WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Former name, former address and former fiscal year, if changed since last report: Not applicable
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Earnings (Loss) Per Share: | | | | | | | | | |
Loss Per Share: | | Loss Per Share: | | | | | |
BASIC | BASIC | | | | | | | | | BASIC | | | | | |
Income (Loss) from Continuing Operations Applicable to Common Shareholders | | $ | 0.05 | | | $ | (0.73) | | | $ | (0.52) | | | $ | (0.66) | | |
Loss from Continuing Operations Applicable to Common Shareholders | | Loss from Continuing Operations Applicable to Common Shareholders | | $ | (0.38) | | | $ | (0.57) | | |
| | | | | | | | | | | | | |
DILUTED | DILUTED | | | | | | | | | DILUTED | | | | | |
Income (Loss) from Continuing Operations Applicable to Common Shareholders | | $ | 0.05 | | | $ | (0.73) | | | $ | (0.52) | | | $ | (0.66) | | |
Loss from Continuing Operations Applicable to Common Shareholders | | Loss from Continuing Operations Applicable to Common Shareholders | | $ | (0.38) | | | $ | (0.57) | | |
| | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding: | Weighted Average Common Shares Outstanding: | | | | | | | | | Weighted Average Common Shares Outstanding: | | | | | |
Basic | Basic | | 39,277,269 | | | 39,097,820 | | | 39,254,536 | | | 39,034,707 | | Basic | | 39,626,231 | | | 39,231,550 | | |
Diluted* | Diluted* | | 40,453,785 | | | 39,097,820 | | | 39,254,536 | | | 39,034,707 | | Diluted* | | 39,626,231 | | | 39,231,550 | | |
*Income (Loss)Loss allocated to noncontrolling interest in Hersha Hospitality Limited Partnership (the “Operating Partnership” or “HHLP”) has been excluded from the numerator and the Class A common shares issuable upon any redemption of the Operating Partnership’s common units of limited partnership interest (“Common Units”) and the Operating Partnership’s vested LTIP units (“Vested LTIP Units”) have been omitted from the denominator for the purpose of computing diluted earnings per share because the effect of including these shares and units in the numerator and denominator would have no impact. In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income (loss) applicable to common shareholders.
The following table summarizes potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Common Units and Vested LTIP Units | Common Units and Vested LTIP Units | 5,262,313 | | | 4,279,355 | | | 5,264,772 | | | 4,314,347 | | Common Units and Vested LTIP Units | 5,840,197 | | | 5,267,258 | | |
Unvested Stock Awards and LTIP Units Outstanding | Unvested Stock Awards and LTIP Units Outstanding | — | | | 939,591 | | | 791,544 | | | 581,989 | | Unvested Stock Awards and LTIP Units Outstanding | 78,391 | | | 681,150 | | |
Contingently Issuable Share Awards | Contingently Issuable Share Awards | — | | | 408,202 | | | 318,893 | | | 594,125 | | Contingently Issuable Share Awards | 1,114,355 | | | 296,157 | | |
Total Potentially Dilutive Securities Excluded from the Denominator | Total Potentially Dilutive Securities Excluded from the Denominator | 5,262,313 | | | 5,627,148 | | | 6,375,209 | | | 5,490,461 | | Total Potentially Dilutive Securities Excluded from the Denominator | 7,032,943 | | | 6,244,565 | | |
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net Income (Loss) | $ | 9,212 | | | $ | (23,523) | | | $ | (7,754) | | | $ | (14,433) | |
Other Comprehensive Income | | | | | | | |
Change in Fair Value of Derivative Instruments | 5,353 | | | 2,539 | | | 20,842 | | | 9,004 | |
Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Income (Loss) | — | | | (141) | | | — | | | 159 | |
Total Other Comprehensive Income | $ | 5,353 | | | $ | 2,398 | | | $ | 20,842 | | | $ | 9,163 | |
| | | | | | | |
Comprehensive Income (Loss) | 14,565 | | | (21,125) | | | 13,088 | | | (5,270) | |
Less: Comprehensive (Income) Loss Attributable to Noncontrolling Interests - Common Units | (1,011) | | | 2,712 | | | (121) | | | 1,711 | |
Less: Comprehensive Income Attributable to Noncontrolling Interests - Consolidated Joint Venture | (691) | | | (1,968) | | | (2,964) | | | (1,810) | |
Less: Preferred Distributions | (6,043) | | | (6,044) | | | (12,087) | | | (12,087) | |
| | | | | | | |
Comprehensive Income (Loss) Attributable to Common Shareholders | $ | 6,820 | | | $ | (26,425) | | | $ | (2,084) | | | $ | (17,456) | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net Loss | $ | (9,501) | | | $ | (16,599) | | | | | |
Other Comprehensive Income | | | | | | | |
Change in Fair Value of Derivative Instruments | (3,979) | | | 15,489 | | | | | |
Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Loss | 7 | | | (367) | | | | | |
Total Other Comprehensive (Loss) Income | $ | (3,972) | | | $ | 15,122 | | | | | |
| | | | | | | |
Comprehensive Loss | (13,473) | | | (1,477) | | | | | |
Less: Comprehensive Loss Attributable to Noncontrolling Interests - Common Units | 2,506 | | | 890 | | | | | |
Less: Comprehensive Income Attributable to Noncontrolling Interests - Consolidated Joint Venture | (1,390) | | | (2,273) | | | | | |
Less: Preferred Distributions | (6,044) | | | (6,044) | | | | | |
| | | | | | | |
Comprehensive Loss Attributable to Common Shareholders | $ | (18,401) | | | $ | (8,904) | | | | | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
| | | Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | | | | | Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | | |
| | Consolidated Joint Venture ($) | | Common Shares | | Class A Common Shares ($) | | Class B Common Shares ($) | | Preferred Shares | | Preferred Shares ($) | | Additional Paid-In Capital ($) | | Accumulated Other Comprehensive Income ($) | | Distributions in Excess of Net Income ($) | | Total Shareholders' Equity ($) | | Common Units and LTIP Units | | Common Units and LTIP Units ($) | | Total Equity ($) | | | | Consolidated Joint Venture ($) | | Common Shares | | Class A Common Shares ($) | | Class B Common Shares ($) | | Preferred Shares | | Preferred Shares ($) | | Additional Paid-In Capital ($) | | Accumulated Other Comprehensive Income ($) | | Distributions in Excess of Net Income ($) | | Total Shareholders' Equity ($) | | Common Units and LTIP Units | | Common Units and LTIP Units ($) | | Total Equity ($) | |
Balance at March 31, 2022 | | 4,583 | | | 39,354,893 | | | 394 | | | — | | | 14,703,214 | | | 147 | | | 1,153,486 | | | 10,908 | | | (615,740) | | | 549,195 | | | 6,926,253 | | | 51,809 | | | 601,004 | | | | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | | 5,076 | | | 39,697,451 | | | 398 | | | — | | | 14,703,214 | | | 147 | | | 1,157,057 | | | 16,213 | | | (490,815) | | | 683,000 | | | 6,940,053 | | | 73,461 | | | 756,461 | | |
Issuance Costs/Other | Issuance Costs/Other | | — | | | — | | | — | | | — | | | — | | | — | | | (10) | | | — | | | — | | | (10) | | | — | | | — | | | (10) | | | | Issuance Costs/Other | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | |
Unit Conversion | | — | | | 50,000 | | | 1 | | | — | | | — | | | — | | | 425 | | | — | | | — | | | 426 | | | (50,000) | | | (426) | | | — | | | | |
| Dividends and Distributions declared: | Dividends and Distributions declared: | | | | | | Dividends and Distributions declared: | | | | |
| Preferred Shares | Preferred Shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,044) | | | (6,044) | | | — | | | — | | | (6,044) | | | | Preferred Shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,044) | | | (6,044) | | | — | | | — | | | (6,044) | | |
| Common Shares ($0.05 per share) | | Common Shares ($0.05 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,994) | | | (1,994) | | | — | | | — | | | (1,994) | | |
Common Units ($0.05 per share) | | Common Units ($0.05 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (88) | | | (88) | | |
LTIP Units ($0.05 per share) | | LTIP Units ($0.05 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (314) | | | (314) | | |
Dividend Reinvestment Plan | | Dividend Reinvestment Plan | | — | | | 8,975 | | | — | | | — | | | — | | | — | | | 72 | | | — | | | — | | | 72 | | | — | | | — | | | 72 | | |
Share Based Compensation: | Share Based Compensation: | | | | | | Share Based Compensation: | | | | |
Grants | Grants | | — | | | 109,768 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 194,427 | | | — | | | 1 | | | | Grants | | — | | | 168,473 | | | 1 | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | 1,104,874 | | | — | | | — | | |
Amortization | Amortization | | — | | | — | | | — | | | — | | | — | | | — | | | 1,157 | | | — | | | — | | | 1,157 | | | 2,142 | | | 3,299 | | | | Amortization | | — | | | — | | | — | | | — | | | — | | | — | | | 1,279 | | | — | | | — | | | 1,279 | | | 3,470 | | | 4,749 | | |
| Change in Fair Value of Derivative Instruments | Change in Fair Value of Derivative Instruments | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,721 | | | — | | | 4,721 | | | — | | | 632 | | | 5,353 | | | | Change in Fair Value of Derivative Instruments | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,462) | | | — | | | (3,462) | | | — | | | (510) | | | (3,972) | | |
Adjustment to Record Noncontrolling Interest at Redemption Value | Adjustment to Record Noncontrolling Interest at Redemption Value | | 691 | | | — | | | — | | | — | | | — | | | — | | | (691) | | | — | | | — | | | (691) | | | — | | | — | | | (691) | | | | Adjustment to Record Noncontrolling Interest at Redemption Value | | 1,390 | | | — | | | — | | | — | | | — | | | — | | | (1,390) | | | — | | | — | | | (1,390) | | | — | | | — | | | (1,390) | | |
Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,833 | | | 8,833 | | | — | | | 379 | | | 9,212 | | | | |
Balance at June 30, 2022 | | 5,274 | | | 39,514,661 | | | 396 | | | — | | | 14,703,214 | | | 147 | | | 1,154,367 | | | 15,629 | | | (612,951) | | | 557,588 | | | 7,070,680 | | | 54,536 | | | 612,124 | | | | |
Net Loss | | Net Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,505) | | | (7,505) | | | — | | | (1,996) | | | (9,501) | | |
Balance at March 31, 2023 | | Balance at March 31, 2023 | | 6,466 | | | 39,874,899 | | | 399 | | | — | | | 14,703,214 | | | 147 | | | 1,157,015 | | | 12,751 | | | (506,358) | | | 663,954 | | | 8,044,927 | | | 74,023 | | | 737,977 | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
| | | Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | | | | | Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | | | |
| | Consolidated Joint Venture ($) | | Common Shares | | Class A Common Shares ($) | | Class B Common Shares ($) | | Preferred Shares | | Preferred Shares ($) | | Additional Paid-In Capital ($) | | Accumulated Other Comprehensive Loss ($) | | Distributions in Excess of Net Income ($) | | Total Shareholders' Equity ($) | | Common Units and LTIP Units | | Common Units and LTIP Units ($) | | Total Equity ($) | | | | Consolidated Joint Venture ($) | | Common Shares | | Class A Common Shares ($) | | Class B Common Shares ($) | | Preferred Shares | | Preferred Shares ($) | | Additional Paid-In Capital ($) | | Accumulated Other Comprehensive (Loss) Income ($) | | Distributions in Excess of Net Income ($) | | Total Shareholders' Equity ($) | | Common Units and LTIP Units | | Common Units and LTIP Units ($) | | Total Equity ($) | | |
Balance at March 31, 2021 | | — | | | 39,132,307 | | | 391 | | | — | | | 14,703,214 | | | 147 | | | 1,154,579 | | | (12,509) | | | (530,535) | | | 612,073 | | | 5,943,014 | | | 49,172 | | | 661,245 | | | | |
| Balance at December 31, 2021 | | Balance at December 31, 2021 | | 2,310 | | | 39,325,025 | | | 394 | | | — | | | 14,703,214 | | | 147 | | | 1,155,034 | | | (6,211) | | | (592,314) | | | 557,050 | | | 6,926,253 | | | 51,246 | | | 608,296 | | | |
Issuance Costs/Other | | Issuance Costs/Other | | — | | | — | | | — | | | — | | | — | | | — | | | (39) | | | — | | | — | | | (39) | | | — | | | — | | | (39) | | | |
| Dividends and Distributions declared: | Dividends and Distributions declared: | | | | | | | Dividends and Distributions declared: | | | | | |
| Preferred Shares | Preferred Shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,044) | | | (6,044) | | | — | | | — | | | (6,044) | | | | Preferred Shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,044) | | | (6,044) | | | — | | | — | | | (6,044) | | | |
| Share Based Compensation: | Share Based Compensation: | | | | | | Share Based Compensation: | | | | | |
Grants | Grants | | — | | | 85,168 | | | 1 | | | — | | | — | | | — | | | 365 | | | — | | | — | | | 366 | | | 19,477 | | | 65 | | | 431 | | | | Grants | | — | | | 29,868 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Amortization | Amortization | | — | | | — | | | — | | | — | | | — | | | — | | | 681 | | | — | | | — | | | 681 | | | — | | | 1,468 | | | 2,149 | | | | Amortization | | — | | | — | | | — | | | — | | | — | | | — | | | 764 | | | — | | | — | | | 764 | | | — | | | 1,777 | | | 2,541 | | | |
Change in Fair Value of Derivative Instruments | Change in Fair Value of Derivative Instruments | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,485 | | | — | | | 1,485 | | | — | | | 912 | | | 2,397 | | | | Change in Fair Value of Derivative Instruments | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 13,288 | | | — | | | 13,288 | | | — | | | 1,834 | | | 15,122 | | | |
Adjustment to Record Noncontrolling Interest at Redemption Value | Adjustment to Record Noncontrolling Interest at Redemption Value | | 1,968 | | | — | | | — | | | — | | | — | | | — | | | (1,968) | | | — | | | — | | | (1,968) | | | — | | | — | | | (1,968) | | | | Adjustment to Record Noncontrolling Interest at Redemption Value | | 2,273 | | | — | | | — | | | — | | | — | | | — | | | (2,273) | | | — | | | — | | | (2,273) | | | — | | | — | | | (2,273) | | | |
| Net Income | Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (20,578) | | | (20,578) | | | (2,945) | | | (23,523) | | | | Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,918) | | | (13,918) | | | — | | | (2,681) | | | (16,599) | | | |
Balance at June 30, 2021 | | 1,968 | | | 39,217,475 | | | 392 | | | — | | | 14,703,214 | | | 147 | | | 1,153,657 | | | (11,024) | | | (557,157) | | | 586,015 | | | 5,962,491 | | | 48,672 | | | 634,687 | | | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | | 4,583 | | | 39,354,893 | | | 394 | | | — | | | 14,703,214 | | | 147 | | | 1,153,486 | | | 7,077 | | | (612,276) | | | 548,828 | | | 6,926,253 | | | 52,176 | | | 601,004 | | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | | | | |
| | Consolidated Joint Venture ($) | | Common Shares | | Class A Common Shares ($) | | Class B Common Shares ($) | | Preferred Shares | | Preferred Shares ($) | | Additional Paid-In Capital ($) | | Accumulated Other Comprehensive Loss ($) | | Distributions in Excess of Net Income ($) | | Total Shareholders' Equity ($) | | Common Units and LTIP Units | | Common Units and LTIP Units ($) | | Total Equity ($) | | |
Balance at December 31, 2021 | | 2,310 | | | 39,325,025 | | | 394 | | | — | | | 14,703,214 | | | 147 | | | 1,155,034 | | | (2,747) | | | (595,454) | | | 557,374 | | | 6,926,253 | | | 50,922 | | | 608,296 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance Costs / Other | | — | | | — | | | — | | | — | | | — | | | — | | | (48) | | | — | | | — | | | (48) | | | — | | | — | | | — | | | |
Unit Conversion | | — | | | 50,000 | | | 1 | | | — | | | — | | | — | | | 425 | | | — | | | — | | | 426 | | | (50,000) | | | (426) | | | — | | | |
Dividends and Distributions declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred Shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,088) | | | (12,088) | | | — | | | — | | | (12,088) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share Based Compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Grants | | — | | | 139,636 | | 1 | | | — | | | — | | | — | | | (1) | | — | | | — | | | — | | | 194,427 | | | — | | | — | | | |
Amortization | | — | | | — | | | — | | | — | | | — | | | — | | | 1,921 | | — | | | — | | | 1,921 | | | | 3,919 | | | 5,840 | | |
Change in Fair Value of Derivative Instruments | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,376 | | — | | | 18,376 | | — | | | 2,466 | | | 20,842 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment to Record Noncontrolling Interest at Redemption Value | | 2,964 | | | — | | | — | | | — | | | — | | | — | | | (2,964) | | | — | | | — | | | (2,964) | | — | | | — | | | (2,964) | | |
Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,409) | | (5,409) | | — | | | (2,345) | | | (7,754) | | |
Balance at June 30, 2022 | | 5,274 | | | 39,514,661 | | 396 | | | — | | | 14,703,214 | | | 147 | | | 1,154,367 | | | 15,629 | | | (612,951) | | | 557,588 | | | 7,070,680 | | | 54,536 | | | 612,124 | | | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | | | | |
| | Consolidated Joint Venture ($) | | Common Shares | | Class A Common Shares ($) | | Class B Common Shares ($) | | Preferred Shares | | Preferred Shares ($) | | Additional Paid-In Capital ($) | | Accumulated Other Comprehensive Loss ($) | | Distributions in Excess of Net Income ($) | | Total Shareholders' Equity ($) | | Common Units and LTIP Units | | Common Units and LTIP Units ($) | | Total Equity ($) | | |
Balance at December 31, 2020 | | — | | | 38,843,482 | | | 389 | | | — | | | 14,703,214 | | | 147 | | | 1,150,985 | | | (19,275) | | | (509,243) | | | 623,003 | | | 5,392,808 | | | 49,246 | | | 672,249 | | | |
Unit Conversion | | — | | | 225,000 | | | 2 | | | — | | | — | | | — | | | 2,870 | | | — | | | — | | | 2,872 | | | (225,000) | | | (2,872) | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends and Distributions declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred Shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (36,262) | | | (36,262) | | | — | | | — | | | (36,262) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share Based Compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Grants | | — | | | 148,993 | | | 1 | | | — | | | — | | | — | | | 356 | | | — | | | — | | | 357 | | | 794,683 | | | 1,683 | | | 2,040 | | | |
Amortization | | — | | | — | | | — | | | — | | | — | | | — | | | 1,414 | | | — | | | — | | | 1,414 | | | — | | | 2,326 | | | 3,740 | | | |
Equity Contribution to Consolidated Joint Venture | | 158 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Change in Fair Value of Derivative Instruments | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,251 | | | — | | | 8,251 | | | — | | | 912 | | | 9,163 | | | |
Adjustment to Record Noncontrolling Interest at Redemption Value | | 1,968 | | | — | | | — | | | — | | | — | | | — | | | (1,968) | | | — | | | — | | | (1,968) | | | — | | | — | | | (1,968) | | | |
