Item 1.
Business
OVERVIEW
Hersha Hospitality Trust is a self-advised Maryland real estate investment trust that was organized in 1998 and completed its initial public offering in January of 1999. Our common shares are traded on the American Stock Exchange under the symbol “HT”. We focus primarily on owning and operating high quality, mid-scale limited service hotels in established markets in the Eastern United States. Our primary strategy is to continue to acquire high quality, mid-scale hotels in metropolitan markets with high barriers to entry in the Northeastern United States. As of December 31, 2004, our portfolio consisted of 25 wholly owned limited and full service properties and joint venture investments in 4 hotels with a total of [2,981] rooms located in Pennsylvania, New York, New Jersey, Maryland, Georgia, Connecticut, and Massachusetts which operate under leading brands, such as Hampton Inn®, Hilton Garden Inn®, Holiday Inn®, Holiday Inn Express®, DoubleTree®, Comfort Inn®, Comfort Suites®, Mainstay Suites®, Sleep Inn®, Four Points by Sheraton®, and Residence Inn®.
We are structured as an umbrella partnership REIT, or UPREIT, and we own our hotels through our operating partnership, Hersha Hospitality Limited Partnership, for which we serve as general partner. All of our hotels are managed by Hersha Hospitality Management, L.P., or HHMLP, a private management company owned by certain of our trustees, officers and other third party investors. In response to tax law changes, we recently formed a wholly-owned taxable REIT subsidiary, or TRS, to which we lease all of our wholly-owned hotels as of December 31, 2004. In addition, all of the hotels we own through joint ventures are leased to TRSs owned by the respective venture. We believe that transitioning to this TRS structure positions us to participate more directly in the operating efficiencies and revenue gains at our hotels.
Our address is 148 Sheraton Drive, Box A, New Cumberland, Pennsylvania 17070. Our telephone number is (717) 770-2405.
As of December 31, 2004, we owned interests in the following 29 hotels:
(1) - Denotes properties owned in a joint venture.
Since our initial public offering in 1999, we have acquired, wholly or through joint ventures, a total of 28 hotels, including 15 hotels acquired from entities controlled by our officers or trustees. Of the 15 acquisitions from these entities, 14 were newly-constructed or newly-renovated by these entities prior to our acquisition. Since we do not develop properties, we take advantage of our relationships with these development entities to identify development and renovation projects that may be attractive to us. While these entities bear all the construction risks of development, we often provide secured development loans and bear economic risks through these development loans. In many instances, we maintain a first right of refusal or first right of offer to purchase the hotel for which we have provided development loan financing. We intend to continue to acquire hotels from these entities if approved by our independent trustees.
In addition to the direct acquisition of hotels, we may make investments in hotels through joint ventures with strategic partners or through equity contributions, sales and leasebacks, or secured loans. We seek to identify acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through our extensive due diligence process, we select those acquisition targets where we believe selective capital improvements and intensive management will increase the hotel’s ability to attract key demand segments, enhance hotel operations and increase long-term value.
Recent Acquisitions
Since December, 31, 2003, we have acquired interests in the following hotels:
·
Holiday Inn Express, Hartford, Connecticut. On January 14, 2004, we acquired the 96 room Holiday Inn Express, Hartford, Connecticut for approximately $4.0 million, including approximately $0.5 million of indebtedness secured by the property, and assumed the ground lease for the underlying property.
·
Four Points by Sheraton, Boston/Logan International Airport. On February 23, 2004, we acquired a 55% joint venture interest in the 180 room Four Points by Sheraton Boston/Logan International Airport for approximately $3.0 million. The Four Points Sheraton Boston/Logan International Airport was substantially rebuilt in 2001 and is located in Revere, Massachusetts, within five miles of Boston Logan Airport and downtown Boston.
·
Residence Inn, Framingham, Massachusetts. On March 26, 2004, we acquired the 125 room Residence Inn, Framingham, Massachusetts for approximately $15.6 million.
·
Comfort Inn, Frederick, Maryland. On May 27, 2004 we acquired the 73 room Comfort Inn, Frederick, Maryland for approximately $5.35 million, including approximately $3.7 million in indebtedness secured by the property.
·
Courtyard by Marriott, Ewing-Hopewell , New Jersey. On July 1, 2004, we acquired a 50% joint venture interest in the 130 room Courtyard by Marriott, Ewing-Hopewell, New Jersey for approximately $1.0 million.
·
Residence Inn, Greenbelt, Maryland. On July 16, 2004, we acquired the 120 suite Residence Inn, Greenbelt, Maryland for approximately $19.35 million.
·
Hilton Garden Inn, Gettysburg, Pennsylvania. On July 23, 2004, we acquired the 88 room Hilton Garden Inn, Gettysburg, Pennsylvania for approximately $7.65 million, including approximately $5.45 million of indebtedness secured by the property.
·
Fairfield Inn, Laurel, Maryland. On February 1, 2005, we acquired the 109 room Fairfield Inn, Laurel, Maryland, for approximately $7.25 million.
All of these hotels have been leased to a TRS and are managed by Hersha Hospitality Management, L.P., a Hersha-affiliated, regional hotel management company.
Joint Ventures
We maintain ownership stakes in four assets with unrelated parties whereby we have acquired an interest in a hotel asset within a joint venture structure.
The Hampton Inn, (Manhattan) Chelsea, NY, is owned in a joint venture with CNL Hospitality Partners, L.P., and is leased to Hersha/CNL TRS Inc., a TRS wholly-owned by that joint venture. The Hilton Garden Inn, Glastonbury, CT is owned in a joint venture with Joseph Pacitti and PRA Glastonbury Management and is leased to Hersha PRA TRS, Inc., a TRS wholly-owned by that joint venture. The Four Points by Sheraton, Revere, MA, is owned in a joint venture with Logan Hospitality Associates, LLC and is leased to Revere Hotel Group, LLC, a TRS owned by that joint venture and the Courtyard by Marriot in Ewing, NJ, is owned in a joint venture with Inn America, LLC and is leased to Hersha Inn America TRS Inc., a TRS owned by that joint venture. We have consolidated the operations of the joint venture that owns The Four Points by Sheraton, Revere, MA, because the Company owns a majority voting interest in the venture.
Financing
We may finance additional investments in hotels, in whole or in part, with undistributed cash, issuances of common shares, preferred stock or operating partnership units, cash received from the disposition of hotels or borrowings. Our debt policy is to limit consolidated indebtedness to less than 67% of the aggregate purchase prices paid for the hotels in which we invest. Our Board of Trustees, however, may change the debt policy without the approval of our shareholders. The aggregate purchase prices for our twenty five wholly-owned and one consolidated hotel, owned as of December 31, 2004, was approximately $205.9 million, and our indebtedness, including our line of credit, at December 31, 2004, was approximately $111.8 million, which represents approximately 54.3% of the aggregate purchase price for our hotels.
We maintain a credit line with Sovereign Bank for $35.0 million. Outstanding borrowings under the line of credit bear interest at the bank’s prime rate. The line of credit is collateralized by a first mortgage on three of our hotels. The interest rate on borrowings under the line of credit at December 31, 2004, was 5.25%. The line of credit expires August 31, 2007. We maintained an outstanding balance of approximately $1.03 million on our Line of Credit as on December 31, 2004.
Dispositions
Since our initial public offering in 1999, we have sold a total of eight hotels, including four hotels sold back to entities controlled by our officers or trustees at the same purchase price we acquired the hotels from those entities. All sales to these entities were in situations where we believed an independent buyer would demand seller financing, which we were not willing to provide. We do not intend to sell hotels to such entities in the future.
We will evaluate our hotels on a periodic basis to determine if these hotels continue to satisfy our investment criteria. We may sell hotels opportunistically based upon management’s forecast and review of the cash flow potential for the hotel and re-deploy the proceeds into debt reduction or acquisitions of hotels. We utilize several criteria to determine the long-term potential of our hotels. Hotels are identified for sale based upon management’s forecast of the strength of the hotel’s cash flows and its ability to remain accretive to our portfolio. Our decision to sell an asset is often predicated upon the size of the hotel, strength of the franchise, property condition and related costs to renovate the property, strength of market demand generators, projected supply of hotel rooms in the market, probability of increased valuation and geographic profile of the hotel. All asset sales are comprehensively reviewed by our Board of Trustees, including our independent trustees. A majority of the independent trustees must approve the terms of all asset sales.
Property Management
Our TRSs have engaged HHMLP as the property manager for all of our hotels pursuant to substantially similar management agreements. Each management agreement provides for a five year term and is 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.
For its services, HHMLP receives a base management fee, and if a hotel meets and exceeds certain thresholds, an additional incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of the gross revenues associated with that hotel for the related month. There were no incentive management fees payable in 2004. The incentive management fee, if any, for all of the hotels is due annually in arrears on the ninetieth day following the end of each fiscal year and is generally based upon the financial performance of all of the hotels under a predetermined formula.
HHMLP must from time to time make expenditures for repairs and maintenance as are necessary to keep a hotel in good operating condition. Our TRS or we may elect to, from time to time at its or our expense, make alterations, additions, or improvements (including structural changes or repairs) in or to our hotels.
Under the management agreements, our TRSs retain the right to sell, lease, transfer or otherwise dispose of our hotels. HHMLP may not transfer or assign any of its rights and obligations under a management agreement without the prior written consent of our TRS. On the other hand, our TRSs may transfer or assign their rights and obligations under a management agreement without the consent of HHMLP. However, HHMLP will have the right to terminate the management agreement after receiving notice of such transfer or assignment and could be entitled to certain termination fees.
The reason we do not operate our own hotels is that we are not permitted to do so by the REIT qualification rules. Furthermore, under the REIT qualification rules in effect prior to 2001, we were generally required to lease our hotels to a third party and as a result, we originally leased substantially all of our hotels to HHMLP. However, the REIT rules that prompted this structure were modified in 2001 and the new rules permit a REIT to lease its hotels to a taxable REIT subsidiary, or TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. Accordingly, since the time of the rule modification we have leased all of our hotels to a wholly-owned TRS which pays us qualifying rents.
Distributions
We have made twenty four consecutive quarterly distributions to the holders of our common shares since our initial public offering in January 1999 and intend to continue to make regular quarterly distributions to our shareholders.
Our Board of Trustees will determine the amount of our future distributions and its decision will depend on a number of factors, including the amount of funds from operations, our partnership’s financial condition, debt service requirements, capital expenditure requirements for our hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors as the trustees deem relevant. Our ability to make distributions will depend on the profitability and cash flow available from our hotels.
The Class A common shares enjoyed a priority period that expired on January 26, 2004. During the priority period, holders of the Class A common shares were entitled to receive, prior to any distributions either to the holders of the operating partnership units or to the holders of the Class B common shares, cumulative dividends in an amount per priority common share equal to $0.18 per quarter. After holders of the Class A common shares received the $0.18 quarterly distribution, holders of the operating partnership units and the Class B common shares were entitled to receive an amount per operating partnership unit or Class B common share equal to the distribution paid to the holders of the common shares. Thereafter, holders of Class A common shares and the holders of the operating partnership units and the Class B common shares were entitled to receive future distributions on a pro rata basis. As of January 26, 2004, no Class B common shares were outstanding. Thus, the Class A common shares had priority distribution rights only with respect to the outstanding operating partnership units. All distinctions between these two classes disappeared as of January 20, 2004. All references herein to common shares refer to the Class A common shares.
The hotel business is seasonal in nature and, therefore, revenues from the hotels in the first and fourth quarters are traditionally lower than those in the second and third quarters and profitability and cash flows may be lower in these quarters. We expect to use excess cash flow from the second and third quarters to fund distribution shortfalls in the first and fourth quarters. There are no assurances we will be able to continue to make quarterly distributions at the current rate.
Operating Practices
HHMLP utilizes a centralized accounting and data processing system, which facilitates financial statement and budget preparation, payroll management, internal auditing and other support functions for the on-site hotel management team. HHMLP provides centralized control over purchasing and project management (which can create economies of scale in purchasing) while emphasizing local discretion within specific guidelines.
We have entered into an Administrative Services Agreement with HHMLP for HHMLP to provide accounting and securities reporting services to us. The terms of the agreement provide for a fee of $10,000 per property per year (pro-rated from the time of acquisition) for each hotel added to our portfolio. HHMLP has advised us that its relationship with its employees is satisfactory.
Seasonality
Our hotels’ operations historically have been seasonal in nature, reflecting higher occupancy rates during the second and third quarters. This seasonality can be expected to cause fluctuations in our quarterly operating revenues and profitability.
The hotel business is seasonal, with hotel revenue generally greater in the second and third quarters than in the first and fourth quarters. To the extent that cash flow from operating activities is insufficient to provide all of the estimated quarterly distributions, we anticipate that we will be able to fund any such deficit from future working capital.
Competition
The upscale and mid-scale, limited service segment of the hotel business is highly competitive. Our hotels compete on the basis of location, room rates and quality, service levels, reputation, and reservation systems, among many other factors. There are many competitors in our market segments, and many of them have substantially greater marketing and financial resources than our operators or us. New hotels are always being constructed, and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash available for distribution to shareholders.
We also compete for hotel acquisitions with entities that have investment objectives similar to ours but have substantially greater financial resources or lower investment return requirements than we have. These entities generally may be able to accept higher levels of debt, or otherwise may tolerate more risk than we think is prudent for us. They may also have better relations with franchisors, sellers or lenders. This competition could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
Employees
As of December 31, 2004, we had six employees who were principally engaged in managing the affairs of the company unrelated to property management. HHMLP had approximately 1,400 employees at that date. Our and HHMLP’s relations with our respective employees are satisfactory.
Capital Improvements, Renovation and Refurbishment
We have established capital reserves for each of our hotels to maintain the hotels in a condition that complies with their respective franchise licenses among other requirements. In addition, we may upgrade the hotels in order to capitalize on opportunities to increase revenue, and as deemed necessary by our management to seek to meet competitive conditions and preserve asset quality. We will also renovate hotels when we believe the investment in renovations will provide an attractive return to us through increased revenues and profitability and is in the best interests of our shareholders. We maintain a capital expenditures policy by which replacements and renovations are monitored to determine whether they qualify as capital improvements. All items that are deemed to be repairs and maintenance costs are expensed and recorded in Hotel Operating Expenses.
Business Risks
The hotels are subject to all operating risks common to the hotel industry. These risks include, among other things, competition from other hotels, which can adversely affect occupancy and room rates; increases in operating costs due to inflation and other factors, which increases have not in recent years been, and may not necessarily in the future be, offset by increased room rates; significant dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and adverse effects of general and local economic conditions. These factors could adversely affect a profitability and cash flows of our hotels and our ability to make expected distributions to shareholders.
Environmental Risks
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 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. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner’s ability to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials (“ACMs”) into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs. In connection with the ownership of the hotels, we, our partnership or the subsidiary partnerships may be potentially liable for any such costs.
Phase I environmental site assessments were obtained on all of the hotels prior to their acquisition by us. Phase I environmental assessments were intended to identify potential environmental contamination for which the hotels may be responsible. The Phase I environmental assessments included historical reviews of the hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screening for the presence of hazardous substances, toxic substances and underground storage tanks, and the preparation and issuance of a written report. The Phase I environmental assessments did not include invasive procedures, such as soil sampling or ground water analysis.
The Phase I site assessments have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any such liability. Nevertheless, it is possible that the Phase I site assessments do not reveal environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability, or (ii) the current environmental condition of the hotels will not be affected by the condition of other properties in the vicinity of the hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us, our partnership, the subsidiary partnerships or HHMLP.
Franchise Agreements
All of our hotels operate under franchise licenses from national hotel franchisors, including Marriott International, Starwood Hotels, Intercontinental Hotel Group, Hilton Hotels Corporation and Choice Hotels International. Residence Inn and Courtyards are registered trademarks of Marriott International, Four Points by Sheraton is a registered trademark of Starwood Hotels, Holiday Inn Express and Holiday Inn are registered trademarks of Intercontinental Hotel Group; Hilton Garden Inn, Hampton Inn and Doubletree Club are registered trademarks of Hilton Hotels Corporation, and Comfort Inn, Comfort Suites, Mainstay Suites and Sleep Inn are registered trademarks of Choice Hotels International.
44 New England, our TRS, holds the franchise license for certain properties that it leases while the respective JV TRS’ hold certain franchise licenses. HHMLP holds some of the franchise licenses for some of the hotels that it manages for our TRS. We do not anticipate any difficulty in maintaining the franchise licenses for hotel properties managed by third party management companies. It is anticipated that franchise licenses for hotel properties managed by other lessees will be maintained by the respective TRS or operating entity.
We anticipate that most of the additional hotels in which we invest will be operated under franchise licenses. We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems.
The franchise licenses generally specify certain management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. The franchise licenses obligate our lessees to comply with the franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided by our lessees, display of signage, and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.
