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 September 30, 2012

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.)

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.

x Yeso No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

x Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerx	Accelerated filero
Non-accelerated filero	Small reporting companyo

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

o Yesx No

As of November 1, 2012, the number of Class A common shares of beneficial interest outstanding was 198,541,109 and there were no Class B common shares outstanding.

Hersha Hospitality Trust

Table of Contents

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Consolidated Balance Sheets as of September 30, 2012 [Unaudited] and December 31, 2011	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 [Unaudited]	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and  2011 [Unaudited]	4
	Consolidated Statements of Equity for the Nine Months Ended September 30, 2012 and 2011 [Unaudited]	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 [Unaudited]	6
	Notes to the Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	47
Item 4.	Controls and Procedures.	49
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings.	50
Item 1A.	Risk Factors.	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	50
Item 3.	Defaults Upon Senior Securities.	50
Item 4.	Mine Safety Disclosures.	50
Item 5.	Other Information.	50
Item 6.	Exhibits.	50
	SIGNATURES	51

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2012 [UNAUDITED] AND DECEMBER 31, 2011

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

	September 30, 2012			December 31, 2011
Assets:
Investment in Hotel Properties, net of Accumulated Depreciation,  (including consolidation of variable interest entity assets of $89,661 and $0)	$	1,477,151		$	1,340,876
Investment in Unconsolidated Joint Ventures		16,581			38,839
Development Loans Receivable		33,425			35,747
Cash and Cash Equivalents		57,274			24,568
Escrow Deposits		25,874			27,321
Hotel Accounts Receivable, net of Allowance for Doubtful Accounts of $268 and $495		15,273			11,353
Deferred Financing Costs, net of Accumulated Amortization of $9,882 and $9,138		8,245			9,023
Due from Related Parties		8,729			6,189
Intangible Assets, net of Accumulated Amortization of $2,038 and $1,357		9,061			8,013
Deposits on Hotel Acquisitions		36,000			19,500
Other Assets		14,332			15,651
Hotel Assets Held for Sale		-			93,829
Total Assets	$	1,701,945		$	1,630,909
Liabilities and Equity:
Line of Credit	$	28,000		$	51,000
Mortgages and Notes Payable, including net Unamortized Premium (including consolidation of variable interest entity debt of $57,639 and $0)		751,999			707,374
Accounts Payable, Accrued Expenses and Other Liabilities		33,348			31,140
Dividends and Distributions Payable		15,616			13,908
Due to Related Parties		5,143			2,932
Liabilities Related to Assets Held for Sale		-			61,758
Total Liabilities		834,106			868,112
Redeemable Noncontrolling Interests - Common Units (Note 1)	$	15,015		$	14,955
Equity:
Shareholders' Equity:
Preferred Shares:  8% Series A, $.01 Par Value, 29,000,000 shares authorized, 2,400,000 Shares Issued and Outstanding (Aggregate Liquidation  Preference $60,000) at September 30, 2012 and December 31, 2011		24			24
Preferred Shares:  8% Series B, $.01 Par Value, 4,600,000 shares authorized, 4,600,000 Shares Issued and Outstanding (Aggregate Liquidation  Preference $115,000) at September 30, 2012 and December 31, 2011		46			46
Common Shares:  Class A, $.01 Par Value,  300,000,000 Shares Authorized at September 30, 2012 and December 31, 2011,  198,539,261 and 169,969,973 Shares Issued and Outstanding at September 30, 2012 and December 31, 2011, respectively		1,985			1,699
Common Shares:  Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding		-			-
Accumulated Other Comprehensive Loss		(2,247	)		(1,151	)
Additional Paid-in Capital		1,176,727			1,041,027
Distributions in Excess of Net Income		(340,099	)		(310,974	)
Total Shareholders' Equity		836,436			730,671
Noncontrolling Interests (Note 1):
Noncontrolling Interests - Common Units		15,855			16,864
Noncontrolling Interests - Consolidated Joint Ventures		-			307
Noncontrolling Interests - Consolidated Variable Interest Entity		533			-
Total Noncontrolling Interests		16,388			17,171
Total Equity		852,824			747,842
Total Liabilities and Equity	$	1,701,945		$	1,630,909

