SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QA
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-14765
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 251811499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
148 SHERATON DRIVE, BOX A
NEW CUMBERLAND, PENNSYLVANIA 17070
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (717) 770-2405
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 2002, the number of outstanding Priority Class A Common
Shares of Beneficial Interest outstanding was 2,576,101.
HERSHA HOSPITALITY TRUST
INDEX
FORM 10-Q
REPORT
ITEM NO. PAGE
-------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HERSHA HOSPITALITY TRUST
Report of Independent Accountant . . . . . . . . . . . . . . 1
Consolidated Balance Sheets as of September 30, 2002
[Unaudited] and December 31, 2001 . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 [Unaudited]. . . . . . 3
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2002 and 2001 [Unaudited] . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . 7
HERSHA HOSPITALITY MANAGEMENT, L.P.
Report of Independent Accountant. . . . . . . . . . . . . . . .16
Balance Sheets as of September 30, 2002 [Unaudited] and
December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . .17
Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 [Unaudited] . . . . . . . . . . . .18
Statement of Cash Flows for the nine months ended
September 30, 2002 and 2001 [Unaudited] . . . . . . . . . . . .19
Notes to Financial Statements . . . . . . . . . . . . . . . . .20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . 22
Results of Operations, Nine Months Ended September 30, 2002
and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Results of Operations, Three Months Ended September 30, 2002
and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Liquidity and Capital Resources. . . . . . . . . . . . . . . . 25
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . . 26
Subsequent Events. . . . . . . . . . . . . . . . . . . . . . . 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 26
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 27
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 27
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 27
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form - K . . . . . . . . . . . . . . . 27
(a) Exhibits. . . . . . . . . . . . . . . . . . . . . . . 27
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . 27
REPORT OF INDEPENDENT ACCOUNTANT
To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Hersha
Hospitality Trust and Subsidiaries as of September 30, 2002, and the related
consolidated statements of operations and consolidated statements of cash flows
for the three and nine month periods ended September 30, 2002 and 2001. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended [not presented
herein]; and in our report dated March 8, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2001, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
November 1, 2002
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
====================================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
====================================================================================================
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
2002 2001
--------------- --------------
ASSETS: [UNAUDITED]
---------------
Cash and cash equivalents $ 75 $ 167
Investment in Hotel Properties, Net of Accumulated Depreciation 83,319 88,100
Escrow and Lease Deposits 1,560 1,647
Lease Payments Receivable - Related Party 4,140 2,376
Intangibles, Net of Accumulated Amortization 964 1,515
Due from Related Party 2,084 1,884
Other Assets 487 328
--------------- --------------
TOTAL ASSETS $ 92,629 $ 96,017
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Lines of Credit $ 2,894 $ 7,058
Deposits Payable 1,000 1,000
Mortgages Payable 53,171 54,477
Dividends Payable 1,377 1,325
Due to Related Party 1,068 1,093
Accounts Payable and Accrued Expenses 617 418
--------------- --------------
TOTAL LIABILITIES 60,127 65,371
--------------- --------------
Minority Interest 21,037 20,436
--------------- --------------
Shareholders' Equity:
Preferred Shares, $.01 par value, 10,000 Shares authorized, None
Issued and Outstanding -- --
Common Shares - Priority Class A, $.01 Par Value, 50,000,000
Shares Authorized, 2,576,101 and 2,275,000 Shares Issued and
Outstanding at September 30, 2002 and December 31, 2001,
Respectively (Aggregate Liquidation Preference $15,457 and
$13,650, Respectively) 26 23
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares
Authorized, -0- Shares Issued and Outstanding at September 30,
2002 and December 31, 2001, Respectively -- --
Additional Paid-in Capital 13,679 11,968
Distributions in Excess of Net Earnings (2,240) (1,781)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 11,465 10,210
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 92,629 $ 96,017
=============== ==============
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
2
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
=====================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ---------- ---------- ----------
REVENUE:
Percentage Lease Revenues - HHMLP $ 3,741 $ 3,053 $ 9,235 $ 7,844
Percentage Lease Revenues - Other 700 700 2,100 2,100
Interest - Related Party 63 54 175 105
Other Revenue 1 2 5 20
----------- ---------- ---------- ----------
TOTAL REVENUE 4,505 3,809 11,515 10,069
EXPENSES:
Interest expense 1,189 1,195 3,666 3,694
Land Lease - Related Party - 4 - 11
Real Estate and Personal Property
Taxes and Property Insurance 262 211 774 671
(Gain) Loss on Disposition of Hotel Properties - - - 12
General and Administrative 95 131 454 411
Depreciation and Amortization 1,002 988 3,078 3,082
----------- ---------- ---------- ----------
TOTAL EXPENSES 2,548 2,529 7,972 7,881
----------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS 1,957 1,280 3,543 2,188
INCOME ALLOCATED TO MINORITY INTEREST 2,131 1,071 3,099 1,611
DISCONTINUED OPERATIONS (NOTE 6):
Gain on Disposition of Hotel Properties 469 - 469 -
Income from Discontinued Operations 2 25 2 18
NET INCOME $ 297 $ 234 $ 915 $ 595
=========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE DATA:
-------------------------------
Basic and Diluted - before discontinued operations $ (0.06) $ 0.09 $ 0.18 $ 0.25
Discontinued operations $ 0.18 $ 0.01 $ 0.19 $ 0.01
Basic and Diluted Earnings Per Common Share $ 0.12 $ 0.10 $ 0.37 $ 0.26
=========== ========== ========== ==========
WEIGHTED AVERAGE SHARES:
Basic and Diluted 2,576,101 2,275,000 2,500,381 2,275,000
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
3
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
NINE MONTHS
ENDED SEPT. 30,
2002 2001
--------- --------
OPERATING ACTIVITIES:
Net Income $ 915 $ 595
--------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,152 3,335
Income Allocated to Minority Interest 3,099 1,611
(Gain) Loss on Disposal of Real Estate (469) 12
Change in Assets and Liabilities:
(Increase) Decrease in:
Lease and Escrow Deposits 87 (237)
Lease Payments Receivable - Related Party (1,764) 642
Other Assets (159) (281)
Due from Related Party (200) (628)
Increase (Decrease):
Due to Related Parties (25) (500)
Accounts Payable and Accrued Expenses 199 (253)
--------- --------
Total Adjustments 3,920 3,701
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,835 4,296
INVESTING ACTIVITIES:
Purchase of Hotel Property Assets (3,735) (4,333)
Sale of Hotel Property Assets 5,997 8,826
Purchase of Intangible Assets - (70)
--------- --------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 2,262 4,423
FINANCING ACTIVITIES:
Proceeds from Borrowings Under Line of Credit 10,465 3,984
Repayment of Borrowings Under Line of Credit (14,629) (6,400)
Borrowings from Mortgages Payable - -
Cash Received from Stock Sales 1,711 -
Principal Repayment of Mortgages Payable (669) 491
Dividends Paid (1,316) (1,229)
Limited Partnership Unit Distributions Paid (2,751) (2,586)
Repayment of Related Party Loans (2,958)
--------- --------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (7,189) (8,698)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (92) 21
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 167 -
--------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 75 $ 21
========= ========
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
4
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
CASH PAID DURING THE PERIOD:
Interest $3,574 $4,139
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As of January 1, 2001, we issued an additional 531,559 units of limited
partnership interest in connection with the repricing of the Holiday Inn
Express, Hershey, Hampton Inn, Carlisle, Holiday Inn Express, New Columbia and
the Comfort Inn, Harrisburg. The total number of units outstanding as of
January 1, 2001 was 4,972,555.
