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Section 1: 10-Q (10-Q)

Document
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 March 31, 2019

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
 
251,811,499
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
44 Hersha Drive, Harrisburg, PA
 
17102
(Address of Registrant’s Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (717) 236-4400

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. xYes oNo
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xYes oNo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Small reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. oYes oNo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). oYes xNo 

As of April 30, 2019, the number of Class A common shares of beneficial interest outstanding was 39,214,677  and there were no Class B common shares of beneficial interest outstanding.



 Hersha Hospitality Trust
Table of Contents
 
PART I.  FINANCIAL INFORMATION
Page
Item 1.
Financial Statements.
 






Item 2.
Item 3.
Item 4.

 
 
PART II.  OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

 
 


2

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2019 (UNAUDITED) AND DECEMBER 31, 2018
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]




 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
 
Investment in Hotel Properties, Net of Accumulated Depreciation
 
$
2,010,575

 
$
2,026,659

Investment in Unconsolidated Joint Ventures
 
2,685

 
4,004

Cash and Cash Equivalents
 
33,526

 
32,598

Escrow Deposits
 
8,693

 
8,185

Hotel Accounts Receivable, Net of Allowance for Doubtful Accounts of $0 and $188
 
12,171

 
10,241

Due from Related Parties
 
5,951

 
3,294

Intangible Assets, Net of Accumulated Amortization of $6,213 and $7,308
 
2,438

 
13,644

Right of Use Asset
 
46,288

 

Other Assets
 
42,949

 
40,005

Total Assets
 
$
2,165,276

 
$
2,138,630


 
 

 
 

Liabilities and Equity:
 
 

 
 

Line of Credit
 
$
37,000

 
$
10,000

Unsecured Term Loans, Net of Unamortized Deferred Financing Costs (Note 5)
 
698,368

 
698,202

Unsecured Notes Payable, Net of Unamortized Deferred Financing Costs (Note 5)
 
50,697

 
50,684

Mortgages Payable, Net of Unamortized Premium and Unamortized Deferred Financing Costs
 
333,798

 
334,145

Lease Liability
 
55,012

 

Accounts Payable, Accrued Expenses and Other Liabilities
 
43,085

 
70,947

Dividends and Distributions Payable
 
17,215

 
17,129

Total Liabilities
 
$
1,235,175

 
$
1,181,107

 
 
 
 
 
Redeemable Noncontrolling Interests - Consolidated Joint Venture (Note 1)
 
$
2,848

 
$
2,708


 
 
 
 
Equity:
 
 

 
 

Shareholders' Equity:
 
 

 
 

Preferred Shares:  $.01 Par Value, 29,000,000 Shares Authorized, 3,000,000 Series C, 7,701,700 Series D and 4,001,514 Series E Shares Issued and Outstanding at March 31, 2019 and December 31, 2018, with Liquidation Preferences of $25 Per Share (Note 1)

 
$
147

 
$
147

Common Shares:  Class A, $.01 Par Value, 104,000,000 Shares Authorized at March 31, 2019 and December 31, 2018; 39,213,269 and 39,458,626 Shares Issued and Outstanding at March 31, 2019 and December 31, 2018, respectively
 
392

 
395

Common Shares:  Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding at March 31, 2019 and December 31, 2018
 

 

Accumulated Other Comprehensive Income
 
1,534

 
4,227

Additional Paid-in Capital
 
1,151,654

 
1,155,776

Distributions in Excess of Net Income
 
(291,282
)
 
(267,740
)
Total Shareholders' Equity
 
862,445

 
892,805


 
 
 
 
Noncontrolling Interests (Note 1)
 
64,808

 
62,010


 
 

 
 

Total Equity
 
927,253

 
954,815


 
 

 
 

Total Liabilities and Equity
 
$
2,165,276

 
$
2,138,630

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

3

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]


 
Three Months Ended March 31,

 
2019
 
2018
Revenue:
 
 
 
 
Hotel Operating Revenues:
 

 

Room
 
$
91,485

 
$
79,048

Food & Beverage
 
14,228

 
13,538

Other Operating Revenues
 
8,930

 
6,929

Other Revenues
 
150

 
124

Total Revenues
 
114,793

 
99,639

Operating Expenses:
 
 
 
 
Hotel Operating Expenses:
 

 

Room
 
22,090

 
19,356

Food & Beverage
 
12,832

 
11,851

Other Operating Expenses
 
40,189

 
35,575

Hotel Ground Rent
 
1,110

 
928

Real Estate and Personal Property Taxes and Property Insurance
 
9,397

 
8,292

General and Administrative (including Share Based Payments of $1,958 and $1,606, for the three months ended March 31, 2019 and 2018, respectively)
 
5,600

 
5,091

Depreciation and Amortization
 
24,128

 
21,539

Total Operating Expenses
 
115,346

 
102,632


 
 
 
 
Operating Loss
 
(553
)
 
(2,993
)
Interest Income
 
83

 
25

Interest Expense
 
(12,898
)
 
(11,372
)
Other Income (Expense)
 
41

 
(657
)
Gain on Disposition of Hotel Properties
 

 
3,417

Loss on Debt Extinguishment
 

 
(22
)
Loss Before Results from Unconsolidated Joint Venture Investments and Income Taxes
 
(13,327
)
 
(11,602
)

 
 
 
 
Income (Loss) from Unconsolidated Joint Ventures
 
181

 
(201
)

 
 
 
 
Loss Before Income Taxes
 
(13,146
)
 
(11,803
)

 
 
 
 
Income Tax Benefit
 
5,264

 
2,655


 
 
 
 
Net Loss
 
(7,882
)
 
(9,148
)
Loss Allocated to Noncontrolling Interests - Common Units
 
1,063

 
1,104

Income Allocated to Noncontrolling Interests - Consolidated Joint Venture
 
(140
)
 

Preferred Distributions
 
(6,044
)
 
(6,044
)
Net Loss Applicable to Common Shareholders
 
$
(13,003
)
 
$
(14,088
)
 
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.

4

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]


 
Three Months Ended March 31,

 
2019
 
2018
Earnings Per Share:
 
 
 
 
BASIC
 
 
 
 
Loss from Continuing Operations Applicable to Common Shareholders
 
$
(0.34
)
 
$
(0.36
)

 
 
 
 
DILUTED
 
 
 
 
Loss from Continuing Operations Applicable to Common Shareholders
 
$
(0.34
)
 
$
(0.36
)

 
 
 
 
Weighted Average Common Shares Outstanding:
 
 
 
 
Basic
 
39,115,390

 
39,636,166

Diluted*
 
39,115,390

 
39,636,166

 
*
Income (Loss) allocated to noncontrolling interest in Hersha Hospitality Limited Partnership (the “Operating Partnership” or “HHLP”) has been excluded from the numerator and the Class A common shares issuable upon any redemption of the Operating Partnership’s common units of limited partnership interest (“Common Units”) and the Operating Partnership’s vested LTIP units (“Vested LTIP Units”) have been omitted from the denominator for the purpose of computing diluted earnings per share because the effect of including these shares and units in the numerator and denominator would have no impact. In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income (loss) applicable to common shareholders.
 