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

1

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Revenue:
Hotel Operating Revenues	$	96,558		$	80,053		$	257,547		$	206,856
Interest Income from Development Loans		463			656			1,602			2,810
Other Revenues		50			87			164			237
Total Revenues		97,071			80,796			259,313			209,903
Operating Expenses:
Hotel Operating Expenses		53,249			41,675			144,594			112,422
Hotel Ground Rent		214			182			622			693
Real Estate and Personal Property Taxes and Property Insurance		5,804			4,781			16,083			14,203
General and Administrative  (including Share Based Payments of $1,923, $1,495, $6,322 and $4,765)		4,705			3,976			15,213			11,256
Acquisition and Terminated Transaction Costs		85			147			1,167			2,263
Depreciation and Amortization		14,719			12,839			42,304			37,587
Total Operating Expenses		78,776			63,600			219,983			178,424
Operating Income		18,295			17,196			39,330			31,479
Interest Income		407			144			859			363
Interest Expense		11,149			10,145			33,073			29,516
Other Expense		42			300			565			866
Loss on Debt Extinguishment		3			21			249			55
Income before (loss) income from Unconsolidated Joint Venture Investments and Discontinued Operations		7,508			6,874			6,302			1,405
Income (loss) from Unconsolidated Joint Ventures		237			107			(79	)		(1,072	)
Impairment of Investment in Unconsolidated Joint Venture		-			(1,677	)		-			(1,677	)
(Loss) gain from Remeasurement of Investment in Unconsolidated Joint Venture		(1,668	)		-			(1,892	)		2,757
(Loss) income from Unconsolidated Joint Venture Investments		(1,431	)		(1,570	)		(1,971	)		8
Income from Continuing Operations		6,077			5,304			4,331			1,413
Discontinued Operations  (Note 12):
(Loss) gain on Disposition of Hotel Properties		(183	)		843			11,269			843
Impairment of Discontinued Assets		-			(30,248	)		-			(30,248	)
Income (loss) from Discontinued Operations		-			1,597			(231	)		418
(Income) loss from Discontinued Operations		(183	)		(27,808	)		11,038			(28,987	)
Net Income (loss)		5,894			(22,504	)		15,369			(27,574	)
Loss Allocated to Noncontrolling Interests		279			1,000			223			1,619
Preferred Distributions		(3,500	)		(3,500	)		(10,500	)		(6,999	)
Net Income (loss) applicable to Common Shareholders	$	2,673		$	(25,004	)	$	5,092		$	(32,954	)

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

2

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Earnings Per Share:
BASIC
Income (loss) from Continuing Operations applicable to Common Shareholders	$	0.01		$	0.01		$	(0.03	)	$	(0.03	)
Income (loss) from Discontinued Operations applicable to Common Shareholders	$	0.00			(0.16	)	$	0.06			(0.17	)
Net Income (loss) applicable to Common Shareholders	$	0.01		$	(0.15	)	$	0.03		$	(0.20	)
DILUTED
Income (loss) from Continuing Operations applicable to Common Shareholders	$	0.01		$	0.01		$	(0.03	)  *	$	(0.03	)
Income (loss) from Discontinued Operations applicable to Common Shareholders	$	0.00			(0.16	)	$	0.06	*		(0.17	)
Net Income (loss) applicable to Common Shareholders	$	0.01	*	$	(0.15	) *	$	0.03	*	$	(0.20	)
Weighted Average Common Shares Outstanding:
Basic		196,360,325			168,985,193			184,394,561			168,666,752
Diluted		199,392,955	*		172,266,298	*		184,394,561	*		168,666,752

* Income (loss) allocated to noncontrolling interest in Hersha Hospitality Limited Partnership has been excluded from the numerator and units of limited partnership interest in Hersha Hospitality Limited Partnership have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact.  In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income (loss) from continuing operations applicable to common shareholders.