On April 1, 2001, we sold the Best Western, Indiana for $2,200 to some of our
executive officers, trustees and their affiliates. In conjunction with this
transaction, we received cash proceeds of $400 and redeemed 76,252 limited
partnership units valued at $457. The buyer also assumed the outstanding
mortgage balance of $1,342.
On May 1, 2001, we sold the Comfort Inn, Denver for $2,100 to an unrelated third
party. Net of settlement fees and other costs, we received $1,868. In
conjunction with this transaction, we received cash proceeds of $460 and have
paid down the outstanding mortgage balance of $1,408 to Shreenathji Enterprises,
Ltd., a related party.
On June 1, 2001, we sold the Comfort Inn, JFK for $7,000 to an unrelated third
party. Net of settlement fees and other costs, we received cash proceeds of
$6,613. Based upon the initial repricing formula, we issued an additional
175,538 limited partnership units in conjunction with this transaction.
On June 1, 2001, we purchased the Mainstay Suites and Sleep Inn in King of
Prussia from some of our executive officers, trustees and their affiliates. We
purchased these assets for $9,445 plus settlement costs and leased them to
Hersha Hospitality Management, LP ("HHMLP"). In conjunction with this
transaction, we assumed the mortgage indebtedness of $6,738, assumed $1,000 of
related party debt and funded the remainder of the proceeds of $1,768 from our
available cash and outstanding line of credit.
On November 1, 2001, we purchased the Holiday Inn Express hotel located in Long
Island City, New York. We purchased this asset for $8,500 plus settlement costs
of approximately $100 and leased it to HHMLP. In conjunction with this
transaction, we assumed the mortgage indebtedness of approximately $5,445,
assumed $1,000 of related party debt, issued additional units for $459 and paid
cash of approximately $1,600.
On November 1, 2001, we sold the Comfort Inn, McHenry, MD to some of our
executive officers, trustees and their affiliates for approximately $1,800,
including the assumption of approximately $1,180 in indebtedness, redemption of
55,175 limited partnership units valued at approximately $331 and cash proceeds
of approximately $300.
On November 1, 2001, we sold the Comfort Inn, Riverfront, Harrisburg, PA to some
of our executive officers, trustees and their affiliates for $3,400 net of
selling costs, including the assumption of approximately $2,500 in indebtedness
and approximately $900 in cash.
5
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
On November 1, 2001, we sold the Holiday Inn, Milesburg, PA to a third party
owner operator for approximately $4,700 less broker fees, settlement and
transfer costs of $617. Net of these fees and expenses we received cash
proceeds of $3,926 and paid down a related party loan receivable of $157.
As of January 1, 2002, we issued an aggregate of 333,541 additional operating
partnership units in connection with the re-pricing of the Holiday Inn Express &
Suites, Harrisburg, the Hampton Inn, Danville and the Hampton Inn & Suites,
Hershey, Pennsylvania. The total number of units outstanding as of January 1,
2002 was 5,099,722.
The Board of Trustees approved the purchase of the Mainstay Suites, Frederick,
Maryland, on February 27, 2002 to be effective January 1, 2002. We purchased
this asset for $5,500 plus settlement costs of approximately $21 and leased it
to HHMLP. In conjunction with this transaction, we assumed mortgage
indebtedness of approximately $3,100, assumed $800 of related party debt, and
paid cash of approximately $1,600. The financial position and results of
operations related to the Mainstay Suites, Frederick, Maryland are included as
of January 1, 2002.
Further, on February 27, 2002, the Board of Trustees also approved the sale of
the Sleep Inn, Corapolis, Pennsylvania to some of our executive officers,
trustees and their affiliates to be effective as of January 1, 2002. We sold
this asset for $5,500, including the assumption of approximately $3,500 in
indebtedness and the redemption of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property from these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500,
including 327,038 limited partnership units. This transaction has been
accounted for as of January 1, 2002.
During the quarter ended March 31, 2002, we issued an additional 300,000
Priority Class A Common Shares. We received gross proceeds of $1,800. We
received net proceeds of $1,700 after selling and offering expenses.
On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third
party owner operator for $6,300 less transfer costs that are estimated at $93.
In order to complete the sale of this hotel, the Company is currently carrying
$200 of seller financing that is due and payable on October 1, 2003. This
financing was completed at an interest rate of 10%. The remaining proceeds from
the sale were utilized to payoff $5,997 of the Company's line of credit balance.
The quarterly dividend distribution pertaining to the Class A Priority Common
Shares and limited partnership units for the second quarter ended June 30, 2002
was paid on July 26, 2002, at the rate of $0.18 per share, which represents an
annualized rate of $0.72 per annum.
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
6
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Hersha Hospitality Trust was formed in May 1998 to acquire equity interests in
ten existing hotel properties. We are a self-administered, Maryland real estate
investment trust for federal income tax purposes. On January 26, 1999, we
completed an initial public offering of 2,275,000 shares of $.01 par value
Priority Class A Common Shares. The offering price per share was $6, resulting
in gross proceeds of $13,650. Net of underwriters discount and offering
expenses, we received proceeds of $11,991. During the quarter ended March 31,
2002, we issued 300,000 shares of $.01 par value Priority Class A Common Shares.
The offering price per share was $6, resulting in gross proceeds of $1,800. Net
of selling and offering expenses, we received proceeds of $1,700.
Upon completion of the initial public offering, we contributed substantially all
of the net proceeds to Hersha Hospitality Limited Partnership [the
"Partnership"] in exchange for a 36.1% general partnership interest in the
Partnership. The Partnership used these proceeds to acquire an equity interest
in ten hotels [the "Initial Hotels"] through subsidiary partnerships, and to
retire certain indebtedness relating to these hotels. The Partnership acquired
these hotels in exchange for (i) units of limited partnership interest in the
Partnership which are redeemable, subject to certain limitations, for an
aggregate of 4,032,431 Priority Class B Common Shares, with a value of
approximately $24,200 based on the initial public offering, and (ii) the
assumption of approximately $23,300 of indebtedness of which approximately
$6,100 was repaid immediately after the acquisition of the hotels. Hasu P.
Shah, K. D. Patel, Kiran Patel and Neil Shah (certain of our executive officers
and trustees) and their affiliates [the "Hersha Affiliates"] received units of
limited partnership interests in the Partnership aggregating a 63.9% equity
interest in the Partnership. The Partnership owns a 99% limited partnership
interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability
company, owns a 1% general partnership interest in the subsidiary partnerships.
The Partnership is the sole member of HHLLC.
We instituted a dividend reinvestment plan ["DRIP"] for our Priority Class A
Common Shares on February 13, 2002. Our DRIP provides holders of our Priority
Class A Common Shares with a convenient method of purchasing additional priority
common shares without payment of any brokerage commission or service charges.
Any holder of record of priority common shares is eligible to participate in the
plan. Participants in the plan may have cash dividends on all or a portion of
their priority common shares automatically reinvested.
The purchase price of the priority common shares purchased with reinvested cash
dividends will be at a price equal to 95% of the "average market price," which
means the average of the close prices of our priority common shares as reported
by the American Stock Exchange for each of the five (5) trading days immediately
preceding the investment date as of which such purchase is made. Shareholders
who do not elect to participate in the plan will continue to receive cash
dividends on shares registered in their names.
As of September 30, 2002 we had issued an additional 1,101 Priority Class A
Common Shares pursuant to the DRIP. Of the total dividends payable of $464 at
September 30, 2002, we paid a cash dividend of $459 and issued an additional 726
shares on October 17, 2002.
We lease 14 of our hotel facilities to Hersha Hospitality Management, LP,
["HHMLP"], a limited partnership owned by certain members of the Hersha
Affiliates. HHMLP operates and leases the hotel properties pursuant to separate
percentage lease agreements that provide for initial fixed rents or percentage
rents based on the revenues of the hotels. The hotels are located principally
in the Mid-Atlantic region of the United States. We have also entered into
percentage leases with Noble Investment Group, Ltd. ["Noble"], an independent
third party management company, to lease and manage four hotels in the
metropolitan Atlanta market.