The following table summarizes potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:
 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
Common Units and Vested LTIP Units
3,308,612

 
3,104,393

Unvested Stock Awards and LTIP Units Outstanding
124,312

 
10,436

Contingently Issuable Share Awards
644,619

 
711,080

Total Potentially Dilutive Securities Excluded from the Denominator
4,077,543

 
3,825,909

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

5

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS]


Three Months Ended March 31,

2019
 
2018
Net Loss
$
(7,882
)
 
$
(9,148
)
Other Comprehensive (Loss) Income
 

 
 

Change in Fair Value of Derivative Instruments
(1,717
)
 
3,907

Less:  Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Income
(1,204
)
 
(275
)
Total Other Comprehensive (Loss) Income
$
(2,921
)
 
$
3,632


 

 
 

Comprehensive Loss
(10,803
)
 
(5,516
)
Less:  Comprehensive Loss Attributable to Noncontrolling Interests - Common Units
1,291

 
840

Less:  Comprehensive Income Attributable to Noncontrolling Interests - Consolidated Joint Venture
(140
)
 

Less:  Preferred Distributions
(6,044
)
 
(6,044
)
Comprehensive Loss Attributable to Common Shareholders
$
(15,696
)
 
$
(10,720
)
 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
 
 
 
 
 
 
 

6

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARES]


 
Shareholders' Equity
 
Noncontrolling Interests
 
 
 
Redeemable Noncontrolling Interests

 
Common Shares
 
Class A Common Shares ($)
 
Class B Common Shares ($)
 
Preferred Shares
 
Preferred Shares ($)
 
Additional Paid-In Capital ($)
 
Accumulated Other Comprehensive Income ($)
 
Distributions in Excess of Net Income ($)
 
Total Shareholders' Equity ($)
 
Common Units and LTIP Units
 
Common Units and LTIP Units ($)
 
Total Equity ($)
 
Consolidated Joint Venture ($)
Balance at December 31, 2018
 
39,458,626

 
395

 

 
14,703,214

 
147

 
1,155,776

 
4,227

 
(267,740
)
 
892,805

 
3,749,665

 
62,010

 
954,815

 
2,708

Repurchase of Common Shares
 
(273,538
)
 
(3
)
 

 

 

 
(4,693
)
 

 

 
(4,696
)
 

 

 
(4,696
)
 

Dividends and Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Common Shares ($0.28 per share)
 

 

 

 

 

 

 

 
(10,979
)
 
(10,979
)
 

 

 
(10,979
)
 

Preferred Shares
 

 

 

 

 

 

 

 
(6,044
)
 
(6,044
)
 

 

 
(6,044
)
 

Common Units ($0.28 per share)
 

 

 

 

 

 

 

 

 

 

 
(578
)
 
(578
)
 

LTIP Units ($0.28 per share)
 

 

 

 

 

 

 

 

 

 

 
(743
)
 
(743
)
 

Dividend Reinvestment Plan
 
1,265

 

 

 

 

 
21

 

 

 
21

 

 

 
21

 

Share Based Compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Grants
 
26,916

 

 

 

 

 

 

 

 

 
530,281

 

 

 

Amortization
 

 

 

 

 

 
690

 

 

 
690

 

 
5,410

 
6,100

 

Equity Contribution to Consolidated Joint Venture






















 

 
300

Change in Fair Value of Derivative Instruments
 

 

 

 

 

 

 
(2,693
)
 

 
(2,693
)
 

 
(228
)
 
(2,921
)
 

Adjustment to Record Noncontrolling Interest at Redemption Value
 

 

 

 

 

 
(140
)
 

 

 
(140
)
 

 

 
(140
)
 
140

Net Loss
 

 

 

 

 

 

 

 
(6,519
)
 
(6,519
)
 


 
(1,063
)
 
(7,582
)
 
(300
)
Balance at March 31, 2019
 
39,213,269

 
392

 

 
14,703,214

 
147

 
1,151,654

 
1,534

 
(291,282
)
 
862,445

 
4,279,946

 
64,808

 
927,253

 
2,848

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

7

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARES]


 
Shareholders' Equity
 
Noncontrolling Interests
 

 
Common Shares
 
Class A Common Shares ($)
 
Class B Common Shares ($)
 
Preferred Shares
 
Preferred Shares ($)
 
Additional Paid-In Capital ($)
 
Accumulated Other Comprehensive Income ($)
 
Distributions in Excess of Net Income ($)
 
Total Shareholders' Equity ($)
 
Common Units and LTIP Units
 
Common Units and LTIP Units ($)
 
Total Equity ($)
Balance at December 31, 2017
 
39,916,661

 
399

 

 
14,701,700

 
147

 
1,164,946

 
3,749

 
(335,373
)
 
833,868

 
3,223,366

 
54,286

 
888,154

Cumulative Effect of Adoption of ASC 610-20
 

 

 

 

 

 

 

 
123,228

 
123,228

 

 
5,793

 
129,021

Adjusted balance at January 1, 2018
 
39,916,661

 
399

 

 
14,701,700

 
147

 
1,164,946

 
3,749

 
(212,145
)
 
957,096

 
3,223,366

 
60,079

 
1,017,175

Unit Conversion
 
19,941

 

 

 

 

 
367

 

 

 
367

 
(19,941
)
 
(367
)
 

Repurchase of Common Shares
 
(635,590
)
 
(6
)
 

 

 

 
(10,827
)
 

 

 
(10,833
)
 

 

 
(10,833
)
Common Units Issued
 

 

 

 

 

 

 

 

 

 

 

 

Dividends and Distributions declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Common Shares ($0.28 per share)
 

 

 

 

 

 

 

 
(11,015
)
 
(11,015
)
 

 

 
(11,015
)
Preferred Shares
 

 

 

 

 

 

 

 
(6,044
)
 
(6,044
)
 

 

 
(6,044
)
Common Units ($0.28 per share)
 

 

 

 

 

 

 

 

 

 

 
(590
)
 
(590
)
LTIP Units ($0.28 per share)
 

 

 

 

 

 

 

 

 

 

 
(566
)
 
(566
)
Dividend Reinvestment Plan
 
1,074

 

 

 

 

 
18

 

 

 
18

 

 

 
18

Share Based Compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Grants
 
27,359

 
1

 

 

 

 

 

 

 
1

 
589,106

 

 
1

Amortization
 

 

 

 

 

 
433

 

 

 
433

 


 
5,311

 
5,744

Change in Fair Value of Derivative Instruments
 

 

 

 

 

 

 
3,368

 

 
3,368

 

 
264

 
3,632

Net Income
 

 

 

 

 

 

 

 
(8,044
)
 
(8,044
)
 

 
(1,104
)
 
(9,148
)
Balance at March 31, 2018
 
39,329,445

 
394

 

 
14,703,214

 
147

 
1,154,904

 
7,117

 
(237,248
)
 
925,314

 
3,792,531

 
63,027

 
988,341

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

8

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS]


