NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

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



		December 31, 2016		December 31, 2015

Land	$	499,484	$	480,874
Buildings and Improvements		1,383,266		1,518,565
Furniture, Fixtures and Equipment		205,162		227,527
		2,087,912		2,226,966

Less Accumulated Depreciation		(320,342)		(395,847)

Total Investment in Hotel Properties	$	1,767,570	$	1,831,119

Depreciation expense on hotel properties was $74,288, $73,672 and $68,418 (including depreciation on assets held for sale) for the years ended December 31, 2016, 2015 and 2014, respectively.

During the year ended December 31, 2016, we acquired the following wholly-owned hotel properties:



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	$	20,278	$	17,319	$	2,369	$	-		$	198	$	40,164	$	14,750	*
Hilton Garden Inn M Street, Washington, DC	3/9/2016		30,793		67,420		9,621		874	**		-		108,708		-
Envoy Hotel, Boston, MA	7/21/2016		25,264		75,979		11,251		131	***		-		112,625		-
Courtyard, Sunnyvale, CA	10/20/2016		17,694		53,272		4,034		150	****		537		75,687		40,600
The Ambrose, Santa Monica, CA	12/1/2016		18,750		26,839		1,911		-			-		47,500		-

TOTAL		$	112,779	$	240,829	$	29,186	$	1,155		$	735	$	384,684	$	55,350

*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.

***Includes a lease-in-place intangible asset of $126, below market lease liability of $319, advance bookings asset of $199, and franchise fees asset of $125.

****Includes a franchise fees asset 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 year ended December 31, 2016, we incurred $2,560 in acquisition costs related to acquired assets and costs related to terminated transactions.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Included in the consolidated statements of operations for the year ended December 31, 2016 are total revenues of $30,991 and a total net income of $5,638 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 as presented in the table below:



	Year Ended December 31, 2016
Hotel		Revenue		Net Income
Sanctuary Beach Resort, Marina, CA	$	6,367	$	933
Hilton Garden Inn M Street, Washington, DC		13,565		3,283
Envoy Hotel, Boston, MA		8,862		1,277
Courtyard, Sunnyvale, CA		1,768		22
The Ambrose, Santa Monica, CA		429		123

Total	$	30,991	$	5,638

Purchase and Sale Agreements

On February 2, 2017, we purchased the Ritz-Carlton, Coconut Grove, FL from an unaffiliated seller for a total purchase price of $36,000 and received seller financing in the amount of $3,200. 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. The purchase price allocations are estimated based on current available information; however, we still are in the process of obtaining appraisals and finalizing the accounting for the acquisition, which was acquired subsequent to year-end.

On February 21, 2017, we purchased the Pan Pacific, Seattle, WA from an unaffiliated seller for a total purchase price of $79,000. 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. The purchase price allocations are estimated based on current available information; however, we still are in the process of obtaining appraisals and finalizing the accounting for the acquisition, which was acquired subsequent to year-end.

Lease Buyout

During November 2016, we signed an agreement with our restaurant lessee at the Courtyard Miami Beach to buyout the remainder of their current lease. The agreement was made in conjunction with our overall property improvement plan, which will also include room and common area upgrades, with the intention to rebrand the hotel to a more upscale Marriott brand. As defined by terms of the agreement, we will pay total consideration to complete the buyout of $10,000 and issue 450,000 operating partnership units. During the fourth quarter of 2016, we paid $5,000 and issued 225,000 units valued at $4,400 with the remainder of the consideration due upon completion of the buyout. The lease buyout is expected to be completed by the second quarter of 2017. We accounted for this transaction in accordance with ASU 420 “Exit or Disposal Cost Obligations,” recording the entire amount of consideration as an expense at the time of agreement execution, resulting in a total expense of $18,831. This recorded expense was partially offset by the write-off of an intangible liability related to the lease of $2,000.

Hotel Dispositions

Effective January 1, 2014, we early adopted ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations. This amendment defines discontinued operations as a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. As a result of the early adoption of ASU Update No. 2014-08, we anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.

For transactions that had been classified as held for sale or as discontinued operations for periods prior to our adoption of ASU

Update No. 2014-08, we have continued to present the operating results as discontinued operations in the statements of operations for all applicable periods presented.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

During the years ended December 31, 2016, 2015 and 2014, we had the following hotel dispositions:



Hotel	Acquisition Date	Disposition Date		Consideration		Gain (Loss) on Disposition

Cindat Hotel Portfolio (7)	April 2005 - March 2011	April 2016	$	543,500	$	89,892
Hyatt Place, King of Prussia, PA	August 2010	May 2016		13,000		5,375
Hawthorn Suites, Franklin, MA	April 2006	September 2016		8,900		(438)
Residence Inn, Framingham, MA	March 2004	November 2016		25,000		11,467
Residence Inn, Norwood, MA	July 2006	November 2016		22,000		9,543
2016 Total					$	115,839

Hotel 373	June 2007	April 2014	$	37,000	$	7,195
2014 Total					$	7,195

On November 4, 2016, the Company closed on the sale of the Residence Inn Framingham, MA and Residence Inn, Norwood, MA to an unaffiliated buyer for a total sales price of $47,000 with a gain on sale of approximately $21,023. These hotels were acquired by the Company in March 2004 and July 2006, respectively. The operating results for these hotels are included in operating income until the date of sale as shown in the consolidated statements of operations for the years ended December 31, 2016 and 2015 as disposition of these hotels does not represent a strategic shift in our business.

