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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

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 25-1811499
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
44 Hersha DriveHarrisburgPA 17102
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (717) 236-4400

Former name, former address and former fiscal year, if changed since last report: Not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Shares of Beneficial Interest, par value $.01 per shareHTNew York Stock Exchange
6.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, par $.01 per shareHT-PCNew York Stock Exchange
6.500% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par $.01 per shareHT-PDNew York Stock Exchange
6.500% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par $.01 per shareHT-PENew York Stock Exchange

Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
 



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

Large accelerated filerAccelerated filer
Non-accelerated filerSmall reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No 

As of November 9, 2020, the number of Class A common shares of beneficial interest outstanding was 38,843,482 and there were no Class B common shares of beneficial interest outstanding.



 Hersha Hospitality Trust
Table of Contents
PART I.  FINANCIAL INFORMATIONPage
Item 1.Financial Statements. 






Item 2.
Item 3.
Item 4.
  
PART II.  OTHER INFORMATION 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


3

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]



September 30, 2020December 31, 2019
Assets:  
Investment in Hotel Properties, Net of Accumulated Depreciation$1,883,335 $1,975,973 
Investment in Unconsolidated Joint Ventures7,082 8,446 
Cash and Cash Equivalents13,139 27,012 
Escrow Deposits7,124 9,973 
Hotel Accounts Receivable3,741 9,213 
Due from Related Parties1,910 6,113 
Intangible Assets, Net of Accumulated Amortization of $6,796 and $6,545
1,786 2,137 
Right of Use Assets44,447 45,384 
Other Assets22,895 38,177 
Hotel Assets Held for Sale40,195  
Total Assets$2,025,654 $2,122,428 
  
Liabilities and Equity:  
Line of Credit$115,000 $48,000 
Term Loans, Net of Unamortized Deferred Financing Costs (Note 5)697,836 697,183 
Unsecured Notes Payable, Net of Unamortized Deferred Financing Costs (Note 5)50,776 50,736 
Mortgages Payable, Net of Unamortized Premium and Unamortized Deferred Financing Costs331,409 332,280 
Lease Liabilities54,042 54,548 
Accounts Payable, Accrued Expenses and Other Liabilities67,000 47,626 
Dividends and Distributions Payable 17,058 
Total Liabilities$1,316,063 $1,247,431 
Redeemable Noncontrolling Interests - Consolidated Joint Venture (Note 1)$ $3,196 
  
Equity:  
Shareholders' Equity:  
Preferred Shares:  $.01 Par Value, 29,000,000 Shares Authorized, 3,000,000 Series C, 7,701,700 Series D and 4,001,514 Series E Shares Issued and Outstanding at September 30, 2020 and December 31, 2019, with Liquidation Preferences of $25.00 Per Share (Note 1)
$147 $147 
Common Shares:  Class A, $.01 Par Value, 104,000,000 Shares Authorized at September 30, 2020 and December 31, 2019; 38,843,482 and 38,652,650 Shares Issued and Outstanding at September 30, 2020 and December 31, 2019, respectively
389 387 
Common Shares:  Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding at September 30, 2020 and December 31, 2019
  
Accumulated Other Comprehensive (Loss) Income(22,747)1,010 
Additional Paid-in Capital1,150,057 1,144,808 
Distributions in Excess of Net Income(470,534)(338,695)
Total Shareholders' Equity657,312 807,657 
  
Noncontrolling Interests (Note 1)52,279 64,144 
  
Total Equity709,591 871,801 
  
Total Liabilities and Equity$2,025,654 $2,122,428 
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
4

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenue:  
Hotel Operating Revenues:
Room$27,546 $108,909 $113,768 $319,374 
Food & Beverage2,441 15,870 12,652 48,351 
Other Operating Revenues3,734 10,140 14,651 29,350 
Other Revenues25 76 253 214 
Total Revenues33,746 134,995 141,324 397,289 
Operating Expenses:  
Hotel Operating Expenses:
Room7,436 24,000 30,150 70,103 
Food & Beverage2,344 12,605 13,686 39,427 
Other Operating Expenses17,965 43,476 67,806 128,273 
Hotel Ground Rent1,062 1,228 3,183 3,452 
Real Estate and Personal Property Taxes and Property Insurance10,597 10,717 30,508 29,111 
General and Administrative (including Share Based Payments of $1,936 and $2,009, and $6,191 and $7,441 for the three and nine months ended September 30, 2020 and 2019, respectively)
4,397 5,613 14,418 19,313 
Loss on Impairment of Assets  1,069  
Depreciation and Amortization24,055 24,092 72,565 72,184 
Total Operating Expenses67,856 121,731 233,385 361,863 
  
Operating (Loss) Income(34,110)13,264 (92,061)35,426 
Interest Income1 66 39 207 
Interest Expense(13,350)(12,935)(39,838)(39,158)
Other Expense(73)(246)(530)(328)
Loss on Debt Extinguishment (231) (265)
Loss Before Results from Unconsolidated Joint Venture Investments and Income Taxes(47,532)(82)(132,390)(4,118)
  
(Loss) Income from Unconsolidated Joint Ventures(669)38 (2,189)518 
  
Loss Before Income Taxes(48,201)(44)(134,579)(3,600)
  
Income Tax Benefit (Expense)28 551 (11,346)1,784 
  
Net (Loss) Income(48,173)507 (145,925)(1,816)
Loss Allocated to Noncontrolling Interests - Common Units5,032 442 15,093 1,554 
Loss (Income) Allocated to Noncontrolling Interests - Consolidated Joint Venture (340)3,196 (188)
Preferred Distributions(6,044)(6,044)(18,132)(18,131)
Net Loss Applicable to Common Shareholders$(49,185)$(5,435)$(145,768)$(18,581)
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Earnings Per Share:    
BASIC    
Loss from Continuing Operations Applicable to Common Shareholders$(1.27)$(0.15)$(3.78)$(0.50)
    
DILUTED    
Loss from Continuing Operations Applicable to Common Shareholders$(1.27)$(0.15)$(3.78)$(0.50)
    
Weighted Average Common Shares Outstanding:    
Basic38,639,048 38,878,818 38,604,483 39,039,665 
Diluted*38,639,048 38,878,818 38,604,483 39,039,665 
*Income (Loss) allocated to noncontrolling interest in Hersha Hospitality Limited Partnership (the “Operating Partnership” or “HHLP”) has been excluded from the numerator and the Class A common shares issuable upon any redemption of the Operating Partnership’s common units of limited partnership interest (“Common Units”) and the Operating Partnership’s vested LTIP units (“Vested LTIP Units”) have been omitted from the denominator for the purpose of computing diluted earnings per share because the effect of including these shares and units 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) 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 September 30,Nine Months Ended September 30,
 2020201920202019
Common Units and Vested LTIP Units3,959,204 3,379,354 3,913,922 3,356,033 
Unvested Stock Awards and LTIP Units Outstanding915,586 631,401 595,539 543,483 
Contingently Issuable Share Awards170,664 306,073 537,189 447,449 
Total Potentially Dilutive Securities Excluded from the Denominator5,045,454 4,316,828 5,046,650 4,346,965 
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS]

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net (Loss) Income$(48,173)$507 $(145,925)$(1,816)
Other Comprehensive Loss    
Change in Fair Value of Derivative Instruments3,710 (111)(29,435)(6,013)
Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Income1,066 (1,010)3,271 (3,263)
Total Other Comprehensive Income (Loss) $4,776 $(1,121)$(26,164)$(9,276)
    
Comprehensive Loss(43,397)(614)(172,089)(11,092)
Less:  Comprehensive Loss Attributable to Noncontrolling Interests - Common Units4,608 532 17,503 2,289 
Less:  Comprehensive Loss (Income) Attributable to Noncontrolling Interests - Consolidated Joint Venture (340)3,196 (188)
Less:  Preferred Distributions(6,044)(6,044)(18,132)(18,131)
Comprehensive Loss Attributable to Common Shareholders$(44,833)$(6,466)$(169,522)$(27,122)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARES]

Shareholders' EquityNoncontrolling InterestsRedeemable Noncontrolling Interests
Common SharesClass A Common Shares ($)Class B Common Shares ($)Preferred SharesPreferred Shares ($)Additional Paid-In Capital ($)Accumulated Other Comprehensive Income ($)Distributions in Excess of Net Income ($)Total Shareholders' Equity ($)Common Units and LTIP UnitsCommon Units and LTIP Units ($)Total Equity ($)Consolidated Joint Venture ($)
Balance at June 30, 202038,789,371 388  14,703,214 147 1,149,291 (27,097)(427,393)695,336 5,381,870 55,715 751,051  
Share Based Compensation:
Grants54,111 1 — — — — — — 1 10,938 — 1 — 
Amortization— — — — — 766 — — 766 1,168 1,934 — 
Change in Fair Value of Derivative Instruments— — — — — — 4,350 — 4,350 — 428 4,778 — 
Net Income (Loss)— — — — — — — (43,141)(43,141)— (5,032)(48,173)— 
Balance at September 30, 202038,843,482 389  14,703,214 147 1,150,057 (22,747)(470,534)657,312 5,392,808 52,279 709,591  
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.











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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARES]
Shareholders' EquityNoncontrolling InterestsRedeemable Noncontrolling Interests
Common SharesClass A Common Shares ($)Class B Common Shares ($)Preferred SharesPreferred Shares ($)Additional Paid-In Capital ($)Accumulated Other Comprehensive Income ($)Distributions in Excess of Net Income ($)Total Shareholders' Equity ($)Common Units and LTIP UnitsCommon Units and LTIP Units ($)Total Equity ($)Consolidated Joint Venture ($)
Balance at June 30, 201939,240,924 393  14,703,214 147 1,152,939 (3,285)(302,705)847,489 4,279,946 64,574 912,063 2,856 
Repurchase of Common Shares(659,898)(7)— — — (9,563)— — (9,570)— — (9,570)— 
Dividends and Distributions declared:
Common Shares ($0.84 per share)
— — — — — — — (10,810)(10,810)— — (10,810)— 
Preferred Shares— — — — — — — (6,044)(6,044)— — (6,044)— 
Common Units ($0.84 per share)
— — — — — — — — — — (579)(579)— 
LTIP Units ($0.84 per share)
— — — — — — — — — — (619)(619)— 
Dividend Reinvestment Plan389 — — — — 6 — — 6 — — 6 — 
Share Based Compensation:
Grants28,487 — — — — — — — — — — — — 
Amortization— — — — — 722 — — 722 — 1,427 2,149 — 
Change in Fair Value of Derivative Instruments— — — — — — (1,031)— (1,031)— (90)(1,121)— 
Adjustment to Record Noncontrolling Interest at Redemption Value— — — — — (340)— — (340)— — (340)340 
Net Loss— — — — — — — 949 949 — (442)507 — 
Balance at September 30, 201938,609,902 386  14,703,214 147 1,143,764 (4,316)(318,610)821,371 4,279,946 64,271 885,642 3,196 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.




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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARES]


Shareholders' EquityNoncontrolling InterestsRedeemable Noncontrolling Interests
Common SharesClass A Common Shares ($)Class B Common Shares ($)Preferred SharesPreferred Shares ($)Additional Paid-In Capital ($)Accumulated Other Comprehensive Income ($)Distributions in Excess of Net Income ($)Total Shareholders' Equity ($)Common Units and LTIP UnitsCommon Units and LTIP Units ($)Total Equity ($)Consolidated Joint Venture ($)
Balance at December 31, 201938,652,650 387  14,703,214 147 1,144,808 1,010 (338,695)807,657 4,279,946 64,144 871,801 3,196 
Issuance Costs— — — — — (30)— — (30)— — (30)— 
Dividends and Distributions declared:
Preferred Shares— — — — — — — (1,007)(1,007)— — (1,007)— 
Dividend Reinvestment Plan1,094 — — — — 14 — — 14 — — 14 — 
Share Based Compensation:
Grants189,738 2 — — — — — — 2 1,112,862 — 2 — 
Amortization— — — — — 2,069 — — 2,069 5,635 7,704 — 
Change in Fair Value of Derivative Instruments— — — — — — (23,757)— (23,757)— (2,407)(26,164)— 
Adjustment to Record Noncontrolling Interest at Redemption Value— — — — — 3,196 — — 3,196 — — 3,196 (3,196)
Net Loss— — — — — — — (130,832)(130,832)— (15,093)(145,925)— 
Balance at September 30, 202038,843,482 389  14,703,214 147 1,150,057 (22,747)(470,534)657,312 5,392,808 52,279 709,591  


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

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARES]

Shareholders' EquityNoncontrolling InterestsRedeemable Noncontrolling Interests
Common SharesClass A Common Shares ($)Class B Common Shares ($)Preferred SharesPreferred Shares ($)Additional Paid-In Capital ($)Accumulated Other Comprehensive Income ($)Distributions in Excess of Net Income ($)Total Shareholders' Equity ($)Common Units and LTIP UnitsCommon Units and LTIP Units ($)Total Equity ($)Consolidated Joint Venture ($)
Balance at December 31, 201839,458,626 395  14,703,214 147 1,155,776 4,227 (267,740)892,805 3,749,665 62,010 954,815 2,708 
Repurchase of Common Shares(933,436)(10)— — — (14,255)— — (14,265)— — (14,265)— 
Issuance Costs— — — — — (21)— — (21)— — (21)— 
Dividends and Distributions declared:
Common Shares ($0.56 per share)
— — — — — — — (32,777)(32,777)— — (32,777)— 
Preferred Shares— — — — — — — (18,131)(18,131)— — (18,131)— 
Common Units ($0.56 per share)
— — — — — — — — — — (1,736)(1,736)— 
LTIP Units ($0.56 per share)
— — — — — — — — — — (1,982)(1,982)— 
Dividend Reinvestment Plan2,885 — — — — 48 — — 48 — — 48 — 
Share Based Compensation:
Grants81,827 1 — — — 400 — — 401 530,281 — 401 — 
Amortization— — — — — 2,304 — — 2,304 — 8,266 10,570 — 
Equity Contribution to Consolidated Joint Venture— — — — — — — — — — — — 300 
Change in Fair Value of Derivative Instruments— — — — — — (8,543)— (8,543)— (733)(9,276)— 
Adjustment to Record Noncontrolling Interest at Redemption Value— — — — — (488)— — (488)— — (488)488 
Net Loss— — — — — — — 38 38 (1,554)(1,516)(300)
Balance at September 30, 201938,609,902 386  14,703,214 147 1,143,764 (4,316)(318,610)821,371 4,279,946 64,271 885,642 3,196 

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



11

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS]

Nine Months Ended September 30,
20202019
Operating Activities:  
Net Loss$(145,925)$(1,816)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:  
Loss from Impairment of Assets1,069  
Deferred Taxes11,390 (2,126)
Depreciation72,229 71,760 
Amortization2,200 1,613 
Loss on Debt Extinguishment 265 
Equity in Loss (Income) of Unconsolidated Joint Ventures2,189 (518)
Distributions from Unconsolidated Joint Ventures 556 
Loss Recognized on Change in Fair Value of Derivative Instrument3,271 226 
Share Based Compensation Expense6,191 7,441 
Change in Assets and Liabilities:  
(Increase) Decrease in:  
Hotel Accounts Receivable5,472 322 
Other Assets2,442 76 
Due from Related Parties4,203 (2,420)
Decrease in:  
Accounts Payable, Accrued Expenses and Other Liabilities(4,189)(905)
Net Cash Provided by (Used in) Operating Activities$(39,458)$74,474 
  
Investing Activities:  
Capital Expenditures(21,958)(33,706)
Cash Paid for Hotel Development Projects21 (149)
Contributions to Unconsolidated Joint Ventures(825)(4,000)
Distributions from Unconsolidated Joint Ventures 1,342 
Net Cash Used in Investing Activities$(22,762)$(36,513)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS]
Nine Months Ended September 30,
20202019
Financing Activities:  
Borrowings Under Line of Credit, Net$67,000 $36,000 
Proceeds of Unsecured Term Loan Borrowing  
Repayment of Borrowings Under Unsecured Term Loan  
Proceeds of Mortgages and Notes Payable 56,469 
Principal Repayment of Mortgages and Notes Payable(1,067)(57,033)
Proceeds of Paycheck Protection Program ("PPP") Loans18,936  
Repayment of PPP Loans(18,936) 
Cash Paid for Deferred Financing Costs(2,354)(2,878)
Cash Paid for Debt Extinguishment (194)
Repurchase of Common Shares (14,196)
Dividends Paid on Common Shares(10,809)(32,960)
Dividends Paid on Preferred Shares(6,044)(18,130)
Distributions Paid on Common Units and LTIP Units(1,198)(3,570)
Other Financing Activities(30)(91)
Net Cash Provided by (Used in) Financing Activities$45,498 $(36,583)
  
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash$(16,722)$1,378 
Cash, Cash Equivalents, and Restricted Cash - Beginning of Period36,985 40,783 
  
Cash, Cash Equivalents, and Restricted Cash - End of Period$20,263 $42,161 
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

13

Table of Contents

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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, 2019, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, 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, 2020, we owned an approximate 87.8% 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 nine months ended September 30, 2020 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, 2019.


14


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

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 $52,279 as of September 30, 2020 and $64,144 as of December 31, 2019. As of September 30, 2020, there were 5,392,808 Common Units and LTIP Units outstanding with a fair market value of $29,876, 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 book value of the noncontrolling interest in the Ritz Coconut Grove is classified as temporary equity within our Consolidated Balance Sheets. The noncontrolling interest in the Ritz Coconut Grove was initially measured at fair value upon formation of the joint venture and will be subsequently measured at the greater of historical cost or the put option redemption value. For the three and nine months ended September 30, 2020, based on the income allocation methodology described above, the noncontrolling interest in this joint venture was allocated losses of $0. For the three and nine months ended September 30, 2019, the noncontrolling interest in the joint venture was allocated losses of $0 and $300, respectively. This is recorded as part of the Loss Allocated to Noncontrolling Interests line item within the Consolidated Statements of Operations. During the nine months ended September 30, 2020, we reclassified $3,196 from Noncontrolling Joint Venture Interest to Additional Paid in Capital to recognize the noncontrolling interest at the put option redemption value of $0.