 
Three Months Ended March 31,

 
2019
 
2018
Operating Activities:
 
 
 
 
Net Loss
 
$
(7,882
)
 
$
(9,148
)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:
 
 

 
 

Gain on Disposition of Hotel Properties, Net
 

 
(3,417
)
Deferred Taxes
 
(5,258
)
 
(2,655
)
Depreciation
 
23,951

 
21,300

Amortization
 
590

 
711

Loss on Debt Extinguishment
 

 
22

Equity in (Income) Loss of Unconsolidated Joint Ventures
 
(181
)
 
201

Distributions from Unconsolidated Joint Ventures
 
853

 

Loss Recognized on Change in Fair Value of Derivative Instrument
 
72

 
36

Share Based Compensation Expense
 
1,958

 
1,606

Change in Assets and Liabilities:
 
 

 
 

(Increase) Decrease in:
 
 

 
 

Hotel Accounts Receivable
 
(1,930
)
 
227

Other Assets
 
(170
)
 
(384
)
Due from Related Parties
 
(2,657
)
 
(63
)
Increase (Decrease) in:
 
 

 
 

Accounts Payable, Accrued Expenses and Other Liabilities
 
(3,344
)
 
1,189

Net Cash Provided by Operating Activities
 
$
6,002

 
$
9,625


 
 
 
 
Investing Activities:
 
 
 
 
Purchase of Hotel Property Assets
 
$

 
$
(41,230
)
Capital Expenditures
 
(8,710
)
 
(19,218
)
Cash Paid for Hotel Development Projects
 
(77
)
 
(11,122
)
Proceeds from Disposition of Hotel Properties
 

 
49,594

Proceeds from Insurance Claims
 

 
6,312

Distributions from Unconsolidated Joint Ventures
 
647

 
47,738

Net Cash (Used in) Provided by Investing Activities
 
$
(8,140
)
 
$
32,074

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

9

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS]


 
Three Months Ended March 31,

 
2019
 
2018
Financing Activities:
 
 
 
 
Borrowings Under Line of Credit, Net
 
$
27,000

 
$
19,900

Repayment of Borrowings Under Unsecured Term Loan
 

 
(18,000
)
Principal Repayment of Mortgages and Notes Payable
 
(467
)
 
(450
)
Cash Paid for Deferred Financing Costs
 
(25
)
 
(75
)
Repurchase of Common Shares
 
(4,624
)
 
(10,833
)
Dividends Paid on Common Shares
 
(11,022
)
 
(11,158
)
Dividends Paid on Preferred Shares
 
(6,044
)
 
(6,044
)
Distributions Paid on Common Units and LTIP Units
 
(1,173
)
 
(998
)
Other Financing Activities
 
(71
)
 
(33
)
Net Cash Provided by (Used in) Financing Activities
 
$
3,574

 
$
(27,691
)

 
 

 
 

Net Increase in Cash, Cash Equivalents, and Restricted Cash
 
$
1,436

 
$
14,008

Cash, Cash Equivalents, and Restricted Cash - Beginning of Period
 
40,783

 
25,586


 
 

 
 

Cash, Cash Equivalents, and Restricted Cash - End of Period
 
$
42,219

 
$
39,594

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

10

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]


NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hersha Hospitality Trust (“we,” “us,” “our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future period. Accordingly, readers of these consolidated interim financial statements should refer to the Company’s audited financial statements prepared in accordance with US GAAP, and the related notes thereto, for the year ended December 31, 2018, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as certain footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to the rules of the Securities and Exchange Commission.
 
We are a self-administered Maryland real estate investment trust that was organized in May 1998 and completed our initial public offering in January 1999. Our common shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HT.” We own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (“HHLP” or “the Partnership”), for which we serve as the sole general partner. As of March 31, 2019, we owned an approximate 90.2%  partnership interest in HHLP, including a 1.0% general partnership interest.
 
Principles of Consolidation and Presentation
 
The accompanying consolidated financial statements have been prepared in accordance with US GAAP and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned Taxable REIT Subsidiary Lessee (“TRS Lessee”). All significant inter-company amounts have been eliminated.
 
Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company as general partner of the Partnership. Properties owned in joint ventures are also consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (“VIE”) or we maintain control of the asset through our voting interest in the entity.
 
Variable Interest Entities

We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have a controlling financial interest in that VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE. Control can also be demonstrated by the ability of a member to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the other member and the inability of the members to replace the managing member.  Based on our examination, the following entities were determined to be VIE’s:  HHLP; Cindat Hersha Lessee JV, LLC; South Bay Boston, LLC; SB Partners Three Lessee, LLC; Hersha Holding RC Owner, LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II.  As noted, HHLP meets the criteria as a VIE.  The Company’s most significant asset is its investment in HHLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of HHLP.  Cindat Hersha Lessee JV, LLC is a VIE that leases hotel property. The entity is consolidated by the lessors, the primary beneficiary. Our maximum exposure to losses from our investment in Cindat Hersha Lessee JV, LLC is limited to our basis in the joint venture which is $0 as of March 31, 2019.

Also, South Bay Boston, LLC and SB Partners Three Lessee, LLC, which lease hotel property are VIE's. The entities are consolidated by the respective lessors, the primary beneficiary. Hersha Holding RC Owner, LLC is the owner entity of the Ritz Carlton Coconut Grove and is a VIE. HHLP is considered the primary beneficiary of the VIE and consolidates the joint venture with the minority owner interest presented as part of noncontrolling interest within the Consolidated Balance Sheets as of March 31, 2019. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs but HHLP is not the primary beneficiary in these entities. Accordingly, the accounts of Hersha Statutory Trust I and Hersha Statutory Trust II are not consolidated.

Noncontrolling Interest
 
We classify the noncontrolling interests of our common units of limited partnership interest in HHLP (“Common Units”), and Long Term Incentive Plan Units (“LTIP Units”) as equity. LTIP Units are a separate class of limited partnership interest in the Operating Partnership that are convertible into Common Units under certain circumstances. The noncontrolling interest of Common Units and LTIP Units totaled $64,808 as of March 31, 2019 and $62,010 as of December 31, 2018. As of March 31, 2019, there were 4,279,946 Common Units and LTIP Units outstanding with a fair market value of $73,358, based on the price per share of our common shares on the NYSE on such date. In accordance with the partnership agreement of HHLP, holders of these Common Units may redeem them for cash unless we, in our sole and absolute discretion, elect to issue common shares on a one-for-one basis in lieu of paying cash.
 
Net income or loss attributed to Common Units and LTIP Units is included in net income or loss but excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.