Since the completion of the initial public offering, we have issued an
additional 173,539 units of limited partnership interest in connection with the
acquisition of the Hampton Inn, Danville, PA and 76,555 units in connection with
the acquisition of the Holiday Inn Express, Long Island City. We also issued an
additional 1,275,662 units of limited partnership interest in connection with
the final settlement of the purchase prices of several hotels and redeemed
458,465 units of limited partnership interest in connection with the sale of
certain hotels. The total number of units of limited partnership interest
outstanding as of September 30, 2002 and September 30, 2001, was 5,099,722 and
5,071,840, respectively.
7
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Percentage lease income is recognized when earned from the
Lessee under the agreements from the date of acquisition of each hotel property.
Contingent rent is recognized when the contingency is met. Lease income is
recognized under fixed rent agreements ratably over the lease term. All leases
between us and the lessees are operating leases.
We recognize lease revenue for interim and annual reporting purposes on an
accrual basis pursuant to the terms of the respective percentage leases and on
an interim basis in accordance with the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." Under the provisions of SAB 101, which we adopted in the
fourth quarter of 2000, a portion of our percentage lease revenues, which
historically were recognized in the first, second, and third quarters, are
deferred and recognized in the fourth quarter. The adoption of SAB 101 impacts
the interim reporting of revenues related to our leases, but has no impact on
its interim cash flow or year-end results of operations.
MINORITY INTEREST - Minority interest in the Partnership represents the limited
partners proportionate share of the equity of the Partnership. Income is
allocated to minority interest based on weighted average percentage ownership
throughout the year.
EARNINGS PER COMMON SHARE - We compute earnings per share in accordance with
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per
Share."
INCOME TAXES - We qualify as a real estate investment trust under Section 856
and 860 of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been reflected in the financial statements.
IMPAIRMENT OF LONG LIVED ASSETS - We review the carrying value of each hotel
property in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144 to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel property or if depreciation
periods should be modified. Long-lived assets are reviewed for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. We perform undiscounted cash
flow analyses to determine if impairment exists. If an impairment is determined
to exist, any related impairment loss is calculated based on fair value. Hotel
properties held for sale are presented at the lower of carrying amount or fair
value less cost to sell.
RECENT ACCOUNTING PRONOUNCEMENTS - On April 30, 2002, the Financial Accounting
Standards Board (FASB) issued Statement No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Statement 145 rescinds Statement 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of any income tax effect. As a result, the criteria in
Opinion No. 30 will now be used to classify those gains and losses. Statement
64 amended Statement 4 and is no longer necessary because Statement 4 has been
rescinded.
Statement 145 amended Statement 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This amendment is
consistent with the FASB's goal of requiring similar accounting treatment for
transactions that have similar economic effects.
This Statement also makes technical corrections to existing pronouncements.
While those corrections are not substantive in nature, in some instances, they
may change accounting practice.
In June 2002 the FASB issued Statement No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities."
8
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
The Company expects that the adoption of the new statements will not have a
significant impact on its financial statements. It is not possible to quantify
the impact until the newly issued statements have been studied.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity shall recognize
the cumulative effect of adoption of SFAS No. 143 as a change in accounting
principle. We are not currently affected by this Statement's requirements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", collectively referred to as the
"Standards". SFAS No. 141 supersedes Accounting Principles Board Opinion ("APB")
No. 16, "Business Combinations". SFAS No. 141 (1) requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001; (2) provides specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill; and (3) requires that
unamortized negative goodwill be written off immediately as an extraordinary
gain. SFAS No. 142 supersedes APB 17, "Intangible Assets," and is effective for
fiscal years beginning after December 15, 2001.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their initial recognition. SFAS No. 142 (1) prohibits the
amortization of goodwill and indefinite-lived intangible assets; (2) requires
testing of goodwill and indefinite-lived intangible assets on an annual basis
for impairment (and more frequently if the occurrence of an event or
circumstance indicates an impairment); (3) requires that reporting units be
identified for the purpose of assessing potential future impairments of
goodwill; and (4) removes the forty-year limitation on the amortization period
of intangible assets that have finite lives. The provisions of the Standards
also apply to equity-method investments made both before and after June 30,
2001. SFAS No. 141 requires that the unamortized deferred credit, related to an
excess over cost arising from an investment acquired prior to July 1, 2001,
accounted for using the equity method (equity-method negative goodwill), must be
written-off immediately and recognized as the cumulative effect of a change in
accounting principle. Equity-method negative goodwill arising from equity
investments made after June 30, 2001 must be written-off immediately and
recorded as an extraordinary gain. We adopted SFAS No. 142 on January 1, 2002.
Going forward, we will test goodwill for impairment annually or more frequently
if the occurrence of an event or circumstance indicate potential impairment.
Non-amortization of goodwill during the current three and nine months ended
September 30, 2002 had a non-material impact on our net income, basic earnings
per share and diluted earnings per share.
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Priority Class A Common Shares have priority as to the payment of dividends
until dividends equal $0.72 per share on a cumulative basis and shares equally
in additional dividends after the Class B Common Shares have received $0.72 per
share in each annual period. The Priority Class A Common Shares carry a
liquidation preference of $6.00 per share plus unpaid dividends and votes with
the Class B Common Shares on a one vote per share basis. The Priority period of
the Class A Shares will commence on the date of the closing of the initial
public offering and end on the earlier of (i) five years after the initial
public offering of the Priority Common Shares, or (ii) the date
9
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
that is 15 trading days after we send notice to the holders of the Priority
Common Shares, provided that the closing bid price of the Priority Common Shares
is at least $7 on each trading day during such 15-day period.
Pursuant to the Hersha Hospitality Limited Partnership agreement, the limited
partners have certain redemption rights that enable them to cause the
partnership to redeem their units of limited partnership interest in exchange
for Class B Common Shares or for cash at our election. In the event the Class B
Common Shares are converted into Priority Class A Common Shares prior to
redemption of the units, the units will be redeemable for Priority Class A
Common Shares. If we do not exercise our option to redeem the units for Class B
Common Shares, then the limited partner may make a written demand that we redeem
the units for Class B Common Shares. These redemption rights may be exercised
by the limited partners. At September 30, 2002 and September 30, 2001, the
aggregate number of Class B Common Shares issuable to the limited partners upon
exercise of the redemption rights is 5,099,722 and 5,071,840, respectively. The
number of shares issuable upon exercise of the redemption rights will be
adjusted upon the occurrence of stock splits, mergers, consolidation or similar
pro rata share transactions, that otherwise would have the effect of diluting
the ownership interest of the limited partners or our shareholders.
We are the sole general partner in the Partnership, which is the sole general
partner in the Subsidiary Partnerships and, as such, are liable for all recourse
debt of the Partnership to the extent not paid by the subsidiary partnerships.
In the opinion of management, we do not anticipate any losses as a result of our
obligations as general partner.
In conjunction with the initial public offering, we acquired the Initial Hotels
and entered into percentage lease agreements with HHMLP. We have acquired
twelve properties from the Hersha Affiliates that were subsequently leased to
HHMLP and acquired four properties from Noble that were leased back to Noble,
subsequent to our public offering. Under the percentage leases, the Partnership
is obligated to pay the costs of certain capital improvements, real estate and
personal property taxes and property insurance, and to make available to the
lessee an amount equal to 4% [6% for some hotels] of room revenues per quarter,
on a cumulative basis, for the periodic replacement or refurbishment of
furniture, fixtures and equipment at these hotels. HHMLP historically has
purchased and may continue to purchase a portion of this furniture, fixtures and
equipment from Hersha Hotel Supply Company ["Hersha Supply"], an entity owned
and controlled by the Hersha Affiliates. For the nine-month period ended
September 30, 2002 and the year ended December 31, 2001, HHMLP purchased
furniture, fixtures and equipment from Hersha Supply for an aggregate of
approximately $521 and $666, respectively.
