UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
|
T
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31, 2008
OR
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______________ to _______________
Commission
file number: 001-14765
HERSHA
HOSPITALITY TRUST
(Exact
Name of Registrant as Specified in Its Charter)
|
Maryland
|
251811499
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
|
44
Hersha Drive, Harrisburg, PA
|
17102
|
|
(Address
of Registrant’s Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (717) 236-4400
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which
registered
|
|
Class
A Common Shares of Beneficial Interest, par value $.01 per
share
|
New
York Stock Exchange
|
|
Series
A Cumulative Redeemable Preferred Shares, par value $.01 per
share
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
class)
1
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o
Yes T
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes T
No
Indicate
by check mark whether the registrant (i) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (ii) has been subject to such filing requirements for
the past 90 days. x
Yes o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer o
|
Accelerated
filer T
|
|
|
Non-accelerated
filer o
|
Small
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). oYes T
No
The
aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant, computed by reference to the price at which the
common equity was last sold as of June 30, 2008, was approximately $363.4
million.
As of
March 5, 2009, the number of Class A common shares of beneficial interest
outstanding was 48,292,360.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement pertaining to the 2009 Annual
Meeting of Stockholders, to be filed not later than 120 days after the end of
the fiscal year pursuant to Regulation 14A, are incorporated herein by reference
into Part III.
2
HERSHA HOSPITALITY TRUST
INDEX
|
Form
10-K
|
||
|
Report
|
||
|
Item No.
|
Page
|
|
|
PART
I
|
||
|
Item
1.
|
4
|
|
|
Item
1A.
|
10
|
|
|
Item
1B.
|
19
|
|
|
Item
2.
|
20
|
|
|
Item
3.
|
22
|
|
|
Item
4.
|
22
|
|
|
PART
II
|
||
|
Item
5.
|
23
|
|
|
Item
6.
|
26
|
|
|
Item
7.
|
28
|
|
|
Item
7A.
|
43
|
|
|
Item
8.
|
45
|
|
|
Item
9.
|
91
|
|
|
Item
9A.
|
91
|
|
|
Item
9B.
|
93
|
|
|
PART
III
|
||
|
Item
10.
|
94
|
|
|
Item
11.
|
94
|
|
|
Item
12.
|
94
|
|
|
Item
13.
|
94
|
|
|
Item
14.
|
94
|
|
|
PART
IV
|
||
|
Item
15.
|
95
|
CAUTIONARY
FACTORS THAT MAY AFFECT FUTURE RESULTS
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
containing the words, “believes,” “anticipates,” “expects” and words of similar
import. Such forward-looking statements relate to future events, our future
financial performance, and involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Readers
should specifically consider the various factors identified in this report
including, but not limited to those discussed in the sections entitled “Risk
Factors,” “Growth Strategy” and “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations” that could cause actual results
to differ. We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments, except as required by
law.
PART
I
|
Item 1.
|
Business
|
OVERVIEW
Hersha
Hospitality Trust is a self-advised Maryland statutory 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 New York Stock Exchange
under the symbol “HT”. We invest primarily in institutional grade hotels in
central business districts, primary suburban office markets and stable
destination and secondary markets in the Northeastern United States and select
markets on the West Coast. Our primary strategy is to continue to acquire high
quality, upscale, mid-scale and extended-stay hotels in metropolitan markets
with high barriers to entry in the Northeastern United States and other markets
with similar characteristics. We are structured as a real estate
investment trust (“REIT”) for U.S. federal income tax reporting
purposes.
As of
December 31, 2008, our portfolio consisted of 58 wholly owned limited and full
service properties and various interests in 18 limited and full service
properties owned through joint venture investments. Of the 18 limited
and full service properties owned through our investment in joint ventures
investments, three are consolidated. These 76 properties, with a total of 9,556
rooms, are located in Arizona, California, Connecticut, Delaware, Maryland,
Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island
and Virginia and operate under leading brands, such as Marriott ®, Courtyard by
Marriott ®, Residence Inn ®, Fairfield Inn ®, Springhill Suites
®, TownePlace Suites ®, Hilton ®, Hilton Garden Inn ®, Hampton
Inn ®, Homewood Suites ®, Hyatt Summerfield Suites
®, Holiday Inn ®, Holiday Inn Express ®, Comfort Inn ®, Mainstay
Suites ®, Sleep Inn ®, Four Points by Sheraton ®, Sheraton Hotel ®, and
Hawthorn Suites ®. In addition, we own several hotels which operate
as independent boutique hotels.
We are
structured as an umbrella partnership REIT, or UPREIT, and we own our hotels and
our investments in joint ventures through our operating partnership, Hersha
Hospitality Limited Partnership, or HHLP, for which we serve as general partner.
Our hotels are managed by qualified independent management companies, including
Hersha Hospitality Management, L.P., or HHMLP. HHMLP is a private
management company owned by certain of our trustees, officers and other third
party investors. We have leased all of our wholly owned hotels to 44 New England
Management Company, or 44 New England, our wholly-owned taxable REIT subsidiary,
or TRS. In addition, all of the hotels we own through investments in
joint ventures are leased to TRSs owned by the respective venture or to
corporations owned in part by our wholly owned TRS.
AVAILABLE
INFORMATION
Our
address is 44 Hersha Drive, Harrisburg, PA 17102. Our telephone number is
(717) 236-4400. Our Internet website address is: www.hersha.com. We make
available free of charge through our website our code of ethics, 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 available on 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.
INVESTMENT
IN HOTEL PROPERTIES
Our
operating strategy focuses on increasing hotel performance for our portfolio.
The key elements of this strategy are:
|
|
·
|
working
together with our hotel management companies to increase occupancy levels
and revenue per available room, or "RevPAR", through active property-level
management, including intensive marketing efforts to tour groups,
corporate and government extended stay customers and other wholesale
customers and expanded yield management programs, which are calculated to
better match room rates to room demand;
and
|
|
|
·
|
positioning
our hotels to capitalize on increased demand in the high quality,
upper-upscale, upscale, mid-scale and extended-stay lodging segment, which
we believe can be expected to follow from improving economic conditions,
by managing costs and thereby maximizing
earnings.
|
As of
December 31, 2008, we had 58 wholly owned limited and full service properties,
with a total of 6,514 rooms.
INVESTMENT
IN JOINT VENTURES
In
addition to the direct acquisition of hotels, we may make investments in hotels
through joint ventures with strategic partners. We seek to identify acquisition
candidates located in markets with economic, demographic and supply dynamics
favorable to hotel owners and operators.
As of
December 31, 2008, we maintain ownership interests in 18 hotels with a total of
3,042 rooms through joint ventures with third parties. Of the 18
hotels owned through interests in joint ventures, three are
consolidated.
DEVELOPMENT
LOANS AND LAND LEASES
We take
advantage of our relationships with hotel developers, including entities
controlled by our officers or affiliated trustees, to identify development and
renovation projects that may be attractive to us. While these developers bear
the risk of construction, we invest in hotel development projects by providing
secured first mortgage or mezzanine financing to hotel developers and through
the acquisition of land that is then leased to hotel developers. In many
instances, we maintain a first right of refusal or right of first offer to
purchase, at fair market value, the hotel for which we have provided development
loan financing or land leases.
As of
December 31, 2008, we had an investment of $81.5 million in loans to eleven
hotel development projects and a net investment of $23.4 million in three
parcels of land leased to hotel developers.
ACQUISITIONS
Our
primary growth strategy is to selectively acquire high quality, upper- upscale,
upscale, mid-scale and extended-stay hotels in metropolitan markets with high
barriers-to-entry. 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. We
believe that current market conditions are creating opportunities to acquire
hotels at attractive prices. In executing our disciplined acquisition program,
we will consider acquiring hotels that meet the following additional
criteria:
|
|
·
|
nationally-franchised
hotels operating under popular brands, such as Marriott Hotels &
Resorts, Hilton Hotels, Courtyard by Marriott, Residence Inn by Marriott,
Spring Hill Suites by Marriott, Hilton Garden Inn, Homewood Suites by
Hilton, Hampton Inn, Sheraton Hotels & Resorts, DoubleTree, Embassy
Suites, Hyatt Summerfield Suites, TownePlace Suites and Holiday Inn
Express;
|
|
|
·
|
hotels
in locations with significant barriers-to-entry, such as high development
costs, limited availability of land and lengthy entitlement processes;
and
|
|
|
·
|
hotels
in our target markets where we can realize operating efficiencies and
economies of scale.
|
In the
ordinary course of our business, we are actively considering hotel acquisition
opportunities. Since our initial public offering in 1999, we have acquired,
wholly or through joint ventures, a total of 84 hotels, including 27 hotels
acquired from entities controlled by our officers or trustees. Of the 27
acquisitions from these entities, 24 were newly-constructed or newly-renovated
by these entities prior to our acquisition. Only independent trustees
vote on related party acquisitions, and a majority must approve the terms of all
related party asset purchases.
DISPOSITIONS
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, development loans 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. Since our initial public
offering in 1999, we have sold a total of 18 hotels.
FINANCING
The
relative stability of the mid-scale and upscale segment of the limited service
lodging industry allows us to increase returns to our shareholders through the
prudent application of leverage. Our debt policy is to limit indebtedness to
less than 67% of the fair market values at the time of acquisition for the
hotels in which we invest. We may employ a higher amount of leverage at a
specific hotel to achieve a desired return when warranted by that hotel's
historical operating performance and may use greater leverage across our
portfolio if and when warranted by prevailing market conditions.
PROPERTY
MANAGEMENT
We work
closely with our hotel management companies to operate our hotels and increase
same hotel performance for our portfolio. Through our TRS and our investment in
joint ventures, we have retained the following management companies to operate
our hotels, as of December 31, 2008:
|
Wholly Owned
|
Joint Ventures
|
Total
|
||||||||||||||||||||||
|
Manager
|
Hotels
|
Rooms
|
Hotels
|
Rooms
|
Hotels
|
Rooms
|
||||||||||||||||||
|
HHMLP
|
50 | 5,306 | 7 | 1,052 | 57 | 6,358 | ||||||||||||||||||
|
Waterford
Hotel Group
|
- | - | 9 | 1,708 | 9 | 1,708 | ||||||||||||||||||
|
LodgeWorks
|
7 | 1,005 | - | - | 7 | 1,005 | ||||||||||||||||||
|
Jiten
Management
|
- | - | 2 | 282 | 2 | 282 | ||||||||||||||||||
|
Marriott
|
1 | 203 | - | - | 1 | 203 | ||||||||||||||||||
|
Total
|
58 | 6,514 | 18 | 3,042 | 76 | 9,556 | ||||||||||||||||||
Each
management agreement provides for a set 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, all managers, including HHMLP, must
qualify as an “eligible independent contractor” during the term of the
management agreements.
Under the
management agreements, the manager generally pays the operating expenses of our
hotels. All operating expenses or other expenses incurred by the manager 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. Our managers are not
obligated to advance any of their own funds for operating expenses of a hotel or
to incur any liability in connection with operating a hotel.
For their
services, the managers receive 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 generally equal to 3% of the
gross revenues associated with that hotel for the related month.
CAPITAL
IMPROVEMENTS, RENOVATION AND REFURBISHMENT
We have
established capital reserves for 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.
OPERATING
PRACTICES
Our
managers utilize centralized accounting and data processing systems, which
facilitate financial statement and budget preparation, payroll management,
quality control and other support functions for the on-site hotel management
team. Our managers also provide centralized control over purchasing and project
management (which can create economies of scale in purchasing) while emphasizing
local discretion within specific guidelines.
DISTRIBUTIONS
We have
made forty 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 as approved by our
Board of Trustees. The following table sets forth distribution
information for the last two calendar years.
|
Quarter to which Distribution
Relates
|
Class A Common and Limited Partnership Unit Per
Share Distribution Amount
|
Record Date
|
Payment Date
|
Series A Preferred Per Share Distribution
Amount
|
Record Date
|
Payment Date
|
||||||||
|
2008
|
||||||||||||||
|
First
Quarter
|
$ | 0.18 |
3/31/2008
|
4/16/2008
|
$ | 0.50 |
4/1/2008
|
4/15/2008
|
||||||
|
Second
Quarter
|
$ | 0.18 |
6/30/2008
|
7/16/2008
|
$ | 0.50 |
7/1/2008
|
7/15/2008
|
||||||
|
Third
Quarter
|
$ | 0.18 |
9/30/2008
|
10/16/2008
|
$ | 0.50 |
10/1/2008
|
10/15/2008
|
||||||
|
Fourth
Quarter
|
$ | 0.18 |
1/5/2009
|
1/16/2009
|
$ | 0.50 |
1/1/2009
|
1/15/2009
|
||||||
|
2007
|
||||||||||||||
|
First
Quarter
|
$ | 0.18 |
3/30/2007
|
4/17/2007
|
$ | 0.50 |
4/1/2007
|
4/16/2007
|
||||||
|
Second
Quarter
|
$ | 0.18 |
6/29/2007
|
7/17/2007
|
$ | 0.50 |
7/1/2007
|
7/16/2007
|
||||||
|
Third
Quarter
|
$ | 0.18 |
9/28/2007
|
10/16/2007
|
$ | 0.50 |
10/1/2007
|
10/15/2007
|
||||||
|
Fourth
Quarter
|
$ | 0.18 |
1/5/2008
|
1/16/2008
|
$ | 0.50 |
1/1/2008
|
1/15/2008
|
||||||
Our Board
of Trustees will determine the amount of our future distributions in its sole
discretion 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. There
can be no assurance we will continue to pay distributions at the rates above or
any other rate. Additionally, we may, if necessary and allowable, pay
taxable dividends of our shares or debt securities to meet the distribution
requirements.
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. Hotel revenue is generally greater in the second and third
quarters than in the first and fourth quarters. There are no assurances we will
be able to continue to make quarterly distributions at the current
rate.
COMPETITION
The
upscale and mid-scale, limited service segment of the hotel business is highly
competitive. Among many other factors, our hotels compete on the basis of
location, room rates, quality, service levels, reputation, and reservation
systems. There are many competitors in our market segments and new hotels are
always being constructed. Additions to supply create new competitors,
in some cases without corresponding increases in demand for hotel
rooms.
We also
compete for hotel acquisitions with entities that have investment objectives
similar to ours. 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, 2008, we had 24 employees who were principally engaged in managing
the affairs of the company unrelated to property management. Our relations with
our employees are satisfactory.
FRANCHISE
AGREEMENTS
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. Most of our hotels operate under franchise licenses from national hotel
franchisors, including:
|
Franchisor
|
Franchise
|
|
|
Marriott
International
|
Marriott,
Residence Inn, Springhill Suites, Courtyard by Marriott, Fairfield Inn,
TownePlace Suites
|
|
|
Hilton
Hotels Corporation
|
Hilton,
Hilton Garden Inn, Hampton Inn, Homewood Suites
|
|
|
Intercontinental
Hotel Group
|
Holiday
Inn, Holiday Inn Express, Holiday Inn Express &
Suites
|
|
|
Global
Hyatt Corporation
|
Hyatt
Summerfield Suites, Hawthorn Suites
|
|
|
Starwood
Hotels
|
Four
Points by Sheraton, Sheraton Hotels
|
|
|
Choice
Hotels International
|
Comfort
Inn, Comfort Suites, Sleep Inn, Mainstay
Suites
|
We
anticipate that most of the hotels in which we invest will be operated pursuant
to franchise licenses.
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. In general, the franchise licenses require us to pay
the franchisor a fee typically ranging between 6.0% and 9.3% of our hotel
revenues.
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 ended 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 currently distributed to
shareholders. If we fail to qualify as a REIT in any taxable year and do not
qualify for certain statutory relief provisions, 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.
We may
own up to 100% of one or more TRSs. 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 25% of the value of our assets may
consist of securities of one or more TRS. In addition, no more than 25% of our
gross income for any year may consist of dividends from one or more TRSs and
income from certain non-real estate related sources.
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
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 shares; and
4. we
do not directly or indirectly derive any income from such manager.
The
deductibility of interest paid or accrued by a TRS to us is limited to assure
that the TRS is subject to an appropriate level of corporate taxation. A 100%
excise tax is imposed on transactions between a TRS and us or our tenants that
are not on an arm’s-length basis.
FINANCIAL
INFORMATION ABOUT SEGMENTS
We are in
the business of acquiring equity interests in hotels, and we manage our business
in one reportable segment. See Item 8 of this Annual Report on Form 10-K for
segment financial information.
|
Item
1A.
|
Risk
Factors
|
You
should carefully consider the following risks, together with the other
information included in this Annual Report on Form 10-K. If any of the following
risks actually occur, our business, financial condition or results of operations
may suffer. As a result, the trading price of our securities could decline, and
you may lose all or part of any investment you have in our
securities.
RISKS
RELATED TO THE HOTEL INDUSTRY
The
value of our hotels depends on conditions beyond our control.
Our
hotels are subject to varying degrees of risk generally incident to the
ownership of hotels. The underlying value of our hotels, our income and ability
to make distributions to our shareholders are dependent upon the operation of
the hotels in a manner sufficient to maintain or increase revenues in excess of
operating expenses. Hotel revenues may be adversely affected by adverse changes
in national economic conditions, adverse changes in local market conditions due
to changes in general or local economic conditions and neighborhood
characteristics, competition from other hotels, changes in interest rates and in
the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of terrorism, acts of
God, including earthquakes, hurricanes and other natural disasters, acts of war,
adverse changes in zoning laws, and other factors that are beyond our control.
In particular, general and local economic conditions may be adversely affected
by the previous terrorist incidents in New York and Washington, D.C. Our
management is unable to determine the long-term impact, if any, of these
incidents or of any acts of war or terrorism in the United States or worldwide,
on the U.S. economy, on us or our hotels or on the market price of our common
shares.
Current
economic conditions have adversely impacted the lodging industry.
During
the twelve months ended December 31, 2008, the U.S. economy has been negatively
impacted by financial market turmoil, growing unemployment and declining
consumer sentiment. As a result, the lodging industry is experiencing slowing
growth or, in some markets, negative growth which could have a negative impact
on our future results of operations and financial condition. These
factors could reduce revenues of the hotels and adversely affect our ability to
make distributions to our shareholders in 2009 and in subsequent
periods.
Our
hotels are subject to general hotel industry operating risks, which may impact
our ability to make distributions to shareholders.
Our
hotels are subject to all operating risks common to the hotel industry. The
hotel industry has experienced volatility in the past, as have our hotels, and
there can be no assurance that such volatility will not occur in the future.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry that could adversely affect hotel revenues;
increases in operating costs due to inflation and other factors, which may not
be offset by increased room rates; reduction in business and commercial travel
and tourism; strikes and other labor disturbances of hotel employees; increases
in energy costs and other expenses of travel; adverse effects of general and
local economic conditions; and adverse political conditions. These factors could
reduce revenues of the hotels and adversely affect our ability to make
distributions to our shareholders.
Our
investments are concentrated in a single segment of the hotel
industry.
Our
current business strategy is to own and acquire hotels primarily in the high
quality, upscale and mid-scale limited service and extended-stay segment of the
hotel industry. We are subject to risks inherent in concentrating investments in
a single industry and in a specific market segment within that industry. The
adverse effect on amounts available for distribution to shareholders resulting
from a downturn in the hotel industry in general or the mid-scale segment in
particular could be more pronounced than if we had diversified our investments
outside of the hotel industry or in additional hotel market
segments.
Operating
costs and capital expenditures for hotel renovation may be greater than
anticipated and may adversely impact distributions to shareholders.
Hotels
generally have an ongoing need for renovations and other capital improvements,
particularly in older structures, including periodic replacement of furniture,
fixtures and equipment. Under the terms of our management agreements with HHMLP,
we are obligated to pay the cost of expenditures for items that are classified
as capital items under GAAP that are necessary for the continued operation of
our hotels. If these expenses exceed our estimate, the additional cost could
have an adverse effect on amounts available for distribution to shareholders. In
addition, we may acquire hotels in the future that require significant
renovation. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
hotels.
The
hotel industry is highly competitive.
The hotel
industry is highly competitive. Our hotels compete with other existing and new
hotels in their geographic markets. Many of our competitors have substantially
greater marketing and financial resources than we do. If their marketing
strategies are effective, we may be unable to make distributions to our
shareholders.
Risks
of operating hotels under franchise licenses, which may be terminated or not
renewed, may impact our ability to make distributions to
shareholders.
The
continuation of the franchise licenses is subject to specified operating
standards and other terms and conditions. All of the franchisors of our hotels
periodically inspect our hotels to confirm adherence to their operating
standards. The failure of our partnership or HHMLP to maintain such standards or
to adhere to such other terms and conditions could result in the loss or
cancellation of the applicable franchise license. It is possible that a
franchisor could condition the continuation of a franchise license on the
completion of capital improvements that the trustees determine are too expensive
or otherwise not economically feasible in light of general economic conditions,
the operating results or prospects of the affected hotel. In that event, the
trustees may elect to allow the franchise license to lapse or be
terminated.
There can
be no assurance that a franchisor will renew a franchise license at each option
period. If a franchisor terminates a franchise license, we, our partnership, and
HHMLP may be unable to obtain a suitable replacement franchise, or to
successfully operate the hotel independent of a franchise license. The loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the related hotel because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor. Our loss of a franchise license for one or more of the hotels
could have a material adverse effect on our partnership’s revenues and our
amounts available for distribution to shareholders.
The
hotel industry is seasonal in nature.
The hotel
industry is seasonal in nature. Generally, hotel revenues are greater in the
second and third quarters than in the first and fourth quarters. Our hotels’
operations historically reflect this trend. As a result, our results
of operations may vary on a quarterly basis.
RISKS
RELATING TO OUR BUSINESS AND OPERATIONS
A
general economic recession or depression could have a serious adverse economic
impact on us.
In 2008,
general worldwide economic conditions declined due to sequential effects of the
sub prime lending crisis, general credit market crisis, collateral effects on
the finance and banking industries, concerns about inflation, slower economic
activity, decreased consumer confidence, reduced corporate profits and capital
spending, adverse business conditions and liquidity concerns. Our
business plans for 2009 and beyond depend on the general state of the global
economy and specifically on the economies of the locations of our hotels. We
cannot assure you that favorable economic conditions will exist in the future. A
general economic recession or depression could have a serious adverse economic
impact on us.
We
face risks associated with the use of debt, including refinancing
risk.
At
December 31, 2008, we had long-term debt, excluding capital leases, outstanding
of $743.8 million. We may borrow additional amounts from the same or other
lenders in the future. Some of these additional borrowings may be secured by our
hotels. Our strategy is to maintain target debt levels of approximately 60% of
the total purchase price of our hotels both on an individual and aggregate
basis. Our Board of Trustees’ policy is to limit indebtedness at the
time of acquisition to no more than 67% of the fair market
value of the hotels in which we have invested. However, our declaration of trust
(as amended and restated, our “Declaration of Trust”) does not limit the amount
of indebtedness we may incur. We cannot assure you that we will be able to meet
our debt service obligations and, to the extent that we cannot, we risk the loss
of some or all of our hotels to foreclosure. Our indebtedness contains various
financial and non-financial event of default covenants customarily found in
financing arrangements. Our mortgages payable typically require that
specified debt service coverage ratios be maintained with respect to the
financed properties before we can exercise certain rights under the loan
agreements relating to such properties. If the specified criteria are
not satisfied, the lender may be able to escrow cash flow. There is
also a risk that we may not be able to refinance existing debt or that the terms
of any refinancing will not be as favorable as the terms of the existing debt.
If principal payments due at maturity cannot be refinanced, extended or repaid
with proceeds from other sources, such as new equity capital or sales of
properties, our cash flow may not be sufficient to repay all maturing debt in
years when significant “balloon” payments come due. See Item 7A. for
a detailed schedule of debt principal repayments.
Tightening
credit markets have made financing development projects and acquiring new hotel
properties more difficult.
The
turmoil in the financial markets has caused credit to significantly tighten
making it more difficult for hotel developers to obtain financing for
development projects or for hotels without an operating history. This
could have a negative impact on the collectability of our portfolio of
development loans receivable, which as of December 31, 2008 was approximately
$81.5 million. In addition, the tightening credit markets have
made it more difficult to finance the acquisition of new hotel properties or
refinance existing hotel properties when our current financing
matures. These factors could have a negative impact on our future
results of operations and financial condition.
Our
Development Loans Receivable are mezzanine loans and involve greater risks of
loss than senior loans secured by income-producing properties.
We make
mezzanine loans to hotel developers. These types of loans are considered to
involve a higher degree of risk than long-term senior mortgage lending secured
by income-producing real property due to a variety of factors, including the
loan becoming unsecured as a result of foreclosure by the senior
lender. Additionally, the success of the projects financed with our
development loans is subject to factors beyond our control, including without
limitation development and construction delays and resultant increased costs and
risks as well as the ability of the project developer to obtain permanent
financing. We may not recover some or all of our investment in these
loans. In addition, our mezzanine loans to hotel developers may have
higher loan-to-value ratios than conventional mortgage loans resulting in less
equity in the property and increasing the risk of loss of
principal.
If
we cannot access the capital markets, we may not be able to grow the Company at
our historical growth rates.
We may
not be able to access the capital markets to obtain capital to fund future
acquisitions and investments. The market for real estate related debt and equity
capital could endure a prolonged period of volatility which may limit our
ability to access new capital for acquisitions, investments and joint ventures.
If we lack the capital to make future acquisitions or investments, we may not be
able to continue to grow at historical rates.
We
face high levels of competition for the acquisition of hotel properties and
other assets, which may impede our ability to make future acquisitions or may
increase the cost of these acquisitions.
We face
competition for investment opportunities in high quality, upscale and mid-scale
limited service and extended-stay hotels from entities organized for purposes
substantially similar to our objectives, as well as other purchasers of hotels.
We compete for such investment opportunities with entities that have
substantially greater financial resources than we do, including access to
capital or better relationships with franchisors, sellers or lenders. Our
competitors may generally be able to accept more risk than we can manage
prudently and may be able to borrow the funds needed to acquire hotels.
Competition may generally reduce the number of suitable investment opportunities
offered to us and increase the bargaining power of property owners seeking to
sell.
We
do not operate our hotels and, as a result, we do not have complete control over
implementation of our strategic decisions.
In order
for us to satisfy certain REIT qualification rules, we cannot directly or
indirectly operate or manage any of our hotels. Instead, we must
engage an independent management company to operate our hotels. As of
December 31, 2008, our TRSs and our joint venture partnerships have engaged
independent management companies as the property managers for all of our wholly
owned hotels leased to our TRSs and the respective hotels for the joint
ventures, as required by the REIT qualification rules. The management
companies operating the hotels make and implement strategic business decisions
with respect to these hotels, such as decisions with respect to the
repositioning of a franchise or food and beverage operations and other similar
decisions. Decisions made by the management companies operating the
hotels may not be in the best interests of a particular hotel or of our
company. Accordingly, we cannot assure you that the management
companies will operate our hotels in a manner that is in our best
interests. The financial condition of the management companies could
impact their future ability to operate our hotels.
Our
acquisitions may not achieve expected performance, which may harm our financial
condition and operating results.
We
anticipate that acquisitions will largely be financed with the net proceeds of
securities offerings and through externally generated funds such as borrowings
under credit facilities and other secured and unsecured debt financing.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that estimates of the cost of improvements necessary to
acquire and market properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. Because we must
distribute annually at least 90% of our taxable income to maintain our
qualification as a REIT, our ability to rely upon income or cash flow from
operations to finance our growth and acquisition activities will be limited.
Accordingly, were we unable to obtain funds from borrowings or the capital
markets to finance our growth and acquisition activities, our ability to grow
could be curtailed, amounts available for distribution to shareholders could be
adversely affected and we could be required to reduce
distributions.
We
depend on key personnel.
We depend
on the services of our existing senior management team, including
Jay H. Shah, Neil H. Shah, Ashish R. Parikh and
Michael R. Gillespie, to carry out our business and investment
strategies. As we expand, we will continue to need to attract and retain
qualified additional senior management. We have employment contracts with
certain of our senior management; however, the employment agreements may be
terminated under certain circumstances. The termination of an employment
agreement and the loss of the services of any of our key management personnel,
or our inability to recruit and retain qualified personnel in the future, could
have an adverse effect on our business and financial results.
Acquisition
of hotels with limited operating history may not achieve desired
results.
Many of
our recent acquisitions are newly-developed hotels. Newly-developed or
newly-renovated hotels do not have the operating history that would allow our
management to make pricing decisions in acquiring these hotels based on
historical performance. The purchase prices of these hotels are based upon
management’s expectations as to the operating results of such hotels, subjecting
us to risks that such hotels may not achieve anticipated operating results or
may not achieve these results within anticipated time frames. As a result, we
may not be able to generate enough cash flow from these hotels to make debt
payments or pay operating expenses. In addition, room revenues may be less than
that required to provide us with our anticipated return on investment. In either
case, the amounts available for distribution to our shareholders could be
reduced.
We
may be unable to integrate acquired hotels into our operations or otherwise
manage our planned growth, which may adversely affect our operating
results.
We have
recently acquired a substantial number of hotels. We cannot assure you that we
or HHMLP will be able to adapt our management, administrative, accounting and
operational systems and arrangements, or hire and retain sufficient operational
staff to successfully integrate these investments into our portfolio and manage
any future acquisitions of additional assets without operational disruptions or
unanticipated costs. Acquisition of hotels generates additional operating
expenses that we will be required to pay. As we acquire additional hotels, we
will be subject to the operational risks associated with owning new lodging
properties. Our failure to integrate successfully any future acquisitions into
our portfolio could have a material adverse effect on our results of operations
and financial condition and our ability to pay dividends to shareholders or make
other payments in respect of securities issued by us.
Most
of our hotels are located in the Eastern United States and many are located in
the area from Pennsylvania to Connecticut, which may increase the effect of any
regional or local economic conditions.
Most of
our hotels are located in the Eastern United States. Thirty-seven of our wholly
owned hotels and thirteen of our joint venture hotels are located in the states
of Pennsylvania, New Jersey, New York, Rhode Island and Connecticut. As a
result, regional or localized adverse events or conditions, such as an economic
recession around these hotels, could have a significant adverse effect on our
operations, and ultimately on the amounts available for distribution to
shareholders.
Downward
adjustments, or “mark-to-market losses,” relating to hedging instruments may
reduce our shareholders’ equity.
Hedging
involves risk and typically involves costs, including transaction costs, which
may reduce returns on our investments. These costs increase as the period
covered by the hedging increases and during periods of rising and volatile
interest rates. These costs will also limit the amount of cash available for
distribution to shareholders. The REIT qualification rules may also limit our
ability to enter into hedging transactions. We generally intend to hedge as much
of our interest rate risk as our management determines is in our best interests
given the cost of such hedging transactions and the requirements applicable to
REITs. If we are unable to hedge effectively because of the cost of such hedging
transactions or the limitations imposed by the REIT rules, we will face greater
interest risk exposure than may be commercially prudent.
We
own a limited number of hotels and significant adverse changes at one hotel may
impact our ability to make distributions to shareholders.
As of
December 31, 2008, our portfolio consisted of 58 wholly-owned limited and full
service properties and joint venture investments in 18 hotels with a total of
9,556 rooms. Significant adverse changes in the operations of any one hotel
could have a material adverse effect on our financial performance and,
accordingly, on our ability to make expected distributions to our
shareholders.
We
focus on acquiring hotels operating under a limited number of franchise brands,
which creates greater risk as the investments are more
concentrated.
We place
particular emphasis in our acquisition strategy on hotels similar to our current
hotels. We invest in hotels operating under a few select franchises and
therefore will be subject to risks inherent in concentrating investments in a
particular franchise brand, which could have an adverse effect on amounts
available for distribution to shareholders. These risks include, among others,
the risk of a reduction in hotel revenues following any adverse publicity
related to a specific franchise brand.
We
may engage in hedging transactions, which can limit our gains and increase
exposure to losses.
We may
enter into hedging transactions to protect us from the effects of interest rate
fluctuations on floating rate debt and also to protect our portfolio of mortgage
assets from interest rate and prepayment rate fluctuations. Our hedging
transactions may include entering into interest rate swaps, caps, and floors,
options to purchase such items, and futures and forward contracts. Hedging
activities may not have the desired beneficial impact on our results of
operations or financial condition. No hedging activity can completely insulate
us from the risks associated with changes in interest rates and prepayment
rates. Moreover, interest rate hedging could fail to protect us or could
adversely affect us because, among other things:
|
|
·
|
Available interest rate hedging
may not correspond directly with the interest rate risk for which
protection is sought.
|
|
|
·
|
The duration of the hedge may not
match the duration of the related
liability.
|
|
|
·
|
The party at risk in the hedging
transaction may default on its obligation to
pay.
|
|
|
·
|
The credit quality of the party
owing money on the hedge may be downgraded to such an extent that it
impairs our ability to sell or assign our side of the hedging
transaction.
|
|
|
·
|
The value of derivatives used for
hedging may be adjusted from time to time in accordance with accounting
rules to reflect changes in fair
value.
|
RISKS
RELATING TO CONFLICTS OF INTEREST
Due
to conflicts of interest, many of our existing agreements may not have been
negotiated on an arm’s-length basis and may not be in our best
interest.
Some of
our officers and affiliated trustees have ownership interests in HHMLP and in
entities with which we have entered into transactions, including hotel
acquisitions and dispositions and certain financings. Consequently, the terms of
our agreements with those entities, including hotel contribution or purchase
agreements, the Option Agreement between our operating partnership and some of
the affiliated trustees and officers and our property management agreements with
HHMLP may not have been negotiated on an arm’s-length basis and may not be in
the best interest of all our shareholders.
Conflicts
of interest with other entities may result in decisions that do not reflect our
best interests.
The
following officers and affiliated trustees own collectively approximately 70% of
HHMLP: Hasu P. Shah, Jay H. Shah, Neil H. Shah,
David L. Desfor and Kiran P. Patel. Conflicts of
interest may arise in respect to the ongoing acquisition, disposition and
operation of our hotels including, but not limited to, the enforcement of the
contribution and purchase agreements, the Option Agreement and our property
management agreements with HHMLP. Consequently, the interests of
shareholders may not be fully represented in all decisions made or actions taken
by our officers and affiliated trustees.
Conflicts
of interest relating to sales or refinancing of hotels acquired from some of our
affiliated trustees and officers may lead to decisions that are not in our best
interest.
Some of
our affiliated trustees and officers have unrealized gains associated with their
interests in the hotels we have acquired from them and, as a result, any sale of
these hotels or refinancing or prepayment of principal on the indebtedness
assumed by us in purchasing these hotels may cause adverse tax consequences to
such of our affiliated trustees and officers. Therefore, our interests and the
interests of these individuals may be different in connection with the
disposition or refinancing of these hotels.
Agreements
to provide financing of hotel development projects owned by some of our
affiliated trustees and officers may not have been negotiated on an arm’s-length
basis and may not be in our best interest.
Some of
our officers and affiliated trustees have ownership interests in projects to
develop hotel properties with which we have entered into agreements to provide
financing. Consequently, the terms of our agreements with those entities,
including interest rates and other key terms, may not have been negotiated on an
arm’s-length basis and may not be in the best interest of all our
shareholders.
Competing
hotels owned or acquired by some of our affiliated trustees and officers may
hinder these individuals from spending adequate time on our
business.
Some of
our affiliated trustees and officers own hotels and may develop or acquire new
hotels, subject to certain limitations. Such ownership, development or
acquisition activities may materially affect the amount of time these officers
and affiliated trustees devote to our affairs. Some of our affiliated trustees
and officers operate hotels that are not owned by us, which may materially
affect the amount of time that they devote to managing our hotels. Pursuant to
the Option Agreement, as amended, we have an option to acquire any hotels
developed by our officers and affiliated trustees.
Need
for certain consents from the limited partners may not result in decisions
advantageous to shareholders.
Under our
operating partnership’s amended and restated partnership agreement, the holders
of at least two-thirds of the interests in the partnership must approve a sale
of all or substantially all of the assets of the partnership or a merger or
consolidation of the partnership. Some of our officers and affiliated trustees
own approximately 6.8% interest in the operating partnership on a fully-diluted
basis. Their large ownership percentage may make it less likely that a merger or
sale of our company that would be in the best interests of our shareholders will
be approved.