Shareholders’ Equity

Terms of the Series C, Series D, and Series E Preferred Shares outstanding at September 30, 2020 and December 31, 2019 are summarized as follows:












15



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 - BASIS OF PRESENTATION (CONTINUED)

    Dividend Per Share  
Shares Outstanding  Nine Months Ended September 30,
SeriesSeptember 30, 2020December 31, 2019Aggregate Liquidation PreferenceDistribution Rate20202019
Series C3,000,000 3,000,000 $75,000 6.875 % $1.2891 
Series D7,701,700 7,701,700 $192,500 6.500 % $1.2189 
Series E4,001,514 4,001,514 $100,000 6.500 % $1.2189 
Total14,703,214 14,703,214     


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. The global impact of the pandemic has been rapidly evolving and, in the United States, certain states and cities, including most of the states and cities where we own properties, have reacted by instituting various restrictive measures such as quarantines, restrictions on travel, school closings, "stay at home" rules and restrictions on types of business that may continue to operate. During the first quarter of 2020 as a result of the impact of the COVID-19 pandemic, we had temporarily closed 21 of our 49 hotels while our remaining hotels operated in a significantly reduced capacity. During the second quarter of 2020 we reopened 5 hotels, and during the third quarter of 2020 we reopened 8 hotels resulting in 8 hotels remaining closed as of September 30, 2020. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will 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.

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. In addition, the magnitude, duration, and speed of the pandemic is uncertain and we cannot estimate when travel demand will recover. As a consequence, we cannot estimate the impact on our business, financial condition, or operating results with reasonable certainty, but we expect a net loss on a U.S. GAAP basis for the year ending December 31, 2020. On April 2, 2020, we amended our existing Credit Agreement (as defined below) and received $100,000 in available funds on our Line of Credit (as defined below), of which we drew $25,000 during April 2020. In total we have drawn $45,000 through September 30, 2020 and an additional $11,000 during October 2020. Additionally, the amendment provided a waiver of covenants under our Credit Facility (as defined below) through March 31, 2021 and changed the Credit Facility from an unsecured borrowing facility to a secured borrowing facility. Based on this amendment along with cost savings measures throughout our operations, we currently believe that we will be able to generate sufficient liquidity to satisfy our obligations for the next twelve months, absent a breach of Credit Facility covenants described below.

At September 30, 2020, we failed our debt service coverage ratio ("DSCR") requirement related to three of our mortgage borrowings. Two of these DSCR failures trigger a cash management provision within their respective mortgages, which results in our respective lenders sweeping cash receipts from the properties into a lockbox to service debt payments. The remaining mortgage for which we failed the DSCR requirement has resulted in an event of default on the mortgage. Subsequent to September 30, 2020, we signed a debt forbearance agreement with this lender to cure the event of default through maturity on this mortgage, which is January 2021. At that time, we plan on refinancing the mortgage with a different lender, but should we be unable to secure different financing, we expect to have sufficient capacity on the line of credit to pay off this mortgage. After considering the effect of the COVID-19 pandemic on our consolidated operations, it is probable that we will fail certain financial covenants within certain property-level mortgage borrowings or under our Credit Facility within the next twelve months. We have received financial covenant waivers from certain of our mortgage lenders, which provided us relief from financial covenants for a period of time that does not extend beyond the first quarter of 2021. For mortgages with financial covenants, the lenders' remedy of a covenant failure would be a requirement to escrow funds for the purpose of meeting our future debt payment obligations.


16



17


HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 - BASIS OF PRESENTATION (CONTINUED)

As noted above, the covenant waivers on our Credit Facility extend through March 31, 2021; however, we believe that it is probable we will breach certain of our Credit Facility covenants when measured for the period ended June 30, 2021. This potential event of default could lead to potential acceleration of amounts due under the Credit Facility. Notwithstanding our belief that we will be successful in renegotiating the terms of our Credit Facility prior to an event of default, we believe that we will continue to have access to the capital markets. Also, we could choose to raise cash by selling hotel properties, although there can be no assurances we would be successful on terms favorable to us.

Management’s primary mitigation plan to avoid a default under its Credit Agreement is to obtain a further waiver from its creditors or amend the Credit Facility in a manner to avoid an event of default. There can be no assurance that we will be able to obtain a waiver or amendment in a timely manner, or on acceptable terms, if at all. The failure to obtain a waiver or amendment, or otherwise repay the debt, could lead to an event of default, which would have a material adverse effect on our financial condition, which gives rise to substantial doubt about our ability to continue as a going concern. As a result, management determined that the future valuation and ability to realize the benefits of our deferred tax assets is not more likely than not and we have recorded a full valuation allowance against our net deferred tax asset as of September 30, 2020.

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, two to seven years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in hotel properties. 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 in a business combination are recorded at full 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.

Properties intended to be sold are designated as “held for sale” on the balance sheet. In accordance with ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations, we evaluate each disposition to determine whether we need to classify the disposition as 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. 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.
18



HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 1 - BASIS OF PRESENTATION (CONTINUED)

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, 2020, based on our analysis and giving consideration to the impairment charge taken on one of our hotels held for sale, we have determined that the estimated future cash flow of each of the properties in our portfolio is sufficient to recover its respective     carrying value.

New Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. 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 this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of this update that will most likely affect our financial reporting process relate to modifications of contracts with lenders and the related hedging contracts associated with each respective modified borrowing contract. In general, the provisions of the update 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.

We have not entered into any contract modifications yet, as it directly relates to reference rate reform but we anticipate having to undertake such modifications in the future as a majority of our contracts with lenders and hedging counterparties are indexed to LIBOR. While we anticipate the impact of this update to be to the benefit of the Company, we are still evaluating the overall impact to the Company.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [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, 2020 and December 31, 2019:
  
September 30, 2020December 31, 2019
  
Land$505,156 $518,243 
Buildings and Improvements1,690,198 1,710,621 
Furniture, Fixtures and Equipment298,107 294,527 
Construction in Progress4,673 10,202 
2,498,134 2,533,593 
  
Less Accumulated Depreciation(614,799)(557,620)
  
Total Investment in Hotel Properties *$1,883,335 $1,975,973 
* The net book value of investment in hotel property at Ritz Coconut Grove, which is a variable interest entity, is $43,462 and $44,854 at September 30, 2020 and December 31, 2019, respectively.

Acquisitions
For the nine months ended September 30, 2020 and 2019, we acquired no hotel properties.

Hotel Dispositions
For the nine months ended September 30, 2020 and 2019, we disposed of no hotel properties.

During October 2020, the Company entered into a purchase and sale agreement with an unrelated third party to sell the Sheraton Wilmington for a sales price of $19,500. The sale is expected to close in the fourth quarter of 2020.


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
Assets Held For Sale
We have classified two assets as held for sale as of September 30, 2020. The sales of Duane Street Hotel and Blue Moon Hotel are expected to close in the first half of 2021 and are included as held for sale assets as of September 30, 2020. During the second quarter of 2020, the Company amended the purchase and sale agreement with the buyer of the Duane Street Hotel to reduce the purchase price by $2,000. As a result of the reduced sales price and after consideration of selling costs to the Company, management determined that the carrying value of the hotel exceeded the anticipated net proceeds from sale, resulting in a $1,069 impairment charge recorded during the second quarter of 2020.
The table below shows the balances for the properties that were classified as assets held for sale as of September 30, 2020.
September 30, 2020
Land$13,087 
Buildings and Improvements35,492 
Furniture, Fixtures and Equipment6,433 
55,012 
Less Accumulated Depreciation(14,817)
Assets Held for Sale$40,195 

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of September 30, 2020 and December 31, 2019, our investment in unconsolidated joint ventures consisted of the following:
 Percent  
Joint VentureHotel PropertiesOwnedSeptember 30, 2020December 31, 2019
    
Cindat Hersha Owner JV, LLCHilton and IHG branded hotels in NYC31 %$ $ 
Hiren Boston, LLCCourtyard by Marriott, South Boston, MA50 %322 1,434 
SB Partners, LLCHoliday Inn Express, South Boston, MA50 %  
SB Partners Three, LLCHome2 Suites, South Boston, MA50 %6,760 7,012 
  $7,082 $8,446 

On January 3, 2020, we entered into an agreement with our joint venture partner for our partner to purchase our membership interests in Hiren Boston, LLC and SB Partners, LLC. Net proceeds from the sale of our interests are anticipated to be approximately $24,000 and this transaction is expected to close during the first half of 2021.

Income/Loss Allocation

As of September 30, 2020, based on the income allocation methodology within Cindat Hersha Owner JV, LLC, the Company has absorbed cumulative losses equal to our accounting basis in the joint venture resulting in a $0 investment balance in the table above, however, we currently maintain a positive equity balance within the venture. This difference is due to difference in our basis inside the venture versus our basis outside of the venture, which is explained later in this note.

For SB Partners, LLC, Hiren Boston, LLC, and SB Partners Three, LLC, income or loss is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. This results in an income allocation consistent with our percentage of ownership interests.

Any difference between the carrying amount of any of our investments noted above and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets. 

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
Income (loss) recognized during the three and nine months ended September 30, 2020 and 2019, for our investments in unconsolidated joint ventures is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Cindat Hersha Owner JV, LLC$ $ $ $ 
Hiren Boston, LLC(457)79 (1,337)217 
SB Partners, LLC  (600)375 
SB Partners Three, LLC(212)(41)(252)(74)
(Loss) Income from Unconsolidated Joint Venture Investments$(669)$38 $(2,189)$518 

The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019.

Balance Sheets
September 30, 2020December 31, 2019
Assets
Investment in Hotel Properties, Net$585,369 $579,287 
Other Assets24,381 33,891 
Total Assets$609,750 $613,178 

Liabilities and Equity
Mortgages and Notes Payable$449,952 $430,282 
Other Liabilities27,646 19,185 
Equity:
Hersha Hospitality Trust6,859 9,588 
Joint Venture Partner(s)125,657 154,998 
Accumulated Other Comprehensive Loss(364)(875)
Total Equity132,152 163,711 

Total Liabilities and Equity$609,750 $613,178 

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
Statements of Operations
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Room Revenue$4,035 $25,098 $20,966 $68,444 
Other Revenue122 604 909 1,848 
Operating Expenses(3,621)(12,142)(15,234)(34,063)
Lease Expense(170)(164)(524)(529)
Property Taxes and Insurance(3,282)(3,161)(9,720)(9,264)
General and Administrative(567)(1,603)(2,083)(4,314)
Depreciation and Amortization(3,972)(3,731)(11,812)(11,085)
Interest Expense(5,487)(7,038)(17,356)(21,381)
Net Loss$(12,942)$(2,137)$(34,854)$(10,344)

The following table is a reconciliation of our share in the unconsolidated joint ventures’ equity to our investment in the unconsolidated joint ventures as presented on our balance sheets as of September 30, 2020 and December 31, 2019.
September 30, 2020December 31, 2019
Our share of equity recorded on the joint ventures' financial statements$6,859 $9,588 
Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1)
223 (1,142)
Investment in Unconsolidated Joint Ventures$7,082 $8,446 

(1)  Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:

the difference between our basis in the investment in joint ventures and the equity recorded on the joint ventures' financial statements;
accumulated amortization of our equity in joint ventures that reflects the difference in our portion of the fair value of joint ventures' assets on the date of our investment when compared to the carrying value of the assets recorded on the joint ventures’ financial statements (this excess or deficit investment is amortized over the life of the properties, and the amortization is included in Income (Loss) from Unconsolidated Joint Venture Investments on our consolidated statement of operations); and
cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements, if any. 
 
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 4 - OTHER ASSETS
Other Assets

Other Assets consisted of the following at September 30, 2020 and December 31, 2019:

September 30, 2020December 31, 2019

Derivative Asset$ $2,514 
Deferred Financing Costs2,625 1,330 
Prepaid Expenses8,727 11,279 
Investment in Statutory Trusts1,548 1,548 
Investment in Non-Hotel Property and Inventories2,643 2,987 
Deposits with Unaffiliated Third Parties2,565 2,577 
Deferred Tax Asset, Net of Valuation Allowance of $22,411 and $497, respectively
 11,390 
Property Insurance Receivable1,038 1,788 
Other3,749 2,764 
$22,895 $38,177 
Derivative Asset – This category represents the Company’s gross asset fair value of interest rate swaps and interest rate caps.  Any swaps and caps resulting in a liability to the Company are accounted for separately within Other Liabilities on the Balance Sheets.

Deferred Financing Costs – This category represents financing costs paid by the Company to establish our Line of Credit. These costs have been capitalized and will amortize to interest expense over the life of the Line of Credit.

Prepaid Expenses – Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in the next twelve months.

Investment in Statutory Trusts – We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II.

Investment in Non-Hotel Property and Inventories – This category represents the costs paid and capitalized by the Company for items such as office leasehold improvements, furniture and equipment, and property inventories.

Deposits with Unaffiliated Third Parties – These deposits represent deposits made by the Company with unaffiliated third parties for items such as lease security deposits, utility deposits, and deposits with unaffiliated third party management companies.

Deferred Tax Asset – We have recorded a valuation allowance resulting in net deferred tax assets of $0 as of September 30, 2020. We have considered various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies in determining the ability to realize the benefits of our deferred tax assets. In Note 1, we also disclosed factors that have given rise to substantial doubt in our ability to continue as a going concern, which is a primary factor in our determination that a full valuation allowance against our net deferred tax asset was appropriate to record during the nine months ended September 30, 2020.

Property Insurance Receivable – This category represents the amount that we expect to receive from our insurance companies for reimbursement of costs incurred as a result of water damage at The Boxer.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT
Mortgages
Mortgages payable at September 30, 2020 and December 31, 2019 consisted of the following:
September 30, 2020December 31, 2019
Mortgage Indebtedness$332,881 $333,948 
Net Unamortized Premium469 821 
Net Unamortized Deferred Financing Costs(1,941)(2,489)
Mortgages Payable$331,409 $332,280 

Net Unamortized Deferred Financing Costs associated with entering into mortgage indebtedness are deferred and amortized over the life of the mortgages. Net Unamortized Premiums are also amortized over the remaining life of the loans. Mortgage indebtedness balances are subject to fixed and variable interest rates, which ranged from 2.15% to 6.30% as of September 30, 2020.

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 all debt covenants contained in the loan agreements securing our consolidated hotel properties with the exception of three mortgage were met as of September 30, 2020. See the Liquidity Section of Note 1 for further discussion of these covenant violations.

As of September 30, 2020, the maturity dates for the outstanding mortgage loans ranged from January 2021 to September 2025.

Unsecured 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 of notes issued to each of Hersha Statutory Trust I and Hersha Statutory Trust II bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets 2 business days prior to each quarterly payment. The face value of the notes payable is offset by $772 and $812 as of September 30, 2020 and December 31, 2019, respectively, in net deferred financing costs incurred as a result of entering into these indentures. The deferred financing costs are amortized over the life of the notes payable. The weighted average interest rate on our two junior subordinated notes payable was 3.42% and 5.37%, and 4.11% and 5.56%, during the three and nine months ended September 30, 2020 and 2019, respectively.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT (CONTINUED)
Credit Facilities as of September 30, 2020

We maintain three credit agreements which aggregate to $950,900 with Citigroup Global Markets Inc., Wells Fargo Bank, Inc. and various other lenders. Our credit agreement (the "Credit Agreement") provides for a $457,000 senior credit facility (“Credit Facility”). The Credit Facility consists of a $250,000 senior revolving line of credit (“Line of Credit”) and a $207,000 senior term loan ("First Term Loan"). The Credit Facility expires on August 10, 2022, 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 $857,000 at our request, subject to the satisfaction of certain conditions.
 
We maintain another credit agreement which provides for a $300,000 senior term loan agreement (“Second Term Loan”) and expires on September 10, 2024.

A separate credit agreement provides for a $193,900 senior term loan agreement (“Third Term Loan” and collectively with the Credit Agreement and the Second Term Loan, the "Credit Agreements") and expires on August 2, 2021.

On April 2, 2020, the Company signed amendments to the Credit Agreements, which, among other things, changed each borrowing facility under the agreements from unsecured to secured. Additionally, the Company received $100,000 in available funds on its Line of Credit, of which $25,000 was drawn during April 2020. Since the amendment, the Company has drawn a total of $45,000 through September 30, 2020.