The following table summarizes potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:

	Three Months Ended				Nine Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Common Units of Limited Partnership Interest		7,172,832		7,246,195		7,231,104		7,311,458
Unvested Stock Awards Outstanding		-		-		308,654		510,677
Contingently Issuable Share Awards		-		-		2,364,550		1,754,130
Options to Acquire Common Shares Outstanding		-		-		368,111		2,503,738
Total potentially dilutive securities excluded from the denominator		7,172,832		7,246,195		10,272,419		12,080,003

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

3

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Net income (loss)	$	5,894		$	(22,504	)	$	15,369		$	(27,574	)
Other comprehensive loss
Change in fair value of derivative instruments		(922	)		(617	)		(1,096	)		(909	)
Comprehensive income (loss)		4,972			(23,121	)		14,273			(28,483	)
Less:  Comprehensive loss (income) attributable to noncontrolling interests		279			1,000			223			1,619
Comprehensive income (loss)  attributable to common shareholders	$	5,251		$	(22,121	)	$	14,496		$	(26,864	)

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

4

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS]

	Shareholders' Equity																				Noncontrolling Interests															Redeemable Noncontrolling Interests
	Class A Common Shares		Class B Common Shares		Series A Preferred Shares		Series B Preferred Shares		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Distributions in Excess of Net Earnings			Total Shareholders' Equity			Common Units			Consolidated Joint Ventures			Consolidated Variable Interest Entity			Total Noncontrolling Interests			Total Equity			Common Units
Balance at December 31, 2011	$	1,699	$	-	$	24	$	46	$	1,041,027		$	(1,151	)	$	(310,974	)	$	730,671		$	16,864		$	307		$	-		$	17,171		$	747,842		$	14,955
Unit Conversion		1		-		-		-		375			-			-			376			(376	)		-			-			(376	)		-			-
Reallocation of Noncontrolling Interest		-		-		-		-		(528	)		-			-			(528	)		-			-			-			-			(528	)		528
Common Stock Issuance
Common Stock Offering, net of costs		240		-		-		-		128,430			-			-			128,670			-			-			-			-			128,670			-
Common Stock Option Cancellation		25		-		-		-		(25	)		-			-			-			-			-			-			-			-			-
Dividends and Distributions declared:
Common Stock ($0.18 per share)		-		-		-		-		-			-			(34,217	)		(34,217	)		-			-			-			-			(34,217	)		-
Preferred Stock ($1.50 per Series A share)		-		-		-		-		-			-			(2,400	)		(2,400	)		-			-			-			-			(2,400	)		-
Preferred Stock ($1.50 per Series B share)		-		-		-		-		-						(8,100	)		(8,100	)		-			-			-			-			(8,100	)		-