We have entered into percentage leases relating to 14 hotels with HHMLP. Each
percentage lease has an initial non-cancelable term of five years. All, but not
less than all, of the percentage leases for these 14 hotels may be extended for
an additional five-year term at HHMLP's option. At the end of the first
extended term, HHMLP, at its option, may extend some or all of the percentage
leases for these hotels for an additional five-year term. Pursuant to the terms
of the percentage leases, HHMLP is required to pay either initial fixed rent,
base rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses.
We have future lease commitments from HHMLP through June 2006. Minimum future
rental income under these non-cancelable operating leases at September 30, 2002,
is as follows:
December 31, 2002 $ 1,980
December 31, 2003 6,770
December 31, 2004 4,049
December 31, 2005 2,759
December 31, 2006 1,821
Thereafter 561
-------
TOTAL $17,940
=======
We have entered into percentage leases relating to four hotels with Noble. Each
percentage lease has an initial non-cancelable term of three years. All, but
not less than all, of the percentage leases for these four hotels may be
10
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
extended for an additional three-year term at Noble's option. At the end of the
first extended term, we or Noble may extend all, but not less than all, of the
percentage leases for these hotels for an additional three-year term. Pursuant
to the terms of the percentage leases, Noble is required to pay either initial
fixed rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses.
We have future lease commitments from Noble through May 19, 2003. Minimum
future rental income under these non-cancelable operating leases at September
30, 2002, is as follows:
December 31, 2002 $ 700
December 31, 2003 946
Thereafer 0
------
TOTAL $1,646
======
For the period January 1, 2002 through September 30, 2002, we earned initial
fixed rents of $4,585 and earned percentage rents of $6,915. For the period
January 1, 2001 through September 30, 2001, we earned initial fixed rents of
$5,247 and earned percentage rents of $5,467.
The hotel properties are operated under franchise agreements assumed by the
lessee that have 10 to 20 year lives but may be terminated by either the
franchisee or franchisor on certain anniversary dates specified in the
agreements. The agreements require annual payments for franchise royalties,
reservation, and advertising services, which are calculated as a percentage of
gross room revenues. These fees are paid by our lessees.
We have acquired, and expect to acquire in the future, from affiliates of
certain of our executive officers and trustees, newly-developed or
newly-renovated hotels that do not have an operating history that would allow us
to make purchase price decisions based on historical performance. In buying
these hotels, we have utilized, and expect to continue to utilize, a
"re-pricing" methodology that, in effect, adjusts the initial purchase price for
the hotel, one or two years after we initially purchase the hotel, based on the
actual operating performance of the hotel during the previous twelve months.
All purchase price adjustments are approved by a majority of our independent
trustees.
The initial purchase price for each of these hotels was based upon management's
projections of the hotel's performance for one or two years following our
purchase. The leases for these hotels provide for fixed initial rent for the
one- or two-year adjustment period that provides us with a 12% annual yield on
the initial purchase price, net of certain expenses. At the end of the one or
two-year period, we calculate a value for the hotel, based on the actual net
income during the previous twelve months, net of certain expenses, such that it
would have yielded a 12% return. We then apply the percentage rent formula to
the hotel's historical revenues for the previous twelve months on a pro forma
basis. If the pro forma percentage rent formula would not have yielded a pro
forma annual return to us of 11.5% to 12.5% based on this calculated value, this
value is adjusted either upward or downward to produce a pro forma return of
either 11.5% or 12.5%, as applicable. If this final purchase price is higher
than the initial purchase price, then the seller of the hotel will receive
consideration in an amount equal to the increase in price. If the final
purchase price is lower than the initial purchase price, then the sellers of the
hotel will return to us consideration in an amount equal to the difference. Any
purchase price adjustment will be made either in operating partnership units or
cash as determined by our Board of Trustees, including the independent trustees.
Any operating partnership units issued by us or returned to us as a result of
the purchase price adjustment historically have been valued at $6.00 per unit.
Any future adjustments will be based upon a value per unit approved by our Board
of Trustees, including our independent trustees. The sellers are entitled to
receive quarterly distributions on the operating partnership units prior to the
units being returned to us in connection with a downward purchase price
adjustment.
11
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
Before we implemented the current pricing methodology in December 2000, our
pricing methodology provided for repricing of a hotel if there was any variance
from our initial forecasted 12% return. We repriced three hotels under this
previous pricing methodology. As of January 1, 2000, the purchase prices for
the Holiday Inn, Milesburg, Comfort Inn, Denver and the Holiday Inn Express,
Riverfront were adjusted based upon the financial results of these hotels and
their respective cash flows, the properties were repriced at higher aggregate
values of $588, $471 and $351, respectively. Based upon the $6.00 offering
price, some of our executive officers, trustees and their affiliates received an
additional 98,050, 78,427 and 58,549 units of limited partnership interest for
the three hotels, respectively. These hotels gave rise to an additional
investment in hotel properties of $485, $388 and $290, respectively.
Some of our executive officers, trustees and their affiliates and the
independent trustees have revised the return criteria upon which the repricings
are to occur going forward. The revised pricing methodology has been
established in order to ensure that we receive a minimum return of 11.5% and a
maximum return of 12.5% based upon audited results for the property and the
pre-established percentage lease formulas.
We have acquired five hotels, since the commencement of operations, for prices
that will be adjusted on either December 31, 2002, 2003 or 2004.
Based upon this revised repricing formula, the purchase prices for the Hampton
Inn, Carlisle, Comfort Inn, West Hanover, Holiday Inn Express, New Columbia, and
Holiday Inn Express, Hershey were adjusted based upon the financial results of
the hotels for the twelve months ended December 31, 2000. Based upon the
financial results of these hotels and their respective cash flows, the
properties were repriced at higher aggregate values of $1,083, $694, $200 and
$1,212, respectively. Based upon the $6.00 offering price, some of our
executive officers, trustees and their affiliates received an additional
180,566, 115,657, 33,370 and 201,966 units of limited partnership interest for
the four hotels, respectively. These hotels gave rise to an additional
investment in hotel properties of $1,017, $651, $188 and $1,137, respectively.
We also issued 175,538 operating partnership units at a value equal to
approximately $1,000 in connection with the repricing of the Comfort Inn,
Jamaica, New York located at John F. Kennedy International Airport prior to its
sale in June 2001.
The purchase prices for the Holiday Inn Express and Suites, Harrisburg, Hampton
Inn, Danville, and Hampton Inn and Suites, Hershey were adjusted based upon the
financial results of the hotels for the twelve months ended December 31, 2001.
Based upon the financial results of these hotels and their respective cash
flows, the properties were repriced at higher aggregate values of $880, $1,086
and $35, respectively. Based upon the $6.00 offering price, some of our
executive officers, trustees and their affiliates received an additional
146,649, 181,049 and 5,843 units of limited partnership interest for the three
hotels, respectively. These hotels gave rise to an additional investment in
hotel properties of $808, $997 and $32, respectively.
On February 27, 2002, the Board of Trustees approved the purchase of the
Mainstay Suites, Frederick, effective as of January 1, 2002, based upon an
agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. We purchased this asset for $5,500 plus
settlement costs of approximately $21 and leased it to HHMLP. In conjunction
with this transaction, we assumed mortgage indebtedness of approximately $3,100,
assumed $800 of related party debt, and paid cash of approximately $1,600. The
consideration for this transaction and all applicable revenue and expense
recognition has been accounted for as of January 1, 2002.
