 
2005 Total Consolidated Joint Ventures
         
228
       
$
3,341
 
$
21,917
 
$
4,876
 
$
421
 
$
30,555
 
$
14,311
 
Sheraton Four Points
   
Revere, MA
   
180
   
2/23/2004
 
$
70
 
$
14,996
 
$
2,153
 
$
111
 
$
17,330
 
$
8,802
 
2004 Total Consolidated Joint Ventures
         
180
       
$
70
 
$
14,996
 
$
2,153
 
$
111
 
$
17,330
 
$
8,802
 

Pro Forma Operating Results (Unaudited)

The following condensed pro forma financial information is presented as if the acquisitions of the Residence Inn, Greenbelt, MD; the Fairfield Inn, Laurel, MD; the McIntosh Porfolio; the Courtyard by Marriott, Brookline, MA; LTD One and LTD Two had been consummated as of January 1, 2004. 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 or 2004. 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.

   
For the year ended
 
       
   
December 31,
 
       
   
2005