On April 2, 2018, we entered into a joint venture with the party from which we acquired the Ritz-Carlton Coconut Grove, FL. By exercising an option provided to the seller in connection with our purchase of the property in 2017, our joint venture partner has a noncontrolling equity interest of 15% in the property. Hersha Holding RC Owner, LLC, the owner entity of the Ritz-Carlton Coconut Grove joint venture ("Ritz Coconut Grove"), will distribute income based on cash available for distribution which will be distributed as follows: (1) to us until we receive a cumulative return on our contributed senior common equity interest, currently at 8%, and (2) then to the owner of the noncontrolling interest until they receive a cumulative return on their contributed junior common equity interest, currently at 8%, and (3) then 75% to us and 25% to the owner of the noncontrolling interest until we both receive a cumulative return on our contributed senior common equity interest, currently at 12%, and (4) finally, any remaining operating profit shall be distributed 70% to us and 30% to the owner of the noncontrolling interest. Additionally, the noncontrolling interest in the Ritz Coconut Grove has the right to put their ownership interest to us for cash consideration at any time during the life of the venture. The balance sheets and financial results of the Ritz Coconut Grove are included in our consolidated financial statements and book value of the noncontrolling interest in the Ritz Coconut Grove is classified as temporary equity within our Consolidated Balance Sheets. The noncontrolling interest in the Ritz Coconut Grove was initially measured at fair value upon formation of the joint venture and will be subsequently measured at the greater of historical cost or the put option redemption value. For the three months ended March 31, 2019, based on the income allocation methodology described above, the noncontrolling interest in this joint venture was allocated losses of $300, and is recorded as part of the Loss Allocated to Noncontrolling Interests line item within the Consolidated Statements of Operations. On March 31, 2019, we reclassified $140 from Additional Paid in Capital to Noncontrolling Joint Venture Interest to recognize the noncontrolling interest at the put option redemption value of $2,848.
 

11

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)

Shareholders’ Equity
 
Terms of the Series C, Series D, and Series E Preferred Shares outstanding at March 31, 2019 and December 31, 2018 are summarized as follows:
 

 
 
 
 
 
 
 
 
 
Dividend Per Share  

 
Shares Outstanding
 
 
 
 
 
Three Months Ended March 31,
Series
 
March 31, 2019
 
December 31, 2018
 
Aggregate Liquidation Preference
 
Distribution Rate
 
2019
 
2018
Series C
 
3,000,000

 
3,000,000

 
$
75,000

 
6.875
%
 
$
0.4297

 
$
0.4297

Series D
 
7,701,700

 
7,701,700

 
$
192,500

 
6.500
%
 
$
0.4063

 
0.4063

Series E
 
4,001,514

 
4,001,514

 
$
100,000

 
6.500
%
 
$
0.4063

 
0.4063

Total
 
14,703,214

 
14,703,214

 
 

 
 

 
 

 
 


In December 2018, our Board of Trustees authorized us to repurchase from time to time up to an aggregate of $50,000 of our outstanding common shares. For the three months ended March 31, 2019, the Company repurchased 273,538 common shares for an aggregate purchase price of $4,625. Upon repurchase by the Company, these common shares ceased to be outstanding and became authorized but unissued common shares. There is no guarantee that the Company will repurchase the entire aggregate value of shares authorized for repurchase prior to the program's expiration. The repurchase program will expire on December 31, 2019, unless extended by our Board of Trustees, at their discretion.
 
Revenue Recognition

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which is codified as ASC 606 and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP. The Company has adopted the provisions of ASC 606 effective January 1, 2018, electing to utilize the modified retrospective transition method. The modified retrospective method allows for, among other things, a cumulative adjustment to opening equity upon adoption of the standard. The adoption of the provisions of ASC 606 was applied to contracts with customers using available practical expedients only for contracts with customers. The Company evaluated only those contracts with customers that did not meet the definition of a closed contract under the guidance of ASC 606 at the time of adoption. This approach resulted in no cumulative adjustment to opening equity for the Company as it relates to contracts with customers. The new revenue recognition model did not have a material impact on our hotel operating revenue.

We recognize revenue for all consolidated hotels as hotel operating revenue when earned. Revenues are recorded net of any sales or occupancy tax collected from our guests. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred. Hotel operating revenues are disaggregated on the face of the consolidated statement of operations into the categories of rooms revenue, food and beverage revenue, and other to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.

Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. The customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. The Company records advanced deposits when a customer or group of customers provides a deposit for a future stay at our hotels. Advanced deposits for room revenue are included in the balance of Accounts Payable, Accrued Expenses and Other Liabilities on the consolidated balance sheet. Advanced deposits are recognized as revenue at the time of the guest's stay. The Company notes no significant judgements regarding the recognition of room revenue.


12

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)


Food and beverage revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate for restaurant dining services or banquet services. The Company's contract performance obligations are fulfilled at the time that the meal is provided to the customer or when the banquet facilities and related dining amenities are provided to the customer. The Company recognizes food and beverage revenue upon the fulfillment of the contract with the customer. The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future banquet event at our hotels. Advanced deposits for food and beverage revenue are included in the balance of Accounts Payable, Accrued Expenses and Other Liabilities on the consolidated balance sheet. Advanced deposits for banquet services are recognized as revenue following the completion of the banquet services. The Company notes no significant judgements regarding the recognition of food and beverage revenue.

Other revenues consist primarily of fees earned for asset management services provided to hotels we own through unconsolidated joint ventures. Fees are earned as a percentage of hotel revenue and are recorded in the period earned to the extent of the noncontrolling interest ownership.

Gains from the sales of ownership interests in real estate are accounted for in accordance with the provisions of Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, which the Company adopted effective January 1, 2018.  Our evaluation over sales of real estate is impacted by the FASB definition of a business and in substance nonfinancial assets, which have been addressed through the issuance of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, and ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), respectively. Based on the provisions of ASU No. 2017-01 and ASU No. 2017-05, the Company expects any future sales of interests in hotel properties to likely meet the criteria for full gain recognition on sale. This treatment is not different from our historical position when selling our entire interest in hotel properties, however, this is different than the historical treatment in certain instances where the Company sold partial interests in hotel properties. 

In particular, during 2016 the Company sold partial interests in seven hotel properties to a third party (“Cindat Sale”) resulting in an approximate $81 million deferred gain based on prevailing GAAP at the time of the transaction. The Company chose to adopt the provisions of ASC 610-20 for contracts with noncustomers for all contracts and chose not to utilize any available practical expedients as it pertains to contracts with noncustomers.  Accordingly, the Company's analysis included all contracts with noncustomers related to the sales, either full or partial, of our interest in hotel properties. The Company noted no changes to the recognition of gains on sales in instances whereby the Company sold 100% of our interest. The Company noted, however, that the Cindat Sale, under the provisions of ASC 610-20, would have resulted in full gain recognition at the time of the partial sale of our interest in the seven hotel properties. The impact of our adoption of the new standard resulted in a cumulative adjustment to decrease the opening balance to distributions in excess of net income, thereby increasing total shareholders' equity by $123,228 and increase the opening balance of noncontrolling interests of $5,793.

The table below shows the cumulative effect our adoption of ASC 610-20 had on the opening balances of on our balance sheet on Janauary 1, 2018.