On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn,
Corapolis, Pennsylvania to some of our executive officers, trustees and their
affiliates for $5,500, including the assumption of approximately $3,500 in
indebtedness and the redemption of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property from these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500
including 327,038 limited partnership units. The sale of the Sleep Inn,
Corapolis, Pennsylvania was approved effective as of January 1, 2002, based upon
an agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15,
12
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
2002. The consideration for this transaction and all applicable revenue and
expense recognition has been accounted for as of January 1, 2002.
On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third
party owner operator for $6,300 less transfer costs that are estimated at $93.
In order to complete the sale of this hotel, the Company is currently carrying
$200 of seller financing that is due and payable on October 1, 2003. This
financing was completed at an interest rate of 10%. The remaining proceeds from
the sale were utilized to payoff $5,997 in mortgage indebtedness.
On January 26, 1999, we executed an administrative services agreement with HHMLP
to provide accounting and securities reporting services for the Company. We
have revised some of the terms of this administrative services agreement since
its original execution. Per the revised terms of the administrative services
agreement, we pay HHMLP a fixed fee of $80 plus $10 per property (prorated from
the time of acquisition) for each hotel added to our portfolio. HHMLP has
reduced the administrative services fee by $75 pursuant to the revised repricing
methodology discussed above. As of September 30, 2002 and 2001, $131 and $133
has been charged to operations, respectively.
We have approved the lending of up to $3,000 to certain of our executive
officers and trustees and their affiliates to construct hotels and related
improvements on specific hotel projects at an interest rate of 12.0%. As of
September 30, 2002 and 2001, certain of our executive officers and trustees and
their affiliates owed us $2,000 and $1,800, respectively. Interest income from
these advances was $171 and $52 for the nine months ended September 30, 2002 and
2001, respectively.
Our Due from Related Party balance was $2,084 as of September 30, 2002. The
September 30, 2002 balance consisted primarily of $2,000 of development line
funding, as mentioned above. The remainder of the balance of approximately $84
consisted primarily of outstanding payments related to property acquisitions and
dispositions between the related parties and interest receivable.
We borrowed certain funds from Shreenathji Enterprises, Ltd. ("SEL"), an
affiliated company, during the nine months ended September 30, 2002 and 2001.
Our total borrowings outstanding from SEL at September 30, 2002 and 2001 were
$1,024 and $1,059. We borrow from SEL at PRIME + 1.50%, per annum. We incurred
related party interest expense of $46 and $17 for the nine month period ended
September 30, 2002 and 2001, respectively.
[4] DEBT
Debt is comprised of the following at September 30, 2002 and December 31, 2001:
9/30/02 12/31/01
-------- ---------
Mortgages Payable $ 53,171 $ 54,477
Revolving Credit Facility 2,894 7,058
-------- ---------
Total Long Term Debt $ 56,065 $ 61,535
======== =========
Substantially all of our long-term debt is collateralized by property and
equipment and in certain situations is personally guaranteed by the Hersha
Affiliates. During March 2000, we completed a portfolio refinancing of $22,050
with Lehman Brothers Bank. We have repaid $15,450 of mortgages payable and
$2,000 of related party debt with proceeds from the refinancing. The remainder
of the funds was utilized for acquisition of hotel properties and general
corporate purposes. These funds are collateralized by seven of our hotel
properties.
Outstanding borrowings under the refinancing bear interest at a annual interest
rate of 8.94% and have a total loan amortization period of 23.5 years. The
first eighteen months of the loan period is structured to be interest only
financing with no principal payoff during the period. We have incurred one-time
early prepayment penalties of $107 in connection with the portfolio refinancing.
13
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[5] EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income before Minority Interest and
Discontinued operations $ 1,957 $ 1,280 $ 3,543 $ 2,188
Add: Discontinued Operations 471 25 471 18
Less: Income Attributable to Minority Interest 2,131 1,071 3,099 1,611
---------- ---------- ---------- ----------
NET INCOME FOR BASIC AND DILUTED EARNINGS PER SHARE $ 297 $ 234 $ 915 $ 595
--------------------------------------------------- ========== ========== ========== ==========
Weighted Average Shares for Basic and Diluted Earnings Per Share 2,576,101 2,275,000 2,500,381 2,275,000
Options to purchase 534,000 shares of Class B common shares for the nine months
ended September 30, 2002 and September 30, 2001, respectively, were outstanding
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive. Additionally,
limited partnership units convertible into 5,099,722 and 5,071,840 shares of
common stock on September 30, 2002 and 2001, respectively, as well as income
allocated to these units of approximately $3,099 and $1,611 for the nine months
then ended were not included in the computation of diluted earnings per share as
the effect would have been antidilutive.
[6] DISCONTINUED OPERATIONS
On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn,
Corapolis, Pennsylvania to some of our executive officers, trustees and their
affiliates for $5,500, including the assumption of approximately $3,500 in
indebtedness and the cancellation of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property from these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500
including 327,038 limited partnership units. The sale of the Sleep Inn,
Corapolis, Pennsylvania was approved effective as of January 1, 2002, based upon
an agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. The consideration for this transaction and all
applicable revenue and expense recognition has been accounted for as of January
1, 2002. We did not recognize any gain or loss on the sale of this asset.
Total revenues related to the asset of $210 and $630 and income from
discontinued operations of $11 and $45 for the three and nine months ended
September 30, 2001, respectively are included in discontinued operations.
On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third
party owner operator for $6,300 less transfer costs that are estimated at $93.
In order to complete the sale of this hotel, the Company is currently carrying
$200 of seller financing that is due and payable on October 1, 2003. This
financing was completed at an interest rate of 10%. The remaining proceeds from
the sale were utilized to payoff $5,997 of the Company's line of credit balance.
14
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[6] DISCONTINUED OPERATIONS [CONTINUED]
Total revenues related to the asset of $165 and $528 and income from
discontinued operations of $2 and $18 for the three and nine months ended
September 30, 2002, respectively are included in discontinued operations. We
recognized a gain of $469 in the third quarter of 2002 on the sale of the
property. Total revenues related to the asset of $185 and $560 and income from
discontinued operations of $14 and $7 for the three and nine months ended
September 30, 2001, respectively are included in discontinued operations.
[7] UNAUDITED INTERIM INFORMATION
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with our customary accounting
practices. In the opinion of management, the information presented reflects all
adjustments [consisting of normal recurring accruals] considered necessary for a
fair presentation of our financial position as of September 30, 2002, and the
results of our operations for the interim periods presented. The results of
operations for the nine months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The unaudited financial statements should be read in conjunction with the
financial statements and footnotes thereto included in Hersha Hospitality
Trust's Annual Report on Form 10-K for the year ended December 31, 2001.
[8] SUBSEQUENT EVENTS
On October 1, 2002, we purchased the Doubletree Club hotel located at the JFK
International Airport in Jamaica, New York. We purchased this asset for $11,500
and leased it to Hersha Hospitality Management, LP. In conjunction with this
transaction, we assumed the mortgage and lease indebtedness of approximately
$8,700, assumed $1,000 of related party debt, and issued a note payable for
$1,800.
The quarterly dividend pertaining to the third quarter of 2002 was paid on
October 18, 2002 at the rate of $0.18 per share, which represents an annualized
rate of $0.72 per annum.
15
REPORT OF INDEPENDENT ACCOUNTANT
To the Partners of
Hersha Hospitality Management L.P.