RISKS
RELATING TO OUR CORPORATE STRUCTURE
There
are no assurances of our ability to make distributions in the
future.
We intend
to pay quarterly dividends and to make distributions to our shareholders in
amounts such that all or substantially all of our taxable income in each year,
subject to certain adjustments, is distributed. However, our ability to pay
dividends may be adversely affected by the risk factors described in this annual
report. All distributions will be made at the discretion of our Board of
Trustees and will depend upon our earnings, our financial condition, maintenance
of our REIT status and such other factors as our board may deem relevant from
time to time. There are no assurances of our ability to pay dividends in the
future. In addition, some of our distributions may include a return of
capital.
An
increase in market interest rates may have an adverse effect on the market price
of our securities.
One of
the factors that investors may consider in deciding whether to buy or sell our
securities is our dividend rate as a percentage of our share or unit price,
relative to market interest rates. If market interest rates increase,
prospective investors may desire a higher dividend or interest rate on our
securities or seek securities paying higher dividends or interest. The market
price of our common shares likely will be based primarily on the earnings and
return that we derive from our investments and income with respect to our
properties and our related distributions to shareholders, and not from the
market value or underlying appraised value of the properties or investments
themselves. As a result, interest rate fluctuations and capital market
conditions can affect the market price of our common shares. For instance, if
interest rates rise without an increase in our dividend rate, the market price
of our common shares could decrease because potential investors may require a
higher dividend yield on our common shares as market rates on interest-bearing
securities, such as bonds, rise. In addition, rising interest rates would result
in increased interest expense on our variable rate debt, thereby adversely
affecting cash flow and our ability to service our indebtedness and pay
dividends.
Holders
of our outstanding Series A preferred shares have dividend, liquidation and
other rights that are senior to the rights of the holders of our common
shares.
Our Board
of Trustees has the authority to designate and issue preferred shares with
liquidation, dividend and other rights that are senior to those of our common
shares. As of December 31, 2008, 2,400,000 shares of our Series A preferred
shares were issued and outstanding. The aggregate liquidation preference with
respect to the outstanding preferred shares is approximately $60.0 million, and
annual dividends on our outstanding preferred shares are $4.8 million. Holders
of our Series A preferred shares are entitled to cumulative dividends before any
dividends may be declared or set aside on our common shares. Upon our voluntary
or involuntary liquidation, dissolution or winding up, before any payment is
made to holders of our common shares, holders of our Series A preferred shares
are entitled to receive a liquidation preference of $25.00 per share plus any
accrued and unpaid distributions. This will reduce the remaining amount of our
assets, if any, available to distribute to holders of our common shares. In
addition, holders of our Series A preferred shares have the right to elect two
additional trustees to our Board of Trustees whenever dividends are in arrears
in an aggregate amount equivalent to six or more quarterly dividends, whether or
not consecutive.
Future
offerings of equity securities, which would dilute our existing shareholders and
may be senior to our common shares for the purposes of dividend distributions,
may adversely affect the market price of our common shares.
In the
future, we may attempt to increase our capital resources by making additional
offerings of equity securities, including classes of preferred or common shares.
Upon liquidation, holders of our preferred shares and lenders with respect to
other borrowings will receive a distribution of our available assets prior to
the holders of our common shares. Additional equity offerings may dilute the
holdings of our existing shareholders or reduce the market price of our common
shares, or both. Our preferred shares, if issued, could have a preference on
liquidating distributions or a preference on dividend payments that could limit
our ability to make a dividend distribution to the holders of our common shares.
Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, our
shareholders bear the risk of our future offerings reducing the market price of
our common shares and diluting their share holdings in us.
Our
Board of Trustees may issue additional shares that may cause dilution or prevent
a transaction that is in the best interests of our shareholders.
Our
Declaration of Trust authorizes the Board of Trustees, without shareholder
approval, to:
|
|
·
|
amend
the Declaration of Trust to increase or decrease the aggregate number of
shares of beneficial interest or the number of shares of beneficial
interest of any class or series that we have the authority to
issue;
|
|
|
·
|
cause us to issue additional
authorized but unissued common shares or preferred shares;
and
|
|
|
·
|
classify or reclassify any
unissued common or preferred shares and to set the preferences, rights and
other terms of such classified or reclassified shares, including the
issuance of additional common shares or preferred shares that have
preference rights over the common shares with respect to dividends,
liquidation, voting and other
matters.
|
Any one
of these events could cause dilution to our common shareholders, delay, deter or
prevent a transaction or a change in control that might involve a premium price
for the common shares or otherwise not be in the best interest of holders of
common shares.
The
Declaration of Trust contains a provision that creates staggered terms for our
Board of Trustees.
Our Board
of Trustees is divided into two classes. The terms of the first and second
classes expire in 2008 and 2009, respectively. Trustees of each class are
elected for two-year terms upon the expiration of their current terms and each
year one class of trustees will be elected by the shareholders. The staggered
terms of trustees may delay, deter or prevent a tender offer, a change in
control of us or other transaction, even though such a transaction might be in
the best interest of the shareholders.
Maryland
Business Combination Law may discourage a third party from acquiring
us.
Under the
Maryland General Corporation Law, as amended (MGCL), as applicable to REITs,
certain “business combinations” (including certain issuances of equity
securities) between a Maryland REIT and any person who beneficially owns ten
percent or more of the voting power of the trust’s shares, or an affiliate
thereof, are prohibited for five years after the most recent date on which this
shareholder acquired at least ten percent of the voting power of the trust’s
shares. Thereafter, any such business combination must be approved by two
super-majority shareholder votes unless, among other conditions, the trust’s
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its common shares. These
provisions could delay, deter or prevent a change of control or other
transaction in which holders of our equity securities might receive a premium
for their shares above then-current market prices or which such shareholders
otherwise might believe to be in their best interests.
Our
Board of Trustees may change our investment and operational policies without a
vote of the common shareholders.
Our major
policies, including our policies with respect to acquisitions, financing,
growth, operations, debt limitation and distributions, are determined by our
Board of Trustees. The Trustees may amend or revise these and other policies
from time to time without a vote of the holders of the common
shares.
Our
Board of Trustees and management make decisions on our behalf, and shareholders
have limited management rights.
Our
shareholders have no right or power to take part in our management except
through the exercise of voting rights on certain specified matters. The board of
trustees is responsible for our management and strategic business direction, and
our management is responsible for our day-to-day operations. Certain policies of
our board of trustees may not be consistent with the immediate best interests of
our security holders.
RISKS
RELATED TO OUR TAX STATUS
If
we fail to qualify as a REIT, our dividends will not be deductible to us, and
our income will be subject to taxation, which would reduce the cash available
for distribution to our shareholders.
We have
operated and intend to continue to operate so as to qualify as a REIT for
federal income tax purposes. However, the federal income tax laws governing
REITs are extremely complex, and interpretations of the federal income tax laws
governing REITs are limited. Our continued qualification as a REIT will depend
on our continuing ability to meet various requirements concerning, among other
things, the ownership of our outstanding shares of beneficial interest, the
nature of our assets, the sources of our income, and the amount of our
distributions to our shareholders. If we were to fail to qualify as a REIT in
any taxable year and do not qualify for certain statutory relief provisions, we
would not be allowed a deduction for distributions to our shareholders in
computing our taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Unless entitled to relief under certain Internal
Revenue Code provisions, we also would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification was
lost. As a result, amounts available for distribution to shareholders would be
reduced for each of the years involved. Although we currently intend to operate
in a manner so as to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the trustees, with the
consent of holders of two-thirds of the outstanding shares, to revoke the REIT
election.
Failure
to make required distributions would subject us to tax, which would reduce the
cash available for distribution to our shareholders.
In order
to qualify as a REIT, each year we must distribute to our shareholders at least
90% of our REIT taxable income determined without regard to the deduction for
dividends paid and excluding net capital gain. To the extent that we satisfy the
90% distribution requirement, but distribute less than 100% of our taxable
income, we will be subject to federal corporate income tax on our undistributed
income. In addition, we will incur a 4% nondeductible excise tax on the amount,
if any, by which our actual distributions in any year are less than the sum
of:
|
|
·
|
85% of our REIT ordinary income
for that year;
|
|
|
·
|
95% of our REIT capital gain net
income for that year; and
|
|
|
·
|
100% of our undistributed taxable
income required to be distributed from prior
years.
|
We have
paid out, and intend to continue to pay out, our income to our shareholders in a
manner intended to satisfy the 90% distribution requirement and to avoid
corporate income tax and the 4% nondeductible excise tax. Differences in timing
between the recognition of income and the related cash receipts or the effect of
required debt amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in a particular year. In the past we have borrowed, and in the future we may
borrow, to pay distributions to our shareholders and the limited partners of our
operating partnership. Such borrowings subject us to risks from borrowing as
described herein. Additionally, we may, if necessary and allowable,
pay taxable dividends of our shares or debt securities to meet the distribution
requirements.
Dividends
payable by REITs do not qualify for the reduced tax rates available for some
dividends.
The
maximum tax rate applicable to income from “qualified dividends” payable to
domestic stockholders taxed at individual rates has been reduced by legislation
to 15% through the end of 2010. Dividends payable by REITs, however, generally
are not eligible for the reduced rates. Although this legislation does not
adversely affect the taxation of REITs or dividends payable by REITs, the more
favorable rates applicable to regular corporate qualified dividends could cause
investors who are taxed at individual rates to perceive investments in REITs to
be relatively less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could adversely affect the value of the
stock of REITs, including our common shares.
If
the leases of our hotels to our TRSs are not respected as true leases for
federal income tax purposes, we would fail to qualify as a REIT.
To
qualify as a REIT, we must satisfy two gross income tests, under which specified
percentages of our gross income must be derived from certain sources, such as
“rents from real property.” Rents paid to our operating partnership
by our TRSs pursuant to the lease of our hotels constitute substantially all of
our gross income. In order for such rent to qualify as “rents from
real property” for purposes of the gross income tests, the leases must be
respected as true leases for federal income tax purposes and not be treated as
service contracts, joint ventures or some other type of arrangement. If our
leases are not respected as true leases for federal income tax purposes, we
would fail to qualify as a REIT.
The
U.S. federal income tax laws governing REITs are complex.
We intend
to continue to operate in a manner that will qualify us as a REIT under the U.S.
federal income tax laws. The REIT qualification requirements are extremely
complex, however, and interpretations of the U.S. federal income tax laws
governing qualification as a REIT are limited. Accordingly, we cannot be certain
that we will be successful in operating so we can continue to qualify as a REIT.
At any time, new laws, interpretations, or court decisions may change the
federal tax laws or the U.S. federal income tax consequences of our
qualification as a REIT.
Complying
with REIT requirements may force us to sell otherwise attractive
investments.
To
qualify as a REIT, we must satisfy certain requirements with respect to the
character of our assets. If we fail to comply with these requirements
at the end of any calendar quarter, we must correct such failure within 30 days
after the end of the calendar quarter (by, possibly, selling assets not
withstanding their prospects as an investment) to avoid losing our REIT
status. If we fail to comply with these requirements at the end of
any calendar quarter, and the failure exceeds a de minimis threshold, we may be
able to preserve our REIT status if (a) the failure was due to reasonable cause
and not to willful neglect, (b) we dispose of the assets causing the failure
within six months after the last day of the quarter in which we identified the
failure, (c) we file a schedule with the Internal Revenue Service describing
each asset that caused the failure, and (d) we pay an additional tax of the
greater of $50,000 or the product of the highest applicable tax rate multiplied
by the net income generated on those assets. As a result, we may be
required to liquidate otherwise attractive investments.
Our
share ownership limitation may prevent certain transfers of our
shares.
In order
to maintain our qualification as a REIT, not more than 50% in value of our
outstanding shares of beneficial interest may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue Code to include
certain entities). Our Declaration of Trust prohibits direct or
indirect ownership (taking into account applicable ownership provisions of the
Internal Revenue Code) of more than (a) 9.9% of the aggregate number of
outstanding common shares of any class or series or (b) 9.9% of the aggregate
number of outstanding preferred shares of any class or series of outstanding
preferred shares by any shareholder or group (the “Ownership
Limitation”). Generally, the shares of beneficial interest owned by
related or affiliated owners will be aggregated for purposes of the Ownership
Limitation. The ownership limitation could have the effect of
delaying, deterring or preventing a change in control or other transaction in
which holders of shares might receive a premium for their shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests. Any transfer of shares of beneficial interest
that would violate the Ownership Limitation, cause us to have fewer than 100
shareholders, cause us to be “closely held” within the meaning of Section 856(h)
of the Internal Revenue Code or cause us to own, directly or indirectly, 10% or
more of the ownership interest in any tenant (other than a TRS) will be void,
the intended transferee of such shares will be deemed never to have had an
interest in such shares, and such shares will be designated
“shares-in-trust.” Further, we will be deemed to have been offered
shares-in-trust for purchase at the lesser of the market price (as defined in
the Declaration of Trust) on the date we accept the offer and the price per
share in the transaction that created such shares-in-trust (or, in the case of a
gift, devise or non-transfer event (as defined in the Declaration of Trust), the
market price on the date of such gift, devise or non-transfer
event). Therefore, the holder of shares of beneficial interest in
excess of the Ownership Limitation will experience a financial loss when such
shares are purchased by us, if the market price falls between the date of
purchase and the date of redemption.
We have,
in limited instances from time to time, permitted certain owners to own shares
in excess of the Ownership Limitation. The Board of Trustees has
waived the Ownership Limitation for such owners after following procedures set
out in our Declaration of Trust, under which the owners requesting the waivers
provided certain information and our counsel provided certain legal
opinions. These waivers established levels of permissible share
ownership for the owners requesting the waivers that are higher than the
Ownership Limitation. If the owners acquire shares in excess of the
higher limits, those shares are subject to the risks described above in the
absence of further waivers. The Board of Trustees is not obligated to
grant such waivers and has no current intention to do so with respect to any
owners who (individually or aggregated as the Declaration of Trust requires) do
not currently own shares in excess of the Ownership Limitation.
RISKS
RELATED TO REAL ESTATE INVESTMENT GENERALLY
Illiquidity
of real estate investments could significantly impede our ability to respond to
adverse changes in the performance of our properties and harm our financial
condition.
Real
estate investments are relatively illiquid. Our ability to vary our portfolio in
response to changes in operating, economic and other conditions will be limited.
No assurances can be given that the fair market value of any of our hotels will
not decrease in the future.
If
we suffer losses that are not covered by insurance or that are in excess of our
insurance coverage limits, we could lose investment capital and anticipated
profits.
We
require comprehensive insurance to be maintained on each of the our hotels,
including liability and fire and extended coverage in amounts sufficient to
permit the replacement of the hotel in the event of a total loss, subject to
applicable deductibles. However, there are certain types of losses, generally of
a catastrophic nature, such as earthquakes, floods, hurricanes and acts of
terrorism, that may be uninsurable or not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make it impracticable to use insurance proceeds to replace
the applicable hotel after such applicable hotel has been damaged or destroyed.
Under such circumstances, the insurance proceeds received by us might not be
adequate to restore our economic position with respect to the applicable hotel.
If any of these or similar events occur, it may reduce the return from the
attached property and the value of our investment.
Real
estate is subject to property taxes.
Each
hotel is subject to real and personal property taxes. The real and personal
property taxes on hotel properties in which we invest may increase as property
tax rates change and as the properties are assessed or reassessed by taxing
authorities. Many state and local governments are facing budget deficits that
have led many of them, and may in the future lead others to, increase
assessments and/or taxes. If property taxes increase, our ability to make
expected distributions to our shareholders could be adversely
affected.
Environmental
matters could adversely affect our results.
Operating
costs may be affected by the obligation to pay for the cost of complying with
existing environmental laws, ordinances and regulations, as well as the cost of
future legislation. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. The cost of complying with
environmental laws could materially adversely affect amounts available for
distribution to shareholders. Phase I environmental assessments have been
obtained on all of our hotels. Nevertheless, it is possible that these reports
do not reveal all environmental liabilities or that there are material
environmental liabilities of which we are unaware.
Costs
associated with complying with the Americans with Disabilities Act may adversely
affect our financial condition and operating results.
Under the
Americans with Disabilities Act of 1993 (ADA), all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. While we believe that our hotels are substantially in
compliance with these requirements, a determination that we are not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels, including changes to building codes and fire and life-safety codes, may
occur. If we were required to make substantial modifications at the hotels to
comply with the ADA or other changes in governmental rules and regulations, our
ability to make expected distributions to our shareholders could be adversely
affected.
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
|
Item
2.
|
Properties
|
The
following table sets forth certain information with respect to the 58 hotels we
wholly owned as of December 31, 2008 which are consolidated on the Company’s
financial statements.
|
Name
|
Year Opened
|
Number of Rooms
|
||
|
Comfort Inn
|
||||
|
North
Dartmouth, MA
|
1986
|
84
|
||
|
Harrisburg,
PA
|
1998
|
81
|
||
|
Frederick,
MD
|
2004
|
73
|
||
|
Courtyard
|
||||
|
Alexandria,
VA
|
2006
|
203
|
||
|
Scranton,
PA
|
1996
|
120
|
||
|
Langhorne,
PA
|
2002
|
118
|
||
|
Brookline/Boston,
MA
|
2003
|
188
|
||
|
Wilmington,
DE
|
1999
|
78
|
||
|
Fairfield Inn
|
||||
|
Bethlehem,
PA
|
1997
|
103
|
||
|
Laurel,
MD
|
1999
|
109
|
||
|
Hampton Inn
|
||||
|
Brookhaven,
NY
|
2002
|
161
|
||
|
Chelsea/Manhattan,
NY
|
2003
|
144
|
||
|
Hershey,
PA
|
1999
|
110
|
||
|
Carlisle,PA
|
1997
|
95
|
||
|
Danville,
PA
|
1998
|
72
|
||
|
Selinsgrove,
PA
|
1996
|
75
|
||
|
Herald
Square, Manhattan, NY
|
2005
|
136
|
||
|
Philadelphia,
PA
|
2001
|
250
|
||
|
Seaport,
NY
|
2006
|
65
|
||
|
Smithfield,
RI
|
2008
|
101
|
||
|
Hawthorn Suites
|
||||
|
Franklin,
MA
|
1999
|
100
|
||
|
Hilton Garden Inn
|
||||
|
JFK
Airport, NY
|
2005
|
188
|
||
|
Edison,
NJ
|
2003
|
132
|
||
|
Gettysburg,
PA
|
2004
|
88
|
||
|
Holiday Inn
|
||||
|
Norwich,
CT
|
2006
|
134
|
||
|
Holiday Inn Express
|
||||
|
Hauppauge,
NY
|
2001
|
133
|
||
|
Cambridge,
MA
|
1997
|
112
|
||
|
Hershey,
PA
|
1997
|
85
|
||
|
New
Columbia, PA
|
1997
|
81
|
||
|
Malvern,
PA
|
2004
|
88
|
||
|
Oxford
Valley, PA
|
2004
|
88
|
||
|
Chester,
NY
|
2006
|
80
|
||
|
Camp
Springs, MD
|
2008
|
127
|
||
|
Holiday Inn Express &
Suites
|
||||
|
Harrisburg,
PA
|
1997
|
77
|
||
|
King
of Prussia, PA
|
2004
|
155
|
||
|
Independent
|
||||
|
Wilmington,
DE
|
1999
|
71
|
||
|
Fifth
Ave, NY
|
2007
|
70
|
||
|
TriBeCa,
NY
|
2008
|
45
|
||
|
Brooklyn,
NY
|
2008
|
93
|
||
|
Mainstay
|
||||
|
Valley
Forge, PA
|
2000
|
69
|
||
|
Frederick,
MD
|
2001
|
72
|
||
|
Residence Inn
|
||||
|
North
Dartmouth, MA
|
2002
|
96
|
||
|
Tysons
Corner, VA
|
1984
|
96
|
||
|
Framingham,
MA
|
2000
|
125
|
||
|
Greenbelt,
MD
|
2002
|
120
|
||
|
Norwood,
MA
|
2006
|
96
|
||
|
Langhorne,
PA
|
2007
|
100
|
||
|
Carlisle,PA
|
2007
|
78
|
||
|
Sleep Inn
|
||||
|
Valley
Forge, PA
|
2000
|
87
|
||
|
Name
|
Year
Opened
|
Number
of Rooms
|
||
|
Sheraton Hotel
|
||||
|
JFK
Airport, NY
|
2008
|
150
|
||
|
Summerfield Suites
|
||||
|
White
Plains, NY
|
2000
|
159
|
||
|
Bridgewater,
NJ
|
1998
|
128
|
||
|
Gaithersburg,
MD
|
1998
|
140
|
||
|
Pleasant
Hill, CA
|
2003
|
142
|
||
|
Pleasanton,
CA
|
1998
|
128
|
||
|
Scottsdale,
AZ
|
1999
|
164
|
||
|
Charlotte,
NC
|
1989
|
144
|
||
|
TownePlace Suites
|
||||
|
Harrisburg,
PA
|
2008
|
107
|
||
|
TOTAL
ROOMS
|
6,514
|
|||
The
following table sets forth certain information with respect to the 18 hotels we
owned through joint ventures with third parties as of December 31,
2008. Of the 18 properties owned through interests in joint ventures,
three are consolidated.
|
Name
|
Year
Opened
|
Number
of Rooms
|
HHLP
Ownership
in
Asset
|
HHLP
Preferred Return
|
Consolidated/
Unconsolidated
|
||||||||||||
| Courtyard | |||||||||||||||||
|
Norwich,
CT
|
1997
|
144 | 66.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
South
Boston, MA
|
2005
|
164 | 50.0 | % | N/A |
Unconsolidated
|
|||||||||||
|
Warwick,
RI
|
2003
|
92 | 66.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
Ewing/Princeton,
NJ
|
2004
|
130 | 50.0 | % | 11.0 | % |
Unconsolidated
|
||||||||||
| Four Points - Sheraton | |||||||||||||||||
|
Revere/Boston,
MA
|
2001
|
180 | 55.0 | % | 12.0 | % |
Consolidated
|
||||||||||
| Hilton | |||||||||||||||||
|
Hartford,
CT
|
2005
|
393 | 8.8 | % | 8.5 | % |
Unconsolidated
|
||||||||||
| Homewood Suites | |||||||||||||||||
|
Glastonbury,
CT
|
2006
|
136 | 48.0 | % | 10.0 | % |
Unconsolidated
|
||||||||||
| Marriott | |||||||||||||||||
|
Mystic,
CT
|
2001
|
285 | 66.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
Hartford,
CT
|
2005
|
409 | 15.0 | % | 8.5 | % |
Unconsolidated
|
||||||||||
| Residence Inn | |||||||||||||||||
|
Danbury,
CT
|
1999
|
78 | 66.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
Mystic,
CT
|
1996
|
133 | 66.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
Southington,
CT
|
2002
|
94 | 44.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
Williamsburg,
VA
|
2002
|
108 | 75.0 | % | 12.0 | % |
Consolidated
|
||||||||||
| Holiday Inn Express | |||||||||||||||||
|
South
Boston, MA
|
1998
|
118 | 50.0 | % | N/A |
Unconsolidated
|
|||||||||||
|
Manhattan,
NY
|
2006
|
228 | 50.0 | % | N/A |
Unconsolidated
|
|||||||||||
| Hilton Garden Inn | |||||||||||||||||
|
Glastonbury,
CT
|
2003
|
150 | 48.0 | % | 11.0 | % |
Unconsolidated
|
||||||||||
| Springhill Suites | |||||||||||||||||
|
Waterford,
CT
|
1998
|
80 | 66.7 | % | 8.5 | % |
Unconsolidated
|
||||||||||
|
Williamsburg,
VA
|
2002
|
120 | 75.0 | % | 12.0 | % |
Consolidated
|
||||||||||
| TOTAL ROOMS | 3,042 | ||||||||||||||||
|
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.
|
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
2008, through the solicitation of proxies or otherwise.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
MARKET
INFORMATION
Our
common shares began trading on the New York Stock Exchange on May 5, 2008 under
the symbol “HT.” Our common shares were previously traded on the American Stock
Exchange under the symbol “HT.” As of March 5, 2009, the last
reported closing price per common share on the New York Stock Exchange was
$1.52. The following table
sets forth the high and low sales price per common share reported on the
American Stock Exchange and New York Stock Exchange as traded and the dividends
paid on the common shares for each of the quarters indicated.
|
Year
Ended December 31, 2008
|
High
|
Low
|
Dividend Per Common Share
|
|||||||||
|
Fourth
Quarter
|
$ | 7.25 | $ | 2.30 | $ | 0.18 | ||||||
|
Third
Quarter
|
$ | 8.61 | $ | 5.74 | $ | 0.18 | ||||||
|
Second
Quarter
|
$ | 10.41 | $ | 7.00 | $ | 0.18 | ||||||
|
First
Quarter
|
$ | 9.80 | $ | 7.61 | $ | 0.18 | ||||||
|
Year
Ended December 31, 2007
|
High
|
Low
|
Dividend Per Common Share
|
|||||||||
|
Fourth
Quarter
|
$ | 11.11 | $ | 9.22 | $ | 0.18 | ||||||
|
Third
Quarter
|
$ | 14.20 | $ | 9.75 | $ | 0.18 | ||||||
|
Second
Quarter
|
$ | 12.38 | $ | 11.19 | $ | 0.18 | ||||||
|
First
Quarter
|
$ | 12.06 | $ | 9.73 | $ | 0.18 | ||||||
SHAREHOLDER
INFORMATION
At March
5, 2009 we had approximately 120 holders of record and 9,585 beneficial owners
of our common shares. Units of limited partnership interest in our operating
partnership (which are redeemable for common shares on a one for one basis
subject to certain limitations) were held by approximately 61 entities and
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 have granted limited waivers of these ownership
limitations from time to time.
DISTRIBUTION
INFORMATION
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. Additionally, we may, if necessary and
allowable, pay taxable dividends of our shares or debt securities to meet the
distribution requirements.
SHARE
PERFORMANCE GRAPH
The
following graph compares the yearly change in our cumulative total shareholder
return on our common shares for the period beginning December 31, 2003 and
ending December 31, 2008, with the yearly changes in the Standard & Poor’s
500 Stock Index (the S&P 500 Index), the Russell 2000 Index, and the SNL
Hotel REITs Index (“Hotel REIT Index”) for the same period, assuming a base
share price of $100.00 for our common shares, the S&P 500 Index, the Russell
2000 Index and the Hotel REIT Index for comparative purposes. The Hotel REIT
Index is comprised of eleven publicly traded REITs which focus on investments in
hotel properties. Total shareholder return equals appreciation in stock price
plus dividends paid and assumes that all dividends are reinvested. The
performance graph is not indicative of future investment performance. We do not
make or endorse any predictions as to future share price
performance:
|
Period Ending December 31,
|
||||||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||||
|
Hersha
Hospitality Trust
|
$ | 100.00 | $ | 122.25 | $ | 103.64 | $ | 140.21 | $ | 123.21 | $ | 44.98 | ||||||||||||
|
Russell
2000
|
100.00 | 118.33 | 123.72 | 146.44 | 144.15 | 95.44 | ||||||||||||||||||
|
SNL
Hotel REITs Index
|
100.00 | 132.65 | 145.65 | 187.33 | 145.80 | 58.32 | ||||||||||||||||||
|
S&P
500
|
100.00 | 110.88 | 116.32 | 134.69 | 142.09 | 89.52 | ||||||||||||||||||
SECURITIES
ISSUABLE PURSUANT TO EQUITY COMPENSATION PLANS
As of
December 31, 2008, no options or warrants to acquire our securities were
outstanding. The following table sets forth the number of securities to be
issued upon exercise of outstanding options, warrants and rights; weighted
average exercise price of outstanding options, warrants and rights; and the
number of securities remaining available for future issuance under our equity
compensation plans as of December 31, 2008:
|
Plan Category
|
Number of securities to be
issued upon exercise of outstanding options, warrants and rights
|
Weighted average exercise price of outstanding options, warrants and rights
|
Number of securities remaining available for
future issuance under equity compensation plans
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans approved by security holders
|
- | - | 2,570,326 | |||||||||
|
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
|
Total
|
- | - | 2,570,326 | |||||||||
|
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. Where applicable, the operating results of certain real estate
assets which have been sold or otherwise qualify as held for disposition are
included in discontinued operations for all periods presented.
HERSHA
HOSPITALITY TRUST
SELECTED
FINANCIAL DATA
(In
thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Hotel
Operating Revenues
|
$ | 250,464 | $ | 229,461 | $ | 132,354 | $ | 65,493 | $ | 33,228 | ||||||||||
|
Interest
Income From Development Loans
|
7,890 | 6,046 | 2,487 | 3,940 | 2,191 | |||||||||||||||
|
Land
Lease Revenue
|
5,363 | 4,860 | 2,071 | - | - | |||||||||||||||
|
Hotel
Lease Revenue
|
- | - | - | - | 1,192 | |||||||||||||||
|
Other
Revenues
|
1,054 | 980 | 737 | 529 | 176 | |||||||||||||||
|
Total
Revenue
|
264,771 | 241,347 | 137,649 | 69,962 | 36,787 | |||||||||||||||
|
Operating
Expenses:
|
||||||||||||||||||||
|
Hotel
Operating Expenses
|
144,972 | 130,910 | 76,694 | 38,573 | 19,875 | |||||||||||||||
|
Hotel
Ground Rent
|
1,040 | 856 | 804 | 433 | 504 | |||||||||||||||
|
Land
Lease Expense
|
2,939 | 2,721 | 1,189 | - | - | |||||||||||||||
|
Real
Estate and Personal Property Taxes and Property Insurance
|
12,953 | 11,349 | 5,979 | 3,374 | 2,129 | |||||||||||||||
|
General
and Administrative
|
8,714 | 7,953 | 5,820 | 4,909 | 3,118 | |||||||||||||||
|
Acquisition
and Terminated Transaction Costs
|
380 | 149 | 316 | 41 | - | |||||||||||||||
|
Impairment
of Development Loan Receivable and Other Asset
|
21,004 | - | - | - | - | |||||||||||||||
|
Depreciation
and Amortization
|
40,998 | 33,863 | 18,420 | 8,336 | 4,754 | |||||||||||||||
|
Total
Operating Expenses
|
233,000 | 187,801 | 109,222 | 55,666 | 30,380 | |||||||||||||||
|
Operating
Income
|
31,771 | 53,546 | 28,427 | 14,296 | 6,407 | |||||||||||||||
|
Interest
Income
|
306 | 686 | 1,182 | 602 | 241 | |||||||||||||||
|
Interest
expense
|
43,156 | 42,115 | 25,123 | 12,167 | 4,155 | |||||||||||||||
|
Other
Expense
|
129 | 83 | 102 | 12 | 12 | |||||||||||||||
|
Loss
on Debt Extinguishment
|
1,568 | - | 1,485 | - | - | |||||||||||||||
|
(Loss)
Income before income (loss) from Unconsolidated Joint Venture Investments,
Distributions to Preferred Unitholders, Minority Interests and
Discontinued Operations
|
(12,776 | ) | 12,034 | 2,899 | 2,719 | 2,481 | ||||||||||||||
|
Income
from Unconsolidated Joint Venture Investments
|
1,373 | 3,476 | 1,799 | 457 | 481 | |||||||||||||||
|
Impairment
on Unconsolidated Joint Venture Assets
|
(1,890 | ) | - | - | - | - | ||||||||||||||
|
Net
(Loss) Income from Unconsolidated Joint Venture
Investments
|
(517 | ) | 3,476 | 1,799 | 457 | 481 | ||||||||||||||
|
(Loss)
Income Before Distribution to Preferred Unitholders, Minority Interest and
Discontinued Operations
|
(13,293 | ) | 15,510 | 4,698 | 3,176 | 2,962 | ||||||||||||||
|
Distributions
to Preferred Unitholders
|
- | - | - | - | 499 | |||||||||||||||
|
(Loss)
Income Allocated to Minority Interest in Continuing
Operations
|
(2,053 | ) | 1,773 | 579 | 122 | 307 | ||||||||||||||
|
(Loss)
Income from Continuing Operations
|
(11,240 | ) | 13,737 | 4,119 | 3,054 | 2,156 | ||||||||||||||
|
Discontinued
Operations, net of minority interest:
|
||||||||||||||||||||
|
Gain
on Disposition of Hotel Properties
|
2,452 | 3,745 | 693 | 1,161 | - | |||||||||||||||
|
(Loss)
Income from Discontinued Operations
|
(20 | ) | 365 | 286 | (918 | ) | (107 | ) | ||||||||||||
|
Income
from Discontinued Operations
|
2,432 | 4,110 | 979 | 243 | (107 | ) | ||||||||||||||
|
Net
(Loss) Income
|
(8,808 | ) | 17,847 | 5,098 | 3,297 | 2,049 | ||||||||||||||
|
Preferred
Distributions
|
4,800 | 4,800 | 4,800 | 1,920 | - | |||||||||||||||
|
Net
(Loss) Income applicable to Common Shareholders
|
$ | (13,608 | ) | $ | 13,047 | $ | 298 | $ | 1,377 | $ | 2,049 | |||||||||
|
Basic
(Loss) Income from Continuing Operations applicable to Common
Shareholders
|
$ | (0.36 | ) | $ | 0.22 | $ | (0.03 | ) | $ | 0.06 | $ | 0.13 | ||||||||
|
Diluted
(Loss) Income from Continuing Operations applicable to Common Shareholder
(1)
|
(0.36 | ) | 0.22 | (0.03 | ) | 0.06 | 0.13 | |||||||||||||
|
Dividends
declared per Common Share
|
0.72 | 0.72 | 0.72 | 0.72 | 0.72 | |||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Net
investment in hotel properties
|
$ | 982,082 | $ | 893,297 | $ | 807,784 | $ | 317,980 | $ | 163,923 | ||||||||||
|
Assets
Held for Sale
|
- | - | - | 3,407 | 18,758 | |||||||||||||||
|
Minority
interest in Partnership
|
53,520 | 42,845 | 25,933 | 15,147 | 16,779 | |||||||||||||||
|
Shareholder's
equity
|
349,963 | 330,405 | 331,619 | 164,703 | 119,792 | |||||||||||||||
|
Total
assets
|
1,179,455 | 1,067,607 | 968,208 | 455,355 | 261,021 | |||||||||||||||
|
Total
debt
|
743,781 | 663,008 | 580,542 | 256,146 | 98,788 | |||||||||||||||
|
Debt
related to Assets Held for Sale
|
- | - | - | 375 | 13,058 | |||||||||||||||
|
Other
Data
|
||||||||||||||||||||
|
Funds
from Operations (2)
|
$ | 31,441 | $ | 49,822 | $ | 25,936 | $ | 14,495 | $ | 10,539 | ||||||||||
|
Net
cash provided by operating activities
|
$ | 53,894 | $ | 59,300 | $ | 27,217 | $ | 15,002 | $ | 12,148 | ||||||||||
|
Net
cash used in investing activities
|
$ | (114,870 | ) | $ | (46,027 | ) | $ | (413,881 | ) | $ | (190,825 | ) | $ | (78,378 | ) | |||||
|
Net
cash (used in) provided by financing activities
|
$ | 64,346 | $ | (11,262 | ) | $ | 388,200 | $ | 163,989 | $ | 46,137 | |||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||||||
|
Basic
|
45,184,127 | 40,718,724 | 27,118,264 | 20,293,554 | 16,391,805 | |||||||||||||||
|
Diluted
(1)
|
45,184,127 | 40,718,724 | 27,118,264 | 20,299,937 | 16,391,805 | |||||||||||||||
(1) Income
allocated to minority interest in the Partnership has been excluded from the
numerator and Partnership units have been omitted from the denominator for the
purpose of computing diluted earnings per share since the effect of including
these amounts in the numerator and denominator would have no
impact.
(2) See
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Funds From Operations” for an explanation of FFO, why we believe
FFO is a meaningful measure of our operating performance and a reconciliation of
FFO to net income calculated in accordance with GAAP.
|
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, 2008, we owned interests in 76 hotels in the eastern United States
including interests in 18 hotels owned through joint ventures. For purposes of
the REIT qualification rules, we cannot directly operate any of our hotels.
