Cautionary Statement Regarding Forward Looking Statements

All statements contained in this section that are not historical facts are based on current expectations. Words such as "believes", "expects", "anticipate", "intends", "plans" and "estimates" and variations of such words and similar words also identify forward-looking statements. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.

General

As of March 31, 2009, we owned interests in 76 hotels, located primarily in the eastern United States, including interests in 18 hotels owned through joint ventures. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a taxable REIT subsidiary ("TRS"), provided that the TRS engages an eligible independent contractor to manage the hotels. As of March 31, 2009 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.

Outlook

During the three months ended March 31, 2009, the U.S. economy has been influenced by financial market turmoil, growing unemployment and declining consumer sentiment. The recessionary environment in 2009 has and will continue to negatively impact overall lodging demand and our results of operations and financial condition. For the three months ended March 31, 2009, we have seen decreases in Average Daily Rate ("ADR"), occupancy, and Revenue Per Available Room ("RevPAR") due to these economic factors as compared to the three months ended March 31, 2008.

The turmoil in the financial markets has caused credit to significantly tighten making it more difficult for hotel developers to obtain financing for development projects or for hotels with limited operating history. This could have a negative impact on the collectability of our portfolio of development loans receivable. We monitor this portfolio to determine the collectability of the loan principal and interest accrued. We will continue to monitor this portfolio on an on-going basis.

In addition, the tightening credit markets have made it more difficult to finance the acquisition of new hotel properties or refinance existing hotel properties that do not have a history of profitable operations. We monitor the maturity dates of our debt obligations and take steps in advance of the debt becoming due to extend or refinance the obligations. Please refer to "Item 3.
Quantitative and Qualitative Disclosures About Market Risk" for a discussion of our debt maturities.

We believe that consumer and commercial spending and lodging demand will continue to decline in 2009. We do not anticipate an improvement in lodging demand until the current economic trends reverse course, particularly the expected continued weakness in the overall economy and the lack of liquidity in the credit markets. The general economic trends discussed above make it difficult to predict our future operating results; however, there can be no assurances that we will not experience further declines in hotel revenues, occupancy, ADR or RevPAR at our properties or experience defaults under our development loans for any number of reasons, including, but not limited to, greater than anticipated weakness in the economy, changes in travel patterns, the continued impact of the trends identified above and the limited availability of permanent financing to refinance or repay existing development loans, as well as other factors identified under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and other documents that we may file with the SEC in the future.

The following table outlines operating results for the Company's portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the three months ended March 31, 2009 and 2008:

 CONSOLIDATED HOTELS:
                                         Three Months Ended March 31,
                                            2009                2008          % Variance

 Rooms Available                               620,640           574,938              7.9 %
 Rooms Occupied                                357,107           377,613             -5.4 %
 Occupancy                                       57.54 %           65.68 %           -8.1 %
 Average Daily Rate (ADR)              $        119.00      $     130.12             -8.5 %
 Revenue Per Available Room (RevPAR)   $         68.47      $      85.46            -19.9 %

 Room Revenues                         $    42,495,757      $ 49,134,472            -13.5 %
 Hotel Operating Revenues              $    45,068,708      $ 51,918,818            -13.2 %

The following table outlines operating results for the three months ended March 31, 2009 and 2008, for hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and other noncontrolling interest holders.

 UNCONSOLIDATED JOINT VENTURES:
                                         Three Months Ended March 31,
                                            2009                2008          % Variance

 Rooms Available                               237,060           239,694             -1.1 %
 Rooms Occupied                                134,998           162,847            -17.1 %
 Occupancy                                       56.95 %           67.94 %          -11.0 %
 Average Daily Rate (ADR)              $        126.97      $     138.07             -8.0 %
 Revenue Per Available Room (RevPAR)   $         72.31      $      93.80            -22.9 %

 Room Revenues                         $    17,140,973      $ 22,484,201            -23.8 %
 Total Revenues                        $    22,453,662      $ 29,807,446            -24.7 %