The following table sets forth certain information in connection with the franchise licenses:
Hotel
Effective
Date
Expiration
Date
Franchise
Fee(1)
Comfort Inn, Harrisburg, PA
15-May-98
15-May-18
8.85%
Comfort Inn, Frederick, MD
25-May-04
25-May-24
9.10%
Comfort Suites, Duluth, GA
19-May-00
19-May-20
8.00%
Courtyard by Marriott, Ewing, NJ (3)
02-Aug-04
05-Feb-24
7.50%
Doubletree Club, Jamaica, NY (2)
25-Apr-01
24-Apr-23
7.00%
Four Points by Sheraton, Revere, MA (3)
1-Jun-01
1-Jun-11
6.00%
Hampton Inn, Peachtree, GA
20-Apr-00
19-Apr-21
8.00%
Hampton Inn, Newnan, GA
20-Apr-00
19-Apr-21
8.00%
Hampton Inn, Selinsgrove, PA
12-Sep-96
11-Sep-16
8.00%
Hampton Inn, Carlisle, PA
16-Jun-97
15-Jun-17
8.00%
Hampton Inn, Chelsea, NY (3)
12-Jul-01
11-Jul-23
8.00%
Hampton Inn, Danville, PA
28-Mar-97
27-Mar-18
8.00%
Hampton Inn, Linden, NJ
1-Oct-03
30-Sep-23
8.00%
Hampton Inn & Suites, Hershey, PA
24-Sep-98
23-Sep-19
8.00%
Hilton Garden Inn, Edison, NJ
1-Oct-03
12-Apr-22
9.00%
Hilton Garden Inn, Glastonbury, CT (3)
16-Nov-03
23-Feb-23
9.00%
Hilton Garden Inn, Gettysburg, PA
23-Jul-04
20-May-24
9.00%
Holiday Inn Hotel and Conference Center,
Harrisburg, PA
29-Sep-95
29-Sep-05
7.50%
Holiday Inn Express, Duluth, GA
20-May-00
20-May-10
8.00%
Holiday Inn Express, Hershey, PA
30-Sep-97
30-Sep-07
8.00%
Holiday Inn Express, New Columbia, PA
3-Dec-97
3-Dec-07
8.00%
Holiday Inn Express, Long Island City, NY
28-Dec-00
28-Dec-10
8.00%
Holiday Inn Express, Hartford, CT
1-Jan-04
1-Jan-14
8.00%
Holiday Inn Express and Suites, Harrisburg, PA
22-Dec-99
22-Dec-09
8.00%
Mainstay/Sleep Inn, King of Prussia, PA
30-Nov-97
30-Nov-17
10.00%
Mainstay Suites, Frederick, MD (2)
4-Apr-00
3-Apr-20
5.50%
Residence Inn by Marriott, Greenbelt, MD
15-July-04
24-July-22
7.50%
Residence Inn by Marriott, Framingham, MA
26-Mar-04
26-Mar-29
7.50%
_______________
(1)
Percentage of room revenues payable to the franchisors.
(2)
Franchise fees are structured to increase on a yearly basis during the first five years of operations.
(3)
Hotel owned through a joint venture with third party.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 1999. As long as we qualify for taxation as a REIT, we generally will not be subject to Federal income tax on the portion of our income that is distributed to shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to Federal income and excise taxes on our undistributed income.
Although we do not intend to request a ruling from the Internal Revenue Service (the “Service”) as to our REIT status, we have obtained the opinion of our legal counsel that we qualify as a REIT, which opinion is based on certain assumptions and representations and is not binding on the Service or any court. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties.
Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, we may now own up to 100% of one or more taxable REIT subsidiaries (“TRS”). A TRS is a taxable corporation that may lease hotels under certain circumstances, provide services to us, and perform activities such as third party management, development, and other independent business activities. Overall, no more than 20% of the value of our consolidated assets may consist of securities of one or more TRSs. In addition, no more than 25% of our consolidated revenue for any year, excluding all TRS revenues, but including any dividends received from TRSs, may consist of dividends from one or more TRSs.
Under the RMA, a TRS is permitted to lease hotels from us as long as the hotels are operated on behalf of the TRS by a third party manager who satisfies the following requirements:
1.
such manager is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS;
2.
such manager does not own, directly or indirectly, more than 35% of our common shares;
3.
no more than 35% of such manager is owned, directly or indirectly, by one or more persons owning 35% or more of our common shares; and
4.
we do not directly or indirectly derive any income from such manager
The RMA limits the deductibility of interest paid or accrued by a TRS to us to assure that the TRS is subject to an appropriate level of corporate taxation. The RMA also imposes a 100% excise tax on transactions between a TRS and us or our tenants that are not on an arm’s length basis.
Earnings and profits, which will determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to compute depreciation. Of the total 2004, 2003 and 2002 distributions, 66.6%, 83.5% and 89.8%, respectively, is considered ordinary income while 33.4%, 16.5% and 10.2%, respectively, is considered a non-taxable return of capital.
Available Information
Our Internet website address is: www.hersha.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. The information of our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.
Item 2.
Item 2.
Properties
The following table sets forth certain information with respect to the hotels we owned as of December 31, 2004.
_________________________
(1)
Represents restaurant revenue, telephone revenue and other revenue.
(2)
REVPAR is determined by dividing room revenue by available rooms for the applicable period.
(3)
A portion of the land adjacent to this hotel, which is not currently used for hotel operations, is leased to an affiliate for $1 per year for 99 years.
(4)
We assumed operations of this hotel in May 2004.
(5)
We assumed operations of these hotels in July 2004.
(6)
We assumed operations of this hotel in January 2004.
(7)
We assumed operations of this hotel in March 2004.
The following table sets forth certain information with respect to the hotels we owned through joint ventures with third parties as of December 31, 2004.
_________________________
(1)
Represents restaurant revenue, telephone revenue and other revenue.
(2)
REVPAR is determined by dividing room revenue by available rooms for the applicable period.
(3)
Hotel opened in July 2004. We own 50% of the joint venture. Inn America, LLC owns 50% of joint venture.
(4)
We assumed operations of this hotel in March 2004. We own 55% of the joint venture. Logan Hospitality Associates, LLC owns 45% of joint venture.
(5)
Hotel opened in August 2003. We own 33.3% of the joint venture. CNL Hospitality Partners, L.P. owns 66.7% of joint venture.
(6)
Hotel opened in November 2003. We own 40% of the joint venture. Joseph Pacitti and PRA Glastonbury Management own 59% and 1% of the joint venture, respectively.
A summary of each hotel owned by us or one of our joint ventures follows:
Comfort Inn
Frederick, Maryland
Description. The Comfort Inn Frederick, Maryland is located just miles from historic Downtown Frederick at 7300 Executive Way, just off Route 270. This 73 room limited service hotel opened in 2004. It includes several whirlpool suites, free high speed internet, ample workspace for the business traveler, a cardiovascular fitness center and free deluxe continental breakfast.
Guest Profile and Local Competition. Approximately 32% of our business consists of corporate travelers related to the governmental sector traveling into area. The hotel's group business, which accounts for 6% of its business, is generated from corporations, local weddings, local social and sporting events. The remainder of our business is the transient traveler traveling into our area due to demand generated by the hotels proximity to Fort Detrick and Camp David. Our primary competition is the Fairfield Inn.
Harrisburg, Pennsylvania
Description. The Comfort Inn, Harrisburg, Pennsylvania is located eight miles north of Hershey, Pennsylvania at 7744 Linglestown Road off exit 27 of Interstate 81. The hotel opened in May 1998. It is an 81-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds and some Jacuzzi suites are available.
Guest Profile and Local Competition. Approximately 25% of the hotel’s business is related to commercial activity from local businesses. The hotel’s group business, which accounts for approximately 5% of its business, is generated from area institutions, local weddings and local social and sporting events. The remainder of the hotel’s business consists of transient and recreational travelers generated by its proximity to Hershey, Pennsylvania. We consider our primary competition to be the Comfort Suites and Holiday Inn in Grantville, Pennsylvania.
Comfort Suites
Duluth, Georgia
Description. The Comfort Suites, Gwinnett Place Mall is located just off Pleasant Hill Road and Interstate 85 at exit 40. Opened in June 1996, this 85-suite hotel features large spacious guest suites each equipped with a king size bed or two double beds. Amenities include a fitness center, Jacuzzi within a large sunroom, indoor pool and meeting facilities with a 60-person capacity.
Guest Profile and Local Competition. Numerous local business parks in Duluth, Norcross and Lawrenceville play a vital role in the hotel’s success. Companies such as Scientific Atlanta, Primerica Financial Services, NCR, Motorola, Hitachi, and Lucent Technologies all have major offices in the area and use this hotel frequently for room nights and meeting space. The leisure market is fueled by the Gwinnett Place Mall and many local events. We consider the hotel’s primary competitors to be the Holiday Inn Express, the Hampton Inn & Suites, the Courtyard Gwinnett Mall and the Fairfield Inn.
Courtyard by Marriott
Ewing, NJ
Description. The Courtyard by Marriott-Ewing/ Hopewell in Ewing New Jersey is moments from Trenton/ Mercer County Airport with easy access to Routes 1 and 95. The hotel opened in 2004 and features 130 spacious rooms and suites, each with complimentary wired and wireless internet access, spacious work areas and speakerphones. The hotel also features a lounge serving breakfast and dinner nightly, and a 24 hour self-serve pantry for the convenience of our guests. There is also an indoor pool with whirlpool and a state of the art fitness room.
Guest Profile and Local Competition. Approximately 70% of the hotel's weekday business is related to activity from local companies which include company headquarters for Janssen Pharmaceutical, Merrill Lynch, Bristol Myers Squibb and Educational Testing Service. The hotel's group business, which accounts for approximately 10% of its business, is generated from both corporate group and weekend weddings and sporting events. The remainder of the hotel's business consists of transient guests, visitors to area residents and demand generated during the summer months by the proximity to Sesame Place. We consider our primary competition to be the Hampton Inn & Suites in Newtown, Pennsylvania.
Doubletree
JFK International Airport, Jamaica, New York
Description. The Doubletree Club, JFK Airport, Jamaica, New York is located 16 miles from Manhattan, and is adjacent to the JFK International Airport. Opened in January 2002, this 110-room hotel features high-speed internet access in all rooms, a 24-hour business center with printers and computers, a fitness room and a full service restaurant.
Guest Profile and Local Competition. Located near JFK Airport and close to Manhattan, this hotel’s main source of room nights is business travelers and transient leisure travelers utilizing the JFK Airport. The main competitors in the area are the Ramada Plaza JFK, Hampton Inn, Courtyard by Marriott and the Radisson Hotel JFK Airport.
Four Points by Sheraton
Revere, MA
Description. The Four Points by Sheraton- Boston Logan International Airport is located just miles from Boston’s Logan Airport as well as historic downtown Boston. The hotel was completely renovated in 2001 and contains 180 guestrooms, 6,000 square feet of meeting space, as well as the Bisuteki Japanese Steakhouse. Each room offers high speed wireless internet access, a coffeemaker and ample workspace for the business traveler.
Guest Profile and Local Competition. Approximately one third of the hotels business consist of business from various airline carriers that house their crews at our hotel on a daily basis. In addition a large portion of our business is generated through locally negotiated rates and contracted corporate business as well as domestic tour and travel groups that bring students and seniors to tour the Boston area. The remainder of the business consists of social business to include: wedding blocks, reunions, and entertainment groups.
Hampton Inns
Peachtree, Georgia
Description. This Hampton Inn is located in the Atlanta community of Peachtree City. This 61-room, limited service hotel opened in 1994. A poured concrete structure, this two-story building features the traditional Hampton Inn architecture with metal rooflines and an ample porte-cochere. This hotel features an outdoor pool and has a well equipped fitness facility. The hotel has a meeting room that can accommodate 25 persons.
Guest Profile and Local Competition. Peachtree City is home to over ten Fortune 500 companies and boasts a two million square foot industrial park. Several major Japanese companies, including Panasonic, Hoshizaki, TDK and Shinsei, are located in Peachtree City. The hotel’s primary competitors are the Holiday Inn, Sleep Inn, and Days Inn located in Peachtree City.
Newnan, Georgia
Description. The Hampton Inn, Newnan is located in one of Atlanta’s fastest growing counties. This 91-room hotel sits adjacent to Interstate I-85 and features traditional Hampton Inn architecture with three floors on poured concrete. This hotel features an outdoor pool, fitness centers, and full-service meeting room.
Guest Profile and Local Competition. The primary demand generators for the Hampton Inn, Newnan include several major corporations located in the industrial park, which include Yokogawa, Johnson-Yokogawa, Yamaha, Kawasaki, Ryder, Ritchie Brothers, and Southern States Vehicle Auctions. The industrial park is slated for expansion and Coweta County’s population has grown by over 40% since 1991. Leisure demand is generated by weddings, festivals, local racetracks and a tourist base. The main competition for this hotel includes the Jameson Inn, Springhill Suites, Comfort Inn, Best Western and Holiday Inn Express.
Selinsgrove, Pennsylvania
Description. The Hampton Inn, Selinsgrove, Pennsylvania is located on Pennsylvania Routes 11 and 15. The hotel, which opened in September 1996, is a 75-room, three story, limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi suites are available and some rooms have refrigerators, coffee makers and microwaves.
Guest Profile and Local Competition. Approximately 80% of the hotel’s business is related to commercial activity from local businesses. The remainder of the hotel’s business consists of leisure travelers, transient guests and demand generated by the hotel’s proximity to area universities and Knoebels Amusement Park. We consider our primary competition to be the Best Western near Selinsgrove, Pennsylvania.
Carlisle, Pennsylvania
Description. The Hampton Inn, Carlisle, Pennsylvania is located at the intersection of Route 11 and exit 16 off the Pennsylvania Turnpike. The hotel, which opened in June 1997, is a 95-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi suites are available and some rooms have refrigerators, coffee makers and microwaves.
Guest Profile and Local Competition. Approximately 50% of the hotel’s business is related to commercial activity from local businesses. The remainder of the hotel’s business consists of overnight travelers and general demand generated by the hotel’s proximity to the Carlisle Fairgrounds and the Army War College. We consider our primary competition to be the Holiday Inn in Carlisle, Pennsylvania.
Danville, Pennsylvania
Description. The Hampton Inn, Danville, Pennsylvania, is located at Exit 33 off Interstate 80. The hotel, which opened in September 1998, is a 72-room, three story, limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast, and 24-hour coffee service. All rooms offer queen beds or king beds, and coffee makers.
Guest Profile and Local Competition. The majority of the hotel guests consist of tourists or overnight business travelers. We consider our primary competition to be several non-franchised hotels located in the surrounding area.
New York, New York (Chelsea)
Description. The Hampton Inn is a new modern 20 story high rise hotel located in the trendy up-and-coming district of Chelsea in New York City, bordering the West Village and Midtown Manhattan, and is equipped with many modern conveniences. The hotel offers free High-Speed Internet Access, complimentary breakfast and a 100% Satisfaction Guarantee. The grand opening of the hotel was on August 27, 2003.
Guest Profile and Local Competition. The many businesses located in the district of Chelsea between mid-town and lower Manhattan’s financial district generate the majority of the guests for this hotel. The surrounding area also includes the Fashion Institute of Technology, the Toy & Gift buildings and the nearby garment district. The hotel is also conveniently located near the Jacob Javits Convention Center and the headquarters for Credit Suisse First Boston. The leisure market is also an important segment fed by the nearby theater district and other attractions in Manhattan. Nearby competing hotels include a Comfort Inn, a Clarion, a Courtyard Marriott, the Giraffe and the Chelsea Savoy hotel.
Linden, New Jersey
Description. The Hampton Inn, Linden, New Jersey is located five miles from Newark Liberty International Airport, adjacent to Linden Airport and 25 minutes from New York City. The hotel offers 149 rooms equipped with high speed Internet access and refrigerators. The property also has an Executive Boardroom and meeting room facilities.
Guest Profile and Local Competition. This Hampton Inn benefits from its close proximity to Newark International Airport but also has a strong corporate base from companies with a local presence, such as Merck and other pharmaceutical companies as well as General Motors. The competition is primarily comprised of branded airport hotels such as Comfort Suites, Courtyard Marriott, Wyndham, Best Western and Sheraton.
Hampton Inn and Suites
Hershey, Pennsylvania
Description. The Hampton Inn and Suites is located at 749 East Chocolate Avenue in Hershey, Pennsylvania. The hotel opened in September 1999 and has 110 rooms, 35 of which are suites. The hotel is located near all of the major attractions in Hershey, including the amusement park and the Hershey chocolate factory. Amenities include an indoor pool, exercise room, hot tub, meeting facilities, complimentary continental breakfast and 24-hour coffee.
Guest Profile and Local Competition. The majority of the hotel guests consist of tourists and overnight travelers. The hotel’s close proximity to all Hershey attractions makes this property especially attractive to leisure travelers. The hotel’s primary competitors are the Hilton Garden Inn, Comfort Inn, Holiday Inn Express and Springhill Suites.
Hilton Garden Inn
Edison, New Jersey
Description. The Hilton Garden Inn Edison/Raritan in Edison, New Jersey is located in the Raritan Center Commercial Park and one half mile from the New Jersey Convention and Exhibition Center. The hotel is 20 minutes from downtown Newark, 25 minutes from Newark International Airport and only 30 minutes from Manhattan. The hotel has 132 rooms, 5,000 square feet of meeting space and a restaurant that serves breakfast, lunch and dinner. The hotel also has a 24 hour business center that includes complimentary high-speed Internet, fax and copy machine.