The amount that we can borrow at any given time under our Line of Credit, and the individual term loans (each a “Term Loan” and together the “Term Loans”) is governed by certain operating metrics of designated hotel properties known as borrowing base assets. As of September 30, 2020, the following hotel properties secured the amended facilities under the Credit Agreements: 
- Courtyard, Brookline, MA- Mystic Marriott Hotel & Spa, Groton, CT
- Holiday Inn Express, Cambridge, MA- Hampton Inn, Washington, DC
- Envoy Hotel, Boston, MA- Ritz Carlton, Washington, DC
- The Boxer, Boston, MA- Hilton Garden Inn, M Street, Washington, DC
- Hampton Inn, Seaport, NY- Residence Inn, Coconut Grove, FL
- The Duane Street Hotel, NY- The Winter Haven, Miami, FL
- NU Hotel, Brooklyn, NY- The Blue Moon, Miami, FL
- Holiday Inn Express, 29th Street, NY- The Cadillac Hotel and Beach Club, Miami, FL
- The Gate JFK Airport, New York, NY- The Parrot Key Hotel & Resort, Key West, FL
- Hilton Garden Inn, JFK Airport, New York, NY- TownePlace Suites, Sunnyvale, CA
- Hyatt House White Plains, NY- The Ambrose Hotel, Santa Monica, CA
- Sheraton, Wilmington South, DE- Courtyard, San Diego, CA
- Hampton Inn, Philadelphia, PA- The Pan Pacific Hotel, Seattle, WA
- The Rittenhouse, Philadelphia, PA- The Westin, Philadelphia, PA

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT (CONTINUED)
The interest rate for borrowings under the Line of Credit and Term Loans are based on a pricing grid with a range of one month U.S. LIBOR plus a spread. The following table summarizes the balances outstanding and interest rate spread for each borrowing:
 Outstanding Balance
BorrowingSpreadSeptember 30, 2020December 31, 2019
Line of Credit
1.50% to 2.25%
$115,000 $48,000 
Term Loan:
     First Term Loan
1.45% to 2.20%
$207,000 $207,000 
     Second Term Loan
1.35% to 2.00%
300,000 300,000 
     Third Term Loan
1.45% to 2.20%
193,900 193,900 
     Deferred Loan Costs(3,064)(3,717)
Total Term Loan$697,836 $697,183 

The Company received a waiver of covenants within our Credit Agreements through March 31, 2021 in connection with the April 2, 2020 amendment to the Credit Agreement. Upon expiration of the covenant waiver in March 2021, the following covenant requirements will again become effective. The Credit Agreements include certain financial covenants and require that we maintain: (1) a minimum tangible net worth (calculated as total assets, plus accumulated depreciation, less total liabilities, intangibles and other defined adjustments) of $1,119,500, 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 1.50 to 1.00;
- a maximum leverage ratio of not more than 60%; and
- a maximum secured debt leverage ratio of 45%.

The weighted average interest rate, inclusive of the effect of derivative instruments, on the Credit Facility and Term Loans was 4.03% and 4.02%, and 4.15% and 4.11%, for the three and nine months ended September 30, 2020 and 2019, respectively.

Deferred Financing Costs

As noted above, costs associated with entering into mortgages, notes payable and our Credit Agreements are deferred and amortized over the life of the debt instruments. The deferred costs related to mortgages and term loans and unsecured notes payable are presented as reductions in the respective debt balances.


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 5 - DEBT (CONTINUED)
Interest Expense

The table below shows the interest expense incurred by the Company during the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Mortgage Loans Payable$2,846 $3,994 $9,362 $12,061 
Interest Rate Swap Contracts on Mortgages604 (207)*1,189 (404)*
Unsecured Notes Payable451 707 1,611 2,173 
Credit Facility and Term Loans4,736 8,517 17,139 26,057 
Interest Rate Swap Contracts on Credit Facility and Term Loans3,543 (804)*7,762 (2,899)*
Deferred Financing Costs Amortization1,104 547 2,299 1,681 
Other66 181 476 489 
     Total Interest Expense$13,350 $12,935 $39,838 $39,158 
*Negative amount indicates decrease to interest expense.

New Debt/Refinance

On April 2, 2020, we amended our Credit Agreements, which covered the Credit Facility and borrowing base of assets on the Line of Credit, to access an additional $100,000. With these amendments, we received waivers on all financial covenants through March 31, 2021. The proceeds from the borrowings drawn will be used to fund the operating expenses of the business. See "Liquidity, Capital Resources and Equity Offerings".



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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 – LEASES
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. The Company adopted the provisions of the update effective January 1, 2019. We elected the modified retrospective transition method upon adoption, which resulted in no cumulative-effect adjustment to the balance of opening retained earnings. As part of our adoption, we elected to utilize the package of practical expedients which allowed us to not reassess existing contracts for embedded leases and not reassess the classification of existing leases. As a result of our adoption, the Company recorded a lease liability and corresponding right of use asset of $55,515 at January 1, 2019 for leases where we are the lessee. Our most significant leases are land leases. We own five hotels within our consolidated portfolio of hotels where we do not own the land on which the hotels reside, rather we lease the land from an unrelated third-party lessor. All of our land leases are classified as operating leases and have initial terms, with extension options that range from May 2062 to October 2103. Based on the nature of these leases, the Company assumed that all extension options would be fully executed. For land leases that include variable payments, those include payments that are tied to an index such as the consumer price index or include rental payments based partially on the hotel's revenues. Two additional office space leases are also factored into the lease liability and are classified as operating leases with terms ranging from January 2022 to December 2027. For office space leases that include variable payments, those include payments for the Company's proportionate share of the building's property taxes, insurance, and common area maintenance.

The Company applied judgments related to the determination of the discount rates used to calculate the lease liability upon adoption at January 1, 2019. Since the discount rate implicit in the leases could not be readily determinable, we calculated our incremental borrowing rate as prescribed by ASC Topic 842. We utilized judgments and estimates regarding the Company's market credit rating, comparable market bond yield curve, and adjustments to market yield curves to determine a securitized rate.

We are also a lessor in certain office space and retail lease agreements related to our hotels and the adoption of this ASU did not have a material impact on our accounting for leases where we are the lessor. The adoption of this ASU did not impact revenue recognition policies for the Company.

The components of lease costs for the three months ended September 30, 2020 and 2019 were as follows:

Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Ground LeaseOffice LeaseTotalGround LeaseOffice LeaseTotal
Operating lease costs$1,052 $121 $1,173 $976 $121 $1,097 
Variable lease costs10 53 63 251 73 324 
Total lease costs$1,062 $174 $1,236 $1,227 $194 $1,421 

The components of lease costs for the nine months ended September 30, 2020 and 2019 were as follows:
Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Ground LeaseOffice LeaseTotalGround LeaseOffice LeaseTotal
Operating lease costs$3,152 $363 $3,515 $2,922 $363 $3,285 
Variable lease costs31 208 239 529 232 761 
Total lease costs$3,183 $571 $3,754 $3,451 $595 $4,046 


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 6 – LEASES (CONTINUED)
Other information related to leases as of and for the nine months ended September 30, 2020 and 2019 is as follows:
September 30, 2020September 30, 2019
Cash paid from operating cash flow for operating leases$3,038 $3,655 
Weighted average remaining lease term64.264.2
Weighted average discount rate7.86 %7.86 %


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Management Agreements

Our wholly-owned TRS, 44 New England Management Company, and certain of our joint venture entities engage eligible independent contractors in accordance with the requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended, including Hersha Hospitality Management Limited Partnership (“HHMLP”), as the property managers for hotels it leases from us pursuant to management agreements. HHMLP is owned, in part, by certain executives and trustees of the Company. Our management agreements with HHMLP provide for a term of five years and are subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties are reimbursed or borne by our TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel. Management agreements with other unaffiliated hotel management companies have similar terms.

For its services, HHMLP receives a base management fee and, if a hotel exceeds certain thresholds, an incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal year and is based upon the financial performance of the hotels. For the three and nine months ended September 30, 2020 and 2019, base management fees incurred from HHMLP totaled $969 and $3,652, and $3,902 and $10,594, respectively, and are recorded as Hotel Operating Expenses. For the three and nine months ended September 30, 2020 and 2019, we did not incur incentive management fees.

Franchise Agreements

Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms, but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as incurred. Franchise fee expenses for the three and nine months ended September 30, 2020 and 2019 were $1,319 and $6,034, and $5,922 and $17,518, respectively, and are recorded in Hotel Operating Expenses. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.

Accounting and Information Technology Fees

Each of the wholly-owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and information technology fee. Monthly fees for accounting services are between $2 and $3 per property and monthly information technology fees range from $1 to $2 per property. For the three and nine months ended September 30, 2020 and 2019, the Company incurred accounting fees of $332 and $315, and $976 and $946, respectively. For the three and nine months ended September 30, 2020 and 2019, the Company incurred information technology fees of $107 and $99, and $315 and $303, respectively. Accounting fees and information technology fees are included in Hotel Operating Expenses.

Capital Expenditure Fees

HHMLP charges a 5% fee on certain capital expenditures and pending renovation projects at the properties as compensation for procurement services related to capital expenditures and for project management of renovation projects. For the three and nine months ended September 30, 2020 and 2019, we incurred fees of $91 and $530, and $1,047 and $2,043, respectively, which were capitalized with the cost of capital expenditures.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Acquisitions from Affiliates

We have entered into an option agreement with certain of our officers and trustees such that we obtain a right of first refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of the Company. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the purchase of hotels from related parties are approved by the Acquisition Committee.

Hotel Supplies

For the three and nine months ended September 30, 2020 and 2019, we incurred charges for hotel supplies of $1 and $46, and $63 and $260, respectively. For the three and nine months ended September 30, 2020 and 2019, we incurred charges for capital expenditure purchases of $121 and $3,578, and $1,177 and $7,995, respectively. These purchases were made from Hersha Purchasing and Design, a hotel supply company owned, in part, by certain executives and trustees of the Company. Hotel supplies are expensed and included in Hotel Operating Expenses on our consolidated statements of operations, and capital expenditure purchases are included in investment in hotel properties on our consolidated balance sheets. Approximately $20 and $9 is included in accounts payable for the purchase of hotel supplies at September 30, 2020 and December 31, 2019, respectively.

Insurance Services

The Company utilizes the services of the Hersha Group, a risk management business owned, in part, by certain executives and trustees of the Company. The Hersha Group provides consulting and procurement services to the Company related to the placement of property and casualty insurance, placement of general liability insurance, and for claims handling for our hotel properties. The total costs of property insurance that we paid through the Hersha Group were $1,835 and $1,533, and $5,009 and $4,402, for the three and nine months ended September 30, 2020 and 2019, respectively. These amounts paid to the Hersha Group include insurance premiums, which are then paid to insurance carriers, and consulting procurement fees and claims handling as compensation for services.

Restaurant Lease Agreements with Independent Restaurant Group

The Company enters into lease agreements with a number of restaurant management companies for the lease of restaurants located within our hotels.  The Company previously entered into lease agreements with Independent Restaurant Group ("IRG") for restaurants at three of its hotel properties.  Jay H. Shah and Neil H. Shah, executive officers and/or trustees of the Company, collectively own a 70.0% interest in IRG.  The Company’s restaurant lease agreements with IRG generally provided for a term of five years and the payment of base rents and percentage rents, which were based on IRG’s revenue in excess of defined thresholds. Effective April 1, 2020, each of these lease agreements became a management agreement between the Company and IRG, subject to the supervision of HHMLP, as property manager. At the time of the conversion of the lease agreements to management agreements there was rent due of $103, which was forgiven due to the impact of the COVID-19 pandemic on the operations of our hotels and IRG's restaurants. The total amount of revenue recognized from IRG was $0 and $233 for the nine months ended September 30, 2020 and 2019, respectively.

Due From Related Parties

The due from related parties balance as of September 30, 2020 and December 31, 2019 was approximately $1,910 and $6,113, respectively. The balances primarily consisted of working capital deposits made to HHMLP and other entities owned, in part, by certain executives and trustees of the Company.

Due to Related Parties

The balance due to related parties as of September 30, 2020 and December 31, 2019 was $0.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements

Our determination of fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, we utilize a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

As of September 30, 2020, the Company’s derivative instruments represented the only financial instruments measured at fair value. Currently, the Company uses derivative instruments, such as interest rate swaps and caps, to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counter-parties. However, as of September 30, 2020 we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Derivative Instruments

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to increases in variable interest rates. The table on the following page presents our derivative instruments as of September 30, 2020 and December 31, 2019.

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
     Estimated Fair Value
     Asset / (Liability) Balance
Hedged DebtTypeStrike RateIndexEffective DateDerivative Contract Maturity DateNotional AmountSeptember 30, 2020December 31, 2019
        
Term Loan Instruments:        
Credit FacilitySwap1.341 %
1-Month LIBOR + 2.20%
October 3, 2019August 2, 2021150,000 (1,501)539 
Credit FacilitySwap1.316 %
1-Month LIBOR + 2.20%
September 3, 2019August 2, 202143,900 (430)175 
Credit FacilitySwap1.824 %
1-Month LIBOR + 2.20%
September 3, 2019August 10, 2022103,500 (3,201)(718)
Credit FacilitySwap1.824 %
1-Month LIBOR + 2.20%
September 3, 2019August 10, 2022103,500 (3,201)(718)
Credit FacilitySwap1.460 %
1-Month LIBOR + 2.00%
September 10, 2019September 10, 2024300,000 (14,347)1,776 
        
Mortgages:        
Courtyard, LA Westside, Culver City, CASwap1.683 %
1-Month LIBOR + 2.75%
August 1, 2017August 1, 202035,000  (8)
Annapolis Waterfront Hotel, MDCap3.350 %
1-Month LIBOR +2.65%
May 1, 2018May 1, 202128,000   
Hyatt, Union Square, New York, NYSwap1.870 %
1-Month LIBOR + 2.30%
June 7, 2019June 7, 202356,000 (2,524)(556)
Hilton Garden Inn Tribeca, New York, NYSwap1.768 %
1-Month LIBOR + 2.25%
July 25, 2019July 25, 202422,725 (1,311)(169)
Hilton Garden Inn Tribeca, New York, NYSwap1.768 %
1-Month LIBOR + 2.25%
July 25, 2019July 25, 202422,725 (1,311)(169)
Hilton Garden Inn 52nd Street, New York, NYSwap1.540 %
1-Month LIBOR + 2.30%
December 4, 2019December 4, 202244,325 (1,331)23 
Courtyard, LA Westside, Culver City, CASwap0.495 %
1-Month LIBOR + 2.75%
June 1, 2020August 1, 202135,000 (102) 
     $(29,259)$175 
On June 1, 2020, we entered into an accelerated termination agreement on the interest rate swap associated with the $35,000 mortgage debt on the Courtyard LA Westside, which had an initial maturity of August 1, 2020. Also on June 1, 2020, we entered into a new interest rate swap associated with the $35,000 mortgage on the Courtyard LA Westside, which will mature on August 1, 2021. The fair value of the old swap at the time of termination was a liability in the amount of $67. Instead of settling this amount with cash consideration at termination, the rate and terms of the new swap were such that, the fair value at termination of the old swap would carry over as the fair value of the new swap at inception. The other comprehensive income related to the old swap will be reclassified to interest expense until the date of the original maturity date of August 1, 2020.

The fair value of swaps and our interest rate caps with a positive balance is included in other assets at September 30, 2020 and December 31, 2019. The fair value of our interest rate swaps with a negative balance is included in accounts payable, accrued expenses and other liabilities at September 30, 2020 and December 31, 2019.

The net change related to derivative instruments designated as cash flow hedges recognized as unrealized gains and losses reflected on our consolidated balance sheet in accumulated other comprehensive income was a gain of $4,776 and a loss of $1,121 for the three months ended September 30, 2020 and 2019, respectively, and a loss of $26,164 and a loss of $9,276 for the nine months ended September 30, 2020 and 2019, respectively.


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate derivatives. The change in net unrealized gains/losses on cash flow hedges reflects a reclassification of $1,066 and $1,010 and $3,271 and $3,263 of net unrealized gains/losses from accumulated other comprehensive income as an increase/decrease to interest expense for the three and nine months ended September 30, 2020 and 2019, respectively. For the next twelve months ending September 30, 2021, we estimate that an additional $12,794 will be reclassified as an increase to interest expense.

Fair Value of Debt
We estimate the fair value of our fixed rate debt and the credit spreads over variable market rates on our variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the fair value hierarchy.  As of September 30, 2020, the carrying value and estimated fair value of our debt was $1,195,021 and $1,172,381 respectively. As of December 31, 2019, the carrying value and estimated fair value of our debt was $1,128,199 and $1,098,082, respectively.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 9 – SHARE BASED PAYMENTS
Our shareholders approved the Hersha Hospitality Trust 2012 Equity Incentive Plan, as amended, (the “2012 Plan”) for the purpose of attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the Company. Pursuant to the 2012 Plan, equity may be awarded in the form of stock awards, LTIP Units, or performance share awards issuable.

The Short Term Incentive Program ("STIP") and the Long-Term Incentive Program ("LTIP") were incentive compensation programs the Compensation Committee of our Board of Trustees established to align executive compensation with the performance of the Company. Prior to 2019, executives participated in our legacy incentive compensation programs, including the Multi-Year Long Term Equity Incentive Program ("Multi-Year EIP").

On April 10, 2020, based on the achievement of certain metrics established under the 2019 STIP for the performance period ended December 31, 2019, the Compensation Committee awarded 833,539 LTIP Units. The awards issued pursuant to the STIP vest on December 31, 2021, the two year anniversary following the end of the performance period. On April 13, 2020, the Compensation Committee awarded 240,923 LTIP Units based on the achievement of certain metrics established under the 2017 Multi-Year EIP for the performance period ended December 31, 2019. Following the three year performance period, the awards issued pursuant to the 2017 Multi-Year EIP vest 50% on the date of issuance and 50% on December 31, 2020. The LTIP Units awarded under both the 2019 STIP and the 2017 Multi-Year EIP were determined by dividing the dollar amount of award earned by $3.58, the per share volume weighted average trading price of the Company’s common shares on the NYSE for the 20 trading days prior to April 13, 2020, the date of issuance.

On August 3, 2020, the Compensation Committee approved the 2020 STIP. This program has a performance period ending on December 31, 2020. As of September 30, 2020, no shares have been issued to the executive officers in settlement of the 2020 STIP awards.

On August 3, 2020, the Compensation Committee approved the 2020 LTIP. This program has a three-year performance period which commenced on January 1, 2020 and ends December 31, 2022. As of September 30, 2020, no shares or LTIP Units have been issued to the executive officers in settlement of 2020 LTIP awards.