 
Balance as Reported at December 31, 2017
 
Cumulative Effect of the Adoption of ASC 610-20
 
Balance at January 1, 2018, as Adjusted
Investment in Unconsolidated Joint Ventures
$
3,569

 
$
47,738

 
$
51,307

Deferred Gain on Disposition of Hotel Assets
81,284

 
(81,284
)
 

Distributions in Excess of Net Income
(335,373
)
 
123,228

 
(212,145
)
Noncontrolling Interests
54,286

 
5,793

 
60,079



13

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)

The quantitative impact of applying the prior accounting policies would have resulted in an increase of $129,021 in the deferred gain on disposition of hotel assets, an increase of $123,228 in distributions in excess of net income thereby decreasing shareholders' equity, and a decrease of $5,793 in noncontrolling interests at March 31, 2019. The adoption of ASC 610-20 did not materially impact the balances in the Company's consolidated statement of operations or its consolidated statement of cash flows.

New Accounting Pronouncements
 
In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The update will simplify several aspects of the accounting for nonemployee share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this update affects all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted the provisions of the update effective January 1, 2019. The adoption of this update did not have a material effect on our consolidated financial statements or the disclosures of share-based payments within Note 9 to these consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The update will make more financial and nonfinancial hedging strategies eligible for hedge accounting, changes how companies assess hedge effectiveness, and amends the presentation and disclosure requirements for hedging transactions. The Company adopted the provisions of the update effective January 1, 2019. The adoption of this update did not have a material effect on our consolidated financial statements or the disclosures related to fair value measurements within Note 8 of these consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business as it relates to acquisitions and business combinations. The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an asset or a business. We expect most of our hotel property acquisitions to qualify as asset acquisitions under the standard which requires the capitalization of acquisition costs to the underlying assets. The Company expects the standard to have an impact on our financial statements in periods during which we complete significant hotel acquisitions. The Company has adopted ASU No. 2017-01 effective, January 1, 2018.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), which provides guidance on the presentation of restricted cash or restricted cash equivalents within the statement of cash flows. Accordingly, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted this standard effective January 1, 2018. The adoption of ASU No. 2016-18 changed the presentation of the statements of cash flows for the Company and we utilized a retrospective transition method for each period presented within financial statements for periods subsequent to the date of adoption. Additionally, the Company provides a reconciliation within Note 11 of cash, cash equivalents, and restricted cash to their relative balance sheet captions.
 

14

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. The accounting for lessors will remain largely unchanged from current GAAP; however, the standard requires that certain initial direct costs be expensed rather than capitalized. Under the standard, lessees apply a dual approach, classifying leases as either finance or operating leases. A lessee is required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their lease classification. Based on the review of our leases, we are a lessee on ground leases in certain markets, hotel equipment leases, and office space leases. The Company adopted the provisions of the update effective January 1, 2019. As a result, the Company recorded a right of use asset and corresponding lease liability of $55,515 at January 1, 2019 for leases where we are the lessee. The Company also reclassified $11,050 previously included in intangible assets to the right of use asset, related to purchase accounting adjustments for below market rate leases. Additionally, the Company reclassified $19,627 previously included in accounts payable and accrued expenses to the right of use asset. This reclassification related to amounts recorded for accrued lease expense, as a result of using the straight-line rent method, and intangible liabilities derived from land leases acquired at above market lease rates. Upon adoption, the right of use asset had a weighted average useful life of 64.2 years. We are also a lessor in certain office space and retail lease agreements related to our hotels and the adoption of this ASU did not have a material impact on our accounting for leases where we are the lessor. The adoption of this ASU did not impact revenue recognition policies for the Company. See Note 6 to these consolidated financial statements for further lease disclosures.
 


15

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 - INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at March 31, 2019 and December 31, 2018:
 
 

 
 
 
 

 
March 31, 2019
 
December 31, 2018

 
 
 
 
Land
 
$
518,243

 
$
518,243

Buildings and Improvements
 
1,692,609

 
1,688,459

Furniture, Fixtures and Equipment
 
281,663

 
278,098

Construction in Progress
 
3,881

 
3,804


 
2,496,396

 
2,488,604


 
 

 
 

Less Accumulated Depreciation
 
(485,821
)
 
(461,945
)

 
 

 
 

Total Investment in Hotel Properties *
 
$
2,010,575

 
$
2,026,659

* The net book value of investment in hotel property at Ritz Coconut Grove, which is a variable interest entity, is $45,535 and $44,875 at March 31, 2019 and December 31, 2018, respectively.

Acquisitions
 
For the three months ended March 31, 2019, we acquired no hotel properties.
 
 

Hotel Dispositions
For the three months ended March 31, 2019, we disposed of no hotel properties.

16

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES


As of March 31, 2019 and December 31, 2018, our investment in unconsolidated joint ventures consisted of the following:
 
 
 

 
 
 
Percent
 
 
 
 
Joint Venture
 
Hotel Properties
 
Owned
 
March 31, 2019
 
December 31, 2018

 
 
 
 
 
 
 
 
SB Partners, LLC
 
Holiday Inn Express, South Boston, MA
 
50.0
%
 
$

 
$
1,125

Hiren Boston, LLC
 
Courtyard by Marriott, South Boston, MA
 
50.0
%
 
1,702

 
1,879

Cindat Hersha Owner JV, LLC
 
Hilton and IHG branded hotels in NYC
 
31.2
%
 

 

SB Partners Three, LLC
 
Home2 Suites, South Boston, MA
 
50.0
%
 
983

 
1,000


 
 
 
 
 
$
2,685

 
$
4,004

 
On September 27, 2018, we entered into a joint venture agreement with JHM SB Three Member, LLC which will own a Home2 Suites located in South Boston, MA. Each partner will have a 50% interest of this asset, which is currently under development and is expected to open in 2020. At the onset of the agreement, each partner contributed $1,000 and any additional contributions will be made equally by each party until construction financing commences.

During the three months ended March 31, 2019, we received a distribution of $1,500 from SB Partners, LLC. This distribution exceeded our accounting basis in this joint venture resulting in a $0 investment balance as of March 31, 2019.

Income/Loss Allocation

Cindat Hersha Owner JV, LLC cash available for distribution will be distributed to (1) Cindat until they receive a return on their contributed $142,000 senior common equity interest, currently at 9.5%, and (2) then to us until we receive an 8% return on our contributed $64,357 junior common equity interest. Any cash available for distribution remaining will be split 31.2% to us and 68.8% to Cindat. Cindat’s senior common equity return is reduced by 0.5% annually for 4 years following the closing until it is set at a rate of 8% for the remainder of the life of the joint venture.  As of March 31, 2019, based on the income allocation methodology described above, the Company has absorbed cumulative losses equal to our accounting basis in the joint venture resulting in a $0 investment balance in the table above, however, we currently maintain a positive equity balance within the venture. This difference is due to difference in our basis inside the venture versus our basis outside of the venture, which is explained later in this note.
 
For SB Partners, LLC, Hiren Boston, LLC, and SB Partners Three, LLC, income or loss is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. This results in an income allocation consistent with our percentage of ownership interests.
 
Any difference between the carrying amount of any of our investments noted above and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets. 