Instead, we must lease our hotels to a third party lessee or to a TRS, provided
that the TRS engages an eligible independent contractor to manage the
hotels. As of December 31, 2008 we have leased all of our hotels to a
wholly-owned TRS, a joint venture owned TRS, or an entity owned by our
wholly-owned TRS. Each of these TRS entities will pay qualifying
rent, and the TRS entities have entered into management contracts with qualified
independent managers, including HHMLP, with respect to our hotels. We intend to
lease all newly acquired hotels to a TRS.
The TRS
structure enables us to participate more directly in the operating performance
of our hotels. The TRS directly receives all revenue from, and funds all
expenses relating to hotel operations. The TRS is also subject to income tax on
its earnings.
During
the year ended December 31, 2008, the U.S. economy has been influenced by
financial market turmoil, growing unemployment and declining consumer sentiment.
As a result, the lodging industry is experiencing slowing growth
or negative growth which could have a negative impact on our future results
of operations and financial condition. For the year ended December
31, 2008, we have seen increases in Average Daily Rate (“ADR”) and Revenue Per
Available Room (“RevPAR”), in part, as a result of our strategy of investing in
high quality upscale hotels in high barrier to entry markets, including gateway
markets such as the New York City metro market. While we have seen
increases in ADR and RevPAR in 2008, these increases were not at the levels
realized in the previous year and we saw decreases in these measures in the
fourth quarter of 2008.
The
turmoil in the financial markets has caused credit to significantly tighten
making it more difficult for hotel developers to obtain financing for
development projects or for hotels without an operating history. This
could have a negative impact on the collectability of our portfolio of
development loans receivable. We monitor this portfolio to determine
the collectability of the loan principal and interest accrued. We
will continue to monitor this portfolio on an on-going basis. For
more information, please see “Note 4 – Development Loans Receivable and Land
Leases.”
In
addition, the tightening credit markets have made it more difficult to finance
the acquisition of new hotel properties or refinance existing hotel properties
that do not have a history of profitable operations. We monitor the
maturity dates of our debt obligations and take steps in advance of the debt
becoming due to extend or refinance the obligations. Please refer to
“Item 7A. Quantitative and Qualitative Disclosures About Market Risk”
for a discussion of our debt maturities.
The
following table outlines operating results for the Company’s portfolio of wholly
owned hotels and those owned through joint venture interests that are
consolidated in our financial statements for the three years ended December 31,
2008, 2007 and 2006:
CONSOLIDATED
HOTELS:
|
Year Ended 2008
|
Year Ended 2007
|
2008 vs. 2007 % Variance
|
Year Ended 2006
|
2007 vs. 2006 % Variance
|
||||||||||||||||
|
Rooms
Available
|
2,423,433 | 2,248,253 | 7.8 | % | 1,472,318 | 52.7 | % | |||||||||||||
|
Rooms
Occupied
|
1,742,468 | 1,656,158 | 5.2 | % | 1,065,825 | 55.4 | % | |||||||||||||
|
Occupancy
|
71.90 | % | 73.66 | % | -1.8 | % | 72.39 | % | 1.3 | % | ||||||||||
|
Average
Daily Rate (ADR)
|
$ | 136.59 | $ | 131.26 | 4.1 | % | $ | 116.23 | 12.9 | % | ||||||||||
|
Revenue
Per Available Room (RevPAR)
|
$ | 98.21 | $ | 96.69 | 1.6 | % | $ | 84.14 | 14.9 | % | ||||||||||
|
Room
Revenues
|
$ | 237,995,147 | $ | 217,393,817 | 9.5 | % | $ | 123,882,745 | 75.5 | % | ||||||||||
|
Hotel
Operating Revenues
|
$ | 250,463,773 | $ | 229,460,728 | 9.2 | % | $ | 132,354,355 | 73.4 | % | ||||||||||
|
Hotel
Operating Revenues from Discontinued Operations
|
$ | - | $ | 6,684,522 | N/A | $ | 15,847,421 | N/A | ||||||||||||
The
following table outlines operating results for the three years ended December
31, 2008, 2007 and 2006 for hotels we own through an unconsolidated joint
venture interest. These operating results reflect 100% of the operating results
of the property including our interest and the interests of our joint venture
partners and other minority interest holders.
UNCONSOLIDATED
JOINT VENTURES:
|
Year Ended 2008
|
Year Ended 2007
|
2008 vs. 2007 % Variance
|
Year Ended 2006
|
2007 vs. 2006 % Variance
|
||||||||||||||||
|
Rooms
Available
|
963,892 | 954,114 | 1.0 | % | 879,384 | 8.5 | % | |||||||||||||
|
Rooms
Occupied
|
677,485 | 682,169 | -0.7 | % | 613,272 | 11.2 | % | |||||||||||||
|
Occupancy
|
70.29 | % | 71.50 | % | -1.2 | % | 69.74 | % | 1.8 | % | ||||||||||
|
Average
Daily Rate (ADR)
|
$ | 146.91 | $ | 144.51 | 1.7 | % | $ | 132.54 | 9.0 | % | ||||||||||
|
Revenue
Per Available Room (RevPAR)
|
$ | 103.26 | $ | 103.32 | -0.1 | % | $ | 92.43 | 11.8 | % | ||||||||||
|
Room
Revenues
|
$ | 99,530,317 | $ | 98,580,629 | 1.0 | % | $ | 81,285,744 | 21.3 | % | ||||||||||
|
Total
Revenues
|
$ | 127,874,193 | $ | 130,167,451 | -1.8 | % | $ | 111,301,348 | 17.0 | % | ||||||||||
Revenue
per available room (“RevPAR”) for the year ended December 31, 2008 increased
1.6% for our consolidated hotels and decreased 0.1% for our unconsolidated
hotels when compared to the same period in 2007. This represents a
deceleration in the rate of increase in RevPAR when compared to the increase
experienced during the year ended December 31, 2007 over the same period in
2006. The deceleration of our growth in RevPAR is primarily due to
deteriorating economic conditions in 2008 and the stabilization of hotel
properties acquired in the previous years.
The
increase in revenue per available room (“RevPAR”) during the year ended December
31, 2007 was due primarily to 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 Hyatt Summerfield Suite, Hilton
Garden Inn, Residence Inn and Courtyard by Marriott; and a 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, 2008 TO DECEMBER 31, 2007
(dollars
in thousands, except per share data)
Revenue
Our total
revenues for the year ended December 31, 2008 consisted of hotel operating
revenues, interest income from our development loan program, land lease revenue,
and other revenue. Hotel operating revenues are recorded for wholly owned hotels
that are leased to our wholly owned TRS and hotels owned through joint venture
interests that are consolidated in our financial statements. Hotel operating
revenues increased $21,003, or 9.2%, from $229,461 for the year ended December
31, 2007 to $250,464 for the same period in 2008. The increase in
revenues is primarily attributable to the acquisitions consummated in 2008 and
improved RevPAR and occupancy at certain of our hotels. We acquired interests in
the following six consolidated hotels since December 31, 2007:
|
Brand
|
Location
|
Acquisition Date
|
Rooms
|
2008 Total Revenue
|
||||||||
|
Duane
Street Hotel (TriBeCa)
|
New
York, NY
|
1/4/2008
|
45 | $ | 3,688 | |||||||
|
TownePlace
Suites
|
Harrisburg,
PA
|
5/8/2008
|
107 | 1,755 | ||||||||
|
Sheraton
Hotel
|
JFK
Airport, Jamaica, NY
|
6/13/2008
|
150 | 3,931 | ||||||||
|
Holiday
Inn Express
|
Camp
Springs, MD
|
6/26/2008
|
127 | 1,313 | ||||||||
|
nu
Hotel
|
Brooklyn,
NY
|
7/7/2008*
|
93 | 2,314 | ||||||||
|
Hampton
Inn & Suites
|
Smithfield,
RI
|
8/1/2008
|
101 | 848 | ||||||||
| 623 | $ | 13,849 | ||||||||||
*The
property was purchased on 1/14/2008, but did not open for business until
7/7/2008.
Revenues
for all six hotels were recorded from the date of acquisition as hotel operating
revenues. Further, hotel operating revenues for the year ended December 31, 2008
included revenues for a full year related to the following six hotels that were
purchased during the year ended December 31, 2007:
|
Brand
|
Location
|
Acquisition Date
|
Rooms
|
2008 Total Revenue
|
2007 Total Revenue
|
|||||||||||
|
Residence
Inn
|
Langhorne,
PA
|
1/8/2007
|
100 | $ | 4,062 | $ | 3,352 | |||||||||
|
Residence
Inn
|
Carlisle,
PA
|
1/10/2007
|
78 | 2,417 | 2,091 | |||||||||||
|
Holiday
Inn Express
|
Chester,
NY
|
1/25/2007
|
80 | 2,337 | 2,367 | |||||||||||
|
Hampton
Inn
|
Seaport,
NY
|
2/1/2007
|
65 | 5,833 | 5,200 | |||||||||||
|
Independent
|
373
Fifth Avenue
|
6/1/2007
|
70 | 4,562 | 3,051 | |||||||||||
|
Holiday
Inn
|
Norwich,
CT
|
7/1/2007
|
134 | 3,297 | 1,689 | |||||||||||
| 527 | $ | 22,508 | $ | 17,750 | ||||||||||||
We invest
in hotel development projects by providing secured first mortgage or mezzanine
financing to hotel developers and through the acquisition of land that is then
leased to hotel developers. Interest income is earned on our
development loans at rates ranging between 10.0% and 20.0%. Interest income
from development loans receivable was $7,890 for the year ended December 31,
2008 compared to $6,046 for the same period in 2007. The average
balance of development loans receivable outstanding in 2008 was higher than the
average balance outstanding in 2007. This resulted in a $1,844, or 30.5%
increase in interest income. For one of our development loans to an
unaffiliated developer, we recorded an impairment charge as of December 31, 2008
for the remaining principal of $18,748, which is net of unamortized discount and
loan fees in the amount of $1,252. The loan was deemed to be fully
impaired when the developer was unable to obtain additional construction
financing to complete the project and consequently defaulted under his senior
mortgage loan. The project, located in Brooklyn, New York, NY, was to
include hotel, residential and retail components, however, the land acquisition
financing and our loan were not sufficient to fund the ongoing
construction. A receivable for uncollected interest income of $569,
which is net of unrecognized deferred loan fees of $143, was also recorded as an
impairment charge. In connection with the development loan, we also
hold an option to acquire an interest in the hotel upon completion of the
development project. This option was valued at $1,687 at its
inception and is deemed to be fully impaired. The total impairment
charge recorded during the year ended December 31, 2008 related to this
development loan and option was $21,004.
In 2006
we acquired two parcels of land, and in 2007 we acquired an additional two
parcels of land, which are being leased to hotel developers. The
hotel developers are owned in part by certain executives and affiliated trustees
of the Company. Our net investment in these parcels is approximately
$23,366. Each land parcel is leased at a minimum rental rate of 10% of our net
investment in the land. Additional rents are paid by the lessee for the
principal and interest on the mortgage, real estate taxes and
insurance. During the year ended December 31, 2008, we recorded
$5,363 in land lease revenue from these parcels. We incurred $2,939 in
expense related to these land leases resulting in a contribution of $2,424 to
our operating income during the year ended December 31, 2008.
Other
revenue consists primarily of fees earned for asset management services provided
to properties owned by two of our unconsolidated joint
ventures. Other revenues increased from $980 for the year ended
December 31, 2007 to $1,054 during the year ended December 31,
2008.
For the
year ended December 31, 2008, interest income decreased $380 compared to the
same period in 2007. Increased levels of interest income in 2007 resulted from
higher levels of interest bearing deposits related to the acquisition of hotel
properties during 2007.
Expenses
Total
hotel operating expenses increased 10.7% to approximately $144,972 for the year
ended December 31, 2008 from $130,910 for the year ended December 31, 2007.
Consistent with the increase in hotel operating revenues, hotel operating
expenses increased primarily due to the acquisitions consummated since the
comparable period in 2007, as mentioned above. The acquisitions also resulted in
an increase in depreciation and amortization from $33,863 for the year ended
December 31, 2007 to $40,998 for the year ended December 31, 2008. Similarly,
real estate and personal property tax and property insurance increased $1,604,
or 14.1%, in the year ended December 31, 2008 when compared to the same period
in 2007.
General
and administrative expense increased by approximately $761 from $7,953 in 2007
to $8,714 in 2008. General and administrative expenses increased primarily to
increased stock based compensation costs associated with the issuance of
additional stock awards in June 2008.
Unconsolidated
Joint Venture Investments
Through
our investment in the Mystic Partners joint venture, we have an 8.8% interest in
the Hilton Hotel in Hartford, CT. In 2008, the Company determined
that its interest in this hotel was impaired. As of December 31,
2008, the Company recorded an impairment loss of approximately $1,890 which
represents our entire investment in the hotel. Offsetting this loss
was approximately $1,373 in income from our unconsolidated joint venture
investments. The net of the impairment charge and income from our
unconsolidated joint ventures is a net loss of approximately
$517. For the year ended December 31, 2007, approximately $3,476 in
income from unconsolidated joint venture investments was recorded, resulting in
a decrease of $3,993 over the same period in 2008.
During
2007, we acquired joint venture interests in the following
property:
|
Joint Venture
|
Brand
|
Name
|
Acquisition Date
|
Rooms
|
Ownership %
|
Hersha Preferred Equity
Return
|
||||||||||||
|
Metro
29th Street Associates, LLC
|
Holiday
Inn Express
|
Manhattan-New
York, NY
|
2/1/2007
|
228 | 50.0 | % | N/A | |||||||||||
Net
Income/Loss
Net loss
applicable to common shareholders for year ended December 31, 2008 was $13,608
compared to net income applicable to common shareholders of $13,047 for the same
period in 2007.
Operating
income for the year ended December 31, 2008 was $31,771 compared to operating
income of $53,546 during the same period in 2007. The $21,775, or 40.7%,
decrease in operating income was primarily the result of the impairment charge
of $21,004 related to our investment in a development loan and an option to
acquire the hotel property upon completion, noted above. This
impairment charge was recorded during the fourth quarter of 2008.
The
weighted average minority interest ownership in our operating partnership
increased from 11.83% for the year ended December 31, 2007 to 15.10% for the
year ended December 31, 2008. This change is a result of the issuance of units
in our operating partnership as consideration for the acquisition of hotel
properties and is partially offset by the issuance of 6,600,000 of our common
shares in May of 2008. Interest expense,
increased $1,041 from $42,115 for the year ended December 31, 2007 to $43,156
for the year ended December 31, 2008. The increase in interest expense is the
result of mortgages placed on newly acquired properties and increased average
balances on our line of credit.
Included
in net loss applicable to common shareholders for the year ended December 31,
2008 is $2,432 in income from discontinued operations compared to $4,110 in
income during the same period in 2007. Discontinued operations was
driven primarily by a gain of $2,452 resulting from the sale of the Holiday Inn
Conference Center in New Cumberland, PA in October 2008 and a gain of $3,745
results from the sale of the Fairfield Inn, Mt. Laurel, NJ and Hampton Inn,
Linden, NJ in November 2007.
COMPARISON
OF THE YEAR ENDED DECEMBER 31, 2007 TO DECEMBER 31, 2006
(dollars
in thousands, except per share data)
Revenue
Our total
revenues for the year ended December 31, 2007 consisted of hotel operating
revenues, interest income from our development loan program, land lease revenue,
and other revenue. Hotel operating revenues are recorded for wholly owned hotels
that are leased to our wholly owned TRS and hotels owned through joint venture
interests that are consolidated in our financial statements. Hotel operating
revenues increased $97,107, or 73.4%, from $132,354 for the year ended December
31, 2006 to $229,461 for the same period in 2007. The increase in
revenues is primarily attributable to the acquisitions consummated in 2007, a
full twelve months of operations from our 2006 acquisitions and improved RevPAR
and occupancy at certain of our hotels.
We
acquired interests in six consolidated hotels during the year ended December 31,
2007, as noted above. Revenues for all six hotels were recorded from
the date of acquisition as hotel operating revenues. Further, hotel operating
revenues for the year ended December 31, 2007 included revenues for a full year
related to the following 22 hotels that were purchased during the year ended
December 31, 2006:
|
Brand
|
Location
|
Acquisition Date
|
Rooms
|
2007 Total Revenue
|
2006 Total Revenue
|
|||||||||||
|
Courtyard
|
Langhorne,
PA
|
1/3/2006
|
118 | $ | 4,088 | $ | 4,312 | |||||||||
|
Fairfield
Inn
|
Mt.
Laurel, NJ
|
1/3/2006
|
118 | 2,697 | 2,760 | |||||||||||
|
Fairfield
Inn
|
Bethlehem,
PA
|
1/3/2006
|
103 | 2,427 | 2,489 | |||||||||||
|
Courtyard
|
Scranton,
PA
|
2/1/2006
|
120 | 3,229 | 2,543 | |||||||||||
|
Residence
Inn
|
Tysons
Corner, VA
|
2/2/2006
|
96 | 4,554 | 4,092 | |||||||||||
|
Hampton
Inn
|
Philadelphia,
PA
|
2/15/2006
|
250 | 10,096 | 7,799 | |||||||||||
|
Hilton
Garden Inn
|
JFK
Airport, NY
|
2/16/2006
|
188 | 9,745 | 7,883 | |||||||||||
|
Hawthorne
Suites
|
Franklin,
MA
|
4/25/2006
|
100 | 2,642 | 1,877 | |||||||||||
|
Residence
Inn
|
North
Dartmouth, MA
|
5/1/2006
|
96 | 3,015 | 2,386 | |||||||||||
|
Comfort
Inn
|
North
Dartmouth, MA
|
5/1/2006
|
84 | 1,403 | 1,213 | |||||||||||
|
Holiday
Inn Express
|
Cambridge,
MA
|
5/3/2006
|
112 | 4,370 | 2,950 | |||||||||||
|
Residence
Inn
|
Norwood,
MA
|
7/27/2006
|
96 | 3,096 | 1,088 | |||||||||||
|
Holiday
Inn Express
|
Hauppauge,
NY
|
9/1/2006
|
133 | 5,038 | 1,580 | |||||||||||
|
Hampton
Inn
|
Brookhaven,
NY
|
9/6/2006
|
161 | 5,536 | 1,658 | |||||||||||
|
Courtyard
|
Alexandria,
VA
|
9/29/2006
|
203 | 7,014 | 1,301 | |||||||||||
|
Summerfield
Suites
|
White
Plains, NY
|
12/27/2006
|
159 | 9,821 | * | |||||||||||
|
Summerfield
Suites
|
Bridgewater,
NJ
|
12/27/2006
|
128 | 5,650 | * | |||||||||||
|
Summerfield
Suites
|
Gaithersburg,
MD
|
12/27/2006
|
140 | 4,863 | * | |||||||||||
|
Summerfield
Suites
|
Pleasant
Hill, CA
|
12/27/2006
|
142 | 6,091 | * | |||||||||||
|
Summerfield
Suites
|
Pleasanton,
CA
|
12/27/2006
|
128 | 4,841 | * | |||||||||||
|
Summerfield
Suites
|
Scottsdale,
AZ
|
12/27/2006
|
164 | 6,350 | * | |||||||||||
|
Summerfield
Suites
|
Charlotte,
NC
|
12/27/2006
|
144 | 3,096 | * | |||||||||||
| 2,983 | $ | 109,662 | $ | 45,931 | ||||||||||||
We invest
in hotel development projects by providing secured first mortgage or mezzanine
financing to hotel developers and through the acquisition of land that is then
leased to hotel developers. Interest income earned on our development
loans during the period covered by this comparison was at rates ranging between
10.0% and 13.5%. Interest income from development loans receivable
was $6,046 for the year ended December 31, 2007 compared to $2,487 for the same
period in 2006. The average balance of development loans receivable
outstanding in 2007 was higher than the average balance outstanding in
2006. This resulted in a $3,559, or 143.1%, increase in interest
income.
In 2006
we acquired two parcels of land, and in 2007 we acquired an additional two
parcels of land, which are being leased to hotel developers. The
hotel developers are owned in part by certain executives and affiliated trustees
of the Company. Our net investment in these parcels is approximately
$23,366. Each land parcel is leased at a minimum rental rate of 10% of our net
investment in the land. Additional rents are paid by the lessee for the
principal and interest on the mortgage, real estate taxes and
insurance. During the year ended December 31, 2007, we recorded
$4,860 in land lease revenue from these parcels. We incurred $2,721
in expense related to these land leases resulting in a contribution of $2,139 to
our operating income during the year ended December 31, 2007.
Other
revenue consists primarily of fees earned for asset management services provided
to properties owned by two of our unconsolidated joint
ventures. Other revenues increased $243, or 32.9%, from $737 during
the year ended December 31, 2006 to $980 during the year ended December 31,
2007.
For the
year ended December 31, 2007, interest income decreased $496 compared to the
same period in 2006. Increased levels of interest income in 2006 resulted from
higher levels of interest bearing deposits related to the acquisition of hotel
properties and interest earned on proceeds from the offering of our common stock
during 2006.
Expenses
Total
hotel operating expenses increased 70.7% to approximately $130,910 for the year
ended December 31, 2007 from $76,694 for the year ended December 31, 2006.
Consistent with the increase in hotel operating revenues, hotel operating
expenses increased primarily due to the acquisitions consummated since the
comparable period in 2006, as mentioned above. The acquisitions also resulted in
an increase in depreciation and amortization from $18,420 for the year ended
December 31, 2006 to $33,863 for the year ended December 31, 2007. Similarly,
real estate and personal property tax and property insurance increased $5,370,
or 89.8%, in the year ended December 31, 2007 when compared to the same period
in 2006.
General
and administrative expense increased by approximately $2,133 from $5,820 in 2006
to $7,953 in 2007. General and administrative expenses increased primarily due
to higher compensation expense related to an increase in staffing in our asset
management and accounting teams and an increase in incentive
compensation.
Unconsolidated
Joint Venture Investments
Income
from unconsolidated joint venture investments increased $1,677 from $1,799 for
the year ended December 31, 2006 to $3,476 for the year ended December 31, 2007.
During 2007, we acquired unconsolidated joint venture interests in the following
property:
|
Joint Venture
|
Brand
|
Name
|
Acquisition Date
|
Rooms
|
Ownership %
|
Hersha Preferred Equity
Return
|
||||||||||||
|
Metro
29th Street Associates, LLC
|
Holiday
Inn Express
|
Manhattan-New
York, NY
|
2/1/2007
|
228 | 50.0 | % | N/A | |||||||||||
In
addition, we acquired joint venture interests in the following two properties
during 2006:
|
Joint Venture
|
Brand
|
Name
|
Acquisition Date
|
Rooms
|
Ownership %
|
Hersha Preferred Equity
Return
|
||||||||||||
|
PRA
Suites at Glastonbury, LLC
|
Homewood
Suites
|
Glastonbury,
CT
|
6/15/2006
|
136 | 40.0 | % * | 10.0 | % | ||||||||||
|
Mystic
Partners, LLC
|
Marriott
|
Hartford,
CT
|
2/8/2006
|
409 | 15.0 | % | 8.5 | % | ||||||||||
*Percent
owned was 40% through March 31, 2007. On April 1, 2007 our percent
owned increased to 48.0%.
Income
from unconsolidated joint venture investments was favorably impacted by the
inclusion of these investments for a full twelve months in 2007.
Net
Income
Net
income applicable to common shareholders for year ended December 31, 2007 was
approximately $13,047 compared to net income applicable to common shareholders
of $298 for the same period in 2006.
Operating
income for the year ended December 31, 2007 was $53,546 compared to operating
income of $28,427 during the same period in 2006. The $25,119, or 88.4%,
increase in operating income resulted from improved performance of our portfolio
and acquisitions that have increased the scale of our operations enabling us to
leverage the absorption of administrative costs.
The
increase in our operating income was partially offset by increases in interest
expense, which increased $16,992 from $25,123 for the year ended December 31,
2006 to $42,115 for the year ended December 31, 2007. The increase in interest
expense is the result of mortgages placed on newly acquired properties and
increased average balances on our line of credit.
Included
in net income applicable to common shareholders for the year ended December 31,
2007 is $365 in income from discontinued operations compared to $286 during the
same period in 2006. Also included in net income applicable to common
shareholders for the year ended December 31, 2007 is a gain of $3,745 resulting
from the sale of the Hampton Inn, Linden, NJ and Fairfield Inn, Mt. Laurel, NJ
which had been held for sale. Included in net income applicable to common
shareholders for the year ended December 31, 2006 is a gain of $693 resulting
from the sale of the Holiday Inn Express in Hartford, CT, the Hampton Inn in
Peachtree, GA, the Hampton Inn in Newnan, GA, the Comfort Suites in Duluth, GA,
and the Holiday Inn Express in Duluth, GA.
LIQUIDITY,
CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars
in thousands, except per share data)
The
current recession and related financial crisis has resulted in deleveraging
attempts throughout the global financial system. As banks and other
financial intermediaries reduce their leverage and incur losses on their
existing portfolio of loans, the ability to originate or refinance existing
loans has become very restrictive for all borrowers, regardless of balance sheet
strength. As a result, it is a very difficult borrowing environment,
even for those borrowers that have strong balance sheets. While we
maintain a portfolio of what we believe to be high quality assets and we believe
our leverage to be at acceptable levels, we are uncertain if we could currently
obtain new debt, or refinance existing debt, on reasonable terms in the current
market.
Owning
hotels is a capital intensive enterprise. Hotels are expensive to
acquire or build and require regular significant capital expenditures to satisfy
guest expectations. However, even with the current depressed cash
flows, we project that our operating cash flow will be sufficient to pay for
almost all of our liquidity and other capital needs over the medium
term. At present, we only project the need for additional capital to
refinance or repay an aggregate of $38,096 of debt that is maturing in
2009. This assumes the exercise of extension options for $34,100 in
debt that would otherwise come due in 2009. We currently expect that
we will either be able to refinance the debt coming due in 2009 or repay such
debt with a draw on our existing credit facility.
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.
Our
ability to incur additional debt is dependent upon a number of factors,
including the current state of the overall credit markets, our degree of
leverage and borrowing restrictions imposed by existing lenders. Our
ability to raise funds through the issuance of debt and equity securities is
dependent upon, among other things, general market conditions for REITs and
market perceptions about us.
We have a
debt policy that limits our indebtedness at the time of acquisition to less than
67% of the fair market value for the hotels in which we have invested. However,
our organizational documents do not limit the amount of indebtedness that we may
incur and our Board of Trustees may modify our debt policy at any time without
shareholder approval. We intend to repay indebtedness incurred under the line of
credit from time to time, for acquisitions or otherwise, out of cash flow and
from the proceeds of issuances of additional common shares and other
securities.
We intend
to invest in additional hotels only as suitable opportunities arise and adequate
sources of financing are available. We expect that future investments in hotels
will depend on and will be financed by, in whole or in part, our existing cash,
the proceeds from additional issuances of common shares, issuances of operating
partnership units or other securities or borrowings.
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 may
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
and Cash Equivalents
The cash
and cash equivalents balance of $15,697 at December 31, 2008 was primarily the
result of cash provided by operations. Cash and cash equivalents are
generally used to reduce obligations under our line of credit, pay dividends and
distributions or invest in hotel properties or loans to hotel development
projects.
Line
of Credit Facility
We have
entered into a Revolving Credit Loan and Security Agreement (the “Credit
Agreement”) with TD Bank, NA and various other lenders. The Credit
Agreement provides for a revolving line of credit (the “Line of Credit”) in the
principal amount of up to $175,000, including a sub-limit of $25,000 for
irrevocable stand-by letters of credit. The existing bank group has
committed $135,000, and the Credit Agreement is structured to allow for an
increase of an additional $40,000 subject to lender approval
and providing additional collateral. Borrowings under this facility
bear interest at either the Wall Street Journal’s variable prime rate of
interest or LIBOR available for the periods of 1, 2, 3, or 6 months
plus 2.50%, at our discretion. The Line of Credit is collateralized
by:
|
|
·
|
A
perfected first-lien security interest in all existing and future
unencumbered assets of HHLP;
|
|
|
·
|
Title-insured,
first-lien mortgages on the following wholly owned
hotels:
|
|
-
Fairfield Inn, Laurel, MD
|
-
Holiday Inn Express, Hershey, PA
|
|
-
Hampton Inn, Danville, PA
|
-
Holiday Inn Express, New Columbia, PA
|
|
-
Hampton Inn, Philadelphia, PA
|
-
Mainstay Suites and Sleep Inn, King of Prussia, PA
|
|
-
Holiday Inn, Norwich, CT
|
-
Residence Inn, Langhorne, PA
|
|
-
Holiday Inn Express, Camp Springs, MD
|
-
Residence Inn, Norwood, MA
|
|
-
Holiday Inn Express and Suites, Harrisburg, PA
|
-
Sheraton Hotel, JFK Airport, New York,
NY
|
|
·
|
Collateral
assignment of all hotel management contracts from which HHLP or its
affiliates derive revenues.
|
The
Credit Agreement includes certain financial covenants and requires that Hersha
maintain:
|
|
·
|
a
minimum tangible net worth of
$300,000;
|
|
·
|
a
maximum of accounts and other receivables from affiliates of
$125,000;
|
|
·
|
annual
distributions not to exceed 95% of adjusted funds from
operations;
|
|
·
|
maximum
variable rate indebtedness to total debt of 30%;
and
|
|
·
|
certain
financial ratios.
|
As of
December 31, 2008, we are in compliance with each of these covenants and
our remaining borrowing capacity under the Line of Credit was $42,783. The line
of credit expires on December 31, 2011 and, provided no event of
default occurs and remains uncured, we may request renewal of the Line of Credit
for an additional period of one year. Any extension of our line may
be granted or withheld at the discretion of the lender.
Mortgages
and Notes Payable
During
2008, in connection with the acquisition of hotel properties and refinancing of
existing mortgage debt, we entered into or assumed $91,658 in mortgages and
notes payable. Our indebtedness contains various financial and
non-financial event of default covenants customarily found in financing
arrangements. Our mortgages payable typically require that specified
debt service coverage ratios be maintained with respect to the financed
properties before we can exercise certain rights under the loan agreements
relating to such properties. If the specified criteria are not
satisfied, the lender may be able to escrow cash flow. As of December
31, 2008 we were in compliance with all event of default covenants under the
applicable loan agreement.
The
Company has two junior subordinated notes payable in the aggregate amount of
$51,548 to statutory trusts entities pursuant to indenture agreements. The
$25,774 note issued to Hersha Statutory Trust I will mature on June 30, 2035,
but may be redeemed at our option, in whole or in part, beginning on June 30,
2010 in accordance with the provisions of the indenture agreement. The $25,774
note issued to Hersha Statutory Trust II will mature on July 30, 2035, but may
be redeemed at our option, in whole or in part, beginning on July 30, 2010 in
accordance with the provisions of the indenture agreement. The note issued to
Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum
through June 30, 2010, and the note issued to Hersha Statutory Trust II bears
interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent
to June 30, 2010 for notes issued to Hersha Statutory Trust I and July 30, 2010
for notes issued to Hersha Statutory Trust II, the notes bear interest at a
variable rate of LIBOR plus 3.0% pre annum.
Equity
Offerings
On May
16, 2008, we completed a public offering of 6,000,000 common shares at $9.90 per
share. On May 20, 2008, the underwriters exercised a portion of their
over-allotment option with respect to that offering, and we issued an additional
600,000 common shares at $9.90 per share. Proceeds to us, net of
underwriting discounts and commissions and expenses, were approximately
$61,845. Immediately upon closing the offering, we contributed all of
the net proceeds of the offering to the Partnership in exchange for additional
Partnership interests. The net offering proceeds were used to repay
indebtedness.
On
December 11, 2006, we completed a public offering of 7,200,000 common shares at
$11.20 per share. On December 13, 2006, the underwriter exercised its
over-allotment option with respect to that offering, and we issued an additional
1,080,000 common shares at $11.20 per share. Proceeds to us, net of underwriting
discounts and commissions and expenses, were approximately $87,658. Immediately
upon closing the offering, we contributed all of the net proceeds of the
offering to the Partnership in exchange for additional Partnership interests.
The net offering proceeds were used to repay indebtedness and to lend additional
development financing to third parties.
On
September 19, 2006, we completed a public offering of 3,775,000 common shares at
$9.75 per share. On September 28, 2006, the underwriter exercised its
over-allotment option with respect to that offering, and we issued an additional
566,250 common shares at $9.75 per share. Proceeds to us, net of underwriting
discounts and commissions and expenses, were approximately $40,004. Immediately
upon closing the offering, we contributed all of the net proceeds of the
offering to the Partnership in exchange for additional Partnership interests.
The net offering proceeds were used to repay indebtedness.
On April
28, 2006, we completed a public offering of 6,520,000 common shares at $9.00 per
share. On May 9, 2006, the underwriter exercised its over-allotment option with
respect to that offering, and we issued an additional 977,500 common shares at
$9.00 per share. Proceeds to us, net of underwriting discounts and commissions
and expenses, were approximately $63,353. Immediately upon closing the offering,
we contributed all of the net proceeds of the offering to the Partnership in
exchange for additional Partnership interests. Of the net offering proceeds,
approximately $30,000 was used to repay indebtedness and approximately $19,500
was used to fund property acquisitions.
CASH FLOW
ANALYSIS
(dollars
in thousands, except per share data)
Comparison
of year ended December 31, 2008 to year ended December 31, 2007
Net cash
provided by operating activities for the year ended December 31, 2008, and 2007,
was $53,894 and $59,300, respectively. The decrease in net cash provided by
operating activities was primarily the result of a decrease in distributions
from unconsolidated joint ventures, an increase in due from related parties, and
a decrease in due to related parties. This decrease was partially
offset by an increase in income before loss on impairment of development loan
receivable and other asset, debt extinguishment and depreciation and
amortization expense.
Net cash
used in investing activities for the year ended December 31, 2008 increased
$68,843, from $46,027 in the year ended December 31, 2007 compared to $114,870
for the year ended December 31, 2008. Net cash used for the purchase of hotel
properties increased $30,968 in 2008 over 2007. During the year ended December
31, 2007, we acquired nine properties for a total purchase price of $129,717
including the assumption of $70,564 in mortgage debt, the conversion of a $2,100
deposit made in 2006 and the issuance of units in our operating partnership
valued at $25,781 resulting in net cash paid for acquisitions of $32,658 plus
$798 paid for the operating assets of the hotel and $588 for the minority
interests in the Hampton Inn, Philadelphia, PA. During the same period in
2008, we acquired six properties for a total purchase price of $115,858,
including the assumption of $30,790 in mortgage debt, the issuance of a $500
note payable, the assumption of $318 of operating liabilities and the issuance
of units in our operating partnership valued at $21,624 resulting in net cash
paid for acquisitions of $62,625. Also, cash provided by the
disposition of hotel assets held for sale was $6,456 in 2008 compared to $11,905
in 2007. Cash provided by distributions from unconsolidated joint ventures
decreased $4,372 while advances and capital contributions for unconsolidated
joint ventures decreased from $2,309 in 2007 to $96 in 2008. We increased our
capital expenditures from $16,773 in 2007 to $19,226 in 2008. This
increase was primarily related to $6,420 in new construction costs related to a
building located in Brooklyn, in New York, NY we acquired in the first quarter
of 2008 and opened as the nu Hotel in July of 2008.
Net cash
provided by financing activities for the year ended December 31, 2008 was
$64,346 compared to cash used in financing activities of $11,262 for the year
ended December 31, 2007. Included in cash provided by financing
activities in 2007 were net proceeds from the issuance of common stock of
$61,845. Also, the increase in cash provided by financing activities
is the result of proceeds from our credit facility and mortgages and notes
payable, net of repayments, of $46,456 in 2008 compared to net proceeds of
$27,526 in 2007. The increase was due to a net increase in borrowings on
our line of credit in 2008. Dividends paid on common shares and our common
partnership units increased $4,878 in 2008, from $33,033 during the year ended
December 31, 2007 to $37,911 during the same period in 2008.
