NOTE 5 – DEBT

Mortgages

We had total mortgages payable at December 31, 2015 and December 31, 2014 of $548,539 and $617,375, respectively. These balances consisted of mortgages with fixed and variable interest rates, which ranged from 2.61% to 6.50% as of December 31, 2015. Included in these balances are net premiums of $3,503 and $1,584 as of December 31, 2015 and December 31, 2014, respectively, which are amortized over the remaining life of the loans. Aggregate interest expense incurred under the mortgage loans payable totaled $26,581, $31,046 and $34,854 during the years ended December 31, 2015, 2014 and 2013, respectively.

Our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, non-recourse financing arrangements. Our mortgage loans payable typically require that specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. We have determined that certain debt service coverage ratio covenants contained in the loan agreements securing two of our hotel properties were not met as of December 31, 2015. Pursuant to these loan agreements, the lender has elected to escrow the operating cash flow for a number of these properties. However, these covenants do not constitute an event of default for these loans.

As of December 31, 2015, the maturity dates for the outstanding mortgage loans ranged from May 2016 to April 2023.

Subordinated Notes Payable

We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements which will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, prior to maturity in accordance with the provisions of the indenture agreements. The $25,774 notes issued to Hersha Statutory Trust I and Hersha Statutory Trust II, bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets two business days prior to each quarterly payment. The weighted average interest rate on our two junior subordinated notes payable during the years ended December 31, 2015, 2014 and 2013 was 3.33%, 3.28% and 3.32%, respectively. Interest expense in the amount of $1,715, $1,690 and $1,712 was recorded for the years ended December 31, 2015, 2014 and 2013, respectively.

Credit Facilities

On August 10, 2015, we entered into a $300,000 senior unsecured term loan agreement with Citigroup Global Markets Inc. and various other lenders. The term loan expires on August 10, 2020. This new term loan expands our senior unsecured borrowing capacity from $500,000 to $800,000.

On February 28, 2014, we entered into a senior unsecured credit agreement with Citigroup Global Markets Inc. and various other lenders. The credit agreement provides for a $500,000 senior unsecured credit facility consisting of a $250,000 senior unsecured revolving line of credit and a $250,000 senior unsecured term loan. This new facility amended and restated the existing $400,000 senior unsecured credit facility. The $500,000 unsecured credit facility expires on February 28, 2018 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 $850,000 at our request, subject to the satisfaction of certain conditions.

Prior to February 28, 2014, we maintained a senior unsecured credit agreement with Citigroup Global Markets Inc. and various other lenders. The credit agreement provided for a $400,000 senior unsecured credit facility consisting of a $250,000 senior unsecured revolving line of credit and a $150,000 senior unsecured term loan.

NOTE 5 – DEBT (CONTINUED)

The amount that we can borrow at any given time on our credit facility is governed by certain operating metrics of designated unencumbered hotel properties known as borrowing base assets. As of December 31, 2015, the following hotel properties were borrowing base assets:



- Holiday Inn Express, Cambridge, MA	- Hampton Inn, Philadelphia, PA
- Holiday Inn, Wall Street, NY	- Hampton Inn, Washington, DC
- Holiday Inn Express, Times Square, NY	- Hyatt Place, King of Prussia, PA
- Residence Inn, Norwood, MA	- Nu Hotel, Brooklyn, NY
- Residence Inn, Framingham, MA	- The Rittenhouse Hotel, Philadelphia, PA
- Sheraton, Wilmington South, DE	- The Boxer, Boston, MA
- Sheraton Hotel, JFK Airport, New York, NY	- Holiday Inn Express (Water Street), New York, NY
- Candlewood Suites, Times Square, NY	- Courtyard, San Diego, CA
- Hampton Inn, Times Square, NY	- Residence Inn, Coconut Grove, FL
- Winter Haven, Miami, FL	- Blue Moon, Miami, FL
- Hampton Inn, Pearl Street, NY	- Parrot Key Resort, Key West, FL
- Residence Inn, Greenbelt, MD	- Courtyard, Brookline, MA
- Courtyard, Miami, FL	- TownePlace Suites, Sunnyvale, CA
- Residence Inn, Tyson's Corner, VA

The interest rate for the $500,000 unsecured credit facility is based on a pricing grid with a range of one month U.S. LIBOR plus 1.70% to 2.45% for the revolving line of credit and 1.60% to 2.35% for the unsecured term loan. The $300,000 unsecured term loan’s interest rate is based on a pricing grid with a range of one month U.S LIBOR plus 1.50% to 2.25%. As noted above, we refinanced our credit facility during February 2014. Prior to this refinancing, the pricing grid for the evolving line of credit and unsecured term loan was U.S. LIBOR plus 1.75% to 2.65%.