Common Units ($0.18 per share)		-		-		-		-		-			-			-			-			(748	)		-			-			(748	)		(748	)		(552	)
Dividend Reinvestment Plan		-		-		-		-		16			-			-			16			-			-			-			-			16			-
Stock Based Compensation
Grants		20		-		-		-		2,428			-			-			2,448			-			-			-			-			2,448			-
Amortization		-		-		-		-		5,004			-			-			5,004			-			-						-			5,004			-
Consolidation of Variable Interest Entity		-		-		-		-		-			-			-			-			-			-			956			956			956
Deconsolidation of Consolidated Joint Ventures								-		-			-			-			-			-			(307	)		-			(307	)		(307	)		-
Change in Fair Value of Derivative Instruments		-		-		-				-			(1,096	)		-			(1,096	)		-			-			-			-			(1,096	)		-
Net Income		-		-		-				-			-			15,592			15,592			115			-			(423	)		(308	)		15,284			84
Balance at September 30, 2012	$	1,985	$	-	$	24	$	46	$	1,176,727		$	(2,247	)	$	(340,099	)	$	836,436		$	15,855		$	-		$	533		$	16,388		$	852,824		$	15,015
Balance at December 31, 2010	$	1,692	$	-	$	24	$	-	$	918,215		$	(338	)	$	(236,159	)	$	683,434		$	19,410		$	474		$	-		$	19,884		$	703,318		$	19,894
Unit Conversion		2		-		-		-		637			-			-			639			(868	)		-			-			(868	)		(229	)		229
Reallocation of Noncontrolling Interest		-		-		-		-		6,387			-			-			6,387			(13	)		-			-			(13	)		6,374			(6,374	)
Preferred Stock Offering
Preferred Stock Offering, net of costs		-		-		-		46		110,951			-			-			110,997			-			-			-			-			110,997			-
Dividends and Distributions declared:
Common Stock ($0.17 per share)		-		-		-		-		-			-			(28,881	)		(28,881	)		-			-			-			-			(28,881	)		-
Preferred Stock ($1.50 per Series A share)		-		-		-		-		-			-			(3,600	)		(3,600	)		-			-			-			-			(3,600	)		-
Preferred Stock ($0.74 per Series B share)		-		-		-		-		-			-			(3,399	)		(3,399	)		-			-			-			-			(3,399	)		-
Common Units ($0.17 per share)		-		-		-		-		-			-			-			-			(718	)		-			-			(718	)		(718	)		(518	)
Dividend Reinvestment Plan		-		-		-		-		11			-			-			11			-			-			-			-			11
Stock Based Compensation																																					-
Grants		5		-		-		-		1,471			-			-			1,476			-			-			-			-			1,476			-
Amortization		-		-		-		-		4,376			-			-			4,376			-			-			-			-			4,376			-
Contribution by Noncontrolling Interests in consolidated joint venture		-		-		-		-		-			-			-			-			-			342			-			342			342			-
Deconsolidation of consolidated joint venture		-		-		-		-		-			-			-			-			-			(322	)		-			(322	)		(322	)		-
Change in Fair Value of Derivative Instruments		-		-		-		-		-			(909	)		-			(909	)		-			-			-			-			(909	)		-
Net Loss		-		-		-		-		-			-			(25,955	)		(25,955	)		(834	)		(192	)		-			(1,026	)		(26,981	)		(593	)
Balance at September 30, 2011	$	1,699	$	-	$	24	$	46	$	1,042,048		$	(1,247	)	$	(297,994	)	$	744,576		$	16,977		$	302		$	-		$	17,729		$	761,855		$	12,638