Comparison
of year ended December 31, 2007 to year ended December 31, 2006
Net cash
provided by operating activities for the year ended December 31, 2007, and 2006,
was $59,300 and $27,217, respectively. The increase in net cash provided by
operating activities was primarily the result of an increase in income before
depreciation and amortization expense and accounts payable and accrued expenses
and decreases in escrows and due from related party. This was partially offset
by an increase in hotel accounts receivable and a decrease in due to related
party.
Net cash
used in investing activities for the year ended December 31, 2007 and 2006
decreased $367,854, from $413,881 in the year ended December 31, 2006 compared
to $46,027 for the year ended December 31, 2007. Net cash used for the purchase
of hotel properties decreased $362,701 in 2007 over 2006 as the number of hotels
acquired decreased and units of our operating partnership were issued in place
of cash for acquisitions in 2007. Also, cash provided by the disposition of
hotel assets held for sale was $11,905 in 2007 compared to $9,800 in 2006. Cash
provided by distributions from unconsolidated joint ventures increased $3,718
while advances and capital contributions for unconsolidated joint ventures
decreased from $4,209 in 2006 to $2,309 in 2007. The increase in distributions
from unconsolidated joint ventures in 2007 was primarily the result of proceeds
of debt refinancing and improved cash flow in certain joint venture interests.
We increased our capital expenditures from $11,020 in 2006 to $16,773 in 2007 as
a result of continuing property improvement plans at certain properties in 2007
in addition to capital expenditures in the ordinary course of
business.
Net cash
used in financing activities for the year ended December 31, 2007 was $11,262
compared to cash provided by financing activities of $388,200 for the year ended
December 31, 2006. This change was, in part, the result of proceeds from
mortgages and notes payable, net of repayments, of $7,826 in 2007 compared to
net proceeds of $199,983 in 2006. The decrease in net proceeds from mortgages
and notes payable was due to a decrease in our acquisition activity in 2007.
Also included in cash provided by financing activities in 2006 were net proceeds
from the issuance of common stock of $191,015. Dividends paid on common shares
increased $11,250 in 2007, from $18,174 during the year ended December 31, 2006
to $29,424 during the same period in 2007.
OFF
BALANCE SHEET ARRANGEMENTS
The
Company does not have off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.
FUNDS
FROM OPERATIONS
(in
thousands, except share data)
The
National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds
from Operations (“FFO”) as a non-GAAP financial measure of performance of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. We calculate FFO
applicable to common shares and Partnership units in accordance with the April
2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper.
The White Paper defines FFO as net income (loss) (computed in accordance with
GAAP) excluding extraordinary items as defined under GAAP and gains or losses
from sales of previously depreciated assets, plus certain non-cash items, such
as depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Our interpretation of the NAREIT definition is
that minority interest in net income (loss) should be added back to (deducted
from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO
computation may not be comparable to FFO reported by other REITs that do not
compute FFO in accordance with the NAREIT definition, or that interpret the
NAREIT definition differently than we do.
The GAAP
measure that we believe to be most directly comparable to FFO, net income (loss)
applicable to common shares, includes depreciation and amortization expenses,
gains or losses on property sales, minority interest and preferred dividends. In
computing FFO, we eliminate these items because, in our view, they are not
indicative of the results from our property operations.
FFO does
not represent cash flows from operating activities in accordance with GAAP and
should not be considered an alternative to net income as an indication of
Hersha’s performance or to cash flow as a measure of liquidity or ability to
make distributions. We consider FFO to be a meaningful, additional measure of
operating performance because it excludes the effects of the assumption that the
value of real estate assets diminishes predictably over time, and because it is
widely used by industry analysts as a performance measure. We show both FFO from
consolidated hotel operations and FFO from unconsolidated joint ventures because
we believe it is meaningful for the investor to understand the relative
contributions from our consolidated and unconsolidated hotels. The display of
both FFO from consolidated hotels and FFO from unconsolidated joint ventures
allows for a detailed analysis of the operating performance of our hotel
portfolio by management and investors. We present FFO applicable to common
shares and Partnership units because our Partnership units are redeemable for
common shares. We believe it is meaningful for the investor to understand FFO
applicable to all common shares and Partnership units.
The
following table reconciles FFO for the periods presented to the most directly
comparable GAAP measure, net income, for the same periods.
|
Twelve Months Ending
|
||||||||||||
|
December 31, 2008
|
December 31, 2007
|
December 31, 2006
|
||||||||||
|
Net
(loss) income applicable to common shares
|
$ | (13,608 | ) | $ | 13,047 | $ | 298 | |||||
|
(Loss)
income allocated to minority interest
|
(2,053 | ) | 1,773 | 579 | ||||||||
|
(Loss)
income of discontinued operations allocated to minority
interest
|
(4 | ) | 49 | 37 | ||||||||
|
Loss
(income) from unconsolidated joint ventures
|
517 | (3,476 | ) | (1,799 | ) | |||||||
|
Gain
on sale of assets
|
(2,452 | ) | (3,745 | ) | (693 | ) | ||||||
|
Depreciation
and amortization
|
40,998 | 33,863 | 18,420 | |||||||||
|
Depreciation
and amortization from discontinued operations
|
420 | 1,267 | 1,850 | |||||||||
|
FFO
related to the minority interests in consolidated joint ventures (1)
|
(240 | ) | (652 | ) | (714 | ) | ||||||
|
Funds
from consolidated hotel operations applicable to common shares and
Partnership units
|
23,578 | 42,126 | 17,978 | |||||||||
|
Income
from Unconsolidated Joint Venture Investments
|
1,373 | 3,476 | 1,799 | |||||||||
|
Impairment
of Investment in Unconsolidated Joint Ventures
|
(1,890 | ) | - | - | ||||||||
|
(Loss)
Income from Unconsolidated Joint Ventures
|
(517 | ) | 3,476 | 1,799 | ||||||||
|
Add:
|
||||||||||||
|
Depreciation
and amortization of purchase price in excess of historical cost (2)
|
2,093 | 2,055 | 1,817 | |||||||||
|
Interest
in deferred financing costs written off in unconsolidated joint venture
debt extinguishment
|
- | (2,858 | ) | (207 | ) | |||||||
|
Interest
in depreciation and amortization of unconsolidated joint venture (3)
|
6,287 | 5,023 | 4,549 | |||||||||
|
Funds
from unconsolidated joint ventures operations applicable to common shares
and Partnership units
|
7,863 | 7,696 | 7,958 | |||||||||
|
Funds
from Operations applicable to common shares and Partnership
units
|
$ | 31,441 | $ | 49,822 | $ | 25,936 | ||||||
|
Weighted
Average Common Shares and Units Outstanding
|
||||||||||||
|
Basic
|
45,184,127 | 40,718,724 | 27,118,264 | |||||||||
|
Diluted
|
53,218,864 | 46,183,394 | 30,672,675 | |||||||||
|
|
(1)
|
Adjustment
made to deduct FFO related to the minority interest in our consolidated
joint ventures. Represents the portion of net income and depreciation
allocated to our joint venture
partners.
|
|
|
(2)
|
Adjustment
made to add depreciation of purchase price in excess of historical cost of
the assets in the unconsolidated joint venture at the time of our
investment.
|
|
|
(3)
|
Adjustment
made to add our interest in real estate related depreciation and
amortization of our unconsolidated joint
ventures.
|
Comparison
of the year ended December 31, 2008 to December 31, 2007
FFO was
$31,441 for the year ended December 31, 2008, which was a decrease of $18,381 or
36.9%, over FFO in the comparable period in 2007, which was $49,822. The
decrease in FFO was primarily a result of an impairment of development loan
receivable and other asset of $21,004 and an impairment of our interest in an
unconsolidated joint venture of $1,890.
FFO was
also negatively impacted by increases in our interest expense during the year
ended December 31, 2008.
Comparison
of the year ended December 31, 2007 to December 31, 2006
For the
year ended December 31, 2007, FFO increased $23,886, or 92.1% over the same
period in 2006. The increase in FFO was primarily a result of growth in the
lodging industry and the markets where our properties are located, the benefits
of acquiring assets and interests in joint ventures since December 31, 2005 and
continued stabilization and maturation of the existing portfolio.
FFO was
negatively impacted by increases in our interest expense during the year ended
December 31, 2007.
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, estimates are evaluated by us, including those related to
carrying value of investments in hotel properties. Our 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
Approximately
95% of our revenues are derived from hotel room revenues and revenue from other
hotel operating departments. We directly recognize revenue and expense for all
consolidated hotels as hotel operating revenue and hotel operating expense when
earned and incurred. These revenues are recorded net of any sales or occupancy
taxes collected from our guests. All revenues are recorded on an accrual basis,
as earned. We participate in frequent guest programs sponsored by the brand
owners of our hotels and we expense the charges associated with those programs,
as incurred.
Revenue
for interest on development loan financing is recorded in the period earned
based on the interest rate of the loan and outstanding balance during the
period. Development loans receivable and accrued interest on the development
loans receivable are evaluated to determine if outstanding balances are
collectible. Interest is recorded only if it is determined the
outstanding loan balance and accrued interest balance are
collectible.
We lease
land to hotel developers under fixed lease agreements. In addition to base
rents, these lease agreements contain provisions that require the lessee to
reimburse real estate taxes, debt service and other impositions. Base rents and
reimbursements for real estate taxes, debt service and other impositions are
recorded in land lease revenue on an accrual basis. Expenses for real
estate taxes, interest expense, and other impositions that are reimbursed under
the land leases are recorded in land lease expense when they are
incurred.
Other
revenues consist primarily of fees earned for asset management services provided
to hotels we own through unconsolidated joint ventures. Fees are earned as a
percentage of the hotels revenue and are recorded in the period
earned.
Investment
in Hotel Properties
Investments
in hotel properties are recorded at cost. Improvements and replacements are
capitalized when they extend the useful life of the asset. Costs of repairs and
maintenance are expensed as incurred. Depreciation is computed using the
straight-line method over the estimated useful life of up to 40 years for
buildings and improvements, five to seven years for furniture, fixtures and
equipment. We are required to make subjective assessments as to the useful lives
of our properties for purposes of determining the amount of depreciation to
record on an annual basis with respect to our investments in hotel properties.
These assessments have a direct impact on our net income because if we were to
shorten the expected useful lives of our investments in hotel properties we
would depreciate these investments over fewer years, resulting in more
depreciation expense and lower net income on an annual basis.
We follow
Statement of Financial Accounting Standards (SFAS) No. 141, “Business
Combinations,” to account for our acquisition of hotel properties. Under SFAS
No. 141 the purchase price of an acquisition is allocated based on the fair
value of identifiable tangible and intangible assets acquired and liabilities
assumed. Estimating techniques and assumptions used in determining fair values
involve significant estimates and judgments. These estimates and
judgments have a direct impact on the carrying value of our assets and
liabilities which can directly impact the amount of depreciation expense
recorded on an annual basis and could have an impact on our assessment of
potential impairment of our investment in hotel properties.
We follow
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
which established a single accounting model for the impairment or disposal of
long-lived assets including discontinued operations. SFAS No. 144 requires that
the operations related to properties that have been sold or properties that are
intended to be sold be presented as discontinued operations in the statement of
operations for all periods presented, and properties intended to be sold to be
designated as “held for sale” on the balance sheet.
Based on
the occurrence of certain events or changes in circumstances, we review the
recoverability of the property’s carrying value. Such events or changes in
circumstances include the following:
|
|
·
|
a
significant decrease in the market price of a long-lived
asset;
|
|
|
·
|
a
significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical
condition;
|
|
|
·
|
a
significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset, including an adverse
action or assessment by a
regulator;
|
|
|
·
|
an
accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived
asset;
|
|
|
·
|
a
current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset; and
|
|
|
·
|
a
current expectation that, it is more likely than not that, a long-lived
asset will be sold or otherwise disposed of significantly before the end
of its previously estimated useful
life.
|
We review
our portfolio on an on-going basis to evaluate the existence of any of the
aforementioned events or changes in circumstances that would require us to test
for recoverability. In general, our review of recoverability is based on an
estimate of the future undiscounted cash flows, excluding interest charges,
expected to result from the property’s use and eventual disposition. These
estimates consider factors such as expected future operating income, market and
other applicable trends and residual value expected, as well as the effects of
hotel demand, competition and other factors. If impairment exists due to the
inability to recover the carrying value of a property, an impairment loss is
recorded to the extent that the carrying value exceeds the estimated fair value
of the property. We are required to make subjective assessments as to whether
there are impairments in the values of our investments in hotel properties.
These assessments have a direct impact on our net income because recording an
impairment loss results in an immediate negative adjustment to net
income.
Investment
in Joint Ventures
Properties
owned in joint ventures are consolidated if the determination is made that we
are the primary beneficiary in a variable interest entity (VIE) or we maintain
control of the asset through our voting interest or other rights in the
operation of the entity. We evaluate whether we have a controlling financial
interest in a VIE through means other than voting rights and determine whether
we should include the VIE in our consolidated financial statements. Our
examination of each joint venture consists of reviewing the sufficiency of
equity at risk, controlling financial interests, voting rights, and the
obligation to absorb expected losses and expected gains, including residual
returns. Control can also be 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. This evaluation requires
significant judgment.
If it is
determined that we do not have a controlling interest in a joint venture, either
through our financial interest in a VIE or our voting interest in a voting
interest entity, the equity method of accounting is used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize our share of
net earnings or losses of the affiliates as they occur rather than as dividends
or other distributions are received, limited to the extent of our investment in,
advances to and commitments for the investee. Pursuant to our joint venture
agreements, allocations of profits and losses of some of our investments in
unconsolidated joint ventures may be allocated disproportionately as compared to
nominal ownership percentages due to specified preferred return rate
thresholds.
The
Company periodically reviews the carrying value of its investment in
unconsolidated joint ventures to determine if circumstances exist indicating
impairment to the carrying value of the investment. When an impairment indicator
is present, we will review the recoverability of our investment. It
the investment’s carrying value is not considered recoverable, we will estimate
the fair value of the investment. Our estimate of fair value takes
into consideration factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other
factors. This determination requires significant estimates by
management, including the expected cash flows to be generated by the assets
owned and operated by the joint venture. Subsequent changes in estimates could
impact the determination of whether impairment exists. To the extent impairment
has occurred, the loss will be measured as the excess of the carrying amount
over the fair value of our investment in the unconsolidated joint
venture.
Development
Loans Receivable
The
Company accounts for the credit risk associated with its development loans
receivable by monitoring the portfolio for indications of
impairment. We follow SFAS No. 114 “Accounting by Creditors for
Impairment of a Loan, an amendment of FASB Statements No. 5 and 15” through a
methodology that consists of the following:
|
|
·
|
Identifying
loans for individual review under SFAS No. 114. In general, these consist
of development loans that are not performing in accordance with the
contractual terms of the loan.
|
|
|
·
|
Assessing
whether the loans identified for review under SFAS No. 114 are impaired.
That is, whether it is probable that all amounts will not be
collected according to the contractual terms of the loan agreement.
We determine the amount of impairment by calculating the estimated fair
value, discounted cash flows or the value of the underlying
collateral.
|
Any
charge to earnings necessary based on our review under SFAS No. 114 is recorded
on our income statement as an impairment of development loan receivable.
Our assessment of impairment is based on information known at the time of
the review. Changes in factors underlying the assessment could have a
material impact on the amount of impairment to be charged against earnings. Such
changes could impact future results.
Accounting
for Derivative Financial Investments and Hedging Activities
We use
derivatives to hedge, fix and cap interest rate risk and we account for our
derivative and hedging activities using SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, which requires all derivative
instruments to be carried at fair value on the balance sheet. Derivative
instruments designated in a hedge relationship to mitigate exposure to
variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. We formally document all
relationships between hedging instruments and hedged items, as well as our
risk-management objective and strategy for undertaking each hedge transaction.
Cash flow hedges that are considered highly effective are accounted for by
recording the fair value of the derivative instrument on the balance sheet as
either an asset or liability, with a corresponding amount recorded in other
comprehensive income within shareholders’ equity. Amounts are reclassified from
other comprehensive income to the income statements in the period or periods the
hedged forecasted transaction affects earnings.
Under
cash flow hedges, derivative gains and losses not considered highly effective in
hedging the change in expected cash flows of the hedged item are recognized
immediately in the income statement. For hedge transactions that do not qualify
for the short-cut method, at the hedge’s inception and on a regular basis
thereafter, a formal assessment is performed to determine whether changes in the
cash flows of the derivative instruments have been highly effective in
offsetting changes in cash flows of the hedged items and whether they are
expected to be highly effective in the future.
RECENTLY
ISSUED ACCOUNTING STANDARDS
SFAS
No. 141R
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R requires most
identifiable assets, liabilities, noncontrolling interests, and goodwill
acquired in a business combination to be recorded at “full fair value.” SFAS No.
141R is effective for fiscal years beginning after December 15, 2008. The
Company has not determined whether the adoption of SFAS No. 141R will have a
material effect on the Company’s financial statements. Adoption of SFAS No.141R
on January 1, 2009 could have a material effect on the Company’s financial
statements and the Company’s future financial results to the extent the Company
acquires significant amounts of real estate assets. Costs related to future
acquisitions will be expensed as incurred compared to the Company’s current
practice of capitalizing such costs and amortizing them over the useful life of
the acquired assets. In addition, to the extent the Company enters into
acquisition agreements with earn-out provisions, a liability may be recorded at
the time of acquisition based on an estimate of the earn-out to be paid compared
to our current practice of recording a liability for the earn-out when amounts
are probable and determinable.
SFAS
No. 160
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No.
160”). SFAS No. 160 requires noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. SFAS No. 160 is effective for fiscal years beginning after December 15,
2008. The adoption of this statement will result in minority interest to be
reclassified as a component of shareholders’ equity.
SFAS
No. 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No.
161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. The objective of the guidance is to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for; and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS No. 161
is effective for fiscal years beginning after November 15, 2008. The Company has
determined that the adoption of SFAS No. 161 will not have a material effect on
the Company’s financial statements.
FSP EITF 03-6-1
In June
2008, the FASB issued FASB Staff Position on Emerging Issues Task Force Issue
03-6, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
states that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of FSP EITF 03-6-1. Early application is not
permitted. We expect that the adoption of this FSP will not impact
our financial position or net income.
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 the
Notes to the consolidated 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, 2008.
|
Contractual
Obligations
(in
thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||
|
Long
Term Debt
|
$ | 72,196 | $ | 21,833 | $ | 41,587 | $ | 11,938 | $ | 25,265 | $ | 482,602 | ||||||||||||
|
Interest
Expense on Long Term Debt
|
34,430 | 33,131 | 31,541 | 30,976 | 29,383 | 151,406 | ||||||||||||||||||
|
Credit
Facility
|
- | - | 88,421 | - | - | - | ||||||||||||||||||
|
Interest
Expense on Credit Facility
|
3,625 | 3,625 | 3,625 | - | - | - | ||||||||||||||||||
|
Hotel
Ground Rent
|
891 | 905 | 935 | 975 | 981 | 93,160 | ||||||||||||||||||
|
Total
|
$ | 111,142 | $ | 59,494 | $ | 166,109 | $ | 43,889 | $ | 55,629 | $ | 727,168 | ||||||||||||
The
carrying value of the mortgages and notes payable and the line of credit
exceeded the fair value by approximately $49 million at December 31,
2008.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk (in thousands, except per
share data)
|
Our
primary market risk exposure is to changes in interest rates on our variable
rate debt. At December 31, 2008 we are exposed to interest rate risk with
respect to our outstanding borrowings under our variable rate Line of Credit and
certain variable rate mortgages and notes payable. At December 31, 2008, we
had total variable rate debt outstanding of $141,918, consisting of outstanding
borrowings of $88,421 under our line of credit and outstanding borrowings of
$53,497 under variable rate mortgages and notes payable. At December
31, 2008, our variable rate debt outstanding had a weighted average interest
rate of 4.41%. The effect of a 100 basis point increase or decrease in the
interest rate on our variable rate debt outstanding at December 31, 2008, would
be an increase or decrease in our interest expense for the year ended December
31, 2008 of $691.
Our
interest rate risk objectives are to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower our overall borrowing
costs. To achieve these objectives, we manage our exposure to fluctuations in
market interest rates for a portion of our borrowings through the use of fixed
rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements. We have also entered into derivative
financial instruments such as interest rate swaps or caps, and in the future may
enter into treasury options or locks, to mitigate our interest rate risk on a
related financial instrument or to effectively lock the interest rate on a
portion of our variable rate debt. Currently, we have four interest rate swaps
related to debt on the Four Points by Sheraton, Revere, MA, nu Hotel, Brooklyn,
NY, Hilton Garden Inn, Edison, NJ and our revolving credit facility and one
interest rate cap related to debt on the Hotel 373, New York, NY. We do not
intend to enter into derivative or interest rate transactions for speculative
purposes.
Approximately
91.8% of our outstanding mortgages and notes payable are subject to fixed rates,
including variable rate debt that is effectively fixed through our use of a
derivative instrument, while approximately 8.2% of our outstanding mortgages
payable are subject to floating rates.
Changes
in market interest rates on our fixed-rate debt impact the fair value of the
debt, but it has no impact on interest incurred for cash flow. If interest rates
rise 100 basis points and our fixed rate debt balance remains constant, we
expect the fair value of our debt to decrease. The sensitivity analysis related
to our fixed-rate debt assumes an immediate 100 basis point move in interest
rates from their December 31, 2008 levels, with all other variables held
constant. A 100 basis point increase in market interest rates would result in
the fair value of our fixed-rate debt outstanding at December 31,
2008 approximating $654,006, and a 100 basis point decrease in market
interest rates would result in the fair value of our fixed-rate debt outstanding
at December 31, 2008 approximating $741,952.
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, 2008, the following table presents expected
principal repayments and related weighted average interest rates by expected
maturity dates (in thousands):
|
Mortgages & Notes
Payable
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
Fixed
Rate Debt
|
$ | 42,970 | $ | 14,340 | $ | 31,690 | $ | 7,321 | $ | 25,083 | $ | 480,520 | $ | 601,924 | |||||||||||||||
|
Average
Interest Rate
|
6.04 | % | 6.00 | % | 6.11 | % | 6.11 | % | 6.10 | % | 6.10 | % | 6.08 | % | |||||||||||||||
|
Floating
Rate Debt
|
$ | 29,226 | $ | 7,493 | $ | 9,897 | $ | 4,617 | $ | 182 | $ | 2,082 | $ | 53,497 | |||||||||||||||
|
Average
Interest Rate
|
2.76 | % | 2.86 | % | 2.74 | % | 3.22 | % | 3.22 | % | 3.22 | % | 3.00 | % | |||||||||||||||
|
subtotal
|
$ | 72,196 | $ | 21,833 | $ | 41,587 | $ | 11,938 | $ | 25,265 | $ | 482,602 | $ | 655,421 | |||||||||||||||
|
Credit Facility
|
|||||||||||||||||||||||||||||
| - | - | 88,421 | - | - | - | $ | 88,421 | ||||||||||||||||||||||
|
Average
Interest Rate
|
4.10 | % | 4.10 | % | |||||||||||||||||||||||||
|
TOTAL
|
$ | 72,196 | $ | 21,833 | $ | 130,008 | $ | 11,938 | $ | 25,265 | $ | 482,602 | $ | 743,842 | |||||||||||||||
The table
incorporates only those exposures that existed as of December 31, 2008 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.
The loan
agreements for debt obligations of $34,100, which mature during the next twelve
months, contain extension options that can be exercised at our
discretion. The following table illustrates principal repayments
under the terms of our refinanced credit facility and assuming the exercise of
our extension options:
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
Principal
repayments due as of December 31, 2008, as noted above
|
$ | 72,196 | $ | 21,833 | $ | 130,008 | $ | 11,938 | $ | 25,265 | $ | 482,602 | $ | 743,842 | ||||||||||||||
|
Exercise
of extension options
|
(34,100 | ) | - | 12,100 | 22,000 | - | - | - | ||||||||||||||||||||
|
Principal
repayments after credit facility refinancing and assuming exercise of
extension options
|
$ | 38,096 | $ | 21,833 | $ | 142,108 | $ | 33,938 | $ | 25,265 | $ | 482,602 | $ | 743,842 | ||||||||||||||
For all
obligations due within the next twelve months, we anticipate that we will be
able to exercise our extension options, refinance, or utilize our credit
facility to repay obligations that do not have extension options.
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Hersha
Hospitality Trust
|
Page
|
|
|
Hersha
Hospitality Trust
|
|
|
Report
of Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
47
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006
|
48
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the years
ended December 31, 2008, 2007 and 2006
|
50
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
51
|
|
Notes
to Consolidated Financial Statements
|
52
|
|
Schedule
III - Real Estate and Accumulated Depreciation for the year ended December
31, 2008
|
87
|
Report of Independent
Registered Public Accounting Firm
The Board
of Trustees and Stockholders of
Hersha
Hospitality Trust:
We have
audited the accompanying consolidated balance sheets of Hersha Hospitality Trust
and subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2008. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial
statement schedule are the responsibility of Hersha Hospitality Trust’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We did not audit the financial statements of Mystic Partners,
LLC an equity method investee company (See note 3) as of and for the year ended
December 31, 2006. The Company's equity in earnings of Mystic
Partners, LLC was $1,691,000 for the year ended December 31,
2006. The 2006 financial statements of Mystic Partners, LLC were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Mystic Partners as of
and for the year ended December 31, 2006, is based on the report of the other
auditors.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 audits provide a reasonable basis
for our opinions.
In our
opinion, based on our audits and the report of other auditors related to 2006,
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, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hersha Hospitality Trust and subsidiaries’
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 5, 2009, expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG
LLP
Philadelphia,
Pennsylvania
March 5,
2009
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND 2007
[IN
THOUSANDS, EXCEPT SHARE AMOUNTS]
|
December 31, 2008
|
December 31, 2007
|
|||||||
|
Assets:
|
||||||||
|
Investment
in Hotel Properties, net of Accumulated Depreciation
|
$ | 982,082 | $ | 893,297 | ||||
|
Investment
in Joint Ventures
|
46,283 | 51,851 | ||||||
|
Development
Loans Receivable
|
81,500 | 58,183 | ||||||
|
Cash
and Cash Equivalents
|
15,697 | 12,327 | ||||||
|
Escrow
Deposits
|
12,404 | 13,706 | ||||||
|
Hotel
Accounts Receivable, net of allowance for doubtful accounts of $120 and
$47
|
6,870 | 7,287 | ||||||
|
Deferred
Costs, net of Accumulated Amortization of $3,606 and
$3,252
|
9,157 | 8,048 | ||||||
|
Due
from Related Parties
|
4,645 | 1,256 | ||||||
|
Intangible
Assets, net of Accumulated Amortization of $595 and $764
|
7,300 | 5,619 | ||||||
|
Other
Assets
|
13,517 | 16,033 | ||||||
|
Total
Assets
|
$ | 1,179,455 | $ | 1,067,607 | ||||
|
Liabilities
and Shareholders’ Equity:
|
||||||||
|
Line
of Credit
|
$ | 88,421 | $ | 43,700 | ||||
|
Mortgages
and Notes Payable, net of unamortized discount of $61 and
$72
|
655,360 | 619,308 | ||||||
|
Accounts
Payable, Accrued Expenses and Other Liabilities
|
17,745 | 17,728 | ||||||
|
Dividends
and Distributions Payable
|
11,240 | 9,688 | ||||||
|
Due
to Related Parties
|
1,352 | 2,025 | ||||||
|
Total
Liabilities
|
774,118 | 692,449 | ||||||
|
Minority
Interests:
|
||||||||
|
Common
Units
|
$ | 53,520 | $ | 42,845 | ||||
|
Interest
in Consolidated Joint Ventures
|
1,854 | 1,908 | ||||||
|
Total
Minority Interests
|
55,374 | 44,753 | ||||||
|
Shareholders'
Equity:
|
||||||||
|
Preferred
Shares - 8% Series A, $.01 Par Value, 2,400,000 Shares Issued and
Outstanding at December 31, 2008 and 2007 (Aggregate Liquidation
Preference $60,000)
|
24 | 24 | ||||||
|
Common
Shares - Class A, $.01 Par Value, 80,000,000 Shares Authorized, 48,276,222
and 41,203,612 Shares Issued and Outstanding at December 31, 2008 and
2007, respectively
|
483 | 412 | ||||||
|
Common
Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued
and Outstanding
|
- | - | ||||||
|
Accumulated
Other Comprehensive Loss
|
(109 | ) | (23 | ) | ||||
|
Additional
Paid-in Capital
|
463,772 | 397,127 | ||||||
|
Distributions
in Excess of Net Income
|
(114,207 | ) | (67,135 | ) | ||||
|
Total
Shareholders' Equity
|
349,963 | 330,405 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 1,179,455 | $ | 1,067,607 | ||||
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Hotel
Operating Revenues
|
$ | 250,464 | $ | 229,461 | $ | 132,354 | ||||||
|
Interest
Income from Development Loans
|
7,890 | 6,046 | 2,487 | |||||||||
|
Land
Lease Revenue
|
5,363 | 4,860 | 2,071 | |||||||||
|
Other
Revenues
|
1,054 | 980 | 737 | |||||||||
|
Total
Revenues
|
264,771 | 241,347 | 137,649 | |||||||||
|
Operating
Expenses:
|
||||||||||||
|
Hotel
Operating Expenses
|
144,972 | 130,910 | 76,694 | |||||||||
|
Hotel
Ground Rent
|
1,040 | 856 | 804 | |||||||||
|
Land
Lease Expense
|
2,939 | 2,721 | 1,189 | |||||||||
|
Real
Estate and Personal Property Taxes and Property Insurance
|
12,953 | 11,349 | 5,979 | |||||||||
|
General
and Administrative
|
8,714 | 7,953 | 5,820 | |||||||||
|
Acquisition
and Terminated Transaction Costs
|
380 | 149 | 316 | |||||||||
|
Impairment
of Development Loan Receivable and Other Asset
|
21,004 | - | - | |||||||||
|
Depreciation
and Amortization
|
40,998 | 33,863 | 18,420 | |||||||||
|
Total
Operating Expenses
|
233,000 | 187,801 | 109,222 | |||||||||
|
Operating
Income
|
31,771 | 53,546 | 28,427 | |||||||||
|
Interest
Income
|
306 | 686 | 1,182 | |||||||||
|
Interest
Expense
|
43,156 | 42,115 | 25,123 | |||||||||
|
Other
Expense
|
129 | 83 | 102 | |||||||||
|
Loss
on Debt Extinguishment
|
1,568 | - | 1,485 | |||||||||
|
(Loss)
Income before (loss) income from Unconsolidated Joint Venture Investments,
Minority Interests and Discontinued Operations
|
(12,776 | ) | 12,034 | 2,899 | ||||||||
|
Unconsolidated
Joint Ventures
|
||||||||||||
|
Income
from Unconsolidated Joint Venture Investments
|
1,373 | 3,476 | 1,799 | |||||||||
|
Impairment
of Investment in Unconsolidated Joint Venture
|
(1,890 | ) | - | - | ||||||||
|
(Loss)
Income from Unconsolidated Joint Venture Investments
|
(517 | ) | 3,476 | 1,799 | ||||||||
|
(Loss)
Income before Minority Interests and Discontinued
Operations
|
(13,293 | ) | 15,510 | 4,698 | ||||||||
|
(Loss)
Income allocated to Minority Interests in Continuing
Operations
|
(2,053 | ) | 1,773 | 579 | ||||||||
|
(Loss)
Income from Continuing Operations
|
(11,240 | ) | 13,737 | 4,119 | ||||||||
|
Discontinued
Operations, net of minority interests (Note 12):
|
||||||||||||
|
Gain
on Disposition of Hotel Properties
|
2,452 | 3,745 | 693 | |||||||||
|
(Loss)
Income from Discontinued Operations
|
(20 | ) | 365 | 286 | ||||||||
|
Income
from Discontinued Operations
|
2,432 | 4,110 | 979 | |||||||||
|
Net
(Loss) Income
|
(8,808 | ) | 17,847 | 5,098 | ||||||||
|
Preferred
Distributions
|
4,800 | 4,800 | 4,800 | |||||||||
|
Net
(Loss) Income applicable to Common Shareholders
|
$ | (13,608 | ) | $ | 13,047 | $ | 298 | |||||
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
|
2008
|
2007
|
2006
|
||||||||||
|
Earnings Per Share:
|
||||||||||||
|
BASIC
|
||||||||||||
|
(Loss)
income from continuing operations applicable to common
shareholders
|
$ | (0.36 | ) | $ | 0.22 | $ | (0.03 | ) | ||||
|
Income
from Discontinued Operations
|
0.05 | 0.10 | 0.04 | |||||||||
|
Net
(loss) income applicable to common shareholders
|
$ | (0.31 | ) | $ | 0.32 | $ | 0.01 | |||||
|
DILUTED
|
||||||||||||
|
(Loss)
income from continuing operations applicable to common
shareholders
|
$ | (0.36 | ) * | $ | 0.22 | * | $ | (0.03 | ) * | |||
|
Income
from Discontinued Operations
|
0.05 | * | 0.10 | * | 0.04 | * | ||||||
|
Net
(loss) income applicable to common shareholders
|
$ | (0.31 | ) * | $ | 0.32 | * | $ | 0.01 | * | |||
|
Weighted Average Common Shares
Outstanding:
|
||||||||||||
|
Basic
|
45,184,127 | 40,718,724 | 27,118,264 | |||||||||
|
Diluted
|
45,184,127 | * | 40,718,724 | * | 27,118,264 | * | ||||||
* Income
allocated to minority interest in the Partnership has been excluded from the
numerator and OP Units have been omitted from the denominator for the purpose of
computing diluted earnings per share since the effect of including these amounts
in the numerator and denominator would have no impact. Weighted average OP Units
outstanding for the years ended December 31, 2008, 2007 and 2006 were 8,034,737,
5,464,670 and 3,554,361, respectively. Unvested stock awards have
been omitted from the denominator for the purpose of computing diluted earnings
per share for the years ended December 31, 2008, 2007 and 2006 since the effect
of including these awards in the denominator would be anti-dilutive to income
from continuing operations applicable to common shareholders.