As of December 31, 2015, we had borrowed $250,000 in unsecured term loans under the $500,000 unsecured credit facility, $150,000 for which we had entered into interest rate swaps which effectively fix the interest rate on these term loans at a blended rate of 2.914%. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information. As of December 31, 2015, we had fully drawn the $300,000 unsecured term loan.

As of December 31, 2015, we had a balance of $27,000 outstanding on the revolving line of credit. As of December 31, 2014, the outstanding unsecured $250,000 term loan under the $500,000 unsecured credit facility was fully drawn and the $250,000 revolving line of credit had no balance outstanding.

The credit agreement providing for the $500,000 unsecured credit facility and $300,000 unsecured term loan include certain financial covenants and requires that we maintain: (1) a minimum tangible net worth of $900,000, 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 1.45 to 1.00, which increases to 1.50 to 1.00 as of January 1, 2016;

·a maximum leverage ratio of not more than 60%; and

·a maximum secured debt leverage ratio of 50%, which decreases to 45% as of January 1, 2016

The Company is in compliance with each of the covenants listed above as of December 31, 2015. As of December 31, 2015, our remaining borrowing capacity under the $500,000 unsecured credit facility and $300,000 unsecured term loan was $218,745 based on the borrowing base assets at December 31, 2015.

The Company recorded interest expense of $10,147, $6,218 and $5,413 related to borrowings drawn on each of the aforementioned credit facilities, for the years ended December 31, 2015, 2014 and 2013, respectively. The weighted average interest rate on our credit facilities was 2.69%, 2.82% and 3.08% for the years ended December 31, 2015, 2014 and 2013, respectively.

NOTE 5 – DEBT (CONTINUED)

Aggregate annual principal payments for the Company’s credit facility, unsecured term loan and mortgages and subordinated notes payable for the five years following December 31, 2016 and thereafter are as follows:


Year Ending December 31,	Amount

2016	$	158,167
2017		203,737
2018		128,871
2019		252,872
2020		2,912
Thereafter		427,025
Net Unamortized Premium		3,503
	$	1,177,087

Capitalized Interest

We utilize cash, mortgage debt and our unsecured credit facility to finance on-going capital improvement projects at our hotels. Interest incurred on mortgages and the revolving credit facility that relates to our capital improvement projects is capitalized through the date when the assets are placed in service. For the years ended December 31, 2015, 2014 and 2013, we capitalized $0, $458 and $1,320 respectively, of interest expense related to these projects.

Deferred Financing Costs

Costs associated with entering into mortgages, notes payable, unsecured term loan and our credit facilities are deferred and amortized over the life of the debt instruments. Amortization of deferred financing costs is recorded in interest expense. As of December 31, 2015, deferred costs were $8,971, net of accumulated amortization of $8,024. Amortization of deferred costs for the years ended December 31, 2015, 2014 and 2013 was $2,650, $2,768 and $2,886 respectively.

Debt Payoff

On August 10, 2015, we repaid in full outstanding mortgage debt with an original principal balance of $60,000 secured by the Courtyard by Marriott, Miami, FL. In connection with this transaction, we terminated the interest rate swap associated with the mortgage on this property. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information on this transaction. The loan was due to mature on July 1, 2016, and we incurred approximately $329 in expense in unamortized deferred financing costs and fees.

On October 27, 2014, we repaid $10,179 on our mortgage with Berkadia Commercial Mortgage, LLC for the Residence Inn, Greenbelt, MD property. The loan was due to mature in October 2014, and we incurred no loss on debt extinguishment in paying off the loan.

On June 30, 2013, we repaid $7,928 on our mortgage with Berkadia Commercial Mortgage, LLC for the Residence Inn, Tysons Corner, VA property. The loan was due to mature in July 2013, and we incurred no loss on debt extinguishment in paying off the loan.

On January 3, 2013, we funded an additional $50,000 in unsecured term loan borrowings under our then $400,000 unsecured credit facility which was used to pay off the balance of the mortgage loan secured by the Holiday Inn Express, Times Square, New York, NY on January 7, 2013. This mortgage was also subject to an interest rate swap, which was terminated as a cash flow hedge as of December 31, 2012 due to this payoff. As a result of this payoff, we expensed $261 in unamortized deferred financing costs and fees, which are included in the Loss on Debt Extinguishment caption of the consolidated statements of operations for the year ended December 31, 2013.