A summary of our share based compensation activity from January 1, 2020 to September 30, 2020 is as follows:
LTIP Unit AwardsRestricted Share AwardsShare Awards
Number of UnitsWeighted Average Grant Date Fair ValueNumber of Restricted SharesWeighted Average Grant Date Fair ValueNumber of SharesWeighted Average Grant Date Fair Value
Unvested Balance as of December 31, 2019441,201 $17.99 92,102 $17.07  
Granted1,112,862 5.24 189,851 5.34  N/A
Vested(120,459)5.23 (78,962)12.49  N/A
Forfeited N/A(113)18.00  N/A
Unvested Balance as of September 30, 20201,433,604 $9.16 202,878 $7.87  


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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 9 – SHARE BASED PAYMENTS (CONTINUED)
The following table summarizes share based compensation expense for the three and nine months ended September 30, 2020 and 2019 and unearned compensation as of September 30, 2020 and December 31, 2019:
Share Based
Compensation Expense
Unearned
Compensation
For the Three Months EndedFor the Nine Months EndedAs of
9/30/20209/30/20199/30/20209/30/20199/30/202012/31/2019
Issued Awards
LTIP Unit Awards$1,169 $1,428 $4,120 $4,218 $3,071 $2,878 
Restricted Share Awards428 334 1,103 1,128 958 1,051 
Share Awards   402   
Unissued Awards
Market Based339 388 968 1,078 2,285 2,739 
Performance Based (141) 615   
Total$1,936 $2,009 $6,191 $7,441 $6,314 $6,668 

The weighted-average period of which the unrecognized compensation expense will be recorded is approximately 1.5 years for LTIP Unit Awards and 0.7 years for Restricted Share Awards.
The remaining unvested target units are expected to vest as follows:
2020202120222023
LTIP Unit Awards535,478898,126  
Restricted Share Awards3,784187,3938,1703,531
539,262 1,085,519 8,170 3,531 

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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 10 – EARNINGS PER SHARE
The following table is a reconciliation of the income or loss (numerator) and the weighted average shares (denominator) used in the calculation of basic and diluted earnings per common share. The computation of basic and diluted earnings per share is presented below.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
NUMERATOR:    
Basic and Diluted*    
Net (Loss) Income$(48,173)$507 $(145,925)$(1,816)
Loss allocated to Noncontrolling Interests5,032 102 18,289 1,366 
Distributions to Preferred Shareholders(6,044)(6,044)(18,132)(18,131)
Dividends Paid on Unvested Restricted Shares and LTIP Units (279) (831)
Net Loss applicable to Common Shareholders$(49,185)$(5,714)$(145,768)$(19,412)
    
DENOMINATOR:    
Weighted average number of common shares - basic38,639,048 38,878,818 38,604,483 39,039,665 
Effect of dilutive securities:    
Restricted Stock Awards and LTIP Units (unvested)    
Contingently Issued Shares and Units    
Weighted average number of common shares - diluted38,639,048 38,878,818 38,604,483 39,039,665 
*Income (loss) allocated to noncontrolling interest in HHLP has been excluded from the numerator and Common Units and Vested LTIP Units have been omitted from the denominator for the purpose of computing diluted earnings per share since 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) applicable to common shareholders.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]

NOTE 11 – CASH FLOW DISCLOSURES AND NON CASH INVESTING AND FINANCING ACTIVITIES
Interest paid during the nine months ended September 30, 2020 and 2019 totaled $29,655 and $41,774 respectively. Net Cash paid on Interest Rate Derivative contracts during the nine months ended September 30, 2020 and 2019 totaled $4,558 and $(3,494) respectively. Cash paid for income taxes during the nine months ended September 30, 2020 and 2019 totaled $223 and $437, respectively. The following non-cash investing and financing activities occurred during the nine months ended September 30, 2020 and 2019:

20202019
Common Shares issued as part of the Dividend Reinvestment Plan$14 $48 
Issuance of share based payments7,259 12,593 
Accrued payables for capital expenditures placed into service892 3,357 
Adjustment to Record Noncontrolling Interest at Redemption Value(3,196)488 
Adjustment to Record Right of Use Asset & Lease Liability 55,515 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019:

20202019
Cash and cash equivalents$13,139 $31,621 
Escrowed cash7,124 10,540 
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows$20,263 $42,161 


Amounts included in restricted cash represent those required to be set aside in escrow by contractual agreement with various lenders for the payment of specific items such as property insurance, property tax, and capital expenditures.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this and other reports filed by us with the SEC, including, but not limited to those discussed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, in our subsequent Quarterly Reports on Form 10-Q and in this Quarterly Report on Form 10-Q, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:

● our business or investment strategy;
● our projected operating results;
● our distribution policy;
● our liquidity and management's plans with respect thereto;
● completion of any pending transactions;
● our ability to maintain existing financing arrangements, including compliance with covenants and our ability to obtain future financing arrangements or refinance or extend the maturity of existing financing arrangements as they come due;
● our ability to negotiate with lenders;
● our understanding of our competition;
● market trends;
● projected capital expenditures;
● the impact of and changes to various government programs, including in response to the novel coronavirus, or COVID-19, including those specifically affecting New York City;
● the timing of the development of any effective cure or treatment for COVID-19;
● our access to capital on the terms and timing we expect;
● the restoration of public confidence in domestic and international travel;
● permanent structural changes in demand for conference centers by business and leisure clientele;
● our ability to dispose of selected hotel properties on the terms and timing we expect, if at all; and
● our ability to reopen our nonoperational hotels on the terms and timing we expect, if at all.

Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements.

Important factors that we think could cause our actual results to differ materially from expected results are summarized below. One of the most significant factors, however, is the ongoing impact of the current outbreak of the novel coronavirus on the United States, regional and global economies, the broader financial markets, our customers and employees, governmental responses thereto and the operation changes we have and may implement in response thereto. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors below.

New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity.


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The following non-exclusive list of factors could also cause actual results to vary from our forward-looking statements:

● general volatility of the capital markets and the market price of our common shares;
● changes in our business or investment strategy;
● availability, terms and deployment of capital;
● changes in our industry and the market in which we operate, interest rates, or the general economy;
● decreased international travel because of geopolitical events, including terrorism and current U.S. government policies such as immigration policies, border closings, and travel bans related to COVID-19;
● the degree and nature of our competition;
● financing risks, including (i) the risk of leverage and the corresponding risk of default on our mortgage loans and other debt, including default with respect to applicable covenants, (ii) potential inability to refinance or extend the maturity of existing indebtedness and (iii) our ability to negotiate with lenders;
● levels of spending in the business, travel and leisure industries, as well as consumer confidence;
● declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;
● hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
● financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;
● increased interest rates and operating costs;
● ability to complete development and redevelopment projects;
● risks associated with potential dispositions of hotel properties;
● availability of and our ability to retain qualified personnel;
● decreases in tourism due to pandemics, geopolitical instability or changes in foreign exchange rates;
● our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended;
● environmental uncertainties and risks related to natural disasters and increases in costs to insure against those risks;
● changes in real estate and zoning laws and increases in real property tax rates;
● the uncertainty and economic impact of pandemics, epidemics, or other public health emergencies or fear of such events, such as the recent outbreak of COVID-19, including with respect to New York City;
● the current COVID-19 pandemic had, and will continue to have, adverse effects on our financial conditions, results of operations, cash flows, and performance for an indefinite period of time. Future pandemics may also have adverse effects on our financial condition, results of operations, cash flows, and performance;
● world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels; and
● the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors,” in our subsequent Quarterly Reports on Form 10-Q and in other reports we file with the SEC from time to time.

These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.

All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
 
BACKGROUND

As of September 30, 2020, we owned interests in 49 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles, Seattle, and Miami, including 38 wholly-owned hotels, 1 hotel through our interest in a consolidated joint venture, and interests in 10 hotels owned through unconsolidated joint ventures. During the third quarter of 2020, the joint venture we most recently entered in South Boston opened a newly constructed Home2 Suites hotel, which became our tenth hotel owned through our investment in unconsolidated joint ventures. We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a
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third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of September 30, 2020, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.

OVERVIEW

At the beginning of the year, we expected that we would achieve operating results for 2020 that would outperform other market participants due to the strong performance anticipated from newly renovated and upgraded hotels in our portfolio, primarily led by our hotels in South Florida. We started 2020 off on solid footing with our comparable portfolio achieving RevPAR growth through the end of February 2020 but this was quickly erased as a result of the global economic slowdown caused by the COVID-19 pandemic. As a result of the pandemic and subsequent government mandates and health official recommendations, hotel demand was substantially reduced across the United States.

Following the government mandates and health official recommendations, and after evaluating the cost of running our respective properties at low occupancy levels versus closing the properties, we originally closed 21 of our 48 hotels properties and dramatically reduced staffing at the hotels that remained open and at the corporate level. As of the date of this filing, we have 37 hotels of our 39 wholly-owned hotels operating while 2 hotels remained closed. The 2 hotels that have remained closed are both under a contract to sell and are classified as held for sale as of September 30, 2020. We had 28 of our wholly-owned hotels that have been opened for the entirety of the third quarter of 2020. Of these hotels, 21 acheived or exceeded their break even point on gross operating profit. The reopening of our wholly-owned hotels should provide us the opportunity to capture incremental demand through the end of the year and be prepared to capture market share during the early stages of an economic recovery in 2021.

In addition to our focus on strategically reopening hotels and driving occupancy at these hotels, we have remained focused on executing expense mitigation measures and shoring up our liquidity position as we continue to face a challenging operating environment. The suspension of our common and preferred dividends, which is expected to last through at least the end of 2020, is expected to reduce our cash expenditures by $72.5 million on an annualized basis when compared to dividends we declared in 2019. We have also deferred certain planned capital expenditures for 2020 with an anticipated cash savings of between $10.0 million to $15.0 million for 2020. In April 2020, we amended our existing Credit Facility, which granted us a waiver of our covenants under the Credit Facility through March 31, 2021 and provided us with additional availability under the Credit Facility of $100 million, of which $25,000 was drawn in April 2020 and $45,000 in total through September 30, 2020.

The manner in which the ongoing COVID-19 pandemic will be resolved or the manner that the hospitality and tourism industries will return to historical performance norms, and whether the economy will contract or grow are not reasonably predictable. As a result, there can be no assurances that we will be able achieve the hotel operating metrics or the results at our properties we have forecasted. Factors that might contribute to less-than-anticipated performance include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 in our subsequent Quarterly Reports on Form 10-Q, and other documents that we may file with the SEC in the future, including this Quarterly Report on Form 10-Q. We will continue to cautiously monitor lodging demand and rates, our third-party hotel managers, and our performance generally.


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SUMMARY OF OPERATING RESULTS

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(dollars in thousands, except ADR, RevPAR, and per share data)

Revenue

Our total revenues for the three months ended September 30, 2020 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the three months ended September 30, 2020 and 2019. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues decreased $101,198, or 75.0%, to $33,721 for the three months ended September 30, 2020 compared to $134,919 for the same period in 2019.  This decrease is attributable to the reduction in operations across our portfolio due to the decrease in demand caused by the COVID-19 pandemic. Management expects hotel operating revenues to remain at a decreased level until business and leisure activities return to pre-pandemic levels, which we have no way to predict at this time.

Expenses

Total hotel operating expenses decreased 65.4% to approximately $27,745 for the three months ended September 30, 2020 from $80,081 for the three months ended September 30, 2019. The decrease in hotel operating expenses can be explained by the temporary closure of certain of our hotels and reduced operations at the remaining hotels as a result of the decrease in demand caused by the COVID-19 pandemic.

Depreciation and amortization decreased by 0.2%, or $37, to $24,055 for the three months ended September 30, 2020 from $24,092 for the three months ended September 30, 2019.

Real estate and personal property tax and property insurance decreased $120, or 1.1%, for the three months ended September 30, 2020 when compared to the same period in 2019. This decrease is mostly related to a $311 decrease in real estate tax which was partially offset by a $191 increase in property insurance costs. The decrease in real estate taxes for the quarter relates to a supplemental tax bill received during the third quarter of 2019 causing an increase in that quarter which was not experienced in 2020. In general, our property insurance costs continue to rise annually which is reflective in the increase during the third quarter 2020 compared to 2019.

General and administrative expense decreased by 21.7%, or approximately $1,216, from $5,613 in the three months ended September 30, 2019 to $4,397 for the same period in 2020. General and administrative expense includes expenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees.  Execution of our cost containment strategies resulted in a decrease of $1,143 in our payroll and other administrative costs. Expenses related to non-cash share based compensation decreased $73 when comparing the three months ended September 30, 2020 to the same period in 2019. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.

Operating Loss

Operating Loss for the three months ended September 30, 2020 was $34,110 compared to operating income of $13,264 during the same period in 2019. Our operating loss for the third quarter 2020 compared to operating income for the same period in 2019 was largely the result of the third quarter of 2020 hotel operating revenues decreasing at a larger rate than hotel operating expenses, both of which are the result of decreased operations across our portfolio due to the COVID-19 pandemic. Partially offsetting this was a decrease in general and administrative expense during the third quarter of 2020 compared to 2019.

Interest Expense

Interest expense increased $415 from $12,935 for the three months ended September 30, 2019 to $13,350 for the three months ended September 30, 2020. The balance of our borrowings, excluding discounts and deferred costs, have increased by $67,548 in total between September 30, 2019 and September 30, 2020, as we drew $69,000, net on our Line of Credit and had a net decrease in mortgages payable of $1,452. The primary driver of our increased interest expense is due to
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increases in overall balance; however, the decrease in weighted average interest rates related to our Credit Facility almost offset the increase due to balance growth.

Income Tax Expense

During the three months ended September 30, 2020, the Company recorded an income tax benefit of $28 compared to an income tax benefit of $551 for the three months ended September 30, 2019. After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe that as of September 30, 2020, it is not more likely than not that we will realize our net deferred tax asset and therefore, maintained the full valuation allowance that was established during the second quarter of 2020. As a result, the balance of our net deferred tax asset at September 30, 2020 is $0. Absent the valuation allowance, the amount of income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”). 
    
Net Loss Applicable to Common Shareholders

Net loss applicable to common shareholders for the three months ended September 30, 2020 was $49,185 compared to net loss of $5,435 during the same period in 2019. This increase in loss was primarily related to the decreased operating income and decreased income tax benefit during the three months ended September 30, 2020, as discussed above. Partially offsetting the increase is loss being absorbed by the noncontrolling interests.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(dollars in thousands, except ADR, RevPAR, and per share data)

Revenue

Our total revenues for the nine months ended September 30, 2020 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the nine months ended September 30, 2020 and 2019. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues decreased $256,004, or 64.5%, to $141,071 for the nine months ended September 30, 2020 compared to $397,075 for the same period in 2019.  This decrease is attributable to the reduction in operations across our portfolio due to the decrease in demand caused by the COVID-19 pandemic. During the nine months ended September 30, 2020, our hotel portfolio experienced a decrease in RevPAR as a result of local stay-at-home orders and business restrictions implemented by local governments and national restrictions on travel. Management expects hotel operating revenues to remain at a decreased level until business and leisure activities return to pre-pandemic levels, which we have no way to predict at this time.

Expenses

Total hotel operating expenses decreased 53.1% to approximately $111,642 for the nine months ended September 30, 2020 from $237,803 for the nine months ended September 30, 2019. The decrease in hotel operating expenses can be explained by the temporary closure of certain of our hotels and reduced operations at the remaining hotels as a result of the decrease in demand caused by the COVID-19 pandemic.

Depreciation and amortization increased by 0.5%, or $381, to $72,565 for the nine months ended September 30, 2020 from $72,184 for the nine months ended September 30, 2019.

Real estate and personal property tax and property insurance increased $1,397, or 4.8%, for the nine months ended September 30, 2020 when compared to the same period in 2019. This increase is mostly related to increased real estate tax expense which increased $995, with increases in property insurance adding $402 to expense for 2020 compared to 2019. The increase in real estate tax is primarily the result of properties that had been re-assessed by the applicable taxing authority, resulting in increases in real estate tax expense. We typically experience increases in tax assessments and tax rates as the economy improves which could be offset by reductions resulting from successful real estate tax appeals. In general, our property insurance costs continue to rise annually which is reflective in the increase during the nine months ended September 30, 2020 compared to 2019.
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General and administrative expense decreased by 25.3%, or approximately $4,895, from $19,313 in the nine months ended September 30, 2019 to $14,418 for the same period in 2020. General and administrative expense includes expenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Execution of our cost containment strategies resulted in a decrease of $3,645 in our payroll and other administrative costs. Expenses related to non-cash share based compensation decreased $1,250 when comparing the nine months ended September 30, 2020 to the same period in 2019. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.

Operating Loss

Operating Loss for the nine months ended September 30, 2020 was $92,061 compared to operating income of $35,426 during the same period in 2019. Our operating loss for the first nine months of 2020 compared to operating income during the same period in 2019 was largely the result of hotel operating revenues for the nine months ended September 30, 2020 decreasing at a larger rate than hotel operating expenses, both of which are the result of decreased operations across our portfolio due to the COVID-19 pandemic. Additionally, we experienced increases in real estate taxes and insurance, and depreciation and amortization expense during the nine months ended September 30, 2020 compared to 2019. Partially offsetting this loss is a decrease in general and administrative expenses.

Interest Expense

Interest expense increased $680 from $39,158 for the nine months ended September 30, 2019 to $39,838 for the nine months ended September 30, 2020. The balance of our borrowings, excluding discounts and deferred costs, have increased by $67,548 in total between September 30, 2019 and September 30, 2020, as we drew $69,000, net on our Line of Credit and had a net decrease in mortgages payable of $1,452. The primary driver of our increased interest expense is due to increases in overall balance; however, the decrease in weighted average interest rates related to our Credit Facility almost fully offset the increase due to balance growth.