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN
THOUSANDS, EXCEPT SHARES]
|
Class A Common Shares
|
Class B Common Shares
|
Series A Preferred Shares
|
Additional Paid-In Capital
|
Other Comprehensive Income
|
Distributions in Excess of Net
Earnings
|
Total
|
||||||||||||||||||||||||||||||||||
|
Shares
|
Dollars
|
Shares
|
Dollars
|
Shares
|
Dollars
|
|||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
20,373,752 | 203 | - | - | 2,400,000 | 24 | 193,228 | 327 | (29,079 | ) | 164,703 | |||||||||||||||||||||||||||||
|
Common
Stock Issuance
|
20,118,750 | 201 | - | - | - | - | 191,875 | - | - | 192,076 | ||||||||||||||||||||||||||||||
|
Issuance
Costs
|
- | - | - | - | - | - | (1,061 | ) | (1,061 | ) | ||||||||||||||||||||||||||||||
|
Unit
Conversion
|
82,077 | 1 | - | - | - | - | 649 | - | - | 650 | ||||||||||||||||||||||||||||||
|
Reallocation
of Minority Interest
|
- | - | - | - | - | - | (3,467 | ) | - | - | (3,467 | ) | ||||||||||||||||||||||||||||
|
Dividends
declared:
|
||||||||||||||||||||||||||||||||||||||||
|
Common
Stock ($0.72 per share)
|
- | - | - | - | - | - | - | - | (21,854 | ) | (21,854 | ) | ||||||||||||||||||||||||||||
|
Preferred
Stock ($2.00 per share)
|
- | - | - | - | - | - | - | - | (4,800 | ) | (4,800 | ) | ||||||||||||||||||||||||||||
|
Dividend
Reinvestment Plan
|
2,871 | - | - | - | - | - | 29 | - | - | 29 | ||||||||||||||||||||||||||||||
|
Stock
Based Compensation
|
||||||||||||||||||||||||||||||||||||||||
|
Restricted
Share Award Grants
|
89,500 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
|
Restricted
Share Award Vesting
|
- | - | - | - | - | - | 293 | 293 | ||||||||||||||||||||||||||||||||
|
Share
Grants to Trustees
|
5,000 | - | - | - | - | - | 46 | - | - | 46 | ||||||||||||||||||||||||||||||
|
Comprehensive
Income (Loss):
|
||||||||||||||||||||||||||||||||||||||||
|
Other
Comprehensive Loss
|
- | - | - | - | - | - | - | (94 | ) | - | (94 | ) | ||||||||||||||||||||||||||||
|
Net
Income
|
- | - | - | - | - | - | - | - | 5,098 | 5,098 | ||||||||||||||||||||||||||||||
|
Total
Comprehensive Income
|
5,004 | |||||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
40,671,950 | $ | 405 | - | $ | - | 2,400,000 | $ | 24 | $ | 381,592 | $ | 233 | $ | (50,635 | ) | $ | 331,619 | ||||||||||||||||||||||
|
Unit
Conversion
|
306,460 | 3 | - | - | - | - | 2,366 | - | - | 2,369 | ||||||||||||||||||||||||||||||
|
Unit
Conversion Costs
|
- | - | - | - | - | - | (142 | ) | - | - | (142 | ) | ||||||||||||||||||||||||||||
|
Reallocation
of Minority Interest
|
- | - | - | - | - | - | 12,422 | - | - | 12,422 | ||||||||||||||||||||||||||||||
|
Dividends
declared:
|
||||||||||||||||||||||||||||||||||||||||
|
Common
Stock ($0.72 per share)
|
- | - | - | - | - | - | - | - | (29,547 | ) | (29,547 | ) | ||||||||||||||||||||||||||||
|
Preferred
Stock ($2.00 per share)
|
- | - | - | - | - | - | - | - | (4,800 | ) | (4,800 | ) | ||||||||||||||||||||||||||||
|
Dividend
Reinvestment Plan
|
2,620 | 1 | - | - | - | - | 29 | - | - | 30 | ||||||||||||||||||||||||||||||
|
Stock
Based Compensation
|
||||||||||||||||||||||||||||||||||||||||
|
Restricted
Share Award Grants
|
214,582 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
|
Restricted
Share Award Vesting
|
- | 2 | - | - | - | - | 766 | - | - | 768 | ||||||||||||||||||||||||||||||
|
Share
Grants to Trustees
|
8,000 | 1 | - | - | - | - | 94 | - | - | 95 | ||||||||||||||||||||||||||||||
|
Comprehensive
Income (Loss):
|
||||||||||||||||||||||||||||||||||||||||
|
Other
Comprehensive Loss
|
- | - | - | - | - | - | - | (256 | ) | - | (256 | ) | ||||||||||||||||||||||||||||
|
Net
Income
|
- | - | - | - | - | - | - | - | 17,847 | 17,847 | ||||||||||||||||||||||||||||||
|
Total
Comprehensive Income
|
17,591 | |||||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
41,203,612 | $ | 412 | - | $ | - | 2,400,000 | $ | 24 | $ | 397,127 | $ | (23 | ) | $ | (67,135 | ) | $ | 330,405 | |||||||||||||||||||||
|
Common
Stock Issuance
|
6,600,000 | 66 | 62,007 | 62,073 | ||||||||||||||||||||||||||||||||||||
|
Issuance
Costs
|
(228 | ) | (228 | ) | ||||||||||||||||||||||||||||||||||||
|
Unit
Conversion
|
175,843 | 2 | - | - | - | - | 1,370 | - | - | 1,372 | ||||||||||||||||||||||||||||||
|
Reallocation
of Minority Interest
|
- | - | - | - | - | - | 1,966 | - | - | 1,966 | ||||||||||||||||||||||||||||||
|
Dividends
declared:
|
||||||||||||||||||||||||||||||||||||||||
|
Common
Stock ($0.72 per share)
|
- | - | - | - | - | - | - | - | (33,464 | ) | (33,464 | ) | ||||||||||||||||||||||||||||
|
Preferred
Stock ($2.00 per share)
|
- | - | - | - | - | - | - | - | (4,800 | ) | (4,800 | ) | ||||||||||||||||||||||||||||
|
Dividend
Reinvestment Plan
|
5,092 | - | - | - | - | - | 31 | - | - | 31 | ||||||||||||||||||||||||||||||
|
Stock
Based Compensation
|
||||||||||||||||||||||||||||||||||||||||
|
Restricted
Share Award Grants
|
281,675 | 3 | - | - | - | - | (3 | ) | - | - | - | |||||||||||||||||||||||||||||
|
Restricted
Share Award Vesting
|
- | - | - | - | - | - | 1,411 | - | - | 1,411 | ||||||||||||||||||||||||||||||
|
Share
Grants to Trustees
|
10,000 | - | - | - | - | - | 91 | - | - | 91 | ||||||||||||||||||||||||||||||
|
Comprehensive
Income (Loss):
|
||||||||||||||||||||||||||||||||||||||||
|
Other
Comprehensive Loss
|
- | - | - | - | - | - | - | (86 | ) | - | (86 | ) | ||||||||||||||||||||||||||||
|
Net
Loss
|
- | - | - | - | - | - | - | - | (8,808 | ) | (8,808 | ) | ||||||||||||||||||||||||||||
|
Total
Comprehensive Loss
|
(8,894 | ) | ||||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
48,276,222 | $ | 483 | - | $ | - | 2,400,000 | $ | 24 | $ | 463,772 | $ | (109 | ) | $ | (114,207 | ) | $ | 349,963 | |||||||||||||||||||||
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
|
2008
|
2007
|
2006
|
||||||||||
|
Operating
activities:
|
||||||||||||
|
Net
(loss) income
|
$ | (8,808 | ) | $ | 17,847 | $ | 5,098 | |||||
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
|
Gain
on disposition of hotel assets held for sale
|
(2,888 | ) | (4,248 | ) | (784 | ) | ||||||
|
Impairment
of development loan receivable and other asset
|
21,004 | - | - | |||||||||
|
Depreciation
|
41,219 | 34,963 | 20,131 | |||||||||
|
Amortization
|
1,958 | 1,812 | 1,118 | |||||||||
|
Debt
extinguishment
|
1,587 | - | 1,485 | |||||||||
|
Income
allocated to minority interests
|
(1,621 | ) | 2,323 | 706 | ||||||||
|
Equity
in loss (income) of unconsolidated joint ventures
|
517 | (3,476 | ) | (1,799 | ) | |||||||
|
Distributions
from unconsolidated joint ventures
|
3,036 | 4,501 | 4,578 | |||||||||
|
Loss
(gain) recognized on change in fair value of derivative
instrument
|
71 | (89 | ) | (197 | ) | |||||||
|
Stock
based compensation expense
|
1,502 | 852 | 339 | |||||||||
|
Change
in assets and liabilities:
|
||||||||||||
|
(Increase)
decrease in:
|
||||||||||||
|
Hotel
accounts receivable
|
420 | (2,500 | ) | (1,731 | ) | |||||||
|
Escrows
|
1,302 | 1,845 | (87 | ) | ||||||||
|
Other
assets
|
(1,132 | ) | (261 | ) | (2,781 | ) | ||||||
|
Due
from related party
|
(3,251 | ) | 3,691 | (2,131 | ) | |||||||
|
Increase
(decrease) in:
|
||||||||||||
|
Due
to related party
|
(1,115 | ) | (1,291 | ) | (1,448 | ) | ||||||
|
Accounts
payable and accrued expenses
|
93 | 3,331 | 4,720 | |||||||||
|
Net
cash provided by operating activities
|
53,894 | 59,300 | 27,217 | |||||||||
|
Investing
activities:
|
||||||||||||
|
Purchase
of hotel property assets
|
(63,626 | ) | (32,658 | ) | (395,359 | ) | ||||||
|
Capital
expenditures
|
(19,226 | ) | (16,773 | ) | (11,020 | ) | ||||||
|
Proceeds
from disposition of hotel assets held for sale
|
6,456 | 11,905 | 9,800 | |||||||||
|
Deposits
on hotel acquisitions
|
- | - | (2,100 | ) | ||||||||
|
Cash
paid for franchise fee intangible
|
(57 | ) | (11 | ) | (46 | ) | ||||||
|
Investment
in notes receivable
|
- | - | (1,057 | ) | ||||||||
|
Repayment
of notes receivable
|
1,350 | 34 | 1,909 | |||||||||
|
Investment
in development loans receivable
|
(64,200 | ) | (65,700 | ) | (51,616 | ) | ||||||
|
Repayment
of development loans receivable
|
22,416 | 53,000 | 37,050 | |||||||||
|
Distributions
from unconsolidated joint venture
|
2,113 | 6,485 | 2,767 | |||||||||
|
Advances
and capital contributions to unconsolidated joint ventures
|
(96 | ) | (2,309 | ) | (4,209 | ) | ||||||
|
Net
cash used in investing activities
|
(114,870 | ) | (46,027 | ) | (413,881 | ) | ||||||
|
Financing
activities:
|
||||||||||||
|
Proceeds
from (repayments of) borrowings under line of credit, net
|
44,721 | 19,700 | 24,000 | |||||||||
|
Principal
repayment of mortgages and notes payable
|
(57,421 | ) | (20,717 | ) | (80,222 | ) | ||||||
|
Proceeds
from mortgages and notes payable
|
59,156 | 28,543 | 280,205 | |||||||||
|
Settlement
of interest rate derivative
|
- | - | 79 | |||||||||
|
Cash
paid for deferred financing costs
|
(1,244 | ) | (286 | ) | (1,224 | ) | ||||||
|
Proceeds
from issuance of common stock, net
|
61,845 | - | 191,015 | |||||||||
|
Stock
issuance costs related to conversion of partnership units
|
- | (143 | ) | - | ||||||||
|
Distributions
to partners in consolidated joint ventures
|
- | (526 | ) | (221 | ) | |||||||
|
Dividends
paid on common shares
|
(32,169 | ) | (29,424 | ) | (18,174 | ) | ||||||
|
Dividends
paid on preferred shares
|
(4,800 | ) | (4,800 | ) | (4,800 | ) | ||||||
|
Distributions
paid on common partnership units
|
(5,742 | ) | (3,609 | ) | (2,458 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
64,346 | (11,262 | ) | 388,200 | ||||||||
|
Net
increase in cash and cash equivalents
|
3,370 | 2,011 | 1,536 | |||||||||
|
Cash
and cash equivalents - beginning of year
|
12,327 | 10,316 | 8,780 | |||||||||
|
Cash
and cash equivalents - end of year
|
$ | 15,697 | $ | 12,327 | $ | 10,316 | ||||||
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[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 (“HHLP” or 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.
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 May 5,
2008, we transferred the listing of our common shares of beneficial interest and
8.0% Series A preferred shares of beneficial interest from the American Stock
Exchange to the New York Stock Exchange (the “NYSE”). Hersha’s common
shares now trade on the NYSE under the ticker symbol "HT" and its Series A
preferred shares now trade on the NYSE under the ticker symbol "HT PR
A."
As of
December 31, 2008, the Company, through the Partnership and subsidiary
partnerships, wholly owned fifty-eight limited and full service hotels. All of
the wholly owned hotel facilities are leased to the Company’s taxable REIT
subsidiary (“TRS”), 44 New England.
In
addition to the wholly owned hotel properties, as of December 31, 2008, the
Company owned joint venture interests in another eighteen properties. The
properties owned by the joint ventures are leased to a TRS owned by the joint
venture or to an entity owned by the joint venture partners and 44 New England.
The following table lists the properties owned by these joint
ventures:
|
Joint Venture
|
Ownership
|
Property
|
Location
|
Lessee/Sublessee
|
|||
|
Unconsolidated Joint
Ventures
|
|||||||
|
Inn America Hospitality at Ewing,
LLC
|
50.0 | % |
Courtyard
|
Ewing/Princeton, NJ
|
Hersha Inn America TRS
Inc.
|
||
|
PRA Glastonbury, LLC
|
48.0 | % |
Hilton Garden Inn
|
Glastonbury, CT
|
Hersha PRA TRS, Inc
|
||
|
PRA Suites at Glastonbury,
LLC
|
48.0 | % |
Homewood Suites
|
Glastonbury, CT
|
Hersha PRA LLC
|
||
|
Mystic
Partners, LLC
|
66.7 | % |
Marriott
|
Mystic,
CT
|
Mystic
Partners Leaseco, LLC
|
||
| 8.8 | % |
Hilton
|
Hartford,
CT
|
Mystic
Partners Leaseco, LLC
|
|||
| 66.7 | % |
Courtyard
|
Norwich,
CT
|
Mystic
Partners Leaseco, LLC
|
|||
| 66.7 | % |
Courtyard
|
Warwick,
RI
|
Mystic
Partners Leaseco, LLC
|
|||
| 66.7 | % |
Residence
Inn
|
Danbury,
CT
|
Mystic
Partners Leaseco, LLC
|
|||
| 66.7 | % |
Residence
Inn
|
Mystic,
CT
|
Mystic
Partners Leaseco, LLC
|
|||
| 44.7 | % |
Residence
Inn
|
Southington,
CT
|
Mystic
Partners Leaseco, LLC
|
|||
| 66.7 | % |
Springhill
Suites
|
Waterford,
CT
|
Mystic
Partners Leaseco, LLC
|
|||
| 15.0 | % |
Marriott
|
Hartford, CT
|
Mystic Partners Leaseco,
LLC
|
|||
|
Hiren Boston, LLC
|
50.0 | % |
Courtyard
|
South Boston, MA
|
South Bay Boston, LLC
|
||
|
SB Partners, LLC
|
50.0 | % |
Holiday Inn Express
|
South Boston, MA
|
South Bay Sandeep, LLC
|
||
|
Metro 29th Street Associates,
LLC.
|
50.0 | % |
Holiday Inn Express
|
New York, NY
|
Metro 29th Sublessee,
LLC
|
||
|
Consolidated Joint Ventures
|
|||||||
|
Logan Hospitality Associates,
LLC
|
55.0 | % |
Four Points – Sheraton
|
Revere/Boston, MA
|
Revere Hotel Group, LLC
|
||
|
LTD Associates One, LLC
|
75.0 | % |
Springhill Suites
|
Williamsburg, VA
|
HT LTD Williamsburg One
LLC
|
||
|
LTD Associates Two, LLC
|
75.0 | % |
Residence Inn
|
Williamsburg, VA
|
HT LTD Williamsburg Two
LLC
|
||
Mystic
Partners, LLC owns an interest in nine hotel properties. Our interest in Mystic
Partners, LLC is relative to our interest in each of the nine properties owned
by the joint venture as defined in the joint venture’s governing documents. Each
of the nine properties owned by Mystic Partners, LLC is leased to a separate
entity that is consolidated in Mystic Partners Leaseco, LLC which is owned by 44
New England and our joint venture partner in Mystic Partners, LLC.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The
properties are managed by eligible independent management companies, including
Hersha Hospitality Management, LP (“HHMLP”), HHMLP is owned in part by four of
the Company’s executive officers, two of its trustees and other third party
investors.
Principles of Consolidation
and Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with U.S. 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 are the primary beneficiary in a variable interest entity (VIE) or
we maintain control of the asset through our voting interest in the entity.
Control can be 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. Control can be demonstrated by the
limited partners if the limited partners have the right to dissolve or liquidate
the partnership or otherwise remove the general partner without cause or have
rights to participate in the significant decisions made in the ordinary course
of the partnership’s business.
We
evaluate each of our investments and contractual relationships to determine
whether they meet the guidelines of consolidation. Our examination consists of
reviewing the sufficiency of equity at risk, controlling financial interests,
voting rights, and the obligation to absorb expected losses and expected gains,
including residual returns. Based on our examination, the following entities
were determined to be VIE’s: Mystic Partners, LLC; Mystic Partners Leaseco, LLC;
Hersha PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg One LLC; HT LTD
Williamsburg Two LLC; Metro 29th Sublessee, LLC; Hersha
Statutory Trust I; and Hersha Statutory Trust II. Mystic Partners, LLC is a VIE
entity, however because we are not the primary beneficiary it is not
consolidated by the Company. Our maximum exposure to losses due to our
investment in Mystic Partners, LLC is limited to our investment in the joint
venture which is $27,977 as of December 31, 2008. Also, Mystic
Partners Leaseco, LLC; Hersha PRA LLC; South Bay Boston, LLC; HT LTD
Williamsburg One LLC; HT LTD Williamsburg Two LLC, and Metro 29th Sublessee, LLC lease hotel
properties from our joint venture interests and are variable interest entities.
These entities are consolidated by the lessors, the primary beneficiaries of
each entity. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs but
HHLP is not the primary beneficiary in these entities. The accounts of Hersha
Statutory Trust I and Hersha Statutory Trust II are not consolidated with and
into HHLP.
We have
consolidated the operations of the Logan Hospitality Associates, LLC; LTD
Associates One, LLC; and LTD Associates Two, LLC joint ventures because each
entity is a voting interest entity and the Company owns a majority voting
interest in the venture.
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.
Although
we believe the assumptions and estimates we made are reasonable and appropriate,
as discussed in the applicable sections throughout these Consolidated Financial
Statements, different assumptions and estimates could materially impact our
reported results. The current economic environment has increased the degree of
uncertainty inherent in these estimates and assumptions and changes in market
conditions could impact our future operating results.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Investment in Hotel
Properties
The
Company allocates the purchase price of hotel properties acquired based on the
fair value of the acquired real estate, furniture, fixtures and equipment, and
intangible assets and the fair value of liabilities assumed, including debt. The
Company’s investments in hotel properties are carried at cost and are
depreciated using the straight-line method over the following estimated useful
lives:
|
Building
and Improvements
|
7
to 40 Years
|
|
Furniture,
Fixtures and Equipment
|
5
to 7 Years
|
The
Company periodically reviews the carrying value of each hotel to determine if
circumstances exist indicating impairment to the carrying value of the
investment in the hotel or that depreciation periods should be modified. If
facts or circumstances support the possibility of impairment, the Company will
prepare an estimate of the undiscounted future cash flows, without interest
charges, of the specific hotel and determine if the investment in such hotel is
recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment will be made to the carrying value of the hotel to
reflect the hotel at fair value.
In
accordance with the provisions of Financial Accounting Standards Board Statement
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a
hotel is considered held for sale when management and our independent trustees
commit to a plan to sell the property, the property is available for sale,
management engages in active program to locate a buyer for the property and it
is probable the sale will be completed within a year of the initiation of the
plan to sell.
Investment in Unconsolidated
Joint Ventures
If it is
determined that we do not have a controlling interest in a joint venture, either
through our financial interest in a VIE or our voting interest in a voting
interest entity, the equity method of accounting is used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize our share of
net earnings or losses of the affiliates as they occur rather than as dividends
or other distributions are received, limited to the extent of our investment in,
advances to and commitments for the investee. Pursuant to our joint venture
agreements, allocations of profits and losses of some of our investments in
unconsolidated joint ventures may be allocated disproportionately as compared to
the ownership percentages due to specified preferred return rate
thresholds.
The
Company periodically reviews the carrying value of its investment in
unconsolidated joint ventures to determine if circumstances exist indicating
impairment to the carrying value of the investment. When an
impairment indicator is present, we will review the recoverability of our
investment. It the investment’s carrying value is not considered
recoverable, we will estimate the fair value of the investment. Our
estimate of fair value takes into consideration factors such as expected future
operating income, trends and prospects, as well as the effects of demand,
competition and other factors. This determination requires
significant estimates by management, including the expected cash flows to be
generated by the assets owned and operated by the joint venture. To the extent
impairment has occurred, the loss will be measured as the excess of the carrying
amount over the fair value of our investment in the unconsolidated joint
venture.
Development Loans
Receivable
The
Company provides secured first-mortgage and mezzanine financing to hotel
developers. Development loans receivable are recorded at cost and are reviewed
for potential impairment at each balance sheet date. The Company’s development
loans receivable are each secured by various hotel or hotel development
properties or partnership interests in hotel or hotel development properties. We
have determined that development loans receivable do not constitute a financial
interest in a VIE and do not consolidate the operating results of the borrower
in our consolidated financial statements. Our evaluation consists of
reviewing the sufficiency of the borrower’s equity at risk, controlling
financial interests in the borrower, voting rights of the borrower, and the
borrower’s obligation to absorb expected losses and expected gains, including
residual returns. The analysis utilized by the Company in evaluating the
development loans receivable involves considerable management judgment and
assumptions.
A
development loan receivable is considered impaired when it becomes probable,
based on current information, that the Company will be unable to collect all
amounts due according to the loan’s contractual terms. The amount of impairment,
if any, is measured by comparing the recorded amount of the loan to the present
value of the expected cash flows or the fair value of the collateral.
If
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
a loan
was deemed to be impaired, the Company would record a charge to income for any
shortfall.
Cash and Cash
Equivalents
Cash and
cash equivalents represent cash on hand and in banks plus short-term investments
with an initial maturity of three months or less when purchased.
Escrow
Deposits
Escrow
deposits include reserves for debt service, real estate taxes, and insurance and
reserves for furniture, fixtures, and equipment replacements, as required by
certain mortgage debt agreement restrictions and provisions.
Hotel Accounts
Receivable
Hotel
accounts receivable consists primarily of meeting and banquet room rental and
hotel guest receivables. The Company generally does not require collateral.
Ongoing credit evaluations are performed and an allowance for potential losses
from uncollectible accounts is provided against the portion of accounts
receivable that is estimated to be uncollectible.
Deferred
Costs
Deferred
loan costs are recorded at cost and amortized over the terms of the related
indebtedness using the effective interest method.
Due from/to Related
Parties
Due
from/to Related Parties represents current receivables and payables resulting
from transactions related to hotel management and project management with
affiliated entities. Due from related parties results primarily from advances of
shared costs incurred. Due to affiliates results primarily from hotel management
and project management fees incurred. Both due to and due from related parties
are generally settled within a period not to exceed one year.
Intangible
Assets
Intangible
assets consist of leasehold intangibles for above-market and below-market value
of in-place leases and deferred franchise fees. The leasehold
intangibles are amortized over the remaining lease term. Deferred franchise fees
are amortized using the straight-line method over the life of the franchise
agreement.
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. Our ownership
interest in the Partnership as of December 31, 2008, 2007 and 2006 was 84.5%,
86.4% and 91.4%, respectively. At December 31, 2008, there were 8,746,300 units
outstanding with a fair market value of $26,239 which has been determined using
the Company’s stock price at December 31, 2008.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The
Company revalues the minority interest associated with the Partnership units
each quarter to maintain a proportional relationship between the book value of
equity associated with common shareholders relative to that of the Unit holders
since both have equivalent rights and Units are convertible into shares of
common stock on a one-for-one basis.
We also
maintain minority interests for the equity interest owned by third parties in
Logan Hospitality Associates, LLC; LTD Associates One, LLC; and LTD Associates
Two, LLC. Third parties own a 45% interest in Logan Hospitality Associates, LLC
and a 25% interest in each of LTD Associates One LLC and LTD Associates Two,
LLC. We allocate the income (loss) of these joint ventures to the minority
interest in consolidated joint ventures based upon the ownership of the
entities, preferences in distributions of cash available and the terms of each
venture agreement.
Shareholders’
Equity
On May
16, 2008, we completed a public offering of 6,000,000 common shares at $9.90 per
share. On May 20, 2008, the underwriters exercised a portion of their
over-allotment option with respect to that offering, and we issued an additional
600,000 common shares at $9.90 per share. Proceeds to us, net of
underwriting discounts and commissions and expenses, were approximately
$61,845. Immediately upon closing the offering, we contributed all of
the net proceeds of the offering to the Partnership in exchange for additional
Partnership interests. The net offering proceeds were used to repay
indebtedness.
Stock Based
Compensation
We apply
Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”
(SFAS 123R) 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 compensation cost is amortized on a straight line
basis over the period during which an employee is required to provide
service in exchange for the award.
Derivatives and
Hedging
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 and
interest rate caps as part of its cash flow hedging strategy. Interest rate
swaps designated as cash flow hedges involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount. Interest rate caps
designated as cash flow hedges limit the Company’s exposure to increased cash
payments due to increases in variable interest rates.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
Recognition
We
recognize revenue and expense for all consolidated hotels as hotel operating
revenue and hotel operating expense when earned and incurred. These revenues are
recorded net of any sales or occupancy taxes collected from our guests. We
participate in frequent guest programs sponsored by the brand owners of our
hotels and we expense the charges associated with those programs, as
incurred.
Interest
income on development loan financing is recorded in the period earned based on
the interest rate of the loan and outstanding balance during the period.
Development loans receivable and accrued interest on the development loans
receivable are evaluated to determine if outstanding balances are
collectible. Interest is recorded only if it is determined the
outstanding loan balance and accrued interest balance are
collectible.
We lease
land to hotel developers under fixed lease agreements. In addition to base
rents, these lease agreements contain provisions that require the lessee to
reimburse real estate taxes, debt service and other impositions. Base rents and
reimbursements for real estate taxes, debt service and other impositions are
recorded in land lease revenue on an accrual basis. Expenses for real
estate taxes, interest expense, and other costs that are reimbursed under the
land leases are recorded in land lease expense when they are
incurred.
Other
revenues consist primarily of fees earned for asset management services provided
to hotels we own through unconsolidated joint ventures. Fees are earned as a
percentage of the hotels revenue and are recorded in the period earned to the
extent of the minority interest ownership.
Income
Taxes
The
Company qualifies as a REIT under applicable provisions of the Internal Revenue
Code (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.
Although
the TRS Lessee is expected to operate at a profit for Federal income tax
purposes in future periods, the utilization of the deferred tax asset is not
determinable. Therefore, any deferred tax assets have been reserved as we have
not concluded that it is more likely than not that these deferred tax assets
will be realizable.
Reclassification
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent Accounting
Pronouncements
SFAS
No. 141R
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R requires most
identifiable assets, liabilities, noncontrolling interests, and goodwill
acquired in a business combination to be recorded at “full fair value.” SFAS No.
141R is effective for fiscal years beginning after December 15, 2008. The
Company has not determined whether the adoption of SFAS No. 141R will have a
material effect on the Company’s financial statements. Adoption of SFAS No.141R
on January 1, 2009 could have a material effect on the Company’s financial
statements and the Company’s future financial results to the extent the Company
acquires significant amounts of real estate assets. Costs related to future
acquisitions will be expensed as incurred compared to the Company’s current
practice of capitalizing such costs and amortizing them over the useful life of
the acquired assets. In addition, to the extent the Company enters into
acquisition agreements with earn-out provisions, a liability may be recorded at
the time of acquisition based on an estimate of the earn-out to be paid compared
to our current practice of recording a liability for the earn-out when amounts
are probable and determinable.
SFAS
No. 160
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No.
160”). SFAS No. 160 requires noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. No. 160 is effective for fiscal years beginning after December 15,
2008. The adoption of this statement will result in minority interest to
be reclassified as a component of shareholders’ equity.
SFAS
No. 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No.
161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. The objective of the guidance is to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for; and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS No. 161
is effective for fiscal years beginning after November 15, 2008. The
Company has determined that the adoption of SFAS No. 161 will not have a
material effect on the Company’s financial statements.
FSP EITF 03-6-1
In June
2008, the FASB issued FASB Staff Position on Emerging Issues Task Force Issue
03-6, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
states that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of FSP EITF 03-6-1. Early application is not
permitted. We expect that the adoption of this FSP will not impact
our financial position or net income.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES
Investment
in hotel properties consist of the following at December 31, 2008 and
2007:
|
December 31, 2008
|
December 31, 2007
|
|||||||
|
Land
|
$ | 184,879 | $ | 172,061 | ||||
|
Buildings
and Improvements
|
802,760 | 706,038 | ||||||
|
Furniture,
Fixtures and Equipment
|
121,991 | 105,979 | ||||||
|
Construction
in Progress
|
- | 1,541 | ||||||
| 1,109,630 | 985,619 | |||||||
|
Less
Accumulated Depreciation
|
(127,548 | ) | (92,322 | ) | ||||
|
Total
Investment in Hotel Properties
|
$ | 982,082 | $ | 893,297 | ||||
Depreciation
expense was $41,219, $34,895 and $20,120 for the years ended December 31, 2008,
2007 and 2006, respectively.
During
the year ended December 31, 2008 we acquired the following wholly owned hotel
properties:
|
Hotel
|
Acquisition Date
|
Land
|
Buildings and Improvements
|
Furniture Fixtures and
Equipment
|
Franchise Fees, Loan Costs, and Leasehold
Intangible
|
Total Purchase Price
|
Fair Value of Assumed Debt
|
|||||||||||||||||||
|
Duane
Street Hotel, TriBeCa,
New York, NY
|
1/4/2008
|
$ | 8,213 | $ | 12,869 | $ | 2,793 | $ | - | $ | 23,875 | $ | - | |||||||||||||
|
nu
Hotel, Brooklyn,
NY
|
1/14/2008
|
- | 17,343 | - | - | 17,343 | - | |||||||||||||||||||
|
TownePlace
Suites, Harrisburg,
PA
|
5/8/2008
|
1,238 | 10,182 | 1,792 | 42 | 13,254 | - | |||||||||||||||||||
|
Sheraton
Hotel, JFK
Airport, Jamaica, NY
|
6/13/2008
|
- | 27,584 | 4,413 | 2,893 | 34,890 | 23,800 | |||||||||||||||||||
|
Holiday
Inn Express, Camp
Springs, MD
|
6/26/2008
|
1,629 | 11,115 | 931 | 5 | 13,680 | - | |||||||||||||||||||
|
Hampton
Inn, Smithfield,
RI
|
8/1/2008
|
2,057 | 9,502 | 1,156 | 102 | 12,817 | 6,990 | |||||||||||||||||||
|
Total
2008 Wholly
Owned Acquisitions
|
$ | 13,137 | $ | 88,595 | $ | 11,085 | $ | 3,042 | $ | 115,859 | $ | 30,790 | ||||||||||||||
In
connection with the acquisitions made during the year ended December 31, 2008,
we acquired $344 in working capital assets and assumed $662 in working capital
liabilities.
Interest
rates on debt assumed in the acquisitions of the Sheraton Hotel, JFK Airport,
Jamaica, NY and the Hampton Inn, Smithfield, RI were at market
rates. In connection with the acquisition of the Sheraton Hotel, the
Company assumed a $23,800 variable rate mortgage which accrued interest at LIBOR
plus 2.00% per annum. This debt was repaid in October 2008 with
borrowings from our revolving line of credit, and this property now serves as
collateral for borrowings under our revolving line of credit. In
connection with the acquisition of the Sheraton Hotel, we assumed a lease for
the underlying land with a remaining term of approximately 94
years. The remaining lease payments were determined to be below
market value and, as a result, $2,171 of the purchase price was allocated to a
leasehold intangible asset. This asset is recorded in intangible
assets on the consolidated balance sheet and is being amortized over the
remaining life of the lease.
In
connection with the acquisition of the Duane Street Hotel, the Company entered
into a $15,000 fixed rate mortgage with interest at 7.15%. The
mortgage matures in February 2018 and is interest only for the first three
years. Upon acquisition of the nu Hotel, located in Brooklyn,
NY, we commenced renovations to fit out the building prior to its
opening. Costs associated with the building while it was being
renovated, including interest, were capitalized. On July 7, 2008, the
property opened and all renovation costs were capitalized to building and
improvements and furniture, fixtures and equipment and are being depreciated
over the useful lives of these assets. In connection with the
acquisition of the nu Hotel the Company entered into an $18,000 variable rate
mortgage debt facility with interest at LIBOR plus 2.00%. Principal
of $13,240 was drawn on the date of acquisition, while the remainder of the
balance has been drawn as renovations progressed and as interest was
incurred. The mortgage requires the payment of interest only and
matures in January of 2011.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (continued)
In
connection with the acquisition of the Hampton Inn, Smithfield, RI, the Company
assumed a $6,990 fixed rate mortgage which accrues interest at
6.98%. The mortgage matures in December 12, 2016. In
connection with the acquisition of the property, the sellers provided a $500
note payable which accrued interest at a rate of 7.00% per
annum. This note was repaid prior to September 30, 2008.
The Duane
Street Hotel, New York, NY was acquired from entities that are owned by
certain of the Company’s executives and affiliated trustees. Included
in the consideration paid for the Duane Street Hotel were 779,585 units of
limited partnership interest (“OP Units”) in Hersha Hospitality Limited
Partnership ("HHLP" or the “Partnership”), our operating partnership subsidiary,
valued at $6,862. The OP Units were issued to certain executives and affiliated
trustees of the Company. The Sheraton Hotel, JFK Airport, Jamaica,
NY, was acquired from entities that are owned by certain of the Company’s
executives and affiliated trustees and an unrelated third
party. Included in the consideration paid for the Sheraton Hotel were
1,177,306 OP Units in HHLP valued at $10,596. The OP Units were
issued to certain executives and affiliated trustees of the Company and an
unrelated third party. The Holiday Inn Express, Camp Springs, MD, was
acquired from entities that are owned by certain of the Company’s executives and
affiliated trustees and an unrelated third party. Included in the
consideration paid for the Holiday Inn Express were 540,337 OP Units in HHLP
valued at $4,166. The OP Units were issued to certain executives and
affiliated trustees of the Company and an unrelated third party.
Our newly
acquired hotels are leased to our wholly-owned taxable REIT subsidiary (“TRS”),
44 New England Management Company and all are managed by Hersha Hospitality
Management, LP (“HHMLP”). HHMLP is owned by three of the Company’s
executives, two of its affiliated trustees and other investors that are not
affiliated with the Company.
During
the year ended December 31, 2007 we acquired the following wholly owned hotel
properties:
|
Hotel
|
Acquisition Date
|
Land
|
Buildings and Improvements
|
Furniture Fixtures and
Equipment
|
Franchise Fees and Loan
Costs
|
Total Purchase Price
|
Fair Value of Assumed Debt
|
|||||||||||||||||||
|
Residence
Inn, Langhorne,
PA
|
1/8/2007
|
$ | 1,463 | $ | 12,125 | $ | 2,170 | $ | 50 | $ | 15,808 | - | ||||||||||||||
|
Residence
Inn, Carlisle,
PA
|
1/10/2007
|
1,015 | 7,511 | 1,330 | 89 | 9,945 | 7,000 | |||||||||||||||||||
|
Holiday
Inn Express, Chester,
NY
|
1/25/2007
|
1,500 | 6,701 | 1,031 | 126 | 9,358 | 6,700 | |||||||||||||||||||
|
Hampton
Inn - Seaport, New
York, NY
|
2/1/2007
|
7,816 | 19,056 | 1,729 | 1,036 | 29,637 | 20,202 | |||||||||||||||||||
|
Hotel
373 and Starbucks Lease - 5th Avenue, New
York, NY
|
6/1/2007
|
14,239 | 16,801 | 3,294 | 11 | 34,345 | 22,000 | |||||||||||||||||||
|
Nevins
Street, Brooklyn,
NY
|
6/11/2007
& 7/11/2007
|
10,650 | - | - | 269 | 10,919 | 6,500 | |||||||||||||||||||
|
Holiday
Inn, Norwich,
CT
|
7/1/2007
|
1,984 | 12,037 | 2,041 | 67 | 16,129 | 8,162 | |||||||||||||||||||
|
Total
2007 Wholly
Owned Acquisitions
|
$ | 38,667 | $ | 74,231 | $ | 11,595 | $ | 1,648 | $ | 126,141 | $ | 70,564 | ||||||||||||||
Interest
rates on debt assumed in the acquisition of the Residence Inn, Carlisle, PA and
the Holiday Inn Express & Suites, Chester, NY were at market
rates. We assumed $19,250 in debt with the acquisition of the Hampton
Inn-Seaport, New York, NY bearing interest at a fixed rate of 6.36% which was
determined on the date of acquisition to be above market rates. We
recorded a premium of $952 related to the assumption of this debt. In the
acquisition of Hotel 373 – 5th
Avenue, New York, NY, we assumed $22,000 in variable rate debt bearing
interest at LIBOR plus 2.00% and an interest rate cap which effectively caps
interest on this debt at 7.75%. The debt matures and the interest
rate cap terminates on April 9, 2009. The interest rate cap had a
fair value of $15 on the date of acquisition. We assumed $6,500 in
variable rate debt bearing interest at LIBOR plus 2.70% with the acquisition of
a parcel of land on Nevins Street in Brooklyn, NY. This parcel of
land is being leased to a hotel developer that is owned in part by certain
executives and affiliated trustees of the Company. Lease income on
the land includes payment of debt service on the assumed debt. We
assumed $8,162 in debt with the acquisition of the Holiday Inn, Norwich, CT
which was repaid on July 30, 2007.