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

5

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS]

	2012			2011
Operating activities:
Net income (loss)	$	15,369		$	(27,574	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on disposition of hotel properties		(11,269	)		(843	)
Impairment of assets		-			30,248
Depreciation		41,520			42,266
Amortization		2,916			2,853
Debt extinguishment		10			-
Development loan interest added to principal		(678	)		(1,699	)
Equity in loss (income) of unconsolidated joint ventures		1,971			(8	)
Distributions of earnings from unconsolidated joint ventures		1,269			-
Loss recognized on change in fair value of derivative instrument		221			55
Stock based compensation expense		6,322			4,765
Change in assets and liabilities:
(Increase) decrease in:
Hotel accounts receivable		(3,970	)		(5,454	)
Escrows		(2,267	)		(4,911	)
Other assets		923			489
Due from related parties		(5,740	)		(1,213	)
Increase (decrease) in:
Due to related parties		2,281			(834	)
Accounts Payable, Accrued Expenses and Other Liabilities		121			766
Net cash provided by operating activities		48,999			38,906
Investing activities:
Purchase of hotel property assets		(67,637	)		(100,780	)
Deposits on hotel acquisitions		(17,000	)		(28,500	)
Capital expenditures		(22,890	)		(21,086	)
Cash paid for hotel development projects		(8,718	)		(26,667	)
Proceeds from disposition of hotel properties and investment in unconsolidated joint ventures		63,738			3,643
Net changes in capital expenditure escrows		(3,212	)		(840	)
Advances to unconsolidated joint ventures		(130	)		-
Distributions of capital from unconsolidated joint ventures		150			13,406
Repayment of development loans receivable		3,000			-
Investment in notes receivable from unconsolidated joint venture		(150	)		(1,420	)
Repayment of notes receivable from unconsolidated joint venture		1,720			-
Cash paid for franchise fee intangible		-			(64	)
Net cash used in investing activities		(51,129	)		(162,308	)
Financing activities:
Proceeds from borrowings under line of credit, net		(23,000	)		(17,000	)
Principal repayment of mortgages and notes payable		(123,823	)		(5,827	)
Proceeds from mortgages and notes payable		97,444			71,353
Cash paid for deferred financing costs		(65	)		(568	)
Proceeds from issuance of preferred stock, net		-			110,997
Proceeds from issuance of common stock, net		128,670			-
Acquisition of interest rate derivative		(96	)		-
Dividends paid on common shares		(32,487	)		(27,130	)
Dividends paid on preferred shares		(10,500	)		(4,699	)
Distributions paid on common partnership units		(1,307	)		(1,173	)
Net cash provided by financing activities		34,836			125,953
Net increase in cash and cash equivalents		32,706			2,551
Cash and cash equivalents - beginning of period		24,568			65,596
Cash and cash equivalents - end of period	$	57,274		$	68,147

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

6

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [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 and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 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, 2011, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, 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 SEC.

We are a self-advised 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 under the symbol “HT.” We own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (“HHLP”), for which we serve as the sole general partner.  As of September 30, 2012, we owned an approximate 96.5% partnership interest in our operating partnership, including a 1.0% general partnership interest.

Noncontrolling Interest

We classify the noncontrolling interests of our consolidated joint ventures and certain common units of limited partnership interests in HHLP (“Nonredeemable Common Units”) as equity.  The noncontrolling interests of Nonredeemable Common Units totaled $15,855 as of September 30, 2012 and $16,864 as of December 31, 2011.  As of September 30, 2012, there were 4,098,254 Nonredeemable Common Units outstanding with a fair market value of $20,081, based on the price per share of our common shares on the New York Stock Exchange on such date.  In accordance with HHLP's partnership agreement, holders of these units may redeem them for cash unless we, in our sole and absolute discretion, elect to issue common shares on a one-for-one basis in lieu of paying cash.

Certain common units of limited partnership interests in HHLP (“Redeemable Common Units”) have been pledged as collateral in connection with a pledge and security agreement entered into by the Company and the holders of the Redeemable Common Units.  The redemption feature contained in the pledge and security agreement where the Redeemable Common Units serve as collateral contains a provision that could result in a net cash settlement outside the control of the Company.  As a result, the Redeemable Common Units are classified in the mezzanine section of the consolidated balance sheets as they do not meet the requirements for equity classification under US GAAP.  The carrying value of the Redeemable Common Units equals the greater of carrying value based on the accumulation of historical cost or the redemption value.

As of September 30, 2012, there were 3,064,252 Redeemable Common Units outstanding with a redemption value equal to the fair value of the Redeemable Common Units, or $15,015.  Historical cost of these units was $11,962 as of September 30, 2012.  As of December 31, 2011, redemption value was $14,955 and historical cost was $12,402.  The redemption value of the Redeemable Common Units is based on the price per share of our common shares on the NYSE on such date.  As of September 30, 2012 and December 31, 2011, the Redeemable Common Units were valued on the consolidated balance sheets at redemption value since the Redeemable Common Units redemption value was greater than historical cost.