Net Loss | | (158) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,652) | | | (11,652) | | | | | (2,623) | | | (14,275) | | | |
Balance at June 30, 2021 | | 1,968 | | | 39,217,475 | | | 392 | | | — | | | 14,703,214 | | | 147 | | | 1,153,657 | | | (11,024) | | | (557,157) | | | 586,015 | | | 5,962,491 | | | 48,672 | | | 634,687 | | | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS)
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Operating Activities: | Operating Activities: | | | | | Operating Activities: | | | | |
Net Loss | Net Loss | | $ | (7,754) | | | $ | (14,433) | | Net Loss | | $ | (9,501) | | | $ | (16,599) | |
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: | Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: | | | | | Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: | | | | |
Gain on Disposition of Hotel Properties | | — | | | (48,352) | | |
Loss on Impairment of Assets | | — | | | 222 | | |
Insurance recoveries in excess of property loss | | (962) | | | (711) | | |
| Property Losses in Excess of Insurance Recoveries | | Property Losses in Excess of Insurance Recoveries | | — | | | 25 | |
Junior Note PIK Interest Added to Principal | Junior Note PIK Interest Added to Principal | | 1,855 | | | 2,514 | | Junior Note PIK Interest Added to Principal | | — | | | 1,855 | |
| Deferred Taxes | | — | | | (499) | | |
| Depreciation | Depreciation | | 36,117 | | | 42,642 | | Depreciation | | 13,639 | | | 19,195 | |
Amortization | Amortization | | 3,017 | | | 2,594 | | Amortization | | 685 | | | 1,484 | |
Loss on Debt Extinguishment | | — | | | 634 | | |
| Equity in Loss of Unconsolidated Joint Ventures | Equity in Loss of Unconsolidated Joint Ventures | | 579 | | | 1,247 | | Equity in Loss of Unconsolidated Joint Ventures | | 352 | | | 936 | |
| Loss Recognized on Change in Fair Value of Derivative Instrument | | — | | | 159 | | |
Loss (Gain) Recognized on Change in Fair Value of Derivative Instrument | | Loss (Gain) Recognized on Change in Fair Value of Derivative Instrument | | 7 | | | (367) | |
Share Based Compensation Expense | Share Based Compensation Expense | | 5,840 | | | 4,758 | | Share Based Compensation Expense | | 2,052 | | | 2,541 | |
| Change in Assets and Liabilities: | Change in Assets and Liabilities: | | | | | Change in Assets and Liabilities: | | | | |
(Increase) Decrease in: | (Increase) Decrease in: | | | | | (Increase) Decrease in: | | | | |
Hotel Accounts Receivable | Hotel Accounts Receivable | | 249 | | | 151 | | Hotel Accounts Receivable | | 4,108 | | | 1,370 | |
| Other Assets | Other Assets | | (4,057) | | | (4,055) | | Other Assets | | 112 | | | 194 | |
Due from Related Parties | Due from Related Parties | | 1,961 | | | 1,089 | | Due from Related Parties | | 98 | | | 2,342 | |
Increase (Decrease) in: | Increase (Decrease) in: | | | | | Increase (Decrease) in: | | | | |
Due to Related Parties | Due to Related Parties | | (1,241) | | | — | | Due to Related Parties | | (371) | | | (1,284) | |
Accounts Payable, Accrued Expenses and Other Liabilities | Accounts Payable, Accrued Expenses and Other Liabilities | | 4,882 | | | 4,933 | | Accounts Payable, Accrued Expenses and Other Liabilities | | (1,184) | | | 3,304 | |
Net Cash Provided by (Used in) Operating Activities | | $ | 40,486 | | | $ | (7,107) | | |
Net Cash Provided by Operating Activities | | Net Cash Provided by Operating Activities | | $ | 9,997 | | | $ | 14,996 | |
| | | | | | | | |
Investing Activities: | Investing Activities: | | | | | Investing Activities: | | | | |
| Capital Expenditures | Capital Expenditures | | (12,041) | | | (5,374) | | Capital Expenditures | | (9,953) | | | (4,219) | |
| Proceeds from Disposition of Hotel Properties | | — | | | 163,583 | | |
| Contributions to Unconsolidated Joint Ventures | Contributions to Unconsolidated Joint Ventures | | (485) | | | (550) | | Contributions to Unconsolidated Joint Ventures | | — | | | (485) | |
| Proceeds from Insurance Claims | | 1,294 | | | — | | |
| Net Cash (Used in) Provided by Investing Activities | | $ | (11,232) | | | $ | 157,659 | | |
| Net Cash Used in Investing Activities | | Net Cash Used in Investing Activities | | $ | (9,953) | | | $ | (4,704) | |
|
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFCASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021(UNAUDITED)
(IN THOUSANDS)
| | | Six Months Ended June 30, | |
| | 2022 | | 2021 | |
Financing Activities: | Financing Activities: | | | | | Financing Activities: | | | | |
Repayments on Line of Credit | | $ | — | | | $ | (14,369) | | |
| Payments on Term Loans | | — | | | (187,024) | | |
Proceeds from Mortgages and Notes Payable | | — | | | 144,750 | | |
| Principal Repayment of Mortgages | Principal Repayment of Mortgages | | (1,221) | | | (1,353) | | Principal Repayment of Mortgages | | (311) | | | (553) | |
Deferred Financing Costs | Deferred Financing Costs | | (209) | | | (5,795) | | Deferred Financing Costs | | — | | | (196) | |
| Dividends Paid on Common Shares | | Dividends Paid on Common Shares | | (21,761) | | | — | |
Dividends Paid on Preferred Shares | Dividends Paid on Preferred Shares | | (12,087) | | | (30,218) | | Dividends Paid on Preferred Shares | | (6,044) | | | (6,044) | |
| Distributions Paid on Common Units and LTIP Units | | Distributions Paid on Common Units and LTIP Units | | (3,817) | | | — | |
Net Cash Used in Financing Activities | Net Cash Used in Financing Activities | | $ | (13,517) | | | $ | (94,009) | | Net Cash Used in Financing Activities | | $ | (31,933) | | | $ | (6,793) | |
| | | | | | | | |
Net Increase in Cash, Cash Equivalents, and Restricted Cash | | $ | 15,737 | | | $ | 56,543 | | |
Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | $ | (31,889) | | | $ | 3,499 | |
Cash, Cash Equivalents, and Restricted Cash - Beginning of Period | Cash, Cash Equivalents, and Restricted Cash - Beginning of Period | | 84,945 | | | 23,607 | | Cash, Cash Equivalents, and Restricted Cash - Beginning of Period | | 230,020 | | | 84,945 | |
| | | | | | | | |
Cash, Cash Equivalents, and Restricted Cash - End of Period | Cash, Cash Equivalents, and Restricted Cash - End of Period | | $ | 100,682 | | | $ | 80,150 | | Cash, Cash Equivalents, and Restricted Cash - End of Period | | $ | 198,131 | | | $ | 88,444 | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hersha Hospitality Trust (“we,” “us,” “our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20222023 or any future period. Accordingly, readers of these consolidated interim financial statements should refer to the Company’s audited financial statements prepared in accordance with US GAAP, and the related notes thereto, for the year ended December 31, 2021,2022, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, as certain footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to the rules of the Securities and Exchange Commission.
We are a self-administered Maryland real estate investment trust that was organized in May 1998 and completed our initial public offering in January 1999. Our common shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HT.” We own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (“HHLP” or “the Partnership”), for which we serve as the sole general partner. As of June 30, 2022,March 31, 2023, we owned an approximate 85.0%83.2% partnership interest in HHLP, including a 1.0% general partnership interest.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with US GAAP and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned Taxable REIT Subsidiary Lessee (“TRS Lessee”), 44 New England Management Company. All significant inter-company amounts have been eliminated.
Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company as general partner of the Partnership. Properties owned in joint ventures are also consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (“VIE”) or we maintain control of the asset through our voting interest in the entity.
Variable Interest Entities
We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have a controlling financial interest in that VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE. Control can also be demonstrated by the ability of a member to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the other member and the inability of the members to replace the managing member. Based on our examination, there have been no changes to the operating structure of our legal entities during the three and six months ended June 30, 2022March 31, 2023 and, therefore, there are no changes to our evaluation of VIE's as presented within our annual report presented on Form 10-K for the year ended December 31, 2021.2022.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
Noncontrolling Interest
We classify the noncontrolling interests of our common units of limited partnership interest in HHLP (“Common Units”), and Long Term Incentive Plan Units (“LTIP Units”) as equity. LTIP Units are a separate class of limited partnership interest in the Operating Partnership that are convertible into Common Units under certain circumstances. The noncontrolling interest of Common Units and LTIP Units totaled $54,536$74,023 as of June 30, 2022March 31, 2023 and $50,922$73,461 as of December 31, 2021.2022. As of June 30, 2022,March 31, 2023, there were 7,070,6808,044,927 Common Units and LTIP Units outstanding with a fair market value of $69,36354,062, based on the price per share of our common shares on the NYSE on such date. In accordance with the partnership agreement of HHLP, holders of these Common Units may redeem them for cash unless we, in our sole and absolute discretion, elect to issue common shares on a 1-for-oneone-for-one basis in lieu of paying cash.
Net income or loss attributed to Common Units and LTIP Units is included in net income or loss but excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.
We are party to a joint venture that owns the Ritz-Carlton Coconut Grove, FL, in which our joint venture partner has a noncontrolling equity interest of 15% in the property. Hersha Holding RC Owner, LLC, the owner entity of the Ritz-Carlton Coconut Grove joint venture ("Ritz Coconut Grove"), will distribute income based on cash available for distribution which will be distributed as follows: (1) to us until we receive a cumulative return on our contributed senior common equity interest, currently at 8%, and (2) then to the owner of the noncontrolling interest until they receive a cumulative return on their contributed junior common equity interest, currently at 8%, and (3) then 75% to us and 25% to the owner of the noncontrolling interest until we both receive a cumulative return on our contributed senior common equity interest, currently at 12%, and (4) finally, any remaining operating profit shall be distributed 70% to us and 30% to the owner of the noncontrolling interest. Additionally, the noncontrolling interest in the Ritz Coconut Grove has the right to put their ownership interest to us for cash consideration at any time during the life of the venture. The balance sheets and financial results of the Ritz Coconut Grove are included in our consolidated financial statements and the book value of the noncontrolling interest in the Ritz Coconut Grove is classified as temporary equity within our Consolidated Balance Sheets.
For Ritz Coconut Grove, income or loss is allocated using Hypothetical Liquidation at Book Value ("HLBV method") as the liquidation rights and priorities, as defined by the venture's governing agreement, differs from the underlying percentage ownership in the venture. The Company applies the HLBV method using a balance sheet approach. A calculation is prepared at each balance sheet date to determine the amount that we would receive if the venture entity were to liquidate all of its assets at carrying value and distribute that cash to the joint venture based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses and the remainder is allocated to noncontrolling interest.
The noncontrolling interest in the Ritz Coconut Grove is measured at the greater of historical cost or the put option redemption value, and is recorded as part of the Income (Loss)(Income) Loss Allocated to Noncontrolling Interests - Consolidated Joint Venture line item within the Consolidated Statements of Operations. The value of the noncontrolling interest at the put option redemption value was $5,274$6,466 as of June 30, 2022.March 31, 2023. As such, we reclassified $2,964$1,390 from Additional Paid in Capital to Redeemable Noncontrolling Interests - Consolidated Joint Venture during the sixthree months ended June 30, 2022March 31, 2023 to record the noncontrolling interest at the estimated value of the put option.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
Shareholders’ Equity
Terms of the Series C, Series D, and Series E Preferred Shares outstanding at June 30, 2022March 31, 2023 and December 31, 20212022 are summarized as follows: | | | | | | | | | | | Dividend Per Share (1) | | | | | | | | | | Dividend Per Share |
| | Shares Outstanding | | | | | | Six Months Ended June 30, | | Shares Outstanding | | | | | | Three Months Ended March 31, |
Series | Series | | June 30, 2022 | | December 31, 2021 | | Aggregate Liquidation Preference | | Distribution Rate | | 2022 | | 2021 | Series | | March 31, 2023 | | December 31, 2022 | | Aggregate Liquidation Preference | | Distribution Rate | | 2023 | | 2022 |
Series C | Series C | | 3,000,000 | | | 3,000,000 | | | $ | 75,000 | | | 6.875 | % | | $ | 0.8594 | | | $ | 2.5782 | | Series C | | 3,000,000 | | | 3,000,000 | | | $ | 75,000 | | | 6.875 | % | | $ | 0.4297 | | | $ | 0.4297 | |
Series D | Series D | | 7,701,700 | | | 7,701,700 | | | $ | 192,500 | | | 6.500 | % | | $ | 0.8126 | | | $ | 2.4378 | | Series D | | 7,701,700 | | | 7,701,700 | | | $ | 192,500 | | | 6.500 | % | | $ | 0.4063 | | | $ | 0.4063 | |
Series E | Series E | | 4,001,514 | | | 4,001,514 | | | $ | 100,000 | | | 6.500 | % | | $ | 0.8126 | | | $ | 2.4378 | | Series E | | 4,001,514 | | | 4,001,514 | | | $ | 100,000 | | | 6.500 | % | | $ | 0.4063 | | | $ | 0.4063 | |
Total | Total | | 14,703,214 | | | 14,703,214 | | | | | | | | | | Total | | 14,703,214 | | | 14,703,214 | | | | | | | | | |
(1) During the six months ended June 30, 2021, the Company paid cash dividends on the Company's Series C, Series D and Series E cumulative redeemable preferred stock reflecting accrued and unpaid dividends for the dividend periods ended April 15, 2020, July 15, 2020, October 15, 2020 and January 15, 2021. In addition, the Company paid a cash dividend on all Series of cumulative redeemable preferred stock for the first dividend period ending April 15, 2021 and declared a similar cash dividend for the second dividend period ending July 15, 2021, which was paid July 15, 2021 to holders of record as of July 1, 2021. The Company is current on dividend obligations on all Series of cumulative redeemable preferred stock as of June 30, 2022.
Liquidity and Management's Plan
Due to the COVID-19 pandemic and the effects of travel restrictions both globally and in the United States, the hospitality industry has experienced drastic drops in demand as a result of government mandates, health official recommendations, corporate policy changes and individual responses. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and may continue to have a material negative impact on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic.
On August 4, 2022, we closed on the sale of 6 of the 7 previously announced hotel dispositions to an unaffiliated buyer for a purchase price of $435,900. These 6 hotels included the Courtyard Brookline, the Hampton Inn Washington, DC, Hilton Garden Inn M Street Washington, DC, Hampton Inn - Philadelphia, TownePlace Suites Sunnyvale and the Courtyard Los Angeles Westside. The proceeds from the sale were used to pay off the Company's junior subordinated notes (the "Junior Notes"), which the Company entered into on February 17, 2021, at a redemption price of 104%, or $164,418. Proceeds from the sale were also used to pay down amounts borrowed under the Company’s line of credit and term loans. Also on August 4, 2022, the Company entered into a new credit agreement for a senior secured credit facility which provides for a $100,000 revolving line of credit and $400,000 term loan. The Company made an initial draw of $400,000 on the facility’s term loan, using the proceeds to pay off the remaining balances under the Company’s prior line of credit and term loans, effectively reducing the Company’s borrowings and moving the maturity of borrowings under the Company’s credit facility to August of 2024. The $100,000 line of credit provided by the new credit facility remains undrawn. See Note 5 – Debt for additional information borrowings under the Company’s prior credit facility, new credit facility, notes payable, and mortgages.
After considering the reduction in debt from proceeds of the hotel dispositions noted above, the effective extension of maturities of borrowings under our new credit agreement noted above, and forecasted cash flows, the Company believes that it has sufficient liquidity to meet its obligations for the next twelve months. We cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because the lodging industry has not previously experienced such an abrupt and drastic reduction in hotel demand, and as a consequence, our ability to be predictive is uncertain and we cannot estimate when travel demand will fully recover.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
Investment in Hotel Properties
Investments in hotel properties are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life of up to 40 years for buildings and improvements, and two to seven years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in hotel properties. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in hotel properties we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Identifiable assets, liabilities, and noncontrolling interests related to hotel properties acquired are recorded at fair value. Estimating techniques and assumptions used in determining fair values involve significant estimates and judgments. These estimates and judgments have a direct impact on the carrying value of our assets and liabilities which can directly impact the amount of depreciation expense recorded on an annual basis and could have an impact on our assessment of potential impairment of our investment in hotel properties.