The
Residence Inn, Carlisle, PA and the Hampton Inn-Seaport, New York, NY were
acquired from entities that are owned by certain of the Company’s executives and
affiliated trustees. Included in the consideration paid for the
Residence Inn, Carlisle, PA
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (continued)
were
119,818 OP Units in HHLP valued at $1,330. The OP Units were issued
to sellers that are not affiliated with the Company. Consideration
paid for the Hampton Inn-Seaport, New York, NY, included 15,016 OP Units valued
at $168 and an $8,208 note payable. The OP Units and note payable
were issued to certain executives and affiliated trustees of the
Company.
On May
24, 2007, the note payable was fully repaid. Interest expense of $203
was incurred on the notes payable during the year ended December 31,
2007. Included in the consideration paid for the Hotel 373 – 5th Avenue, New York, NY were
1,000,000 OP Units valued at $12,320. The OP Units were issued to a
seller that is not affiliated with the Company. Consideration paid
for the Holiday Inn, Norwich, CT, included 659,312 OP Units valued at
$7,800. The OP Units were issued to certain executives and affiliated
trustees of the Company.
On
January 8, 2007, we closed on the acquisition of the Residence Inn, Langhorne,
PA. The purchase agreement for this acquisition contained certain provisions
that entitle the seller to an earn-out payment of up to $1,000 based on the net
operating income of the property, as defined in the purchase agreement. The
earn-out period expired on July 31, 2008. Based on results for this
property through July 31, 2008, a $1,000 earn-out was paid in October
2008. This additional purchase price was capitalized to land,
building and improvements, and furniture, fixtures and equipment and is being
depreciated over the useful lives of these assets.
The
purchase agreements for some of our acquisitions contain certain provisions that
entitle the seller to an earn-out payment based on the Net Operating Income of
the properties, as defined in each purchase agreement. The following
table summarizes our existing earn-out provisions:
|
Acquisition Date
|
Acquisition Name
|
Maximum Earn-Out Payment
Amount
|
Earn-Out Period
Expiration
|
||||
|
12/28/2006
|
Summerfield
Suites Portfolio
|
$ | 6,000,000 |
December
31, 2009
|
|||
|
6/26/2008
|
Holiday
Inn Express, Camp Springs, MD
|
1,905,000 |
December
31, 2010
|
||||
|
8/1/2008
|
Hampton
Inn & Suites, Smithfield, RI
|
1,515,000 |
December
31,
2010
|
||||
We are
currently unable to determine whether amounts will be paid under these three
earn-out provisions since significant time remains until the expiration of the
earn-out periods. Due to uncertainty of the amounts that will
ultimately be paid, no accrual has been recorded on the consolidated balance
sheet for amounts due under these earn-out provisions. In the event amounts are
payable under these provisions, payments made will be recorded as additional
consideration given for the properties.
On
February 15, 2006, we acquired an 80% joint venture interest in an entity that
owns the Hampton Inn, Philadelphia, PA. The entity that sold the 80% interest
was owned, in part, by certain executives and affiliated trustees of the
Company. On October 1, 2007, we acquired the remaining 20% interest from our
joint venture partners. The following is the allocation of purchase price for
each step of the acquisition:
|
Acquisition Date
|
Land
|
Buildings and Improvements
|
Furniture Fixtures and
Equipment
|
Franchise Fees and Loan
Costs
|
Total
|
||||||||||||||||
|
Acquisition
of 80% Interest
|
2/15/2006
|
$ | 2,928 | $ | 21,062 | $ | 3,029 | $ | 117 | $ | 27,136 | ||||||||||
|
Acquisition
of Remaining 20% Interest
|
10/1/2007
|
744 | 4,850 | 790 | - | 6,384 | |||||||||||||||
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (continued)
Consideration
paid for the remaining 20% interest in the Hampton Inn, Philadelphia, PA
consisted of 406,877 OP Units valued at $4,162, which were issued to certain
executives and affiliated trustees of the Company. Prior to the acquisition of
the remaining 20% interest, the Hampton Inn, Philadelphia, PA was reported as a
consolidated joint venture and its assets and liabilities were included in the
Company’s consolidated balance sheet and non-controlling interest of $588 was
reported as Minority Interests. As a result of acquiring the
remaining 20% interest in the venture, our investment in hotel properties was
increased as follows:
|
Land
|
Buildings and Improvements
|
Furniture Fixtures and
Equipment
|
Total
|
|||||||||||||
|
Purchase
Price
|
$ | 744 | $ | 4,850 | $ | 790 | $ | 6,384 | ||||||||
|
Less:
|
||||||||||||||||
|
Net
book value included in consolidated financial statements prior to
acquisition
|
(193 | ) | (2,396 | ) | (220 | ) | (2,809 | ) | ||||||||
|
Step-up
in value included in consolidated financial statements after
acquisition
|
$ | 551 | $ | 2,454 | $ | 570 | $ | 3,575 | ||||||||
Pro
Forma Operating Results (Unaudited)
The
following condensed pro forma financial data is presented as if all 2008 and
2007 acquisitions had been consummated as of January 1, 2007. Properties
acquired without any operating history are excluded from the condensed pro forma
operating results. The condensed pro forma information is not necessarily
indicative of what actual results of operations of the Company would have been
assuming the acquisitions had been consummated at the beginning of the year
presented, nor does it purport to represent the results of operations for future
periods.
|
For the Year Ended
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Pro
Forma Total Revenues
|
$ | 266,728 | $ | 243,681 | ||||
|
Pro
Forma (Loss) income from Continuing Operations applicable to Common
Shareholders
|
$ | (11,115 | ) | $ | 13,220 | |||
|
Income
from Discontinued Operations
|
2,432 | 4,110 | ||||||
|
Pro
Forma Net (Loss) income
|
(8,683 | ) | 17,330 | |||||
|
Preferred
Distributions
|
4,800 | 4,800 | ||||||
|
Pro
Forma Net (Loss) income applicable to Common Shareholders
|
$ | (13,483 | ) | $ | 12,530 | |||
|
Pro
Forma (Loss) income applicable to Common Shareholders per Common
Share
|
||||||||
|
Basic
|
$ | (0.30 | ) | $ | 0.31 | |||
|
Diluted
|
$ | (0.30 | ) | $ | 0.31 | |||
|
Weighted
Average Common Shares Outstanding
|
||||||||
|
Basic
|
45,184,127 | 40,718,724 | ||||||
|
Diluted
|
45,184,127 | 40,718,724 | ||||||
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of
December 31, 2008 and December 31, 2007 our investment in unconsolidated joint
ventures consisted of the following:
|
Percent
|
Preferred
|
December 31,
|
|||||||||||||||
|
Joint Venture
|
Hotel Properties
|
Owned
|
Return
|
2008
|
2007
|
||||||||||||
|
PRA
Glastonbury, LLC
|
Hilton
Garden Inn,
Glastonbury,
CT
|
48 | %* |
11.0%
cumulative
|
$ | 738 | $ | 945 | |||||||||
|
Inn
American Hospitality
at
Ewing, LLC
|
Courtyard
by Marriott,
Ewing,
NJ
|
50.0 | % |
11.0%
cumulative
|
736 | 1,016 | |||||||||||
|
Hiren
Boston, LLC
|
Courtyard
by Marriott,
Boston,
MA
|
50.0 | % |
N/A
|
3,960 | 4,148 | |||||||||||
|
SB
Partners, LLC
|
Holiday
Inn Express,
Boston,
MA
|
50.0 | % |
N/A
|
2,091 | 2,010 | |||||||||||
|
Mystic
Partners, LLC
|
Hilton
and Marriott branded
hotels
in CT and RI
|
8.8%-66.7 | % |
8.5%
non-cumulative
|
27,977 | 32,928 | |||||||||||
|
PRA
Suites at
Glastonbury,
LLC
|
Homewood
Suites,
Glastonbury,
CT
|
48 | %* |
10.0%
non-cumulative
|
2,800 | 2,808 | |||||||||||
|
Metro
29th Street
Associates,
LLC
|
Holiday
Inn Express,
New
York, NY
|
50.0 | % |
N/A
|
7,981 | 7,996 | |||||||||||
| $ | 46,283 | $ | 51,851 | ||||||||||||||
* Percent
owned was 40.0% through March 31, 2007. On April 1, 2007 our percent
owned increased to 48.0%.
On
February 1, 2007 we acquired a 50.0% interest in Metro 29th Street Associates, LLC
(“Metro 29th”), the lessee of the 228 room Holiday Inn Express-Manhattan, New
York, NY, for approximately $6,817. Metro 29th holds a twenty five year
lease with certain renewal options at the end of the lease term. We
also acquired an option to acquire a 50% interest in the entity that owns the
Holiday Inn Express-Manhattan. The option is exercisable after
February 1, 2012 or upon termination of Metro 29th Street’s lease of the
hotel and expires at the end of the lease term. The fair value of the
option was $933 at the time of acquisition and is recorded in other assets on
our consolidated balance sheet. We issued 694,766 OP Units valued at
$7,747 for our interest in Metro 29th and the
option. Metro 29th Street entered into an
agreement with Metro 29th Sublessee, LLC, a joint
venture owned by 44 New England and our joint venture partner, to sublease the
hotel property. The hotel is managed by HHMLP.
On April
1, 2007, we increased our investment in PRA Glastonbury, LLC, the owner of the
Hilton Garden Inn, Glastonbury, CT, and PRA Suites at Glastonbury, LLC, the
owner of the Homewood Suites, Glastonbury, CT by acquiring an additional 8%
preferred interest from our partner in each venture. The purchase
prices for our additional equity interests were $780 and $716 for PRA
Glastonbury, LLC and PRA Suites at Glastonbury, LLC, respectively.
During
the year ended December 31, 2008, we determined that our investment in the
Hartford Hilton, part of the Mystic Partners joint venture portfolio, was
impaired. As a result, the Company recorded an impairment charge of
$1,890 which is included as impairment of investment in unconsolidated joint
venture on the Company’s consolidated statements of operations. This
charge reduced our investment in the Hartford Hilton to $0.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
Income
from our unconsolidated joint ventures is allocated to us and our joint venture
partners consistent with the allocation of cash distributions in accordance with
the joint venture agreements. Any difference between the carrying amount of
these investments and the underlying equity in net assets is amortized over the
expected useful lives of the properties and other intangible assets. Income
(loss) recognized during the years ended December 31, 2008, 2007, and 2006 for
our Investments in Unconsolidated Joint Ventures is as follows:
|
Twelve Months Ended
|
||||||||||||
|
12/31/2008
|
12/31/2007
|
12/31/2006
|
||||||||||
|
PRA
Glastonbury, LLC
|
$ | 94 | $ | 47 | $ | (257 | ) | |||||
|
Inn
American Hospitality at Ewing, LLC
|
20 | 73 | 160 | |||||||||
|
Hiren
Boston, LLC
|
(189 | ) | 304 | (167 | ) | |||||||
|
SB
Partners, LLC
|
80 | 191 | (24 | ) | ||||||||
|
Mystic
Partners, LLC
|
(345 | ) | 1,612 | 1,691 | ||||||||
|
PRA
Suites at Glastonbury, LLC
|
(8 | ) | (7 | ) | (2 | ) | ||||||
|
Metro
29th Street Associates, LLC
|
1,721 | 1,256 | - | |||||||||
|
HT/CNL
Metro Hotels, LP
|
- | - | 398 | |||||||||
|
Income
from Unconsolidated Joint Venture Investments
|
1,373 | 3,476 | 1,799 | |||||||||
|
Less: Impairment
of Investment in Unconsolidated Joint Venture
|
(1,890 | ) | - | - | ||||||||
|
Net
(Loss) Income from Unconsolidated Joint Venture
Investments
|
$ | (517 | ) | $ | 3,476 | $ | 1,799 | |||||
The SB
Partners and Hiren Boston joint venture agreements provided for a 10% preferred
return during the first two years of the ventures based on our equity interest
in the ventures. The preferred return period expired on July 1, 2007
for Hiren and October 1, 2007 for SB Partners. Subsequent to this
initial two year period, cash distributions are made 50% to us and 50% to our
joint venture partners in the ventures.
The
Mystic Partners joint venture agreement provides for an 8.5% non-cumulative
preferred return based on our contributed equity interest in the venture. Cash
distributions will be made from cash available for distribution, first, to us to
provide an 8.5% annual non-compounded return on our unreturned capital
contributions and then to our joint venture partner to provide an 8.5% annual
non-compounded return of their unreturned contributions. Any remaining cash
available for distribution will be distributed to us 10.5% with respect to the
net cash flow from the Hartford Marriott, 7.0% with respect to the Hartford
Hilton and 56.7%, with respect to the remaining seven properties. Mystic
Partners allocates income to us and our joint venture partner consistent with
the allocation of cash distributions in accordance with the joint venture
agreements.
Each of
the Mystic Partners hotel properties, except the Hartford Hilton, is under an
Asset Management Agreement with 44 New England to provide asset management
services. Fees for these services are paid monthly to 44 New England and
recognized as income in the amount of 1% of operating revenues, except for the
Hartford Marriott which is 0.25% of operating revenues.
The
Company and our joint venture partner in Mystic Partners jointly and severally
guarantee the performance of the terms of a loan to Adriaen’s Landing Hotel,
LLC, owner of the Hartford Marriott, in the amount of $50,000, and 315 Trumbull
Street Associates, LLC, owner of the Hartford Hilton, in the amount of $27,000,
if at any time during the term of the note and during such time as the net worth
of Mystic Partners falls below the amount of the guarantee. We have
determined that the probability of incurring loss under this guarantee is remote
and the value attributed to the guarantee is de minimis.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
The
following tables set 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, 2008 and December 31, 2007 and
for the years ended December 31, 2008, 2007, and 2006.
|
Balance
Sheets
|
||||||||
|
December 31,
|
December 31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Investment
in hotel properties, net
|
$ | 209,468 | $ | 229,829 | ||||
|
Other
Assets
|
25,334 | 30,000 | ||||||
|
Total
Assets
|
$ | 234,802 | $ | 259,829 | ||||
|
Liabilities
and Equity
|
||||||||
|
Mortgages
and notes payable
|
$ | 219,889 | $ | 221,398 | ||||
|
Other
liabilities
|
11,636 | 12,305 | ||||||
|
Equity:
|
||||||||
|
Hersha
Hospitality Trust
|
44,938 | 47,311 | ||||||
|
Joint
Venture Partner(s)
|
(41,661 | ) | (21,185 | ) | ||||
|
Total
Equity
|
3,277 | 26,126 | ||||||
|
Total
Liabilities and Equity
|
$ | 234,802 | $ | 259,829 | ||||
The
following table is a reconciliation of the Company’s share in the unconsolidated
joint ventures to the Company’s investment in the unconsolidated joint ventures
as presented on the Company’s balance sheets as of December 31, 2008 and
2007.
|
December 31,
|
December 31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Company's
Share
|
$ | 44,938 | $ | 47,311 | ||||
|
Excess
Investment (1)
|
1,345 | 4,540 | ||||||
|
Investment
in Joint Venture
|
$ | 46,283 | $ | 51,851 | ||||
(1)
Excess investment represents the unamortized difference between the Company's
investment and the Company's share of the equity in the underlying net
investment in the partnerships. The excess investment is amortized
over the life of the properties, and the amortization is included in Net (Loss)
Income from Unconsolidated Joint Venture Investments.
|
Statements
of Operations
|
||||||||||||
|
Twelve
Months Ended
|
||||||||||||
|
12/31/2008
|
12/31/2007
|
12/31/2006
|
||||||||||
|
Room
Revenue
|
$ | 99,530 | $ | 98,581 | $ | 81,285 | ||||||
|
Other
Revenue
|
28,344 | 31,586 | 30,016 | |||||||||
|
Operating
Expenses
|
(82,327 | ) | (81,873 | ) | (74,370 | ) | ||||||
|
Interest
Expense
|
(13,442 | ) | (15,421 | ) | (15,687 | ) | ||||||
|
Debt
Extinguishment
|
- | (2,858 | ) | (517 | ) | |||||||
|
Loss
on Impairment of Building and Equipment
|
(9,171 | ) | - | - | ||||||||
|
Lease
Expense
|
(5,538 | ) | (5,332 | ) | (393 | ) | ||||||
|
Property
Taxes and Insurance
|
(6,459 | ) | (6,159 | ) | (5,537 | ) | ||||||
|
Federal
and State Income Taxes
|
121 | (141 | ) | (224 | ) | |||||||
|
General
and Administrative
|
(7,835 | ) | (7,446 | ) | (7,264 | ) | ||||||
|
Depreciation
and Amortization
|
(16,171 | ) | (16,680 | ) | (16,993 | ) | ||||||
|
Net
loss
|
$ | (12,948 | ) | $ | (5,743 | ) | $ | (9,684 | ) | |||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 - DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES
We have
approved first mortgage and mezzanine lending to hotel developers, including
entities in which our executive officers and affiliated trustees own an
interest, to enable such entities to construct hotels and conduct related
improvements on specific hotel projects at interest rates ranging from 10% to
20%. As of December 31, 2008 and December 31, 2007, we had Development Loans
Receivable of $81,500 and $58,183, respectively. Interest income from
development loans was $7,890, $6,046, and $2,487 for the years ended December
31, 2008, 2007, and 2006, respectively. Accrued interest on our development
loans receivable was $2,785 as of December 31, 2008 and $1,591 as of December
31, 2007.
As of
December 31, 2008 and 2007, our development loans receivable consisted of the
following:
|
Hotel Property
|
Borrower
|
Principal Outstanding
12/31/2008
|
Principal Outstanding
12/31/2007
|
Interest Rate
|
Maturity Date **
|
||||||||||
|
Sheraton
- JFK Airport, NY
|
Risingsam
Hospitality, LLC
|
$ | - | $ | 10,016 | 10 | % |
October
9, 2008
|
|||||||
|
Hampton
Inn & Suites - West Haven, CT
|
44
West Haven Hospitality, LLC
|
2,000 | 2,000 | 10 | % | October 9, 2009 * | |||||||||
|
Hilton
Garden Inn - New York, NY
|
York
Street LLC
|
15,000 | 15,000 | 11 | % |
May
31, 2009
|
|||||||||
|
Hampton
Inn - Smithfield, RI
|
44
Hersha Smithfield, LLC
|
- | 2,000 | 10 | % | October 9, 2008 * | |||||||||
|
Homewood
Suites - Newtown, PA
|
Reese
Hotels, LLC
|
500 | 700 | 11 | % |
November
14, 2009
|
|||||||||
|
Union
Square Hotel - Union Square, NY
|
Risingsam
Union Square, LLC
|
10,000 | 10,000 | 10 | % |
May
31, 2009
|
|||||||||
|
Hyatt
Place - Manhattan, NY
|
Brisam
East 52, LLC
|
10,000 | - | 10 | % |
January
16, 2010
|
|||||||||
|
Lexington
Avenue Hotel - Manhattan, NY
|
44
Lexington Holding, LLC
|
10,000 | - | 11 | % | May 30, 2009 * | |||||||||
|
Renaissance
by Marriott - Woodbridge, NJ
|
Hersha
Woodbridge Associates, LLC
|
5,000 | - | 11 | % | April 1, 2009 * | |||||||||
|
32
Pearl - Manhattan, NY
|
SC
Waterview, LLC
|
8,000 | - | 10 | % |
July
4, 2009
|
|||||||||
|
Greenwich
Street Courtyard - Manhattan, NY
|
Brisam
Greenwich, LLC
|
10,000 | - | 10 | % |
September
12, 2009
|
|||||||||
|
Independent
Hotel - New York, NY
|
Maiden
Hotel, LLC
|
10,000 | - | 20 | % |
March
8, 2009
|
|||||||||
|
Hilton
Garden Inn - Dover, DE
|
44
Aasha Hospitality Associates, LLC
|
1,000 | - | 10 | % | November 1, 2009 * | |||||||||
|
Hilton
Garden Inn/Homewood Suites - Brooklyn, NY
|
167
Johnson Street, LLC
|
||||||||||||||
|
Tranche
1
|
- | 11,000 | 11 | % | |||||||||||
|
Tranche
2
|
- | 9,000 | 13.5 | % | |||||||||||
|
Discount
|
- | (1,533 | ) | ||||||||||||
|
Total
Hilton Garden Inn/Homewood Suites - Brooklyn, NY
|
- | 18,467 | |||||||||||||
|
Total
Development Loans Receivable
|
$ | 81,500 | $ | 58,183 | |||||||||||
*
Indicates borrower is a related party
**
Represents current maturity date in effect. Agreements for our
development loans receivable typically allow for two one-year extensions which
can be exercised by the borrower if the loan is not in default,
We
monitor our portfolio of development loans on an on-going basis to determine
collectability of the loan principal and accrued interest. As part of
our review we determined that the developer of the Hilton Garden Inn/Homewood
Suites – Brooklyn, NY has failed to make payments to the senior lender on the
property’s first mortgage. After discussions with the developer
and the senior lender, we have determined that the fair value of the loan
receivable and discount is $0 as of December 31, 2008. As a
result, we incurred an impairment charge for the remaining principal of $18,748,
which is net of unamortized discount in the amount of $1,252. A
receivable for uncollected interest income of $569, which is net of unrecognized
deferred loan fees of $143, was also recorded as an impairment
charge.
Advances
and repayments on our development loans receivable consisted of the following
for the years ended December 31, 2008, 2007, and 2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Balance
at January 1,
|
$ | 58,183 | $ | 47,016 | $ | 32,450 | ||||||
|
New
Advances
|
64,200 | 65,700 | 51,616 | |||||||||
|
Repayments
|
(22,416 | ) | (53,000 | ) | (37,050 | ) | ||||||
|
Discount
recorded
|
- | (1,687 | ) | - | ||||||||
|
Amortization
of discount
|
281 | 154 | - | |||||||||
|
Impairment
of Development Loan Receivable, net of discount
|
(18,748 | ) | - | - | ||||||||
|
Balance
at December 31,
|
$ | 81,500 | $ | 58,183 | $ | 47,016 | ||||||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 - DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES (continued)
We
acquire land and improvements and lease them to entities, including entities in
which our executive officers and affiliated trustees own an interest, to enable
such entities to construct hotels and related improvements on the leased
land. The land is leased under fixed lease agreements which earn
rents at a minimum rental rate of 10% of our net investment in the leased
property. Additional rents are paid by the lessee for the interest on the
mortgage, real estate taxes and insurance. Revenues from our land leases are
recorded in land lease revenue on our consolidated statement of
operations. All expenses related to the land leases are recorded in
operating expenses as land lease expense. Leased land and
improvements are included in investment in hotel properties on our consolidated
balance sheet. As of December 31, 2008 and 2007 our investment in
leased land and improvements consists of the following:
|
Investment In Leased
Properties
|
|||||||||||||||||||||||||||
|
Location
|
Land
|
Improvements
|
Other
|
Total Investment
|
Debt
|
Net Investment
|
Acquisition/ Lease Date
|
Lessee
|
|||||||||||||||||||
|
440
West 41st Street, New
York, NY
|
$ | 10,735 | $ | 11,051 | $ | 196 | $ | 21,982 | $ | 12,100 | $ | 9,882 |
7/28/2006
|
Metro
Forty First Street, LLC
|
|||||||||||||
|
39th
Street and 8th Avenue, New
York, NY
|
21,774 | - | 541 | 22,315 | 13,250 | 9,065 |
6/28/2006
|
Metro
39th Street Associates, LLC
|
|||||||||||||||||||
|
Nevins
Street, Brooklyn,
NY
|
10,650 | - | 269 | 10,919 | 6,500 | 4,419 |
6/11/2007
& 7/11/2007
|
H Nevins Street Associates, LLC * | |||||||||||||||||||
|
Total
|
$ | 43,159 | $ | 11,051 | $ | 1,006 | $ | 55,216 | $ | 31,850 | $ | 23,366 | |||||||||||||||
*
Indicates lessee is a related party
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE 5 — OTHER ASSETS
Other
Assets consisted of the following at December 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Transaction
Costs
|
$ | 237 | $ | 209 | ||||
|
Investment
in Statutory Trusts
|
1,548 | 1,548 | ||||||
|
Notes
Receivable
|
1,267 | 2,581 | ||||||
|
Due
from Lessees
|
1,907 | 1,986 | ||||||
|
Prepaid
Expenses
|
3,182 | 3,402 | ||||||
|
Interest
due on Development Loans to Non-Related Parties
|
2,024 | 1,456 | ||||||
|
Deposits
on Property Improvement Plans
|
149 | 640 | ||||||
|
Hotel
Purchase Option
|
933 | 2,620 | ||||||
|
Other
|
2,270 | 1,591 | ||||||
| $ | 13,517 | $ | 16,033 | |||||
Transaction Costs -
Transaction costs include legal fees and other third party transaction costs
incurred relative to entering into debt facilities, issuances of equity
securities or acquiring interests in hotel properties are recorded in other
assets prior to the closing of the respective transactions.
Investment in Statutory
Trusts - We have an investment in the common stock of Hersha Statutory
Trust I and Hersha Statutory Trust II. Our investment is accounted for under the
equity method.
Notes Receivable – Notes
receivable as of December 31, 2007 includes a loan made to one of our
unconsolidated joint venture partners in the amount of $1,120 bearing interest
at 13.5% with a maturity date of December 27, 2008. Notes receivable
as of December 31, 2007 also included $1,350 extended in November and December
2006 to the purchaser of the Holiday Inn Express, Duluth, GA; Comfort Suites,
Duluth, GA; Hampton Inn, Newnan, GA; and the Hampton Inn Peachtree City, GA
(collectively the “Atlanta Portfolio”). The Atlanta Portfolio notes
receivables were repaid in September 2008. Notes receivable as of
December 31, 2008 includes a loan made to one of our unconsolidated joint
venture partners in the amount of $1,267 bearing interest at 11% with a maturity
date of December 31, 2009.
Due from Lessees - Due from lessees represent
rents due under our land lease and hotel lease agreements.
Prepaid Expense - Prepaid expenses include
amounts paid for property tax, insurance and other expenditures that will be
expensed in the next twelve months.
Interest due on Development Loans
– Interest due
on development loans represents interest income due from loans extended to
non-related
parties that are used to enable such entities to construct hotels and
conduct related improvements on specific hotel projects. This excludes
interest due on development loans from loans extended to related parties in the
amounts of $761 and $135, as of December 31, 2008 and 2007, respectively, which
is included in the Due from Related Parties caption on the face of the
consolidated balance sheets.
Deposits on Property Improvement
Plans – Deposits
on property improvement plans consists of amounts advanced to HHMLP that is to
be used to fund capital expenditures as part of our property improvement
programs at certain properties.
Hotel Purchase Option – We have options to acquire
interests in two hotel properties at fixed purchase prices. An option
valued at $1,687 is for the development property related to the impaired
development loan receivable noted in Footnote 4. We determined that
the fair value of this option as of December 31, 2008 is $0. Therefore,
we recorded an impairment charge for the option value of $1,687, which is
included in Impairment of Development Loan Receivable and Other Asset on the
Company’s consolidated statements of operations.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 - DEBT
Mortgages and Notes
Payable
The total
mortgages payable balance at December 31, 2008, and December 31, 2007, was
$603,538 and $567,507, respectively, and consisted of mortgages with fixed and
variable interest rates ranging from 4.0% to 8.94%. The maturities for the
outstanding mortgages ranged from July 2009 to January 2032. Aggregate interest
expense incurred under the mortgages payable totaled $34,855, $33,767 and
$20,579 during 2008, 2007 and 2006, respectively. The mortgages are secured by
first deeds of trust on various hotel properties with a combined net book value
of $919,815 and $829,008 as of December 31, 2008, and 2007,
respectively. Our indebtedness contains various financial and
non-financial event of default covenants customarily found in financing
arrangements. Our mortgages payable typically require that specified
debt service coverage ratios be maintained with respect to the financed
properties before we can exercise certain rights under the loan agreements
relating to such properties. If the specified criteria are not
satisfied, the lender may be able to escrow cash flow. As of December
31, 2008 we were in compliance with all event of default covenants under the
applicable loan agreement.
We have
two junior subordinated notes payable in the aggregate amount of $51,548 to the
Hersha Statutory Trusts pursuant to indenture agreements. The $25,774 note
issued to Hersha Statutory Trust I will mature on June 30, 2035, but may be
redeemed at our option, in whole or in part, beginning on June 30, 2010 in
accordance with the provisions of the indenture agreement. The $25,774 note
issued to Hersha Statutory Trust II will mature on July 30, 2035, but may be
redeemed at our option, in whole or in part, beginning on July 30, 2010 in
accordance with the provisions of the indenture agreement. The note issued to
Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum
through June 30, 2010, and the note issued to Hersha Statutory Trust II bears
interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent
to June 30, 2010 for notes issued to Hersha Statutory Trust I and July 30, 2010
for notes issued to Hersha Statutory Trust II, the notes bear interest at a
variable rate of LIBOR plus 3.0% per annum. Interest expense in
amount of $3,729, $3,793, and $3,766 was recorded during the years ended
December 31, 2008, 2007, and 2006, respectively.
As part
of the acquisition of the Hyatt Summerfield Suites Portfolio, HHLP entered into
a management agreement with Lodgeworks, L.P.
(“Lodgeworks”). Lodgeworks extended an interest-free loan to HHLP for
working capital contributions that are due at either the termination or
expiration of the management agreement. Because the interest rate on
the note payable is below the market rate of interest at the date of the
acquisition, a discount was recorded on the note payable. The
discount reduced the principal balances recorded in the mortgages and notes
payable and is being amortized over the remaining life of the loan and is
recorded as interest expense. The balance of the note payable, net of
unamortized discount, was $274 as of December 31, 2008 and $253 as of December
31, 2007.
Aggregate
annual principal payments for the Company’s mortgages and notes payable for the
five years following December 31, 2008 and thereafter are as
follows:
|
Year Ending December 31,
|
Amount
|
|||
|
2009
|
72,196 | |||
|
2010
|
21,833 | |||
|
2011
|
41,587 | |||
|
2012
|
11,938 | |||
|
2013
|
25,265 | |||
|
Thereafter
|
482,602 | |||
|
Unamortized
Discount
|
(61 | ) | ||
| $ | 655,360 | |||
The loan
agreements for two debt obligations totaling $34,100, which mature during the
next twelve months, contain extension options that can be exercised at our
discretion, effectively extending the maturity of $12,100 to 2011 and extending
the maturity of $22,000 to 2012. As of December 31, 2008, mortgages
and notes payable and borrowings under our line of credit had a carrying value
of $743,842, which exceeded the fair value by approximately $48,511 due to an
increase in market borrowing rates.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 – DEBT (continued)
Revolving Line of
Credit
On
October 14, 2008, we entered into a Revolving Credit Loan and Security Agreement
with T.D. Bank, NA and various other lenders. The credit
agreement provides for a revolving line of credit in the principal amount of up
to $175,000, including a sub-limit of $25,000 for irrevocable stand-by letters
of credit. The existing bank group has committed $135,000, and the credit
agreement is structured to allow for an increase of an additional $40,000 under
the line of credit, provided that additional collateral is
supplied.
On
October 14, 2008, our previous line of credit was terminated and replaced by the
new line of credit and as a result all amounts outstanding under our previous
credit facility were repaid with borrowings from our new credit facility.
Additional borrowings under the line of credit provided by T.D. Bank, NA may be
used for working capital and general corporate purposes, including payment of
distributions or dividends and for the future purchase of additional
hotels. The line of credit expires on December 31, 2011, and,
provided no event of default has occurred and remains uncured, we may request
that T.D. Bank, NA and the other lenders renew the line of credit for an
additional one-year period.
At HHLP’s
option, the interest rate on the line of credit is either (i) the Wall Street
Journal variable prime rate per annum or (ii) LIBOR available for the periods of
1, 2, 3, or 6 months plus two and one half percent (2.5%) per
annum. Our interest rate swap agreement entered into on February 1,
2008 which fixed the interest rate on a $40,000 portion of our existing line of
credit remains in place. See Note 8 for more information on this
interest rate swap.
The line
of credit is collateralized by a first lien-security interest in all existing
and future assets of HHLP, a collateral assignment of all hotel management
contracts of the management companies in the event of default, and
title-insured, first-lien mortgages on the following properties:
|
-
Fairfield Inn, Laurel, MD
|
-
Holiday Inn Express, Hershey, PA
|
|
|
-
Hampton Inn, Danville, PA
|
-
Holiday Inn Express, New Columbia, PA
|
|
|
-
Hampton Inn, Philadelphia, PA
|
-
Mainstay Suites and Sleep Inn, King of Prussia, PA
|
|
|
-
Holiday Inn, Norwich, CT
|
-
Residence Inn, Langhorne, PA
|
|
|
-
Holiday Inn Express, Camp Springs, MD
|
-
Residence Inn, Norwood, MA
|
|
|
-
Holiday Inn Express and Suites, Harrisburg, PA
|
-
Sheraton Hotel, JFK Airport, New York,
NY
|
The
credit agreement providing for the line of credit includes certain financial
covenants and requires that we maintain (1) a minimum tangible net worth of
$300,000; (2) a maximum accounts and other receivables from affiliates of
$125,000; (3) annual distributions not to exceed 95% of adjusted funds from
operations; (4) maximum variable rate indebtedness to total debt of 30%; and (5)
certain financial ratios, including the following:
|
·
|
a
debt service coverage ratio of not less than 1.35 to
1.00;
|
|
·
|
a
total funded liabilities to gross asset value ratio of not more than 0.67
to 1.00; and
|
|
·
|
a
EBITDA to debt service ratio of not less than 1.40 to
1.00;
|
The
Company maintained a line of credit balance of $88,421 at December 31, 2008 and
$43,700 at December 31, 2007. The Company recorded interest expense of $3,094,
$4,239 and $2,134 related to the line of credit borrowings, for the years ended
December 31, 2008, 2007, and 2006, respectively. The weighted average interest
rate on our Line of Credit during the years ended December 31, 2008, 2007, and
2006 was 5.07%, 7.30%, and 7.33%, respectively. As of December 31,
2008 our remaining borrowing capacity under the Line of Credit was
$42,143.
Capitalized
Interest
We
utilize mortgage debt and our revolving line of credit to finance on-going
capital improvement projects at our properties. Interest incurred on
mortgages and the revolving line of credit that relates to our capital
improvement projects is capitalized through the date when the assets are placed
in service. For the years ended December 31, 2008 and 2007, we
capitalized $544 and $389, respectively, of interest expense related to
these projects.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 – DEBT (continued)
Deferred
Costs
Costs
associated with entering into mortgages and notes payable and our revolving line
of credit are deferred and amortized over the life of the debt instruments.
Amortization of deferred costs is recorded in interest expense. As of December
31, 2008, deferred costs were $9,157, net of accumulated amortization of $3,606.
Deferred costs were $8,048, net of accumulated amortization of $3,252, as
of December 31, 2007. Amortization of deferred costs for the years ended
December 31, 2008, 2007, and 2006 was $2,030, $1,724 and $944,
respectively.
Debt
Extinguishment
On July 1, 2008, we settled on the
defeasance of loans associated with four of our properties. These
mortgage loans had an aggregate outstanding principal balance of approximately
$11,028 as of June 30, 2008. As a result of
this extinguishment, we expensed $1,399 in unamortized deferred costs and
defeasance premiums for three of the four properties, which are included in the
Debt Extinguishment caption on the consolidated statements of operations for the
year ended December 31, 2008 and now serve as collateral
for our revolving credit facility entered into on October 14, 2008. The fourth property, the
Holiday Inn Conference Center, New Cumberland, PA was sold
on October 30,
2008 and $19 in
unamortized deferred costs expensed as a result of the debt extinguishment is
included in the Income (Loss) from Discontinued Operations caption on the
consolidated statements of operations for the year ended December 31, 2008.