New Cumberland, Pennsylvania
We have reviewed the accompanying balance sheet of Hersha Hospitality
Management L.P. as of September 30, 2002, and the related statements of
operations for the three and nine months ended September 30, 2002 and 2001 and
statements of cash flows for the nine months ended September 30, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Hersha
Hospitality Management L.P., as of December 31, 2001, and the related statements
of operations, partners' capital, and cash flows for the year then ended [not
presented herein]; and in our report dated March 8, 2002, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying balance sheet as of December 31, 2001,
is fairly stated, in all material respects, in relation to the balance sheet
from which it has been derived.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
November 1, 2002
16
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS
[IN THOUSANDS]
================================================================================
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
2002 2001
--------------- --------------
CURRENT ASSETS: [UNAUDITED]
Cash and Cash Equivalents $ 49 $ 222
Accounts Receivable, less allowance for doubtful
accounts of $144 and $230 at September 30, 2002 and
December 31, 2001, respectively 694 698
Prepaid Expenses 12 34
Due from Related Party - HHLP 96 63
Due from Related Parties 1,518 1,097
Other Assets 800 252
Assets of Discontinued Operations 373 -
--------------- --------------
TOTAL CURRENT ASSETS 3,542 2,366
FRANCHISE LICENSES [NET OF ACCUMULATED AMORTIZATION OF
$180 AND $149 AT SEPTEMBER 30, 2002 AND DECEMBER 31,
2001, RESPECTIVELY] 239 293
PROPERTY AND EQUIPMENT 883 1,079
CONSTRUCTION IN PROGRESS - 8
--------------- --------------
TOTAL ASSETS $ 4,664 $ 3,746
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL:
CURRENT LIABILITIES:
Accounts Payable $ 829 $ 1,278
Accrued Expenses 556 268
Due to Related Party - HHLP - 310
Lease Payments Payable - Related Party - HHLP 3,906 2,376
Liabilities of Discontinued Operations 71 -
--------------- --------------
TOTAL CURRENT LIABILITIES 5,362 4,232
COMMITMENTS - -
PARTNERS' CAPITAL (698) (486)
--------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 4,664 $ 3,746
=============== ==============
The Accompanying Notes Are an Integral Part of This Financial Statement.
17
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS]
================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------ ------ -------- --------
REVENUES FROM HOTEL OPERATIONS
Room Revenue $7,888 $7,484 $18,930 $19,595
Restaurant Revenue 506 485 1,730 1,244
Other Revenue 706 441 1,296 1,233
------ ------ -------- --------
TOTAL REVENUES FROM HOTEL OPERATIONS $9,100 $8,410 $21,956 $22,072
EXPENSES:
Hotel Operating Expenses 2,871 2,926 7,349 8,073
Restaurant Operating Expenses 459 463 1,400 1,113
Advertising and Marketing 472 570 1,513 1,475
Bad Debts (Recoveries) - 100 - 110
Depreciation and Amortization 61 58 184 168
General and Administrative 1,282 874 3,563 2,822
General and Admin. - Related Parties - - - 434
Lease Expense - HHLP 2,765 2,564 8,329 7,793
Lease Expense - Other Related Parties - 353 - 353
------ ------ -------- --------
TOTAL EXPENSES $7,910 $7,908 $22,338 $22,341
------ ------ -------- --------
Income (Loss) before Discontinued
operations $1,190 $ 502 $ (382) $ (269)
Income (Loss) from Discontinued
operations $ 32 $ 49 $ 42 $ (57)
NET INCOME (LOSS) $1,222 $ 551 $ (340) $ (326)
====== ====== ======== ========
The Accompanying Notes Are an Integral Part of This Financial Statement.
18
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS]
================================================================================
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
OPERATING ACTIVITIES:
Net Income (Loss) $ (340) $(326)
------------- -------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 191 178
Allowance for Doubtful Accounts - -
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 4 (315)
Prepaid Expenses 22 (140)
Other Assets (548) (14)
Due from Related Parties (376) 490
Assets of Discontinued Operations (373) -
Increase (Decrease):
Accounts Payable (449) (248)
Accounts Payable - Related Party - (60)
Lease Payments Payable - HHLP 1,530 (622)
Due to Related Parties (310) 902
Accrued Expenses 288 279
Other Liabilities - (6)
Liabilities of Discontinued Operations 71 -
------------- -------------
Total Adjustments 50 444
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (290) 118
INVESTING ACTIVITIES
Property and Equipment (11) (31)
Franchise Licenses - (43)
------------- -------------
NET CASH (USED) IN INVESTING ACTIVITIES (11) (74)
FINANCING ACTIVITIES
Partner's Capital Contribution 128 -
------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 128 -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (173) 44
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 222 623
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 49 $ 667
============= =============
The Accompanying Notes Are an Integral Part of This Financial Statement.
19
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]
================================================================================
[1] ORGANIZATION
Hersha Hospitality Management, L.P., ["HHMLP" or the "Lessee"], was organized
under the laws of the State of Pennsylvania in May 1998 to lease and operate
existing hotel properties from Hersha Hospitality Limited Partnership ["HHLP" or
the "Partnership"]. The Lessee is owned by Mr. Hasu P. Shah and certain of our
other executive officers, trustees and their affiliates, some of whom have
ownership interests in the Partnership. We also manage certain other properties
owned by some of our executive officers, trustees and their affiliates that are
not owned by the Partnership as well as certain properties owned by unaffiliated
third parties. HHMLP commenced operations on January 1, 1999 and as of
September 30, 2002 leased 14 hotel properties from the Partnership.
[2] COMMITMENTS AND CONTINGENCIES
We have assumed the rights and obligations under the terms of existing franchise
licenses relating to the hotels upon acquisition of the hotels by the
partnership. The franchise licenses generally specify certain management,
operational, accounting, reporting and marketing standards and procedures with
which the franchisee must comply and provide for annual franchise fees based
upon percentages of gross room revenues.
We have entered into percentage lease agreements ["Percentage Leases"] with
HHLP. Each Percentage Lease has an initial non-cancelable term of five years
and may be extended for an additional five-year term at our option. Pursuant to
the terms of the Percentage Leases, we are required to pay the greater of the
base rent or the percentage rent for hotels with established operating
histories. The base rent is 6.5 percent of the purchase price assigned to each
hotel. The percentage rent for each hotel is comprised of (i) a percentage of
room revenues up to a certain threshold amount for each hotel up to which we
receive a certain percentage of room revenues as a component of percentage rent,
(ii) a percentage of room revenues in excess of the threshold amount, but not
more than a certain incentive threshold amount for each hotel in excess of the
threshold amount up to which we receive a certain percentage of the room
revenues in excess of the threshold amount as a component of percentage rent
(iii) a percentage for room revenues in excess of the incentive threshold amount
and (iv) a percentage of revenues other than room revenues. For hotels with
limited operating histories, the leases provide for the payment of an initial
fixed rent for certain periods as specified in the leases and the greater of
base rent or percentage rent thereafter. The leases commenced on January 26,
1999.
Minimum future lease payments due during the non-cancellable portion of the
leases as of September 30, 2002 is as follows:
December 31, 2002 $1,980
December 31, 2003 6,770
December 31, 2004 4,049
December 31, 2005 2,759
December 31, 2006 1,821
Thereafter 561
-------
TOTAL $17,940
=======
On January 26, 1999, we executed an administrative services agreement with HHMLP
to provide accounting and securities reporting services for the Company. We
have revised some of the terms of this administrative services agreement since
its original execution. Per the revised terms of the administrative services
agreement, we pay HHMLP a fixed fee of $80 plus $10 per property (prorated from
the time of acquisition) for each hotel added to our portfolio. HHMLP has
reduced the administrative services fee by $75 pursuant to the revised repricing
methodology discussed above. As of September 30, 2002 and 2001, $131 and $133
has been charged to operations, respectively.