We consider a hotel to be held for sale when management and our independent trustees commit to a plan to sell the property, the property is available for sale, management engages in an active program to locate a buyer for the property and it is probable the sale will be completed within a year of the initiation of the plan to sell. We evaluate each disposition to determine whether we need to classify the disposition as discontinued operations. We generally include the operations of a hotel that was sold or a hotel that has been classified as held for sale in continuing operations unless the sale represents a strategic shift that will have a major impact on our future operations and financial results. We anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
Based on the occurrence of certain events or changes in circumstances, we review the recoverability of the property’s carrying value. Such events or changes in circumstances include the following:
•a significant decrease in the market price of a long-lived asset;
•a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
•a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;
•an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset;
•a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and
•a current expectation that, it is more likely than not that, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of hotel demand, competition and other factors. Other assumptions used in the review of recoverability include the holding period and expected terminal capitalization rate. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in hotel properties.
As of June 30, 2022, based on our analysis, we have determined that the estimated future cash flow of each of the properties in our portfolio is sufficient to recover its respective carrying value.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued 2021-01, Reference Rate Reform (Topic 848), Scope, which further clarified the scope of the reference rate reform optional practical expedients and exceptions outlined in Topic 848. As a result of identified structural risks of interbank offered rates, in particular, the London Interbank Offered Rate (LIBOR), reference rate reform is underway to identify alternative reference rates that are more observable or transaction based. The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The optional expedients and exceptions contained within these updates, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of these updates that will most likely affect our financial reporting process related to modifications of contracts with lenders and the related hedging contracts associated with each respective modified borrowing contract. In general, the provisions of these updates would impact the Company by allowing, among other things, the following:
•Allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 470 to be accounted for as a non-substantial modification and not be considered a debt extinguishment.
•Allowing a change to contractual terms of a hedging instrument in conjunction with reference rate reform to not require a dedesignation of the hedging relationship.
•Allowing a change to the interest rate used for margining, discounting, or contract price alignment for a derivative that is a cash flow hedge to not be considered a change to the critical terms of the hedge and will not require a dedesignation of the hedging relationship.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
As disclosed in Note 8, Fair Value Measurements and Derivative Instruments, we modified interest rate swap contracts, which serve as cash flow hedges with total notional amounts of $300,000, to replace LIBOR with an alternative reference rate that matches the reference rate of the underlying hedged debt. We did not apply optional expedients and exceptions contained within these updates in the modifications of these contracts. For our remaining borrowing and hedging contracts, we have not entered into modifications for our other remaining contracts, as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the future as a majority of ourwe have contracts remaining with lenders and hedging counterparties which are indexed to LIBOR. Some debt contract modifications have occurred and will occur in the normal course of business and will include other changes in the terms, for which we do not anticipate that this accounting relief will beis not applicable. However, we anticipate that other debt contract modifications will occur prior to the phase out of LIBOR on June 30, 2023 specifically to address the LIBOR transition, for which we will be able to apply the accounting relief.
Revision of Prior Period Financial Statements
During the third quarter of 2022, the Company identified immaterial errors in its previously issued financial statements resulting from the incorrect amortization of accumulated other comprehensive income related to interest rate hedges. This occurred over the periods from 2019 through 2021, thereby overstating interest expense in those periods as well as impacting certain captions in the equity section of the consolidated balance sheet, including accumulated other comprehensive income, distributions in excess of net income, and noncontrolling interests.
In accordance with Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company assessed the materiality of these misstatements both quantitatively and qualitatively and determined that these errors and the related impact did not, either individually or in the aggregate, materially misstate previously issued consolidated financial statements. To reflect the correction of these immaterial errors, the Company is revising the previously issued consolidated financial statements for the three months ended March 31, 2022 in this Form 10-Q. As a result, the Company has corrected the immaterial misstatements as disclosed in the following tables for all impacted financial statement line items in prior periods.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | |
| March 31, 2022 | | |
| As Previously Reported | | Adjustment | | As Revised | | | | | | |
Consolidated Statement of Operations: | | | | | | | | | | | |
Interest Expense | $ | (14,237) | | | $ | 367 | | | $ | (13,870) | | | | | | | |
Loss Before Results from Unconsolidated Joint Venture Investments and Income Taxes | (16,009) | | | 367 | | | (15,642) | | | | | | | |
Loss Before Income taxes | (16,945) | | | 367 | | | (16,578) | | | | | | | |
Net Loss | (16,966) | | | 367 | | | (16,599) | | | | | | | |
Loss Allocated to Noncontrolling Interests - Common Units | 2,724 | | | (43) | | | 2,681 | | | | | | | |
Net Loss Applicable to Common Shareholders | (22,559) | | | 324 | | | (22,235) | | | | | | | |
Net Loss Per Share: | | | | | | | | | | | |
Basic - Loss from Continuing Operations Applicable to Common Shareholders | $ | (0.58) | | | $ | 0.01 | | | $ | (0.57) | | | | | | | |
Diluted - Loss from Continuing Operations Applicable to Common Shareholders | $ | (0.58) | | | $ | 0.01 | | | $ | (0.57) | | | | | | | |
Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | | | |
Net Loss | $ | (16,966) | | | $ | 367 | | | $ | (16,599) | | | | | | | |
Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Loss | — | | | (367) | | | (367) | | | | | | | |
Total Other Comprehensive Income | 15,489 | | | (367) | | | 15,122 | | | | | | | |
Consolidated Statement of Cash Flows: | | | | | | | | | | | |
Operating Activities: | | | | | | | | | | | |
Net Loss | (16,966) | | | 367 | | | (16,599) | | | | | | | |
Loss (Gain) Recognized on Change in Fair Value of Derivative Instrument | — | | | (367) | | | (367) | | | | | | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties consists of the following at June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | | | |
| | June 30, 2022 | | December 31, 2021 | | | | | | | | | | | | |
| | | | | | March 31, 2023 | | December 31, 2022 |
Land | Land | | $ | 403,611 | | | $ | 478,412 | | Land | | $ | 390,532 | | | $ | 390,532 | |
Buildings and Improvements | Buildings and Improvements | | 1,240,265 | | | 1,560,768 | | Buildings and Improvements | | 1,098,258 | | | 1,093,575 | |
Furniture, Fixtures and Equipment | Furniture, Fixtures and Equipment | | 219,901 | | | 274,802 | | Furniture, Fixtures and Equipment | | 206,189 | | | 203,369 | |
Construction in Progress | Construction in Progress | | 4,897 | | | 1,784 | | Construction in Progress | | 10,647 | | | 7,105 | |
| | 1,868,674 | | | 2,315,766 | | | 1,705,626 | | | 1,694,581 | |
| | | | |
Less Accumulated Depreciation | Less Accumulated Depreciation | | (533,195) | | | (650,669) | | Less Accumulated Depreciation | | (518,919) | | | (505,342) | |
| | | | |
Total Investment in Hotel Properties * | Total Investment in Hotel Properties * | | $ | 1,335,479 | | | $ | 1,665,097 | | Total Investment in Hotel Properties * | | $ | 1,186,707 | | | $ | 1,189,239 | |
* The net book value of investment in hotel property at Ritz Coconut Grove, which is a variable interest entity, is $38,256$36,951 and $39,577$37,303 at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
Acquisitions
For the sixthree months ended June 30,March 31, 2023 and 2022, and 2021, we acquired no hotel properties.
Hotel Dispositions
For the six months ended June 30, 2022, we had no hotel dispositions. During the six monthsyear ended June 30, 2021,December 31, 2022, we had the following hotel dispositions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Hotel | | Acquisition Date | | Disposition Date | | Consideration | | Gain on Disposition | |
| | | | | | | | | |
Courtyard San Diego, CA | | 05/30/2013 | | 02/19/2021 | | $ | 64,500 | | | $ | 5,032 | | |
The Capitol Hill Hotel Washington, DC | | 04/15/2011 | | 03/09/2021 | | 51,000 | | | 12,975 | | |
Holiday Inn Express Cambridge, MA | | 05/03/2006 | | 03/09/2021 | | 32,000 | | | 20,280 | | |
Residence Inn Miami Coconut Grove, FL | | 06/12/2013 | | 03/10/2021 | | 31,000 | | | 9,996 | | |
| | | | | | | | | |
2021 Total | | | | | | | | $ | 48,283 | | |
Assets Held For Sale
On April 27, 2022, we entered into a purchase and sale agreement to sell 7 hotel properties: the Courtyard Brookline, the Hampton Inn Washington, DC, Hilton Garden Inn M Street, DC, Hampton Inn - Philadelphia, Courtyard Sunnyvale, TownePlace Suites Sunnyvale and the Courtyard Los Angeles Westside to an unaffiliated buyer for a purchase price of $505,000. We closed on the sale of these properties, except for the Courtyard Sunnyvale on August 4, 2022. The sale of the Courtyard Sunnyvale is expected to close in the fourth quarter of 2022, subject to customary closing conditions. The proceeds from the sale were used to pay off the Junior Notes, payable at a redemption price of 104%, or $164,418, and to pay down borrowings under our credit facility (See Note 5 – Debt). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Hotel | | Acquisition Date | | Disposition Date | | Consideration | | Gain on Disposition | |
Urban Select Service (7 hotels) | | June 2005 - October 2016 | | 8/4/2022, 10/26/22 | | $ | 505,000 | | | $ | 170,193 | | |
Hotel Milo Santa Barbara | | 02/28/2014 | | 10/06/2022 | | 55,000 | | | 25,784 | | |
Pan Pacific Seattle | | 02/21/2017 | | 10/19/2022 | | 70,000 | | | 1,532 | | |
Gate hotel JFK Airport | | 06/13/2008 | | 11/02/2022 | | 11,000 | | | — | | |
| | | | | | | | | |
| | | | | | | | | |
2022 Total | | | | | | | | $ | 197,509 | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
As of December 31, 2021, there were no assets held for sale. The table below shows the balances for the 7 properties noted above that were classified as held for sale as of June 30, 2022:
| | | | | | | | | | | | | | |
| | | | | | | | |
| | | June 30, 2022 | | | | | |
| | | | | | | | |
Land | | | $ | 74,801 | | | | | | |
Right of Use Asset - Land Lease | | | 12,705 | | | | | | |
Buildings and Improvements | | | 325,566 | | | | | | |
Furniture, Fixtures and Equipment | | | 59,096 | | | | | | |
| | | 472,168 | | | | | | |
| | | | | | | | |
Less Accumulated Depreciation | | | (153,452) | | | | | | |
| | | | | | | | |
Assets Held for Sale | | | $ | 318,716 | | | | | | |
Liabilities Related to Hotel Assets Held for Sale
Liabilities related to hotel assets held for sale at June 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Mortgage Indebtedness | $ | 74,522 | | | $ | — | |
Net Unamortized Deferred Financing Costs | (359) | | | — | |
Lease Liabilities | 5,624 | | | — | |
Liabilities Related to Hotel Assets Held for Sale | $ | 79,787 | | | $ | — | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 3 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, our investment in unconsolidated joint ventures consisted of the following:
| Joint Venture | Joint Venture | | Hotel Properties | | Percent Owned | | June 30, 2022 | | December 31, 2021 | Joint Venture | | Hotel Properties | | Percent Owned | | March 31, 2023 | | December 31, 2022 |
| Hiren Boston, LLC | | Courtyard by Marriott, South Boston, MA | | 50 | % | | 407 | | | 189 | | |
SB Partners, LLC | SB Partners, LLC | | Holiday Inn Express, South Boston, MA | | 50 | % | | — | | | — | | SB Partners, LLC | | Holiday Inn Express, South Boston, MA | | 50 | % | | $ | — | | | $ | — | |
SB Partners Three, LLC | SB Partners Three, LLC | | Home2 Suites, South Boston, MA | | 50 | % | | 5,079 | | | 5,391 | | SB Partners Three, LLC | | Home2 Suites, South Boston, MA | | 50 | % | | 4,636 | | | 4,989 | |
| | | | | | $ | 5,486 | | | $ | 5,580 | | | | | | | $ | 4,636 | | | $ | 4,989 | |
Income/Loss Allocation
For SB Partners, LLC, Hiren Boston, LLC, and SB Partners Three, LLC, incomeIncome or loss is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. This results in an income allocation consistent with our percentage of ownership interests. When we absorb cumulative losses equal to our accounting basis in the joint venture, our investment balance is $0 as presented in the table above.
Any difference between the carrying amount of any of our investments noted above and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets.
Income (loss)Loss recognized during the three and six months ended June 30,March 31, 2023 and 2022, and 2021, for our investments in unconsolidated joint ventures is as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| Hiren Boston, LLC | | $ | 301 | | | $ | (354) | | | 42 | | | (689) | | |
Hiren Boston, LLC* | | Hiren Boston, LLC* | | $ | — | | | $ | (258) | | |
SB Partners, LLC | SB Partners, LLC | | — | | | (50) | | | (310) | | | (50) | | SB Partners, LLC | | — | | | (310) | | |
SB Partners Three, LLC | SB Partners Three, LLC | | 56 | | | (185) | | | (311) | | | (508) | | SB Partners Three, LLC | | (352) | | | (368) | | |
Income (Loss) from Unconsolidated Joint Venture Investments | | $ | 357 | | | $ | (589) | | | $ | (579) | | | $ | (1,247) | | |
Loss from Unconsolidated Joint Venture Investments | | Loss from Unconsolidated Joint Venture Investments | | $ | (352) | | | $ | (936) | | |
The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of June*On November 30, 2022, and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021.we sold our 50% membership interest in Hiren Boston, LLC.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022.
Balance Sheets
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Assets | Assets | | | | | Assets | | | | |
Investment in Hotel Properties, Net | Investment in Hotel Properties, Net | | $ | 61,627 | | | $ | 64,096 | | Investment in Hotel Properties, Net | | $ | 46,290 | | | $ | 47,356 | |
Other Assets | Other Assets | | 17,266 | | | 15,649 | | Other Assets | | 11,256 | | | 11,803 | |
Total Assets | Total Assets | | $ | 78,893 | | | $ | 79,745 | | Total Assets | | $ | 57,546 | | | $ | 59,159 | |
| Liabilities and Equity | Liabilities and Equity | | Liabilities and Equity | |
Mortgages | Mortgages | | $ | 65,461 | | | $ | 65,723 | | Mortgages | | $ | 50,060 | | | $ | 50,236 | |
Other Liabilities | Other Liabilities | | 15,892 | | | 15,656 | | Other Liabilities | | 10,081 | | | 10,012 | |
Equity: | Equity: | | Equity: | |
Hersha Hospitality Trust | Hersha Hospitality Trust | | 2,978 | | | 3,328 | | Hersha Hospitality Trust | | 1,877 | | | 2,630 | |
Joint Venture Partner(s) | Joint Venture Partner(s) | | (5,438) | | | (4,962) | | Joint Venture Partner(s) | | (4,472) | | | (3,719) | |
| Total Equity | Total Equity | | (2,460) | | | (1,634) | | Total Equity | | (2,595) | | | (1,089) | |
| Total Liabilities and Equity | Total Liabilities and Equity | | $ | 78,893 | | | $ | 79,745 | | Total Liabilities and Equity | | $ | 57,546 | | | $ | 59,159 | |
Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Room Revenue | | $ | 6,848 | | | $ | 1,888 | | | $ | 9,495 | | | $ | 4,143 | |
Other Revenue | | 318 | | | 125 | | | 504 | | | 242 | |
Operating Expenses | | (3,630) | | | (1,244) | | | (6,083) | | | (3,109) | |
Lease Expense | | (257) | | | (245) | | | (514) | | | (516) | |
Property Taxes and Insurance | | (572) | | | (382) | | | (1,144) | | | (1,948) | |
General and Administrative | | (15) | | | (26) | | | (35) | | | (247) | |
Depreciation and Amortization | | (1,248) | | | (1,300) | | | (2,502) | | | (3,612) | |
Interest Expense | | (773) | | | (642) | | | (1,442) | | | (3,334) | |
Loss on Dissolution of Joint Venture | | — | | | — | | | — | | | (112,429) | |
Income Tax (Expense) Benefit | | (74) | | | 39 | | | 51 | | | 94 | |
Net Income (Loss) | | $ | 597 | | | $ | (1,787) | | | $ | (1,670) | | | $ | (120,716) | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Room Revenue | | $ | 2,298 | | | $ | 2,647 | | | | | |
Other Revenue | | 126 | | | 186 | | | | | |
Operating Expenses | | (1,635) | | | (2,455) | | | | | |
Lease Expense | | (134) | | | (257) | | | | | |
Property Taxes and Insurance | | (374) | | | (572) | | | | | |
General and Administrative | | (10) | | | (20) | | | | | |
Depreciation and Amortization | | (1,072) | | | (1,253) | | | | | |
Interest Expense | | (803) | | | (668) | | | | | |
| | | | | | | | |
Income Tax Expense | | 98 | | | 125 | | | | | |
Net Loss | | $ | (1,506) | | | $ | (2,267) | | | | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
The following table is a reconciliation of our share in the unconsolidated joint ventures’ equity to our investment in the unconsolidated joint ventures as presented on our balance sheets as of June 30, 2022March 31, 2023 and December 31, 2021.2022.
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Our share of equity recorded on the joint ventures' financial statements | Our share of equity recorded on the joint ventures' financial statements | | $ | 2,978 | | | $ | 3,328 | | Our share of equity recorded on the joint ventures' financial statements | | $ | 1,877 | | | $ | 2,630 | |
Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1) | Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1) | | 2,508 | | | 2,252 | | Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1) | | 2,759 | | | 2,359 | |
Investment in Unconsolidated Joint Ventures | Investment in Unconsolidated Joint Ventures | | $ | 5,486 | | | $ | 5,580 | | Investment in Unconsolidated Joint Ventures | | $ | 4,636 | | | $ | 4,989 | |
(1) Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:
•the difference between our basis in the investment in joint ventures and the equity recorded on the joint ventures' financial statements;statements.
