| BASIS OF PRESENTATION | 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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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, 2021, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, 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 September 30, 2022, we owned an approximate 85.0% 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”), 44 New England Management Company. 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, there have been no changes to the operating structure of our legal entities during the three and nine months ended September 30, 2022 and, therefore, there are no changes to our evaluation of VIE's as presented within our annual report presented on Form 10-K for the year ended December 31, 2021. NOTE 1 - BASIS OF PRESENTATION (CONTINUED) 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 $71,995 as of September 30, 2022 and $51,246 as of December 31, 2021. As of September 30, 2022, there w ere 6,990,053 Common Units and LTIP Units outstanding with a fair market value of $55,781 , 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. We are party to a joint venture that owns the Ritz-Carlton Coconut Grove, FL, in which 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 the book value of the noncontrolling interest in the Ritz Coconut Grove is classified as temporary equity within our Consolidated Balance Sheets. For Ritz Coconut Grove, income or loss is allocated using Hypothetical Liquidation at Book Value ("HLBV method") as the liquidation rights and priorities, as defined by the venture's governing agreement, differs from the underlying percentage ownership in the venture. The Company applies the HLBV method using a balance sheet approach. A calculation is prepared at each balance sheet date to determine the amount that we would receive if the venture entity were to liquidate all of its assets at carrying value and distribute that cash to the joint venture based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses and the remainder is allocated to noncontrolling interest. The noncontrolling interest in the Ritz Coconut Grove is measured at the greater of historical cost or the put option redemption value, and is recorded as part of the (Income) Loss Allocated to Noncontrolling Interests - Consolidated Joint Venture line item within the Consolidated Statements of Operations. The value of the noncontrolling interest at the put option redemption value was $4,659 as of September 30, 2022. As such, we reclassified $2,349 from Additional Paid in Capital to Redeemable Noncontrolling Interests - Consolidated Joint Venture during the nine months ended September 30, 2022 to record the noncontrolling interest at the estimated value of the put option. NOTE 1 - BASIS OF PRESENTATION (CONTINUED) Shareholders’ Equity Terms of the Series C, Series D, and Series E Preferred Shares outstanding at September 30, 2022 and December 31, 2021 are summarized as follows: Dividend Per Share (1) Shares Outstanding Nine Months Ended September 30, Series September 30, 2022 December 31, 2021 Aggregate Liquidation Preference Distribution Rate 2022 2021 Series C 3,000,000 3,000,000 $ 75,000 6.875 % $ 1.2891 $ 3.0079 Series D 7,701,700 7,701,700 $ 192,500 6.500 % $ 1.2188 $ 2.8438 Series E 4,001,514 4,001,514 $ 100,000 6.500 % $ 1.2188 $ 2.8438 Total 14,703,214 14,703,214 (1) During the nine months ended September 30, 2021, the Company paid cash dividends on the Company's Series C, Series D and Series E cumulative redeemable preferred stock reflecting accrued and unpaid dividends for the dividend periods ended April 15, 2020, July 15, 2020, October 15, 2020 and January 15, 2021. In addition, the Company paid a cash dividend on all Series of cumulative redeemable preferred stock for the first dividend period ending April 15, 2021, declared a similar cash dividend for the second dividend period ending July 15, 2021, which was paid July 15, 2021 to holders of record as of July 1, 2021 and declared a similar cash dividend for the third dividend period ending October 15, 2021, which was paid October 15, 2021 to holders of record as of October 1, 2021. The Company is current on dividend obligations on all Series of cumulative redeemable preferred stock as of September 30, 2022. Liquidity and Management's Plan Due to the COVID-19 pandemic and the effects of travel restrictions both globally and in the United States, the hospitality industry has experienced drastic drops in demand as a result of government mandates, health official recommendations, corporate policy changes and individual responses. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and may continue to have a material negative impact on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic. On August 4, 2022 and October 26, 2022, we closed on the sale of the seven previously announced hotel dispositions to an unaffiliated buyer for a purchase price of $505,000. These seven hotels included the Courtyard Brookline, the Hampton Inn Washington, DC, Hilton Garden Inn M Street Washington, DC, Hampton Inn - Philadelphia, TownePlace Suites Sunnyvale, Courtyard Sunnyvale, and the Courtyard Los Angeles Westside. The Courtyard Sunnyvale was the only hotel disposition that closed on October 26, 2022. A portion of the proceeds from the sale were used to pay off the Company's junior subordinated notes (the "Junior Notes"), which the Company entered into on February 17, 2021, at a redemption price of 104%, or $164,418. Proceeds from the sale were also used to pay down amounts borrowed under the Company’s line of credit and term loans. Also on August 4, 2022, the Company entered into a new credit agreement for a senior secured credit facility which provides for a $100,000 revolving line of credit and a $400,000 term loan. The Company made an initial draw of $400,000 on the facility’s term loan, using the proceeds to pay off the remaining balances under the Company’s prior line of credit and term loans, effectively reducing the Company’s borrowings and moving the maturity of borrowings under the Company’s credit facility to August of 2024. The $100,000 line of credit provided by the new credit facility remains undrawn. See Note 5 – Debt for additional information borrowings under the Company’s prior credit facility, new credit facility, notes payable, and mortgages. After considering the reduction in debt from proceeds of the hotel dispositions noted above, the effective extension of maturities of borrowings under our new credit agreement noted above, and forecasted cash flows, the Company believes that it has sufficient liquidity to meet its obligations for the next twelve months. We cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because the lodging industry has not previously experienced such an abrupt and drastic reduction in hotel demand, and as a consequence, our ability to be predictive is uncertain and we cannot estimate when travel demand will fully recover. NOTE 1 - BASIS OF PRESENTATION (CONTINUED) Investment in Hotel Properties Investments in hotel properties are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life of up to 40 years for buildings and improvements, and two These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in hotel properties we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis. Identifiable assets, liabilities, and noncontrolling interests related to hotel properties acquired are recorded at fair value. Estimating techniques and assumptions used in determining fair values involve significant estimates and judgments. These estimates and judgments have a direct impact on the carrying value of our assets and liabilities which can directly impact the amount of depreciation expense recorded on an annual basis and could have an impact on our assessment of potential impairment of our investment in hotel properties. We consider a hotel to be held for sale when management and our independent trustees commit to a plan to sell the property, the property is available for sale, management engages in an active program to locate a buyer for the property and it is probable the sale will be completed within a year of the initiation of the plan to sell. We evaluate each disposition to determine whether we need to classify the disposition as discontinued operations. We generally include the operations of a hotel that was sold or a hotel that has been classified as held for sale in continuing operations unless the sale represents a strategic shift that will have a major impact on our future operations and financial results. We anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition. Based on the occurrence of certain events or changes in circumstances, we review the recoverability of the property’s carrying value. Such events or changes in circumstances include the following: • a significant decrease in the market price of a long-lived asset; • a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; • a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; • an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; • a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and • a current expectation that, it is more likely than not that, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of hotel demand, competition and other factors. Other assumptions used in the review of recoverability include the holding period and expected terminal capitalization rate. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in hotel properties. As of September 30, 2022, based on our analysis, we have determined that the carrying value of the Gate hotel JFK Airport exceeded the anticipated net proceeds from sale under an executed purchase and sale agreement, resulting in a $10,024 impairment charge recorded during the third quarter of 2022. New Accounting Pronouncements In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued 2021-01, Reference Rate Reform (Topic 848), Scope, which further clarified the scope of the reference rate reform optional practical expedients and exceptions outlined in Topic 848. As a result of identified structural risks of interbank offered rates, in particular, the London Interbank Offered Rate (LIBOR), reference rate reform is underway to identify alternative reference rates that are more observable or transaction based. The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The optional expedients and exceptions contained