Income (loss) recognized during the three months ended March 31, 2019 and 2018, for our investments in unconsolidated joint ventures is as follows:
 

17

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)


 
Three Months Ended March 31,

 
2019
 
2018
SB Partners, LLC
 
$
375

 
$
(94
)
Hiren Boston, LLC
 
(177
)
 
(107
)
Cindat Hersha Owner JV, LLC
 

 

SB Partners Three, LLC
 
(17
)
 

Income (Loss) from Unconsolidated Joint Venture Investments
 
$
181

 
$
(201
)

The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.

Balance Sheets
 
 

 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
 
Investment in Hotel Properties, Net
 
$
566,596

 
$
569,609

Other Assets
 
33,411

 
30,088

Total Assets
 
$
600,007

 
$
599,697


 
 
 
 
Liabilities and Equity
 
 
 
 
Mortgages and Notes Payable
 
$
422,669

 
$
422,205

Other Liabilities
 
19,135

 
7,478

Equity:
 
 
 
 
Hersha Hospitality Trust
 
3,048

 
15,554

Joint Venture Partner(s)
 
156,116

 
155,053

Accumulated Other Comprehensive Loss
 
(961
)
 
(593
)
Total Equity
 
158,203

 
170,014


 
 
 
 
Total Liabilities and Equity
 
$
600,007

 
$
599,697


18

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)

Statements of Operations
 

 
Three Months Ended March 31,

 
2019
 
2018
Room Revenue
 
$
16,350

 
$
16,732

Other Revenue
 
621

 
460

Operating Expenses
 
(10,031
)
 
(10,157
)
Lease Expense
 
(200
)
 
(164
)
Property Taxes and Insurance
 
(3,051
)
 
(2,911
)
General and Administrative
 
(1,207
)
 
(1,125
)
Depreciation and Amortization
 
(3,660
)
 
(3,178
)
Interest Expense
 
(7,147
)
 
(5,737
)
Loss on Debt Extinguishment
 

 
(7,284
)
Net Loss
 
$
(8,325
)
 
$
(13,364
)

The following table is a reconciliation of our share in the unconsolidated joint ventures’ equity to our investment in the unconsolidated joint ventures as presented on our balance sheets as of March 31, 2019 and December 31, 2018.
 

 
March 31, 2019
 
December 31, 2018
Our share of equity recorded on the joint ventures' financial statements
 
$
3,048

 
$
15,554

Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1)
 
(363
)
 
(11,550
)
Investment in Unconsolidated Joint Ventures
 
$
2,685

 
$
4,004

 

(1)  Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:
 
the difference between our basis in the investment in joint ventures and the equity recorded on the joint ventures' financial statements;
accumulated amortization of our equity in joint ventures that reflects the difference in our portion of the fair value of joint ventures' assets on the date of our investment when compared to the carrying value of the assets recorded on the joint ventures’ financial statements (this excess or deficit investment is amortized over the life of the properties, and the amortization is included in Income (Loss) from Unconsolidated Joint Venture Investments on our consolidated statement of operations); and
cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements, if any. 
 

19

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 - OTHER ASSETS

Other Assets
 
Other Assets consisted of the following at March 31, 2019 and December 31, 2018:
 

 
March 31, 2019
 
December 31, 2018

 
 

 
 

Derivative Asset
 
$
3,027

 
$
5,307

Deferred Financing Costs
 
1,716

 
1,845

Prepaid Expenses
 
10,784

 
10,695

Investment in Statutory Trusts
 
1,548

 
1,548

Investment in Non-Hotel Property and Inventories
 
3,485

 
3,349

Deposits with Unaffiliated Third Parties
 
2,751

 
2,866

Deferred Tax Asset, Net of Valuation Allowance of $497
 
16,337

 
11,078

Other
 
3,301

 
3,317


 
$
42,949

 
$
40,005

 
Derivative Asset – This category represents the Company’s gross asset fair value of interest rate swaps and interest rate caps.  Any swaps and caps resulting in a liability to the Company are accounted for separately within Other Liabilities on the Balance Sheet.
 
Deferred Financing Costs – This category represents financing costs paid by the Company to establish our Line of Credit. These costs have been capitalized and will amortize to interest expense over the life of the Line of Credit.
 
Prepaid Expenses – Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in the next twelve months.
 
Investment in Statutory Trusts – We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II. Our investment is accounted for under the equity method.

Investment in Non-Hotel Property and Inventories – This category represents the costs paid and capitalized by the Company for items such as office leasehold improvements, furniture and equipment, and property inventories.
 
Deposits with Unaffiliated Third Parties – These deposits represent deposits made by the Company with unaffiliated third parties for items such as lease security deposits, utility deposits, and deposits with unaffiliated third party management companies.
 
Deferred Tax Asset – We have approximately $16,337 of net deferred tax assets as of March 31, 2019. We have considered various factors, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies in determining a valuation allowance for our deferred tax assets, and we believe that it is more likely than not that we will be able to realize the $16,337 of net deferred tax assets in the future.



20

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT


Mortgages
 
Mortgages payable at March 31, 2019 and December 31, 2018 consisted of the following:
 

 
March 31, 2019
 
December 31, 2018
Mortgage Indebtedness
 
$
334,430

 
$
334,897

Net Unamortized Premium
 
1,182

 
1,304

Net Unamortized Deferred Financing Costs
 
(1,814
)
 
(2,056
)
Mortgages Payable
 
$
333,798

 
$
334,145

 
Net Unamortized Deferred Financing Costs associated with entering into mortgage indebtedness are deferred and amortized over the life of the mortgages. Net Unamortized Premiums are also amortized over the remaining life of the loans.
 
Mortgage indebtedness balances are subject to fixed and variable interest rates, which ranged from 4.40% to 6.30% as of March 31, 2019. Aggregate interest expense incurred under the mortgage loans payable totaled $3,990 and $3,419 during the three months ended March 31, 2019 and 2018, respectively.
 
Our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, non-recourse financing arrangements. Our mortgage loans payable typically require that specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. We have determined that all debt covenants contained in the loan agreements securing our consolidated hotel properties were met as of March 31, 2019.
 
As of March 31, 2019, the maturity dates for the outstanding mortgage loans ranged from June 2019 to September 2025. The Company will be refinancing loans maturing within a year of March 31, 2019 into new property-specific mortgage debt on or before the respective loan maturity dates.
 
Unsecured Notes Payable
 
We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements which will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, prior to maturity in accordance with the provisions of the indenture agreements. The $25,774 of notes issued to each of Hersha Statutory Trust I and Hersha Statutory Trust II bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets two business days prior to each quarterly payment. The face value of the notes payable is offset by $851 and $864 as of March 31, 2019 and December 31, 2018, respectively, in net deferred financing costs incurred as a result of entering into these indentures. The deferred financing costs are amortized over the life of the notes payable. The weighted average interest rate on our two junior subordinated notes payable was 5.68% and 4.64% during the three months ended March 31, 2019 and 2018, respectively. Interest expense on Unsecured Notes Payable in the amount of $731 and $614 was recorded for the three months ended March 31, 2019 and 2018, respectively.
 