On September 30,
2008, we repaid
$8,188 on our mortgage with M&T Bank for the Holiday Inn Express,
Cambridge property as a result of debt
refinancing. The new debt of $11,000 has a fixed interest rate of
6.625% and a maturity date of September 30,
2023. As a result of
this extinguishment, we expensed $17 in unamortized deferred costs, which are
included in the Loss on Debt Extinguishment caption on the consolidated
statements of operations for the year ended December 31, 2008.
On
October 14, 2008, we replaced our previous line of credit with Commerce Bank and
various other lenders with a new credit facility with T.D. Bank, NA and various
other lenders. As a result of the termination of the existing line of
credit, we expensed $152 in unamortized deferred costs related to the
origination of the original Commerce Bank Line of Credit, which are included in
the Loss on Debt Extinguishment caption on the consolidated statements of
operations for the year ended December 31, 2008.
In
January 2006, we replaced our line of credit with Sovereign Bank and various
other lenders with a line of credit with Commerce Bank and various other
lenders. As a result of this termination, we expensed $255 in unamortized
deferred costs related to the origination of the Sovereign Bank line of credit,
which are included in the Loss on Debt Extinguishment caption on the
consolidated statements of operations for the year ended December 31,
2006.
On April
7, 2006, we repaid $21,900 on our mortgage with Merrill Lynch for the
Hampton Inn Herald Square property as a result of a debt refinancing. The new
debt of $26,500 has a fixed interest rate of 6.085% and a maturity date of May
1, 2016. As a result of this extinguishment, we expensed $534 in unamortized
deferred costs and prepayment penalties, which are included in the Loss on Debt
Extinguishment caption on the consolidated statements of operations for the year
ended December 31, 2006.
On June
9, 2006, we repaid $34,200 on our mortgage with UBS for the McIntosh Portfolio,
as a result of a debt refinancing. The new debt of $36,300 has a fixed interest
rate of 6.33% and maturity date of June 11, 2016 for each of the loans
associated with the McIntosh Portfolio. As a result of this extinguishment, we
expensed $374 in unamortized deferred costs, which are included in the Loss on
Debt Extinguishment caption on the consolidated statements of operations for the
year ended December 31, 2006.
On
September 9, 2006, we repaid $8,287 on our mortgage with South New Hampshire
Bank for the Residence Inn, Norwood, using proceeds from a draw on our line of
credit with Commerce Bank. In connection with the mortgage assumption, the
seller agreed to reimburse all pre-payment related fees associated with this
payoff.
On December 27, 2006, we repaid $12,907 on our
mortgage with GE Capital for the Hilton Garden Inn, JFK, NY property as a result of a
debt payoff. The new debt of $21,000 was acquired on March 7, 2007 and has a fixed interest
rate of 5.82% and a maturity date of March 1, 2017. As a result of
this extinguishment, we expensed $322 in prepayment penalties, which are
included in the Loss on Debt Extinguishment caption on the consolidated
statements of operations for the year ended December 31, 2006.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
We are
the sole general partner in our operating partnership subsidiary, HHLP, which is
indirectly the sole general partner of the subsidiary partnerships. At December
31, 2008, there were 8,746,300 non-controlling OP Units outstanding with a fair
market value of $26,239, based on the price per share of our common shares on
the New York Stock Exchange on such date. These units are redeemable
by the unitholders for cash or, at our option, common shares on a one-for-one
basis.
Management
Agreements
Our
wholly owned TRS, 44 New England, engages eligible independent contractors
pursuant to REIT qualifications, including HHMLP, as the property managers for
hotels it leases from us pursuant to management agreements. Our management
agreements with HHMLP provide for five-year terms and are subject to early
termination upon the occurrence of defaults and certain other events described
therein. As required under the REIT qualification rules, HHMLP must qualify as
an “eligible independent contractor” during the term of the management
agreements. Under the management agreements, HHMLP generally pays the operating
expenses of our hotels. All operating expenses or other expenses incurred by
HHMLP in performing its authorized duties are reimbursed or borne by our TRS to
the extent the operating expenses or other expenses are incurred within the
limits of the applicable approved hotel operating budget. HHMLP is not obligated
to advance any of its own funds for operating expenses of a hotel or to incur
any liability in connection with operating a hotel. Management
agreements with other unaffiliated hotel management companies have similar
terms.
For its
services, HHMLP receives a base management fee, and if a hotel exceeds certain
thresholds, an incentive management fee. The base management fee for a hotel is
due monthly and is equal to 3% of gross revenues associated with each hotel
managed for the related month. The incentive management fee, if any, for a hotel
is due annually in arrears on the ninetieth day following the end of each fiscal
year and is based upon the financial performance of the
hotels. For the years ended December 31, 2008, 2007 and 2006,
base management fees incurred totaled $6,136, $5,571 and $4,361, respectively
and are recorded as Hotel Operating Expenses. For the years ended
December 31, 2008, 2007 and 2006, incentive management fees of $363, $0, and $0,
respectively were recorded as Hotel Operating Expenses.
Franchise
Agreements
Our
branded hotel properties are operated under franchise agreements assumed by the
hotel property lessee. The franchise agreements have 10 to 20 year terms but may
be terminated by either the franchisee or franchisor on certain anniversary
dates specified in the agreements. The franchise agreements require annual
payments for franchise royalties, reservation, and advertising services, and
such payments are based upon percentages of gross room revenue. These payments
are paid by the hotels and charged to expense as incurred. Franchise
fee expense for the years ended December 31, 2008, 2007, and 2006 was $17,041,
$16,333 and $9,773 respectively. The initial fees incurred to enter
into the franchise agreements are amortized over the life of the franchise
agreements.
Administrative Services
Agreement
Each of
the wholly owned hotels and consolidated joint venture hotel properties managed
by HHMLP incurs a monthly accounting and information technology
fee. Monthly fees for accounting services are $2 per property
and monthly information technology fees are $0.5 per property. In addition, each
of the wholly owned hotels not managed by HHMLP, but for which the accounting is
provided by HHMLP incurs a monthly accounting fee of $3. For
the years ended December 31, 2008, 2007 and 2006, the Company incurred
accounting fees of $1,426, $1,408 and $1,053, respectively. For the
years ended December 31, 2008, 2007 and 2006, the Company incurred information
technology fees of $316, $276 and $251, respectively. Administrative services
fees, accounting fees, and information technology fees are included in General
and Administrative expenses.
Capital Expenditure
Fees
Beginning
April 1, 2006, HHMLP began to charge a 5% fee on all capital expenditures and
pending renovation projects at the properties as compensation for procurement
services related to capital expenditures and for project management of
renovation projects. For the years ended December 31, 2008, 2007 and
2006, we incurred fees of $271, $292, and $155, respectively, which
were capitalized in with the cost of fixed asset additions.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(continued)
Acquisitions from
Affiliates
We have
entered into an option agreement with each of our officers and affiliated
trustees such that we obtain a right of first refusal to purchase any hotel
owned or developed in the future by these individuals or entities controlled by
them at fair market value. This right of first refusal would apply to each party
until one year after such party ceases to be an officer or trustee of our
Company. Our Acquisition Committee of the Board of Trustees is comprised solely
of independent trustees, and the purchase prices and all material terms of the
purchase of hotels from related parties are approved by the Acquisition
Committee.
Hotel
Supplies
For the
years ended December 31, 2008, 2007 and 2006, we incurred expenses of $1,588,
$2,113 and $1,686, respectively, for hotel supplies from Hersha Hotel Supply, an
unconsolidated related party, which are expenses included in Hotel Operating
Expenses. Approximately $39 and $149 is included in accounts payable at December
31, 2008 and 2007.
Due From Related
Parties
The Due
from Related Party balance as of December 31, 2008 and December 31, 2007 was
approximately $4,645 and $1,256, respectively. The balances primarily consisted
of accrued interest due on our development loans, and the remaining due from
related party balance are receivables owed from our unconsolidated joint
ventures.
Due to Related
Parties
The Due
to Related Parties balance as of December 31, 2008 and December 31, 2007 was
approximately $1,352 and $2,025, respectively. The balances consisted of amounts
payable to HHMLP for administrative, management, and benefit related
fees.
Hotel Ground
Rent
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. On February 16, 2006, in conjunction with the
acquisition of the Hilton Garden Inn, JFK Airport, we assumed a land lease
with an original term of 99 years. Monthly payments are determined by
the lease agreement and are due through the expiration in July
2100. On June 13, 2008, in conjunction with the acquisition of the
Sheraton Hotel, JFK Airport, we assumed a land lease with an original term
of 99 years. Monthly payments are determined by the lease agreement
and are due through the expiration in November 2103. Each land leases
provide rent increases at scheduled intervals. We record rent expense on a
straight-line basis over the life of the lease from the beginning of the lease
term. For the years ended December 31, 2008, 2007 and 2006, we incurred $1,040,
$856, and $804 respectively, in hotel ground rent from continuing operations
under the agreements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(continued)
Future
minimum lease payments (without reflecting future applicable Consumer Price
Index increases) under these agreements are as follows:
|
Year Ending December 31,
|
Amount
|
|||
|
2009
|
$ | 891 | ||
|
2010
|
905 | |||
|
2011
|
935 | |||
|
2012
|
975 | |||
|
2013
|
981 | |||
|
Thereafter
|
93,160 | |||
| $ | 97,847 | |||
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.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value
Measurements
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”) which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value
measurements. SFAS No. 157 applies to reported balances that are
required or permitted to be measured at fair value under existing accounting
pronouncements; the standard does not require any new fair value measurements of
reported balances.
SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, SFAS No. 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
As of
December 31, 2008, the Company’s derivative instruments represented the only
financial instruments measured at fair value. Currently, the Company
uses derivative instruments, such as interest rate swaps and caps, to manage its interest
rate risk. The
valuation of these instruments is determined using widely accepted valuation
techniques, including discounted cash flow analysis on the expected cash flows
of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based
inputs.
To comply
with the provisions of SFAS No. 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, the Company has considered the impact of
netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads, to evaluate the likelihood of
default by itself and its counterparties. However, as of December 31,
2008, the Company has assessed the significance of the effect of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.
Derivative
Instruments
On
January 15, 2008, we entered into an interest rate swap agreement that fixes the
interest rate on the variable rate mortgage, bearing interest at one month U.S.
dollar LIBOR plus 2.0%, originated to finance the acquisition of the nu Hotel,
Brooklyn, NY. Under the terms of this interest rate swap, we pay
fixed rate interest of 3.245% on the $13,240 notional amount and we receive
floating rate interest equal to the one month U.S. dollar LIBOR, effectively
fixing our interest at a rate of 5.245%. On January 12, 2009, we
entered into a new interest rate swap agreement for this variable rate mortgage,
bearing interest at one month U.S. LIBOR plus 2.0%.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (continued)
Under the
terms of this interest rate swap, we pay fixed rate interest of 1.1925% up to a
$18,000 notional amount and we receive floating rate interest equal to the one
month U.S. LIBOR, effectively fixing our interest at a rate of
3.1925%. This interest rate swap matures on January 10,
2011.
On
February 1, 2008, we entered into an interest rate swap agreement that fixes the
interest rate on a $40,000 portion of our floating revolving credit facility
with Commerce Bank, which bears interest at one month U.S. dollar LIBOR plus
2.0%. Under the terms
of this interest rate swap, we pay fixed rate interest of 2.6275% on the $40,000
notional amount and we receive floating rate interest equal to the one month
U.S. dollar LIBOR, effectively fixing our interest on this portion of the line
of credit at a rate of 4.6275%. This interest rate swap agreement
matured on February 1, 2009, and we did not replace it with another
agreement.
On
December 31, 2008, we entered into an interest rate swap agreement that fixes
the interest rate on a variable rate mortgage, bearing interest at one month
U.S. dollar LIBOR plus 3.0%, originated upon the refinance of the debt
associated with the Hilton Garden Inn, Edison, NJ. Under the terms of
this interest rate swap, we pay fixed rate interest of 1.37% and we receive
floating rate interest equal to the one month U.S. dollar LIBOR, effectively
fixing our interest at a rate of 4.37%. The notional amount amortizes
in tandem with the amortization of the underlying hedged debt and is $7,300 as
of December 31, 2008.
We
maintain an interest rate cap that effectively fixes interest payments when
LIBOR exceeds 5.75% on our debt financing Hotel 373, New York,
NY. The notional amount of the interest rate cap is $22,000 and
equals the principal of the variable interest rate debt being
hedged.
We
maintain an interest rate swap that fixes our interest rate on a variable rate
mortgage on the Sheraton Four Points, Revere, MA. Under the terms of
this interest rate swap, we pay fixed rate interest of 4.73% of the notional
amount and we receive floating rate interest equal to the one month U.S. dollar
LIBOR. The notional amount amortizes in tandem with the amortization
of the underlying hedged debt and is $7,619 as of December 31,
2008. We entered into this interest rate swap in July of 2004 and
designated it as a cash flow hedge in November of 2004 when the fair value of
the swap was a liability of $342, causing ineffectiveness in the hedge
relationship. Prior to January 1, 2008, the hedge relationship was
deemed to be effective and the change in fair value related to the effective
portion of the interest rate swap was recorded in Accumulated Other
Comprehensive Income on the Balance Sheet. Subsequent to January 1,
2008, the hedge relationship was no longer deemed to be effective. The
change in fair value of this interest rate swap for the year ended December
31, 2008 was a loss of $52 and was recorded in Interest Expense on the Statement
of Operations.
At
December 31, 2008 and December 31, 2007, the fair value of the interest rate
swaps and cap were:
|
Date of Transaction
|
Hedged Debt
|
Type
|
Maturity Date
|
December 31, 2008
|
December 31, 2007
|
|||||||||
|
July
2, 2004
|
Variable
Rate Mortgage - Sheraton Four Points, Revere, MA
|
Swap
|
July
23, 2009
|
$ | (172 | ) | $ | (120 | ) | |||||
|
July
1, 2007
|
Variable
Rate Mortgage - Hotel 373, New York, NY
|
Cap
|
April
9, 2009
|
- | 1 | |||||||||
|
January
15, 2008
|
Variable
Rate Mortgage - Nu Hotel, Brooklyn, NY
|
Swap
|
January
12, 2009
|
(6 | ) | - | ||||||||
|
February
1, 2008
|
Revolving
Variable Rate Credit Facility
|
Swap
|
February
1, 2009
|
(74 | ) | - | ||||||||
|
December
31, 2008
|
Variable
Rate Mortgage - Hilton Garden Inn, Edison, NJ
|
Swap
|
January
1, 2011
|
(25 | ) | |||||||||
| $ | (277 | ) | $ | (119 | ) | |||||||||
The fair
value of the derivative instrument is included in Accounts Payable, Accrued
Expenses and Other Liabilities at December 31, 2008 and December 31,
2007.
The
change in fair value of derivative instruments designated as cash flow hedges
was a loss of $86, $256, and $94 for the years ended December 31, 2008, 2007,
and 2006, respectively. These unrealized losses were reflected on our
Balance Sheet in Accumulated Other Comprehensive Income. Hedge ineffectiveness
of $1, $15, and $14 on cash flow hedges was recognized in interest expense for
the years ended December 31, 2008, 2007, and 2006, respectively.
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 $13 of net unrealized gains/losses
from accumulated other comprehensive income as a reduction to interest expense
during 2008. During 2009, the Company estimates that an additional $37 will be
reclassified as a reduction to interest expense.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
9 - SHARE-BASED PAYMENTS
In May
2008, the Company established the Hersha Hospitality Trust 2008 Equity Incentive
Plan (the “2008 Plan”) for the purpose of attracting and retaining executive
officers, employees, trustees and other persons and entities that provide
services to the Company. Prior to the 2008 Plan, the Company made awards
pursuant to the 2004 Equity Incentive Plan (the “2004 Plan”). Upon
approval of the 2008 Plan by the Company’s shareholders on May 22, 2008, the
Company terminated the 2004 Plan. Termination of the 2004 Plan did
not have any effect on equity awards and grants previously made under that
plan.
Executives
Compensation
expense related to restricted stock awards issued to executives of the Company
of $1,411, $766 and $293 was incurred during the years ended December 31, 2008,
2007 and 2006, respectively, related to the restricted share awards and is
recorded in general and administrative expense on the statement of operations.
Unearned compensation as of December 31, 2008 and 2007 was $4,118 and $3,008,
respectively. The following table is a summary of all of the grants
issued to executives under the 2004 and 2008 Plans:
|
Shares
Vested
|
Unearned
Compensation
|
||||||||||||||||||||||||||
|
December 31,
|
December 31,
|
||||||||||||||||||||||||||
|
Original Issuance Date
|
Shares Issued
|
Share Price on date of
grant
|
Vesting Period
|
Vesting Schedule
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||
|
June
1, 2005
|
71,000 | $ | 9.60 |
4
years
|
25%/year
|
53,250 | 35,500 | $ | 71 | $ | 242 | ||||||||||||||||
|
June
1, 2006
|
89,500 | $ | 9.40 |
4
years
|
25%/year
|
44,750 | 22,375 | 298 | 508 | ||||||||||||||||||
|
June
1, 2007
|
214,582 | $ | 12.32 |
4
years
|
25%/year
|
53,645 | - | 1,597 | 2,258 | ||||||||||||||||||
|
June
2, 2008
|
278,059 | $ | 8.97 |
4
years
|
25%/year
|
- | - | 2,130 | - | ||||||||||||||||||
|
September
30, 2008
|
3,616 | $ | 7.44 |
1-4
years
|
25-100%/year
|
- | - | 22 | - | ||||||||||||||||||
| 656,757 | 151,645 | 57,875 | $ | 4,118 | $ | 3,008 | |||||||||||||||||||||
Trustees
Compensation
expense related to stock awards issued to the Board of Trustees of $91, $86, and
$45 was incurred during the years ended December 31, 2008, 2007, and
2006. All shares issued to the Board of Trustees are
immediately vested. The following table is a summary of all of the
grants issued to trustees under the 2004 and 2008 Plans:
|
Date of Award Issuance
|
Shares Issued
|
Share Price on date of
grant
|
||||||
|
March
1, 2005
|
2,095 | $ | 11.97 | |||||
|
January
3, 2006
|
5,000 | 9.12 | ||||||
|
January
2, 2007
|
4,000 | 11.44 | ||||||
|
July
2, 2007
|
4,000 | 12.12 | ||||||
|
January
2, 2008
|
4,000 | 9.33 | ||||||
|
June
2, 2008
|
6,000 | 8.97 | ||||||
|
January
2, 2009
|
12,500 | 2.96 | ||||||
| 37,595 | ||||||||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 - EARNINGS PER SHARE
The
following table 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. The computation of basic and diluted earnings per share
is presented below.
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Numerator:
|
||||||||||||
|
BASIC
|
||||||||||||
|
(Loss)
income from Continuing Operations
|
$ | (11,240 | ) | $ | 13,737 | $ | 4,119 | |||||
|
Dividends
paid on unvested restricted shares
|
(329 | ) | (197 | ) | (95 | ) | ||||||
|
Distributions
to 8.0% Series A Preferred Shareholders
|
(4,800 | ) | (4,800 | ) | (4,800 | ) | ||||||
|
(Loss)
income from continuing operations applicable to common
shareholders
|
(16,369 | ) | 8,740 | (776 | ) | |||||||
|
Income
from Discontinued Operations
|
2,432 | 4,110 | 979 | |||||||||
|
Net
(Loss) income applicable to common shareholders
|
$ | (13,937 | ) | $ | 12,850 | $ | 203 | |||||
|
DILUTED*
|
||||||||||||
|
(Loss)
income from Continuing Operations
|
$ | (11,240 | ) | $ | 13,737 | $ | 4,119 | |||||
|
Dividends
paid on unvested restricted shares
|
(329 | ) | (197 | ) | (95 | ) | ||||||
|
Distributions
to 8.0% Series A Preferred Shareholders
|
(4,800 | ) | (4,800 | ) | (4,800 | ) | ||||||
|
(Loss)
income from continuing operations applicable to common
shareholders
|
(16,369 | ) | 8,740 | (776 | ) | |||||||
|
Income
from Discontinued Operations
|
2,432 | 4,110 | 979 | |||||||||
|
Net
(Loss) income applicable to common shareholders
|
$ | (13,937 | ) | $ | 12,850 | $ | 203 | |||||
|
Denominator:
|
||||||||||||
|
Weighted
average number of common shares - basic
|
45,184,127 | 40,718,724 | 27,118,264 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Unvested
stock awards
|
- | ** | - | ** | - | ** | ||||||
|
Weighted
average number of
common
shares - diluted*
|
45,184,127 | 40,718,724 | 27,118,264 | |||||||||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 - EARNINGS PER SHARE (continued)
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Earnings Per Share:
|
||||||||||||
|
BASIC
|
||||||||||||
|
(Loss)
income from continuing operations applicable to common
shareholders
|
$ | (0.36 | ) | $ | 0.22 | $ | (0.03 | ) | ||||
|
Income
from Discontinued Operations
|
$ | 0.05 | $ | 0.10 | $ | 0.04 | ||||||
|
Net
(loss) income applicable to common shareholders
|
$ | (0.31 | ) | $ | 0.32 | $ | 0.01 | |||||
|
DILUTED*
|
||||||||||||
|
(Loss)
income from continuing operations applicable to common
shareholders
|
$ | (0.36 | ) | $ | 0.22 | $ | (0.03 | ) | ||||
|
Income
from Discontinued Operations
|
$ | 0.05 | $ | 0.10 | $ | 0.04 | ||||||
|
Net
(loss) income applicable to common shareholders
|
$ | (0.31 | ) | $ | 0.32 | $ | 0.01 | |||||
* Income
allocated to minority interest in the Partnership has been excluded from the
numerator and OP Units have been omitted from the denominator for the purpose of
computing diluted earnings per share since the effect of including these amounts
in the numerator and denominator would have no impact. Weighted average OP Units
outstanding for years ended December 31, 2008, 2007 and 2006 were 8,034,737,
5,464,670 and 3,554,361, respectively.
**
Unvested stock awards have been omitted from the denominator for the purpose of
computing diluted earnings per share for the years ended December 31, 2008, 2007
and 2006 since the effect of including these awards in the denominator would be
anti-dilutive to income from continuing operations applicable to common
shareholders.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
11 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
Interest
paid in 2008, 2007 and 2006 totaled $41,797, $40,594, and $25,349, respectively.
The following non-cash investing and financing activities occurred during 2008,
2007 and 2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Common
Shares issued as part of the Dividend Reinvestment Plan
|
$ | 31 | $ | 30 | $ | 29 | ||||||
|
Issuance
of Common Shares to the Board of Trustees
|
91 | 95 | 46 | |||||||||
|
Issuance
of OP Units for acquisitions of hotel properties
|
21,624 | 25,781 | 9,940 | |||||||||
|
Debt
assumed in acquisition of hotel properties
|
30,790 | 70,564 | 101,900 | |||||||||
|
Issuance
of OP Units for acquisition of unconsolidated joint
venture
|
- | 6,817 | - | |||||||||
|
Issuance
of OP Units for acquisition of option to acquire interest in hotel
property
|
- | 933 | - | |||||||||
|
Conversion
of OP Units to Common Shares
|
1,372 | 2,369 | 650 | |||||||||
|
Reallocation
to minority interest
|
1,966 | 12,422 | 3,467 | |||||||||
|
Issuance
of notes receivable in disposition of hotel properties held for
sale
|
- | - | 1,350 | |||||||||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
12 - DISCONTINUED OPERATIONS
We follow
the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which requires, among other things, that the operating
results of certain real estate assets which have been sold, 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.
In
September of 2005, our Board of Trustees authorized management of the Company to
sell the Holiday Inn Express, Hartford, CT. The operating results for this hotel
were reclassified to discontinued operations in the statements of operations in
the statements of operations for the year ended December 31, 2006. The hotel was
acquired by the Company in January 2004 and was sold on April 12, 2006. Proceeds
from the sale were $3,600, and the gain on the sale was $497, of which $61 was
allocated to minority interest in HHLP. 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 were due through the expiration in September
2101. Subsequent to the sale of this property in the second quarter of 2006, we
did not incur further lease expense. For the year ended December 31,
2006, we incurred $85 in hotel ground rent under this agreement, which have been
reclassified to discontinued operations in the statement of
operations. The lease was assumed by the purchaser of this
property.
In March
of 2006, our Board of Trustees authorized management of the Company to sell four
properties located in metropolitan Atlanta, Georgia. These four properties are
the Holiday Inn Express, Duluth, Comfort Suites, Duluth, Hampton Inn, Newnan and
the Hampton Inn Peachtree City. The operating results
for these hotels were reclassified to discontinued operations in the statements
of operations for the year ended December 31, 2006. These hotels were
acquired by the Company in April and May 2000 and were sold during November and
December 2006. Proceeds from the sales were $18,100, and the gain on
the sale was $290, of which $33 was allocated to minority interest in HHLP.
Notes receivable in the aggregate amount of $1,350 were received as part of the
proceeds of the sale of the Atlanta Portfolio and were repaid in September
2008.
In
September of 2007, our Board of Trustees authorized management of the Company to
sell the Hampton Inn, Linden, NJ (Hampton Inn) and Fairfield Inn, Mt. Laurel, NJ
(Fairfield Inn). The Company acquired the Hampton Inn in October 2003
and the Fairfield Inn in January 2006. The operating results
for these hotels have been reclassified to discontinued operations in the
statements of operations for the years ended December 31, 2007 and
2006. Proceeds from the sales were $29,500, and the gain on the sale
was $4,248, of which $503 was allocated to minority interest in
HHLP.
In
October 2008, the Company sold the Holiday Inn Conference Center,
New Cumberland, PA (Holiday Inn). Beginning on July 1, 2006, the
Company leased this hotel to an unrelated party and the lease agreement
contained a purchase provision by the lessee. Prior to July 1, 2006,
this hotel was leased to our wholly owned TRS and operating revenues and
expenses of the hotel were recorded in hotel operating revenues and hotel
operating expenses. The operating results for this hotel have been
reclassified to discontinued operations in the statements of operations for the
years ended December 31, 2008, 2007 and 2006. Proceeds from the sale
of this property were $6,456 and the gain on this sale was $2,888, of which $436
was allocated to minority interest in HHLP.
We
allocate interest and capital lease 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 $145, $1,276 and $2,215 of interest and
capital lease expense to discontinued operations for the years ended December
31, 2008, 2007, and 2006, respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
12 - DISCONTINUED OPERATIONS (continued)
The
following table sets forth the components of discontinued operations (excluding
the gains on sale) for the years ended December 31, 2008, 2007 and
2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Hotel
Operating Revenues
|
$ | - | $ | 6,685 | $ | 15,847 | ||||||
|
Hotel
Lease Revenue
|
628 | 781 | 391 | |||||||||
|
Total
Revenue
|
628 | 7,466 | 16,238 | |||||||||
|
Expenses:
|
||||||||||||
|
Interest
and Capital Lease Expense
|
145 | 1,276 | 2,215 | |||||||||
|
Hotel
Operating Expenses
|
- | 3,999 | 10,799 | |||||||||
|
Hotel
Ground Rent
|
- | - | 85 | |||||||||
|
Real
Estate and Personal Property Taxes and Property Insurance
|
65 | 510 | 966 | |||||||||
|
General
and Administrative
|
3 | - | - | |||||||||
|
Loss
on Debt Extinguishment
|
19 | - | - | |||||||||
|
Depreciation
and Amortization
|
420 | 1,267 | 1,850 | |||||||||
| 652 | 7,052 | 15,915 | ||||||||||
|
Total
Expenses
|
||||||||||||
|
Loss
(Income) from Discontinued Operations before Minority
Interest
|
(24 | ) | 414 | 323 | ||||||||
|
Allocation
to Minority Interest
|
4 | (49 | ) | (37 | ) | |||||||
|
(Loss)
Income from Discontinued Operations
|
$ | (20 | ) | $ | 365 | $ | 286 | |||||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
13 - SHAREHOLDERS’ EQUITY AND MINORITY INTEREST IN PARTNERSHIP
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.
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 additional 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.
Common Partnership
Units
Units of
interest in our limited partnership, or OP Units are issued in connection with
the acquisition of wholly owned hotels and joint venture interests in hotel
properties. The total number of OP Units outstanding as of December
31, 2008, 2007 and 2006 was 8,746,300; 6,424,915; and 3,835,586, respectively.
These units can be converted to common shares which are issuable to the limited
partners upon exercise of their redemption rights. 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. During 2008 and 2007, 175,843 and 306,460
common units were converted to Class A Common Shares, respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
14 - 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.
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 2008,
2007 and 2006, 44 New England Management Company generated net operating losses
(income) of $2,554, $707 and ($420), respectively. In 2008, 2007 and 2006,
Revere Hotel Group LLC generated net operating losses of $265, $313, $521,
respectively. The Company did not record an income tax expense (benefit)
for the net operating losses generated in 2008, 2007 or 2006.
There was
no income tax expense (benefit) recognized by the Consolidated TRS for 2008,
2007 and 2006.
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:
|
For the year ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Computed
"Expected" federal tax expense (benefit) of TRS, at 35%
|
$ | (1,251 | ) | $ | (270 | ) | $ | (451 | ) | |||
|
State
income taxes, net of federal income tax effect
|
(181 | ) | (66 | ) | (6 | ) | ||||||
|
Changes
in valuation allowance
|
1,432 | 336 | 457 | |||||||||
|
Total
income tax expense
|
$ | - | $ | - | $ | - | ||||||
The
components of consolidated TRS’s deferred tax assets as of December 31, 2008 and
2007 were as follows:
|
as of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforward
|
$ | 3,185 | $ | 1,743 | ||||
|
Depreciation
|
(29 | ) | (19 | ) | ||||
|
Net
deferred tax assets
|
3,156 | 1,724 | ||||||
|
Valuation
allowance
|
(3,156 | ) | (1,724 | ) | ||||
|
Deferred
tax assets
|
$ | - | $ | - | ||||
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 deferred tax assets at
December 31, 2008.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
14 - INCOME TAXES (continued)
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. The following table sets forth certain per share
information regarding the Company’s common and preferred share distributions for
the years ended December 31, 2008, 2007 and 2006.