Guest Profile and Local Competition. The typical Hilton Garden Inn, Edison, guest is a corporate traveler visiting a number of business parks in the local area. The Raritan Center is comprised of 108 buildings with over 350 companies in operation. The New Jersey Convention Center is located within the Raritan Center Commercial Park with 131,700 square feet of space. The Metropark Office Park is also located within five miles of the hotel. Two of the largest shopping centers in the area, Menlo Park Mall and Woodbridge Center are located within a few miles of the property. The competition is comprised of Hilton, Sheraton, Clarion, Holiday Inn Express, Marriott Courtyard and Ramada hotels located nearby.
Gettysburg, Pennsylvania
Description. The Hilton Garden Inn Gettysburg is located minutes from historic downtown Gettysburg and the battlefields, museums and shopping that make Gettysburg a tourist destination. Located at 1061 York Street, on Route 30, the hotel features 88 guestrooms with complimentary internet access, a lounge serving breakfast and lunch, an indoor pool and exercise room.
Guest Profile and Local Competition. Approximately 15% of the hotel's business is related to commercial activity from local business. The hotel's group business, which accounts for approximately 60% of its business, is generated from area institutions, motor coach tours, local weddings and local social and sporting events. The remainder of the hotel's business consists of transient guests, visitors to area residents and demand generated by the hotel's proximity to The Gettysburg National Military Park and National Cemetery. We consider our primary competition to be the Historic Gettysburg Hotel in Gettysburg, Pennsylvania.
Glastonbury, Connecticut
Description. The Hilton Garden Inn, Glastonbury is located seven miles southeast of Hartford, accessible via Connecticut SR-2 exit 6. The hotel opened in 2003 and features 150 rooms, each equipped with a spacious work desk, two phones, voice mail, data ports, as well as complimentary high-speed Internet access. A hospitality center in each guestroom includes a microwave, refrigerator and coffee maker. The hotel has a complimentary 24 hour business center, restaurant, indoor pool, whirlpool, fitness center and 3,200 square feet of meeting space.
Guest Profile and Local Competition. The hotel is close to numerous office buildings and industrial parks. Major nearby corporations include Pratt & Whitney, Lowes, Amica Insurance and Ikon Office Solutions. The Hilton Garden Inn, Glastonbury is within walking distance or a short drive from over 35 Hartford South/Glastonbury restaurants and numerous and varied shopping is everywhere in the area, including the Shops at Somerset Square, across the street. Competitors in the area include Sheraton, Crowne Plaza, Wellesley Inn and Residence Inn.
Holiday Inn Hotel and Conference Center
Harrisburg, Pennsylvania
Description. The Holiday Inn Hotel and Conference Center, Harrisburg, Pennsylvania is located at the intersection of the Pennsylvania Turnpike exit 18 and Interstate 83, ten minutes from downtown, Harrisburg International Airport and Hershey Park. The hotel opened in 1970 as a Sheraton Inn and was converted to a Ramada Inn in 1984. It was completely renovated and converted to a Holiday Inn in September 1995. This hotel has 196 deluxe guest units and is a full service hotel, including a full service restaurant as well as a nightclub. Amenities include an indoor tropical courtyard with a pool and Jacuzzi as well as a banquet and conference facility for up to 700 people.
Guest Profile and Local Competition. Approximately 40% of the hotel’s business is related to commercial activity from local businesses. The remainder of the hotel’s business consists of overnight travelers visiting Hershey and Harrisburg. We consider our primary competition to be the Radisson Penn Harris in Camp Hill, Pennsylvania.
Holiday Inn Express
Hartford, Connecticut
Description. The Holiday Inn Express, Hartford, Connecticut is located in Downtown Hartford, adjacent to the state capitol building and minutes away from the city’s train and bus stations and many downtown businesses. The 96 room hotel opened in January 2004, and features complimentary high speed internet access in all rooms, room service provided by local restaurants, complimentary continental breakfast, and a fitness center.
Guest Profile and Competition. Approximately 70% of the hotel's business is corporate from all the local companies and office parks in the area. The group business which is about 20% is made up of events in the city, weddings, sports and entertainment business. The other 10% is made up of people coming into the city to attend concerts, plays, or events taking place in the city. We consider our primary competition the Crowne Plaza and Holiday Inn Express on Brainard Rd.
Duluth, Georgia
Description. The Holiday Inn Express, Gwinnett Place Mall is located just off Pleasant Hill Road and Interstate 85 at exit 40. Opened in June 1996, this 68-room hotel features spacious guestrooms equipped with a king size bed or two double beds. This hotel features an outdoor pool along with a well-equipped fitness center. Meeting space is also available and accommodates up to 50 people.
Guest Profile and Local Competition. Numerous local business parks in Duluth, Norcross and Lawrenceville play a vital role in the hotel’s success. Companies such as Scientific Atlanta, Primerica Financial Services, NCR, Motorola, Hitachi, and Lucent Technologies all have major offices in the area and use this hotel frequently for room nights and meeting space. The Gwinnett Civic and Cultural Center and the millions of Priority Club members worldwide are also solid contributors of room nights throughout the year. We consider the hotel’s primary competitors to be the Comfort Suites, the Hampton Inn & Suites, the Courtyard Gwinnett Mall and the Fairfield Inn.
Hershey, Pennsylvania
Description. The Holiday Inn Express, Hershey, Pennsylvania is located on Walton Avenue, one and one half miles from Hershey Park. The hotel, which opened in October 1997, is an 85-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, business service center, meeting facility, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds and some rooms have refrigerators, coffee makers and microwaves.
Guest Profile and Local Competition. Approximately 30% of the hotel’s business is related to commercial activity from local business. The hotel’s group business, which accounts for approximately 5% of its business, is generated from area institutions, local weddings and local social and sporting events. The remainder of the hotel’s business consists of transient guests, visitors to area residents and demand generated by the hotel’s proximity to Hershey Park. We consider our primary competition to be the Comfort Inn in Hershey, Pennsylvania.
New Columbia, Pennsylvania
Description. The Holiday Inn Express, New Columbia, Pennsylvania is located at the intersection of Interstate 80 and Route 15. The hotel, which opened in December 1997, is an 81-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facility, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi suites are available and some rooms have refrigerators, coffee makers and microwaves. The Holiday Inn Express in New Columbia, Pennsylvania is consistently ranked number one in its region for GSTS (Guest Satisfaction Tracking System). This award recognizes the Holiday Inn Express in New Columbia as the leader in guest satisfaction and product service out of 32 other Holiday Inns and Holiday Inns Express in the Eastern region.
Guest Profile and Local Competition. Approximately 80% of the hotel’s business is related to commercial activity from local business. As a result of its proximity to ski resorts and nearby tourist attractions, recreational travelers generate approximately 10% of the hotel’s business. The remainder of the hotel’s business consists of overnight travelers and visitors to area residents. We consider our primary competition to be the Comfort Inn in New Columbia, Pennsylvania.
Long Island City (Midtown Tunnel), New York
Description. This Holiday Inn Express is located adjacent to the entrance of the Midtown Tunnel in Long Island City and is within minutes from midtown Manhattan. This 79-room, limited service hotel opened in 2001. A poured concrete structure, this three-story building is conveniently located alongside the Long Island Expressway.
Guest Profile and Local Competition. Long Island City is within minutes of midtown Manhattan and is accessible via car or via direct access to the subway line into Times Square. The hotel also serves numerous corporate headquarters and businesses within Queens and is located within six miles of La Guardia airport and within 13 miles of the JFK International Airport. The hotel competes directly with the Best Western and numerous other limited service hotels within Long Island City and Manhattan.
Holiday Inn Express and Suites
Harrisburg, Pennsylvania
Description. The Holiday Inn Express and Suites, Harrisburg, Pennsylvania is located at 5680 Allentown Boulevard and is easily accessible from Interstates 81 and 83. The hotel, which opened in August 1998 as a Clarion Inn and Suites, is a 77-room limited service hotel. Amenities include an outdoor pool, meeting facilities, complimentary continental breakfast, and 24-hour coffee. All rooms have one king bed or two queen beds. Jacuzzi suites are available and some rooms also have refrigerators and microwaves.
Guest Profile and Local Competition. Approximately 40% of the hotel’s business is comprised of business travelers, 30% is related to group business, 20% is leisure travelers, and 10% is government business. We consider our primary competition the Best Western and the Baymont Inn, both located in Harrisburg, Pennsylvania.
Mainstay Suites
Frederick, Maryland
Description. The Mainstay Suites, Frederick, Maryland is an all-suites extended stay hotel located near the office parks of Frederick and convenient to Baltimore and Washington, D.C. Each suite features a separate living area and fully equipped kitchen and dining area. The property also features a fitness room and indoor pool. There are also several suites with computers available in the room.
Guest Profile and Local Competition. The Frederick market has experienced significant growth over the past five years due to the development of new office parks and governmental agencies due to its proximity to Baltimore and Washington, D.C. Both governmental agencies and private companies utilize this hotel for long-term accommodations for their employees. Tourist attractions in close proximity to Frederick also attract leisure travelers that complement the corporate and governmental business. The primary competition for this hotel comes from the Residence Inn, Frederick and the Courtyard, Frederick.
King of Prussia, Pennsylvania
Description. This Mainstay Suites is located just off the Pennsylvania Turnpike and is part of a unique dual branded hotel, the first to feature a Mainstay Suites and Sleep Inn under one roof. This unique property combines many amenities convenient for both the business and leisure traveler. This 69-room hotel opened in 2000 and the suites include fully-equipped kitchens, a comfortable living room and a spacious work area.
Guest Profile and Local Competition. This hotel serves both the nearby corporate market as well as the strong leisure demand generators such as the Valley Forge Historic Park, Valley Forge Convention Center, King of Prussia Mall. The hotel is within twenty miles of downtown Philadelphia and serves all of the corporate and leisure demand generators of this market. The hotel’s primary competition includes the Fairfield Inn, Best Western, Comfort Inn and McIntosh Inn located within King of Prussia.
Residence Inn by Marriott
Greenbelt, Maryland
Description. The Residence Inn Greenbelt is located off of Route 495 and convenient to both Baltimore and Washington, DC. The hotel was built in 2002 and features 120 suites, each with a kitchen that includes a microwave and dishwasher. The hotel features a nightly reception for its guests, complimentary continental breakfast, an indoor pool and exercise room.
Guest Profile and Local Competition. Majority of the hotel's business is related to commercial activity from local corporations/government contractors. The hotel's group business, which accounts for approximately 18% of its business, is generated from area institutions, local weddings, social/sporting events, and local government agencies. The remainder of the hotel's business consists of transient guests visiting the DC area over citywide events, creating compression to the outskirts of DC.
Framingham, Massachusetts
Description. The Residence Inn Boston Framingham, opened in 2000, is convenient to the Massachusetts Turnpike and within a half hour of Boston. Its 125 suites feature kitchens with refrigerator and stovetop in studio, one and two bedroom layouts. The hotel features a nightly social hour for its guests, as well as an indoor pool and exercise room.
Guest Profile and Local Competition. A majority of this hotel’s business comes from commercial customers in the surrounding office park, including Staples, Computer Associates, Sun Microsystems and Bose. Approximately 10% of the hotel’s business is generated by leisure travelers, visiting historic Boston and the surrounding area, as well as the private and state colleges nearby.
Sleep Inn
King of Prussia, Pennsylvania
Description. This Sleep Inn is located just off the Pennsylvania Turnpike and is part of a unique dual branded hotel, the first to feature a Mainstay Suites and Sleep Inn under one roof. This unique property combines many amenities convenient for both the business and leisure traveler. This 87-room limited service hotel opened in 2000.
Guest Profile and Local Competition. This hotel serves both the nearby corporate market as well as the strong leisure demand generators such as the Valley Forge Historic Park, Valley Forge Convention Center and King of Prussia Mall. The hotel is within twenty miles of downtown Philadelphia and serves all of the corporate and leisure demand generators of this market. The hotel’s primary competition includes the Fairfield Inn, Best Western, Comfort Inn and McIntosh Inn all located within King of Prussia.
The following table sets forth certain information with respect to each of our hotels:
______________
(1)
This hotel opened in May 2004 and, thus, the data shown for 2004 represents approximately seven months of operations.
(2)
This hotel was acquired in July 2004 and, thus, the data shown for 2004 represents approximately six months of operations. The hotel is owned by a joint venture with Inn America, LLC
(3)
This hotel opened in January 2002.
(4)
We assumed operations of this hotel in March 2004 and, thus, the data shown for 2004 represents approximately ten months of operations. The hotel is owned by a joint venture with Logan Hospitality Associates, LLC
(5)
This hotel opened in August 2003 and, thus, the data shown for 2003 represents approximately five months of operations. The hotel is owned by a joint venture with CNL Hospitality Partners, L.P.
(6)
We assumed operations of this hotel in October 2003 and, thus, the data shown for 2003 represents approximately three months of operations.
(7)
This hotel opened in September 1999 and, thus, the data shown for 1999 represents approximately four months of operations.
(8)
This hotel opened in October 2003 and, thus, the data shown for 2003 represents approximately three months of operations.
(9)
This hotel opened in November 2003 and, thus, the data shown for 2003 represents approximately two months of operations. The hotel is owned by a joint venture with Joseph Pacitti and PRA Glastonbury Management.
(10)
This hotel opened in July 2004 and, thus, the data shown for 2004 represents approximately five months of operations.
(11)
This hotel opened in May 2001 and, thus, the data shown for 2001 represents approximately eight months of operations.
(12)
This hotel opened in January 2004 and, thus, the data shown for 2004 represents approximately eleven months of operations.
(13)
This hotel opened in April 2000 and, thus, the data shown for 2000 represents approximately nine months of operations.
(14)
This hotel opened in September 2000 thus the data shown for 2000 represents four months of operations.
(15)
We assumed operations of this hotel in March 2004 and, thus, the data shown for 2004 represents approximately nine months of operations.
(16)
We assumed operations of this hotel in July 2004 and, thus, the data shown for 2004 represents approximately six months of operations.
Taxable REIT Subsidiaries
In January 2003, the operating partnership formed a wholly owned taxable REIT subsidiary (TRS), 44 New England Management Company (“44 New England”), to lease certain of the company’s hotels.
We entered into an agreement with HHMLP, our affiliated lessor, effective April 1, 2004, to terminate the eight remaining affiliated leases, which related to the following properties:
·
Holiday Inn Express, Long Island City, New York
·
Doubletree Club, Jamaica, JFK Airport - New York
·
Mainstay Suites, Frederick, Maryland
·
Hampton Inn & Suites, Hershey, Pennsylvania
·
Hampton Inn, Danville, Pennsylvania
·
Holiday Inn Express & Suites, Harrisburg, Pennsylvania
·
Sleep Inn and Mainstay Suites, King of Prussia, Pennsylvania
As of March 1, 2005, 44 New England leased all of our hotels. The company has entered into joint venture agreements with CNL Hospitality Partners, LP (CNL), PRA Glastonbury, LLC, Logan Hospitality and Inn America Hospitality and established a TRS for each joint venture, respectively. Each joint venture TRS leases one property. We believe that transitioning to TRS structures positions us to participate more directly in the operating efficiencies and revenue gains at our hotels.
Management Agreements
Our TRSs have engaged HHMLP as the property manager for our hotels pursuant to substantially similar management agreements. Each management agreement provides for a five year term and is 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.
For its services, HHMLP receives a base management fee, and if a hotel meets and exceeds certain thresholds, an additional incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of the gross revenues associated with that hotel for the related month. There were no incentive management fees payable in 2004. 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 equal to an amount determined based upon the financial performance of the hotel according to a pre-determined formula.
HHMLP must from time to time make expenditures on our behalf for repairs and maintenance as are necessary to keep a hotel in good operating condition. Our TRS or we may elect to, from time to time at its or our expense, make alterations, additions, or improvements (including structural changes or repairs) in or to our hotels.
Under the management agreements, our TRSs retain the right to sell, lease, transfer or otherwise dispose of our hotels. HHMLP may not transfer or assign any of its rights and obligations under a management agreement without the prior written consent of our TRS. On the other hand, our TRSs may transfer or assign their rights and obligations under a management agreement without the consent of HHMLP. However, HHMLP will have the right to terminate the management agreement after receiving notice of such transfer or assignment and could be entitled to termination fees.
Item 3.
Item 3.
Legal Proceedings
We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth quarter of 2004, through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information (Ashish to update based upon AMEX prices)
Our common shares began trading on the American Stock Exchange on January 20, 1999 under the symbol “HT.” As of March 14, 2005, the last reported closing price per common share on the American Stock Exchange was $10.24. The following table sets forth the high and low sales price per common share reported on the American Stock Exchange as traded and the dividends paid on the common shares for each of the quarters indicated.
__________
* Dividend for the quarter ending March 31, 2005 has not been declared as of March 14, 2005.