•accumulated amortization of our equity in joint ventures that reflects the difference in our portion of the fair value of joint ventures' assets on the date of our investment when compared to the carrying value of the assets recorded on the joint ventures’ financial statements (this excess or deficit investment is amortized over the life of the properties, and the amortization is included in Loss from Unconsolidated Joint Venture Investments on our consolidated statement of operations); and
•cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements, if any.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 4 - OTHER ASSETS
Other Assets
Other Assets consisted of the following at June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| Derivative Asset | Derivative Asset | | $ | 12,924 | | | $ | 92 | | Derivative Asset | | $ | 14,730 | | | $ | 18,709 | |
Deferred Financing Costs | Deferred Financing Costs | | 190 | | | 1,070 | | Deferred Financing Costs | | 1,008 | | | 1,197 | |
Prepaid Expenses | Prepaid Expenses | | 12,035 | | | 11,632 | | Prepaid Expenses | | 9,437 | | | 10,481 | |
Investment in Statutory Trusts | Investment in Statutory Trusts | | 1,548 | | | 1,548 | | Investment in Statutory Trusts | | 1,548 | | | 1,548 | |
Investment in Non-Hotel Property and Inventories | Investment in Non-Hotel Property and Inventories | | 2,104 | | | 2,193 | | Investment in Non-Hotel Property and Inventories | | 1,936 | | | 2,026 | |
Deposits with Unaffiliated Third Parties | Deposits with Unaffiliated Third Parties | | 2,676 | | | 2,663 | | Deposits with Unaffiliated Third Parties | | 574 | | | 597 | |
Deferred Tax Asset, Net of Valuation Allowance of $19,883 and $21,612, respectively | | — | | | — | | |
Property Insurance Receivable | | 906 | | | 693 | | |
Deferred Tax Asset, Net of Valuation Allowance of $15,586 and $14,414, respectively | | Deferred Tax Asset, Net of Valuation Allowance of $15,586 and $14,414, respectively | | — | | | — | |
Swap Interest Receivable | | Swap Interest Receivable | | 1,104 | | | 932 | |
Other | Other | | 3,769 | | | 1,868 | | Other | | 3,873 | | | 3,062 | |
| | $ | 36,152 | | | $ | 21,759 | | | $ | 34,210 | | | $ | 38,552 | |
Derivative Asset - This category represents the Company’s gross asset fair value of interest rate swaps and interest rate caps. Any swaps and caps resulting in a liability to the Company are accounted for separately within Other Liabilities on the Balance Sheet.
Deferred Financing Costs – This category represents financing costs paid by the Company to establish our Line of Credit. These costs have been capitalized and will amortize to interest expense over the term of the Line of Credit.
Prepaid Expenses – Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in the next twelve months.
Investment in Statutory Trusts – We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II.
Investment in Non-Hotel Property and Inventories – This category represents the costs paid and capitalized by the Company for items such as office leasehold improvements, furniture and equipment, and property inventories.
Deposits with Unaffiliated Third Parties – These deposits represent deposits made by the Company with unaffiliated third parties for items such as lease security deposits, utility deposits, and deposits with unaffiliated third party management companies.
Deferred Tax Asset – We have $0 of net deferred tax assets as of June 30, 2022.March 31, 2023. We have considered various factors, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies in determining a valuation allowance for our deferred tax assets, and at the current time, we believe that it is more likely than not that we will not be able to realize the net deferred tax assets in the future, and a valuation allowance for the entire deferred tax asset has been recorded.
Swap Interest Receivable – Swap Interest Receivable represents amounts due from counterparties under our swap agreements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 5 - DEBT
Mortgages
Mortgages payable at June 30, 2022March 31, 2023 and December 31, 20212022 consisted of the following:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Mortgage Indebtedness | | $ | 230,334 | | | $ | 306,078 | |
Net Unamortized Premium | | 10 | | | 13 | |
Net Unamortized Deferred Financing Costs | | (739) | | | (1,477) | |
Mortgages Payable | | $ | 229,605 | | | $ | 304,614 | |
| | | | |
| | | | |
As of June 30, 2022, 2 mortgages with an aggregate balance of $74,522 were classified as Liabilities Related to Hotel Assets Held for Sale and are included in the Liabilities Related to Hotel Assets Held for Sale section in Note 2 - Investment in Hotel Properties. On August 4, 2022, using the proceeds from the dispositions discussed in Note 2 - Investment in Hotel Properties, we paid off 1 mortgage balance with a principal balance of $35,000, and anticipate that the remaining mortgage balance of $39,522 will be assumed by the buyer upon disposition of the Courtyard Sunnyvale, which is expected to close in the fourth quarter of 2022, subject to customary closing conditions. | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Mortgage Indebtedness | | $ | 208,570 | | | $ | 208,880 | |
Net Unamortized Premium | | 5 | | | 7 | |
Net Unamortized Deferred Financing Costs | | (389) | | | (533) | |
Mortgages Payable | | $ | 208,186 | | | $ | 208,354 | |
| | | | |
Net Unamortized Deferred Financing Costs associated with entering into mortgage indebtedness are deferred and amortized over the life of the mortgages. Net Unamortized Premiums are also amortized over the remaining life of the loans. Mortgage indebtedness balances are subject to fixed and variable interest rates, which ranged from 3.84%4.02% to 5.05%9.00% as of June 30, 2022.March 31, 2023.
Our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, non-recourse financing arrangements. Our mortgage loans payable typically require that specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. We have determined that all debt covenants contained in the loan agreements securing our consolidated hotel properties with the exception of the Courtyard Sunnyvale mortgage waswere met as of June 30, 2022. The lender has elected its right to escrow property level cash flow for the purpose of meeting future payment obligations, and as noted above, we anticipate that this mortgage as well as the escrow held by the lender will be assumed by the buyer upon disposition of the Courtyard Sunnyvale, CA.March 31, 2023.
As of June 30, 2022,March 31, 2023, the maturity dates for the outstanding mortgage loans ranged from December 2022June 2023 to September 2025.July 2024. For mortgages with maturity dates within the next twelve months, we plan to refinance each mortgage before their maturities, or use available cash on hand or capacity under our revolving line of credit to pay the obligation.
Credit Facilities
As of June 30,On August 4, 2022, we maintained 3 secured credit arrangements which aggregate to $747,481 with Citigroup Global Markets Inc., Wells Fargo Bank, Inc. and various other lenders. Oneentered into a credit agreement as amended,(the "Credit Agreement"), which provided for a $442,404 senior secured credit facility (“Prior Credit Facility”). The Prior Credit Facility consiststerm loan of a $250,000 senior$400,000 and secured revolving line of credit (“Prior Linewith capacity of Credit”$100,000, both of which mature on August 4, 2024. Borrowings under the Credit Agreement bear interest at a rate of Term Secured Overnight Financing Rate ("SOFR") andplus a $192,404 senior250 basis point spread. The following table summarizes the secured term loan ("Prior First Term Loan"),balances outstanding as of March 31, 2023 and was set to expire on August 10, 2022.
We maintained another credit agreement, as amended, which provided for a $278,846 senior secured term loan agreement (“Prior Second Term Loan”) and was set to expire on September 10, 2024.December 31, 2022:
A separate credit agreement, as amended, provided for a $26,231 senior secured term loan agreement (“Prior Third Term Loan” and collectively with the Prior Credit Facility and the Prior Second Term Loan, the "Prior Facilities") was set to expire on August 10, 2022. | | | | | | | | | | | |
| Outstanding Balance |
| March 31, 2023 | | December 31, 2022 |
| | | |
Principal | $ | 372,853 | | | $ | 372,853 | |
Deferred Loan Costs | (1,867) | | | (2,217) | |
Total Secured Term Loan | $ | 370,986 | | | $ | 370,636 | |
On February 17, 2021,Immediately upon entering into the Company signed amendmentsCredit Agreement, proceeds from the $400,000 new term loan, along with a portion of the proceeds from the dispositions discussed in Note 2 – Investment in Hotel Properties, were used to pay off and terminate all borrowings under our previous credit facility agreement ("the Prior FacilitiesFacilities"), which resultedconsisted of three secured credit arrangements which had an aggregate principal balance of $497,481.
The Credit Agreement contains financial covenants, including a fixed charge coverage ratio of not less than 1.35 to 1.00; and a maximum leverage ratio of not more than 60%. We have determined that we are in debt extinguishment expensecompliance with all covenants contained in the Credit Agreement as of $2,977. Debt extinguishment expense consists of $635 of debt extinguishment losses and $2,342 of debt modification losses.March 31, 2023.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 5 - DEBT (CONTINUED)
The Prior Facilities, as amended, contained financial covenants beginning in the second quarter of 2022:
•a fixed charge coverage ratio of not less than 1.20 to 1.00;
•a maximum leverage ratio of not more than 65%; and
•a financial covenant that requires the borrowing base leverage ratio to not exceed 60% at any time.
The amount that we couldcan borrow at any given time under our Prior Line ofthe Credit and the individual term loans (each a “Prior Term Loan” and together the “Prior Term Loans”)Agreement is governed by certain operating metrics of designated hotel properties known as borrowing base assets. As of June 30, 2022,March 31, 2023, the following hotel properties securedsecure the amended facilities under the Prior Facilities:Credit Agreement:
| | | | | |
- Courtyard by Marriott Brookline, Brookline, MA(1)
| - Hampton Inn, Washington, DC(1)
|
- The Envoy Boston Seaport, Boston, MA | - Ritz-Carlton Georgetown, Washington, DC |
- The Boxer, Boston, MA | - Hilton Garden Inn, MStreet, Washington, DCThe Winter Haven Hotel Miami Beach, Miami, FL(1) |
- Hampton Inn Seaport, Seaport, New York, NY | - The Winter HavenBlue Moon Hotel Miami Beach, Miami, FL |
- Holiday Inn Express Chelsea, 29th Street, New York, NY | - The Blue Moon Hotel Miami Beach, Miami, FL |
- Gate Hotel JFK Airport, New York, NY | - Cadillac Hotel & Beach Club, Miami, FL |
- Hilton Garden Inn JFK Airport,NU Hotel, Brooklyn, New York, NY | - The Parrot Key Hotel & Villas, Key West, FL |
- NU Hotel, Brooklyn, New York, NY | - TownePlace Suites, Sunnyvale, CA(1)
|
- Hyatt House White Plains, White Plains, NY | - The Ambrose Hotel, Santa Monica, CA |
- Hampton Inn Center City/Convention Center, Philadelphia, PA(1)
| - The Pan Pacific Hotel Seattle, Seattle, WA |
- The Rittenhouse, Philadelphia, PA | - Mystic Marriott Hotel & Spa, Groton, CT |
- Philadelphia Westin, Philadelphia, PA | - Hilton Garden Inn JFK Airport, New York, NY |
| |
| |
| |
| |
(1) Hotel property sold to an unaffiliated buyer on August 4, 2022.
The interest rate for borrowings under the Prior Line of Credit and Prior Term Loans were based on a pricing grid with a range of one month U.S. LIBOR plus a spread. The following table summarizes the balances outstanding and interest rate spread for each borrowing:
| | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding Balance |
Borrowing | | Spread | | June 30, 2022 | | December 31, 2021 |
Prior Line of Credit | | 1.50% to 2.25% | | $ | 118,684 | | | $ | 118,684 | |
Prior Term Loans: | | | | | | |
Prior First Term Loan | | 1.45% to 2.20% | | $ | 192,404 | | | $ | 192,404 | |
Prior Second Term Loan | | 1.35% to 2.00% | | 278,846 | | | 278,846 | |
Prior Third Term Loan | | 1.45% to 2.20% | | 26,231 | | | 26,231 | |
Prior Deferred Loan Costs | | | | (954) | | | (1,396) | |
Total Prior Term Loans | | | | $ | 496,527 | | | $ | 496,085 | |
The weighted average interest rate on our credit facilities, including our Prior Facilities and including the effect of derivative instruments, was 3.52%4.47% and 3.92%, 3.53% and 3.73%3.51% for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively.
On August 4, 2022, we entered into a credit agreement (the "Credit Agreement"), with certain lenders, for whom Citibank, N.A. ("Citibank") acted as the administrative agreement and collateral agent, Wells Fargo Bank, N.A. and Manufacturers and Traders Trust Company acted as the co-syndication agents, and Citibank, Wells Fargo Securities, LLC, and Manufacturers and Traders Trust Company acted as joint lead arrangers and joint book running managers. The Credit Agreement provided for a new secured term loan of $400,000 and secured revolving line of credit with capacity of $100,000 which mature in August of 2024. Immediately upon entering into the Credit Agreement, proceeds from the $400,000 new term loan, along with a portion
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 5 - DEBT (CONTINUED)
of the proceeds from the dispositions discussed in Note 2 – Investment in Hotel Properties, were used to pay off and terminate all borrowings under the Prior Facilities. Borrowings under the Credit Agreement bear interest at a rate of Term SOFR plus a 250 basis point spread.
Notes Payable
Notes payable at June 30, 2022March 31, 2023 and December 31, 20212022 consisted of the following:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Statutory Trust I and Statutory Trust II Notes Payable Indebtedness | | $ | 51,548 | | | $ | 51,548 | |
Net Unamortized Deferred Financing Costs | | (679) | | | (706) | |
Statutory Trust I and Statutory Trust II Notes Payable | | 50,869 | | | 50,842 | |
| | | | |
Junior Notes Payable Indebtedness | | 158,094 | | | 156,239 | |
Net Unamortized Deferred Financing Costs | | (3,716) | | | (4,209) | |
Net Unamortized Discount | | (3,861) | | | (4,382) | |
Junior Notes Payable | | 150,517 | | | 147,648 | |
| | | | |
Total Notes Payable | | $ | 201,386 | | | $ | 198,490 | |
| | | | |
| | | | |
Statutory Trust I and Statutory Trust II Notes Payable | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Statutory Trust I and Statutory Trust II Notes Payable Indebtedness | | $ | 51,548 | | | $ | 51,548 | |
Net Unamortized Deferred Financing Costs | | (640) | | | (653) | |
Statutory Trust I and Statutory Trust II Notes Payable | | $ | 50,908 | | | $ | 50,842 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
We have 2two junior subordinated notes payable in the aggregate amount of $51,548 related to the Hersha Statutory Trusts pursuant to indenture agreements which will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, prior to maturity in accordance with the provisions of the indenture agreements. The $25,774 of notes issued to each of Hersha Statutory Trust I and Hersha Statutory Trust II bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets 2 business days prior to each quarterly payment. The related deferred financing costs are amortized over the life of the notes payable. The weighted average interest rate on our 2two junior subordinated notes payable was 3.97%7.67% and 3.19%, and 3.61% and 3.20%3.17% for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively.
Junior Notes Payable
On February 17, 2021, the Company entered into a note purchase agreement with several purchasers (the “Purchasers”). The Company issued and sold to the Purchasers $150,000 aggregate principal amount of the Company’s 9.50% Unsecured PIK Toggle Notes due 2026 (the “Junior Notes”) on February 23, 2021. The Junior Notes were set to mature on February 23, 2026. The Junior Notes bear interest at a rate of 9.50% per year, payable in arrears on June 30, September 30, December 31 and March 31 of each year, beginning on June 30, 2021. For any interest period ended on or prior to March 31, 2022, the Issuer, in its sole discretion could elect to pay interest (a) in cash at a rate per annum equal to 4.75% per annum, and (b) in kind at a rate per annum equal to 4.75% per annum (“PIK Interest”). Any PIK Interest will be paid by increasing the principal amount of the Junior Notes at the end of the applicable interest period by the amount of such PIK Interest. We elected the PIK Interest option for the interest periods ended June 30, 2021, September 30, 2021, December 31, 2021, and March 31, 2022, increasing the total principal balance by $8,094 to $158,094 as of June 30, 2022.
The Junior Notes were redeemable during the 12 month period beginning February 23, 2022 at a redemption price equal to 104% of the principal amount of the Junior Notes.
On August 4, 2022, using a portion of the proceeds from the dispositions discussed in Note 2 - Investment in Hotel Properties, we paid off the Junior Notes, payable at a redemption price of 104%, or $164,418.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 5 - DEBT (CONTINUED)
Interest Expense
The table below shows thesummarizes interest expense incurred by the Company during the sixthree months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | |
Mortgage Loans Payable | | $ | 2,948 | | | $ | 2,680 | | | $ | 5,477 | | | $ | 5,415 | | |
Interest Rate Swap Contracts on Mortgages | | 358 | | | 627 | | | 923 | | | 1,230 | | |
Unsecured Notes Payable | | 4,589 | | | 4,311 | | | 8,995 | | | 6,248 | | |
Credit Facility and Term Loans | | 4,507 | | | 3,754 | | | 8,157 | | | 8,122 | | |
Interest Rate Swap Contracts on Prior Facilities | | 971 | | | 2,417 | | | 2,793 | | | 4,841 | | |
Deferred Financing Costs Amortization | | 1,235 | | | 1,088 | | | 2,426 | | | 2,380 | | |
Other | | 161 | | | 105 | | | 235 | | | 175 | | |
Total Interest Expense | | $ | 14,769 | | | $ | 14,982 | | | $ | 29,006 | | | $ | 28,411 | | |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | |
| | 2023 | | 2022 | | | | | |
Mortgage Loans Payable | | $ | 3,797 | | | $ | 2,529 | | | | | | |
Interest Rate Swap Contracts on Mortgages | | (676) | | | 565 | | | | | | |
Unsecured Notes Payable | | 1,002 | | | 4,406 | | | | | | |
Credit Facility and Term Loans | | 6,628 | | | 3,649 | | | | | | |
Interest Rate Swap Contracts on Credit Facilities | | (2,463) | | | 1,455 | | | | | | |
Deferred Financing Costs Amortization | | 697 | | | 1,191 | | | | | | |
Other | | 104 | | | 75 | | | | | | |
Total Interest Expense | | $ | 9,089 | | | $ | 13,870 | | | | | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 6 – LEASES
We
As of March 31, 2023, we own 5two hotels (the Hilton Garden Inn JFK and the Annapolis Waterfront Hotel) within our consolidated portfolio of hotels where we do not own the land on which the hotels reside, rather we lease the land from an unrelated third-party lessor. All of ourOur land leases are classified as operating leases and have initial terms with extension options that range from May 2062August 2064 to October 2103. We also have 2two additional office space leases with terms ranging fromfor our Philadelphia office and New York City office. Our Philadelphia office lease ended in March 2023, to Decemberand we have subsequently entered into a new lease agreement which commenced in April 2023. Our New York City office lease term is through December 2027. Lease costs for our office spaces are included in General and Administrative expense.