|
2008
|
2007
|
2006
|
||||||||||
|
Preferred
Shares - 8% Series A
|
||||||||||||
|
Ordinary
income
|
86.46 | % | 81.98 | % | 83.05 | % | ||||||
|
Capital
Gain Distribution
|
13.54 | % | 18.02 | % | 16.95 | % | ||||||
|
Common
Shares - Class A
|
||||||||||||
|
Ordinary
income
|
44.61 | % | 48.25 | % | 28.27 | % | ||||||
|
Return
of Capital
|
48.40 | % | 41.14 | % | 65.85 | % | ||||||
|
Capital
Gain Distribution
|
6.99 | % | 10.61 | % | 5.88 | % | ||||||
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Year Ended December 31,
2008
|
||||||||||||||||
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|||||||||||||
|
Total
Revenues
|
$ | 55,607 | $ | 71,363 | $ | 75,933 | $ | 62,174 | ||||||||
|
Total
Expenses
|
58,642 | 62,757 | 69,855 | 86,599 | ||||||||||||
|
(Loss)
Income from Unconsolidated Joint Ventures
|
(738 | ) | 1,360 | 1,629 | (2,768 | ) | ||||||||||
|
(Loss)
Income before Minority Interests and Discontinued
Operations
|
(3,773 | ) | 9,966 | 7,707 | (27,193 | ) | ||||||||||
|
(Loss)
Income Allocated to Minority Holders in Continuing
Operations
|
(990 | ) | 1,738 | 1,417 | (4,218 | ) | ||||||||||
|
(Loss)
Income from Continuing Operations
|
(2,783 | ) | 8,228 | 6,290 | (22,975 | ) | ||||||||||
|
(Loss)
Income from Discontinued Operations (including Gain on Disposition of
Hotel Properties)
|
(96 | ) | (3 | ) | 45 | 2,486 | ||||||||||
|
Net
(Loss) Income
|
(2,879 | ) | 8,225 | 6,335 | (20,489 | ) | ||||||||||
|
Preferred
Distributions
|
1,200 | 1,200 | 1,200 | 1,200 | ||||||||||||
|
Net
(Loss) Income applicable to Common Shareholders
|
$ | (4,079 | ) | $ | 7,025 | $ | 5,135 | $ | (21,689 | ) | ||||||
|
Basic
and diluted earnings per share:
|
||||||||||||||||
|
(Loss)
Income from continuing operations applicable to common
shareholders
|
$ | (0.10 | ) | $ | 0.16 | $ | 0.11 | $ | (0.51 | ) | ||||||
|
Discontinued
Operations
|
- | - | - | 0.05 | ||||||||||||
|
Net
Loss (Income) applicable to Common Shareholders
|
$ | (0.10 | ) | $ | 0.16 | $ | 0.11 | $ | (0.46 | ) | ||||||
|
Weighted
Average Common Shares Outstanding
|
||||||||||||||||
|
Basic
|
40,891,140 | 44,253,641 | 47,764,168 | 47,770,780 | ||||||||||||
|
Diluted
|
40,891,140 | 44,253,641 | 47,764,168 | 47,770,780 | ||||||||||||
|
Year Ended December 31,
2007
|
||||||||||||||||
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|||||||||||||
|
Total
Revenues
|
$ | 47,466 | $ | 64,529 | $ | 68,712 | $ | 61,326 | ||||||||
|
Total
Expenses
|
51,687 | 57,414 | 60,658 | 60,240 | ||||||||||||
|
(Loss)
Income from Unconsolidated Joint Ventures
|
(838 | ) | 1,741 | 1,680 | 893 | |||||||||||
|
(Loss)
Income before Minority Interests and Discontinued
Operations
|
(5,059 | ) | 8,856 | 9,734 | 1,979 | |||||||||||
|
(Loss)
Income Allocated to Minority Holders in Continuing
Operations
|
(981 | ) | 1,164 | 1,376 | 214 | |||||||||||
|
(Loss)
Income from Continuing Operations
|
(4,078 | ) | 7,692 | 8,358 | 1,765 | |||||||||||
|
(Loss)
Income from Discontinued Operations (including Gain on Disposition of
Hotel Properties)
|
(160 | ) | 103 | 138 | 4,029 | |||||||||||
|
Net
(Loss) Income
|
(4,238 | ) | 7,795 | 8,496 | 5,794 | |||||||||||
|
Preferred
Distributions
|
1,200 | 1,200 | 1,200 | 1,200 | ||||||||||||
|
Net
(Loss) Income applicable to Common Shareholders
|
$ | (5,438 | ) | $ | 6,595 | $ | 7,296 | $ | 4,594 | |||||||
|
Basic
and diluted earnings per share:
|
||||||||||||||||
|
(Loss)
Income from continuing operations applicable to common
shareholders
|
$ | (0.13 | ) | $ | 0.16 | $ | 0.18 | $ | 0.01 | |||||||
|
Discontinued
Operations
|
- | - | - | 0.10 | ||||||||||||
|
Net
(Loss) Income applicable to Common Shareholders
|
$ | (0.13 | ) | $ | 0.16 | $ | 0.18 | $ | 0.11 | |||||||
|
Weighted
Average Common Shares Outstanding
|
||||||||||||||||
|
Basic
|
40,537,851 | 40,642,569 | 40,807,626 | 40,882,090 | ||||||||||||
|
Diluted
|
40,537,851 | 40,842,382 | 40,807,626 | 40,882,685 | ||||||||||||
SCHEDULE
III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31,
2008
[IN
THOUSANDS]
|
Initial
Costs
|
Costs
Capitalized Subsequent to Acquisition
|
Gross
Amounts at which Carrried at Close of Period
|
Accumulated
|
Net
Book Value
|
|||||||||||||||||||||||||||||||||||||
|
Depreciation
|
Land
|
||||||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances
|
Land
|
Buildings
& Improvements
|
Land
|
Buildings
& Improvements
|
Land
|
Buildings
& Improvements
|
Total
|
Buildings
& Improvements*
|
Buildings
& Improvements
|
Date
of Acquisition
|
||||||||||||||||||||||||||||||
|
Hampton
Inn, Carlisle, PA
|
$ | (3,477 | ) | $ | 300 | $ | 3,109 | $ | 200 | $ | 2,170 | $ | 500 | $ | 5,279 | $ | 5,779 | $ | (1,507 | ) | $ | 4,272 |
06/01/97
|
||||||||||||||||||
|
Holiday Inn Exp,
Hershey, PA
|
- | 426 | 2,645 | 410 | 3,429 | 836 | 6,074 | 6,910 | (1,726 | ) | 5,184 |
10/01/97
|
|||||||||||||||||||||||||||||
|
Holiday Inn Exp, New
Columbia, PA
|
- | 94 | 2,510 | 66 | 771 | 160 | 3,281 | 3,441 | (900 | ) | 2,541 |
12/01/97
|
|||||||||||||||||||||||||||||
|
Comfort
Inn, Harrisburg, PA
|
(2,113 | ) | - | 2,720 | 214 | 1,184 | 214 | 3,904 | 4,118 | (1,051 | ) | 3,067 |
05/15/98
|
||||||||||||||||||||||||||||
|
Hampton
Inn, Selinsgrove, PA
|
(2,905 | ) | 157 | 2,511 | 93 | 2,356 | 250 | 4,867 | 5,117 | (1,574 | ) | 3,543 |
09/12/96
|
||||||||||||||||||||||||||||
|
Hampton
Inn, Danville, PA
|
- | 300 | 2,787 | 99 | 1,170 | 399 | 3,957 | 4,356 | (1,066 | ) | 3,290 |
08/28/97
|
|||||||||||||||||||||||||||||
|
HIE
& Suites, Harrisburg, PA
|
213 | 1,934 | 81 | 1,083 | 294 | 3,017 | 3,311 | (790 | ) | 2,521 |
03/06/98
|
||||||||||||||||||||||||||||||
|
Hampton
Inn, Hershey, PA
|
(2,994 | ) | 807 | 5,714 | 4 | 1,365 | 811 | 7,079 | 7,890 | (1,592 | ) | 6,298 |
01/01/00
|
||||||||||||||||||||||||||||
|
Mainstay
Suites, Frederick, MD
|
(2,537 | ) | 262 | 1,049 | 171 | 2,989 | 433 | 4,038 | 4,471 | (712 | ) | 3,759 |
01/01/02
|
||||||||||||||||||||||||||||
|
Mainstay
Suites & Sleep
Inn, KOP, PA
|
1,133 | 7,294 | - | 323 | 1,133 | 7,617 | 8,750 | (1,433 | ) | 7,317 |
06/01/01
|
||||||||||||||||||||||||||||||
|
Hilton
Garden Inn, Edison, NJ
|
(7,300 | ) | - | 12,159 | - | 331 | - | 12,490 | 12,490 | (1,639 | ) | 10,851 |
10/01/04
|
||||||||||||||||||||||||||||
|
Sheraton
Four Points, Revere, MA
|
(8,148 | ) | 70 | 14,996 | - | 355 | 70 | 15,351 | 15,421 | (3,720 | ) | 11,701 |
02/23/04
|
||||||||||||||||||||||||||||
|
Residence
Inn, Framingham, MA
|
(8,848 | ) | 1,325 | 12,737 | - | 768 | 1,325 | 13,505 | 14,830 | (1,659 | ) | 13,171 |
03/26/04
|
||||||||||||||||||||||||||||
|
Comfort
Inn, Frederick, MD
|
(3,257 | ) | 450 | 4,342 | - | 90 | 450 | 4,432 | 4,882 | (523 | ) | 4,359 |
05/27/04
|
||||||||||||||||||||||||||||
|
Hilton
Garden Inn, Gettysburg, PA
|
(5,031 | ) | 745 | 6,116 | - | 31 | 745 | 6,147 | 6,892 | (692 | ) | 6,200 |
07/23/04
|
||||||||||||||||||||||||||||
|
Hampton
Inn, NYC, NY
|
(26,250 | ) | 5,472 | 23,280 | - | 106 | 5,472 | 23,386 | 28,858 | (2,308 | ) | 26,550 |
04/01/05
|
||||||||||||||||||||||||||||
|
Residence
Inn, Greenbelt, MD
|
(12,047 | ) | 2,615 | 14,815 | - | 182 | 2,615 | 14,997 | 17,612 | (1,702 | ) | 15,910 |
07/16/04
|
||||||||||||||||||||||||||||
|
Fairfield
Inn, Laurel, MD
|
- | 927 | 6,120 | - | 992 | 927 | 7,112 | 8,039 | (766 | ) | 7,273 |
01/31/05
|
|||||||||||||||||||||||||||||
|
Holiday Inn Exp,
Langhorne, PA
|
(6,499 | ) | 1,088 | 6,573 | - | 58 | 1,088 | 6,631 | 7,719 | (610 | ) | 7,109 |
05/26/05
|
||||||||||||||||||||||||||||
|
Holiday Inn Exp,
Malvern, PA
|
(4,038 | ) | 2,639 | 5,324 | 654 | 90 | 3,293 | 5,414 | 8,707 | (489 | ) | 8,218 |
05/24/05
|
||||||||||||||||||||||||||||
|
Holiday Inn Exp,
KOP, PA
|
(12,849 | ) | 2,557 | 13,339 | - | 246 | 2,557 | 13,585 | 16,142 | (1,250 | ) | 14,892 |
05/23/05
|
||||||||||||||||||||||||||||
|
Courtyard
Inn, Wilmington, DE
|
- | 988 | 10,295 | - | 689 | 988 | 10,984 | 11,972 | (1,041 | ) | 10,931 |
06/17/05
|
|||||||||||||||||||||||||||||
|
McIntosh
Inn, Wilmington, DE
|
(12,631 | ) | 898 | 4,515 | - | 766 | 898 | 5,281 | 6,179 | (529 | ) | 5,650 |
06/17/05
|
||||||||||||||||||||||||||||
|
Residence
Inn, Williamsburg, VA
|
(7,610 | ) | 1,911 | 11,625 | 13 | 606 | 1,924 | 12,231 | 14,155 | (2,208 | ) | 11,947 |
11/22/05
|
||||||||||||||||||||||||||||
|
Springhill
Suites, Williamsburg, VA
|
(5,182 | ) | 1,430 | 10,293 | (13 | ) | 60 | 1,417 | 10,353 | 11,770 | (1,783 | ) | 9,987 |
11/22/05
|
|||||||||||||||||||||||||||
|
Courtyard
Inn, Brookline, MA
|
(38,913 | ) | - | 47,414 | - | 242 | - | 47,656 | 47,656 | (4,218 | ) | 43,438 |
06/15/05
|
||||||||||||||||||||||||||||
|
Courtyard
Inn, Scranton, PA
|
(6,208 | ) | 761 | 7,193 | - | 1,099 | 761 | 8,292 | 9,053 | (667 | ) | 8,386 |
02/01/06
|
||||||||||||||||||||||||||||
SCHEDULE
III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2008
(continued)
[IN
THOUSANDS]
|
Initial
Costs
|
Costs
Capitalized Subsequent to Acquisition
|
Gross
Amounts at which Carrried at Close of Period
|
Accumulated
|
Net
Book Value
|
|||||||||||||||||||||||||||||||||||||
|
Depreciation
|
Land
|
||||||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances
|
Land
|
Buildings
& Improvements
|
Land
|
Buildings
& Improvements
|
Land
|
Buildings
& Improvements
|
Total
|
Buildings
& Improvements*
|
Buildings
& Improvements
|
Date
of Acquisition
|
||||||||||||||||||||||||||||||
|
Courtyard
Inn, Langhorne, PA
|
$ | (15,343 | ) | $ | 3,064 | $ | 16,068 | $ | - | $ | 91 | $ | 3,064 | $ | 16,159 | $ | 19,223 | $ | (1,200 | ) | $ | 18,023 |
01/03/06
|
||||||||||||||||||
|
Fairfield
Inn, Bethlehem, PA
|
(6,132 | ) | 1,399 | 6,778 | - | 328 | 1,399 | 7,106 | 8,505 | (581 | ) | 7,924 |
01/03/06
|
||||||||||||||||||||||||||||
|
Residence
Inn, Tyson's Corner, VA
|
(9,044 | ) | 4,283 | 14,475 | - | 282 | 4,283 | 14,757 | 19,040 | (1,084 | ) | 17,956 |
02/02/06
|
||||||||||||||||||||||||||||
|
Hilton
Garden Inn, JFK Airport, NY
|
(21,000 | ) | - | 25,018 | - | 423 | - | 25,441 | 25,441 | (1,868 | ) | 23,573 |
02/16/06
|
||||||||||||||||||||||||||||
|
Hawthorne
Suites, Franklin, MA
|
(8,430 | ) | 1,872 | 8,968 | - | 113 | 1,872 | 9,081 | 10,953 | (622 | ) | 10,331 |
04/25/06
|
||||||||||||||||||||||||||||
|
Comfort
Inn, Dartmouth, MA
|
(3,090 | ) | 902 | 3,525 | - | 497 | 902 | 4,022 | 4,924 | (328 | ) | 4,596 |
05/01/06
|
||||||||||||||||||||||||||||
|
Residence
Inn, Dartmouth, MA
|
(8,880 | ) | 1,933 | 10,434 | - | 188 | 1,933 | 10,622 | 12,555 | (706 | ) | 11,849 |
05/01/06
|
||||||||||||||||||||||||||||
|
Holiday Inn Exp,
Cambridge, MA
|
(10,972 | ) | 1,956 | 9,793 | - | 503 | 1,956 | 10,296 | 12,252 | (716 | ) | 11,536 |
05/03/06
|
||||||||||||||||||||||||||||
|
Residence
Inn, Norwood, MA
|
- | 1,970 | 11,761 | - | 152 | 1,970 | 11,913 | 13,883 | (725 | ) | 13,158 |
07/27/06
|
|||||||||||||||||||||||||||||
|
Hampton
Inn, Brookhaven, NY
|
(14,778 | ) | 3,130 | 17,345 | - | 863 | 3,130 | 18,208 | 21,338 | (1,081 | ) | 20,257 |
09/06/06
|
||||||||||||||||||||||||||||
|
Holiday Inn Exp,
Hauppage, NY
|
(10,133 | ) | 2,737 | 14,080 | - | 685 | 2,737 | 14,765 | 17,502 | (899 | ) | 16,603 |
09/01/06
|
||||||||||||||||||||||||||||
|
Residence
Inn, Langhorne, PA
|
- | 1,463 | 12,094 | 94 | 889 | 1,557 | 12,983 | 14,540 | (624 | ) | 13,916 |
01/08/07
|
|||||||||||||||||||||||||||||
|
Hampton
Inn, Chelsea, NY
|
(36,000 | ) | 8,905 | 33,500 | - | 613 | 8,905 | 34,113 | 43,018 | (1,999 | ) | 41,019 |
09/29/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, Bridgewater, NJ
|
(14,492 | ) | 3,373 | 19,685 | - | 159 | 3,373 | 19,844 | 23,217 | (995 | ) | 22,222 |
12/28/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, Charlotte, NC
|
(7,330 | ) | 770 | 7,315 | - | 1,608 | 770 | 8,923 | 9,693 | (565 | ) | 9,128 |
12/28/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, Gaithersburg, MD
|
(13,720 | ) | 2,912 | 16,001 | - | 309 | 2,912 | 16,310 | 19,222 | (865 | ) | 18,357 |
12/28/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, Pleasant Hills, CA
|
(20,160 | ) | 6,216 | 17,229 | - | 137 | 6,216 | 17,366 | 23,582 | (872 | ) | 22,710 |
12/28/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, Pleasanton, CA
|
(14,490 | ) | 3,941 | 12,560 | - | 142 | 3,941 | 12,702 | 16,643 | (639 | ) | 16,004 |
12/28/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, Scottsdale, AZ
|
(16,778 | ) | 3,060 | 19,968 | - | 163 | 3,060 | 20,131 | 23,191 | (1,011 | ) | 22,180 |
12/28/06
|
||||||||||||||||||||||||||||
|
Hyatt Summerfield
Suites, White Plains, NY
|
(33,030 | ) | 8,823 | 30,273 | - | 154 | 8,823 | 30,427 | 39,250 | (1,528 | ) | 37,722 |
12/28/06
|
||||||||||||||||||||||||||||
|
HIE
& Suites, Chester, NY
|
(6,700 | ) | 1,500 | 6,671 | - | 43 | 1,500 | 6,714 | 8,214 | (322 | ) | 7,892 |
01/25/07
|
||||||||||||||||||||||||||||
|
Residence
Inn, Carlisle, PA
|
(6,958 | ) | 1,015 | 7,511 | - | 24 | 1,015 | 7,535 | 8,550 | (374 | ) | 8,176 |
01/10/07
|
||||||||||||||||||||||||||||
|
Hampton
Inn, Seaport, NY
|
(19,218 | ) | 7,816 | 19,040 | - | 143 | 7,816 | 19,183 | 26,999 | (922 | ) | 26,077 |
02/01/07
|
||||||||||||||||||||||||||||
|
Hotel
373-5th Ave, NYC, NY
|
(22,000 | ) | 14,239 | 16,778 | - | 78 | 14,239 | 16,856 | 31,095 | (671 | ) | 30,424 |
06/01/07
|
||||||||||||||||||||||||||||
|
Holiday
Inn, Norwich, CT
|
- | 1,984 | 12,037 | - | 123 | 1,984 | 12,160 | 14,144 | (460 | ) | 13,684 |
07/01/07
|
|||||||||||||||||||||||||||||
|
Sheraton
Hotel, JFK Airport, NY
|
- | - | 27,315 | - | 52 | - | 27,367 | 27,367 | (374 | ) | 26,993 |
06/13/08
|
|||||||||||||||||||||||||||||
|
Hampton
Inn, Philadelphia, PA
|
- | 3,490 | 24,382 | - | 2,798 | 3,490 | 27,180 | 30,670 | (4,420 | ) | 26,250 |
02/15/06
|
|||||||||||||||||||||||||||||
SCHEDULE
III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2008
(continued)
[IN
THOUSANDS]
|
Initial
Costs
|
Costs
Capitalized Subsequent to Acquisition
|
Gross
Amounts at which Carrried at Close of Period
|
Accumulated
|
Net
Book Value
|
|||||||||||||||||||||||||||||||||||||
|
Depreciation
|
Land
|
||||||||||||||||||||||||||||||||||||||||
|
Description
|
Encumbrances
|
Land
|
Buildings
& Improvements
|
Land
|
Buildings
& Improvements
|
Land
|
Buildings
& Improvements
|
Total
|
Buildings
& Improvements*
|
Buildings
& Improvements
|
Date
of Acquisition
|
||||||||||||||||||||||||||||||
|
Duane
Street, Tribeca, NY
|
$ | (15,000 | ) | $ | 8,213 | $ | 12,869 | $ | - | $ | 287 | $ | 8,213 | $ | 13,156 | $ | 21,369 | $ | (334 | ) | $ | 21,035 |
01/04/08
|
||||||||||||||||||
|
NU
Hotel, Brooklyn, NY
|
(17,818 | ) | - | 22,042 | - | 2 | - | 22,044 | 22,044 | (263 | ) | 21,781 |
01/14/08
|
||||||||||||||||||||||||||||
|
Towneplace
Suites, Harrisburg, PA
|
(9,250 | ) | 1,237 | 10,136 | - | 37 | 1,237 | 10,173 | 11,410 | (165 | ) | 11,245 |
05/08/08
|
||||||||||||||||||||||||||||
|
Holiday
Inn Express, Camp Springs, MD
|
- | 1,629 | 11,094 | - | 115 | 1,629 | 11,209 | 12,838 | (146 | ) | 12,692 |
06/26/08
|
|||||||||||||||||||||||||||||
|
Hampton
Inn, Smithfield, RI
|
(6,943 | ) | 2,057 | 9,486 | - | 17 | 2,057 | 9,503 | 11,560 | (99 | ) | 11,461 |
08/01/08
|
||||||||||||||||||||||||||||
|
Courtyard
Inn, Alexandria, VA
|
(25,000 | ) | 6,376 | 26,089 | - | 214 | 6,376 | 26,303 | 32,679 | (1,520 | ) | 31,159 |
09/29/06
|
||||||||||||||||||||||||||||
|
8th
Ave Land, NYC, NY
|
(13,250 | ) | 21,575 | - | - | 198 | 21,575 | 198 | 21,773 | (12 | ) | 21,761 |
06/28/06
|
||||||||||||||||||||||||||||
|
41st
Street Facility, NYC, NY
|
(12,100 | ) | 10,735 | 11,051 | - | (1 | ) | 10,735 | 11,050 | 21,785 | (679 | ) | 21,106 |
07/28/06
|
|||||||||||||||||||||||||||
|
Nevins Street Land,
Brooklyn, NY
|
(6,500 | ) | 10,650 | - | - | - | 10,650 | - | 10,650 | - | 10,650 |
06/11/07
& 07/11/07
|
|||||||||||||||||||||||||||||
|
Total
Investment in Real Estate
|
$ | (603,376 | ) | $ | 182,793 | $ | 766,780 | $ | 2,086 | $ | 35,980 | $ | 184,879 | $ | 802,760 | $ | 987,639 | $ | (67,824 | ) | $ | 919,815 | |||||||||||||||||||
* Assets
are depreciated over a 7 to 40 year life, upon which the latest income statement
is computed
SCHEDULE
III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2008
(continued)
[IN
THOUSANDS]
|
2008
|
2007
|
2006
|
||||||||||
|
Reconciliation
of Real Estate
|
||||||||||||
|
Balance
at beginning of year
|
$ | 878,099 | $ | 776,609 | $ | 318,865 | ||||||
|
Additions
during the year
|
114,596 | 125,175 | 479,028 | |||||||||
|
Dispositions
during the year
|
(5,056 | ) | (23,685 | ) | (21,284 | ) | ||||||
|
Total
Real Estate
|
$ | 987,639 | $ | 878,099 | $ | 776,609 | ||||||
|
Reconciliation
of Accumulated Depreciation
|
||||||||||||
|
Balance
at beginning of year
|
$ | 49,091 | $ | 33,373 | $ | 21,727 | ||||||
|
Depreciation
for year
|
20,965 | 17,252 | 14,390 | |||||||||
|
Accumulated
depreciation on assets sold
|
(2,232 | ) | (1,534 | ) | (2,744 | ) | ||||||
|
Balance
at the end of year
|
$ | 67,824 | $ | 49,091 | $ | 33,373 | ||||||
The
aggregate cost of land, buildings and improvements for Federal income tax
purposes for the years ended December 31, 2008, 2007 and 2006 is approximately
$894,596, $817,805, and 676,415, respectively.
Depreciation
is computed for buildings and improvements using a useful life for these assets
of 7 to 40 years.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
|
Item
9A.
|
Controls
and Procedures
|
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated 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 that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered
by this report are functioning effectively to provide reasonable assurance that
the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure. A control system cannot provide absolute assurance,
however, that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
|
(b)
|
Management’s
Annual Report on Internal Control Over Financial
Reporting
|
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined within Exchange Act Rules
13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the
processes 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, and
includes policies and procedures that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
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
|
|
·
|
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.
|
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.
A
material weakness in internal control over financial reporting is 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.
Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the criteria contained in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission as of December 31, 2008. Based on that evaluation,
management has concluded that, as of December 31, 2008, the Company’s internal
control over financial reporting was effective based on those criteria. The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
|
(c)
|
Audit
Report of Independent Registered Public Accounting
Firm
|
Report of Independent
Registered Public Accounting Firm
The Board
of Trustees and Shareholders of
Hersha
Hospitality Trust:
We have
audited Hersha Hospitality Trust and subsidiaries’ internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Hersha Hospitality Trust's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
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
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) 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 (3) 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.
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.
In our
opinion, Hersha Hospitality Trust maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Hersha
Hospitality Trust and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated March 5, 2009 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Philadelphia,
Pennsylvania
March 5,
2009
|
(d)
|
Changes
in Internal Control Over Financial
Reporting
|
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2008, that have materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
|
Item
9B.
|
Other
Information
|
None.
PART
III
|
Item 10.
|
Trustees,
Executive Officers and Corporate
Governance
|
The
required information is 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 2009
Annual Meeting of Shareholders.
|
Item
11.
|
Executive
Compensation
|
The
required information is 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 2009
Annual Meeting of Shareholders.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
required information is 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 2009
Annual Meeting of Shareholders.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Trustee
Independence
|
The
required information is 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 2009
Annual Meeting of Shareholders.
|
Item
14.
|
Principal
Accountant Fees and Services
|
The
required information is 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 2009
Annual Meeting of Shareholders.
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
|
(a)
|
Documents
filed as part of this report.
|
|
1.
|
Financial
Reports:
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2008 and 2007
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007
and 2006
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
Notes to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules:
|
Schedule
III - Real Estate and Accumulated Depreciation for the year ended December 31,
2008
|
(b)
|
Exhibits
|
The
Exhibits listed in the accompanying “Index of Exhibits” on pages 97
through 100 hereof are filed and incorporated by reference as a part of
this report.
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
6, 2009
|
/s/ Jay H. Shah
|
|
|
Jay H. Shah
|
||
|
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
and Trustee
|
March
6, 2009
|
||
|
Hasu
P. Shah
|
||||
|
/s/ Jay H. Shah
|
Chief
Executive Officer and Trustee
(Principal Executive
Officer)
|
March
6, 2009
|
||
|
Jay
H. Shah
|
||||
|
/s/ Neil H. Shah
|
President
and Chief Operating Officer
(Chief Operating
Officer)
|
March
6, 2009
|
||
|
Neil
H. Shah
|
||||
|
/s/ Ashish R. Parikh
|
Chief
Financial Officer
(Principal Financial
Officer)
|
March
6, 2009
|
||
|
Ashish
R. Parikh
|
||||
|
/s/ Michael R. Gillespie
|
Chief
Accounting Officer
(Principal Accounting
Officer)
|
March
6, 2009
|
||
|
Michael
R. Gillespie
|
||||
|
/s/ Kiran P. Patel
|
Trustee
|
March
6, 2009
|
||
|
Kiran
P. Patel
|
||||
|
/s/ John M. Sabin
|
Trustee
|
March
6, 2009
|
||
|
John
M. Sabin
|
||||
|
/s/ Michael A. Leven
|
Trustee
|
March
6, 2009
|
||
|
Michael
A. Leven
|
||||
|
/s/ Thomas S. Capello
|
Trustee
|
March
6, 2009
|
||
|
Thomas
S. Capello
|
||||
|
/s/ Donald J. Landry
|
Trustee
|
March
6, 2009
|
||
|
Donald
J. Landry
|
||||
|
/s/ Thomas J. Hutchison III
|
Trustee
|
March
6, 2009
|
||
|
Thomas
J. Hutchison III
|
INDEX
OF EXHIBITS
|
3.1
|
Amended
and Restated Declaration of Trust, as amended and supplemented. (filed
with the SEC as Exhibit 3.1 to the Quarterly Report on Form 10-Q, filed on
April 9, 2007 (SEC File No. 001-14765) and incorporated by reference
herein).
|
|
|
3.2
|
Bylaws
of the Registrant.*
|
|
|
4.1
|
Form
of Common Share Certificate.*
|
|
|
4.2
|
Junior
Subordinated Indenture, dated as of May 13, 2005, between the Company and
JPMorgan Chase Bank, National Association, as trustee (filed as Exhibit
4.1 to the Current Report on Form 8-K filed on May 17, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
4.3
|
Amended
and Restated Trust Agreement, dated as of May 13, 2005, among the Company,
as depositor, JPMorgan Chase Bank, National Association, as property
trustee, Chase Bank USA, National Association, as Delaware trustee, the
Administrative Trustees named therein and the holders of undivided
beneficial interests in the assets of the Trust. (filed as Exhibit 4.2 to
the Current Report on Form 8-K filed on May 17, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
4.4
|
Form
of Junior Subordinated Note (included in Exhibit 4.2
hereto).
|
|
|
4.5
|
Form
of Trust Preferred Security Certificate (included in Exhibit 4.3
hereto).
|
|
|
4.6
|
Junior
Subordinated Indenture, dated as of May 31, 2005, between the Company and
Wilmington Trust Company, as trustee (filed as Exhibit 4.1 to the Current
Report on Form 8-K filed on June 6, 2005 (SEC File No. 001-14765) and
incorporated by reference herein).
|
|
|
4.7
|
Amended
and Restated Trust Agreement, dated as of May 31, 2005, among the Company,
as depositor, Wilmington Trust Company, as property trustee and Delaware
trustee, the Administrative Trustees named therein and the holders of
undivided beneficial interests in the assets of the Trust (filed as
Exhibit 4.2 to the Current Report on Form 8-K filed on June 6, 2005 (SEC
File No. 001-14765) and incorporated by reference
herein).
|
|
|
|
||
|
4.8
|
Form
of Junior Subordinated Note (included in Exhibit 4.6
hereto).
|
|
|
4.9
|
Form
of Trust Preferred Security Certificate (included in Exhibit 4.7
hereto).
|
|
|
4.10
|
Form
of 8.00% Series A Cumulative Redeemable Preferred Share certificate (filed
as Exhibit 3.4 to the Form 8-A filed on August 3, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
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
|
Form
of Percentage Lease.*
|
|
|
10.5
|
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) and incorporated by reference
herein).
|
|
INDEX
OF EXHIBITS (continued)
|
||
|
10.6
|
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) and
incorporated by reference herein).
|
|
|
10.7
|
Purchase
Agreement, dated as of May 11, 2005, among the Company, the Trust and
Merrill Lynch International (previously filed with the SEC as Exhibit 10.1
to the Current Report on Form 8-K filed on May 17, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
10.8
|
Placement
Agreement, dated as of May 31, 2005, among the Company, the Trust and
Credit Suisse First Boston LLC (filed as Exhibit 10.1 to the Current
Report on Form 8-K filed on June 6, 2005 (SEC File No. 001-14765) and
incorporated by reference herein).
|
|
|
10.9
|
Membership
Interests Contribution Agreement, dated June 15, 2005, by and among
Waterford Hospitality Group, LLC, Mystic Hotel Investors, LLC and Hersha
Hospitality Group Limited Partnership (filed as Exhibit 10.1 to the
Current Report on Form 8-K filed on June 21, 2005 (SEC File No. 001-14765)
and incorporated by reference herein).
|
|
|
|
||
|
10.10
|
Form
of Limited Liability Company Agreement of Mystic Partners, LLC (filed as
Exhibit 10.2 to the Current Report on Form 8-K filed on June 21, 2005 (SEC
File No. 001-14765) and incorporated by reference
herein).
|
|
|
|
||
|
10.11
|
Form
of Management Agreement between Lessee and Waterford Hotel Group, Inc.
(filed as Exhibit 10.3 to the Current Report on Form 8-K filed on June 21,
2005 (SEC File No. 001-14765) and incorporated by reference
herein).
|
|
|
10.12
|
Form
of Limited Liability Company Agreement of Leaseco, LLC (filed as Exhibit
10.4 to the Current Report on Form 8-K filed on June 21, 2005 (SEC File
No. 001-14765) and incorporated by reference herein).
|
|
|
10.13
|
Third
Amendment to Agreement of Limited Partnership of Hersha Hospitality
Limited Partnership, by and between Hersha Hospitality Trust and Hersha
Hospitality Limited Partnership, dated August 5, 2005 (filed as Exhibit
10.1 to the Current Report on Form 8-K filed on August 8, 2005 (SEC File
No. 001-14765) and incorporated by reference herein).
|
|
|
|
||
|
10.14
|
Sixth
Amendment to Membership Interests Contribution Agreement, dated February
8, 2006, by and among Hersha Hospitality Limited Partnership, Mystic Hotel
Investors, LLC; Waterford Hospitality Group, LLC and First American Title
Insurance Company (filed as Exhibit 10.5 to the Current Report on Form 8-K
filed February 14, 2006 (SEC File No. 001-14765) and incorporated by
reference herein).
|
|
|
10.15
|
Second
Amendment to Limited Liability Company Operating Agreement of Mystic
Partners, LLC, dated February 8, 2006 (filed as Exhibit 10.6 to the
Current Report on Form 8-K filed February 14, 2006 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
10.16
|
First
Amendment to Limited Liability Company Operating Agreement of Mystic
Partners Leaseco, LLC, dated February 8, 2006 (filed as Exhibit 10.7 to
the Current Report on Form 8-K filed February 14, 2006 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
10.17
|
Conditional
Payment Guaranty, dated February 8, 2006, made by Hersha Hospitality
Limited Partnership and Mystic Hotel Investors, LLC to and for the benefit
or Merrill Lynch Capital (filed as Exhibit 10.8 to the Current Report on
Form 8-K filed February 14, 2006 (SEC File No. 001-14765) and incorporated
by reference
herein).
|
|
|
INDEX
OF EXHIBITS (continued)
|
||
|
10.18
|
Conditional
Payment Guaranty, dated February 8, 2006, made by Hersha Hospitality
Limited Partnership and Mystic Hotel Investors, LLC to and for the benefit
or Merrill Lynch Capital (filed as Exhibit 10.9 to the Current Report on
Form 8-K filed February 14, 2006 (SEC File No. 001-14765) and incorporated
by reference herein).
|
|
|
10.19
|
Supplemental
Limited Joinder, dated February 8, 2006, made by Hersha Hospitality
Limited Partnership and Mystic Hotel Investors LLC (filed as Exhibit 10.10
to the Current Report on Form 8-K filed February 14, 2006 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
10.20
|
Purchase
and Sale Agreement, dated as of the 18th day of December, 2006, between
Bridgeworks Hotelworks Associates, L.P., Charlotte Hotelworks Associates,
L.P., Gaithersburg Hotelworks Associates, L.P., Pleasant Hill Lodging
Partners, L.P., Pleasanton Hotelworks Associates, L.P., Scottsdale
Hotelworks Associates, L.P., and Harrison Hotelworks Associates, L.P., and
Hersha Hospitality Limited Partnership (filed as Exhibit 10.1 to the
Current Report on Form 8-K filed December 18, 2006 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
10.21
|
Sales
Agreement by and between Hersha Hospitality Trust and Cantor Fitzgerald
& Co., dated April 5, 2007 (filed as Exhibit 10.1 to the Current
Report on Form 8-K filed April 6, 2007 (SEC File No. 001-14765) and
incorporated by reference herein).
|
|
|
10.22
|
Amended
and Restated Employment Agreement, dated June 28, 2007, by and between the
Company and Hasu P. Shah (filed as Exhibit 10.1 to the Current Report on
Form 8-K filed July 3, 2007 (SEC File No. 001-14765) and incorporated by
reference herein).†
|
|
|
10.23
|
Amended
and Restated Employment Agreement, dated June 28, 2007, by and between the
Company and Jay H. Shah (filed as Exhibit 10.2 to the Current Report on
Form 8-K filed July 3, 2007 (SEC File No. 001-14765) and incorporated by
reference herein).†
|
|
|
10.24
|
Amended
and Restated Employment Agreement, dated June 28, 2007, by and between the
Company and Neil H. Shah (filed as Exhibit 10.3 to the Current Report on
Form 8-K filed July 3, 2007 (SEC File No. 001-14765) and incorporated by
reference herein).†
|
|
|
10.25
|
Amended
and Restated Employment Agreement, dated June 28, 2007 by and between the
Company and Ashish R. Parikh (filed as Exhibit 10.4 to the Current Report
on Form 8-K filed July 3, 2007 (SEC File No. 001-14765) and incorporated
by reference herein).†
|
|
|
10.26
|
Amended
and Restated Employment Agreement, dated June 28, 2007 by and between the
Company and Michael R. Gillespie (filed as Exhibit 10.5 to the Current
Report on Form 8-K filed July 3, 2007 (SEC File No. 001-14765) and
incorporated by reference herein).†
|
|
|
10.27
|
Contribution
Agreement, dated as of January 8, 2008, by and among Shree Associates,
Kunj Associates, Shanti III Associates, Trust FBO Sajni Mehta Browne under
the Bharat and Devyani Mehta 2005 Trust dated January 13, 2006, Trust FBO
Neelay Mehta under the Bharat and Devyani Mehta 2005 Trust dated January
13, 2006, Trust FBO Jay H Shah under the Hasu and Hersha Shah 2004 Trust
dated August 18, 2004, Trust FBO Neil H Shah under the Hasu and Hersha
Shah 2004 Trust dated August 18, 2004, PLM Associates LLC, David L. Desfor
and Ashish R. Parikh and Hersha Hospitality Limited Partnership (filed as
Exhibit 10.1 to the Current Report on form 8-K filed January 10, 2008 (SEC
File No. 001-14765) and incorporated by reference
herein).
|
|
|
10.28
|
Hersha
Hospitality Trust 2008 Equity Incentive Plan (filed as Appendix B to
the Company’s Definitive Proxy Statement
on Schedule 14A, filed on April 18, 2008 (SEC File No.
001-14765) and incorporated by reference
herein).†
|
|
|
INDEX
OF EXHIBITS (continued)
|
||
|
10.29
|
Form
of Stock Award Agreement under the Hersha Hospitality Trust 2008 Equity
Incentive Plan (filed as Exhibit 10.2 to the Current Report on Form
8-K filed on May 29, 2008 (SEC File No. 001-14765) and
incorporated by reference herein).†
|
|
|
10.30
|
Contribution
Agreement, dated as of June 13, 2008, by and among Shree Associates, Kunj
Associates, Devi Associates, Shanti III Associates, Trust FBO Jay H Shah
under the Hasu and Hersha Shah 2004 Trust dated August 18, 2004, Trust FBO
Neil H Shah under the Hasu and Hersha Shah 2004 Trust dated August 18,
2004, PLM Associates LLC, David L. Desfor and Ashish R. Parikh and Hersha
Hospitality Limited Partnership (filed as Exhibit 10.1 to the Current
Report on Form 8-K filed on June 19, 2008 (SEC File No. 001-14765) and
incorporated by reference herein).
|
|
|
10.31
|
Contribution
Agreement, dated as of June 26, 2008, by and among Akshar Limited
Liability Company and Hersha Hospitality Limited Partnership (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed on July 2,
2008 (SEC File No. 001-14765) and incorporated by reference
herein).
|
|
|
10.32
|
Contribution
Agreement, dated as of August 1, 2008, by and among Hersha Northeast
Associates, LLC, Kirit Patel, K&D Investment Associates, LLC, and
Ashwin Shah, as contributors, and Hersha Hospitality Limited Partnership
and Hersha Smithfield Managing Member, LLC, as acquirer (filed as Exhibit
10.1 to the Current Report on Form 8-K filed on August 7, 2008
(SEC File No. 001-14765) and incorporated by reference
herein).
|
|
|
10.33
|
Revolving
Credit Loan and Security Agreement, dated October 14, 2008, by and between
Hersha Hospitality Limited Partnership, Hersha Hospitality Trust and
TD Bank, N.A. (filed as Exhibit 10.1 to the Current
Report on Form 8-K filed on October 14, 2008 (SEC File No. 001-
14765) and incorporated by reference herein).
|
|
|
14.1
|
Hersha
Hospitality Trust Code of Ethics Adopted May 1, 2008 (filed as Exhibit
14.1 to the Current Report on Form 8-K filed May 5, 2009 (SEC File No.
001-14765) and incorporated by reference herein).
|
|
|
List
of Subsidiaries of the Registrant.**
|
||
|
Consent
of KPMG LLP.**
|
||
|
Consent
of Pricewaterhouse Coopers LLP.**
|
||
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**
|
||
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**
|
||
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
|
||
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
|
||
|
Consolidated
Financial Statements of Mystic Partners, LLC and
Subsidiaries.**
|
||
|
*
|
Filed
as an exhibit to Hersha Hospitality Trust’s Registration Statement on Form
S-11, as amended, filed June 5, 1998 (SEC File No. 333-56087) and
incorporated by reference herein.
|
|
|
**
|
Filed
herewith.
|
|
|
†
|
Indicates
management contract or compensatory plan or
arrangement.
|
|
100