RevPAR for the three months ended March 31, 2009 decreased 19.9% for our consolidated hotels and decreased 22.9% for our unconsolidated hotels when compared to the same period in 2008. This decrease in RevPAR has been caused by decreases in both occupancy and ADR and is primarily due to deteriorating economic conditions in 2009, as discussed above.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2009 TO MARCH 31, 2008
(dollars in thousands, except per room and per share data)

Revenue

Our total revenues for three months ended March 31, 2009 consisted of hotel operating revenues, interest income from our development loan program, land lease revenue, and other revenue. Hotel operating revenues are recorded for wholly owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating revenues decreased $6,850, or 13.2%, from $51,919 for the three months ended March 31, 2008 to $45,069 for the same period in 2009. This decrease was primarily the result of a decrease in our occupancy rate from 65.7% during the three months ended March 31, 2008 to 57.5% for the same period in 2009. In addition, ADR decreased 8.5% from $130.12 per room for the three months ended March 31, 2008 to $119.00 per room during the same period in 2009. The decrease was only partially offset by increases in revenue attributed to the acquisitions consummated in 2008.

We acquired interests in the following five consolidated hotels since March 31, 2008:

            Brand                   Location           Acquisition Date   Rooms

     TownePlace Suites      Harrisburg, PA                     5/8/2008      107
     Sheraton Hotel         JFK Airport, Jamaica, NY          6/13/2008      150
     Holiday Inn Express    Camp Springs, MD                  6/26/2008      127
     nu Hotel               Brooklyn, NY                      7/7/2008*       93
     Hampton Inn & Suites   Smithfield, RI                     8/1/2008      101

*The property was purchased on 1/14/2008, but did not open for business until 7/7/2008.

We invest in hotel development projects by providing secured first mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Interest income is earned on our development loans at rates ranging between 10.0% and 20.0%. Interest income from development loans receivable was $2,397 for the three months ended March 31, 2009 compared to $2,020 for the same period in 2008. The average balance of development loans receivable outstanding in 2009 was higher than the average balance outstanding in 2008. This resulted in a $377, or 18.7%, increase in interest income.

We continue to monitor our development loan portfolio for indications of impairment considering the current economic environment, the borrowers access to other sources of financing to complete their hotel development projects, and the borrowers ability to repay amounts owed to us through the operation or eventual sale of the properties being financed by our loans receivable. Based on our reviews of each of the development loans receivable, we have concluded, as of March 31, 2009, that no impairment exists, as we believe that all amounts due under each loan will be fully realized.

We own parcels of land which are being leased to hotel developers, some of which are owned in part by certain executives and affiliated trustees of the Company.
Our net investment in these parcels is approximately $23,366. Each land parcel is leased at a minimum rental rate of 10% of our net investment in the land. Additional rents are paid by the lessee for the principal and interest on the mortgage, real estate taxes and insurance. During the three months ended March 31, 2009, we recorded $1,321 in land lease revenue from these parcels. We incurred $724 in expense related to these land leases resulting in a contribution of $597 to our operating income during the three months ended March 31, 2009. These leases contributed $585 to our operating income during the three months ended March 31, 2008.

Other revenue consists primarily of fees earned for asset management services provided to properties owned by certain of our unconsolidated joint ventures.
These fees are earned as a percentage of the revenues of the unconsolidated joint ventures' hotels. Other revenues decreased $36, from $252 for the three months ended March 31, 2008 to $216 during the three months ended March 31, 2009. The decrease in other revenue was driven primarily by decreases in asset management fees as a result of declining revenues at the hotels owned by certain of our unconsolidated joint ventures.

Expenses

Total hotel operating expenses decreased 5.8% to approximately $30,538 for the three months ended March 31, 2009 from $32,432 for the three months ended March 31, 2008. As a result of declining hotel operating revenues, our hotel operators implemented cost reduction and cost containment initiatives to reduce hotel operating expenses. Decreases in our hotel operating expenses resulting from lower occupancies and our operators cost reduction initiatives were partially offset by increases in hotel operating expenses due to the acquisitions consummated since March 31, 2008, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization from $9,466 for the three months ended March 31, 2008 to $10,938 for the three months ended March 31, 2009. Similarly, real estate and personal property tax and property insurance increased $186, or 5.88%, in the three months ended March 31, 2009 when compared to the same period in 2008. General and administrative expense for the three months ended March 31, 2009 remained consistent when compared to the same period in 2008.