We disposed of the following hotels during the year ended December 31, 2022 which had ground leases that were assumed by the buyers: the Courtyard Brookline, the Gate JFK Airport, Hotel Milo, and Towneplace Suites Sunnyvale.
The components of lease costs for the three months ended June 30,March 31, 2023 and 2022 and 2021 were as follows:
| | | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 | | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
| | Ground Lease | Office Lease | Total | | Ground Lease | Office Lease | Total | | Ground Lease | Office Lease | Total | | Ground Lease | Office Lease | Total |
Operating lease costs | Operating lease costs | $ | 1,050 | | $ | 153 | | $ | 1,203 | | | $ | 1,050 | | $ | 121 | | $ | 1,171 | | Operating lease costs | $ | 303 | | $ | 121 | | $ | 424 | | | $ | 1,050 | | $ | 88 | | $ | 1,138 | |
Variable lease costs | Variable lease costs | 481 | | 87 | | 568 | | | 14 | | 83 | | 97 | | Variable lease costs | 15 | | 81 | | 96 | | | 40 | | 70 | | 110 | |
Total lease costs | Total lease costs | $ | 1,531 | | $ | 240 | | $ | 1,771 | | | $ | 1,064 | | $ | 204 | | $ | 1,268 | | Total lease costs | $ | 318 | | $ | 202 | | $ | 520 | | | $ | 1,090 | | $ | 158 | | $ | 1,248 | |
The components of lease costs for the six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| | Ground Lease | Office Lease | Total | | Ground Lease | Office Lease | Total |
Operating lease costs | | $ | 2,101 | | $ | 242 | | $ | 2,343 | | | $ | 2,126 | | $ | 242 | | $ | 2,368 | |
Variable lease costs | | 520 | | 156 | | 676 | | | 38 | | 167 | | 205 | |
Total lease costs | | $ | 2,621 | | $ | 398 | | $ | 3,019 | | | $ | 2,164 | | $ | 409 | | $ | 2,573 | |
Other information related to leases as of and for the sixthree months ended June 30,March 31, 2023 and 2022 and 2021 is as follows:
| | | June 30, 2022 | June 30, 2021 | | March 31, 2023 | March 31, 2022 |
Cash paid from operating cash flow for operating leases | Cash paid from operating cash flow for operating leases | $ | 2,758 | | $ | 2,246 | | Cash paid from operating cash flow for operating leases | $ | 538 | | $ | 1,085 | |
Weighted average remaining lease term (in years) | Weighted average remaining lease term (in years) | 63.5 | 64.2 | Weighted average remaining lease term (in years) | 50.7 | 63.4 |
Weighted average discount rate | Weighted average discount rate | 7.86 | % | 7.87 | % | Weighted average discount rate | 7.84 | % | 7.86 | % |
As noted in Note 2 - Investment in Hotel Properties, on April 27, 2022, we entered into a purchase and sale agreement to sell seven hotel properties, including the Courtyard Sunnyvale, CA, which is subject to a land lease and included in the tables above.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Management Agreements
Our wholly-owned TRS, 44 New England Management Company, and certain of our joint venture entities engage eligible independent contractors in accordance with the requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended, including Hersha Hospitality Management Limited Partnership (“HHMLP”), as the property managers for hotels it leases from us pursuant to management agreements. Certain executives and trustees of the Company own a minority interest in HHMLP. Our management agreements with HHMLP provide for a term of five years and are subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties are reimbursed or borne by our TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel. Management agreements with other unaffiliated hotel management companies have similar terms.
For its services, HHMLP receives a base management fee and, if a hotel exceeds certain thresholds, an incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal year and is based upon the financial performance of the hotels. For the three and six months ended June 30,March 31, 2023 and 2022, and 2021, base management fees incurred to HHMLP totaled $3,145$1,698 and $1,745, and $5,143 and $2,925,$1,999, respectively, and are recorded as Hotel Operating Expenses. For the three and six months ended June 30, 2022 and 2021, we did not incur incentive management fees.
Franchise Agreements
Our branded hotel properties that are not managed by the brand are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms, but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, advertising services and certain other charges, and such payments are primarily based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as incurred. Franchise fee expenses for the three and six months ended June 30,March 31, 2023 and 2022 were $2,669 and 2021 were $5,362 and $2,465, and $8,413 and $4,287,$3,052, respectively, and are recorded in Hotel Operating Expenses. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
Accounting, Revenue Management and Information Technology Fees
Each of the wholly-owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and information technology fee. Monthly fees for accounting services are between $2 and $3 per property and monthly information technology fees range from $1 to $2 per property. Revenue management service fees are incurred to reimburse HHMLP for costs related to corporate level direct sales and sales support, and are allocated based on total hotel revenue. For the three and six months ended June 30,March 31, 2023 and 2022, and 2021, the Company incurred accountingthe following fees of $277 and $277, and $555 and $590, respectively. For the three and six months ended June 30, 2022 and 2021, the Company incurred information technology fees of $90 and $90, and $177 and $191, respectively. For the three and six months ended June 30, 2022 and 2021, the Company incurred revenue management service fees of $574 and $399, and $1,149 and $837, respectively. Accounting fees, revenue management fees and information technology feeswhich are included in Hotel Operating Expenses under Other.Other:
| | | | | | | | | | | |
| For the Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
Accounting fees | $ | 205 | | | 277 |
Information technology fees | 70 | | 87 |
Revenue management service fees | 449 | | 574 |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Capital Expenditure Fees
HHMLP charges fees between 3% and 5% on certain capital expenditures and pending renovation projects at the properties as compensation for procurement services related to capital expenditures and for project management of renovation projects. For the three and six months ended June 30,March 31, 2023 and 2022, and 2021, we incurred fees of $170$304 and $78, and $294 and $197,$83, respectively, which were capitalized with the cost of capital expenditures.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Acquisitions from Affiliates
We have entered into an option agreement with certain of our officers and trustees such that we obtain a right of first refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of the Company. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the purchase of hotels from related parties are approved by the Acquisition Committee.
Hotel Supplies
We purchase certain hotel supplies and make certain capital expenditures from Hersha Purchasing and Design (HPD), a hotel supply company owned, in part, by certain executives and trustees of the Company. For the three and six months ended June 30, 2022 and 2021, we incurredWe did not incur charges for hotel supplies of $0 and $0, and $0 and $1, respectively, for hotel supplies purchased from HPD.HPD for the three months ended March 31, 2023 and 2022. For the three and six months ended June 30,March 31, 2023 and 2022, and 2021, we incurred charges of $3,652$888 and $86, and $4,541 and $220,$889, respectively, for capital expenditure purchases from HPD. Hotel supplies are expensed and included in Hotel Operating Expenses on our consolidated statements of operations, and capital expenditure purchases are included in investment in hotel properties on our consolidated balance sheets.
Insurance Services
The Company utilizes the services of HHMLP to provide risk management services to the Company related to the placement of property and casualty insurance, placement of general liability insurance and claims handling for our hotel properties. The fees incurred for these risk management services for the three and six months ended June 30,March 31, 2023 and 2022 were $20 and 2021 were $30, and $56, and $59 and $113, respectively.
Restaurant Lease Agreements with Independent Restaurant Group
The Company has entered into management agreements with Independent Restaurant Group (“IRG”), owned, in part, by certain executives and trustees of the Company. IRG is subject to the supervision of HHMLP, as property manager, for restaurants at 2two of its hotel properties. Jay H. Shah and Neil H. Shah, executive officers and/or trustees of the Company, collectively own a 70.0% interest in IRG. For the three and six months ended June 30,March 31, 2023 and 2022, and 2021, management fees incurred to IRG totaled $68$74 and $35, and $111 and $48,$43, respectively.
Due From Related Parties
The due from related parties balance as of June 30, 2022March 31, 2023 and December 31, 20212022 was approximately $534$147 and $2,495,$245, respectively. The balances primarily consistedconsist of working capital deposits made to HHMLP and other entities owned, in part, by certain executives and trustees of the Company.asset management fees due from our unconsolidated joint ventures.
Due to Related Parties
The balance due to related parties as of June 30, 2022March 31, 2023 and December 31, 20212022 was $482$2,239 and $1,723,$2,610, respectively. The balance at June 30, 2022March 31, 2023 and December 31, 20212022 primarily consisted of amounts due to HHMLP for monthly management fees discussed above.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements
Our determination of fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, we utilize a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
As of June 30, 2022,March 31, 2023, the Company’s derivative instruments represented the only financial instruments measured at fair value. Currently, the Company uses derivative instruments, such as interest rate swaps and caps, to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counter-parties. However, as of June 30, 2022March 31, 2023 we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Derivative Instruments
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to increases in variable interest rates. The table on the following pagetable presents our derivative instruments as of June 30, 2022March 31, 2023 and December 31, 2021.2022:
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
| | | | | | | | | | | | | Estimated Fair Value | | | | | | | | | | Estimated Fair Value |
| | | | | | | | | | | | (Liability) Asset Balance | | | | | | | | | | | | Asset Balance |
Hedged Debt | Hedged Debt | | Type | | Strike Rate | | Index | | Effective Date | | Derivative Contract Maturity Date | | Notional Amount | | June 30, 2022 | | December 31, 2021 | Hedged Debt | | Type | | Strike Rate | | Index | | Effective Date | | Derivative Contract Maturity Date | | Notional Amount | | March 31, 2023 | | December 31, 2022 |
| Term Loan Instruments: | Term Loan Instruments: | | | | | | | | | | | | | | | | | Term Loan Instruments: | | | | | | | | | | | | | | | | |
| Credit Facility | | Swap | | 1.824 | % | | 1-Month LIBOR + 2.20% | | September 3, 2019 | | August 10, 2022 | | 103,500 | | | $ | (12) | | | $ | (970) | | |
Credit Facility | Credit Facility | | Swap | | 1.824 | % | | 1-Month LIBOR + 2.20% | | September 3, 2019 | | August 10, 2022 | | 103,500 | | | (12) | | | (970) | | Credit Facility | | Swap | | 1.341 | % | | 1-Month SOFR + 2.50% | | August 30, 2022 | | September 10, 2024 | | 270,000 | | | $ | 11,314 | | | $ | 14,123 | |
Credit Facility | Credit Facility | | Swap | | 1.460 | % | | 1-Month LIBOR + 2.00% | | September 10, 2019 | | September 10, 2024 | | 300,000 | | | 10,225 | | | (3,729) | | Credit Facility | | Swap | | 1.279 | % | | 1-Month SOFR + 2.50% | | September 6, 2022 | | August 4, 2024 | | 30,000 | | | 1,222 | | | 1,533 | |
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Mortgages: | Mortgages: | | | | | | | | | | | | | | | | | Mortgages: | | | | | | | | | | | | | | | | |
| Hyatt, Union Square, New York, NY | Hyatt, Union Square, New York, NY | | Swap | | 1.870 | % | | 1-Month LIBOR + 2.30% | | June 7, 2019 | | June 7, 2023 | | 56,000 | | | 637 | | | (987) | | Hyatt, Union Square, New York, NY | | Swap | | 1.870 | % | | 1-Month LIBOR + 2.30% | | June 7, 2019 | | June 7, 2023 | | 56,000 | | | 318 | | | 699 | |
Hilton Garden Inn Tribeca, New York, NY | Hilton Garden Inn Tribeca, New York, NY | | Swap | | 1.768 | % | | 1-Month LIBOR + 2.25% | | July 25, 2019 | | July 25, 2024 | | 22,725 | | | 605 | | | (460) | | Hilton Garden Inn Tribeca, New York, NY | | Swap | | 1.768 | % | | 1-Month LIBOR + 2.25% | | July 25, 2019 | | July 25, 2024 | | 22,725 | | | 802 | | | 1,007 | |
Hilton Garden Inn Tribeca, New York, NY | Hilton Garden Inn Tribeca, New York, NY | | Swap | | 1.768 | % | | 1-Month LIBOR + 2.25% | | July 25, 2019 | | July 25, 2024 | | 22,725 | | | 604 | | | (460) | | Hilton Garden Inn Tribeca, New York, NY | | Swap | | 1.768 | % | | 1-Month LIBOR + 2.25% | | July 25, 2019 | | July 25, 2024 | | 22,725 | | | 802 | | | 1,007 | |
Hilton Garden Inn 52nd Street, New York, NY | Hilton Garden Inn 52nd Street, New York, NY | | Swap | | 1.540 | % | | 1-Month LIBOR + 2.30% | | December 4, 2019 | | December 4, 2022 | | 44,325 | | | 194 | | | (458) | | Hilton Garden Inn 52nd Street, New York, NY | | Cap | | 4.000 | % | | 1-Month LIBOR | | December 4, 2022 | | December 1, 2023 | | 44,325 | | | 272 | | | 340 | |
| | | | | | | | | | | | | $ | 14,730 | | | $ | 18,709 | |
Courtyard, LA Westside, Culver City, CA | | Cap | | 2.500 | % | | 1-Month LIBOR | | August 1, 2021 | | August 1, 2024 | | 35,000 | | | 659 | | | 92 | | |
| | | | | | | | | | | $ | 12,900 | | | $ | (7,942) | | |
The fair value of the interest rate swaps and cap with an asset balance are included in Other Assets and the fair value of the interest rate swaps with a liability balance are included in Accounts Payable, Accrued Expenses and Other Liabilities at June 30, 2022March 31, 2023 and December 31, 2021.2022.
The net change related to derivative instruments designated as cash flow hedges recognized as unrealized gains reflected on our consolidated balance sheet in accumulated other comprehensive income was a (loss)/gain of $5,353$(3,972) and $2,398, and $20,842 and $9,163$15,122 for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made and received on the Company’s variable-rate derivatives. The change in net unrealized gains/losses on cash flow hedges reflects a reclassification of $0$7 and $(141), and $0 and $159$(367) of net unrealized gains from accumulated other comprehensive income as an increase/decrease to interest expense for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively. For the next twelve months ending June 30, 2023,March 31, 2024, we estimate that an additional $6,521$11,490 will be reclassified as a decrease to interest expense.
Fair Value of Debt
We estimate the fair value of our fixed rate debt and the credit spreads over variable market rates on our variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the fair value hierarchy. As of June 30,March 31, 2023, the carrying value and estimated fair value of our debt was $630,080 and $610,845, respectively. As of December 31, 2022, the carrying value and estimated fair value of our debt was $1,120,364$629,885 and$1,147,112 $610,401, respectively. As of December 31, 2021, the carrying value and estimated fair value of our debt was $1,117,873 and $1,146,699, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 9 – SHARE BASED PAYMENTS
Our shareholders approvedA summary of our share based compensation activity fromDecember 31, 2022 to March 31, 2023 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | LTIP Unit Awards | | Restricted Share Awards | | Share Awards |
| | Number of Units | | Weighted Average Grant Date Fair Value | | Number of Restricted Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested Balance as of December 31, 2022 | | 1,105,573 | | | $ | 9.65 | | | 164,166 | | | $ | 9.83 | | | — | | | |
Granted | | 1,104,874 | | (1) | 5.90 | | | 52,710 | | | 5.90 | | | 118,530 | | | $ | 6.45 | |
Vested | | (51,452) | | | 5.90 | | | (48,462) | | | 11.21 | | | (118,530) | | | 6.45 | |
Forfeited | | — | | | N/A | | (2,767) | | | 10.52 | | | — | | | N/A |
Unvested Balance as of March 31, 2023 | | 2,158,995 | | | $ | 7.82 | | | 165,647 | | | $ | 8.17 | | | — | | | |
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(1) On March 22, 2023, 1,104,874 Units were issued to the Hersha Hospitality Trust 2012 Equity Incentive Plan, as amended, for the purpose of attracting and retaining executive officers employees, trustees and other persons and entities that provide services to the Company.
On May 26, 2022, the Compensation Committee approvedin settlement of the 2022 LTIP in which 60% are issuable basedShort Term Incentive Program. These Units vest on December 31, 2024, the Company's achievement of a certain level of (1) absolute total shareholder return (37.5%two year anniversary following the end of the award), (2) relative total shareholder return as compared to the Company’s peer group (37.5% of the award),performance period and (3) relative growth in revenue per available room ("RevPar") compared to the Company’s peer group (25.0% of the award) and the remaining 40% of the awards provide for time based vesting. On May 26, 2022, the Compensation Committee awarded 194,427 LTIP Units related to the time based portion of the plan. These Units will vest over a three year period from January 1, 2022 to December 31, 2024. The LTIP Units awarded waswere determined by dividing the dollar amount of award earned by $9.04,$9.32, the per share volume weighted average trading price of the Company’sCompany's common shares on the NYSE for the 20 trading days prior to December 31, 2021.2022.
The 60% market-based portion of the 2022 LTIP has a three-year performance period which commenced on January 1, 2022 and ends December 31, 2024. As of June 30, 2022, no shares or LTIP Units have been issued to the executive officers in settlement of 2022 LTIP market-based awards.