Loss from Impairment of Assets

During the nine months ended September 30, 2020, the Company recorded an impairment charge of $1,069 related to the Duane Street Hotel, which is held for sale as of September 30, 2020. During the second quarter of 2020, the Company amended the purchase and sale agreement with the buyer of the hotel to reduce the purchase price by $2,000. As a result of the reduced sales price and after consideration of selling costs to the Company, management determined that the carrying value of the hotel exceeded the anticipated net proceeds from sale, resulting in the impairment charge.

Income Tax Expense

During the nine months ended September 30, 2020, the Company recorded an income tax expense of $11,346 compared to an income tax benefit of $1,784 for the nine months ended September 30, 2019. After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe that as of September 30, 2020 it is not more likely than not that we will realize our net deferred tax asset. During the nine months ended September 30, 2020 we recorded a valuation allowance of $21,914 resulting in a net deferred tax asset of $0 as of September 30, 2020 Absent the valuation allowance, the amount of income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”). 
    
Net Loss Applicable to Common Shareholders

Net loss applicable to common shareholders for the nine months ended September 30, 2020 was $145,768 compared to net loss of $18,581 during the same period in 2019, resulting in an increased loss of $127,187. This increase in loss was primarily related to the decreased operating income and increased income tax expense during the first half of 2020, as discussed above. Partially offsetting the increase in loss is the increase in loss being absorbed by the noncontrolling interests.
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LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)

We started 2020 off on solid footing with our comparable portfolio achieving RevPAR growth through the end of February 2020, but this was quickly erased as a result of the global economic slowdown caused by the COVID-19 pandemic. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was substantially reduced across the United States. Following the government mandates and health official recommendations, and after evaluating the cost of running our respective properties at low occupancy levels versus closing the properties, we initially closed 21 of our 49 hotel properties and dramatically reduced staffing at the hotels that remained open and at the corporate level. As of September 30, 2020, we had 41 hotels open while 8 hotels remained closed and as of November 1, 2020, we had 37 of our 39 wholly-owned hotels open. The 2 hotels that have remained closed are both under a contract to sell and are classified as held for sale as of September 30, 2020. We had 28 of our wholly-owned hotels that have been opened for the entirety of the third quarter of 2020. Of these hotels, 21 achieved or exceeded their break even point on gross operating profit.

Potential Sources of Capital

Our organizational documents do not limit the amount of indebtedness that we may incur. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its investments.

In addition, our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, nonrecourse financing arrangements. 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 all covenants contained in the loan agreements securing our hotel properties were met as of September 30, 2020, with the exception of three mortgages. These covenant failure were the result of failures to maintain a minimum debt service coverage ratios at the respective mortgaged hotels. These covenant failures do not result in an event of default in two of these mortgages; rather, it triggers certain cash escrow requirements at the property. For one mortgage, the covenant failure is an event of default, which was remedied through a loan forbearance agreement signed between the Company and its lender, which provides relief from default until maturity of the mortgage in January 2021. At maturity, we plan to refinance the mortgage with a different lender, but should we be unable to secure separate financing, we expect to have sufficient capacity on our line of credit to repay the mortgage in full.

We have debt facilities in the aggregate of $950,900 which is comprised of a $457,000 senior credit facility and two term loans totaling $493,900. The credit facility (“Credit Facility”) contains a $207,000 term loan (“First Term Loan”) and a $250,000 revolving line of credit (“Line of Credit”). This Credit Facility expires on August 10, 2022 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 by $400,000 at our request, subject to the satisfaction of certain conditions. Our two additional term loans are $300,000 (“Second Term Loan”) and $193,900 (“Third Term Loan”), which mature on September 10, 2024 and August 2, 2021, respectively.

On April 2, 2020, we amended our existing Credit Agreement and received $100,000 in available funds on our Line of Credit, of which we drew $25,000 during April 2020. Since the amendment, the Company has drawn a total of $45,000 through September 30, 2020. The amendment provided a waiver of covenants under our Credit Facility through March 31, 2021 and changed the Credit Facility from an unsecured borrowing facility to a secured borrowing facility. If we would breach certain of our Credit Facility covenants when measured for the period ended June 30, 2021, Management’s primary mitigation plan to avoid a default is to obtain a further waiver from its creditors or amend the Credit Facility in a manner to avoid an event of default. As of September 30, 2020, the outstanding balance under the First Term Loan was $207,000, under the Second Term Loan was $300,000, under the Third Term Loan was $193,900 and we had $115,000 outstanding under the Line of Credit.

We will continue to monitor our debt maturities to manage our liquidity needs. However, no assurances can be given that we will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms. As of September 30, 2020, we have $0 of mortgage indebtedness maturing on or before December 31, 2020. We have three mortgage borrowings with total principal of $88,403 that will mature within the next twelve months, which we expect to be able to extend the maturity based on the
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provisions within the existing mortgage or refinance the mortgages. We currently expect that cash requirements for all debt that is not refinanced by our existing lenders for which the maturity date is not extended will be met through a combination of cash on hand, refinancing the existing debt with new lenders, draws on the Line of Credit and the issuance of our securities.

In addition to the incurrence of debt and the offering of equity securities, dispositions of property may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets or from sales of hotels. Capital from these types of transactions is intended to be utilized to pay down existing debt. As of September 30, 2020, we are not under any requirement to sell any properties as a matter of meeting debt obligations.

Acquisitions

During the nine months ended September 30, 2020, we acquired no hotel properties. Given the current economic downturn and challenging operating environment facing the lodging industry, we are not currently exploring hotel acquisition opportunities as we focus on maintaining liquidity or reducing debt obligations, when possible. We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in hotels will depend upon and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common or preferred shares, proceeds from the sale of assets, issuances of Common Units, issuances of preferred units or other securities or borrowings secured by hotel assets and under our Line of Credit.

Operating Liquidity and Capital Expenditures

As we find ourselves operating in a severely reduced capacity with 8 of our hotels temporarily closed due to decreased demand as a result of the COVID-19 pandemic, we expect to meet our short-term liquidity requirements generally through existing cash balances and borrowings under the Line of Credit. The ongoing effects of the COVID-19 pandemic on our operations have had, and will 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. While we currently believe that the net cash provided by borrowings drawn on the Line of Credit and any cash provided by operations in the coming year will be adequate to fund the Company’s operating requirements and monthly recurring debt service, we cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because we have not previously experienced such an abrupt and drastic reduction in hotel demand. The magnitude, duration, and speed of the pandemic is uncertain and, as a consequence, our ability to be predictive is uncertain and we cannot estimate the impact on our business, financial condition, or operating results with reasonable certainty. We have cancelled the payment of dividends for the first, second, and third quarters of 2020 and anticipate not paying dividends for the remainder of 2020. Based on remaining funds available to us on our Line of Credit, along with cost savings measures throughout our operations, we believe that we will be able to generate sufficient liquidity to satisfy our obligations for the next twelve months, absent a breach of Credit Facility covenants.

To qualify as a REIT, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and requires us to raise additional capital in order to grow our business and acquire additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we cannot guarantee if and when we will continue to make distributions to our shareholders. Due to the seasonality of our business, cash provided by operating activities fluctuates significantly from quarter to quarter in a normal operating period. Our Board of Trustees continues to evaluate the dividend policy in the context of our overall liquidity and market conditions and will determine when we are able to reinstate the dividend. Net cash used by operating activities for the nine months ended September 30, 2020 was $39,458 and cash used for the payment of distributions and dividends for the nine months ended September 30, 2020 was $18,051, which related to the dividend declared during the fourth quarter of 2019.

Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovation and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties and scheduled debt repayments. We will seek to satisfy these long-term liquidity requirements through various sources of capital, including borrowings under the Line of Credit and through secured, non-recourse mortgage financings with respect to our unencumbered hotel properties. In addition, we may seek to raise capital through public or private offerings of our securities. Certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties and borrowing restrictions imposed by lenders or franchisors. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all.
Spending on capital improvements during the nine months ended September 30, 2020 decreased when compared to spending on capital improvements during the nine months ended September 30, 2019. During the nine months ended
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September 30, 2020, we spent $21,958 on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $33,706 during the same period in 2019. These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will generate a return on investment. In an effort to properly manage liquidity in the current operating environment we are completing projects previously commenced and have deferred all other capital expenditure projects for the remainder of the year.

We may spend additional amounts, if necessary, to comply with the requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be prudent. Currently, all brand mandated improvements have been deferred by the respective franchisors for the remainder of 2020. We are also obligated to fund the cost of certain capital improvements to our hotels. In addition to capital reserves required under certain loan agreements and capital expenditures to renovate, improve or replace assets at our hotels, we have opportunistically engaged in hotel development projects. In an effort to properly manage liquidity in the current operating environment we have sought or are currently in negotiations with our mortgage lenders to defer all payments into capital expenditure escrow accounts for a period of 6 months to a year.
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CASH FLOW ANALYSIS
(dollars in thousands, except per share data)

Comparison of the Nine Months Ended September 30, 2020 and 2019

Net cash provided by operating activities decreased $113,932 from $74,474 for the nine months ended September 30, 2019 to cash used by operating activities of $39,458 for the comparable period in 2020. In addition to the change in net income adjusted for non-cash items, the following items are the other contributing factors for the change in operating cash flow.

Distributions received from unconsolidated joint ventures operations totaled $556 for the nine months ended September 30, 2019 with no such proceeds in 2020.
The remaining change in operating cash flows related to net changes in working capital assets and liabilities.

Net cash used in investing activities for the nine months ended September 30, 2020 was $22,762 compared to net cash used in investing activities of $36,513 for the nine months ended September 30, 2019. The following items are the major contributing factors for the change in investing cash flows:

An increase in comparative cash flows of $12,907 related to a decrease in spending on capital expenditures for the nine months ended September 30, 2020 compared to 2019.
An increase in comparative cash flows of $3,175 related to a contribution of $825 to unconsolidated joint ventures for the nine months ended September 30, 2020 compared to contributions of $4,000 made for the comparative period in 2019.
A decrease in comparative cash flows of $1,342 related to distributions received from unconsolidated joint ventures during the nine months ended September 30, 2019. No such distributions were received during 2020.

Net cash provided by financing activities for the nine months ended September 30, 2020 was $45,498 compared to net cash used in financing activities for the nine months ended September 30, 2019 of $36,583. The following items are the major contributing factors for the change in financing cash flows:

An increase in comparative cash flows as we drew $31,000 more on our Line of Credit during the nine months ended September 30, 2020 when compared to the same period in 2019.
An increase in comparative cash flows of $14,196 related to the repurchase on common shares. During the nine months ended September 30, 2019, we repurchased $14,196 in common shares. We had no such repurchases during 2020.
An increase in comparative cash flows of $36,609 related to dividends paid. During the nine months ended September 30, 2020 we paid $18,051 in dividends compared to $54,660 for the comparative period in 2019.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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FUNDS FROM OPERATIONS
(in thousands, except share data)

The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Common Units in accordance with the December 2018 Financial Standards White Paper of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Our interpretation of the NAREIT definition is that noncontrolling interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.

The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shareholders, includes loss from the impairment of certain depreciable assets, our investment in unconsolidated joint ventures and land, depreciation and amortization expenses, gains or losses on property sales, noncontrolling interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations. We determined that the loss from the impairment of certain depreciable assets including investments in unconsolidated joint ventures and land, was driven by a measurable decrease in the fair value of certain hotel properties and other assets as determined by our analysis of those assets in accordance with applicable GAAP. As such, these impairments have been eliminated from net loss to determine FFO.

FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Common Units because our Common Units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Common Units.
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The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods (dollars in thousands):
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
    
Net loss applicable to common shareholders$(49,185)$(5,435)$(145,768)$(18,581)
Loss allocated to noncontrolling interest(5,032)(102)(18,289)(1,366)
Loss (income) from unconsolidated joint ventures669 (38)2,189 (518)
Loss from impairment of depreciable assets— — 1,069 — 
Depreciation and amortization24,055 24,092 72,565 72,184 
Funds from consolidated hotel operations applicable to common shareholders and Partnership Units(29,493)18,517 (88,234)51,719 
    
(Loss) income from unconsolidated joint ventures(669)38 (2,189)518 
Unrecognized pro rata interest in loss (1)
(558)(656)(919)(3,665)
Depreciation and amortization of difference between purchase price and historical cost (2)
21 26 63 73 
Interest in depreciation and amortization of unconsolidated joint ventures (3)
415 1,305 1,210 3,879 
Funds from unconsolidated joint ventures operations applicable to common shareholders and Partnership Units(791)713 (1,835)805 
    
Funds from Operations applicable to common shareholders and Partnership Units$(30,284)$19,230 $(90,069)$52,524 
    
Weighted Average Common Shares and Common Units    
Basic38,639,048 38,878,818 38,604,483 39,039,665 
Diluted43,736,289 43,195,646 43,666,753 43,386,630 
(1) For U.S. GAAP reporting purposes, our interest in the joint venture's loss is not recognized since our U.S. GAAP basis in the joint venture has been reduced to $0. Our interest in FFO from the joint venture equals our percentage ownership in the venture's FFO including loss we have not recognized for U.S. GAAP reporting.
(2) Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint venture at the time of our investment.
(3) Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint ventures.
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INFLATION

Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates. Additionally, our management companies will face challenges to raise room rates to reflect the impact of inflation until there is a substantial economic recovery from the COVID-19 pandemic.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2020 and 2019 and none of the estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements.

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, two to seven years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in hotel properties. 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 in a business combination are recorded at full 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.

Properties intended to be sold are designated as “held for sale” on the balance sheet. In accordance with ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations, we evaluate each disposition to determine whether we need to classify the disposition as 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. 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.
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We review our portfolio on an on-going 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. 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, 2020, based on our analysis and giving consideration to the impairment charge taken on one of our hotels held for sale, we have determined that the estimated future cash flow of each of the properties in our portfolio was sufficient to recover its respective carrying value.

New Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. 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 this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of this update that will most likely affect our financial reporting process relate to modifications of contracts with lenders and the related hedging contracts associated with each respective modified borrowing contract. In general, the provisions of the update would benefit 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.

We have not entered into any contract modifications yet, as it directly relates to reference rate reform but we anticipate having to undertake such modifications in the future as a majority of our contracts with lenders and hedging counterparties are indexed to LIBOR. While we anticipate the impact of this update may benefit the Company, we are still evaluating the overall impact to the Company.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk (in thousands, except per share data)

Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of September 30, 2020, we are exposed to interest rate risk with respect to variable rate borrowings under our Line of Credit, certain variable rate mortgages, and notes payable. As of September 30, 2020, we had total variable rate debt outstanding of $219,548 with a weighted average interest rate of 2.62%. The effect of a 100 basis point increase or decrease in the interest rate on our variable rate debt outstanding as of September 30, 2020 would be an increase or decrease in our interest expense for the three and nine months ended September 30, 2020 of $507 and $1,418, respectively.

Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates for a portion of our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We have also entered into derivative financial instruments such as interest rate swaps or caps, and in the future may enter into treasury options or locks, to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. As of September 30, 2020, we have an interest rate cap related to debt on the Annapolis Waterfront Hotel, MD and we have ten interest rate swaps related to debt on Hilton Garden Inn, 52nd Street, New York, NY; Courtyard, LA Westside, Culver City, CA; Hyatt Union Square, New York, NY; Hilton Garden Inn Tribeca, New York, NY; and our Credit Facility. We do not intend to enter into derivative or interest rate transactions for speculative purposes.

As of September 30, 2020, approximately 84.0% of our outstanding consolidated long-term indebtedness was subject to fixed rates or effectively capped, while 16.0% of our outstanding long term indebtedness is subject to floating rates, including borrowings under our Line of Credit. The majority of our floating rate debt and any corresponding derivative instruments are indexed to various tenors of LIBOR, and we acknowledge that in 2021, the financial institutions that produce the LIBOR indexes are expected to discontinue that practice. We are currently evaluating the impact this will have on our financial results and liquidity and will continue to work with our lenders to find a suitable resolution for our LIBOR-based debt.

Changes in market interest rates on our fixed-rate debt impact the fair value of the debt, but such changes have no impact on interest expense incurred. If interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2020 levels, with all other variables held constant. A 100 basis point increase in market interest rates would cause the fair value of our fixed-rate debt outstanding at September 30, 2020 to be approximately $1,148,116 and a 100 basis point decrease in market interest rates would cause the fair value of our fixed-rate debt outstanding at September 30, 2020 to be approximately $1,197,471.

We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations. For debt obligations outstanding as of September 30, 2020, the following table presents expected principal repayments and related weighted average interest rates by expected maturity dates:
Less Than 1 Year1 - 3 years4 - 5 YearsAfter 5 YearsTotal
     
Fixed Rate Debt$548 $505,381 $437,021 $37,831 $980,781 
Weighted Average Interest Rate3.83 %3.83 %3.79 %4.72 %4.04 %
    
Floating Rate Debt$— $26,047 $26,953 $51,548 $104,548 
Weighted Average Interest Rate— 3.03 %3.08 %3.15 %3.02 %
$548 $531,428 $463,974 $89,379 $1,085,329 
Line of Credit$— $115,000 $— $— $115,000 
Weighted Average Interest Rate— 2.40 %— — 2.40 %
$548 $646,428 $463,974 $89,379 $1,200,329 

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Item 4. Controls and Procedures

Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2020.

There were no changes to the Company’s internal controls over financial reporting during the three months ended September 30, 2020, that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

The following risk factors update and supplement the risk factors disclosed in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019, and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020, respectively.