Shareholder Information
At March 14, 2005 we had approximately 131 holders of record and 2,650 beneficial owners of our common shares. Units of limited partnership interest in our operating partnership (which are redeemable for common shares subject to certain limitations) were held by 12 entities and/or persons.
Our organizational documents limit the number of equity securities of any series that may be owned by any single person or affiliated group to 9.9% of the outstanding shares. We granted limited waivers of these ownership limitations as follows:
·
a limited waiver to CNL allows CNL to own 100% of the outstanding Series A Preferred Shares and up to 60% of the outstanding common shares on a fully diluted basis, subject to CNL’s compliance with certain representations and warranties (see “CNL Strategic Alliance”);
·
a limited waiver to RREEF America L.L.C., Deutche Asset Management, Inc., and their related mutual funds and accounts, specifically including Scudder RREEF Real Estate Fund Inc., Scudder RREEF Real Estate Fund II Inc. and Scudder RREEF Securities Trust (collectively, the “Scudder RREEF Group”) to own 16% of the outstanding common shares, subject to their compliance with certain representations and warranties, including that no single person will own more than 9.9% of the outstanding common shares; and
·
a limited waiver to K.G. Redding & Associates, and its managed accounts to own 15% of the outstanding common shares, subject to their compliance with certain representations and warranties including that no single person will own more than 9.9% of the outstanding common shares.
Distribution Information
Our Board of Trustees declared a cash distribution for the holders of the common shares and the operating partnership units for the period from January 1, 2005 to March 31, 2005 in the amount of $0.18 per share and unit, payable on April xx, 2005, to holders of record on March 31, 2005. While it is the current policy of our Board to maintain our dividend at least this level, future distributions, if any, will be at the discretion of our Board of Trustees and will depend on our actual cash flow, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as we may deem relevant. Our ability to make distributions will depend on our receipt of distributions from our operating partnership and lease payments from our lessees with respect to the hotels. We rely on the profitability and cashflows of our hotels to generate sufficient cash flow for distributions.
Common Shares Issuable Pursuant to Options
The following table summarizes information with respect to equity compensation as of December 31, 2004:
As of December 31, 2004, no options or warrants to acquire our securities were outstanding. In March 2005, we issued 419 common shares to each of our Independent Trustees pursuant to our 2004 Equity Incentive Plan.
Recent Issuances of Unregistered Securities
In April of 2003, we entered into a strategic alliance with CNL Hospitality Partners, L.P., a subsidiary of CNL Hospitality Properties, Inc. Our agreement with CNL provides that it will invest up to $25 million in our operating partnership and up to $40 million in a newly formed hotel acquisition joint venture. On April 21 and May 21, 2003, CNL purchased a total of 150,000 units of a newly created series of convertible preferred limited partnership units of our operating partnership (the “Series A Convertible Preferred Units”) in exchange for CNL’s payment of $15,000,000 in cash, net of certain transaction costs. CNL purchased an additional 40,266 Series A Convertible Preferred Units on August 29, 2003, for approximately $4 million. CNL has converted all of their preferred limited partnership units during 2004. CNL may be obligated to purchase up to an additional 59,734 Series A Convertible Preferred Units, also at a per unit price of $100.00. A more complete description of our sales of Series A Convertible Preferred Units to CNL is included in a Periodic Report on Form 8-K filed by us on April 23, 2003 and in our Quarterly Reports on Form 10-Q for the quarters ending June 30, 2003 and September 30, 2003.
Effective January 1, 2002, the operating partnership issued 333,541 units of limited partnership interest to some of our executive officers, trustees and their affiliates in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. These units were issued in connection with the repricing of the Hampton Inn and Suites, Hershey, PA; Holiday Inn Express and Suites, Harrisburg, PA; and Hampton Inn, Danville, PA hotels. There were no proceeds to us from this issuance.
Item 6.
Item 6.
Selected Financial Data
The following sets forth selected financial and operating data on a historical consolidated basis. The following data should be read in conjunction with the financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.
HERSHA HOSPITALITY TRUST
SELECTED FINANCIAL DATA
(In thousands, except per share data)
_________________________
(1)
Represents initial fixed rent plus aggregate percentage rent paid by HHMLP to the Partnership pursuant to percentage leases, which payments are calculated by applying the rent provisions in the respective percentage leases to the historical room revenues.
(2)
Represents initial fixed rent paid by the lessee to the Partnership pursuant to percentage leases, which payments are calculated by applying the rent provisions in the respective percentage leases to the historical room revenues.
(3)
Represents basic earnings per share computed in accordance with FAS No. 128.
(4)
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funds From Operations” for an explanation of FFO, why we believe Adjusted FFO is a meaningful measure of our operating performance and a reconciliation of Adjusted FFO to net income calculated in accordance with GAAP.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 December 31, 2004, we owned interests in 29 hotels in the eastern United States including four 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. In 2001, the REIT rules were modified, allowing a hotel REIT to lease its hotels to a taxable REIT subsidiary, or TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. Accordingly, as of December 31, 2004, we have leased 25 of our hotels to a wholly-owned TRS, which will pay qualifying rent, and the TRS has entered into management contracts with HHMLP with respect to those hotels. We intend to lease all newly acquired hotels to a TRS. As of December 31, 2004, we also owned interests in four hotels through joint ventures, and those hotels are leased to TRSs that are wholly owned by those joint ventures. The hotels owned by the joint ventures are managed by HHMLP pursuant to the terms of certain management agreements.
As all of our hotels have been leased to our TRS or a joint venture TRS, we are participating more directly in the operating performance of our hotels. Rather than receiving base and percentage lease payments from HHMLP, which funded its own hotel operating expenses, the TRS’ will directly receive all revenue from, and be required to fund all expenses relating to, hotel operations. The TRS’ will also be subject to income tax on its earnings.
The increase in revenue per available room (“RevPAR”) during the years ended December 31, 2004, and 2003, was due primarily to a rebounding economy; the Company's broadened strategic portfolio focus on stronger central business districts and primary suburban office parks; the size of the recent acquisitions as a percentage of the portfolio; franchise affiliations with stronger brands, such as Hilton Garden Inn, Residence Inn and Four Points by Sheraton; and a strong focus on improving the average daily rate (“ADR”). The increase in both rooms and total revenue can be attributed primarily to the hotels acquired during the respective periods.
Comparison of the year ended December 31, 2004 to December 31, 2003
Revenue
Our total revenues for the year ended December 31, 2004, consisted substantially of hotel operating revenues for hotels leased to our wholly owned TRS, 44 New England, and percentage lease revenue recognized pursuant to percentage leases with HHMLP. Our total revenues were approximately $50,562,000, an increase of $34,727,000 or 219.31% compared to total revenues of $15,835,000 for the year ended December 31, 2003. The increase in revenue is primarily attributable to the acquisition of new hotels since the period ended December 31, 2003, and the direct recording of hotel operating revenues for hotels leased to our TRS. Under the TRS structure, we recognize gross hotel operating revenues and gross hotel operating expenses for hotels leased to 44 New England. Under the percentage lease structure, we recorded only lease revenues pursuant to the terms of the percentage leases that were calculated as a percentage of a hotel’s revenues per the lease agreements.
Hotel operating revenues increased by approximately $44,639,000 as hotels previously leased to HHMLP through percentage leases were converted to a TRS structure and were subsequently leased to our TRS, 44 New England. During the first three months ended March 31, 2004, eight of our hotels were leased to HHMLP through percentage leases and 14 hotels were leased to our TRS. As of April 1, 2004, all of our owned hotels were leased to our TRS, and all of our hotels owned in a joint venture were leased to a TRS owned by the joint venture.
Additionally, since December 31, 2003, the Company has acquired five hotels and a joint venture interest in two additional hotels. Revenue for all five purchases and one consolidated joint venture was recorded from the date of acquisition as Hotel Operating Revenues. The other joint venture was accounted for utilizing the equity method of accounting and our portion of the net income from three of our joint ventures using the equity method is recorded as “Income from Unconsolidated Joint Venture Investments” in our Statement of Operations.
Lease revenues from the percentage leases decreased from approximately $11,104,000 in 2003, to $1,192,000 in 2004. This decrease is due to the expiration of six percentage leases on January 31, 2004, and the transfer of all of our leases to a TRS structure as of April 1, 2004, as mentioned above.
Interest and other revenue increased to approximately $2,608,000 in 2004, from $809,000 in 2003. The Company recorded interest revenue of $2,191,000 on its secured and unsecured development lines for six hotels and a loan to HT/CNL Metro Hotels, LP during the year ended December 31, 2004. The loan to HT/CNL Metro Hotels, LP was fully repaid in July 2004. Additionally, the Company earned interest on short term investments and escrow accounts of $241,000 in 2004. Other revenue primarily related to asset management fees received for the Hampton Inn, (Manhattan) Chelsea, NY and loan commitment fees on our secured lending totaling $176,000.
Expenses
Total expenses increased 327.07%, to approximately $46,056,000 for the year ended December 31, 2004, from $10,912,000 for the year ended December 31, 2003.
Hotel operating expenses increased to approximately $31,557,000 in 2004, from $3,323,000 in 2003, due to the direct recognition of hotel operating expenses for hotels leased to 44 New England. Under the TRS structure we recognize gross hotel operating revenues and gross hotel operating expenses for hotels leased to 44 New England. In addition, we recorded expenses for five acquisitions and one joint venture from the date of acquisition.
Depreciation and amortization increased from approximately $4,136,000 in 2003, to $7,194,000 in 2004, an increase of $3,058,000, due to additional depreciation expense incurred related to property acquisitions.
Interest expense increased approximately $1,880,000 from $4,250,000 in 2003, to $6,130,000 in 2004. The increase is related to additional financings related to the property acquisitions.
Real estate and personal property taxes and insurance increased by approximately $1,955,000 from $1,309,000 in 2003, to $3,264,000 in 2004. The increase is primarily related to additional property taxes incurred at our hotels acquired since December 31, 2003.
General and administrative expense increased by approximately $2,529,000 from $671,000 in 2003, to $3,200,000 in 2004. The increase is related to the establishment of a formal management compensation plan in 2004. In prior periods HHMLP was responsible for a majority of the compensation expense related to our employees. General and administrative expenses also increased due to increased audit and legal expenses incurred during the period and costs associated with compliance work related to the Sarbanes-Oxley Act.
The Company assumed land leases on the Hilton Garden Inn, Edison, NJ and the Holiday Inn Express, Hartford, CT in conjunction with the acquisition of these assets and has realized an increase of land lease expense by approximately $729,000 during the year ended December 31, 2004.
Net Income
Net income for the year ended December 31, 2004, was approximately $2,049,000, compared to 2003 net income of $785,000. As mentioned above, we converted a majority of our hotels to a TRS structure, in which we recognize both gross hotel operating revenues and gross hotel operating expenses. Excluding unconsolidated joint ventures, we own or have a consolidated joint venture interest in 26 hotels that are leased to a wholly-owned TRS.
On April 16, 2004, CNL converted all of its Series A Preferred Units into common stock and sold these shares in a secondary offering. Net income available for common shareholders was positively impacted due to the fact that there were no distributions paid on the Series A Preferred Units after this conversion.
Net income was positively impacted by income from unconsolidated joint venture investments of $481,000 and the reduction in income allocated to minority interest during the period as a result of the October 2003 and September 2004 common share offerings and contribution of the proceeds to our operating partnership. Net income was negatively impacted by start up costs at hotels that were recently acquired and are still in the ramp up or stabilization phase.
Comparison of year ended December 31, 2003 to year ended December 31,
Revenue
Our total revenues for the year ended December 31, 2003, consisted substantially of percentage lease revenue recognized pursuant to percentage leases with HHMLP and hotel operating revenues for hotels leased to our wholly owned TRS, 44 New England. Our revenue was approximately $15,835,000, an increase of 25.2% compared to revenue of $12,647,000 for the year ended December 31, 2002. The increase in revenue is primarily attributable to the direct recording of hotel operating revenues for hotels leased to our TRS. Additionally, we acquired the Hampton Inn, Linden, NJ and Hilton Garden Inn, Edison, NJ in October 2003, the Hilton Garden Inn, Edison, NJ in October 2003 and recorded revenue for these hotels from the date of acquisition.
Expenses
Total expenses increased 109.60% to approximately $10,912,000 from $5,206,000 in 2002. The increase is primarily a result of the direct recognition of hotel operating expenses for hotels leased to our TRS, increased property taxes, insurance, depreciation and amortization, and non recurring expenses related to the expensing of options granted in prior periods and prepayment penalties on certain debt instruments.
Net Income
Net income for the period was approximately $785,000, compared to 2002 net income of $1,292,000. Net income decreased from the prior year due to an increase in property taxes, insurance, depreciation and amortization, distributions to preferred unitholders (CNL), and expenses related to options granted in prior periods. In December 2003, we negotiated a buyout of all of the outstanding options related to the HHMLP Stock Appreciation Rights Plan for approximately $1,028,000 and recorded this amount as compensation expense during the year. We have also recorded compensation expense of $279,000 related to 75,714 options that had vested as of December 31, 2003, and were exercised during January 2004. We also recorded approximately $116,000 of non recurring expenses related to prepayment penalties on the early extinguishment of debt with the proceeds of our October equity offering.
Liquidity and Capital Resources
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. We believe that the net cash provided by operations 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. We expect to meet our long-term liquidity requirements, such as scheduled debt maturities and property acquisitions, through long-term secured and unsecured borrowings, the issuance of additional equity securities or, in connection with acquisitions of hotel properties, the issuance of units of operating partnership interest in our operating partnership subsidiary.
On September 24, 2004, we completed a public offering of 3,500,000 common shares at $9.37 per share. On September 30, 2004, the underwriter exercised its over-allotment option on these shares, and we issued an additional 400,000 common shares at $9.37 per share. Proceeds to the Company, net of underwriting discounts and commissions and expenses, were approximately $36,317,000. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $5,000,000 was used to repay indebtedness. The remaining net proceeds have been principally allocated to fund secured development loans, acquisitions and for general corporate purposes.
Our cash and cash equivalents balance of $20,614,000 at December 31, 2004, was primarily due to the proceeds from this equity offering.
We currently maintain a $35,000,000 line of credit with Sovereign Bank. We may use the line of credit to fund future acquisitions and for working capital. Outstanding borrowings under the line of credit bear interest at the bank’s prime rate and are collateralized by certain of our properties. In the future, we may seek to increase the amount of the line of credit, negotiate additional credit facilities or issue corporate debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term or short-term, fixed or variable interest rate and may be subject to such other terms as we deem prudent. As of December 31, 2004, we maintained an outstanding balance on our Line of Credit of $1,027,335 and the interest rate on the line of credit was 5.25%.
We have a debt policy that limits our consolidated indebtedness to less than 67% of the aggregate purchase prices for the hotels in which we have invested, and our current level is approximately 54.3%. 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.
We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. Our bylaws require the approval of a majority of our Board of Trustees, including a majority of the independent trustees, to acquire any additional hotel in which one of our trustees or officers, or any of their affiliates, has an interest (other than solely as a result of his status as our trustee, officer or shareholder). 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 operating partnership units or other securities or borrowings. We currently have no agreement or understanding to acquire any hotel, and there can be no assurance that we will acquire any additional hotels that meet our investment criteria.
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. We intend to spend amounts in excess of the obligated amounts if necessary 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. We are also obligated to fund the cost of certain capital improvements to our hotels. We will use undistributed cash or borrowings under credit facilities to pay for the cost of capital improvements and any furniture, fixture and equipment requirements in excess of the set aside referenced above.
Cash Flow Analysis
Comparison of year ended December 31, 2004 to year ended December 31,
Net cash provided by operating activities for the year ended December 31, 2004, and 2003, was $12,148,000 and $5,193,000, respectively. The increase in net cash provided by operating activities was primarily the result of an increase in net income, a decrease in income allocated to minority interest, a decrease in lease payments receivable - related party and an increase in accounts payable and accrued expenses.
Net cash used in investing activities for the year ended December 31, 2004, and 2003 was $78,378,000 and $58,370,000, respectively. The increase in net cash used in investing activities was primarily the result of (a) $51,102,000 related to the purchase of the Holiday Inn Express, Hartford, CT; Residence Inn, Framingham, MA; Comfort Inn, Frederick, MD; Residence Inn, Greenbelt, MD; Hilton Garden Inn, Gettysburg, PA, (b) $2,869,000 to fund capital improvements in our hotels, (c) $5,012,000 utilized for joint venture investments in the Four Points by Sheraton, Revere, MA and the Courtyard by Marriott, Ewing, NJ and certain capital improvements at our existing joint venture properties, (d) $13,800,000 utilized to fund a development loan to Metro Ten Hotels, LLC, and (e) $20,550,000 of development loans to related parties. This was partially offset by $15,000,000 received from HT/CNL Metro Hotels, LP related to the repayment of indebtedness.
Net cash provided by financing activities for the year ended December 31, 2004 and 2003 was $46,137,000 and $93,744,000 respectively. The increase in net cash provided by financing activities for the years ended December 31, 2004 and 2003 was primarily the result of $38,279,000 and $77,262,000 respectively, of proceeds related to the issuance of common shares and $37,375,000 and $28,907,000, respectively, of proceeds from mortgages payable.