Net income or loss related to Nonredeemable Common Units and Redeemable Common Units (collectively, “Common Units”), as well as the net income or loss related to the noncontrolling interests of our consolidated joint ventures, is included in net income or loss in the consolidated statements of operations and is excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 – BASIS OF PRESENTATION (CONTINUED)

Shareholders’ Equity

On May 8, 2012, we closed on a public offering in which we issued and sold 24,000,000 common shares through several underwriters for net proceeds to us of approximately $128,670.  Immediately upon the closing the offering, we contributed all of the net proceeds of the offering to HHLP in exchange for additional Common Units of limited partnership in HHLP.  HHLP used the net proceeds of this offering to reduce some of the indebtedness outstanding under our revolving line of credit facility and for general corporate purposes, including the funding of future acquisitions.

On August 4, 2009, we entered into a purchase agreement with Real Estate Investment Group L.P. (“REIG”), pursuant to which we sold 5,700,000 common shares at a price of $2.50 per share to REIG for gross proceeds of $14,250. We also granted REIG the option to buy up to an additional 5,700,000 common shares at a price of $3.00 per share, which was exercisable through August 4, 2014. On February 13, 2012, pursuant to the terms of the original option, we called in and canceled the option granted to REIG in exchange for the issuance of 2,521,561 common shares with an aggregate value equal to $13,566. This amount equals the volume weighted average price per common share for the 20 trading days prior to the exercise of the option, less the $3.00 option price, multiplied by the 5,700,000 common shares remaining under the option.

Recent Accounting Pronouncements

Effective January 1, 2012, we adopted ASC Update No. 2011-05 concerning the presentation of comprehensive income. The amendment provides guidance to improve comparability, consistency, and transparency of financial reporting.  The amendment also eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Instead, entities will be required to present all non-owner changes in stockholders’ equity as either a single continuous statement of comprehensive income or in two separate but consecutive statements, for which we have elected to present two separate but consecutive statements.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [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 September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
Land	$	305,286		$	278,442
Buildings and Improvements		1,212,511			1,090,280
Furniture, Fixtures and Equipment		170,382			151,600
Construction in Progress		40,356			31,638
		1,728,535			1,551,960
Less Accumulated Depreciation		(251,384	)		(211,084	)
Total Investment in Hotel Properties	$	1,477,151		$	1,340,876

Acquisitions

During the nine months ended September 30, 2012, we acquired the following wholly-owned properties:

Hotel	Acquisition Date	Land		Buildings and Improvements		Furniture Fixtures and Equipment		Franchise Fees, Loan Costs, and Leasehold Intangible		Leasehold Liability			Acquisition Costs		Total Purchase Price		Fair Value of Assumed Debt
The Rittenhouse Hotel,  Philadelphia, PA	3/1/2012	$	7,119	$	29,605	$	3,580	$	2,156	$	(827	)	$	956	$	42,589	$	-
Bulfinch Hotel, Boston, MA	5/7/2012		1,456		14,954		1,790		-		-			58		18,258	$	-
Holiday Inn Express, New York, NY	6/18/2012		30,329		57,016		2,856		98		-			67		90,366	$	73,038
Courtyard by Marriot, Ewing, NJ	8/13/2012		950		9,835		1,415		30		-			-		12,230	$	12,875
Total		$	39,854	$	111,410	$	9,641	$	2,284	$	(827	)	$	1,081	$	163,443	$	85,913

The fair values for the assets and liabilities acquired in 2012 are preliminary as the Company continues to finalize their acquisition date fair value determination.

On August 13, 2012, the Company purchased, from an unaffiliated seller, the remaining 50% ownership in Inn America Hospitality at Ewing, LLC (“Inn at Ewing”), the owner of the Courtyard by Marriot, Ewing, NJ.  Consideration given for this interest in Inn at Ewing included the assumption of the property’s mortgage debt of $12,875.