On September 7, 2016, the Company closed on the sale of Hawthorn Suites, Franklin, MA to an unaffiliated buyer for a total sales price of $8,900 with a loss on sale of approximately $437. This hotel was acquired by the Company in April 2006. The operating results for this hotel are included in operating income until the date of sale as shown in the consolidated statements of operaations for the years ended December 31, 2016 and 2015 as disposition of this hotel does not represent a strategic shift in our business.

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 operating income until the date of sale as shown in the consolidated statements of operations for the years ended December 31, 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 invested 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.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

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 $81,314, 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.

Assets Held For Sale

In July 2016, we entered into a purchase and sale agreement to sell the Residence Inn, Greenbelt, MD, Courtyard, Alexandria, VA, Hyatt House, Scottsdale, AZ, Hyatt House, Pleasant Hill, CA, and Hyatt House, Pleasanton, CA to an unaffiliated buyer for a sales price of $185,000. The Residence Inn, Greenbelt, MD and Courtyard, Alexandria, VA were sold in January 2017 for a combined sale price of $62,000. The purchase and sale agreement was amended, increasing the sales price by $7,500. The remainder of the transaction is expected to close in the third quarter of 2017 with an adjusted purchase price of $130,500, subject to customary closing conditions.

We have classified the assets and mortgage indebtedness related to these hotels as held for sale as of December 31, 2016:



	December 31, 2016

Land	$	22,208
Buildings and Improvements		105,663
Furniture, Fixtures and Equipment		24,187
		152,058

Less: Accumulated Depreciation & Amortization		(53,585)

Assets Held for Sale	$	98,473

Liabilities Related to Assets Held for Sale	$	51,428

We did not have any assets or liabilities related to assets held for sale as of December 31, 2015.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

During the year ended December 31, 2015, we acquired the following wholly-owned hotel properties:


Hotel	Acquisition Date	Land		Buildings and Improvements		Furniture Fixtures and Equipment		Other Intangibles			Loan Costs		Total Purchase Price		Assumption of Debt
St. Gregory Hotel, Washington, DC	6/16/2015		23,764		33,005		3,240		45			978		61,032		28,902*
TownePlace Suites, Sunnyvale, CA	8/25/2015		-		18,999		2,348		6,453	**		-		27,800		-
Ritz-Carlton Georgetown, DC	12/29/2015		17,825		29,584		3,270		-			-		50,679		-

Total		$	41,589	$	81,588	$	8,858	$	6,498		$	978	$	139,511	$	28,902

*Includes a $3,050 premium as we determined that the stated rate of interest on the assumed mortgage debt was above market.

**Acquired ground lease asset of $6,353 and intangible asset related to the franchise agreement of $100 with purchase of the property.

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 year ended December 31, 2015, we incurred $1,119 in acquisition costs related to the above acquired assets and costs related to terminated transactions.

Included in the consolidated statement of operations for the year ended December 31, 2015 are total revenues of $7,150 and a total net income of $548 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 as presented in the table below:


	Year Ended December 31, 2015
Hotel		Revenue		Net Income
St. Gregory Hotel, Washington, DC	$	5,257	$	164
TownePlace Suites, Sunnyvale, CA		1,744		364
Ritz-Carlton Georgetown, DC		149		20

Total	$	7,150	$	548

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Pro Forma Results (Unaudited)

The following condensed pro forma financial data are presented as if all acquisitions completed since January 1, 2016 and 2015 had been completed on January 1, 2015 and 2014, respectively. Properties acquired without any operating history are excluded from the condensed pro forma operating results. The condensed pro forma financial data is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2016 and 2015 at the beginning of the year presented, nor do they purport to represent the results of operations for future periods.



		Years Ended December 31,
	2016		2015
Pro Forma Total Revenues	$	493,791	$	551,584

Pro Forma Income from Continuing Operations		127,328		44,419
Loss from Discontinued Operations		-		-
Pro Forma Net Income		127,328		44,419
Income Allocated to Noncontrolling Interest		(4,764)		(496)
Preferred Distributions		(17,380)		(14,356)
Extinguishment of Issuance Costs Upon Redemption of Series B Preferred Shares		(4,021)		-
Pro Forma Income Applicable to Common Shareholders	$	101,163	$	29,567

Pro Forma Income Applicable to Common Shareholders per Common Share
Basic	$	2.35	$	0.62
Diluted	$	2.32	$	0.61

Weighted Average Common Shares Outstanding
Basic		42,957,199		47,786,811
Diluted		43,530,731		48,369,658