Comparison of year ended December 31, 2003 to year ended December 31,
Net cash provided by operating activities for the year ended December 31, 2003, and 2002, was $5,193,000 and $8,177,000, respectively. The decrease in net cash provided by operating activities was primarily the result of an decrease in net income, a decrease in deposits payable, and decreases in our payables to related parties.
Net cash used in investing activities for the year ended December 31, 2003, and 2002 was $58,370,000 and $345,000, respectively. The increase in net cash used in investing activities was primarily the result of (a) $31,943,000 related to the purchase of the Hilton Garden Inn, Edison, NJ and the Hampton Inn, Linden, NJ (b) $6,600,000 to fund utilized for joint venture investments in the Hampton Inn, Chelsea, NY and the Hilton Garden Inn, Glastonbury, CT, and (c) $15,000,000 utilized for an investment in a note receivable to HT/CNL Metro Hotels, LP.
Net cash provided by financing activities for the year ended December 31, 2003 and 2002 was $93,744,000 compared to net cash used in financing activities of $7,859,000 for the year ended December 31, 2002. The increase in net cash provided by financing activities for the years ended December 31, 2003 was primarily the result of $77,262,000 of proceeds related to the issuance of common shares and $28,907,000 of proceeds from mortgages payable.
Funds From Operations
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds From Operations (“FFO”) as a relative non-GAAP financial measure of performance and liquidity of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO as defined by NAREIT is 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. We also present Adjusted Funds From Operations (AFFO), which reflects FFO in accordance with the NAREIT definition plus the following additional adjustments:
·
adding back income allocated to units of partnership interest in its operating partnership, because we report AFFO to common shareholders on a fully diluted basis assuming conversion of those units to common shares;
·
adding back income allocated to units of partnership interest in its operating partnership related to discontinued operations;
·
adding back depreciation related to discontinued operations;
·
adding back distributions to holders of preferred units of partnership interest in its operating partnership, which are expensed on our income statement; and
·
making adjustments to ground lease payments, which are required by GAAP to be amortized on a straight-line basis over the term of the lease, to reflect the actual lease payment.
FFO or AFFO 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 and AFFO to be meaningful, additional measures of operating performance because they excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because they are widely used by industry analysts as a performance measure. We also believe that the additional adjustments made to arrive at AFFO help to provide a meaningful view of our underlying operations. Comparison of our presentation of FFO and AFFO to similarly titled measures for other REITs is not necessarily meaningful due to the differences in the calculations used by us and other REITs.
The following table reconciles FFO and AFFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods.
(in thousands, except per share data)
AFFO was $11,571,000 for the year ended December 31, 2004, which was an increase of $3,843,000, or 49.7% over AFFO in the comparable period in 2003, which was $7,728,000. The increase in AFFO was primarily a result of a strengthened economy; the benefits of asset acquisitions since December 31, 2003; the conversion of fixed and percentage leases with HHMLP to leases with our TRS since April 1, 2004; continued stabilization and maturation of the existing portfolio; an increase in business travel and aggressive attention to the average daily rate. Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, the Company is permitted to lease hotels to a wholly owned taxable REIT subsidiary (“TRS”) and may continue to qualify as a REIT provided the TRS enters into management agreements with an “eligible independent contractor” who will manage the hotels leased by the TRS. The Company formed the TRS Lessee in 2003. As of December 31, 2004, the TRS leased 25 properties from the Partnership, and is subject to taxation as a c-corporation. During 2004, all of our fixed and percentage leases have either expired or been terminated, and the Company now records the hotel operating revenues and expenses directly on its books.
FFO was negatively impacted by start up costs at hotels that were recently acquired and are still in the ramp up or stabilization phase. FFO was also negatively impacted by increases in our general and administrative expenses during the year ended December 31, 2004 reflecting the implementation of a formal management compensation plan and additional legal and accounting expenses incurred during the periods.
AFFO was $7,728,000 for the year ended December 31, 2003, which was a decrease of approximately $565,000 or 6.8% over AFFO in the comparable period in 2002, which was $8,293,000. The decrease in AFFO for the year ended December 31, 2003 was primarily a result of compensation costs relating to the vesting of certain stock options awarded in prior periods and due to the recognition of hotel operating expenses in excess of income from hotel operations.
AFFO was $8,293,000 for the year ended December 31, 2002, which was an increase of approximately $1,239,000 or 17.6% over AFFO in the comparable period in 2001, which was $7,054,000. The increase in AFFO during the year ended December 31, 2002 was primarily a result of higher lease revenues pursuant to the percentage leases at several of our properties in addition to lower overall borrowing costs on our floating rate debt.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, all estimates are evaluated by us, including those related to carrying value of investments in hotel properties. All estimates are based upon historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
We directly recognize revenue and expense for all hotels leased through 44 New England as “Hotel Operating Revenue” and “Hotel Operating Expense” when earned and incurred.
Stock Compensation
We apply SFAS 123, “Accounting for Stock-Based Compensation,” whereby we measure the cost of employee service received in exchange for an award of equity instruments based on the grant -date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award. There were no costs incurred in 2004.
Allowance for Doubtful Accounts
Accounts receivable are charged to bad debt expense when they are determined to be uncollectible based upon a periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debts.
Derivatives
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps 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. During 2004, the derivative was used to hedge the variable cash flows associated with existing variable-rate debt.
As of December 31, 2004, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.
Impairment of Long-Lived Assets.
We review the carrying value of each hotel property in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or if depreciation periods should be modified. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell.
We would record an impairment charge if we believe an investment in hotel property has been impaired such that future undiscounted cash flows would not recover the book basis of the investment in the hotel property. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s carrying value, thereby possibly requiring an impairment charge in the future. We have reviewed each of our hotel properties at December 31, 2004 for impairment and, based on our estimate of each hotel’s future undiscounted cash flows, determined that no impairment existed at any of our hotels.
REIT Qualification Tests
We are subject to numerous operational and organizational requirements to maintain our REIT status. Based on tests performed by management for the years ended December 31, 1999 through December 31, 2004, we believe that we satisfied the requirements needed to maintain our REIT status. However, we are subject to audit and if the Internal Revenue Service determined that we failed one or more of these tests, we could lose our REIT status. If we did not qualify as a REIT, our income would become subject to federal and state income taxes, which would be substantial, and the resulting adverse effects on our results of operations, liquidity and amounts distributable to shareholders would be material.
Equity Offerings
In October, 2003, we completed an equity offering of 9,775,000 common shares. Net proceeds from the offering were $77.3 million after deducting underwriting discounts, commissions, and offering expenses paid by us. Net proceeds were used to reduce debt; redeem limited partnership units; pay dividends and operating expenses; and fund acquisitions.
On September 24, 2004, we completed a public offering of 3,500,000 common shares at $9.37 per share. On September 30, 2004, the underwriter exercised its over-allotment option on these shares, and we issued an additional 400,000 common shares at $9.37 per share. Proceeds to the Company, net of underwriting discounts and commissions and expenses, were approximately $36.3 million. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $5.0 million was used to repay indebtedness. The remaining net proceeds have been principally allocated to fund secured development loans, acquisitions and for general corporate purposes.
Distributions/Dividends
We have paid regular distributions on our common shares, and each of the 2004 and 2003 quarterly distributions was $0.18 per share. In addition, the operating partnership has paid regular distributions to the holders of units of limited partnership interest in the partnership in an amount of $0.18 per unit. There currently are no accruals for distributions not yet paid to the unitholders.
Related Party Transactions
We have entered into a number of transactions and arrangements that involve related parties. For a description of the transactions and arrangements, please see Notes 3, 4, 5 and 6 to the financial statements.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commitments to make future payments under contracts, such as debt and lease agreements, as of December 31, 2004.
Inflation
Operators of hotels in general possess the ability to adjust room rates. However, competitive pressures may limit the hotel operator’s ability to raise room rates in the face of inflation.
Seasonality
Our hotels’ operations historically have been seasonal in nature, reflecting higher occupancy rates during the second and third quarters. This seasonality can be expected to cause fluctuations in our quarterly lease revenue to the extent that we receive percentage rent.
Recently Issued Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No.123R”) which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”). SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion No. 25”) and its related implementation guidance. SFAS No. 123R requires companies to record compensation expense for share-based payments to employees, including grants of employee stock options, at fair value. SFAS No. 123R is effective for most public companies at the beginning of the first interim or annual period beginning after June 15, 2005. We do not expect SFAS 123R to have a material impact on the Company.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is to changes in interest rates on our variable rate Line of Credit and other floating rate debt. At December 31, 2004, we maintained a balance of $1,027,335 under our Line of Credit. The total floating rate mortgages payable of $23,202,394 had a current weighted average interest rate of 5.66%. The total fixed rate mortgages payable of $87,616,926 had a current weighted average interest rate of 7.26%. The carrying value of all of our fixed rate debt approximates fair value.
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 may enter into derivative financial instruments such as interest rate swaps or caps and 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. Currently, we have one interest rate swap related to debt on the Four Points by Sheraton, Revere. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
Approximately 79.1% of our outstanding mortgages payable are subject to fixed rates, including the debt whose rate is fixed through a derivative instrument, while approximately 20.9% of our outstanding mortgages payable are subject to floating rates. The total weighted average interest rate on our debt and Line of Credit as of December 31, 2004 was approximately 6.91%. If the interest rate for our Line of Credit and other variable rate debt was 100 basis points higher or lower during the year ended December 31, 2004, our interest expense for the year ended December 31, 2004 would have been increased or decreased by approximately $204,000.
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 at December 31, 2004, the following table presents expected principal repayments and related weighted average interest rates by expected maturity dates (in thousands):
The table incorporates only those exposures that existed as of December 31, 2004 and does not consider exposure or positions that could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the future period, prevailing interest rates, and our hedging strategies at that time.
At December 31, 2004, derivatives with a fair value of $306,000 were included as liabilities. The change in net unrealized gains/losses of $33,000 in 2004 for derivatives designated as cash flow hedges is separately disclosed in the statement of changes in shareholders’ equity and comprehensive income. The change in fair value of derivatives prior to hedge designation of $62 is included in our Statement of Operations in 2004. This interest rate derivative matures in July 2009.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Hersha Hospitality Trust
Page
Hersha Hospitality Trust
Reports of Independent Auditors
Consolidated Balance Sheets as of December 31,
and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Shareholders’ Equity and Comprehensive
Income for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation for
the year ended December 31, 2004
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees of
Hersha Hospitality Trust:
We have audited the accompanying consolidated balance sheet of Hersha Hospitality Trust and subsidiaries as of December 31, 2004, and the related consolidated statement of operations, shareholders’ equity and comprehensive income and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the 2004 financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hersha Hospitality Trust and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule for 2004, when considered in relation to the 2004 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 46 (R) Consolidation of Variable Interest Entities effective March 31, 2004.
/s/ KPMG LLP
Harrisburg, Pennsylvania
March 12,
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania
We have audited the accompanying consolidated balance sheet of Hersha Hospitality Trust and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for year then ended. Our audit also included the financial statement schedule included on Pages 77 and 78. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hersha Hospitality Trust and subsidiaries as of December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule referred to above, when considered in relationship to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 5, 2004, except for the third paragraph
of Note 15 as to which the date is March 11, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Hersha Hospitality Trust and subsidiaries for the year ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Hersha Hospitality Trust and subsidiaries, for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
February 28, 2003, except
for the effect on 2002 amounts as described in
Note 8 as to which the date is March 14, 2005
Part I. Financial Information
Item 1. Financial Statements
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
The Accompaning Notes Are an Integral Part of These Consolidated Financial Statments.
- 43 -
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
The Accompaning Notes Are an Integral Part of These Consolidated Financial Statments.
-
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
The Accompaning Notes Are an Integral Part of These Consolidated Financial Statments.
-
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
[IN THOUSANDS, EXCEPT SHARES]
The Accompaning Notes Are an Integral Part of These Consolidated Financial Statments.
-
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
The Accompaning Notes Are an Integral Part of These Consolidated Financial Statments.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hersha Hospitality Trust (“we” or the “Company”) was formed in May 1998 as a self-administered, Maryland real estate investment trust (“REIT”) for Federal income tax purposes.
The Company owns a controlling general partnership interest in Hersha Hospitality Limited Partnership (the “Partnership”), which owns a 99% limited partnership interest in various subsidiary partnerships. Hersha Hospitality, LLC (“HHLLC”), a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships and the Partnership is the sole member of HHLLC.
On January 16, 2003, the Partnership formed a wholly owned taxable REIT subsidiary, 44 New England Management Company (“44 New England” or “TRS Lessee”), to lease certain of the Company’s hotels.
On April 21, 2003, May 21, 2003 and August 29, 2003, CNL Hospitality Partnership, LP (“CNL”) purchased $10,000, $5,000 and $4,027, respectively, of convertible preferred units of limited partnership interest in the Partnership (the “Series A Preferred Units”). Net of offering expenses, the Partnership received proceeds of $17,023. On April 16, 2004, CNL exercised its conversion right and redeemed all of its convertible preferred units in exchange for 2,816,460 shares of common stock. On October 21, 2003, we completed a public offering of 9,775,000 common shares at $8.50 per share. Proceeds to the Company, net of underwriting discounts and commissions, structuring fees and expenses, were approximately $77,262. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership. Of the net offering proceeds, approximately $10,400 was used to fund limited partner redemptions and approximately $24,000 was used to repay indebtedness. The remaining net proceeds were used principally to fund acquisitions and for general corporate purposes.
On September 24, 2004, we completed a public offering of 3,500,000 common shares at $9.37 per share. On September 30, 2004, the underwriter exercised its over-allotment option on these shares, and we issued an additional 400,000 common shares at $9.37 per share. Proceeds to the Company, net of underwriting discounts and commissions and expenses, were approximately $36,317. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $5,000 was used to repay indebtedness. The remaining net proceeds have been principally allocated to fund secured development loans, acquisitions and for general corporate purposes.
As of December 31, 2004, the Company, through the Partnership and subsidiary partnerships, owned twenty-five limited and full service hotels and a joint venture interest in four properties. The Company terminated eight leases with Hersha Hospitality Management, LP (“HHMLP”), a Pennsylvania limited partnership, as of April 1, 2004. Subsequent to this termination, all of the owned hotel facilities are leased to the Company’s taxable REIT subsidiary (“TRS”), 44 New England. The Hampton Inn, (Manhattan) Chelsea, NY, owned in a joint venture with CNL, is leased to Hersha/CNL TRS Inc., a TRS wholly-owned by that joint venture. The Hilton Garden Inn, Glastonbury, CT owned in a joint venture, is leased to Hersha PRA TRS, Inc., a TRS wholly-owned by that joint venture. The Four Points by Sheraton, Revere, MA owned in a joint venture, is leased to Revere Hotel Group, LLC, a TRS owned by that joint venture and the Courtyard by Marriot in Ewing, NJ owned in a joint venture, is leased to Hersha Inn America TRS Inc., a TRS owned by that joint venture. We have consolidated the operations of the joint venture that owns the Four Points by Sheraton, Revere, MA because the Company owns a majority voting interest in the venture.
44 New England and the joint venture TRS lessees lease the hotel properties pursuant to separate percentage lease agreements (the “Percentage Leases”) that provide for percentage rents based on the revenues of the hotels. The hotels are located principally in the Mid-Atlantic region of the United States. HHMLP serves as the manager for all of the owned assets and joint venture assets. HHMLP is owned in part by four of the Company’s executive officers, two of its trustees and other third party investors.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include all of our accounts as well as accounts of the Partnership, subsidiary Partnerships and our wholly owned TRS Lessee. 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 maintain control of the asset through our voting interest in the entity. Control is demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the limited partners and the inability of the limited partners to replace the general partner. The minority interest balance in the accompanying balance sheets represents the limited partners’ interest in the net assets of the Partnership and the joint venture partner’s ownership interests in the consolidated net assets. Net operating results of the Partnership are allocated based on their respective partners’ ownership interests. Our ownership interest in the Partnership as of December 31, 2004, 2003 and 2002 was 87.7%, 65.1 and 33.6%, respectively.
We own a 55% joint venture interest in Logan Hospitality Associates, LLC, the owner of the Sheraton Four Point, Revere, MA. We have determined that we have a majority voting interest in this joint venture and that it qualifies for consolidation as it is a voting interest entity.
The Financial Accounting Standards Board issued FASB Interpretation No. 46, ("FIN 46") "Consolidation of Variable Interest Entities (VIE’s), an interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in January 2003 and a further interpretation of FIN 46 in December 2003 ("FIN 46-R" and FIN 46, collectively "FIN 46"). FIN 46 addresses how a business enterprise should evaluate whether it has a controlling financial interest in any variable interest entity (“VIE”) through means other than voting rights, and accordingly, should include the VIE in its consolidated financial statements. We have adopted FIN 46 effective as of March 31, 2004.