On June 18, 2012, the Company purchased, from an unaffiliated seller, the remaining 50% ownership interest in Metro 29th Street Associates, LLC (“Metro 29th”), the lessee of the Holiday Inn Express, New York, NY.  Consideration given for this interest in Metro 29th included $10,000 cash and the forgiveness of approximately $800 of accrued interest payable under a mezzanine loan made by the Company to an affiliate of the seller.  Brisam Management DE, LLC (“Brisam”), as the owner of the land, building and improvements leased by Metro 29th, is considered a variable interest entity and, based on our evaluation, we determined that we are the primary beneficiary of this variable interest entity and therefore Brisam is consolidated in our financial statements.  As a result, we included in our consolidated financial statements approximately $90,201 in investment in hotel properties and an aggregate of $73,038 in first mortgage and mezzanine debt at acquisition.  On the date we acquired the remaining interest in Metro 29th, we determined that the stated rate of interest on the first mortgage debt was above market and, accordingly, recorded a $3,436 premium.   Also included in this transaction was an option to acquire the equity interests in the entity owning the real estate assets or the real estate assets from Brisam for nominal consideration. The option is exercisable by the Company after September 1, 2016 or before that date in the event of certain specified events.  This option may be put to the Company by the Seller at any time.  On June 29, 2012, the Company repaid the $15,000 mezzanine debt.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

As shown in the table below, included in the consolidated statements of operations for the three and nine months ended September 30, 2012 are total revenues of $10,539 and $19,023, respectively, and total net income of $406 and net loss of $537 respectively, for hotels we have acquired and consolidated since the date of acquisition.   These amounts represent the results of operations for these hotels since the date of acquisition:

	Three Months Ended					Nine Months Ended
	September 30, 2012					September 30, 2012
Hotel	Revenue		Net (Loss) Income			Revenue		Net  (Loss) Income
The Rittenhouse Hotel, Philadelphia, PA	$	4,554	$	(503	)	$	11,754	$	(1,796	)
Bulfinch Hotel, Boston, MA		1,181		301			1,909		479
Holiday Inn Express, New York, NY		4,267		580			4,823		752
Courtyard by Marriot, Ewing, NJ		537		28			537		28
Total	$	10,539	$	406		$	19,023	$	(537	)

Pro Forma Results (Unaudited)

The following condensed pro forma financial data are presented as if all acquisitions completed since January 1, 2012 and 2011 had been completed on January 1, 2011 and 2010.  Properties acquired without any operating history are excluded from the condensed pro forma operating results.  The condensed pro forma financial data are not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2012 and 2011 at the beginning of the year presented, nor does it purport to represent the results of operations for future periods.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Pro Forma Total Revenues	$	97,551		$	93,894		$	271,275		$	255,501
Pro Forma Income (Loss) from Continuing Operations	$	5,890		$	5,751		$	2,998		$	3,228
Income (loss) from Discontinued Operations		(183	)		(27,808	)		11,038			(28,987	)
Pro Forma Net Income (loss)		5,707			(22,057	)		14,036			(25,759	)
Loss allocated to Noncontrolling Interest		(272	)		(1,016	)		(173	)		(1,694	)
Preferred Distributions		(3,500	)		(3,500	)		(10,500	)		(6,999	)
Pro Forma Net Income (loss) applicable to Common Shareholders	$	1,935		$	(26,573	)	$	3,363		$	(34,452	)
Pro Forma Loss  applicable to Common Shareholders per Common Share
Basic	$	0.00		$	(0.16	)	$	0.01		$	(0.20	)
Diluted	$	0.00		$	(0.16	)	$	0.01		$	(0.20	)
Weighted Average Common Shares Outstanding
Basic		196,360,325			168,985,193			184,394,561			168,666,752
Diluted		199,392,955			168,985,193			184,394,561			168,666,752

Asset Development

We have opportunistically engaged in development of hotel assets.  We capitalize expenditures related to hotel development projects and renovations, including indirect costs such as interest expense, real estate taxes and utilities related to hotel development projects and renovations.