A summary of our share based compensation activity from January 1, 2022 to June 30, 2022 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | LTIP Unit Awards | | Restricted Share Awards | | Share Awards |
| | Number of Units | | Weighted Average Grant Date Fair Value | | Number of Restricted Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested Balance as of December 31, 2021 | | 1,658,995 | | | $ | 10.73 | | | 170,740 | | | $ | 10.52 | | | — | | | |
Granted | | 194,427 | | | 11.25 | | | 67,804 | | | 11.25 | | | 71,832 | | | 10.57 | |
Vested | | — | | | N/A | | (125,544) | | | 10.82 | | | (71,832) | | | 10.57 | |
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Unvested Balance as of June 30, 2022 | | 1,853,422 | | | $ | 10.78 | | | 113,000 | | | $ | 10.62 | | | — | | | |
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The following table summarizes share based compensation expense for the three and six months ended June 30,March 31, 2023 and 2022 and 2021 and unearned compensation as of June 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | Share Based Compensation Expense | | Unearned Compensation | | Share Based Compensation Expense | | Unearned Compensation |
| | For the Three Months Ended | For the Six Months Ended | | As of | | For the Three Months Ended | | | As of |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | March 31, 2022 | | | March 31, 2023 | | December 31, 2022 |
Issued Awards | Issued Awards | | | | | | | | | | | | | Issued Awards | | | | | | | | | |
LTIP Unit Awards | LTIP Unit Awards | | $ | 2,142 | | | $ | 1,534 | | | $ | 3,919 | | | $ | 3,258 | | | $ | 9,613 | | | $ | 11,344 | | LTIP Unit Awards | | $ | 773 | | | $ | 1,777 | | | | $ | 8,359 | | | $ | 5,311 | |
Restricted Share Awards | Restricted Share Awards | | 346 | | | 254 | | | 538 | | | 422 | | | 1,049 | | | 834 | | Restricted Share Awards | | 199 | | | 192 | | | | 721 | | | 683 | |
Share Awards | Share Awards | | 478 | | | 367 | | | 764 | | | 367 | | | — | | | — | | Share Awards | | 810 | | | 287 | | | | — | | | — | |
Unissued Awards | Unissued Awards | | Unissued Awards | | | |
Market Based | Market Based | | 333 | | | 434 | | | 619 | | | 711 | | | 3,657 | | | 2,230 | | Market Based | | 270 | | | 285 | | | | 2,271 | | | 2,541 | |
| Total | Total | | $ | 3,299 | | | $ | 2,589 | | | $ | 5,840 | | | $ | 4,758 | | | $ | 14,319 | | | $ | 14,408 | | Total | | $ | 2,052 | | | $ | 2,541 | | | | $ | 11,351 | | | $ | 8,535 | |
The weighted-average period of which the unrecognized compensation expense will be recorded is approximately 1.0 yearyears for LTIP Unit Awards and 1.0 year0.9 years for Restricted Share Awards.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2022 AND 2021(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 9 – SHARE BASED PAYMENTS (CONTINUED)
The remaining unvested target units are expected to vest as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2023 | | 2024 | | 2025 |
LTIP Unit Awards | | 680,854 | | 1,107,757 | | 64,811 | | | — | |
Restricted Share Awards | | — | | 99,998 | | 10,002 | | 3,000 |
| | 680,854 | | | 1,207,755 | | | 74,813 | | | 3,000 | |
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| | 2023 | | 2024 | | 2025 | | 2026 |
LTIP Unit Awards | | 1,046,441 | | 1,112,554 | | — | | | — | |
Restricted Share Awards | | 73,961 | | 73,758 | | 10,464 | | 7,464 |
| | 1,120,402 | | | 1,186,312 | | | 10,464 | | | 7,464 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 10 – EARNINGS PER SHARE
The following table is a reconciliation of the income or loss (numerator) and the weighted average shares (denominator) used in the calculation of basic and diluted earnings per common share. The computation of basic and diluted earnings per share is presented below.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
NUMERATOR: | NUMERATOR: | | | | | | | | | NUMERATOR: | | | | | |
Basic and Diluted* | Basic and Diluted* | | | | | | | | | Basic and Diluted* | | | | | |
Net income (loss) | | $ | 9,212 | | | $ | (23,523) | | | $ | (7,754) | | | $ | (14,433) | | |
(Income) Loss allocated to Noncontrolling Interests | | (1,070) | | | 977 | | | (619) | | | 813 | | |
Net loss | | Net loss | | $ | (9,501) | | | $ | (16,599) | | |
Loss allocated to Noncontrolling Interests | | Loss allocated to Noncontrolling Interests | | 606 | | | 408 | | |
Distributions to Preferred Shareholders | Distributions to Preferred Shareholders | | (6,043) | | | (6,044) | | | (12,087) | | | (12,087) | | Distributions to Preferred Shareholders | | (6,044) | | | (6,044) | | |
Dividends Paid on Unvested Restricted Shares and LTIP Units | | Dividends Paid on Unvested Restricted Shares and LTIP Units | | (116) | | | — | | |
| Net income (loss) applicable to Common Shareholders | | $ | 2,099 | | | $ | (28,590) | | | $ | (20,460) | | | $ | (25,707) | | |
Net loss applicable to Common Shareholders | | Net loss applicable to Common Shareholders | | $ | (15,055) | | | $ | (22,235) | | |
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DENOMINATOR: | DENOMINATOR: | | | | | | | | | DENOMINATOR: | | | | | |
Weighted average number of common shares - basic | Weighted average number of common shares - basic | | 39,277,269 | | | 39,097,820 | | | 39,254,536 | | | 39,034,707 | | Weighted average number of common shares - basic | | 39,626,231 | | | 39,231,550 | | |
Effect of dilutive securities: | Effect of dilutive securities: | | | | | Effect of dilutive securities: | | | |
Restricted Stock Awards and LTIP Units (unvested) | Restricted Stock Awards and LTIP Units (unvested) | | 853,136 | | | — | | | — | | | — | | Restricted Stock Awards and LTIP Units (unvested) | | — | | | — | | |
Contingently Issued Shares and Units | Contingently Issued Shares and Units | | 323,380 | | | — | | | — | | | — | | Contingently Issued Shares and Units | | — | | | — | | |
| Weighted average number of common shares - diluted | Weighted average number of common shares - diluted | | 40,453,785 | | | 39,097,820 | | | 39,254,536 | | | 39,034,707 | | Weighted average number of common shares - diluted | | 39,626,231 | | | 39,231,550 | | |
*(Income) lossLoss allocated to noncontrolling interest in HHLP has been excluded from the numerator and Common Units and Vested LTIP Units have been omitted from the denominator for the purpose of computing diluted earnings per share since including these amounts in the numerator and denominator would have no impact. In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income (loss)loss applicable to common shareholders.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS)
NOTE 11 – CASH FLOW DISCLOSURES AND NON CASH INVESTING AND FINANCING ACTIVITIES
Interest paid during the sixthree months ended June 30,March 31, 2023 and 2022 totaled $11,024 and 2021 totaled $19,976 and $20,052,$8,390, respectively. Net cash received on Interest Rate Derivative contracts during the three months ended March 31, 2023 totaled $2,973 and net cash paid on Interest Rate Derivative contracts during the sixthree months ended June 30,March 31, 2022 and 2021 totaled $4,333 and $6,259, respectively. $2,496. Cash paid for income taxes during the sixthree months ended June 30,March 31, 2023 and 2022 totaled $220 and 2021 totaled $1,085 and $60,$32, respectively. The following non-cash investing and financing activities occurred during the sixthree months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Issuance of share based payments | Issuance of share based payments | | $ | 5,171 | | | $ | 13,103 | | Issuance of share based payments | | $ | 6,819 | | | $ | — | |
Accrued payables for capital expenditures placed into service | Accrued payables for capital expenditures placed into service | | 433 | | | 230 | | Accrued payables for capital expenditures placed into service | | 2,724 | | | 914 | |
| Adjustment to Record Noncontrolling Interest at Redemption Value | Adjustment to Record Noncontrolling Interest at Redemption Value | | 2,964 | | | 1,968 | | Adjustment to Record Noncontrolling Interest at Redemption Value | | 1,390 | | | 2,273 | |
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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the sixthree months ended June 30, 2022March 31, 2023 and 2021:2022:
| | | 2022 | 2021 | | 2023 | 2022 |
Cash and cash equivalents | Cash and cash equivalents | $ | 87,918 | | $ | 69,083 | | Cash and cash equivalents | $ | 193,574 | | $ | 77,447 | |
Escrowed cash | Escrowed cash | 12,764 | | 11,067 | | Escrowed cash | 4,557 | | 10,997 | |
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 100,682 | | $ | 80,150 | | Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 198,131 | | $ | 88,444 | |
Amounts included in restricted cash represent those required to be set aside in escrow by contractual agreement with various lenders for the payment of specific items such as property insurance, property tax, and capital expenditures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may”“may,” "could," "will," "would," "forecast," "project," "potential," "likely," and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors that are, in some cases, beyond our control and which may causecould materially affect our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this report and other reports filed by us with the U.S. Securities and Exchange Commission (the "SEC"), including, but not limited to those discussed in the sections entitled “Risk Factors” and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 20212022 and in this Quarterly Report on Form 10-Q, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:
● our business or investment strategy;
● our projected operating results;
● our ability to generate positive cash flow from operations;
● our distribution policy;
● our liquidity and management's plans with respect thereto;
● completion of any pending transactions;
● our ability to maintain existing financing arrangements, including compliance with covenants and our ability to obtain future financing arrangements or refinance or extend the maturity of existing financing arrangements as they come due;
● our ability to negotiate with lenders;
● our understanding of our competition;
● market trends;
● projected capital expenditures;
● the impact of inflation and the change in interest rates;
● the impacteffects of COVID-19 and changes to various government programs, including in response to the novel coronavirus, or COVID-19, including those specifically affecting New York City;its variants and other infectious disease outbreaks;
● the efficacy of any treatment for COVID-19;supply and demand factors in our markets or sub-markets, or a potential recessionary environment;
● our access to capital on the terms and timing we expect;
● the restoration of public confidence in domestic and international travel;
● permanent structural changes in demand for conference centers by business and leisure clientele; and
● our ability to dispose of selected hotel properties on the terms and timing we expect, if at all.
Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements.
Important factors that we think could cause our actual results to differ materially from expected results are summarized below. One of the most significant factors, however, is the ongoing impact of the current outbreak of the novel coronavirus on the United States, regional and global economies, the broader financial markets, our customers and employees, governmental responses thereto and the operation changes we have and may implement in response thereto. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many other important factors below.
New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally, and the possibility of additional subsequent widespread outbreaks and variant strains and the impacts of actions taken in response, and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity.
The following non-exclusive list of factors could also cause actual results to vary from our forward-looking statements:
● general volatility of the capital markets and the market price of our common shares;
● changes in our business or investment strategy;
● availability, terms and deployment of capital;
● changes in our industry and the market in which we operate, interest rates, or the general economy;
● decreased international travel because of geopolitical events, including terrorism and current U.S. government policies such as immigration policies, border closings, and travel bans related to COVID-19;
● widespread adoption of teleconference and virtual meeting technologies could reduce the number of in person business meetings and demand for travel and our services;
● uncertainty surrounding the financial stability of the United States, Europe and China;
● the degree and nature of our competition;
● financing risks, including (i) the risk of leverage and the corresponding risk of default on our mortgage loans and other debt, including default with respect to applicable covenants, (ii) potential inability to obtain waivers of covenants or refinance or extend the maturity of existing indebtedness and (iii) our ability to negotiate with lenders;
● levels of spending in the business, travel and leisure industries, as well as consumer confidence;
● declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;
● hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
● financial condition of, and our relationships with, our joint venture partners, third-party property managers, and franchisors;
● increased interest rates and operating costs and the impact of inflation;
● ability to complete development and redevelopment projects;
● risks associated with potential dispositions of hotel properties;
● availability of and our ability to retain qualified personnel;
● decreases in tourism due to pandemics, geopolitical instability or changes in foreign exchange rates;
● our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the "Code";
● environmental uncertainties and risks related to natural disasters and increases in costs to insure against those risks;
● changes in real estate and zoning laws and increases in real property tax rates;
● the uncertainty and economic impact of pandemics, epidemics, or other public health emergencies or fear of such events, such as the recent outbreak of COVID-19, including with respect to New York City;
● the current COVID-19 pandemic had, and will continue to have, adverse effects on our financial conditions, results of operations, cash flows, and performance for an indefinite period of time. Future pandemics may also have adverse effects on our financial condition, results of operations, cash flows, and performance;
● world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels; and
● the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20212022 under the headings “Risk Factors” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in other reports we file with the SEC from time to time.
These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.
All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
BACKGROUND
As of June 30, 2022,March 31, 2023, we owned interests in 3625 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, Los Angeles, Seattle,Monterey Bay, Key West, and Miami, including 3222 wholly-owned hotels, 1 hotel through
our interest in a consolidated joint venture, and interests in 32 hotels owned through unconsolidated joint ventures. We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a
third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of June 30, 2022,March 31, 2023, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.
OVERVIEW
We started to realize the effects from the global economic slowdown caused by the COVID-19 pandemic in March of 2020. As a result ofIn response to the COVID-19 pandemic, we completed several hotel dispositions to enhance our liquidity to address our various debt obligations and subsequent government mandates and health official recommendations, hotel demand has been substantially reduced across the United States.limit capital expenditures.
Following the government mandates and health official recommendations, and after evaluating the cost of running our respective properties at low occupancy levels versus closing the properties, we originally closed 21 hotel properties and dramatically reduced staffing at the hotels that remained open and at the corporate level; however, we have subsequently reopened all of our hotels. The reopening of our hotels provided us the opportunity to capture incremental demand through the end of 2020 and during the early stages of an economic recovery in 2021.
In 2021, in addition to our focus on strategically reopening hotels and driving occupancy at these hotels, we remained focused on executing expense mitigation measures and shoring up our liquidity position as we continued to face a challenging operating environment. We suspended our common and preferred dividends in 2020. During the three months ended June 30, 2021, we paid approximately $24.2 million in preferred dividend arrearage that was not paid in 2020. We also reduced capital expenditures in 2021. In February 2021, the Company entered into an unsecured notes facility that provided net proceeds of $144.8 million at closing. The initial net proceeds of $144.8 million provided by this facility, along with a portion of the proceeds from asset sales, were used to repay amounts outstanding under our credit agreements, allowing us to amend our credit agreements on February 17, 2021, eliminating maturities under the credit agreements until August of 2022. The credit agreement amendments also waived all financial covenants through March 31, 2022, established accommodative covenant testing methodology through December 31, 2022, and provided additional liquidity at the Company’s discretion.
On August 4, 2022, we closed on the sale of sixten hotel properties for consideration of the seven previously announced hotel dispositions to an unaffiliated buyer for a purchase price of $435.9$641.0 million. These six hotels included the Courtyard Brookline, the Hampton Inn Washington, DC, Hilton Garden Inn M Street Washington, DC, Hampton Inn - Philadelphia, TownePlace Suites Sunnyvale and the Courtyard Los Angeles Westside. The proceeds from the salesales were used to pay off the Company's unsecured notes facility discussed above at a redemption price of 104%, or $164.4 million. Proceeds from the sale were also usedmillion, and to pay down amounts borrowed under the Company’s line of credit and term loans. Also onOn August 4, 2022, the Company entered into a new credit agreement for a senior secured credit facility which providesprovided for a $100,000$100.0 million revolving line of credit and $400,000a $400.0 million term loan. The Company made an initial draw of $400,000$400.0 million on the facility’s term loan, using the proceeds to pay off the remaining balances under the Company’s prior line of credit and term loans, effectively reducing the Company’s borrowings and moving the maturity of borrowings under the Company’s credit facility to August of 2024. The $100,000$100.0 million line of credit provided by the new credit facility remains undrawn.
The manner in which the ongoing COVID-19 pandemic will be resolved or the manner that the hospitality and tourism industries will return to historical performance norms, and whether the economy will contract or grow are not reasonably predictable. As a result, there can be no assurances that we will be able to achieve the hotel operating metrics or the results at our properties we have forecasted. Factors that might contribute to less-than-anticipated performance include those described under the headings “Risk Factors” and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 20212022 and other documents that we may file with the SEC in the future. We will continue to cautiously monitor lodging demand and rates, our third-party hotel managers, and our performance generally.
SUMMARY OF OPERATING RESULTS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30,MARCH 31, 2023 AND 2022 AND 2021
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the three months ended June 30, 2022 consisted of hotel operating revenues and other revenue. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $53,116, or 75.8%,decreased $6,736 to $123,199$75,091 for the three months ended June 30, 2022March 31, 2023 compared to $70,083$81,827 for the same period in 2021.2022. This increasedecrease is primarily attributable to the sale of ten hotel properties in the third and fourth quarters of 2022, which contributed hotel operating revenue of $17,048 during the three months ended March 31, 2022. This decrease is partially offset by an increase in demand across our portfolio in 20222023 as our hotels continue to recover from the decrease in demand causedwas suppressed by the COVID-19 pandemic. We realized an increase in revenue in all ofOmicron variant during the markets in which we operate.three months ended March 31, 2022.
Expenses
Total hotel operating expenses was $67,093increased $3,364 to $52,714 for the three months ended June 30, 2022March 31, 2023 compared to $41,310$49,350 for the three months ended June 30, 2021.March 31, 2022. The $25,783, or 62.4%, increase in hotel operating expenses is due primarily to the reopening of food and beverage outlets at several of our hotels and due to increased operationsoccupancy at our hotels for the three months ended June 30, 2022March 31, 2023 as a result of the increase in demand noted above. This is partially offset by the sale of ten hotel properties in the third and fourth quarters of 2022, which contributed hotel operating expense of $8,776 during the three months ended March 31, 2022.
Hotel ground rent decreased by $772, or 70.8%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 as a result of the marketsdisposal of the following hotels during the year ended December 31, 2022 which had ground leases that were assumed by the buyers: the Courtyard Brookline, the Gate JFK Airport, Hotel Milo and Towneplace Suites Sunnyvale. As of March 31, 2023, we have two hotels in our portfolio in which we have operations continue to recover fromincur ground rent: the decrease in demand caused byHilton Garden Inn JFK and the COVID-19 pandemic.Annapolis Waterfront Hotel.
Depreciation and amortization decreased by 19.1%, or $4,011, to $17,003 for the three months ended June 30, 2022 from $21,014 for the three months ended June 30, 2021. The decrease is primarily attributable to assets that fully depreciated during 2021, a reduction in expense due to the disposition of five hotels during the six months ended June 30, 2021, and the cessation of depreciation beginning in May 2022 on the seven hotels that were classified as held for sale as of June 30, 2022.