SUMMARY

RISKS RELATED TO THE ECONOMY AND CREDIT MARKETS
Economic conditions have reduced, and may continue to reduce, demand for hotel properties, which has, and may continue to, adversely affect the Company’s profitability.
A sustained recession could result in declines in our average daily room rates, occupancy and RevPAR.
Disruptions in the financial markets could adversely affect our ability to obtain sufficient third-party financing.
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR.

RISKS RELATED TO THE HOTEL INDUSTRY
Our hotels are subject to general hotel industry operating risks.
The value of our hotels depends on conditions beyond our control.
Our investments are concentrated in a single segment of the hotel industry.
Operating costs and capital expenditures for hotel renovation may be greater than anticipated.
The hotel industry is highly competitive.
The franchise licenses under which we operate our hotels may be terminated or not renewed.
The seasonal and cyclical nature of the hotel industry may cause fluctuations in our operating performance.
The increasing use of Internet travel intermediaries by consumers.
The need for business-related travel may decline.
Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.
The COVID-19 pandemic has had, and will continue to have, adverse effects on our business.


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RISKS RELATED TO OUR BUSINESS AND OPERATIONS
We face risks associated with the use of debt, including covenant compliance and refinancing risk.
We may fail to maintain an effective system of internal controls.
We do not operate our hotels or have complete control over implementation of our strategic decisions.
Our acquisitions may not achieve expected performance.
Most of our hotels are located in the area from Washington, DC to Boston, MA, including New York City, which may increase the effect of any regional or local events or conditions.
Acquired properties may be located in new markets with which we are unfamiliar.
We own a limited number of hotels.
We focus on acquiring hotels operating under a limited number of franchise brands.
We depend on key personnel.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial conditions and disputes between us and our co-venturers.
We engage in hedging transactions to limit our exposure to fluctuations in interest rates.
Hedging transactions may reduce our shareholders’ equity.
We and our hotel managers rely on information technology, which may fail or be inadequate, in our operations.
We face possible risks associated with the physical effects of severe weather and climate change.
We may be unsuccessful in obtaining a waiver or amendment to our Credit Agreement, which probably will lead to an event of default and gives rise to substantial doubt about our ability to continue as a going concern.
We are contractually prohibited from paying dividends.
If we default on our property level secured debt and if we are unable to negotiate forbearance agreements, the lenders may foreclose on our hotels.
We could be required to refinance our debt before it matures and may not be able to do so on acceptable terms.

RISKS RELATED TO REAL ESTATE INVESTMENT GENERALLY
Real estate investments can be illiquid.
We may suffer losses not covered by insurance or that are in excess of our insurance coverage limits.
Real estate is subject to property taxes.
Environmental matters could adversely affect our results.
Our hotel properties may contain or develop harmful mold, which could lead to liability and remediation costs.
Costs associated with complying with the ADA may adversely affect our financial condition and operating results.

RISKS RELATED TO CONFLICTS OF INTEREST
Many of our existing agreements may not have been negotiated on an arm’s-length basis.
Conflicts of interest with HHMLP may result in decisions that do not reflect our best interests.
Sales or refinancing of certain hotels acquired from related parties may lead to decisions not in our best interest.
Hotels owned or acquired by related parties may hinder such individuals from focusing on our business.


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RISKS RELATED TO OUR STRUCTURE
There are no assurances of our ability to make distributions in the future.
Holders of our outstanding preferred shares have certain senior rights to the holders of our common shares.
Our Board of Trustees may authorize the issuance of additional shares.
Our Declaration of Trust contains a provision that creates staggered terms for our Board of Trustees.
Certain provisions of Maryland law may discourage a third party from acquiring us.
Our Board of Trustees and management make decisions on our behalf and shareholders have limited policymaking and management rights.

RISKS RELATED TO OUR TAX STATUS
If we fail to qualify as a REIT, our dividends will not be deductible, and our income will be subject to taxation.
To qualify as a REIT, we must distribute annually a certain percentage of our REIT taxable income.
If the leases of our hotels to our TRSs are not respected as true leases, we would fail to qualify as a REIT.
Our ownership of our TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm's-length terms.
If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.
The federal income tax laws governing REITs are complex.
Complying with REIT requirements may force us to sell otherwise attractive investments.
The prohibited transactions tax may limit our ability to engage in certain transactions, including dispositions.
We may pay taxable dividends partly in shares and partly in cash.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
Our share ownership limitation may prevent certain transfers of our shares.
We may be subject to adverse legislative or regulatory tax changes.

GENERAL RISK FACTORS
An increase in market interest rates may have an adverse effect on the market price of our securities.
Future offerings of equity securities may adversely affect the market price of our common shares.
The market price of our securities has been, and may continue to be, volatile and has declined, and may continue to decline.
Future sales of our securities could depress the market price of our common shares.

You should carefully consider the following risks, together with the other information included in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed by us with the SEC. If any of the following risks actually occur, our business, financial condition or results of operations may suffer. As a result, the trading price of our securities could decline, and you may lose all or part of any investment you have in our securities.

RISKS RELATED TO THE ECONOMY AND CREDIT MARKETS

Economic conditions have reduced, and may continue to reduce, demand for hotel properties, which has, and may continue to, adversely affect the Company’s profitability.

The performance of the lodging industry is highly cyclical and has traditionally been closely linked with the performance of the general economy and, specifically, growth in the U.S. gross domestic product, employment, and investment and travel demand. The Company cannot predict the pace or duration of the global economic cycle or the cycles of the lodging industry. Furthermore, the Company cannot predict major disruptions in business cycles, including the development, length and ultimate effects of a global pandemic such as COVID-19.

As a result of the COVID-19 pandemic, (i) conditions in the lodging industry have deteriorated and show inconsistent signs of improvement and (ii) we are experiencing a period of economic weakness. In turn, the Company’s occupancy rates, revenues and profitability have been, and may continue to be, adversely affected. Other macroeconomic factors, such as consumer confidence and conditions which negatively shape public perception of travel, have also had, and may continue to have, a negative effect on the lodging industry and the Company’s business.

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Furthermore, some of the Company’s hotels are classified as upper-upscale or upscale. These types of hotels have been, and may continue to be, more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. This characteristic may result from the fact that upper-upscale hotels generally target business and high-end leisure travelers. Furthermore, because of the COVID-19 pandemic, business and leisure travelers have reduced, and may continue to reduce, travel costs by limiting travel or seeking to reduce costs on their trips. In addition, profitability has been, and may continue to be, negatively affected by the relatively high fixed costs of operating upper-upscale and upscale hotels.

A sustained recession could result in declines in our average daily room rates, occupancy and RevPAR, and thereby have a material adverse effect on our results of operations.

The performance of the hotel industry has traditionally been closely linked with the general economy. For example, during both the recession of 2008 and 2009 and the COVID-19-related downturn, overall travel was reduced, which had a significant effect on our results of operations. While operating results subsequently improved, the COVID-19 pandemic has depressed economic activity. Certain of our properties’ occupancy and room rates have dropped, and others may drop, such that their revenues are insufficient to cover their respective operating expenses. As a result we have been, and may continue to be, required to spend additional funds for such properties’ operating expenses. Other factors that may also affect our revenues and earnings, include, but are not limited to, hindered growth in the economy, changes in unemployment, underemployment, administration policies and changes in travel patterns. A sustained recession would have a material adverse effect on our results of operations.

In addition, operating results have declined, and may continue to decline, at our hotels secured by mortgage debt, which has resulted, and may continue to result, in insufficient operating profit from such hotels to cover the respective debt service on the mortgage. In response, we have been, and may continue to be, forced to choose from a number of unfavorable options, including using corporate cash, drawing on our revolving credit facility, selling the hotel on disadvantageous terms, including at an unattractive price, or defaulting on the mortgage debt and permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions to our shareholders.

Disruptions in the financial markets could adversely affect our ability to obtain sufficient third-party financing for our capital needs, including expansion, acquisition and other activities, on favorable terms or at all, which could materially and adversely affect us.

In response to the COVID-19 pandemic, the U.S. stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks, including ours, to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing, even for companies which otherwise are qualified to obtain financing. Continued volatility and uncertainty in the stock and credit markets in the U.S. and abroad have negatively impacted, and may continue to negatively impact, our ability to access additional financing for our capital needs, including expansion, acquisition activities and other purposes, on favorable terms or at all, which may negatively affect our business. Additionally, due to this uncertainty, we may in the future be unable to refinance or extend our debt, or the terms of any refinancing may not be as favorable as the terms of our existing debt. If we are not successful in refinancing our debt when it becomes due, we may be forced to dispose of hotels on disadvantageous terms, which might adversely affect our ability to service other debt and to meet our other obligations. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of new equity capital or the incurrence of additional secured or unsecured debt, which could materially and adversely affect us.

Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR after 2021 may affect our financial results.

The chief executive of the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, has recently announced (the "FCA Announcement") that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom or elsewhere. Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. The U.S. Federal Reserve, in conjunction with the Alternative Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements, backed by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in 2018. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. There are significant differences between LIBOR
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and SOFR, such as LIBOR being an unsecured lending rate and SOFR a secured lending rate, and SOFR is an overnight rate and LIBOR reflects term rates at different maturities. These and other differences create the potential for basis risk between the two rates. The impact of any basis risk between LIBOR and SOFR may negatively affect our operating results. Any of these alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could have a material adverse effect on results.

Any changes announced by the FCA, including the FCA Announcement, other regulators or any other successor governance or oversight body, or future changes adopted by such body, in the method pursuant to which the LIBOR rates are determined may result in a sudden or prolonged increase or decrease in the reported LIBOR rates. If that were to occur, the level of interest payments we incur may change. In addition, although certain of our LIBOR based obligations provide for alternative methods of calculating the interest rate payable on certain of our obligations if LIBOR is not reported, which include requesting certain rates from major reference banks in London or New York, or alternatively using LIBOR for the immediately preceding interest period or using the initial interest rate, as applicable, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher than, lower than or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR rate was available in its current form.

RISKS RELATED TO THE HOTEL INDUSTRY

Our hotels are subject to general hotel industry operating risks, which may impact our ability to make distributions to shareholders.

Our hotels are subject to all operating risks common to the hotel industry. The hotel industry has previously experienced, and is currently experiencing, volatility , as have, and are, our hotels, and there can be no assurance that such volatility will subside or not occur in the future. These risks include, among other things: competition from other hotels; over-building in the hotel industry that could adversely affect hotel revenues and hotel values; increases in operating costs due to inflation and other factors, which may not be offset by increased room rates; reduction in business and commercial travel and tourism, including as a result of legislation, executive policies or pandemics such as COVID-19; strikes and other labor disturbances of hotel employees; increases in energy costs and other expenses of travel; civil unrest; adverse effects of general and local economic conditions; and adverse political conditions. Certain of these factors have reduced, and may continue to reduce, revenues of our hotels, which has adversely affected, and may continue to adversely affect, our ability to make distributions to our shareholders.

The value of our hotels depends on conditions beyond our control.

Our hotels are subject to varying degrees of risk generally incident to the ownership of hotels. The underlying value of our hotels, our income and ability to make distributions to our shareholders are dependent upon the operation of the hotels in a manner sufficient to maintain or increase revenues in excess of operating expenses. Hotel revenues may be adversely affected by adverse changes in national economic conditions, adverse changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, competition from other hotels, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, particularly in older structures, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of terrorism, acts of God, including earthquakes, hurricanes and other natural disasters, acts of war, adverse changes in zoning laws, pandemics and epidemics such as COVID-19 and other factors that are beyond our control. In particular, general and local economic conditions (i) have been, and may continue to be, adversely affected by the COVID-19 pandemic and (ii) may be adversely affected by terrorist incidents, which may target cities where many of our hotels are located. Our management is unable to determine the long-term impact, if any, of these incidents or of any acts of war or terrorism in the United States or worldwide, on the U.S. economy, on us or our hotels or on the market price of our securities.

Our investments are concentrated in a single segment of the hotel industry.

Our primary business strategy is to continue to acquire high quality, upper-upscale, and upscale limited service and extended-stay hotels in metropolitan markets with high barriers to entry including New York, Washington DC, Boston, Philadelphia, South Florida, select markets on the West Coast, and other markets with similar characteristics. We are subject to risks inherent in concentrating investments in a single industry and in a specific market segment within that industry. The adverse effect on amounts available for distribution to shareholders resulting from a downturn in the hotel industry in general or the mid-scale segment in particular has been, and may continue to be, more pronounced than if we had diversified our investments outside of the hotel industry or in additional hotel market segments.

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Operating costs and capital expenditures for hotel renovation may be greater than anticipated and may adversely impact distributions to shareholders.

Hotels generally have an ongoing need for renovations and other capital improvements, particularly in older structures, including periodic replacement of furniture, fixtures and equipment. Under the terms of our management agreements, we generally are obligated to pay the cost of expenditures for items that are classified as capital items under GAAP that are necessary for the continued operation of our hotels.

If these expenses exceed our expectations, the additional cost could have an adverse effect on amounts available for distribution to shareholders. In addition, we may acquire hotels in the future that require significant renovation. Renovation of hotels involves certain risks, including the possibility of environmental problems, construction cost overruns and delays, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from hotels.

Risks of operating hotels under franchise licenses, which may be terminated or not renewed, may impact our ability to make distributions to shareholders.

The continuation of our franchise licenses is subject to specified operating standards and other terms and conditions. All of the franchisors of our hotels periodically inspect our hotels to confirm adherence to their operating standards. The failure to maintain such standards or to adhere to such other terms and conditions could result in the loss or cancellation of the applicable franchise license. It is possible that a franchisor could condition the continuation of a franchise license on the completion of capital improvements that our trustees determine are too expensive or otherwise not economically feasible in light of general economic conditions, the operating results or prospects of the affected hotel. In that event, our trustees may elect to allow the franchise license to lapse or be terminated.

There can be no assurance that a franchisor will renew a franchise license at each option period. If a franchisor terminates a franchise license, we may be unable to obtain a suitable replacement franchise, or to successfully operate the hotel independent of a franchise license. The loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the related hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Our loss of a franchise license for one or more of the hotels could have a material adverse effect on our partnership’s revenues and our amounts available for distribution to shareholders.

The seasonal and cyclical nature of the hotel industry may cause fluctuations in our operating performance, which could have a material adverse effect on us.

The hotel industry is seasonal in nature. Generally, in certain markets we operate, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. Revenues for hotels and resorts in tourist areas generally are substantially greater during tourist season than other times of the year. Our hotels’ operations historically reflect this trend in these markets. As a result, our results of operations may vary on a quarterly basis, impairing comparability of operating data and financial performance on a quarter to quarter basis.

Additionally the hotel industry historically has been, and continues to be, highly cyclical in nature. Fluctuations in lodging demand and, therefore, operating performance, are caused largely by general economic and local market conditions, which subsequently affect levels of business and leisure travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect the hotel industry's performance, and overbuilding has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. We can provide no assurances regarding whether, or the extent to which, lodging demand will rebound or whether any such rebound will be sustained. An adverse change in lodging fundamentals could result in returns that are substantially below our expectations or result in losses, which could have a material adverse effect on us.

The increasing use of Internet travel intermediaries by consumers may materially and adversely affect our profitability.

Although a majority of rooms sold on the Internet are sold through websites maintained by the hotel franchisors and managers, some of our hotel rooms will be booked through Internet travel intermediaries. These Internet travel intermediaries may purchase rooms at a negotiated discount from participating hotels, which could result in lower room rates than the franchisor or manager otherwise could have obtained. As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us and any hotel management companies that we engage. Moreover, some of these Internet travel intermediaries are attempting to offer
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hotel rooms as a commodity, by increasing the importance of price and general indicators of quality, such as "three-star downtown hotel," at the expense of brand identification or quality of product or service. If consumers develop brand loyalties to Internet reservations systems rather than to the brands under which our hotels are franchised, the value of our hotels could deteriorate and our business could be materially and adversely affected. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be materially and adversely affected.

The need for business-related travel and, thus, demand for rooms in our hotels may be materially and adversely affected by the increased use of business-related technology.

The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, demand for our hotel rooms may decrease and we could be materially and adversely affected.

Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.

Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries in prior years, often disproportionately to the effect on the overall economy. The impact that terrorist attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be determined but any such attacks or the threat of such attacks could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and our results of operations and financial condition.

The COVID-19 pandemic has had, and will continue to have, adverse effects on our financial condition, results of operations, cash flows and performance for an indeterminate period of time. Future pandemics may also have adverse effects on our financial condition, results of operations, cash flows and performance.

The global pandemic caused by the coronavirus known as COVID-19 has had, and is continuing to have, a severe and negative impact on both the U.S. economy and the global economy. Financial markets have experienced significant volatility during the first three quarters of 2020, which is expected to continue over upcoming quarters. Globally and throughout the United States, federal, state, and local governments have instituted quarantines, domestic and international travel restrictions and advisories, school closings, "shelter in place" orders, social distancing efforts, limits on gathering size and restrictions on types of businesses that may continue operations. These restrictions have had, and may continue to have, a severe impact on the U.S. lodging industry and many of our hotels have suspended operations while others continue to operate at a significantly reduced occupancy.