In accordance with FIN 46, we have evaluated our investments and contractual relationships with HHMLP, Logan Hospitality Associates, LLC, HT/CNL Metro Hotels, LP, PRA Glastonbury, LLC, Inn America Hospitality at Ewing, LLC, HPS Seaport LLC & BCM, LLC, 44 Fifth Avenue, LLC, HBK Hospitality Associates, L.P., 5444 Associates, LP, Brisam Hotel, LLC and Metro Ten Hotels, LLC to determine whether these entities meet the guidelines of consolidation per FIN 46. Our examination consisted of reviewing the sufficiency of equity at risk, controlling financial interests, voting rights, obligation to absorb expected losses and expected gains, including residual returns. Based on our examination, none of these entities was determined to be a variable interest entity.
We have terminated all of the existing leases with HHMLP, effective April 1, 2004. Due to the termination of the leases and the funding of sufficient equity by the partners of HHMLP, we have determined that HHMLP is a voting interest entity and we have no ownership interest in that entity. Therefore we have not consolidated the financial statements of HHMLP with ours effective as of April 1, 2004.
Our investments in HT/CNL Metro Hotels, LP, PRA Glastonbury, LLC and Inn America Hospitality at Ewing, LLC represent non-controlling ownership interests in properties. All of these entities are voting interest entities. These investments are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for net equity in income (loss), which is allocated in accordance with the provisions of the applicable partnership or joint venture agreements.
We will continue to evaluate each of our investments and contractual relationships to determine if consolidation is required based upon the provisions of FIN 46.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Developments
On July 1, 2004, we acquired a 50% joint venture interest in the 130 room Courtyard by Marriott, Ewing-Hopewell, NJ for approximately $1,025 from Inn America Hospitality, a third party developer. The Courtyard by Marriott, Ewing-Hopewell, NJ is leased to Hersha Inn America TRS, Inc, a TRS owned by that joint venture and managed by HHMLP. Our investment in the Courtyard by Marriott, Ewing-Hopewell is accounted for as an unconsolidated joint venture.
On July 16, 2004, we acquired the 120 suite Residence Inn, Greenbelt, MD for approximately $19,350. Residence Inn, Greenbelt, MD is leased to our TRS and managed by HHMLP.
On July 23, 2004, we acquired the 88 room Hilton Garden Inn, Gettysburg, PA for $7,650 including the assumption of approximately $5,450 of debt. We have acquired the Hilton Garden Inn, Gettysburg, PA from a partnership controlled by several of our executive officers and trustees. The Hilton Garden Inn, Gettysburg, PA is leased to our TRS and managed by HHMLP.
On September 24, 2004, we completed a public offering of 3,500,000 common shares at $9.37 per share. On September 30, 2004, the underwriter exercised its over-allotment option on these shares, and we issued an additional 400,000 common shares at $9.37 per share. Proceeds to the Company, net of underwriting discounts and commissions and expenses, were approximately $36,317. Immediately upon closing the offering, the Company contributed all of the net proceeds of the offering to the Partnership in exchange for additional Partnership interests. Of the net offering proceeds, approximately $5,000 was used to repay indebtedness. The remaining net proceeds have been principally allocated to fund secured development loans, acquisitions and for general corporate purposes.
We entered into an agreement effective April 1, 2004, with HHMLP to terminate the eight remaining leases for the following properties:
Holiday Inn Express, Long Island City, NY
Doubletree Club, Jamaica, JFK Airport - NY
Mainstay Suites, Frederick, MD
Hampton Inn & Suites, Hershey, PA
Hampton Inn, Danville, PA
Holiday Inn Express & Suites, Harrisburg, PA
Sleep Inn and Mainstay Suites, King of Prussia, PA
All of these properties have entered into leases with 44 New England (our TRS) effective as of April 1, 2004 and will continue to be managed by HHMLP. As part of the lease termination, the original sellers of the properties, HHLP and HHMLP have agreed to waive any and all purchase price adjustments (See “Note 6- Commitments and Contingencies and Related Party Transactions”) in the original purchase agreements for each of the properties. There is no contractual liability for any future repricings with any of our owned properties as of April 1, 2004. We entered into management agreements with HHMLP for each of these hotels, but did not pay any other consideration in connection with the lease terminations.
On November 1, 2004, we increased our first mortgage financing commitment of $11,000 to $13,850 for the newly constructed Hilton Garden Inn (JFK Airport), NY to Metro Ten Hotels, LLC, a third party owner of the asset.
On November 1, 2004, we provided a first mortgage financing commitment of $5,000 at 8.0% for the renovation of a Holiday Inn Express Lancaster, PA to HBK Hospitality Associates, L.P., a related party owner of the asset. We have also acquired a first right of offer to purchase this asset.
On November 1, 2004, we provided a first mortgage financing commitment of $4,100 at 10.0% for the construction of a hotel in Manhattan (Tribeca), New York to 5544 Associates, LP, a related party owner of the asset. We have simultaneously cancelled our $2,000 development line funding of this asset. We have also acquired a first right of offer to purchase this asset.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On November 1, 2004, we provided a first mortgage financing commitment of $4,400 at 10.0% for the construction of a Hampton Inn hotel in Manhattan (South Street Seaport), New York to HPS Seaport, LLC and BCM, LLC, a related party owner of the asset. We have simultaneously cancelled our $3,000 development line funding of this asset. We have also acquired a first right of offer to purchase this asset.
On November 5, 2004, we provided a first mortgage financing commitment of $7,000 at 8.0% for the construction of a limited service hotel in Manhattan (Midtown-South), New York to 44 Fifth Avenue, LLC, a related party owner of the asset. We have also acquired a first right of offer to purchase this asset.
Based on our examination, each of the five entities mentioned above to which we have provided development loans is a voting interest entity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Investment in Hotel Properties
Investment in hotel properties is stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method.
The estimated lives used to depreciate the hotel properties are as follows:
Building and Improvements
15 to 40 Years
Furniture and Fixtures to 7 Years
Revenue Recognition
We directly recognize revenue and expense for all hotels leased through 44 New England as “Hotel Operating Revenue” and “Hotel Operating Expense” when earned and incurred.
Earnings Per Common Share
We compute earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.”
Minority Interest
Minority Interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income (Loss) is allocated to minority interest in accordance with the weighted average percentage ownership of the partnership during the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted average percentage ownership of the partnership during the period.
We also maintain minority interests for the 45% equity interest in Logan Hospitality Associates, LLC (“Logan”) owned by a third party. We purchased a 55% joint venture in Logan during March 2004, and have consolidated the operations of this entity. We allocate this joint venture’s income (loss) to this minority interest account based upon the ownership of the entity.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
We review the carrying value of each hotel property in accordance with SFAS No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or if depreciation periods should be modified. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell.
Income Taxes
The Company qualifies as a REIT under applicable provisions of the Internal Revenue Code, as amended, and intends to continue to qualify as a REIT. In general, under such provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income will not be subject to Federal income tax to the extent of the income which it distributes. Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation of hotel properties for Federal income tax purposes.
Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS Lessee and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors. There were no income taxes recorded in the Statement of Operations.
Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, the Company is permitted to lease hotels to a wholly owned taxable REIT subsidiary (“TRS”) and may continue to qualify as a REIT provided the TRS enters into management agreements with an “eligible independent contractor” who will manage the hotels leased by the TRS. The Company formed the TRS Lessee in 2003. The TRS Lessee currently leases 25 properties from the Partnership. The TRS Lessee is subject to taxation as a C-Corporation. The TRS Lessee had an operating loss for financial reporting purposes for the period ended December 31, 2004. Although the TRS Lessee is expected to operate at a profit for Federal income tax purposes in future periods, the value of the deferred tax asset is not able to be quantified with certainty. Therefore, no deferred tax assets have been recorded as we have not concluded that it is more likely than not that these deferred tax assets will be realizable.
Cash Equivalents
The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
Escrow Deposits
We are obligated to maintain reserve funds for items such as capital expenditures at hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment), property taxes and insurance pursuant to mortgage agreements with participating lenders.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable
Accounts receivable are charged to bad debt expense when they are determined to be uncollectible based upon a periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debts.
Notes Receivable
The Company has invested in notes receivable in connection with hotel property transactions. Interest income is recognized on the notes receivable when earned based upon the terms of the related notes. Fees and costs incurred are amortized over the term of the related notes. The ultimate repayment of the notes is subject to a number of variables, including the performance and value of the underlying real property. The carrying amount of the notes receivable approximates its fair value in consideration of interest rates, market conditions and other qualitative factors.
Deferred Costs and Goodwill
Intangible assets consist of loan acquisition fees and franchise fees and are carried at cost net of accumulated amortization. Amortization of loan acquisition fees is computed using the straight-line method over the term of the related debt. Amortization of franchise fees is computed using the straight-line method over the term of the related agreement.
Goodwill of $412, net of accumulated amortization of $353, resulted from the acquisition of the Holiday Inn Hotel and Conference Center, Harrisburg, Pennsylvania. We have not recognized amortization expense on goodwill subsequent to December 31, 2001. We test goodwill for impairment at least annually and have not recognized any impairment during the three years ended December 31, 2004.
Advertising and Marketing
Advertising and marketing costs are expensed as incurred and totaled $1,082, $143 and $-0- for the years ended December 31, 2004, 2003 and December 31, 2002, respectively, related to the hotels operated by the TRS and consolidated in these financial statements. In connection with our franchise agreements, a portion of the franchise fees paid is for marketing services.
Distributions
We intend to pay distributions which, at a minimum, will be sufficient for us to maintain our REIT status.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents, rent receivable and note receivable arising from our normal business activities. We place our cash and cash equivalents with high credit quality financial institutions. We require collateral to support our financial instruments. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution. At December 31, 2004, we maintained funds at financial institutions that exceeded federally insured amounts.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
At December 31, 2004, financial instruments include cash and cash equivalents, notes receivable, accounts payable, accrued expenses, loans to and from related parties, notes payable, a line of credit and mortgages payable. The fair values of cash and cash equivalents, notes receivable and accounts payable and accrued expenses approximate carrying value because of the short-term nature of these instruments. The carrying value of loans with related parties approximates fair value. The carrying value of the mortgages payable and the line of credit approximates fair value since the interest rates approximate the interest rates currently offered for similar debt with similar maturities.
Derivatives
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps 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. During 2004, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
As of December 31, 2004, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENTS IN HOTEL PROPERTIES
Hotel properties consist of the following at December 31, 2004 and 2003:
Assets Held for Sale consist of the following at December 31, 2004. There were no assets held for sale at December 31, 2003.
The mortgage debt related to the Assets Held for Sale was $13,058 at December 31, 2004.
Depreciation expense was $7,356, $4,681 and $4,089 for the years ended December 31, 2004, 2003 and 2002, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENTS IN HOTEL PROPERTIES (Continued)
In 2004, 2003 and 2002, we acquired and sold the following hotels for the approximate amounts indicated.
The above acquisitions were accounted for as purchases, and the results of such acquisitions are included in the Company’s consolidated statements of operations from the dates of acquisition. No goodwill arose in the transactions.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENTS IN HOTEL PROPERTIES (Continued)
The following summarizes the number of hotels owned excluding those owned in joint ventures for the periods presented:
During the years ended December 31, 2004, 2003 and 2002 we acquired the following hotel properties, including closing costs.
On February 23, 2004, we purchased a 55% joint venture interest in Logan Hospitality Associates, LLC, the owner of the Sheraton Four Point, Revere, MA. We have determined that we have a majority voting interest in this joint venture and that it qualifies for consolidation as it is a voting interest entity. The consolidated assets of this property included in our balance sheet as of December 31, 2004 are as follows:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 2 - INVESTMENTS IN HOTEL PROPERTIES (Continued)
Pro Forma Opeating Results (Unaudited)
The following condensed pro forma financial is presented as if the Residence Inn, Greenbelt, MD acquisition had been consummated as of January 1, 2003. All of the other acquisitions listed above were either purchased without any operating history or did not have a full year’s operating history in 2003 or 2004 due to renovation activity. The condensed pro forma information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisition had been consummated at the beginning of the respective periods presented, nor does it purport to represent the results of operations for future periods.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 3 - NOTES RECEIVABLE
Joint Ventures
On November 11, 2003, we provided financing to HT/CNL Metro Hotels, our joint venture with CNL, in the amount of $15,000. This note was fully repaid in July 2004. The terms of the note called for interest only payments at 5.0% per annum through maturity. For the years ended December 31, 2004 and 2003, we earned interest income of $412 and $79, respectively, which is included in “Interest - Secured Loans Related Party” on the statement of operations.
During 2004, we provided a first mortgage financing commitment of $13,850 for the newly constructed Hilton Garden Inn (JFK Airport), NY to Metro Ten Hotels, LLC, a third party owner of the asset. We have also acquired an option to purchase a 50% interest in this asset at fair value. As of December 31, 2004, $13,800 of the mortgage has been drawn and is recorded in our Notes Receivable balance. For the year ended December 31, 2004, we earned interest income of $693, which is included in “Interest - Secured Loans” on the statement of operations.
Seller Financing
On September 26, 2002, in connection with the sale of the Clarion Suites, Philadelphia, PA, we provided financing in the amount of $200 of which $103 and $200 were outstanding as of December 31, 2004 and 2003. The terms of the note called for accrued interest at 10% per annum through maturity on December 31, 2003, when the outstanding balance and accrued interest were due. The note is unsecured. During 2004, we extended the due date of the note through June 30, 2005. The note modification also increases our interest rate to 12% from July 1, 2004 until maturity. We had not been accruing interest in prior periods due to the uncertainty of collection of this interest. Based upon current interest and principal payments made during 2004 and our ongoing negotiations, we have determined that the interest and principal is fully collectible. We have recognized accrued interest income from September 2002 until December 31, 2003 during the current year. For the year ended December 31, 2004, we recorded interest income of $44 which is included in “Other Revenue” on the statement of operations.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 4 - INVESTMENT IN JOINT VENTURES
On August 29, 2003, HT/CNL Metro Hotels, LP purchased the Hampton Inn, (Manhattan) Chelsea, NY. We own a one-third equity interest in this joint venture partnership while CNL Hospitality Partners LP owns the remaining equity interests. HT/CNL Metro Hotels purchased this asset for $28,000 plus settlement costs of approximately $480 and leased it to Hersha CNL TRS, Inc., a TRS wholly owned by HT/CNL Metro Hotels. In conjunction with this transaction, HT/CNL Metro Hotels executed mortgage indebtedness of approximately $15,400 payable to the Partnership and paid cash of approximately $14,080. HT/CNL Metro Hotels repaid the entire amount of the indebtedness to the Partnership in July 2004.
On November 13, 2003, we purchased a 40% joint venture interest in PRA Glastonbury, LLC. The only asset owned by PRA Glastonbury, LLC is the Hilton Garden Inn, Glastonbury, CT. We purchased our joint venture interest in this asset for $2,680 including settlement costs of approximately $250 and leased the hotel assets to Hersha PRA TRS, Inc., a TRS wholly owned by PRA Glastonbury, LLC. In conjunction with this transaction, PRA Glastonbury, LLC assumed mortgage indebtedness of approximately $9,900.
On July 1, 2004, we purchased a 50% joint venture interest in Inn America Hospitality at Ewing, LLC. The only asset owned by this entity is the Courtyard by Marriott, Ewing-Hopewell, NJ. We purchased our joint venture interest in this asset for $1,025 including closing costs of approximately $55 and leased the hotel assets to Hersha Inn America TRS, Inc., a TRS wholly-owned by Inn America Hospitality at Ewing, LLC.
We account for our investment in the above mentioned unconsolidated joint ventures using the equity method of accounting. We recognize depreciation expense on the depreciation on any outside basis recorded by the Company related to the partnership.
As of December 31, 2004, and 2003, our investment in unconsolidated joint ventures consists of the following:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (Continued)
The following table sets forth the total assets, liabilities, equity and components of net income, including the Company’s share, related to the unconsolidated joint ventures discussed above as of December 31, 2004, and 2003.
Equity in income (loss) recognized during years ended December 31, 2004 and 2003 for our Equity
Investments in Unconsolidated Joint Ventures:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 5 - DEBT
Mortgages
The total mortgages payable balance at December 31, 2004, and December 31, 2003, was $110,819 and $70,837, respectively, and consisted of mortgages with fixed and variable interest rates ranging from 4.0% to 9.43%. Of our total mortgages payable balance at December 31, 2004, $13,058 related to mortgages on assets held for sale. The maturities for the outstanding mortgages ranged from May 2007, to October 2014. Aggregate interest expense incurred under the mortgages payable totaled $6,780, $4,894 and $4,766 during 2004, 2003 and 2002, respectively. The mortgages are secured by first deeds of trust various hotel properties with a combined net book value of $164,517 and $121,076 as of December 31, 2004, and 2003, respectively.
Aggregate annual principal payments for the Company’s mortgages payable for the five years following December 31, 2004 and thereafter are as follows:
Revolving Line of Credit
The Company has a revolving line of credit from Sovereign Bank (the “Line of Credit”) in the maximum amount of $35,000. Outstanding borrowings under the Line of Credit bear interest at the bank’s prime rate and the Line of Credit is collateralized by the Holiday Inn Express and Suites, Harrisburg, PA and the Mainstay Suites and Sleep Inn, King of Prussia, PA. On August 31, 2004, the Company extended the term of the Line of Credit from its scheduled expiration in December 2004 to its current expiration in August 31, 2007. The Company maintained a Line of Credit balance of $1,027 at December 31, 2004, and there was no outstanding principal balance on the Line of Credit December 31, 2003. The weighted average interest rate on our Line of Credit during the years ended December 31, 2004 and 2003 was approximately 4.30% and 4.13%.