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT (CONTINUED)

Credit Facilities
 
We maintain three unsecured credit agreements which aggregate to $950,900 with Citigroup Global Markets Inc., Wells Fargo Bank, Inc. and various other lenders. Our credit facility provides for a $457,000 senior unsecured credit facility (“Credit Facility”). The Credit Facility consists of a $250,000 senior unsecured revolving line of credit (“Line of Credit”) and a $207,000 senior unsecured term loan ("First Term Loan"). The Credit Facility expires on August 1, 2022, and, provided no event of default has occurred, we may request that the lenders renew the credit facility for an additional one- year period. The Credit Facility is also expandable to $857,000 at our request, subject to the satisfaction of certain conditions.
 
We maintain another credit agreement which provides for a $300,000 senior unsecured term loan agreement (“Second Term Loan”) and expires on August 10, 2020.  
 
A separate credit agreement provides for a $193,900 senior unsecured term loan agreement (“Third Term Loan”) and expires on August 2, 2021.  
 
The amount that we can borrow at any given time under our Line of Credit, and the individual term loans (each a “Term Loan” and together the “Term Loans”) is governed by certain operating metrics of designated unencumbered hotel properties known as borrowing base assets. As of March 31, 2019, the following hotel properties were borrowing base assets: 
 
 
- Courtyard, Brookline, MA
- Mystic Marriott Hotel & Spa, Groton, CT
- Holiday Inn Express, Cambridge, MA
- Hampton Inn, Washington, DC
- Envoy Hotel, Boston, MA
- Ritz Carlton, Washington, DC
- The Boxer, Boston, MA
- Hilton Garden Inn, M Street, Washington, DC
- Hampton Inn, Seaport, NY
- Residence Inn, Coconut Grove, FL
- The Duane Street Hotel, NY
- The Winter Haven, Miami, FL
- NU Hotel, Brooklyn, NY
- The Blue Moon, Miami, FL
- Holiday Inn Express, 29th Street, NY
- The Cadillac Hotel and Beach Club, Miami, FL
- The Gate JFK Airport, New York, NY
- The Parrot Key Hotel & Resort, Key West, FL
- Hilton Garden Inn, JFK Airport, New York, NY
- TownePlace Suites, Sunnyvale, CA
- Hyatt House White Plains, NY
- The Ambrose Hotel, Santa Monica, CA
- Sheraton, Wilmington South, DE
- Courtyard, San Diego, CA
- Hampton Inn, Philadelphia, PA
- The Pan Pacific Hotel, Seattle, WA
- The Rittenhouse, Philadelphia, PA
- The Westin, Philadelphia, PA

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT (CONTINUED)

The interest rate for borrowings under the Line of Credit and Term Loans are based on a pricing grid with a range of one month U.S. LIBOR plus a spread. The following table summarizes the balances outstanding and interest rate spread for each borrowing:
 

 
 
 
Outstanding Balance
Borrowing
 
Spread
 
March 31, 2019
 
December 31, 2018
Line of Credit
 
1.50% to 2.25%
 
$
37,000

 
$
10,000

Unsecured Term Loan:
 
 
 
 
 
 
     First Term Loan
 
1.45% to 2.20%
 
$
207,000

 
$
207,000

     Second Term Loan
 
1.50% to 2.25%
 
300,000

 
300,000

     Third Term Loan
 
1.45% to 2.20%
 
193,900

 
193,900

     Deferred Loan Costs
 
 
 
(2,532
)
 
(2,698
)
Total Unsecured Term Loan
 
 
 
$
698,368

 
$
698,202

 
The Credit Facility and the Term Loans include certain financial covenants and require that we maintain: (1) a minimum tangible net worth (calculated as total assets, plus accumulated depreciation, less total liabilities, intangibles and other defined adjustments) of $1,075,000, plus an amount equal to 75% of the net cash proceeds of all issuances and primary sales of equity interests of the parent guarantor or any of its subsidiaries consummated following the closing date; (2) annual distributions not to exceed 95% of adjusted funds from operations; and (3) certain financial ratios, including the following:
- a fixed charge coverage ratio of not less than 1.50 to 1.00;
- a maximum leverage ratio of not more than 60%; and
- a maximum secured debt leverage ratio of 45%.

The Company is in compliance with all of the covenants as of March 31, 2019.
 
 
The Company recorded interest expense of $8,636 and $7,112 related to borrowings drawn on the Credit Facility and Term Loans for the three months ended March 31, 2019 and 2018, respectively. The weighted average interest rate, inclusive of the effect of derivative instruments, on the Credit Facility and Term Loans was 4.12% and 3.66% for the three months ended March 31, 2019 and 2018, respectively.
 
Capitalized Interest
 
We utilize cash, mortgage debt and our Line of Credit to finance on-going capital improvement projects at our hotels. Interest incurred on mortgages and the Line of Credit that relates to our capital improvement projects is capitalized through the date when the assets are placed in service. For the three months ended March 31, 2019 and 2018, we capitalized $37 and $98 of interest expense to ongoing capital improvement projects, respectively.
 
Deferred Financing Costs
 
As noted above, costs associated with entering into mortgages, notes payable and our credit facilities are deferred and amortized over the life of the debt instruments. The deferred costs related to mortgages and term loans and unsecured notes payable are presented as reductions in the respective debt balances. Amortization of deferred costs for the three months ended March 31, 2019 and 2018 was $574 and $429, respectively.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT (CONTINUED)

New Debt/Refinance

On January 31, 2018, we refinanced the outstanding mortgage debt with an original principal balance of $25,000 secured by the Capitol Hill Hotel, Washington, D.C. The loan was due to mature on January 31, 2018, but will now mature on January 31, 2021.

On April 13, 2018, we entered into a mortgage debt with a principal balance of $28,000 secured by the Annapolis Waterfront Hotel, Annapolis, MD. The loan bears interest at a variable rate of one month U.S. dollar LIBOR plus 2.65% and matures in April 2024. Concurrently, we entered into an interest rate cap which effectively caps LIBOR at 3.35%, limiting the interest rate to not exceed 6.00% per annum until May 2021.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]


NOTE 6 – LEASES

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. The Company adopted the provisions of the update effective January 1, 2019. We elected the modified retrospective transition method upon adoption, which resulted in no cumulative-effect adjustment to the balance of opening retained earnings. As part of our adoption, we elected to utilize the package of practical expedients which allowed us to not reassess existing contracts for embedded leases and not reassess the classification of existing leases. As a result of our adoption, the Company recorded a lease liability and corresponding right of use asset of $55,515 at January 1, 2019 for leases where we are the lessee. Our most significant leases are land leases. We own five hotels within our consolidated portfolio of hotels where we do not own the land on which the hotels reside, rather we lease the land from an unrelated third-party lessor. All of our land leases are classified as operating leases and have initial terms, with extension options that range from May 2062 to October 2103. Based on the nature of these leases, the Company assumed that all extension options would be fully executed. For land leases that include variable payments, those include payments that are tied to an index such as the consumer price index or include rental payments based partially on the hotel revenues. Two additional office space lease are also factored into the lease liability and are classified as operating leases with terms ranging from January 2022 to December 2027. For office space leases that include variable payments, those include payments for the Company's proportionate share of the building's property taxes, insurance, and common area maintenance.