Unconsolidated Joint Venture Investments

Loss from unconsolidated joint venture investments for the three months ended March 31, 2009 was approximately $1,329 compared to a loss of $738 for the same period in 2008. The increase in loss from unconsolidated joint venture investments was the result of deteriorating revenues in the hotels owned by our unconsolidated joint ventures. The operating factors impacting the results of our hotels owned by our unconsolidated joint ventures are consistent with those described above in our discussion of our consolidated hotel, and include declining ADR, occupancy and RevPAR.

Net Loss

Net loss applicable to common shareholders for three months ended March 31, 2009 was $9,830 compared to net loss applicable to common shareholders of $4,079 for the same period in 2008.

Operating income for the three months ended March 31, 2009 was $1,255 compared to operating income of $7,615 during the same period in 2008. The $6,360, or 83.5%, decrease in operating income was primarily the result of declining hotel operating revenues which were only partially offset by decreases in hotel operating expenses.

Interest expense, decreased $88 from $10,707 for the three months ended March 31, 2008 to $10,619 for the three months ended March 31, 2009. The decrease in interest expense is due primarily to declines in rates on our variable rate borrowings and our interest rate hedge strategy that has taken advantage of declines in LIBOR by locking in favorable fixed rates by entering into interest rate swaps.

LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)

Debt and Equity Offerings

The current recession and related financial crisis has resulted in deleveraging attempts throughout the global financial system. As banks and other financial intermediaries reduce their leverage and incur losses on their existing portfolio of loans, the ability to originate or refinance existing loans has become very restrictive for all borrowers, regardless of balance sheet strength.
As a result, it is a very difficult borrowing environment, even for those borrowers that have strong balance sheets. While we maintain a portfolio of what we believe to be high quality assets and we believe our leverage to be at acceptable levels, the market for new debt origination and refinancing of existing debt remains very challenging and there is little visibility on the length of debt terms, the loan to value parameters and loan pricing on new debt originations.

We have a debt policy that limits our indebtedness at the time of acquisition to less than 67% of the fair market value for the hotels in which we have invested. However, our organizational documents do not limit the amount of indebtedness that we may incur and our Board of Trustees may modify our debt policy at any time without shareholder approval. We intend to repay indebtedness incurred under the line of credit from time to time, for acquisitions or otherwise, out of cash flow and from the proceeds of issuances of additional common shares and other securities.

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.

At present, we only project the need for additional capital to refinance or repay an aggregate of $32,328 of debt that is maturing on or prior to December 31, 2009. This assumes that we exercise an extension option with respect to a mortgage loan that has an outstanding principal balance of $12,100 and would otherwise come due in August of 2009. If exercised, this mortgage loan comes due in August of 2011. We are currently working with the existing lenders to refinance all of the debt that is maturing in 2009 and expect that we will be able to refinance this debt on terms that are substantially similar to the existing loan terms of this debt. However, no assurances can be given that we will be successful in refinancing all or a portion of this debt due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms. We currently expect that cash requirements for all debt coming due on or before December 31, 2009 that is not refinanced by our existing lenders will be met through a combination of refinancing the existing debt with new lenders and draws on the remaining capacity on our existing credit facility. In addition, we believe there may be an opportunity to leverage some of our existing unencumbered assets as a possible additional source of funds.

Development Loans Receivable

This borrowing environment has made it difficult for our development loan borrowers to obtain or renew construction financing to complete certain hotel development projects for which we have provided development loan financing. As of March 31, 2009 we have $83,500 in development loan principal receivable and $4,366 in accrued interest receivable on these loans. Most of our development loans have options to extend the maturity of the loan for periods up to three years from the original maturity date of the loan. We expect certain development loan borrowers to take advantage of these extension options. In addition, we may modify the contractual terms of development loans to allow borrowers the option to add accrued interest to the loan principal in lieu of making current interest payments. We do not expect the payments of principal or accrued interest on the development loans to be a significant source of liquidity over the next twelve to eighteen months.