within these updates, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of these updates that will most likely affect our financial reporting process related to modifications of contracts with lenders and the related hedging contracts associated with each respective modified borrowing contract. In general, the provisions of these updates would impact the Company by allowing, among other things, the following: • Allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 470 to be accounted for as a non-substantial modification and not be considered a debt extinguishment. • Allowing a change to contractual terms of a hedging instrument in conjunction with reference rate reform to not require a dedesignation of the hedging relationship. • Allowing a change to the interest rate used for margining, discounting, or contract price alignment for a derivative that is a cash flow hedge to not be considered a change to the critical terms of the hedge and will not require a dedesignation of the hedging relationship. As disclosed in Note 8, Fair Value Measurements and Derivative Instruments, we modified interest rate swap contracts, which serve as cash flow hedges with total notional amounts of $300,000, to replace LIBOR with an alternative reference rate that matches the reference rate of the underlying hedged debt. We did not apply optional expedients and exceptions contained within these updates in the modifications of these contracts. For our remaining borrowing and hedging contracts, we have not entered into modifications as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the future as we have contracts remaining with lenders and hedging counterparties which are indexed to LIBOR. Some debt contract modifications have occurred and will occur in the normal course of business and will include other changes in the terms, for which this accounting relief is not applicable. However, we anticipate that other debt contract modifications will occur prior to the phase out of LIBOR on June 30, 2023 specifically to address the LIBOR transition, for which we will be able to apply the accounting relief. Revision of Prior Period Financial Statements During the third quarter of 2022, the Company identified immaterial errors in its previously issued financial statements resulting from the incorrect amortization of accumulated other comprehensive income related to interest rate hedges. This occurred over the periods from 2019 through 2021, thereby overstating interest expense in those periods as well as impacting certain captions in the equity section of the consolidated balance sheet, including accumulated other comprehensive income, distributions in excess of net income, and noncontrolling interests. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company assessed the materiality of these misstatements both quantitatively and qualitatively and determined that these errors and the related impact did not, either individually or in the aggregate, materially misstate previously issued consolidated financial statements. To reflect the correction of these immaterial errors, the Company is revising the previously issued consolidated financial statements for the three and nine months ended September 30, 2021 in this Form 10-Q. As a result, the Company has corrected the immaterial misstatements as disclosed in the following tables for all impacted financial statement line items in prior periods. As of December 31, 2021 As Previously Reported Adjustment As Revised Consolidated Balance Sheet: Accumulated Other Comprehensive Income $ (2,747) $ (3,464) $ (6,211) Distributions in Excess of Net Income (595,454) 3,140 (592,314) Total Shareholders' Equity 557,374 (324) 557,050 Noncontrolling Interests 50,922 324 51,246 Total Equity 608,296 — 608,296 For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2021 As Previously Reported Adjustment As Revised As Previously Reported Adjustment As Revised Consolidated Statement of Operations: Interest Expense $ (14,589) $ 375 $ (14,214) $ (43,000) $ 1,114 $ (41,886) Loss Before Results from Unconsolidated Joint Venture Investments and Income Taxes (15,044) 375 (14,669) (28,668) 1,114 (27,554) Loss Before Income taxes (15,655) 375 (15,280) (30,526) 1,114 (29,412) Net Loss (15,932) 375 (15,557) (30,365) 1,114 (29,251) Loss Allocated to Noncontrolling Interests - Common Units 2,177 (37) 2,140 4,800 (111) 4,689 Net Loss Applicable to Common Shareholders (19,799) 338 (19,461) (45,506) 1,003 (44,503) Net Income (Loss) Per Share: Basic - Loss from Continuing Operations Applicable to Common Shareholders $ (0.51) $ 0.01 $ (0.50) $ (1.16) $ 0.02 $ (1.14) Diluted - Loss from Continuing Operations Applicable to Common Shareholders $ (0.51) $ 0.01 $ (0.50) $ (1.16) $ 0.02 $ (1.14) Consolidated Statement of Comprehensive Income (Loss): Net Loss $ (15,932) $ 375 $ (15,557) $ (30,365) $ 1,114 $ (29,251) Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Loss 207 (375) (168) 367 (1,114) (747) Total Other Comprehensive Income 2,408 (375) 2,033 11,571 (1,114) 10,457 Consolidated Statement of Cash Flows: Operating Activities: Net Loss (30,365) 1,114 (29,251) Loss (Gain) Recognized on Change in Fair Value of Derivative Instrument 367 (1,114) (747) |