20
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]
================================================================================
[2] COMMITMENTS AND CONTINGENCIES [CONTINUED]
For the nine months ended September 30, 2002 and 2001 we incurred lease expense
of $8,857 and $8,401, respectively. As of September 30, 2002 and 2001 the
amount due to the Partnership for lease payments was $3,906 and $2,235,
respectively.
[3] DISCONTINUED OPERATIONS
On September 26, 2002, Hersha Hospitality Limited Partnership ("HHLP") sold the
Clarion Suites, Philadelphia, PA to a third party owner operator for $6,300 less
transfer costs that are estimated at $93. We have terminated the lease with
HHLP as of this date without any fees or penalties incurred by either party.
Total revenues related to the asset of $485 and $1,586 and income from
discontinued operations of $32 and $42 for the three and nine months ended
September 30, 2002, respectively are included in discontinued operations. Total
revenues related to the asset of $537 and $1,668 and income (loss) from
discontinued operations of $49 and $(57) for the three and nine months ended
September 30, 2001, respectively are included in discontinued operations.
[4] UNAUDITED INTERIM INFORMATION
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with the Lessee's customary
accounting practices. In the opinion of management, the information presented
reflects all adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation of our financial position as of September 30,
2002 and the results of our operations for the interim periods presented. The
results of operations for the nine months ended September 30, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in
Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 2001.
. . . . . . . .
21
Item 2. 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. This includes statements regarding our 2002
anticipated revenues, expenses and returns, and future capital requirements.
Words such as "believes", "expects", "anticipates", "intends", "plans" and
"estimates" and variations of such words and similar words also identify
forward-looking statements. Such statements are forward-looking in nature and
involve a number of risks and uncertainties, including the risks described under
the caption "Risk Factors" in our registration statement on Form S-11 (File No.
333-56087). 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.
Hersha Hospitality Trust was formed in May 1998 to own initially ten hotels
in Pennsylvania and to continue the hotel acquisition and development strategies
of Hasu P. Shah, Chairman of the board of trustees and Chief Executive Officer
of our Company. We are a self-advised Maryland real estate investment trust for
federal income tax purposes.
We completed an initial public offering of two million of our Class A
Priority Common Shares at $6.00 per share and commenced operations on January
26, 1999. On February 5, 1999, we sold an additional 275,000 Class A Priority
Common Shares pursuant to an over allotment option granted to the underwriter in
our initial public offering. During the quarter ended March 31, 2002, we sold an
additional 300,000 Class A Priority Common Shares. Our Priority Class A Common
Shares are traded on the American Stock Exchange under the symbol "HT."
We contributed substantially all of the net proceeds from our initial
public offering to our operating partnership subsidiary, Hersha Hospitality
Limited Partnership, of which we are the sole general partner. We currently own
a 33.6% partnership interest in that partnership. With the proceeds of our
initial public offering, we caused the partnership to acquire ten hotels in
exchange for (i) 4,032,431 subordinated units of limited partnership interest in
the partnership that are redeemable for the same number of Class B Common Shares
with a value of approximately $24,200 based on the initial public offering
price, and (ii) the assumption of approximately $23,300 of indebtedness of which
approximately $6,100 was repaid immediately after the acquisition of the hotels.
Since the completion of the initial public offering, we have issued an
additional 173,539 units of limited partnership interest in connection with the
acquisition of the Hampton Inn, Danville, PA and 76,555 units in connection with
the acquisition of the Holiday Inn Express, Long Island City. We have also
issued an additional 1,275,662 units of limited partnership interest in
connection with final settlement of the purchase prices of several hotels and
have redeemed 458,465 units of limited partnership interest in connection with
the sale of certain hotels. The total number of units of limited partnership
interest outstanding as of September 30, 2002 and 2001 was 5,099,722 and
5,071,840, respectively.
We have acquired five hotels, since the commencement of operations, for
prices that will be adjusted at either December 31, 2002, 2003 or 2004.
The initial purchase price for each of these hotels was based upon
management's projections of the hotel's performance for one or two years
following our purchase. The leases for these hotels provide for fixed initial
rent for the one or two-year adjustment period that provides us with a 12%
annual yield on the initial purchase price, net of certain expenses. At the end
of the one or two-year period, we calculate a value for the hotel, based on the
actual net income during the previous twelve months, net of certain expenses,
such that it would have yielded a 12% return. We then apply the percentage rent
formula to the hotel's historical revenues for the previous twelve months on a
pro forma basis. If the pro forma percentage rent formula would not have
22
yielded a pro forma annual return to us of 11.5% to 12.5% based on this
calculated value, this value is adjusted either upward or downward to produce a
pro forma return of either 11.5% or 12.5%, as applicable. If this final
purchase price is higher than the initial purchase price, then the seller of the
hotel will receive consideration in an amount equal to the increase in price.
If the final purchase price is lower than the initial purchase price, then the
sellers of the hotel will return to us consideration in an amount equal to the
difference. Any purchase price adjustment will be made either in operating
partnership units or cash as determined by our Board of Trustees, including the
independent trustees. Any operating partnership units issued by us or returned
to us as a result of the purchase price adjustment historically have been valued
at $6.00 per unit. Any future adjustments will be based upon a value per unit
approved by our Board of Trustees, including our independent trustees. The
sellers are entitled to receive quarterly distributions on the operating
partnership units prior to the units being returned to us in connection with a
downward purchase price adjustment.
On February 27, 2002, the Board of Trustees approved the purchase of the
Mainstay Suites, Frederick, effective as of January 1, 2002, based upon an
agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. We purchased this asset for $5,500 plus
settlement costs of approximately $21 and leased it to HHMLP. In conjunction
with this transaction, we assumed mortgage indebtedness of approximately $3,100,
assumed $800 of related party debt, and paid cash of approximately $1,600. The
consideration for this transaction and all applicable revenue and expense
recognition has been accounted for as of January 1, 2002.
On February 27, 2002, the Board of Trustees approved the sale of the Sleep
Inn, Corapolis, Pennsylvania to some of our executive officers, trustees and
their affiliates for $5,500, including the assumption of approximately $3,500 in
indebtedness and the redemption of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property from these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500
including 327,038 limited partnership units. The sale of the Sleep Inn,
Corapolis, Pennsylvania was approved effective as of January 1, 2002, based upon
an agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. The consideration for this transaction and all
applicable revenue and expense recognition has been accounted for as of January
1, 2002.
As of November 1, 2002, we owned five Hampton Inn hotels, one Hampton Inn &
Suites hotel, one Holiday Inn hotel, one Holiday Inn Express and Suites hotel,
four Holiday Inn Express hotels, one Comfort Inn hotel, one Comfort Suites
hotel, two Mainstay Suites hotels, one Sleep Inn hotel and one Doubletree Club
hotel, which contain an aggregate of 1,594 rooms.
RESULTS OF OPERATIONS, NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
SEPTEMBER 30, 2001 ($'s in thousands)
Our revenues for the nine months ended September 30, 2002 and 2001,
substantially consisted of percentage lease revenues recognized pursuant to the
percentage leases. Percentage lease revenues during the nine month period ended
September 30, 2002 were $11,335 an increase of $1,391, or 14.0%, as compared to
percentage lease revenues of $9,944 for the same period during 2001. The
improvement in lease revenues is primarily attributable to additional percentage
lease revenues derived from the Holiday Inn New Cumberland, Hampton Inn &
Suites, Hershey and other existing properties and from a full nine months of
operations at the Mainstay Suites and Sleep Inn, King of Prussia that was
acquired on June 1, 2001.
23
Net income increased by $320 or 53.8% to $915, for the nine months ended
September 30, 2002 as compared to net income of $595 for the same period during
2001. The increase in net income is primarily attributable to an increase in
percentage lease revenues in addition to a decrease in interest expense and
depreciation expense and a gain of $469 on the sale of the Clarion Suites,
Philadelphia, PA. Net income was offset by an increased income allocation to
the Minority Interest holders to $3,099 from $1,611 for the same period during
2001.