The following factors should be considered because the COVID-19 pandemic has significantly adversely affected, and continues to affect, the ability of our hotel managers to successfully operate our hotels and has had, and continues to have, a significant adverse effect on our financial condition, results of operations and cash flows due to, among other factors:
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a complete suspension or significant reduction of operations at many of our properties, including our largest concentration of properties in New York City, which has been disproportionately adversely affected by COVID-19;
a variety of factors related to the coronavirus have caused, and may continue to cause, a sharp decline in group, business and leisure travel, including but not limited to (i) restrictions on travel mandated by governmental entities or voluntarily imposed by employers, (ii) the postponement or cancellation of conventions and conferences, music and arts festivals, sporting events and other large public gatherings, (iii) the closure of amusement parks, museums and other tourist attractions, (iv) the closure of colleges and universities, and (v) negative public perceptions of travel and public gatherings in light of the perceived risks associated with COVID-19;
travelers have been, and may continue to be, wary to travel where, or because, they may view the risk of contagion as increased and contagion or virus-related deaths linked or alleged to be linked to travel to our properties, whether accurate or not, may injure our reputation;
travelers may be dissuaded from traveling due to possible enhanced COVID-19-related screening measures which are being implemented across multiple markets we serve;
travelers may be dissuaded from traveling due to the concern that additional travel restrictions implemented between their departure and return may affect their ability to return to their homes;
commercial airline service has been reduced or suspended to many of the areas in which our hotels are located, if scheduled airline service does not increase or return to normal levels once our hotels and resorts are re-opened it could negatively affect our revenues;
the reduced economic activity could also result in an economic recession, and increased unemployment, which could negatively impact future ability or desire to travel lodging demand and, therefore, our revenues, even after the temporary restrictions are lifted;
a decrease in the ancillary revenue from amenities at our properties;
the financial impact of the COVID-19 pandemic has (i) negatively impacted our compliance with covenants in certain debt obligations, triggering cash management provisions provided for in two mortgages and resulting in an event of default in a third mortgage, which, if not resolved through negotiations with the lenders, will accelerate such indebtedness and adversely affect our financial condition and liquidity and (ii) could negatively impact our future compliance with the financial covenants of our Credit Facility after these covenants again become applicable in 2021, which could result in an event of default and an acceleration of indebtedness under the Credit Facility, which would adversely affect our financial condition and liquidity;
a potential decline in asset values at one or more of our properties encumbered by mortgage debt, which could inhibit our ability to successfully refinance one or more such properties, result in a default under the applicable mortgage debt agreement and potentially cause the acceleration of such indebtedness;
difficulty in accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital;
the general decline in business activity and demand for real estate transactions adversely affecting our ability to acquire additional properties;
the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during and after this disruption;
we may be subject to increased risks related to employee matters, including increased employment litigation and claims for severance or other benefits tied to termination or furloughs as a result of hotel closures or reduced operations prompted by the effects of the pandemic;
employee or guest assertions that our properties were not adequately cleaned or that adequate safeguards were not in place to prevent contact with employees or guests may result in liabilities; and
the reduction in our cash flows, prohibitions contained in our Credit Agreements and, with respect to our common dividends, the terms of our declaration of trust designating our preferred shares, have caused the indefinite suspension of dividends and could impact our ability to pay dividends to our stockholders at expected levels in the future.
The rapid development and fluidity of the COVID-19 pandemic makes it extremely difficult to assess its full adverse
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The rapid development and fluidity of the COVID-19 pandemic makes it extremely difficult to assess its full adverse economic impact, and future impact, on our financial condition, results of operations, cash flows and performance. In addition, an outbreak of another disease or similar public health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could have a material adverse impact on the Company's business, financial condition and operating results. Outbreaks of other diseases could also result in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely affect our operations.

The potential effects of COVID-19 also could intensify or otherwise affect many of our other risk factors that are included herein, including, but not limited to, those factors listed under “Risks Related to the Economy and Credit Markets” and “Risks Related to the Hotel Industry” and in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed by us with the SEC. Because the COVID-19 situation is unprecedented and continuously evolving, the other potential impacts to our risk factors that are further described herein, in our Annual Report on Form 10-K, in our Quarterly Reports on Form 10-Q and other reports filed by us with the SEC are uncertain.

RISKS RELATED TO OUR BUSINESS AND OPERATIONS

We face risks associated with the use of debt, including covenant compliance and refinancing risk.

At September 30, 2020, we had outstanding long-term debt of approximately $1.2 billion. We may borrow additional amounts from the same or other lenders in the future. Any future repurchases of our own shares may require additional borrowings. Some of these additional borrowings may be secured by our hotels. Our declaration of trust (as amended and restated, our “Declaration of Trust”) does not limit the amount of indebtedness we may incur. We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our hotels to foreclosure. Our indebtedness contains various financial and non-financial events of default covenants customarily found in financing arrangements. Our mortgages 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 from the applicable hotels.

We have determined that all covenants contained in the loan agreements securing our hotel properties were met as of September 30, 2020, with the exception of three mortgages. These covenant failures were the result of a failure to maintain minimum debt service coverage ratios at the respective mortgaged hotels. This covenant failure does not result in an event of default in two of these mortgages; rather, it triggers certain cash escrow requirements at the property. For one mortgage, the covenant failure is an event of default which we have remedied through the signing of a loan forbearance agreement that is effective through the mortgage maturity in January 2021.

Additionally, we have a substantial amount of debt that will mature within the next 1 to 4 years. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital or sales of properties, we may be forced to use operating income to repay such indebtedness, which would have a material adverse effect on our cash available for distribution in years when significant “balloon” payments come due. In some such cases, we may lose the applicable hotels to foreclosure. This risk is particularly significant.

If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our shareholders could lose confidence in our financial results, which could harm our business and the value of our common shares.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner.

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We do not operate our hotels and, as a result, we do not have complete control over implementation of our strategic decisions.

In order for us to satisfy certain REIT qualification rules, we cannot directly or indirectly operate or manage any of our hotels. Instead, we must engage an independent management company to operate our hotels. As of September 30, 2020, our TRSs and our joint venture partnerships have engaged independent management companies as the property managers for all of our wholly owned hotels leased to our TRSs and the respective hotels for the joint ventures, as required by the REIT qualification rules. The management companies operating the hotels make and implement strategic business decisions with respect to these hotels, such as decisions with respect to the repositioning of a franchise or food and beverage operations and other similar decisions. Decisions made by the management companies operating the hotels may not be in the best interests of a particular hotel or of the Company. Accordingly, we cannot assure you that the management companies will operate our hotels in a manner that is in our best interests. In addition, the financial condition of the management companies could impact their future ability to operate our hotels.

Most of our hotels are located in major gateway urban markets in the United States with many located in the area from Washington, DC to Boston, MA, including New York City, which may increase the effect of any regional or local events or conditions.

Most of our hotels are located in major gateway urban markets in the United States, with many located in the area from Washington, DC to Boston, MA. As a result, regional or localized adverse events or conditions, such as an economic recession or pandemic, in any of these major gateway urban markets could have a significant adverse effect on our operations, and ultimately on the amounts available for distribution to shareholders.

Specifically, a significant portion of our portfolio is concentrated in New York City. The operations of our consolidated portfolio of hotels in New York City will have a material impact on our overall results of operations. Concentration risk with respect to our ownership of hotels in the New York City market may lead to increased volatility in our overall results of operations. Our overall results of operations may be adversely affected and our ability to pay distributions to our shareholders could be negatively impacted in the event:
downturns in lodging fundamentals are more severe or prolonged in New York City compared to the United States as a whole;

negative economic conditions are more severe or prolonged in New York City compared to other areas, due to concentration of the financial industry in New York or otherwise;

as new hotel supply enters the New York City market, this could impact our ability to grow ADR and RevPar as a result of the new supply; or

New York City is impacted by other unforeseen events beyond our control, including, among others, terrorist attacks and travel related health concerns including pandemics and epidemics.
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As of the third quarter of 2020, New York City has been significantly adversely impacted by the COVID-19 pandemic disproportionately compared to other cities in the U.S. and across the globe. Many of our hotels closed in the first quarter of 2020 but began reopening when New York City entered phase two of its state-mandated reopening plan in the second quarter of 2020. Because of the disproportionate impact, the economic recovery following the COVID-19 pandemic may be delayed more in New York City than in other parts of the country, which may cause reduced demand for hotels there. Therefore, our concentration of assets in New York City may have an adverse impact on the fair value of our assets, our results of operations, our financial condition and our ability to pay dividends to our stockholders at expected levels or at all.

We own a limited number of hotels and significant adverse changes at one hotel may impact our ability to make distributions to shareholders.

As of September 30, 2020, our portfolio consisted of 38 wholly-owned limited and full service properties, 1 property within a consolidated joint venture investment, and joint venture investments in 10 hotels with a combined total of 7,774 rooms. However, certain larger hotels or hotels in certain locations disproportionately impact our performance. Accordingly, significant adverse changes in the operations of any one of these hotels could have a material adverse effect on our financial performance and on our ability to make expected distributions to our shareholders.

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We focus on acquiring hotels operating under a limited number of franchise brands, which creates greater risk as the investments are more concentrated.

We place particular emphasis in our acquisition strategy on hotels similar to our current hotels. We invest in hotels operating under a few select franchises and therefore will be subject to risks inherent in concentrating investments in a particular franchise brand, which could have an adverse effect on amounts available for distribution to shareholders. These risks include, among others, the risk of a reduction in hotel revenues following any adverse publicity related to a specific franchise brand or the failure of the franchisor to maintain a certain brand.

We depend on key personnel.

We depend on the services of our existing senior management team, including Jay H. Shah, Neil H. Shah, Ashish R. Parikh and Michael R. Gillespie, to carry out our business and investment strategies. As we expand, we will continue to need to attract and retain qualified additional senior management. We have employment agreements with certain of our senior management; however, the employment agreements may be terminated under certain circumstances. The termination of an employment agreement and the loss of the services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial conditions and disputes between us and our co-venturers.

As of September 30, 2020, we had several joint ventures in which we shared ownership and decision-making power with one or more parties. Joint venture investments involve risks that may not be present with other methods of ownership, including the possibility: that our partner might become insolvent, refuse to make capital contributions when due or otherwise fail to meet its obligations, which may result in certain liabilities to us for guarantees and other commitments; that our partner might at any time have economic or other business interests or goals that are or become inconsistent with our interests or goals; that we could become engaged in a dispute with our partner, which could require us to expend additional resources to resolve such disputes and could have an adverse impact on the operations and profitability of the joint venture; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests. Our joint venture partners must agree in order for the applicable joint venture to take, or in some cases, may have control over whether the applicable joint venture will take, specific major actions, such as budget approvals, acquisitions, sales of assets, debt financing, executing lease agreements, and vendor approvals. Under these joint venture arrangements, any disagreements between us and our partners may result in delayed decisions. Our inability to take unilateral actions that we believe are in our best interests may result in missed opportunities and an ineffective allocation of resources and could have an adverse effect on the financial performance of the joint venture and our operating results.

We engage in hedging transactions to limit our exposure to fluctuations in interest rates, which can result in recognizing interest expense at rates higher than the stated rates within our floating rate debt.

We enter into hedging transactions intended to protect us from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions may include entering into interest rate swaps, caps, and floors, options to purchase such items, and futures and forward contracts. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition, particularly in a declining rate environment. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or could adversely affect our operating results because, among other things:
Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

The duration of the hedge may not match the duration of the related liability;

The party at risk in the hedging transaction may default on its obligation to pay;

The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

The value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value.
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Hedging transactions may reduce our shareholders’ equity.

Hedging involves risk and typically involves costs, including transaction costs, which may reduce returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distribution to shareholders. The REIT qualification rules may also limit our ability to enter into hedging transactions. We generally intend to hedge as much of our interest rate risk as our management determines is in our best interests given the cost of such hedging transactions and the requirements applicable to REITs. If we are unable to hedge effectively because of the cost of such hedging transactions or the limitations imposed by the REIT rules, we will face greater interest risk exposure than may be commercially prudent.

We and our hotel managers rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We and our hotel managers rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We and our hotel managers purchase some of our information technology from vendors, on whom our systems depend. We and our hotel managers rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts. Although we and our hotel managers have taken steps we believe are necessary to protect the security of our information systems and the data maintained in those systems, it is possible that the safety and security measures taken will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. In November 2018, Marriott announced a data security incident involving a guest reservation database. Security breaches such as the one that occurred at Marriott and, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.

We face possible risks associated with the physical effects of severe weather and climate change.

We recognize there are inherent weather and climate risks that may impact our business, including, but not limited to, storms, hurricanes, sea level rise, floods, extreme temperatures, wildfires, drought, and water stress. Climate change may increase the frequency and severity of such climate phenomenon and weather events. Should (i) weather events or (ii) the impact of climate change be severe or continue for lengthy periods of times, these risks may be exacerbated and may directly damage our hotels, disrupt hotel operations and our supply chain, reduce travel demand to affected areas, increase operating costs, and increase (or make unavailable) property insurance on terms we find acceptable. There can be no assurance that severe weather and climate change will not have a material adverse effect on our properties, operations, or business.

We may be unsuccessful in obtaining a waiver or amendment to our Credit Agreement, specifically with respect to the Credit Facility covenants, prior to certain covenants being measured for the period ending June 30, 2021. The failure to obtain such a waiver or amendment, or otherwise repay the debt, probably will lead to an event of default, which would have a material adverse effect on our financial condition, which gives rise to substantial doubt about our ability to continue as a going concern.

The covenant waivers on our Credit Facility extend through March 31, 2021. Absent additional amendments to our Credit Agreement, however, we believe that it is probable we will breach certain of our Credit Facility covenants when measured for the period ended June 30, 2021. This potential event of default could lead to potential acceleration of amounts due under the Credit Facility. Notwithstanding our belief that we probably will be successful in renegotiating the terms of our Credit Facility prior to an event of default, we believe that we will continue to have access to the capital markets. Also, we could choose to raise cash by selling hotel properties, although there can be no assurances we would be successful on terms favorable to us.

Management’s primary mitigation plan to avoid a default under its Credit Agreement is to obtain a further waiver from its creditors or amend the Credit Facility in a manner to avoid an event of default. There can be no assurances that we will be able to obtain a waiver or amendment in a timely manner, or on acceptable terms, if at all. The failure to obtain a waiver or amendment, or otherwise repay the debt, could lead to an event of default, which would have a material adverse effect on our financial condition, which gives rise to substantial doubt about our ability to continue as a going concern.


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We are contractually prohibited from paying dividends.

Our Credit Agreements, as amended on April 2, 2020, contain prohibitions against our payment of any dividend on common or preferred shares, including at any time when there is an event of default under such credit agreement. An event of default for this purpose includes a failure to comply with various covenants, including reporting obligations and other nonmonetary obligations, as well as financial conditions that may be beyond our control. An event of default for this purpose occurs as soon as the failure occurs, even if the applicable credit agreement allows a period for curing the failure. If one of these events of default has occurred and is continuing on the day when a dividend is otherwise payable on our common or preferred shares, we will be unable to pay the dividend unless the lenders on these credit agreements waive the prohibition, or until we cure the event of default. Additionally, while we are in arrears on the payment of preferred share dividends, the terms of our declaration of trust designating our preferred shares prohibit the payment of dividends on our common shares. Failure to pay dividends could jeopardize our continued qualification as a REIT.

We could be required to refinance our debt before it matures and there is no assurance that we will be able to refinance our debt on acceptable terms.

In response to the effects of the COVID-19 pandemic on our operations, on April 2, 2020, we amended our existing Credit Agreement and received $100,000 in available funds on our Line of Credit. The amendment also provided a waiver of covenants under our Credit Facility through March 31, 2021 and changed the Credit Facility from an unsecured borrowing facility to a secured borrowing facility. To the extent the COVID-19 pandemic continues or our business levels do not recover to pre-pandemic levels or we are otherwise unable to refinance our debt on acceptable terms, we may be forced to choose from a number of unfavorable options, including agreeing to otherwise unfavorable financing terms, selling one or more hotel properties at unattractive prices or on disadvantageous terms, or defaulting on mortgages and allowing our lenders to foreclose. Any one of these options could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

RISKS RELATED TO REAL ESTATE INVESTMENT GENERALLY

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in operating, economic and other conditions will be limited. No assurances can be given that the fair market value of any of our hotels will not decrease in the future.

If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose investment capital and anticipated profits.

We require comprehensive insurance to be maintained on each of the our hotels, including liability and fire and extended coverage in amounts sufficient to permit the replacement of the hotel in the event of a total loss, subject to applicable deductibles. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes and acts of terrorism that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impracticable to use insurance proceeds to replace the applicable hotel after such applicable hotel has been damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to the applicable hotel. If any of these or similar events occur, it may reduce the return from the attached property and the value of our investment.

Real estate is subject to property taxes.

Each hotel is subject to real and personal property taxes. The real and personal property taxes on hotel properties in which we invest may increase as property tax rates change and as the properties are assessed or reassessed by taxing authorities. Many state and local governments are facing budget deficits that have led many of them, and may in the future lead others to, increase assessments and/or taxes. If property taxes increase, our operating results may be negatively affected.

Environmental matters could adversely affect our results.

Operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of future legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or
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remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of complying with environmental laws could materially adversely affect amounts available for distribution to shareholders. Phase I environmental assessments have been obtained on all of our hotels. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware.

Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of mold to which hotel guests or employees could be exposed at any of our properties could require us to undertake a remediation program to contain or remove the mold from the affected property, which could be costly. In addition, exposure to mold by guests or employees, management company employees or others could expose us to liability if property damage or health concerns arise.

Costs associated with complying with the ADA may adversely affect our financial condition and operating results.

Under the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While we believe that our hotels are substantially in compliance with these requirements, a determination that we are not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies affecting the use and operation of the hotels, including changes to building codes and fire and life-safety codes, may occur. If we were required to make substantial modifications at the hotels to comply with the ADA or other changes in governmental rules and regulations, our ability to make expected distributions to our shareholders could be adversely affected.

RISKS RELATED TO CONFLICTS OF INTEREST

Due to conflicts of interest, many of our existing agreements may not have been negotiated on an arm’s-length basis and may not be in our best interest.