Capital Lease Payable
The Company assumed a $500 capital lease obligation as part of its acquisition of the Holiday Inn Express, Hartford, CT in January 2004. The six year lease is secured by furniture, fixtures and equipment and the hotel property and is amortized over a six year period from the acquisition at a fixed rate of 7.75%.
Aggregate annual payments for the Company’s capital leases payable for the five years following December 31, 2004 and thereafter are as follows:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
We are the sole general partner in the Partnership, which is indirectly the sole general partner of the subsidiary partnerships. The Company does not anticipate any losses as a result of our obligations as general partner.
Percentage Leases
In June 2004, we entered into an agreement effective April 1, 2004, with HHMLP to terminate the eight remaining leases for the following properties:
Holiday Inn Express, Long Island City, NY
Doubletree Club, Jamaica, JFK Airport - NY
Mainstay Suites, Frederick, MD
Hampton Inn & Suites, Hershey, PA
Hampton Inn, Danville, PA
Holiday Inn Express & Suites, Harrisburg, PA
Sleep Inn and Mainstay Suites, King of Prussia, PA
All of these properties have entered into leases with 44 New England (our TRS) effective as of April 1, 2004, and will continue to be managed by HHMLP. As part of the lease termination, the original sellers of the properties, HHLP and HHMLP have agreed to waive any and all purchase price adjustment in the original purchase agreements for each of the properties. There is no potential liability for any future repricings with any of our owned properties as of December 31, 2004. We entered into management agreements with HHMLP for each of these hotels, but did not pay any other consideration in connection with the lease terminations.
For the year ended December 31, 2004, we earned fixed rents of $1,222 and earned percentage rents of $662. For the year ended December 31, 2003, we earned fixed rents of $4,889 and earned percentage rents of $8,021. For the year ended December 31, 2002, we earned fixed rents of $6,510 and earned percentage rents of $8,252.
The Company had previously entered into leases with Noble Investment Group Ltd. (“Noble”), an independent third party management company, to lease and manage four hotels in the metropolitan Atlanta, Georgia market. Noble elected not to renew these leases upon expiration of the initial terms of the leases. The leases for the Hampton Inn, Newman, GA and Hampton Inn, Peachtree City, GA expired on April 20, 2003 and the leases for the Comfort Suites, Duluth, GA and Holiday Inn Express, Duluth, GA expired on May 20, 2003. On the respective lease termination dates, the Company leased the four properties to 44 New England and engaged HHMLP to operate the hotels under management contracts.
Therefore, the consolidated financial statements as of December 31, 2003, and thereafter, include the operating results of these four hotels under the TRS structure from the termination date, Previously, revenues in the consolidated financial statements were derived primarily from lease payments which were made out of the net operating income of the properties pursuant to the Percentage Leases. Under the TRS structure, total revenues from the hotel properties and the related operating expenses are reported in the consolidated statements of operations.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
Management Agreements
Beginning in April 2003, 44 New England, our TRS, engaged HHMLP as the property manager for hotels it leased from us pursuant to management agreements. Each management agreement provides for a five-year term and is 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.
As of December 31, 2004, HHMLP managed all 25 hotels leased to our TRS, and we consolidated the financial statements of these 25 hotels in these financial statements. HHMLP also managed one consolidated joint venture hotel property and three unconsolidated joint venture hotel properties in which we maintain an investment. For its services, HHMLP receives a base management fee, and if a hotel meets and exceeds certain thresholds, an additional 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 hotel. There were no incentive management fees payable for the years ended December 31, 2004 and 2003. For the years ended December 31, 2004, 2003 and 2002, management fees incurred totaled $1,454, $142 and $-0-, respectively, and are recorded as Hotel Operating Expenses.
Administrative Services Agreement
We have executed an administrative services agreement with HHMLP to provide accounting and securities reporting services for the Company. The terms of the agreement provide for us to pay HHMLP an annual fee of $10 per property (prorated from the time of acquisition) for each hotel in our portfolio. For the years ended December 31, 2004, 2003 and 2002, administrative services fees of $253, $178 and $175, respectively, are included in General and Administrative expenses.
Franchise Agreements
The 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 lessees and charged to expenses as incurred. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
Acquisitions from Affiliates
We have acquired from affiliates of certain of our executive officers and trustees, newly-developed or newly-renovated hotels that do not have an operating history that would allow us to make purchase price decisions based on historical performance. In buying these hotels, we previously utilized, a “re-pricing” methodology that, in effect, adjusted the initial purchase price for the hotel, one or two years after we initially purchased the hotel, based on the actual operating performance of the hotel during the twelve months prior to the repricing. As part of our lease termination agreement with HHMLP, the original sellers of all of these properties, HHMLP and the Company have waived their respective rights to any and all purchase price adjustments for all properties.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
In the future, we do not intend to use any re-pricing methodology in acquisitions from entities controlled by our officers and trustees.
We have entered into an option agreement with each of our officers and trustees such that we obtain a first right of refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them regardless of proximity to our hotels. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of our Company. Of the 28 hotel properties purchased by us since our initial public offering, 15 were acquired from affiliates, 14 of which were newly-constructed or substantially renovated. 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 negotiated with the Acquisition Committee. In addition, we have hired an independent accounting firm to provide our Board of Trustees with an “Agreed Upon Procedures” report for all acquisitions and dispositions to related parties.
Hotel Supplies
For the years ended December 31, 2004, 2003 and 2002, we incurred expenses of $804, $73 and $0, respectively, for hotel supplies from Hersha Hotel Supply, an unconsolidated related party, which are expenses included in Hotel Operating Expenses. Approximately $4 and $20 is included in accounts payable at December 31, 2004 and 2003.
Advances to/from Affiliates
As of December 31, 2004, and December 31, 2003, amounts due from related parties totaled $27,129 and $5,768, respectively. We have approved mortgage lending to entities in which our executive officers and trustees own an interest to enable such entities to construct hotels and conduct related improvements on specific hotel projects at interest rates ranging from 8.0% to 12.0% (“Development Line Funding”). As of December 31, 2004, and December 31, 2003, our due from related party balance consisted of Development Line Funding of $22,750 and $5,700. We also maintain interest bearing deposits of $3,500 related to letters of intents for acquisitions of these properties. Interest income from these advances included in “Interest - Secured Loans Related Party,” was $1,498, $715 and $207 for the periods ended December 31, 2004, 2003 and 2002, respectively. The remainder of the due from related party balance as of December 31, 2004 and 2003 included approximately $879 and $68, respectively, of operating cash from HHMLP and other operating entities.
As of December 31, 2004 our development loans to related parties consist of the following:
(*) - Loan has been paid off as of March 4, 2005
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (Continued)
The due to related party balance as of December 31, 2004, and 2003, totaled $129 and $419, respectively. The due to related party balances at December 31, 2004 and 2003 consists of monies payable to HHMLP for administrative and management fees and for furniture, fixtures and equipment reserves.
Land Leases
During 2003, in conjunction with the acquisition of the Hilton Garden Inn, Edison, NJ, we assumed a land lease from a third party with an original term of 75 years. Monthly payments as determined by the lease agreement are due through the expiration in August 2074. For the years ended December 31, 2004 and 2003, we incurred $504 and $50, respectively, in lease expense under the agreement.
During 2004, in conjunction with the acquisition of the Holiday Inn Express, Hartford, CT, we assumed a land lease from a third party with an original term of 99 years. Monthly payments as determined by the lease agreement are due through the expiration in September 2101. For the year ended December 31, 2004, we incurred $275 in lease expense under the agreement.
Future minimum lease payments (without reflecting future applicable Consumer Price Index increases) under the agreements are as follows:
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
Legal Fees
We have paid to the law firm of Shah & Byler, LLP and its predecessor, Shah Ray & Byler, LLP, whose former senior partner, Jay H. Shah is now our President and Chief Operating Officer and is the son of Hasu P. Shah, legal fees aggregating $679, $212 and $60 during 2004, 2003 and 2002, respectively. Mr. Shah has resigned from the law firm and relinquished all ownership and control of the firm. Mr. Shah will continue as counsel to the law firm and may receive compensation from the firm for prior client origination. We intend to continue to use the services of Shah & Byler, LLP. Approximately $15 and $16 is included in accounts payable at December 31, 2004 and 2003, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 7 - 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 or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps 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. During 2004, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
As of December 31, 2004, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.
At December 31, 2004, derivatives with a fair value of $306 were included as liabilities. The change in net unrealized gains/losses of $33 in 2004 for derivatives designated as cash flow hedges is separately disclosed in the statement of changes in shareholders’ equity and comprehensive income. Hedge ineffectiveness of $3 on cash flow hedges was recognized in general and administrative expense during 2004. The change in fair value of derivatives prior to hedge designation of $62 is included in our Statement of Operations in 2004. This interest rate derivative matures in July 2009.
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 debt. The change in net unrealized gains/losses on cash flow hedges reflects a reclassification of $33 of net unrealized gains/losses from accumulated other comprehensive income to interest expense during 2004. During 2005, the Company estimates that an additional $133 will be reclassified.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 8 - DISCONTINUED OPERATIONS
The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective January 1, 2002 which requires, among other things, that the operating results of certain real estate assets which have been sold subsequent to January 1, 2002, or otherwise qualify as held for disposition (as defined by SFAS No. 144), be included in discontinued operations in the statements of operations for all periods presented.
On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn, Corapolis, Pennsylvania to some of our executive officers, trustees and their affiliates for $5,500, including the assumption of approximately $3,500 in indebtedness and the cancellation of 327,038 limited partnership units valued at approximately $2,000. We initially purchased this property from these executive officers, trustees and their affiliates as of October 1, 2000, for $5,500 including 327,038 limited partnership units. This transaction has been accounted for as of January 1, 2002. We did not recognize any gain or loss on the sale of this asset.
On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third party for $6,300 less transfer costs of $103. In order to complete the sale of this hotel, the Company is currently carrying seller financing that is due and payable on June 30, 2005. The operating results for this hotel are included in discontinued operations in the statements of operations for the year ended December 31, 2002.
In 2004, our Board of Trustees authorized management of the Company to sell the Doubletree Club, Jamaica, NY and the Holiday Inn Express, Long Island City, NY which are classified as “held for sale” on the Company’s Consolidated Balance Sheet as of December 31, 2004. Both properties are currently under a non-binding letter of intent with potential purchasers. The operating results for these hotels have been reclassified to discontinued operations in the statements of operations for the years ended December 31, 2004, 2003 and 2002.
We allocate interest expense to discontinued operations for debt that is to be assumed or that is required to be repaid as a result of the disposal transaction. We allocated $650, $644 and $548 of interest expense to discontinued operations for the years ended December 31, 2004, 2003 and 2002, respectively.
The following table sets forth the components of discontinued operations for the years ended December 31, 2004, 2003 and 2002:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 8 - DISCONTINUED OPERATIONS (continued)
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 9 - EARNINGS PER SHARE
The following is a reconciliation of the income (numerator) and weighted average shares (denominator) used in the calculation of basic earnings per common share and diluted earnings per common share in accordance with SFAS No. 128, Earnings Per Share:
Our earnings per share calculation presents only basic earnings per share in cases where the inclusion of the Common Partnership Units and Series A Preferred Units are deemed to be anti-dilutive to earnings per share.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 10 - SHAREHOLDERS’ EQUITY AND MINORITY INTEREST IN PARTNERSHIP
As of December 31, 2003, the Priority Class A Common Shares had priority as to the payment of dividends until dividends declared equal $0.18 per share on a quarterly basis ($.72 per year) and participated equally in additional dividends after the Class B Common Shares received $.18 per share in each quarterly period. The Priority Class A Common Shares carried a liquidation preference of $6.00 per share plus unpaid dividends and vote with the Class B Common Shares on a one vote per share basis. The priority period of the Class A Shares commenced on the date of the closing of the initial public offering and ended on January 26, 2004.
There have never been any Class B Common Shares outstanding since our initial public offering on January 26, 1999. The conversion features of the Class B Common Shares into Priority Class A Common Shares are exactly the same as the conversion features of the Hersha Hospitality Limited Partnership (HHLP) Units into Priority Class A Common Shares. The Limited Partnership Units and Class B Common Shares were convertible into Priority Class A Common Shares as of January 26, 2004. During 2004, 957,286 common units were converted to Class A Common Shares.
The Company’s common shares are duly authorized, fully paid and non-assessable. Common shareholders are entitled to receive dividends if and when authorized and declared by the Board of Trustees of the Company out of assets legally available and to share ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation, dissolution or winding up after payment of, or adequate provision for, all known debts and liabilities of the Company.
Upon liquidation of the Partnership after the Priority Period, after payment of, or adequate provision for, debts and obligations of the Partnership, including any partner loans, any remaining assets of the Partnership will be distributed to us and the Limited Partners with positive capital accounts in accordance with their respective positive capital account balances.
Preferred Shares
The Declaration of Trust authorizes our Board of Trustees to classify any unissued preferred shares and to reclassify any previously classified but unissued preferred shares of any series from time to time in one or more series, as authorized by the Board of Trustees. Prior to issuance of shares of each series, the Board of Trustees is required by Maryland REIT Law and our Declaration of Trust to set for each such series, subject to the provisions of our Declaration of Trust regarding the restriction on transfer of shares of beneficial interest, the terms, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Thus, our Board of Trustees could authorize the issuance of preferred shares with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control in us that might involve a premium price for holders of common shares or otherwise be in their best interest.
Preferred Units of Limited Partnership Interests
During 2003, CNL purchased a total of 190,266 of convertible preferred limited partnership units (the “Series A Convertible Preferred Units”) at a per unit price of $100.00. The Series A Preferred Units had priority over all Common Shares and Partnership Units, as to the payment of dividends at a rate of 10.5% per annum of the original issue price. In addition, the Series A Preferred Units had a liquidation preference of $100 per unit plus accrued and unpaid distributions. CNL has converted all of their preferred limited partnership units during 2004.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 10 - SHAREHOLDERS’ EQUITY AND MINORITY INTEREST IN PARTNERSHIP (Continued)
Common Partnership Units
Since the completion of the initial public offering we have issued an additional 173,539 units of limited partnership interest in connection with the acquisition of the Hampton Inn, Danville, PA and 76,555 units in connection with the acquisition of the Holiday Inn Express, Long Island City. We have also issued an additional 1,275,663 units of limited partnership interest in connection with final settlement of the purchase prices of several hotels and have redeemed 458,465 units of limited partnership interest in connection with the sale of certain hotels. On October 21, 2003, we redeemed 1,300,000 limited partnership units at a price of $8.00 per unit, or $10,400 in the aggregate. The redemption price was funded with the proceeds of our public equity offering in October 2003. During 2004, 957,286 units of limited partnership interest were converted to Class A Common Shares.
The total number of units of limited partnership interest outstanding as of December 31, 2004, 2003 and 2002 was 2,842,437; 3,799,723; and 5,099,220, respectively.
At December 31, 2004 and 2003, the aggregate number of common shares issuable to the limited partners upon exercise of the redemption rights is 2,842,437 and 3,799,723, respectively. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidation or similar pro rata share transactions, that otherwise would have the effect of diluting the ownership interest of the limited partners or our shareholders.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 11 - INCOME TAXES
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1999. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders. It is the Company’s current intention to adhere to these requirements and maintain the Company’s qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.
In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes. 44 New England Company, a 100% owned taxable REIT subsidiary, and Revere Hotel Group LLC, a 55% owned taxable REIT subsidiary, (collectively “Consolidated TRS”) are both entities subject to income taxes at the applicable federal, state and local tax rates.
In 2003 and 2004, 44 New England Management Company generated net operating losses of $351 and $1,279, respectively. In 2004 Revere Hotel Group LLC generated a net operating loss of $201. The Company did not record a tax benefit for the net operating losses generated in either 2003 or 2004.
