NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at June 30, 2016 and December 31, 2015:



		June 30, 2016		December 31, 2015

Land	$	463,969	$	480,874
Buildings and Improvements		1,362,665		1,518,565
Furniture, Fixtures and Equipment		214,480		227,527
		2,041,114		2,226,966

Less Accumulated Depreciation		(358,122)		(395,847)

Total Investment in Hotel Properties	$	1,682,992	$	1,831,119

Acquisitions

We acquired the following properties during the six months ended June 30, 2016:



Hotel	Acquisition Date		Land		Buildings and Improvements		Furniture Fixtures and Equipment		Other Intangibles			Loan Costs		Total Purchase Price		Assumption of Debt
Sanctuary Beach Resort, Marina, CA	1/28/2016	$	20,014	$	17,093	$	2,369	$	-		$	198	$	39,674	$	14,750	*
Hilton Garden Inn M Street, Washington, DC	3/9/2016		30,131		65,971		9,621		874	**		-		106,597		-
TOTAL		$	50,145	$	83,064	$	11,990	$	874		$	198	$	146,271	$	14,750

*Assumption of debt includes a $50 premium resulting from the determination that the stated rate of interest is above market rates on the date of acquisition

**Includes an intangible asset for a lease-in-place of $648, advance bookings of $76 and franchise fees of $150.

Acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the above acquired assets. During the six months ended June 30, 2016, we paid $1,424 in acquisition costs related to the above acquired assets.

Included in the consolidated statement of operations for the three and six months ended June 30, 2016 are total revenues of $6,565 and $8,696, and total net income of $1,793 and $2,547 for the hotels we acquired during the six months ended June 30, 2016 and consolidated since the date of acquisition of the hotels.



	Three Months Ended June 30,				Six Months Ended June 30,
	2016				2016
Hotel		Revenue		Net Income		Revenue		Net Income
Sanctuary Beach Resort, Marina, CA	$	1,662	$	175	$	2,564	$	438
Hilton Garden Inn M Street, Washington, DC		4,903		1,618		6,132		2,109
Total	$	6,565	$	1,793	$	8,696	$	2,547

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Purchase and Sale Agreement

In June 2016, we entered into a purchase and sale agreement to purchase the Envoy Hotel in Boston, MA from an unaffiliated seller for a total purchase price of $112,500. The transaction closed on July 21, 2016. Accounting for this acquisition requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values.

In June 2016, we entered into a purchase and sale agreement to sell the Residence Inn, Framingham, MA and Residence Inn, Norwood, MA to an unaffiliated buyer for a purchase price of $47,000. The transaction is expected to close in the third quarter of 2016, subject to customary closing conditions.

Hotel Dispositions

On May 3, 2016, the Company closed on the sale of Hyatt Place, King of Prussia, PA to an unaffiliated buyer for a total sales price of $13,000 with a gain on sale of approximately $5,402. This hotel was acquired by the Company in August 2010. The operating results for this hotel are included in net income as shown in the consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 as disposition of this hotel does not represent a strategic shift in our business.

On February 4, 2016, we announced the signing of asset purchase and contribution agreements (the “Contribution Agreements”) with Cindat Manhattan Hotel Portfolio (US) LLC (“Cindat”) to form a joint venture, Cindat Hersha Owner JV, LLC (the “Owner JV”), which initially invests in seven of our limited service hotels in Manhattan (The “JV Properties”). This transaction was consummated on April 29, 2016. The Contribution Agreements valued the JV Properties at $543,500. Cindat contributed $354,550 and received a 70% senior common equity interest in Owner JV. We contributed the JV Properties to Owner JV and received $354,550 in cash and a preferred equity interest initially valued at $37,000. In addition, we retained a 30% junior common equity interest in Owner JV. We contributed $12,239 and Cindat contributed an aggregate of $14,105 in working capital and closing costs for the formation of Owner JV, and finance costs related to debt originated on the JV Properties by Owner JV. In addition, we incurred additional closing costs associated with the contribution of the JV Properties to Owner JV of $10,653.

Prior to the contribution to Owner JV, our basis in the JV Properties was $264,658. Our preferred equity and junior common equity interest in Owner JV was initially recorded at $104,248 which represents our retained interest in the JV Properties at our basis prior to contribution and additional contributions made for the formation of Owner JV. Please refer to “Note 3 – Investment in Unconsolidated Joint Ventures” more information about the joint venture with Cindat.

Due to our continuing interest in the JV Properties, gain recognized on the properties is limited to cash received less the basis of the properties contributed. As a result, we recognized a gain on the disposition of hotel properties of $89,892 and recorded a deferred gain of $81,333, which is recorded as a liability in the consolidated balance sheets. The deferred gain will be recognized as income in a future period if an event occurs that changes our retained interest in the JV Properties.

Proceeds received from the contribution of the JV Properties were used to reduce our consolidated mortgage debt by $55,103, our line of credit balance by $194,550 and our unsecured term loan balance by $39,480. Any remaining proceeds are to be used for general corporate purposes, including, but not limited to, the acquisition of hotel properties, the repurchase of our common shares and future distributions to shareholders.

We did not have any hotel dispositions during the three and six months ended June 30, 2015.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Pro Forma Results (Unaudited)

The following condensed pro forma financial data for the three and six months ended June 30, 2016 and 2015 are presented as if the hotels acquired by the Company in 2016 and 2015 had been acquired as of January 1, 2015 and 2014, respectively. The condensed pro forma financial data are not necessarily indicative of what actual results of operations of the Company would have been for the periods presented assuming the acquisitions had been consummated on January 1, 2015 and 2014, nor do they purport to represent the results of operations for future periods.



	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015		2016		2015
Pro Forma Total Revenues	$	127,723		133,796	$	238,031	$	236,574

Pro Forma Net Income		114,968		21,364		108,780		16,698
Income Allocated to Noncontrolling Interest		(4,748)		(470)		(4,164)		(16)
Preferred Distributions		(4,000)		(3,589)		(7,589)		(7,178)
Extinguishment of Issuance Costs Upon Redemption of Series B Preferred Shares		(4,021)		-		(4,021)		-
Pro Forma Income Applicable to Common Shareholders	$	102,199	$	17,305	$	93,006	$	9,504

Pro Forma Income Applicable to Common Shareholders per Common Share
Basic	$	2.35	$	0.36	$	2.12	$	0.19
Diluted	$	2.33	$	0.35	$	2.10	$	0.19

Weighted Average Common Shares Outstanding
Basic		43,427,726		48,530,716		43,903,526		49,053,846
Diluted		43,863,577		49,043,914		44,384,969		49,576,322