Some of our officers and trustees have ownership interests in HHMLP and in entities with which we have entered into transactions, including hotel acquisitions and dispositions and certain financings. Consequently, the terms of our agreements with those entities, including hotel contribution or purchase agreements, the Option Agreement (as defined below) between our operating partnership and some of the trustees and officers and our property management agreements with HHMLP, while intended to be negotiated on an arm’s-length basis, may not have been and may not be in the best interest of all our shareholders. We have policies in place to encourage agreements to be negotiated on an arm’s-length basis. Transactions with related persons must be approved by a majority of the Company’s independent trustees. The Board of Trustees’ policy requires any independent trustee with a direct or indirect interest in the transaction to excuse himself or herself from any consideration of the related person transaction in which he or she has an interest.

Conflicts of interest with HHMLP may result in decisions that do not reflect our best interests.

We have entered into an option agreement (as amended, the “Option Agreement”) with each of our officers and certain trustees such that we obtain a right of first refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of the Company. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the purchase of hotels from related parties are approved by the Acquisition Committee.

The following officers and trustees own collectively approximately 14% of HHMLP: Hasu P. Shah, Jay H. Shah, Neil H. Shah and Ashish R. Parikh. Conflicts of interest may arise with respect to the ongoing operation of our hotels including, but not limited to, the enforcement of the contribution and purchase agreements, the Option Agreement and our property management agreements with HHMLP. These officers and trustees also make decisions for our company with respect to property management. Consequently, these officers and trustees may not act solely in the best interests of our shareholders relating to property management by HHMLP.

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Conflicts of interest relating to sales or refinancing of hotels acquired from some of our trustees and officers may lead to decisions that are not in our best interest.

Some of our non-independent trustees and officers have unrealized gains associated with their interests in the hotels we have acquired from them and, as a result, any sale of these hotels or refinancing or prepayment of principal on the indebtedness assumed by us in purchasing these hotels may cause adverse tax consequences to such trustees and officers. Therefore, our interests and the interests of these individuals may be different in connection with the disposition or refinancing of these hotels.

Hotels owned or acquired by some of our trustees and officers may hinder these individuals from spending adequate time on our business.

Some of our trustees and officers own hotels and may develop or acquire new hotels, subject to certain limitations. Such ownership, development or acquisition activities may materially affect the amount of time these officers and trustees devote to our affairs. Some of our trustees and officers operate hotels that are not owned by us, which may materially affect the amount of time that they devote to managing our hotels. Pursuant to the Option Agreement we have an option to acquire any hotels developed by our officers and trustees.

RISKS RELATED TO OUR STRUCTURE

There are no assurances of our ability to make distributions in the future.

We generally intend to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. However, our ability to pay dividends has been, and may continue to be, adversely affected by the risk factors described herein and in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed by us with the SEC. All distributions will be made at the discretion of our Board of Trustees and will depend upon our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Trustees may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.

Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.

Our Board of Trustees has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of September 30, 2020, 3,000,000 Series C Preferred Shares, 7,701,700 Series D Preferred Shares and 4,001,514 Series E Preferred Shares were issued and outstanding. Holders of our outstanding preferred shares are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of our preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of our preferred shares have the right to elect two additional trustees to our Board of Trustees whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive. As of September 30, 2020, we are currently in arrears on the payment of preferred share dividends for the first, second, and third quarters of 2020.


Our Board of Trustees may authorize the issuance of additional shares that may cause dilution or prevent a transaction that is in the best interests of our shareholders.

Our Declaration of Trust authorizes the Board of Trustees, without shareholder approval, to:
amend the Declaration of Trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class or series that we have the authority to issue;

cause us to issue additional authorized but unissued common shares or preferred shares; or

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classify or reclassify any unissued common or preferred shares and to set the preferences, rights and other terms of such classified or reclassified shares, including the issuance of additional common shares or preferred shares that have preference rights over the common shares with respect to dividends, liquidation, voting and other matters.

Any one of these events could cause dilution to our common shareholders, delay, deter or prevent a transaction or a change in control that might involve a premium price for the common shares or otherwise not be viewed in the best interest of holders of common shares.

Our Declaration of Trust contains a provision that creates staggered terms for our Board of Trustees.

Our Board of Trustees is divided into two classes, the terms of which expire every two years. Trustees of each class are elected for two-year terms upon the expiration of their current terms and each year one class of trustees will be elected by the shareholders. The staggered terms of trustees may delay, deter or prevent a tender offer, a change in control of us or other transaction, even though such a transaction might be viewed in the best interest of the shareholders.

Certain provisions of Maryland law may discourage a third party from acquiring us.

Under the Maryland General Corporation Law, as amended (MGCL), as applicable to REITs, certain “business combinations” (including certain issuances of equity securities) between a Maryland REIT and any person who beneficially owns ten percent or more of the voting power of the trust’s shares, or an affiliate thereof, are prohibited for five years after the most recent date on which such shareholder acquired at least ten percent of the voting power of the trust’s shares. Thereafter, any such business combination must be approved by two super-majority shareholder votes unless, among other conditions, the trust’s common shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its common shares. These provisions could delay, deter or prevent a change of control or other transaction in which holders of our equity securities might receive a premium for their shares above then-current market prices or which such shareholders otherwise might believe to be in their best interests. Although our bylaws contain a provision exempting acquisitions of our shares from the control share acquisition legislation referenced above, there can be no assurance that this provision will not be amended or eliminated at any time in the future.

Our Board of Trustees and management make decisions on our behalf, and shareholders have limited policymaking and management rights.

Our major policies, including our policies with respect to acquisitions, financing, growth, operations, debt limitation and distributions, are determined by our Board of Trustees. The Trustees may amend or revise these and other policies from time to time without a vote of the holders of the common shares.

Under Maryland law, generally, a trustee’s actions will be upheld if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinary prudent person in a like position would use under similar circumstances. Our shareholders have no right or power to take part in our management except through the exercise of voting rights on certain specified matters. The Board of Trustees is responsible for our management and strategic business direction, and our management is responsible for our day-to-day operations. Certain policies of our Board of Trustees may not be consistent with the short-term best interests of our shareholders.



RISKS RELATED TO OUR TAX STATUS

If we fail to maintain our qualification as a REIT, our dividends will not be deductible to us, and our income will be subject to taxation, which would reduce the cash available for distribution to our shareholders.

We have operated and intend to continue to operate so as to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing REITs are limited. Our continued qualification as a REIT will depend on our continuing ability to meet various requirements concerning, among other things, the ownership of our outstanding shares of beneficial interest, the nature of our assets, the sources of our income, and the amount of our distributions to our shareholders. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or
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impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year and did not qualify for certain statutory relief provisions, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax on our taxable income at regular corporate rates. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of, and trading prices for, our shares. Unless entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, amounts available for distribution to shareholders would be reduced for each of the years involved. Although we currently intend to continue to operate in a manner so as to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Trustees, with the consent of holders of two-thirds of the outstanding shares, to revoke our REIT election.

To maintain our qualification as a REIT and avoid corporate income tax and excise tax, we must distribute annually a certain percentage of our REIT taxable income, which could require us to raise capital on terms or sell properties at prices or at times that are unfavorable.

In order to maintain our qualification as a REIT, each year we must distribute to our shareholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our actual distributions in any year are less than the sum of:
85% of our REIT ordinary income for that year;

95% of our REIT capital gain net income for that year; and

100% of our undistributed taxable income required to be distributed from prior years.

We have distributed, and intend to continue to distribute, our taxable income to our shareholders in a manner intended to satisfy the 90% distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow or raise capital on terms we regard as unfavorable, or sell assets at prices or at times we regard as unfavorable to distribute out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in a particular year. In the past we have borrowed, and in the future we may borrow, to pay distributions to our shareholders and the limited partners of our operating partnership. Such borrowings subject us to risks from borrowing as described herein. Additionally, we may, if necessary and allowable, pay taxable dividends of our shares or debt securities to meet the distribution requirements.

If the leases of our hotels to our TRSs are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.

To maintain our qualification as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our operating partnership by our TRSs pursuant to the lease of our hotels constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
Our ownership of our TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm's-length terms.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from hotel operations pursuant to hotel management contracts. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation, and in certain circumstances, other limitations on the deductibility of interest may apply. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.
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Our TRSs are subject to applicable federal, foreign, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us. We believe that the aggregate value of the stock and securities of our TRSs is and will continue to be less than 20% of the value of our total assets (including our TRS stock and securities). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition, we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm's-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.

If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We lease our hotels to our TRSs. A TRS will not be treated as a “related party tenant,” and will not be treated as directly operating a lodging facility, which is prohibited, to the extent the TRS leases properties from us that are managed by an “eligible independent contractor.”

We believe that the rent paid by our TRSs is qualifying income for purposes of the REIT gross income tests and that our TRSs qualify to be treated as taxable REIT subsidiaries for federal income tax purposes, but there can be no assurance that the Internal Revenue Service, or the IRS, will not challenge this treatment or that a court would not sustain such a challenge. If the IRS successfully challenged this treatment, we would likely fail to satisfy the asset tests applicable to REITs and substantially all of our income would fail to qualify for the gross income tests. If we failed to satisfy either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless certain relief provisions applied.

If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT. Each of the hotel management companies that enters into a management contract with our TRSs must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRSs to be qualifying income for our REIT income test requirements. Among other requirements, in order to qualify as an eligible independent contractor a manager must not own more than 35% of our outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the manager, taking into account only owners of more than 5% of our shares and, with respect to ownership interests in such managers that are publicly traded, only holders of more than 5% of such ownership interests. Complex ownership attribution rules apply for purposes of these 35% thresholds. Although we intend to continue to monitor ownership of our shares by our hotel managers and their owners, there can be no assurance that these ownership levels will not be exceeded.

Complying with REIT requirements may force us to sell otherwise attractive investments.

To maintain our qualification as a REIT, we must satisfy certain requirements with respect to the character of our assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter (by, possibly, selling assets notwithstanding their prospects as an investment) to avoid losing our REIT status. If we fail to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, we may be able to preserve our REIT status if (a) the failure was due to reasonable cause and not to willful neglect, (b) we dispose of the assets causing the failure within six months after the last day of the quarter in which we identified the failure, (c) we file a schedule with the IRS, describing each asset that caused the failure, and (d) we pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets. As a result, we may be required to liquidate otherwise attractive investments.
The prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets that would be treated as sales for federal income tax purposes.

A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.

We may pay taxable dividends partly in shares and partly in cash, in which case shareholders may sell our shares to pay tax on such dividends, placing downward pressure on the market price of our shares.
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We may make taxable dividends that are payable partly in cash and partly in shares. Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, as long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the share distribution as a dividend (to the extent applicable rules treat such distribution as being made out of our earnings and profits). If in the future we choose to pay dividends in our own shares, our shareholders may be required to pay tax in excess of the cash that they receive. If a U.S. shareholder sells the shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in shares. If we pay dividends in our own shares and a significant number of our shareholders sell our shares in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our shares.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum U.S. federal income tax rate applicable to qualified dividend income payable to certain non-corporate U.S. holders is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced qualified dividend rates. For taxable years beginning before January 1, 2026, non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to qualified dividend income does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends and the reduced corporate tax rate (currently 21%) could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our shares.

Our share ownership limitation may prevent certain transfers of our shares.

In order to maintain our qualification as a REIT, not more than 50% in value of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). Our Declaration of Trust prohibits direct or indirect ownership (taking into account applicable ownership provisions of the Code) of more than (a) 9.9% of the aggregate number of outstanding common shares of any class or series or (b) 9.9% of the aggregate number of outstanding preferred shares of any class or series of outstanding preferred shares by any shareholder or group, or the Ownership Limitation. Generally, the shares of beneficial interest owned by related owners will be aggregated for purposes of the Ownership Limitation. The Board of Trustees, upon receipt of advice of counsel or other evidence satisfactory to the Board of Trustees, in its sole and absolute discretion, may exempt a shareholder from the Ownership Limitation. The Ownership Limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of shares might receive a premium for their shares over the then prevailing market price or which such holders might believe to be otherwise in their best interests. Any transfer of shares of beneficial interest that would violate the Ownership Limitation, cause us to have fewer than 100 shareholders, cause us to be “closely held” within the meaning of Section 856(h) of the Code or cause us to own, directly or indirectly, 10% or more of the ownership interest in any tenant (other than a TRS) will be void, the intended transferee of such shares will be deemed never to have had an interest in such shares, and such shares will be designated “shares-in-trust.” Further, we will be deemed to have been offered shares-in-trust for purchase at the lesser of the market price (as defined in the Declaration of Trust) on the date we accept the offer and the price per share in the transaction that created such shares-in-trust (or, in the case of a gift, devise or non-transfer event (as defined in the Declaration of Trust), the market price on the date of such gift, devise or non-transfer event). Therefore, the holder of shares of beneficial interest in excess of the Ownership Limitation will experience a financial loss when such shares are purchased by us, if the market price falls between the date of purchase and the date of redemption.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our shares.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. Additional changes to the tax laws are likely to continue to occur. We cannot predict the long-term effect of any recent changes or any future law changes on REITs and their shareholders. We and our shareholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

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GENERAL RISK FACTORS

An increase in market interest rates may have an adverse effect on the market price of our securities.

One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to shareholders, and not from the market value or underlying appraised value of the properties or investments themselves. The market price of our preferred shares is based in large part on prevailing interest rates. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares and preferred shares. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common shares could decrease because potential investors may require a higher dividend yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

Future offerings of equity securities, which would dilute our existing shareholders and may be senior to our common shares for the purposes of dividend distributions, may adversely affect the market price of our common shares.

In the future, we may attempt to increase our capital resources by making additional offerings of equity securities, including classes of preferred or common shares. Upon liquidation, holders of our preferred shares and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Our preferred shares could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common shares and diluting their share holdings in us.

The market price of our securities has been, and may continue to be, volatile and has declined, and may continue to decline, which may result in a substantial or complete loss of your investment in our securities.

The stock markets have previously and recently experienced significant price and volume fluctuations. As a result, the market price of our securities has been and could be similarly volatile in the future, and investors in our securities may experience a decrease in the value of their investments, including decreases unrelated to our operating performance or prospects. The market price of our securities could be subject to wide fluctuations in response to a number of factors, including:
our operating performance and the performance of other similar companies;

actual or anticipated differences in our operating results;

changes in our revenues or earnings estimates or recommendations by securities analysts; publication of research reports about us or our industry by securities analysts;

additions and departures of key personnel;

strategic decisions by us or our competitors, such as mergers and acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;

the passage of legislation or other regulatory developments or executive policies that adversely affect us or our industry;

speculation in the press or investment community; actions by institutional shareholders;

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changes in accounting principles;

terrorist acts;

general market conditions, including factors unrelated to our performance; and
pandemics and epidemics, such as the COVID-19 pandemic, and the related governmental and economic responses thereto.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.

Future sales of our common shares, preferred shares, or securities convertible into or exchangeable or exercisable for our common shares could depress the market price of our common shares.

We cannot predict whether future sales of our common shares, preferred shares, or securities convertible into or exchangeable or exercisable for our common shares or the availability of these securities for resale in the open market will decrease the market price of our common shares. Sales of a substantial number of these securities in the public market, including sales upon the redemption of Common Units held by the limited partners of our operating partnership, (other than us and our subsidiaries) or the perception that these sales might occur, may cause the market price of our common shares to decline and you could lose all or a portion of your investment.

Future issuances of our common shares, preferred shares, or other securities convertible into or exchangeable or exercisable for our common shares, including, without limitation, common units of beneficial interest in our Operating Partnership (“Common Units”), in connection with property, portfolio or business acquisitions and issuances of equity-based awards to participants in our equity incentive plans, could have an adverse effect on the market price of our common shares. Future issuances of these securities also could adversely affect the terms upon which we obtain additional capital through the sale of equity securities. In addition, future sales or issuances of our common shares may be dilutive to existing shareholders.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

As a result of the turmoil in the financial markets resulting from the spread of the novel coronavirus and the global COVID-19 pandemic, on March 19, 2020, in order to preserve liquidity, we revoked our previously announced first quarter 2020 quarterly cash dividends on our common shares, 6.875% Series C Cumulative Redeemable Preferred Shares, 6.50% Series D Cumulative Redeemable Preferred Shares and 6.50% Series E Cumulative Redeemable Preferred Shares. The payment by us of dividends, with limited exceptions, has been prohibited under the terms of the amendments to the Credit Agreements entered into on April 2, 2020. Unpaid dividends on our Series B and Series C Preferred Stock accumulate without interest. Unpaid dividends on our preferred shares shall accrue without interest. No cash dividends may be paid on our common shares unless all accrued but unpaid dividends on our preferred shares have been (or contemporaneously are) declared and paid, or declared and a sum sufficient for such payment has been set apart for payment for all past dividend periods. As of the date of this report, the total arrearage of unpaid cash dividends due on each of our 6.875% Series C Cumulative Redeemable Preferred Shares, 6.50% Series D Cumulative Redeemable Preferred Shares and 6.50% Series E Cumulative Redeemable Preferred Shares is $3,867,300, $9,386,448 and $4,876,845, respectively.

Item 4. Mine Safety Disclosures.
 
Not Applicable.



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Item 5. Other Information.

None.

Item 6. Exhibits.
  
Exhibit No.  
10.1 
31.1  
31.2  
32.1  
32.2  
101.INS The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document*
 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Filed herewith
+Compensatory plan or arrangement

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 HERSHA HOSPITALITY TRUST
   
November 9, 2020/s/ Ashish R. Parikh 
 Ashish R. Parikh 
 
Chief Financial Officer
(Principal Financial Officer)
 
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