The Company applied judgments related to the determination of the discount rates used to calculate the lease liability upon adoption at January 1, 2019. Since the discount rate implicit in the leases could not be readily determinable, we had to calculate our incremental borrowing rate as defined by ASC Topic 842. In order to calculate our incremental borrowing rate, the Company utilized judgments and estimates regarding the Company's market credit rating, comparable market bond yield curve, and adjustments to market yield curves to determine a securitized rate.

We are also a lessor in certain office space and retail lease agreements related to our hotels and the adoption of this ASU did not have a material impact on our accounting for leases where we are the lessor. The adoption of this ASU did not impact revenue recognition policies for the Company.

The components of lease costs for the three months ended March 31, 2019 were as follows:

 
Three Months Ended March 31, 2019
 
Ground Lease
Office Lease
Total
Operating lease costs
$
973

$
121

$
1,094

Variable lease costs
137

71

207

Total lease costs
$
1,110

$
192

$
1,301


Other information related to leases as of and for the three months ended March 31, 2019 is as follows:
 
March 31, 2019
Cash paid from operating cash flow for operating leases
$
1,171

Weighted average remaining lease term
64.2

Weighted average discount rate
7.85
%


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]


NOTE 6 – LEASES (CONTINUED)

Payments against lease liabilities are as follows:
 
 
Amount
April 1, 2019 to December 31, 2019
 
$
3,441

2020
 
4,638

2021
 
4,705

2022
 
4,167

2023
 
4,149

Thereafter
 
270,978

     Total undiscounted lease payments
 
292,078

Less imputed interest
 
(237,066
)
     Total lease liabilities
 
$
55,012


Future minimum lease payments (without reflecting future applicable Consumer Price Index increases) under these agreements as of December 31, 2018 are as follows:

Year Ending December 31,
 
Amount
2019
 
$
4,585

2020
 
4,638

2021
 
4,705

2022
 
4,167

2023
 
4,149

Thereafter
 
270,978

 
 
$
293,222



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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS


Management Agreements
 
Our wholly-owned TRS, 44 New England Management Company, and certain of our joint venture entities engage eligible independent contractors in accordance with the requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended, including Hersha Hospitality Management Limited Partnership (“HHMLP”), as the property managers for hotels it leases from us pursuant to management agreements. HHMLP is owned, in part, by certain executives and trustees of the Company. Our management agreements with HHMLP provide for five-year terms and are subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties are reimbursed or borne by our TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel. Management agreements with other unaffiliated hotel management companies have similar terms.
 
For its services, HHMLP receives a base management fee and, if a hotel exceeds certain thresholds, an incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal year and is based upon the financial performance of the hotels. For the three months ended March 31, 2019 and 2018, base management fees incurred from HHMLP totaled $2,993 and $2,592, respectively, and are recorded as Hotel Operating Expenses. For the three months ended March 31, 2019 and 2018, we did not incur incentive management fees.
 
Franchise Agreements
 
Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms, but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as incurred. Franchise fee expenses for the three months ended March 31, 2019 and 2018 were $4,975 and $4,665, respectively, and are recorded in Hotel Operating Expenses. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
 
Accounting and Information Technology Fees
 
Each of the wholly-owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and information technology fee. Monthly fees for accounting services are between $2 and $3 per property and monthly information technology fees range from $1 to $2 per property. For the three months ended March 31, 2019 and 2018, the Company incurred accounting fees of $315 and $296, respectively. For the three months ended March 31, 2019 and 2018, the Company incurred information technology fees of $102 and $95, respectively. Accounting fees and information technology fees are included in Hotel Operating Expenses.
 
Capital Expenditure Fees
 
HHMLP charges a 5% fee on certain 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 months ended March 31, 2019 and 2018, we incurred fees of $524 and $512, respectively, which were capitalized with the cost of capital expenditures.

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Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)


Acquisitions from Affiliates
 
We have entered into an option agreement with certain of our officers and trustees such that we obtain a right of first refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of the Company. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the purchase of hotels from related parties are approved by the Acquisition Committee.
 
Hotel Supplies
 
For the three months ended March 31, 2019 and 2018, we incurred charges for hotel supplies of $134 and $67, respectively. For the three months ended March 31, 2019 and 2018, we incurred charges for capital expenditure purchases of $535 and $498, respectively. These purchases were made from Hersha Purchasing and Design, a hotel supply company owned, in part, by certain executives and trustees of the Company. Hotel supplies are expensed and included in Hotel Operating Expenses on our consolidated statements of operations, and capital expenditure purchases are included in investment in hotel properties on our consolidated balance sheets. Approximately $1 and $0 is included in accounts payable at March 31, 2019 and December 31, 2018, respectively.

Restaurant Lease Agreements with Independent Restaurant Group

The Company enters into lease agreements with a number of restaurant management companies for the lease of restaurants located within our hotels.  Subsequent to December 31, 2018, the Company entered into lease agreements with Independent Restaurant Group (“IRG”) for restaurants at two of its hotel properties.  Certain executive officers and/or trustees of the Company, collectively own a 70.0% interest in IRG.  The Company’s restaurant lease agreements with IRG generally provide for five-year terms and the payment of base rents and percentage rents, which are based on IRG’s revenue in excess of defined thresholds.  Aggregate minimum rents due under the two leases range between $323 and $450 per annum over the initial five-year term.  Percentage rents range between 5% and 15% of IRG’s revenues in excess of defined thresholds.  The base rents are due monthly and percentages rents owed, if any, are due quarterly.  The restaurant leases are subject to early termination upon the occurrence of defaults and certain other events described therein.  Restaurant lease agreements with other unaffiliated restaurant management companies have similar terms.

Due From Related Parties
 
The due from related parties balance as of March 31, 2019 and December 31, 2018 was approximately $5,951 and $3,294, respectively. The balances primarily consisted of working capital deposits made to HHMLP and other entities owned, in part, by certain executives and trustees of the Company.
 
Due to Related Parties
 
The balance due to related parties as of March 31, 2019 and December 31, 2018 was $0.
 





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Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS


Fair Value Measurements
 
Our determination of fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, we utilize a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
As of March 31, 2019, the Company’s derivative instruments represented the only financial instruments measured at fair value. Currently, the Company uses derivative instruments, such as interest rate swaps and caps, to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.
 
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
 
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counter-parties. However, as of March 31, 2019 we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)


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. 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. The table on the following page presents our derivative instruments as of March 31, 2019 and December 31, 2018.


 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Fair Value

 
 
 
 
 
 
 
 
 
 
 
 
 
Asset / (Liability) Balance
Hedged Debt
 
Type
 
Strike Rate
 
Index
 
Effective Date
 
Derivative Contract Maturity Date
 
Notional Amount
 
March 31, 2019
 
December 31, 2018

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Term Loan Instruments:
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

Unsecured Credit Facility
 
Swap
 
1.011
%
 
1-Month LIBOR + 2.20%
 
November 3, 2016
 
October 3, 2019
 
$
150,000