NOTE 5 – DEBT (CONTINUED)

New Debt/Refinance

On October 27, 2015, we refinanced the outstanding mortgage debt with an original balance of $30,000 secured by the Courtyard by Marriott, Los Angeles, California and simultaneously entered into a new mortgage obligation of $35,000, incurring a loss on debt extinguishment of approximately $10. The new mortgage debt bears interest at a variable rate of one month U.S. dollar LIBOR plus 3.00% and matures on September 29, 2017. Also on October 27, 2015, we entered into an interest rate cap that matures on September 27, 2017 that effectively limits the interest at 3.00% per annum. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information on the interest rate cap.

On June 10, 2015, we refinanced the outstanding mortgage debt with an original principal balance of $55,000 secured by the Hyatt Union Square, New York, NY and simultaneously entered into a new mortgage obligation of $55,750, incurring a loss on debt extinguishment of approximately $212. The new mortgage debt bears interest at a variable rate of one month U.S dollar LIBOR plus 2.30% and matures on June 10, 2019. Also on June 10, 2015, we entered into an interest rate cap that matures on June 10, 2016 that effectively limits the interest at 3.00% per annum. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information on the interest rate cap.

On April 10, 2015, we refinanced the outstanding mortgage debt with an original principal balance of $38,913 secured by the Courtyard by Marriott, Brookline, MA. The loan was due to mature in July 2015, and we incurred approximately $10 in expense in unamortized deferred financing costs and fees.

On January 30, 2015, we repaid in full outstanding mortgage debt with an original principal balance of $27,500 secured by the Capitol Hill Hotel, Washington, DC and simultaneously entered into a new mortgage obligation of $25,000. The new mortgage debt bears interest at a variable rate of one month U.S. dollar LIBOR plus 2.25% and matures on January 30, 2018. The loan was due to mature in January 2015, and we incurred no loss on debt extinguishment in paying off the loan. We had previously entered into an interest rate swap with respect to the $27,500 mortgage loan that matured on February 1, 2015. In connection with this transaction, we did not enter into a new derivative instrument to fix or cap the rate of interest payable on the $25,000 mortgage loan. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information on this transaction.

On November 13, 2014, we repaid outstanding mortgage debt on with an original principal balance of $32,000 secured by the Hilton Garden Inn, Tribeca, NY and simultaneously entered into a new mortgage obligation of $46,500 with a new lender. The new mortgage debt bears interest at a variable rate of one month U.S. dollar LIBOR plus 2.30% and matures on November 1, 2019.

On February 28, 2014, we refinanced our previous $400,000 unsecured credit facility with a $500,000 unsecured credit facility with Citigroup Global Markets Inc. and various other lenders. As a result of this refinance, we expensed $579 in unamortized deferred financing costs and fees, which are included in the Loss on Debt Extinguishment caption of the consolidated statements of operations for the year ended December 31, 2014.

On January 31, 2014, we paid down $5,175 of the outstanding debt and modified the mortgage loan on the Duane Street Hotel, New York, NY. As a result, we entered into a $9,500 loan with a maturity date of February 1, 2017. The modified loan bears interest at a variable rate of one month U.S. dollar LIBOR plus 4.50%. The modification also includes an interest rate swap, which effectively fixes the interest rate at 5.433%. As a result of this modification, we expensed $91 in unamortized deferred financial costs and fees during the year ended December 31, 2014.

On April 24, 2013, we modified the $30,000 mortgage loan on the Courtyard by Marriott, Westside, Los Angeles, CA. The modified loan bears interest at a variable rate of one month U.S. dollar LIBOR plus 3.00%, and matures on September 29, 2017. The modification also contains an option for the Company to advance $5,000 in principal subject to certain conditions, including there being no event of default and compliance with debt service coverage ratio requirements. As a result of this modification, we incurred a loss on debt extinguishment of $284. This modification did not change the terms of the interest rate swap that we entered into in 2011, which had effectively fixed the interest at 4.947%, and now effectively fixes the interest at 4.10% through September 29, 2015. After the maturity date of the swap, the loan will bear interest at the stated variable rate of one-month U.S. dollar LIBOR plus 3.00%, with a LIBOR floor of 0.75%. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information.