Real estate and personal property tax and property insurance decreased $1,131,$2,302, or 11.9%27.1%, for the three months ended June 30, 2022March 31, 2023 when compared to the same period in 2021. This decrease2022, which is primarily driven by reductions in expense due to the sale of five hotelsten hotel properties in 2021, as well as a decrease in real estate tax assessments, specifically in the New York Citythird and Washington D.C. markets. In general, our property insurance costs continue to rise annually, which was partially offset by a reduction in expense due to the dispositions fourth quarters of 2022 noted above.
General and administrative expense increaseddecreased $386, or 7.3%, from $5,287$5,318 for the three months ended June 30, 2021March 31, 2022 to $6,491$4,932 for the same period in 2022.2023. General and administrative expense includes expenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as compensation to the Company’s trustees, executives, and employees. Expenses related to non-cash share based compensation increased $710decreased $489 when comparing the three months ended June 30, 2022March 31, 2023 to the same period in 2021.2022. This increase resulted primarily from a difference in the timing of share based compensation recognition. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.
Operating Income (Loss)
Operating income (loss)Depreciation and amortization decreased by $5,607, or 29.1%, to $13,669 for the three months ended June 30,March 31, 2023 from $19,276 for the three months ended March 31, 2022. The decrease is primarily attributable to the sale of ten hotels in 2022 improved by $31,416noted above, and assets that fully depreciated during 2022.
Operating Loss
Operating loss for the three months ended March 31, 2023 was $2,664 compared to operating income of $23,824 from an operating loss of $7,592$1,674 during the same period in 2021. The improvement in operating income2022. This increase is primarily due todriven by an increase in demand duringhotel operating expenses and a decrease in the hotel operating revenues, described above.
Interest Income
Interest income increased $1,738 from $1 for the three months ended June 30,March 31, 2022 to $1,739 for the three months ended March 31, 2023. The increase in interest income is primarily driven by an increase in cash and cash equivalents as compared toa result of the same period2022 hotel dispositions noted above, and a corresponding increase in 2021. Increases in hotel operating revenues duringinterest rates on the period outpaced increases in hotel operating expense, contributing to improvement in operating margins as the markets in which we operate continue to recover from the decrease in demand caused by the COVID-19 pandemic.interest income earned on cash and cash equivalents.
Interest Expense
Interest expense was $14,769decreased $4,781 from $13,870 for the three months ended June 30,March 31, 2022 compared to $14,982$9,089 for the three months ended June 30, 2021.March 31, 2023. The primary driver of the decrease in interest expense is dueprimarily driven by the pay down of the amount drawn under the prior line of credit of $118,684 on August 4, 2022, the decrease in the principal term loan balance of $97,481 after the credit refinancing on August 4, 2022, and the pay off of certain unsecured notes payable on August 4, 2022 which had a principal balance of $158,094.
Other Income (Expense)
Other income was $913 for the three months ended March 31, 2023 compared to decreasesother expense of $99 for the three months ended March 31, 2022. Other income during the three months ended March 31, 2023 primarily consists of the recovery of certain receivables associated with properties sold in amortization2022 that we had previously deemed uncollectible.
Unconsolidated Joint Venture Investments
The loss from unconsolidated joint ventures consists of our interest rate hedges, offsetin the operating results of the properties we own in joint ventures. Loss from our unconsolidated joint ventures decreased by an increase$584 to a loss of $352 for the three months ended March 31, 2023 compared to loss of $936 during the same period in interest expense due2022. The loss from unconsolidated joint ventures for the three months ended March 31, 2022 includes a loss of $258 for Hiren Boston, LLC, which we sold on November 30, 2022. The remaining decrease in loss is attributable to improved operating results at our remaining two South Boston joint ventures for the three months ended March 31, 2023 compared to the issuance of the Junior Notes in February 2021. The Junior Notes were subsequently redeemed in Augustthree months ended March 31, 2022.
The balance of our borrowings, excluding discounts and deferred costs, has increased by $4,526 in total between June 30, 2021 and June 30, 2022.
Income Tax Expense
During the three months ended June 30, 2022,March 31, 2023, the Company recorded income tax expense of $93$34 compared to income tax expense of $151$21 for the three months ended June 30, 2021. March 31, 2022.
After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe that as of June 30, 2022,March 31, 2023, it is not more likely than not that we will be able to realize our net deferred tax asset and therefore, maintained the full valuation allowance that was established during the second quarter of 2020. As a result, the balance of our net deferred tax asset at June 30, 2022March 31, 2023 is $0. Absent the valuation allowance and the amount of income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”).
Net Income (Loss) Applicable to Common Shareholders
Net income applicable to common shareholders for the three months ended June 30, 2022 was $2,099 compared to net loss applicable to common shareholders of $28,590 during the same period in 2021. This increase is primarily due to an increase in demand in 2022 as compared to the same period in 2021.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the six months ended June 30, 2022 consistedimpact of hotel operating revenues and other revenue. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $87,790, or 74.9%, to $205,026 for the six months ended June 30, 2022 compared to $117,236 for the same period in 2021. This increase is attributable to an increase in RevPAR across our portfolio during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 as our hotels continue to recover from the decrease in demand caused by the COVID-19 pandemic. The increase in demand is partially offset by a reduction in hotel operating revenue attributable to the sale of the Courtyard San Diego, the Residence Inn Coconut Grove, the Holiday Inn Express Cambridge, the Capitol Hill Hotel, and the Duane Street hotel during the six months ended June 30, 2021. These five hotels contributed hotel operating revenue of $2,053 during the six months endedJune 30, 2021.
Expenses
Total hotel operating expenses increased 58.4% to $116,443 for the six months ended June 30, 2022 from $73,490 for the six months ended June 30, 2021. The increase in hotel operating expenses is due to increased operations at our hotels for the six months ended June 30, 2022 as a result of the increase in demand as the markets in which we have operations continue to recover from the decrease in demand caused by the COVID-19 pandemic. This increase in hotel operating expense is partially offset by the sale of the five hotels noted above. These five hotels incurred hotel operating expense of $1,815 during thesix months ended June 30, 2021.
Depreciation and amortization decreased by 15.3%, or $6,537, to $36,279 for the six months ended June 30, 2022 from $42,816 for the six months ended June 30, 2021. The decrease is primarily attributable to assets that fully depreciated during 2021 and a reduction in expense due to the 2021 hotel dispositions, noted above.
Real estate and personal property tax and property insurance decreased $2,719, or 13.9%, for the six months ended June 30, 2022 when compared to the same period in 2021, which is primarily due to the sale of hotels noted above, as well as a decrease in real estate tax assessments, specifically in the New York City and Washington D.C. markets. In general, our property insurance costs continue to rise annually, which was partially offset by a reduction in expense due to the dispositions noted above.
General and administrative expense was $11,809 for the six months ended June 30, 2022 compared to $10,231 for the six months ended June 30, 2021. General and administrative expense includes expenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as compensation to the Company’s trustees, executives, and employees. Expenses related to non-cash share based compensation increased $1,082 when comparing the six months ended June 30, 2022 to 2021. This increase resulted primarily from a difference in the timing of share based compensation recognition. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.
Operating Income (Loss)
Operating income (loss) for the six months ended June 30, 2022 improved by $53,028 to operating income of $22,150 during the six months ended June 30, 2022 compared to operating loss of $30,878 during the same period in 2021. The change in operating income (loss) is primarily due to an increase in demand during the six months ended June 30, 2022 as compared to the same period in 2021. Increases in hotel operating revenues during the period outpaced increases in hotel operating expense, contributing to improvement in operating margins, as the markets in which we operate continue to recover from the decrease in demand caused by the COVID-19 pandemic.
Interest Expense
Interest expense for the six months ended June 30, 2022 was $29,006 compared to $28,411 for the six months ended June 30, 2021. The balance of our borrowings, excluding discounts and deferred costs, has increased by $4,526 in total between June 30, 2021 and June 30, 2022. We experienced an increase in our weighted average interest rate, driven by the unsecured junior notes payable facility we entered into in February 2021, and increased interest expense related to the amortization of additional deferred costs incurred during the six months ended June 30, 2022. Proceeds from the Junior Notes payable were used to reduce borrowings under our secured credit facility and term loans.
Income Tax (Expense) Benefit
During the six months ended June 30, 2022, the Company recorded income tax expense of $114 compared to an income tax benefit of $438 for the six months ended June 30, 2021. After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe that as of June 30, 2022, it is not more likely than not that we will be able to realize our net deferred tax asset and therefore, maintained the full valuation allowance that was established during the second quarter of 2020. As a result, the balance of our net deferred tax asset at June 30, 2022 is $0. Absent the valuation allowance, the amount of income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”).
Net Loss Applicable to Common Shareholders
Net loss applicable to common shareholders for the sixthree months ended June 30, 2022March 31, 2023 was $20,460$14,939 compared to net loss applicable to common shareholders of $25,707$22,235 during the same period in 2021, resulting2022. This increase is primarily driven by decreases in a decreased loss of $5,247. This decreaseinterest expense, depreciation and amortization, and real estate and personal property taxes and property insurance, and an increase in loss is primarily related to improved operatinginterest income for the six months ended June 30, 2022in 2023 as compared to 2021, which is offset by gains on hotel dispositions of $48,352 recognizedthe same period in 2021.2022.
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)
Potential Sources of Capital
Our organizational documents do not limit the amount of indebtedness that we may incur. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its investments.
In addition, our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, nonrecourse financing arrangements. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. Future deterioration in market conditions could cause restrictions in our access to the cash flow of additional properties.
In addition to the incurrence of debt and the offering of equity securities, dispositions of property may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets or from sales of non-core hotels in secondary and tertiary markets. Capital from these types of transactions is intended to be redeployed into high growth acquisitions, share buybacks, or to pay down existing debt.
Junior Unsecured Notes Facility
In February 2021, the Company entered into a junior unsecured notes facility (“Junior Notes”) that provided net proceedsAs of $144,750 at closing. The Junior Notes bear interest at a rate of 9.50%, of which half, or 4.75%, was paid in cash through March 31, 2022, with the remaining half added to the principal of the note through March 31, 2022. During the three months ended June 30, 2022, interest at a rate of 9.50% was paid in cash. The original maturity date under the Junior Notes was February of 2026 and the notes were non-callable through February 2022. The Junior Notes were callable at 104% beginning February of 2022.
The net proceeds of $144,750 provided by the Junior Notes, along with a portion of the proceeds from asset sales, were used to repay amounts outstanding under the Credit Facility, the Second Term Loan, and the Third Term Loan. The Junior Notes and asset sales that closed in the first quarter of 2021 allowed the Company to execute amendments to credit agreements governing the Credit Facility, the Second Term Loan, and the Third Term Loan. These amendments eliminated term loan maturities until August of 2022, waived all financial covenants through March 31, 2022, established accommodative covenant testing methodology through December 31, 2022, enabled the Company to pay down the accrual of the Company’s preferred dividends and allow the ongoing preferred dividend accrual to be kept current, and provided additional liquidity at the Company’s discretion.
On August 4, 2022, using the proceeds from the disposition of the Courtyard Brookline, MA; the Hampton Inn Washington, DC; Hilton Garden Inn M Street, Washington, DC; Hampton Inn - Philadelphia, PA; TownePlace Suites Sunnyvale, CA and the Courtyard Los Angeles Westside, CA,2023 we paid off the Junior Notes at a redemption price of 104%, or $164,418, and the Prior Facilities.had no off-balance sheet arrangements.
Credit Facility and Term Loans
As of June 30, 2022, our secured debt facilities aggregated to $747,481 and was comprised of a $442,404 senior credit facility and two term loans totaling $305,077. The credit facility (“Prior Credit Facility”) contained a $192,404 term loan (“Prior First Term Loan”) and a $250,000 revolving line of credit (“Prior Line of Credit”), and was set to expire on August 10, 2022. As of June 30, 2022, we had $118,684 outstanding under the Line of Credit. Our two additional term loan balances were $278,846 (“Prior Second Term Loan”) and $26,231 (“Prior Third Term Loan”) as of June 30, 2022, and with an original maturity date of September 10, 2024 and August 10, 2022, respectively.
On August 4, 2022, we entered into a credit agreement (the "Credit Agreement"), with certain lenders, for whom Citibank, N.A. ("Citibank") acted as the administrative agreement and collateral agent, Wells Fargo Bank, N.A. and Manufacturers and Traders Trust Company acted as the co-syndication agents, and Citibank, Wells Fargo Securities, LLC, and Manufacturers and Traders Trust Company acted as joint lead arrangers and joint book running managers. The Credit
Agreement provided for a new secured term loan of $400,000$400.0 million and secured revolving line of credit with capacity of $100,000$100.0 million which mature in August of 2024. Immediately upon entering into the Credit Agreement, proceeds from the $400,000$400.0 million new term loan, along with a portion of the proceeds from the dispositions discussed in Note 2 – Investment in Hotel Properties, were used to pay off and terminate all borrowings under the Prior Facilities. The maturity date of the secured revolving credit facility and the secured term loan is August 4, 2024.
All borrowings under the Credit Agreement will bear interest at a rate per annum equal to, at the option of the Company, either (i) 2.50% plus Adjusted Term SOFR (defined as the forward-looking term rate based on SOFR plus 0.10%), or (ii) 1.50% plus the Base Rate (defined as the highest of (a) the rate of interest announced publicly by Citibank, as its base rate, (b) ½ of 1% per annum above the Federal Funds Rate and (c) the Adjusted Term SOFR for a one-month Interest Period in effect on such day plus 1.00% per annum.annum). The Credit Agreement provides for a 0.00% floor for borrowings at Adjusted Term SOFR and a 1.00% floor for borrowings at the Base Rate. The Credit Agreement also permits the issuance of letters of credit.
Acquisitions
During the sixthree months ended June 30, 2022March 31, 2023 and 20212022, we acquired no hotel properties. We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of capital are available. We expect that future investments in hotels will depend upon and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common or preferred shares, proceeds from the sale of assets, issuances of Common Units, issuances of preferred units or other securities or borrowings secured by hotel assets and under our Line of Credit.
Dispositions
During the sixthree months ended June 30, March 31, 2023 and 2022 we disposed of, there were no properties. During the six months ended June 30, 2021, we disposed of four hotel properties for an aggregate sales price of $178,500 resulting in a gain on disposition of $48,283. The net proceeds were used to repay existing debt.
On August 4, 2022, we closed on the sale of six of the seven previously announced hotel dispositions to an unaffiliated buyer for a purchase price of $435,900. These six hotels included the Courtyard Brookline; the Hampton Inn Washington, DC; Hilton Garden Inn M Street Washington, DC; Hampton Inn - Philadelphia; TownePlace Suites Sunnyvale and the Courtyard Los Angeles Westside. We expect the sale of the Courtyard Sunnyvale to close in the fourth quarter of 2022. The proceeds from the sale were used to pay off the Junior Notes at a redemption price of 104%, or $164,418, and the Prior Facilities.property dispositions.
Operating Liquidity and Capital Expenditures
Our short-term liquidity requirements generally consist of funds necessary to pay our scheduled debt service and operating expenses and capital expenditures directly associated with our hotels. 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 the new $100,000$100.0 million line of credit.
To qualify as a REIT, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and requires us to raise additional capital in order to grow our business and acquire additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we cannot guarantee that we will be able to make distributions to our shareholders.
At June 30, 2022, the mortgage borrowing on the Courtyard Sunnyvale hotel failed itsMarch 31, 2023, we were in compliance with our debt service coverage ratio ("DSCR") requirement. The lenderrequirements for thisour mortgage has elected its right to escrow property level cash flow for the purpose of meeting future payment obligations. We expect that this mortgage as well as the escrow held by the lender will be assumed by the buyer upon disposition of the Courtyard Sunnyvale which is anticipated to close in the fourth quarter of 2022. After considering the effect of the COVID-19 pandemic on our consolidated operations, itborrowings. It is possible that we could fail certain financial covenants within certain property-level mortgage borrowings. Certain of our mortgage lenders have modified the financial covenants for a period of time to establish accommodative covenant testing in 2022. For mortgages with financial covenants, theThe lenders' remedy of a covenant failure would be a requirement to escrow funds for the purpose of meeting our future debt payment obligations.
ThreeFive of our mortgages totaling $121,167$163,119 mature in the next twelve months. We plan to work with the mortgage lenders to exercise available extension options, under these mortgages, or refinance each mortgage before their maturities.maturities, or use available cash on hand or capacity under our revolving line of credit to pay the obligation.
Spending on capital improvements during the sixthree months ended June 30, 2022March 31, 2023 increased when compared to spending on capital improvements during the sixthree months ended June 30, 2021.March 31, 2022. During the sixthree months ended June 30, 2022,March 31, 2023, we spent
$12,041 $9,953 on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $5,374$4,219 spent during the same period in 2021.2022. These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will generate a return on investment. We may spend additional amounts, if necessary, to comply with the requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be prudent. We are also obligated to fund the cost of certain capital improvements to our hotels.
We expect to use operating cash flow, borrowings under the Line of Credit, and proceeds from issuances of our securities and hotel dispositions to pay for the cost of capital improvements and any furniture, fixture and equipment requirements.
CASH FLOW ANALYSIS
(dollars in thousands, except per share data)
Comparison of the SixThree Months Ended June 30,March 31, 2023 and 2022 and 2021
Net cash provided by (used in) operating activities increased by $47,593 from net cash used in operating activities of $7,107 for the six months ended June 30, 2021 to net cash provided by operating activities of $40,486decreased by $4,999 from $14,996 for the three months ended March 31, 2022 to $9,997 for the comparable period in 2022.2023. The increasedecrease in cash flow is primarily attributable to an increasea decrease in hotel property cash flow as a result of an increasethe sale of ten hotel properties in demand since the onsetthird and fourth quarters of the COVID-19 pandemic.2022.