HHMLP's room revenues from the hotels decreased by $665, or 3.4%, to
$18,930 for the nine months ended September 30, 2002, as compared to $19,595 for
the same period in 2001. This decrease in revenues is primarily attributable to
a decrease in the number of hotel properties leased and managed during the
period. Room revenues were slightly offset by an increase in occupancies from
58.7% to 63.0% and an increase in revenues per available room from $44.29 to
$50.66.
The Lessee maintains the ability to borrow funds from related entities,
partners and shareholders. The Lessee's borrowing costs range from 8.5% on
short-term loans to 10.5% on longer term loans.
The following table shows certain other information for the periods
indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------ ------------
Occupancy rate 63.0% 58.7%
ADR $ 80.44 $ 75.43
REVPAR $ 50.66 $ 44.29
Room revenue 20,357,036 21,115,384
Room nights available 401,866 476,806
Room nights occupied 253,073 279,951
RESULTS OF OPERATIONS, THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
SEPTEMBER 30, 2001 ($'S IN THOUSANDS)
Our revenues for the three months ended September 30, 2002 and 2001,
substantially consisted of percentage lease revenues recognized pursuant to the
percentage leases. Percentage lease revenues during the three month period
ended September 30, 2002 were $4,441 an increase of $688, or 18.3%, as compared
to percentage lease revenues of $3,753 for the same period during 2001.
The improvement in lease revenues is primarily attributable to additional
percentage lease revenues derived from the Holiday Inn New Cumberland, Hampton
Inn & Suites, Hershey and other existing properties.
Lease revenues were slightly higher for several properties due to the
methodology change in percentage lease revenue recognition versus straight-line
revenue recognition. The Holiday Inn Express and Suites, Harrisburg, Hampton
Inn, Danville and Hampton Inn & Suites, Hershey were repriced on January 1,
2002. These properties now receive percentage lease revenues based upon a
percentage lease formula. During each quarter of the fiscal year ended December
31, 2001, all of these properties received an equivalent amount of fixed lease
revenues although the properties were seasonal in nature. Due to the seasonality
of the hotels that were repriced, we will receive a higher portion of the total
lease payments during the second and third quarters and lower lease revenues
during the first and fourth quarters.
Net income increased by $63 or 26.9% to $297, for the three months ended
September 30, 2002 as compared to net income of $234 for the same period during
2001. The increase in net income is primarily attributable to higher percentage
lease revenues as described above, and decreased interest expense. The increase
24
in net income was also attributable to a gain of $469 attributable to the sale
of the Clarion Suites, Philadelphia, PA. Net income was offset by an increased
income allocation to the Minority Interest holders to $2,131 from $1,071 for the
same period during 2001.
HHMLP's room revenues from the hotels increased by $404, or 4.3%, to $7,888
for the three months ended September 30, 2002, as compared to $7,484 for the
same period in 2001.
This increase in revenues is primarily attributable to an increase in
occupancies from 66.4% to 70.1% and a increase in revenues per available room
from $54.07 to $64.13.
HHMLP maintains the ability to borrow funds from related entities, partners
and shareholders. The Lessee's borrowing costs range from 8.5% on short-term
loans to 10.5% on longer term loans.
The following table shows certain other information for the periods
indicated.
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------- -----------
Occupancy rate 70.1% 66.4%
ADR $ 90.36 $ 81.46
REVPAR $ 64.13 $ 54.07
Room revenue 8,337,088 7,993,149
Room nights available 129,996 147,842
Room nights occupied 92,266 98,120
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to shareholders, is our share of the Partnership's cash flow. The
Partnership's principal source of revenue is rent payments under the percentage
leases with HHMLP and Noble. The lessee's obligations under the leases are
unsecured. The lessee's ability to make rent payments, and our liquidity,
including our ability to make distributions to common shareholders, is dependent
on the lessee's ability to generate sufficient cash flow from the operation of
the hotels.
We note that industry analysts and investors use Funds From Operations
("FFO") as a tool to compare equity REIT performance. In accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investments Trusts ("NAREIT"), FFO represents net income (loss) (computed
in accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructuring or sales of property, plus depreciation, and
after adjustments for unconsolidated partnerships and joint ventures. FFO was
$6,697 in the nine months ended September 30, 2002, which is an increase of
$1,144, or 20.6 % over FFO in the comparable period in 2001, which was $5,553.
The increase in FFO can be attributed to increased lease revenues and decreased
interest expense costs as mentioned above.
FFO presented herein is not necessarily comparable to FFO presented by
other real estate companies due to the fact that not all real estate companies
use the same definition. However, our FFO is comparable to the FFO of the real
estate companies that use the current definition of NAREIT.
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 a secured line of credit. We believe that our net
cash provided by operations will be adequate to fund both operating requirements
and payment of dividends by us in accordance with REIT requirements.
25
We expect to meet our long-term liquidity requirements, such as scheduled
debt maturities and property acquisitions, through long-term secured and
unsecured borrowing, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
Units in the Partnership.
We intend to make additional investments in hotel properties and may incur,
or cause the Partnership to incur, indebtedness to make such investments or to
meet distribution requirements imposed on a REIT under the Internal Revenue Code
to the extent that working capital and cash flow from our investments are
insufficient to make such distributions. Our policy is to limit consolidated
indebtedness to less than 67% of the total purchase prices paid by us 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 the debt policy at any time without shareholder approval.
The hotel business is seasonal, with hotel revenue generally greater in the
second and third quarters than in the first and fourth quarters. To the extent
that cash flow from operating activities is insufficient to provide all of the
estimated quarterly distributions, we anticipate that we will be able to fund
any such deficit from future working capital.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the lessee's ability to raise
room rates in the face of inflation, and annual increases in average daily rates
have failed to keep pace with inflation.
SEASONALITY
Our hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in our quarterly lease revenue
to the extent that we receive percentage rent.
SUBSEQUENT EVENTS
On October 1, 2002, we purchased the Doubletree Club hotel located at the
JFK International Airport in Jamaica, New York. We purchased this asset for
$11,500 and leased it to Hersha Hospitality Management, LP. In conjunction with
this transaction, we assumed the mortgage and lease indebtedness of
approximately $8,700, assumed $1,000 of related party debt, and issued a note
payable for $1,800.
The quarterly dividend pertaining to the third quarter of 2002 was paid on
October 18, 2002 at the rate of $0.18 per share and represents an annualized
rate of $0.72 per annum.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the general instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to our Company at this time.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer, Hasu P.
Shah, and Chief Financial Officer, Ashish R. Parikh, of the effectiveness of the
26
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon
that evaluation, the Company's Chief Executive Officer, Hasu P. Shah, and Chief
Financial Officer, Ashish R. Parikh, concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
We filed a report on Form 8-K on August 14, 2002 under Item 9 in
order to file the certifications required under Section 906 of
the Sarbanes-Oxley Act of 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHA HOSPITALITY TRUST
November 14, 2002 /s/ Ashish R. Parikh
--------------------
Ashish R. Parikh
Chief Financial Officer
28
CHIEF EXECUTIVE OFFICER CERTIFICATION FOR FORM 10-Q
I, Hasu P. Shah, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hersha Hospitality
Trust;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Hasu P. Shah
----------------- -------------------
Hasu P. Shah
Chief Executive Officer
29
CHIEF FINANCIAL OFFICER CERTIFICATION FOR FORM 10-Q
I, Ashish R. Parikh, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hersha Hospitality
Trust;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Ashish R. Parikh
----------------- -----------------------
Ashish R. Parikh
Chief Financial Officer
30