Acquisitions

Each of our development loans provides us with a right of first offer on hotels constructed through the development loan program. We expect to convert the principal and interest due to us on certain development loans into equity interests in the hotels developed allowing us to acquire new hotel properties without a significant outlay of cash. 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 on and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common shares, issuances of Common Units or other securities or borrowings.

Operating Liquidity and Capital Expenditures

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our line of credit. Due to seasonality in our hotel portfolio, the first quarter is typically our weakest quarter with respect to generating cash from operations. We believe that the net cash provided by operations in the second, third and fourth quarter of this year will be adequate to fund the Company's operating requirements, debt service and the payment of dividends in accordance with REIT requirements of the federal income tax laws. Subsequent to the end of the first quarter of 2009, the Company reduced its second quarter dividend by approximately 72% in order to preserve cash. This action is anticipated to strengthen our liquidity.

Owning hotels is a capital intensive enterprise. Hotels are expensive to acquire or build and require regular significant capital expenditures to satisfy guest expectations. However, even with the current depressed cash flows, we project that our operating cash flow will be sufficient to pay for almost all of our liquidity and other capital needs over the next twelve to eighteen months.

We make available to the TRS of our hotels 4% (6% for full service properties) of gross revenues per quarter, on a cumulative basis, for periodic replacement or refurbishment of furniture, fixtures and equipment at each of our hotels. We believe that a 4% (6% for full service hotels) reserve is a prudent estimate for future capital expenditure requirements. Our operators have implemented a policy of limiting capital expenditures in the current year to only those projects that impact safety of our guests or preserve the value of our assets. As such we have reduce amounts spent on capital improvements during the three months ended March 31, 2009 when compared to the same period in 2008 and we expect to continue this trend over the next twelve months. While we have reduced the amounts we are spending on capital expenditures, we may be required to comply with the reasonable requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be in our best interests.

Cash Flow Analysis

Net cash used in operating activities for the three months ended March 31, 2009 was $398 and compared to cash provided by operating activities of $3,672 for the same period in 2008. Primarily as a result of declining ADR and occupancy at our wholly owned hotel properties, income before depreciation and amortization decreased $5,297 during the three months ended March 31, 2009 when compared to the same period in 2008. In addition, the decrease in cash from operating activities was also the result of an increase in other assets and a decrease in accounts payable and accrued expenses.

Net cash used in investing activities for the year ended December 31, 2008 decreased $45,434, from $50,185 in the three months ended March 31, 2008 compared to $4,751 for the three months ended March 31, 2009. During the three months ended March 31, 2008, we acquired two properties for a total purchase price of $41,218 including the issuance of units in our operating partnership valued at $6,862 resulting in net cash paid for acquisitions of $34,356 plus $104 paid for the operating assets of the hotel. We did not acquire any hotel properties during the same period in 2008. We decreased our capital expenditures from $3,828 during the three months ended March 31, 2008 to $1,998 during the same period in 2009. This decrease was the result of our initiatives to defer all non-essential capital expenditures. In addition, cash used to invest in development loans receivable was $12,700 for the three months ended March 31, 2008 compared to $2,000 for the same period in 2009.

Net cash provided by financing activities for the three months ended March 31, 2009 was $4,222 compared to $46,794 during the same period in 2008. Proceeds from our credit facility and mortgages and notes payable, net of repayments, were $15,689 during the three months ended March 31, 2009 compared to net proceeds of $56,772 during the same period in 2008. The decrease in these borrowings is a result of a decrease in our acquisition activity. The decrease in cash provided by financing activities was partially offset by an increase in dividends paid on common shares and our Common Units. Dividends paid on common shares and distributions on our Common Units increased $1,551 during the three months ended March 31, 2009 compared to the same period in 2008.

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.

Funds From Operations

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 April 2002 National Policy Bulletin 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 extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. 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 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.

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 Hersha'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.

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 Ended
                                                                March 31, 2009       March 31, 2008
. . .