There was no income tax expense (benefit) recognized by the Consolidated TRS for 2004 or 2003.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 11 - INCOME TAXES (continued)
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
The components of consolidated TRS’s deferred tax assets as of December 31, 2004 were as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Consolidated TRS will not realize the benefits of these Net Operating Losses at December 31, 2004.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 12 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING ACTIVITIES
Interest paid in 2004, 2003 and 2002 totaled $6,706, $4,927 and $5,364, respectively. The following non-cash investing and financing activities occurred during 2004, 2003 and 2002:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No.123R”) which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”). SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion No. 25”) and its related implementation guidance. SFAS No. 123R requires companies to record compensation expense for share-based payments to employees, including grants of employee stock options, at fair value. SFAS No. 123R is effective for most public companies at the beginning of the first interim or annual period beginning after June 15, 2005. We do not expect SFAS 123R to have a material impact on the Company.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 14 - SELECTED RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED)
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 14 - SELECTED RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Notes:
1)
As discussed in Note 8, two properties were held for sale at December 31, 2004 and in accordance with SFAS 144 the results of those properties have been restated from continuing operations to discontinued operations. The first quarter revenues, expenses, and income (loss) from continuing operations have been adjusted to reflect the Doubletree Club, Jamaica (JFK Airport), NY and the Holiday Inn Express, Long Island City, NY as discontinued operations. The impact of this change was to reclassify; revenue $692, expense $337, and income (loss) from continuing operations $355. The second quarter revenues, expenses, and income (loss) from continuing operations have been adjusted to reflect the Holiday Inn Express, Long Island City, NY as discontinued operations (the previously reported amounts already presented the Doubletree Club, Jamaica, NY as discontinued operations). The impact of this change was to reclassify; revenue $607, expense $447, and income (loss) from continuing operations $160. The third quarter revenues, expenses, and income (loss) from continuing operations have been adjusted to reflect the Holiday Inn Express, Long Island City, NY as discontinued operations (the previously reported amounts already presented the Doubletree Club, Jamaica, NY as discontinued operations). The impact of this change was to reclassify; revenue $565, expenses $492, income (loss) from continuing operations $73.
2)
Adjustments to correct errors caused by the recording of certain revenue and expense items, in the fourth quarter, which should have been recorded in prior quarters.
a.
In the fourth quarter, the Company recorded the quarterly asset management fee due from HT/CNL Metro Hotels LP of $100 ($25 per quarter). An adjustment was necessary to record $25 of revenue in each of the first three quarters and to properly record revenue in the fourth quarter.
b.
In the fourth quarter, the Company recorded additional property tax expense related to the Holiday Inn Express in Hartford CT, which was acquired in 2004 in the amount of $138, which related to the first and second quarter property tax bills. An adjustment was necessary to increase the reported property taxes in the first quarter by $16 and the second quarter by $122 and to properly state expense in the fourth quarter.
c.
In the first quarter, we recognized $100 of insurance expense resulting from a workers compensation audit from 2002/2003. During the period under audit, the hotels were leased to HHMLP and therefore the additional expense should have been paid by HHMLP and not our wholly owned TRS.
d.
In the first quarter, HHLP accrued additional insurance expense related to prior period estimates that is properly reflected as a change in estimate. The additional expense was recognized throughout 2004 instead of during the first quarter of 2004. As a result, there was an understatement of insurance expense in the first quarter of $124 and an overstatement of insurance expense in the second and third quarters of $52.
e.
The land lease for the Hilton Garden Inn Edison, NJ provides rent increases at scheduled intervals. The Company had recorded the land lease expense based upon the cash payment schedule per the lease terms. Rent expense should be recorded on a straight-line basis over the life of the lease from the beginning of the lease term. In the fourth quarter an entry in the amount of $242 was made to increase the rent expense to the straight-line annual amount of $442. Lease expense has been increased by $61 in each of the first through third quarters of 2004.
f.
Also related to the land lease for the Hilton Garden Inn Edison, NJ a review of the rent expense for the year showed an additional payment in the first quarter for a total of 13 payments in the year. This additional payment was adjusted to prepaid rent in the fourth quarter but should have been made in the first quarter.
g.
During a review of assets capitalized in connection with various acquisitions during 2004 it was discovered that certain assets were recorded with incorrect methods or lives when compared to the Company’s asset capitalization policy. These were corrected in the fourth quarter, however, on a quarterly basis these errors resulted in an overstatement of depreciation expense in the first quarter of $7 and an understatement of depreciation expense in the second and third quarters of $44 and $39 respectively.
h.
In July of 2004 the Company entered into an interest rate swap associated with a mortgage on The Sheraton Four Points. The Sheraton Four Points is owned by Logan Hospitality and HHLP owns a 55% majority voting interest and as a result is consolidated in the Company’s financial statements. The Company did not record this swap nor designate it as a hedge until the fourth quarter and as a result any changes in the fair value of the swap should be recorded as gains or losses on the statement of operations. As a result a loss of $118 on derivative should have been recorded in the third quarter and a gain of $54 should have been recorded as a gain on derivative prior to November 15, 2004 when the swap was designated as an effective hedge. The net loss on derivative was recorded in the fourth quarter and this adjustment correctly states the third and fourth quarters.
During the fourth quarter, the taxable REIT subsidiary of one of our joint ventures in which we have a 33% voting interest recorded an expense for estimated state and federal income taxes in the amount of $181 of which our portion is $75. This expense should have been recognized in the respective quarter in which it was incurred. We have decreased income from unconsolidated joint ventures in the second and third quarters by $23 and $22, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 14 - SELECTED RESTATED QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTE 15 - SUBSEQUENT EVENTS
On December 1, 2004, we declared a $0.18 per Class A common share dividend and a distribution of $0.18 per limited partnership unit that was paid on January 14, 2005.
On January 6, 2005, we purchased land in Carlisle, PA and leased the land to 44 Carlisle Associates, LP, a related party.
On February 1, 2005, we acquired the 109 room Fairfield Inn, Laurel, MD for $7,250 plus closing costs.
On February 18, 2005, we purchased land at the Bradley International Airport and leased the land to 44 Windsor Locks Associates, LLC, a related party.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
The aggregate coat of land, buildings and improvements for
Federal income tax purposes is approximately $128,518
The aggregate coat of land, buildings and improvements for
Federal income tax purposes is approximately $89,852
Depreciation is computed based upon the following useful lives:
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Please refer to our Current Reports on Form 8-K filed on April 9, 2003, and April 22, 2004.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision of and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are not effective and reasonably designed to ensure that all material information relating to the Company required to be included in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Company’s management has identified material weaknesses and has described these weaknesses in further detail below.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company is in the process of conducting an evaluation of its internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controls over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
The Company’s evaluation of its internal control over financial reporting has not yet been completed. Securities and Exchange Commission Release No. 34-50754, provides up to 45 additional days beyond the due date of this Annual Report on Form 10-K for the filing of management’s annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K and the related attestation report of the independent registered public accounting firm, as required by Item 308(b) of Regulation S-K. Pursuant to such release, management’s report on internal control over financial reporting and the associated report on the audit of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, are not filed herein and are expected to be filed no later than May 2, 2005.
Although the Company has not yet completed its annual report on internal controls over financial reporting as stated above, during the process of this evaluation, management has concluded that there are material weaknesses in the Company’s internal controls over financial reporting as defined by the Public Company Accounting Oversight Board, or PCAOB. In its rules implementing Section 404 of the Sarbanes-Oxley Act, PCAOB defines a material weakness in internal controls over financial reporting as “a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.”
The material weaknesses that the Company believes will be included in its final report include the following:
·
The Company has designed a control to detect material errors in payroll expense by comparing actual expense per the reports of a third party who administers the Company’s payroll to estimated payroll expense and reconciling any significant differences. Estimated payroll expense is developed using data supporting changes in payroll amounts. Based upon our testing we determined that the control was not operating effectively.
·
The Company has designed a control to ensure the completeness and accuracy of revenue by reconciling revenue to rooms occupied and charges applied data. The reconciliation control was to be performed by hotel level accounting personnel employed by the Company’s affiliated hotel management company. As a result of our testing we determined that the control was not operating effectively.
·
The Company has identified material weaknesses in its financial reporting process related to the prompt identification of the accounting impact of transactions in accordance with financial reporting requirement per GAAP caused by insufficient levels of review by appropriately qualified personnel in its financial reporting process. Secondly, management has determined that the review of account reconciliations and journal entries to ensure the completeness and accuracy is not operating effectively.
The Company has taken, and intends to take further, remedial measures in response to these identified material weaknesses. To date, those remedial measures include the following:
·
The Company has changed third party payroll service providers, and the new provider is able to provide an independent audit report on its internal controls so that we can adequately monitor controls over the payroll process. The Company expects to use this information to satisfactorily control the payroll process and will no longer rely on the control described above that is not operating effectively.
·
The Company is taking steps to better inform and train hotel level accounting employees of its management company regarding the internal control over revenue accounting, which was not operating effectively.
·
The Company is seeking to hire additional senior accounting professionals, including a Chief Accounting Officer whose responsibilities were previously performed by the Chief Financial Officer and Treasurer. The Company has also established additional procedures to more thoroughly prepare and review its financial statements.
These material weaknesses and remedial measures, as well as any other material weaknesses identified and remedial measures undertaken as part of the testing process, will be explained in detail in management’s report on internal control over financial reporting and the associated report on the audit of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, which will be filed with the SEC no later than May 2, 2005.
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2004, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There can be no assurance that as a result of the ongoing evaluation of internal control over financial reporting, additional material weaknesses or significant deficiencies will not be identified or that any material weaknesses or significant deficiencies identified, either alone or in combination with others, will not be considered a material weakness.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Further, the design of disclosure controls and internal control over financial reporting must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
PART III
Item 10.
Item 10.
Trustees and Executive Officers of Our Company
Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on May 15, 2005.
Item 11.
Item 11.
Executive Compensation
Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on or about May 15, 2005.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on or about May 15, 2005.
Item 13.
Item 13.
Certain Relationships and Related Transactions
Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on or about May 15, 2005.
Item 14.
Item 14.
Principal Accountant Fees and Services
Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on or about May 15, 2005.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
Financial Statements
Hersha Hospitality Trust and Subsidiaries
Reports of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31,
(b)
Reports on Form 8-K
No Current Reports on Form 8-K were filed by us during the fourth quarter of 2004.
(c)
Exhibits
3.1
Amended and Restated Declaration of Trust of the Registrant.**
3.2
Articles Supplementary of Hersha Hospitality Trust which classify and designate 350,000 preferred shares of beneficial interest as Series A Preferred Shares of beneficial interest, par value $.01 per share (filed as Exhibit 3.1 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
3.3
Bylaws of the Registrant.*
4.1
Form of Common Share Certificate*
4.2
Excepted Holder Agreement, dated April 21, 2003, by and among CNL Hospitality Properties, Inc., CNL Hospitality Partners, L.P., Hersha Hospitality Trust and Hersha Hospitality Limited Partnership (filed as Exhibit 4.1 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.1
Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership*
10.2
Option Agreement dated as of June 3, 1998, among Hasu P. Shah, Jay H. Shah, Neil H, Shah, Bharat C. Mehta, K.D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and the Partnership*
10.3
Amendment to Option Agreement dated December 4, 1998*
10.4
Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi Associates, Shreeji Associates, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror*
10.5
Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror*
10.6
Purchase Leaseback Agreement entered into as of May 19, 2000 between Hersha Hospitality Limited Partnership and each of Noble Investments Newnan, LLC, Millennium Two Investments Duluth, LLC, Noble Investments RMD, LLC and Embassy Investments Duluth, LLC, entities owned by Noble Investment Group, Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 5, 2000)
10.7
Form of Percentage Lease*
10.8
Administrative Services Agreement, dated January 26, 1999, between Hersha Hospitality Trust and Hersha Hospitality Management, L.P.*
10.9
Purchase Agreement, dated December 4, 2001, between Metro Two Hotel, LLC, as Seller, and HHLP Hunters Point, LLC, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 7, 2001)
10.10
Securities Purchase Agreement, dated as of April 21, 2003, among CNL Hospitality Partners, L.P., Hersha Hospitality Trust and Hersha Hospitality Limited Partners (filed as Exhibit 10.1 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.11
Second Amendment to the Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership, dated as of April 21, 2003 (filed as Exhibit 10.2 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.12
Standstill Agreement, dated as of April 21, 2003, by and among Hersha Hospitality Trust, Hersha Hospitality Limited Partnership, CNL Hospitality Partners, L.P. and CNL Financial Group, Inc. (filed as Exhibit 10.3 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.13
Registration Rights Agreement, dated April 21, 2003, between CNL Hospitality Partners, L.P. and Hersha Hospitality Trust (filed as Exhibit 10.4 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.14
Limited Partnership Agreement of HT/CNL Metro Hotels, LP, dated as of April 21, 2003 (filed as Exhibit 10.5 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.15
Second Amendment to Option Agreement (filed as Exhibit 10.15 to the Registration Statement on Form S-3 filed on February 24, 2004 (File No. 333-113061)).
List of Subsidiaries of the Registrant***
23.1
Consent of Moore Stephens, P.C.***
23.2
Consent of Reznick Group, P.C.***
23.3
Consent of KPMG LLP***
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
_____________________
*
Filed with the SEC as an exhibit to Hersha Hospitality Trust’s registration statement on Form S-11, as amended, Registration No. 333-56087, and incorporated herein by reference.
**
Filed with the SEC as an exhibit to the registration statement on Form S-2, Registration No. 333-109100, filed on September 25, 2003, and incorporated herein by reference.
***
Filed herewith.
(d)
Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2001 included in Item 8 on page 77 hereof.
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
March 15, 2005 /s/ Hasu P. Shah
Hasu P. Shah
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Hasu P. Shah
Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
March 15, 2005
Hasu P. Shah
/s/ Thomas S. Capello
Trustee
March 15, 2005
Thomas S. Capello
/s/ John M. Sabin
Trustee
March 15, 2005
John M. Sabin
/s/ Donald J. Landry
Trustee
March 15, 2005
Donald J. Landry
/s/ William Lehr, Jr.
Trustee
March 15, 2005
William Lehr, Jr.
/s/ Michael A. Leven
Trustee
March 15, 2005
Michael A. Leven
/s/ K.D. Patel
Trustee
March 15, 2005
K.D. Patel
/s/ Ashish R. Parikh
Chief Financial Officer (Principal Financial Officer)
March 15, 2005
Ashish R. Parikh
/s/ David Desfor
Controller (Principal Accounting Officer)
March 15, 2005
David Desfor
List of Exhibits
Unless otherwise indicated, the exhibits listed below are incorporated by reference to our Registration Statement on Form S-11, File No. 333-56087.
3.1
Amended and Restated Declaration of Trust of the Registrant.**
3.2
Articles Supplementary of Hersha Hospitality Trust which classify and designate 350,000 preferred shares of beneficial interest as Series A Preferred Shares of beneficial interest, par value $.01 per share (filed as Exhibit 3.1 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
3.3
Bylaws of the Registrant.*
4.1
Form of Common Share Certificate*
4.2
Excepted Holder Agreement, dated April 21, 2003, by and among CNL Hospitality Properties, Inc., CNL Hospitality Partners, L.P., Hersha Hospitality Trust and Hersha Hospitality Limited Partnership (filed as Exhibit 4.1 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.1
Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership*
10.2
Option Agreement dated as of June 3, 1998, among Hasu P. Shah, Jay H. Shah, Neil H, Shah, Bharat C. Mehta, K.D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and the Partnership*
10.3
Amendment to Option Agreement dated December 4, 1998*
10.4
Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi Associates, Shreeji Associates, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror*
10.5
Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror*
10.6
Purchase Leaseback Agreement entered into as of May 19, 2000 between Hersha Hospitality Limited Partnership and each of Noble Investments Newnan, LLC, Millennium Two Investments Duluth, LLC, Noble Investments RMD, LLC and Embassy Investments Duluth, LLC, entities owned by Noble Investment Group, Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 5, 2000)
10.7
Form of Percentage Lease*
10.8
Administrative Services Agreement, dated January 26, 1999, between Hersha Hospitality Trust and Hersha Hospitality Management, L.P.*
10.9
Purchase Agreement, dated December 4, 2001, between Metro Two Hotel, LLC, as Seller, and HHLP Hunters Point, LLC, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 7, 2001)
10.10
Securities Purchase Agreement, dated as of April 21, 2003, among CNL Hospitality Partners, L.P., Hersha Hospitality Trust and Hersha Hospitality Limited Partners (filed as Exhibit 10.1 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.11
Second Amendment to the Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership, dated as of April 21, 2003 (filed as Exhibit 10.2 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.12
Standstill Agreement, dated as of April 21, 2003, by and among Hersha Hospitality Trust, Hersha Hospitality Limited Partnership, CNL Hospitality Partners, L.P. and CNL Financial Group, Inc. (filed as Exhibit 10.3 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.13
Registration Rights Agreement, dated April 21, 2003, between CNL Hospitality Partners, L.P. and Hersha Hospitality Trust (filed as Exhibit 10.4 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.14
Limited Partnership Agreement of HT/CNL Metro Hotels, LP, dated as of April 21, 2003 (filed as Exhibit 10.5 to the Form 8-K filed on April 23, 2003 (SEC File No. 001-14765))
10.15
Second Amendment to Option Agreement (filed as Exhibit 10.15 to the Registration Statement on Form S-3 filed on February 24, 2004 (File No. 333-113061)).
List of Subsidiaries of the Registrant***
23.1
Consent of Moore Stephens, P.C.***
23.2
Consent of Reznick Group, P.C.***
23.3
Consent of KPMG LLP***
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
_____________________
*
Filed with the SEC as an exhibit to Hersha Hospitality Trust’s registration statement on Form S-11, as amended, Registration No. 333-56087, and incorporated herein by reference.
**
Filed with the SEC as an exhibit to the registration statement on Form S-2, Registration No. 333-109100, filed on September 25, 2003, and incorporated herein by reference.
***
Filed herewith.