Net cash used in investing activities for the sixthree months ended June 30, 2022 was $11,232 comparedMarch 31, 2023 increased by $5,249 to net cash provided by investing activities of $157,659$9,953 from $4,704 for the sixthree months ended June 30, 2021. The change isMarch 31, 2022. This was primarily attributable to proceedsa result of $163,583 received during the six months ended June 30, 2021 related to the disposition of the Courtyard San Diego, the Capitol Hill Hotel, the Holiday Inn Express Cambridge, and the Residence Inn Coconut Grove, compared to no dispositions for the six months ended June 30, 2022. In addition, we had an increase of $6,667$5,734 for capital expenditures for the sixthree months ended June 30, 2022March 31, 2023 compared to 20212022 as we have resumed certain selective capital expenditure projects during the sixthree months ended June 30, 2022.March 31, 2023. We had an increasea decrease of $65$485 of contributions related to unconsolidated joint ventures as we contributed a total of $485 to the Hiren Boston and SB Partners joint ventures during the six months ended June 30, 2022 compared to a contribution of $550 to the Hiren Boston and SB Partners unconsolidated joint ventures during the sixthree months ended June 30, 2021. Lastly, we received insurance proceeds of $1,294March 31, 2022 compared to no contributions during the sixthree months ended June 30, 2022 related to property damage incurred for a 2021 claim at our Hampton Inn Philadelphia hotel.March 31, 2023.
Net cash used in financing activities increased by $25,140 to $31,933 for the sixthree months ended June 30, 2022 was $13,517March 31, 2023 compared to net cash used in financing activities$6,793 for the sixthree months ended June 30, 2021 of $94,009.March 31, 2022. The following items are the major contributing factors for the change in financing cash flows:
•The primary use of cash in 2021 was the payment of $187,024 of outstanding borrowings under the Term Loan agreements and a repayment of $14,369 on our Line of Credit. We received net proceeds of $144,750 from the issuance of the Junior Notes, a portion of which, in addition to the proceeds received from the hotel dispositions noted above, were used to pay down the Term Loans and Line of Credit.
•Payment of $209 of deferred financing costs for the six months ended June 30, 2022, as compared to the payment of $5,795 during the six months ended June 30, 2021 whichincrease primarily relates to the Junior Notes issuance noted above.
•A decreasean increase in cash payments of $18,131$25,578 related to dividends paid. During the sixthree months ended June 30, 2021, our executed amendmentsMarch 31, 2023, we paid a dividend of $0.55 per common share and per limited partnership unit compared to no dividends paid on common shares and per limited partnership units during the Prior Facilities allowed for the paymentthree months ended March 31, 2022. This was partially offset by a reduction in principal payments on mortgages of $242 as we disposed of the total arrearageTowneplace Suites Sunnyvale and Courtyard Sunnyvale in the third and fourth quarters of unpaid cash dividends for2022, respectively, which had monthly principal payments. In addition, during the periods ended April 15, 2020, July 15, 2020, October 15, 2020 and January 15, 2021 due on each of our 6.875% Series C Cumulative Redeemable Preferred Shares, 6.50% Series D Cumulative Redeemable Preferred Shares and 6.50% Series E Cumulative Redeemable Preferred Shares, which was paid on March 26, 2021, as the well as the dividend paid on April 15, 2021. During the sixthree months ended June 30,March 31, 2022 we paid dividendsdeferred financing costs of $12,087 on these preferred shares.$196 for our prior line of credit.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
FUNDS FROM OPERATIONS
(in thousands, except share data)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Common Units in accordance with the December 2018 Financial Standards White Paper of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Our interpretation of the NAREIT definition is that noncontrolling interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shareholders, includes loss from the impairment of certain depreciable assets, our investment in unconsolidated joint ventures and land, depreciation and amortization expenses, gains or losses on property sales, noncontrolling interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations. We determined that the loss from the impairment of certain depreciable assets including investments in unconsolidated joint ventures and land, was driven by a measurable decrease in the fair value of certain hotel properties and other assets as determined by our analysis of those assets in accordance with applicable GAAP. As such, these impairments have been eliminated from net loss to determine FFO.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Common Units because our Common Units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Common Units.
The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods (dollars in thousands):
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | | March 31, 2023 | | March 31, 2022 | |
Net income (loss) applicable to common shareholders | | $ | 2,099 | | | $ | (28,590) | | | $ | (20,460) | | | $ | (25,707) | | |
Income (loss) allocated to noncontrolling interest | | 1,070 | | | (977) | | | 619 | | | (813) | | |
(Income) loss from unconsolidated joint ventures | | (357) | | | 589 | | | 579 | | | 1,247 | | |
Loss applicable to common shareholders | | Loss applicable to common shareholders | | $ | (14,939) | | | $ | (22,235) | | |
Loss allocated to noncontrolling interest | | Loss allocated to noncontrolling interest | | (606) | | | (408) | | |
Loss from unconsolidated joint ventures | | Loss from unconsolidated joint ventures | | 352 | | | 936 | | |
| Gain on disposition of hotel properties | | — | | | — | | | — | | | (48,352) | | |
Loss from impairment of depreciable assets | | — | | | 222 | | | — | | | 222 | | |
| Depreciation and amortization | Depreciation and amortization | | 17,003 | | | 21,014 | | | 36,279 | | | 42,816 | | Depreciation and amortization | | 13,669 | | | 19,276 | | |
Funds from consolidated hotel operations applicable to common shareholders and Partnership Units | Funds from consolidated hotel operations applicable to common shareholders and Partnership Units | | 19,815 | | | (7,742) | | | 17,017 | | | (30,587) | | Funds from consolidated hotel operations applicable to common shareholders and Partnership Units | | (1,524) | | | (2,431) | | |
| | | | | | | | | | | | | | | |
(Income) loss from unconsolidated joint ventures | | 357 | | | (589) | | | (579) | | | (1,247) | | |
Loss from unconsolidated joint ventures | | Loss from unconsolidated joint ventures | | (352) | | | (936) | | |
| Unrecognized pro rata interest in loss (1) | Unrecognized pro rata interest in loss (1) | | (79) | | | (318) | | | (298) | | | (814) | | Unrecognized pro rata interest in loss (1) | | (420) | | | (219) | | |
Depreciation and amortization of difference between purchase price and historical cost (2) | Depreciation and amortization of difference between purchase price and historical cost (2) | | 21 | | | 21 | | | 42 | | | 42 | | Depreciation and amortization of difference between purchase price and historical cost (2) | | 19 | | | 21 | | |
Interest in depreciation and amortization of unconsolidated joint ventures (3) | Interest in depreciation and amortization of unconsolidated joint ventures (3) | | 625 | | | 651 | | | 1,252 | | | 1,282 | | Interest in depreciation and amortization of unconsolidated joint ventures (3) | | 536 | | | 627 | | |
Funds from unconsolidated joint ventures operations applicable to common shareholders and Partnership Units | Funds from unconsolidated joint ventures operations applicable to common shareholders and Partnership Units | | 924 | | | (235) | | | 417 | | | (737) | | Funds from unconsolidated joint ventures operations applicable to common shareholders and Partnership Units | | (217) | | | (507) | | |
| | | | | | | | | | | | | |
Funds from Operations applicable to common shareholders and Partnership Units | Funds from Operations applicable to common shareholders and Partnership Units | | $ | 20,739 | | | $ | (7,977) | | | $ | 17,434 | | | $ | (31,324) | | Funds from Operations applicable to common shareholders and Partnership Units | | $ | (1,741) | | | $ | (2,938) | | |
| | | | | | | | | | | | | |
Weighted Average Common Shares and Common Units | Weighted Average Common Shares and Common Units | | | | | | | | | Weighted Average Common Shares and Common Units | | | | | |
Basic | Basic | | 39,277,269 | | | 39,097,820 | | | 39,254,536 | | | 39,034,707 | | Basic | | 39,626,231 | | | 39,231,550 | | |
Diluted | Diluted | | 45,716,098 | | | 44,724,968 | | | 45,629,745 | | | 44,525,168 | | Diluted | | 46,659,174 | | | 45,476,116 | | |
(1) For U.S. GAAP reporting purposes, our interest in the joint venture's loss is not recognized since our U.S. GAAP basis in the joint venture has been reduced to $0. Our interest in FFO from the joint venture equals our percentage ownership in the venture's FFO, including loss we have not recognized for U.S. GAAP reporting.
(2) Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint venture at the time of our investment.
(3) Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint ventures.
CYBERSECURITY
The hospitality industry and certain of the major brand and franchise companies have recently experienced cybersecurity breaches. We are not aware of any material cybersecurity losses at any of our properties. We manage cybersecurity risks at our hotel properties through our franchisors and property management companies. An important part of our cybersecurity risk mitigation efforts includes maintaining cybersecurity insurance and indemnifications in certain of our property management agreements. The Risk & Environmental, Social, Governance Sub-Committee of the Audit Committee of the Board of Trustees provides on-going oversight of management's approach to managing cybersecurity risks.
INFLATION
Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates. Additionally, our management companies will face challenges to raise room rates to reflect the impact of inflation until there is a substantial economic recovery from the COVID-19 pandemic. Increasing inflation could adversely affect consumer confidence, which could reduce consumer purchasing power and demand for lodging. Additionally, an increased rate of inflation will cause our operating and renovation costs to increase. These conditions could have a material adverse effect on our business, financial conditions, results of operations and cash flows.
BUSINESS INTERRUPTION
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes the Company has adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain, especially in light of the current economic environment due to the COVID-19 pandemic. The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 20222023 and 20212022 and none of the estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods.
Investment in Hotel Properties
We review our portfolio on an on-going basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition.
Our impairment evaluation contains uncertainties because it requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include expected future operating income, as well as the holding period and the expected terminal capitalization rate. Estimates of revenue growth and operating expenses are based on third-party market data, where available and applicable to the hotel evaluated, and internal projections which consider the hotel’s historical performance, hotel demand, competition and other factors that impact the hotel’s performance. The terminal capitalization rate is selected based on third-party market data, recent dispositions, and what we believe a buyer would assume when determining a purchase price for the hotel. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.
If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. As of June 30, 2022,March 31, 2023, based on our analysis, we have determined that the estimated future cash flow of each of the properties in our portfolio is sufficient to recover its carrying value.
Item 3. Quantitative and Qualitative Disclosures About Market Risk (in thousands, except per share data)
Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of June 30, 2022,March 31, 2023, we are exposed to interest rate risk with respect to variable rate borrowings under our Line of Credit, certain variable rate mortgages, and notes payable. As of June 30, 2022,March 31, 2023, we had total variable rate debt outstanding of $281,374173,612 with a weighted average interest rate of 7.49%3.89%. The effect of a 100 basis point increase or decrease in the interest rate on our variable rate debt outstanding as of June 30, 2022March 31, 2023 would be an increase or decrease in our interest expense for the three and six months ended June 30, 2022March 31, 2023 of $694 and $1,399, respectively.$434.
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates for a portion of our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We have also entered into derivative financial instruments such as interest rate swaps or caps, and in the future may enter into treasury options or locks, to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. As of June 30, 2022,March 31, 2023, we have an interest rate cap related to debt on Courtyard, LA Westside, Culver City, CA, and we have sevensix interest rate swaps related to debt on Hilton Garden Inn, 52nd Street, New York, NY; Hyatt Union Square, New York, NY; Hilton Garden Inn Tribeca, New York, NY; and our Prior Facilities.Credit Facility. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
As of June 30, 2022,March 31, 2023, approximately 75.1%73% of our outstanding consolidated long-term indebtedness was subject to fixed rates, or effectively capped, while 24.9%27% of our outstanding long term indebtedness is subject to floating rates, including borrowings under our Line of Credit.rates. The majority of our floating rate debt and any corresponding derivative instruments are indexed to various tenors of LIBOR.LIBOR or SOFR.
On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banks discontinued new LIBOR debt issuances by December 31, 2021. However, the ICE Benchmark Administration, in its capacity as administrator of LIBOR, has announced that it intends to extend publication of LIBOR (other than one-week and two-month tenors) by 18 months to June 2023.
Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. In anticipation of the cessation of LIBOR, we may need to renegotiate credit facilities and any credit agreements extending beyond 2022 that utilize LIBOR as a factor in determining the interest rate or rely on certain fallback provisions that could cause interest rates to shift to a base rate plus a margin. Any such renegotiations may have a material adverse effect on our business.
Changes in market interest rates on our fixed-rate debt impact the fair value of the debt, but such changes have no impact on interest expense incurred. If interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their June 30, 2022March 31, 2023 levels, with all other variables held constant. A 100 basis point increase in market interest rates would cause the fair value of our fixed-rate debt outstanding at June 30, 2022March 31, 2023 to be approximately $1,130,657 $605,730 and a 100 basis point decrease in market interest rates would cause the fair value of our fixed-rate debt outstanding at June 30, 2022March 31, 2023 to be approximately $1,164,049. $616,033.
We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations. For debt obligations outstanding as of June 30, 2022,March 31, 2023, the following table presents expected principal repayments and related weighted average interest rates by expected maturity dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2023 - 2024 | | 2025 - 2026 | | Thereafter | | Total |
Fixed Rate Debt | | $ | 238,257 | | | $ | 419,404 | | | $ | 191,629 | | | $ | — | | | $ | 849,290 | |
Weighted Average Interest Rate | | 5.27 | % | | 6.24 | % | | 9.50 | % | | N/A | | 5.25 | % |
| | | | | | | | | | |
Floating Rate Debt | | $ | 26,471 | | | $ | 84,671 | | | $ | — | | | $ | 51,548 | | | $ | 162,690 | |
Weighted Average Interest Rate | | 5.07 | % | | 4.89 | % | | N/A | | 4.79 | % | | 4.88 | % |
| | $ | 264,728 | | | $ | 504,075 | | | $ | 191,629 | | | $ | 51,548 | | | $ | 1,011,980 | |
| | | | | | | | | | |
Line of Credit | | $ | 118,684 | | | $ | — | | | $ | — | | | $ | — | | | $ | 118,684 | |
Weighted Average Interest Rate | | 4.04 | % | | N/A | | N/A | | N/A | | 2.70 | % |
| | $ | 383,412 | | | $ | 504,075 | | | $ | 191,629 | | | $ | 51,548 | | | $ | 1,130,664 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 - 2025 | | 2026 - 2027 | | Thereafter | | Total |
Fixed Rate Debt | | $ | 100,547 | | | $ | 358,811 | | | $ | — | | | $ | — | | | $ | 459,358 | |
Weighted Average Interest Rate | | 3.99 | % | | 3.93 | % | | N/A | | N/A | | 3.96 | % |
| | | | | | | | | | |
Floating Rate Debt | | $ | 96,114 | | | $ | 26,091 | | | $ | — | | | $ | 51,548 | | | $ | 173,753 | |
Weighted Average Interest Rate | | 7.65 | % | | 7.77 | % | | N/A | | 7.77 | % | | 7.73 | % |
| | $ | 196,661 | | | $ | 384,902 | | | $ | — | | | $ | 51,548 | | | $ | 633,111 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Item 4. Controls and Procedures
Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2022.March 31, 2023.
There were no changes to the Company’s internal controls over financial reporting during the three months ended June 30, 2022,March 31, 2023, that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
Item 1A. Risk Factors.
The impact of the Russian invasion of Ukraine on the global economy is uncertain, but may prove to negatively impact our business and operations.
While the Company does not have any material business, operations or assets in Russia, Belarus or Ukraine, and has not been materially impacted by the actions of the Russian government at this time, the short and long-term implications of Russia’s invasion of Ukraine are difficult to predict. We continue to monitor any adverse impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by the United States and several European and Asian countries may have on the global economy in general, on our business and operations and on the businesses and operations of our suppliers and customers. To the extent the war in Ukraine may adversely affect our business, it may also have the effect of heightening many of the other risks described in our risk factors in our Annual Report on Form 10-K for the year ended December 31, 2021, such as those relating to information technology and market conditions, any of which could negatively affect our business and financial condition.
Inflation and price volatility in the global economy could negatively impact our business and results of operations.
General inflation in the United States has risen to levels not experienced in recent decades, including rising energy prices, prices for consumer goods, interest rates, wages, and currency volatility. These increases and any fiscal or other policy interventions by the U.S. government in reaction to such events could negatively impact our business by increasing our operating costs and our borrowing costs as well as decreasing the capital. Although we have the ability to pass on these increased costs associated with providing services by adjusting room rates, the cost to operate and maintain the hotel properties could increase faster or at a rate greater than our ability to increase room rates, which could adversely affect our results of operations.
Other than as described above, thereThere have been no material changes to the Risk Factors previously disclosed in Item 1A in the Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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| | |
Exhibit No. | | |
10.1 | | | Credit Agreement, dated as of August 4, 2022, by and among Hersha Hospitality Limited Partnership, as borrower, Hersha Hospitality Trust, as parent guarantor, the subsidiary guarantors named therein, as guarantors, the initial lenders and initial issuing banks named therein, Citibank, N.A., as administrative agent and collateral agent, Wells Fargo Bank, N.A. and Manufacturers and Traders Trust Company, as co-syndication agents, Manufacturers and Traders Trust Company, Fifth Third Bank and Wilmington Savings Fund Society, FSB, as co-documentation agents, and Citibank, N.A., Wells Fargo Securities, LLC, and Manufacturers and Traders Trust Company, as joint lead arrangers and joint book running managers (as filed Exhibit 10.1 to the Current Report on Form 8-K filed by Hersha Hospitality Trust on August 8, 2022). |
10.2 | | | |
31.1 | | | |
31.2 | | | |
32.1 | | | |
32.2 | | | |
101.INS | | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document* |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | | Filed herewith |
+ | | Compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | |
| HERSHA HOSPITALITY TRUST |
| | |
August 9, 2022April 27, 2023 | /s/ Ashish R. Parikh | |
| Ashish R. Parikh | |
| Chief Financial Officer (Principal Financial Officer) | |