On July 22, 2011, the Company completed the acquisition of the real property and improvements located at 32 Pearl Street, New York, NY from an unaffiliated seller for a total purchase price of $28,300.  The property is a re-development project which was initiated in 2008. The Company acquired the real property and the improvements for cash and by cancelling an $8,000 development loan on the re-development project made to the seller and by cancelling $300 of accrued interest receivable from the seller.  Since the date of acquisition and through September 30, 2012, we have spent $5,652 in development costs, including $214 in property tax expense.  All such costs have been capitalized.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

During the first quarter of 2012, the Company commenced construction of an additional oceanfront tower, additional meeting space and structured parking on a land parcel adjacent to the Courtyard by Marriott, Miami, Florida, a hotel acquired on November 16, 2011. See “Note 6 – Debt” for information on the financing of this construction. This land parcel was included in the acquisition of the hotel.  Since commencement of construction and through September 30, 2012, we have spent $3,559 in construction costs.  All such costs have been capitalized.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 [UNAUDITED]

[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of September 30, 2012 and December 31, 2011 our investment in unconsolidated joint ventures consisted of the following:

		Percent			Preferred	September 30,		December 31,
Joint Venture	Hotel Properties	Owned			Return	2012		2011
Inn America Hospitality at Ewing, LLC	Courtyard by Marriott, Ewing, NJ		50.0	%	11.0% cumulative	$	-	$	-
SB Partners, LLC	Holiday Inn Express, South Boston, MA		50.0	%	N/A		1,561		1,681
Hiren Boston, LLC	Courtyard by Marriott, South Boston, MA		50.0	%	N/A		5,134		5,035
Mystic Partners, LLC	Hilton and Marriott branded hotels in CT and RI		8.8%-66.7	%	8.5% non-cumulative		9,886		23,762
Metro 29th Street Associates, LLC	Holiday Inn Express, New York, NY		50.0	%	N/A		-		8,361
						$	16,581	$	38,839

As noted in “Note 2 – Investment in Hotel Properties,” on August 10, 2012, the Company purchased the remaining 50% ownership interest in Inn America Hospitality at Ewing, the lessee of the Courtyard by Marriot, Ewing, NJ.  As such, we ceased to account for our investment in Inn America Hospitality at Ewing under the equity method of accounting as of August 10, 2012 because it became a consolidated subsidiary.  Our interest in Inn America Hospitality at Ewing, which consisted of our investment in Inn America Hospitality at Ewing and a receivable, was remeasured, and as a result, during the three and nine months ended September 30, 2012, we recorded a loss of approximately $1,668.

As noted in “Note 2 – Investment in Hotel Properties,” on June 18, 2012, the Company purchased the remaining 50% ownership interest in Metro 29th, the lessee of the Holiday Inn Express, Manhattan, New York, NY. As such, we ceased to account for our investment in Metro 29th under the equity method of accounting as of June 18, 2012 because it became a consolidated subsidiary.  Our interest in Metro 29th was remeasured, and as a result, we recorded a loss of approximately $224.

On August 15, 2011, the Company entered into two purchase and sale agreements to dispose of a portfolio of 18 non-core hotel properties, four of which are owned in part by the Company through an unconsolidated joint venture.  As a result of entering into these purchase and sale agreements, during the twelve months ended December 31, 2011, we recorded an impairment loss of approximately $1,677 for those hotel properties for which our investment in the unconsolidated joint venture did not exceed the net proceeds distributable to us on the sale of the hotel properties held by the joint venture based on the purchase price. On February 23, 2012, the Company closed on the sale of 14 of these non-core hotel properties, including three of the unconsolidated joint venture hotel properties.  On May 8, 2012, the Company closed on the remaining four non-core hotel properties, including one of the unconsolidated joint venture hotel properties.  As our investment in these unconsolidated joint ventures equated the net proceeds distributed to us, we did not record a gain or loss in connection with the sale of these hotel properties.  See “Note 12 – Discontinued Operations” for more information.

Income or loss from our unconsolidated joint ventures is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. Any difference between the carrying amount of these investments and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets.

12